Newtek Business Services Corp. (NTWK) - Q2 2018 Filing Summary
Business Context and Reporting Period
This summary covers the Form 10-Q for Newtek Business Services Corp. (NTWK) for the quarterly period ended June 30, 2018. Newtek is a Business Development Company (BDC) that provides financing and related services to small and medium-sized businesses (SMBs). The company's portfolio consists primarily of SBA-guaranteed and unguaranteed loans, as well as controlled investments in portfolio companies.
Key Financial Metrics
| Metric | Q2 2018 (3 Months) | YTD 2018 (6 Months) | YTD 2017 (6 Months) |
|---|---|---|---|
| Total Investment Income | $11.40 million | $22.47 million | $18.90 million |
| Total Expenses | $13.54 million | $27.38 million | $22.67 million |
| Net Investment Loss | ($2.13 million) | ($4.91 million) | ($3.77 million) |
| Net Realized & Unrealized Gains | $9.76 million | $20.64 million | $16.61 million |
| Net Increase in Net Assets | $7.62 million | $15.73 million | $12.84 million |
| Net Asset Value (NAV) per Share | $15.06 | $15.06 | $15.08 (Dec 31, 2017) |
| Dividends Declared per Share | $0.42 | $0.82 | $0.76 |
| Total Assets | $561.81 million | $561.81 million | $519.61 million (Dec 31, 2017) |
| Total Liabilities | $279.53 million | $279.53 million | $241.28 million (Dec 31, 2017) |
| Cash and Restricted Cash | $28.28 million | $28.28 million | $20.54 million (Dec 31, 2017) |
Material Changes vs. Prior Period
- Revenue Growth: Total investment income increased by 15.1% year-over-year for the six-month period ($22.47M vs. $18.90M), driven by higher interest income from non-affiliate investments ($10.68M vs. $8.87M) and servicing income ($4.07M vs. $3.37M).
- Expense Increase: Total expenses rose 20.8% year-over-year ($27.38M vs. $22.67M). This was primarily due to a $1.06 million loss on extinguishment of debt in the prior year period (not present in 2018) being offset by higher interest expenses ($7.30M vs. $5.15M) and increased origination and servicing costs ($3.77M vs. $2.65M).
- Net Investment Loss: The company reported a net investment loss for the period, as operating expenses exceeded investment income. However, this was significantly offset by net realized and unrealized gains, resulting in a positive net increase in net assets.
- Debt Structure: The company redeemed $40.25 million of Notes due 2021 and issued $57.50 million of Notes due 2023. Bank notes payable increased to $31.00 million from $0 in the prior year-end.
- Portfolio Composition: Total investments at fair value increased to $487.72 million from $456.69 million. Controlled investments (equity stakes in portfolio companies) represent a significant portion of the portfolio, valued at $157.24 million.
Guidance, Outlook, and Risks
- Dividend Policy: The company declared dividends of $0.42 per share for the quarter, totaling $0.82 for the six months. This exceeds the net investment income generated, indicating the company is distributing capital in excess of current earnings (distributions in excess of net investment income totaled $5.40 million as of June 30, 2018).
- Portfolio Performance: The portfolio includes a mix of performing and non-performing SBA unguaranteed investments. Non-performing SBA unguaranteed investments had a fair value of $14.12 million (5.00% of total unguaranteed SBA investments).
- Liquidity: Cash and restricted cash increased to $28.28 million, providing liquidity for operations and new investments. The company utilized an At-the-Market (ATM) equity distribution agreement, issuing shares for net proceeds of $2.65 million during the period.
- Risks: As a BDC, the company is subject to credit risk from its loan portfolio, interest rate risk, and the risk of non-performance by portfolio companies. The reliance on SBA guarantees for a portion of the portfolio mitigates some credit risk but introduces regulatory and compliance risks.
Key Facts for Investor Verification
- Dividend Coverage: Verify the sustainability of the dividend policy given the net investment loss and the drawdown of retained earnings (distributions in excess of net investment income).
- Debt Maturity Profile: Review the maturity schedule of the new Notes due 2023 and the remaining Notes due 2022 to assess refinancing risks.
- Non-Performing Assets: Monitor the trend in non-performing SBA unguaranteed investments ($14.12M) and the associated fair value adjustments.
- Controlled Investments: Assess the performance and valuation of the significant controlled investments (e.g., Universal Processing Services, Premier Payments, Newtek Technology Solutions), which make up a large portion of the portfolio's fair value.
- Capital Raise: Track the utilization of the ATM equity program and its impact on share dilution versus capital deployment.