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ABDC: Alcentra’s Repositioning Yields Higher NAV and Lower Discount to NAV

By Lisa Thompson



Alcentra Capital's (NASDAQ:ABDC) reported Q4 and full year 2018 earnings. The new management team continues to execute on its strategy of rotating toward a larger middle market, senior secured debt portfolio. Its goal is to both improve earnings and to decrease the discount of the stock price to NAV. In pursuit of that goal it is also buying back stock which also increases NAV. Since January 1, 2018, Alcentra has repurchased 1,280,111 shares of its outstanding common stock under its share repurchase programs, or approximately 9.0% of the shares outstanding as of January 1, 2018. As of January 14, 2019, it has approximately $6.2 million of repurchase authority remaining under the current repurchase program.

‣ Alcentra Capital is a business development company (BDC) with a disciplined portfolio approach and the benefit of an affiliation with BNY Mellon.

‣ As of December 31, the company’s $235 million portfolio was composed of 30 investments, comprised of 28 companies, one broadly syndicated loan (BSL), and one rated CLO debt instrument. It was invested 91% in debt and 9% in equity.

‣ The company originally targeted the lower middle-market, but new management is rotating the portfolio to larger middle-market private equity backed transactions. It considers the middle market $15 million - $75 million in EBITDA. Management believes this is a more prudent place to invest this late in the credit cycle. It is also beginning to invest overseas where it can take advantage of the company’s strengths and network and its President is now located in London.

‣ To mitigate its risk, the company conducts substantial due diligence, seeks rigorous financial covenants and diversifies its investments across a broad range of sectors and portfolio companies. Its largest sector is business services at 20% of the total investment portfolio followed by healthcare services at 19%.

‣ Only one company is now on non-accrual: Southern Technical Institute. There are seven others on the watch list: Alarm Capital, Battery Solutions, Conisus, Envocore, IGT, Palmetto Moon, and XGS. The weighted average yield on the company’s debt portfolio was again 11.0% this quarter.

‣ Alcentra is suffering from increased competition in the lending market that is pushing down rates. It also had a number of investments that went sour. These investments have been written down to where there most could provide upside in the future or completely eliminated.

‣ At $7.69, the shares trade at a 31% discount to the company’s $11.13 NAV (net asset value) per share. NAV has declined from the $14.63 per share at the time of its May 2014 IPO, but has been on the rise for the past two quarters since new management took over. The company is actively working to revamp the portfolio and decrease the discount of the stock price to the NAV. At its current price, Alcentra’s current dividend yield is 9.4%, below the average of 10.2%.

While past dividend cuts have stung investors, new management has rapidly culled the losing investments from the portfolio, which should lessen the chance for future declines in NAV. With assets redeployed there is the potential for higher earnings, which could lead to an increased dividend in the future and thus further price appreciation. Stock buybacks are also still in effect increasing NAV. These efforts should lead to stock price appreciation going forward.

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