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ABDC: Q4 Write Downs Clear the Way For an Improved 2018

By Lisa Thompson


Alcentra Capital is a business development company (NASDAQ:ABDC) with a disciplined portfolio approach and the benefit of an affiliation with BNY Mellon, its single largest shareholder. Its $288 million portfolio is invested in 29 companies, with 90% in debt and 10% in equity. 

For the fourth quarter of 2017, the company reported total investment income of $8.2 million versus $10.9 million last year, a decline of 25%. Adjusted and net investment income was $4.0 million, or $0.28 per share versus $6.1 million and $0.45 per share last year. 

Of the 29 portfolio companies, had three had write-ups and ten had write-downs during Q4 quarter resulting in a net decrease in net assets of $13.4 million.

Net asset value (NAV) was $157.7 million, or $11.06 per share as of December 31, 2017 versus $13.72 per share, on December 31, 2016. During Q4 the company received proceeds from repayments and amortizations on investments of $15.7 million and invested $36.8 million, including investments in one new investment, two add-on investments, and one refinancing.

The weighted average yield on the company’s debt portfolio is 11.3% and the weighted average portfolio company leverage is 3.30 times EBITDA.

At $7.75, yesterday’s close, the shares traded at a 30% discount to the company’s $11.03 NAV (net asset value) per share. NAV has declined from the $14.63 per share at the time of its May 2014 IPO. The company is actively working to revamp the portfolio and decrease the discount of the stock price to the NAV. At its current price, the discount is up to 43%. Alcentra’s current dividend yield, using the new quarterly dividend it 11.4% above the average of 10.8%.

Three debt investments in the portfolio are now on non-accrual: Southern Technical Institute, Media Storm, and Show Media. One other, Conisus, is still on the watch list.

Alcentra is suffering from increased competition in the lending market that is pushing down rates. It also has a number of investments that have gone sour. These investments have been written down to where there most could provide upside in the future. This quarter it cut its dividend from an initial $0.34 per quarter, to a more sustainable $0.18, and the stock price has reset to reflect that. The price may however have declined further than it should give the portfolio and its prospects.

The company has a valuation below its peers, and a best-in-class management fee structure for investors. We are cutting our price target due to the dividend cut despite its large discount to NAV. believe that ABDC is worth $9.00 due to its future earnings potential. 


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