Business Context and Reporting Period
This summary covers the Form 10-Q filed by TICC Capital Corp. (referred to as TICC) for the quarterly period ended September 30, 2015. TICC is a non-diversified, closed-end management investment company and a business development company (BDC) that invests primarily in corporate debt securities and collateralized loan obligation (CLO) vehicles. The company is currently navigating a potential change in control of its investment adviser, TICC Management, LLC, to an affiliate of Benefit Street Partners L.L.C. (BSP), which has triggered a proxy contest and related litigation.
Key Financial Metrics
| Metric | Q3 2015 | Q3 2014 | YTD 9M 2015 | YTD 9M 2014 |
|---|---|---|---|---|
| Total Investments (Fair Value) | $927.2 million | $984.2 million | $927.2 million | $984.2 million |
| Net Investment Income | $10.9 million | $17.5 million | $34.1 million | $52.7 million |
| Net Change in Net Assets from Operations | ($29.7 million) | ($1.3 million) | $1.1 million | $25.1 million |
| Net Asset Value (NAV) per Share | $7.81 | $9.40 | $7.81 | $9.40 |
| Total Debt Outstanding | $505.0 million | $505.0 million | $505.0 million | $505.0 million |
| Cash and Cash Equivalents | $21.2 million | $20.5 million | $21.2 million | $20.5 million |
| Asset Coverage Ratio | 192.1% | N/A | 192.1% | N/A |
Note: The asset coverage ratio of 192.1% is below the 200% threshold required by the Investment Company Act of 1940 for additional borrowings.
Material Changes vs. Prior Period
- Investment Income Decline: Total investment income decreased by $7.1 million in Q3 2015 compared to Q3 2014. This was primarily driven by a reduction in income from securitization vehicles due to a change in accounting policy for CLO equity investments (shifting from dividend recognition to the effective yield method) and lower fee income.
- Unrealized Depreciation: The company recorded a net change in unrealized depreciation of approximately $41.0 million for the quarter, significantly higher than the $15.3 million recorded in the prior year quarter. Major contributors to depreciation included CLO equity positions (e.g., Mountain Hawk III CLO, Catamaran CLO 2012-1) and specific corporate debt investments (e.g., Algorithmic Implementations, Inc.).
- Portfolio Composition: The portfolio fair value decreased by approximately $57 million from year-end 2014, driven by debt repayments, sales, and net unrealized depreciation, partially offset by new purchases of $214.1 million year-to-date.
- Accounting Adjustments: An out-of-period adjustment of approximately $1.4 million was recorded in Q3 2015 related to a miscalculation of discount accretion, increasing interest income and investment cost.
Guidance, Outlook, and Risks
- Change of Control Transaction: The company is in the process of a transaction where Benefit Street Partners (BSP) would acquire control of TICC Management. This requires shareholder approval of a new investment advisory agreement. The transaction is currently the subject of a proxy contest involving NexPoint Advisers and TPG Specialty Lending, Inc., who have filed preliminary proxy statements opposing the deal and proposing alternative director slates or acquisition offers.
- Litigation: NexPoint has filed suit alleging violations of the Securities Exchange Act and breach of fiduciary duty regarding the proxy process. A court has issued a temporary restraining order and ordered the company to provide additional disclosures. A putative class action lawsuit was also filed by stockholders.
- Liquidity Constraints: Due to the asset coverage ratio falling below 200% (at 192.1%), the company is currently precluded from taking on additional borrowings under the 1940 Act.
- Share Repurchase Program: A previous repurchase program expired in June 2015. Subsequent to the quarter end (November 5, 2015), the Board authorized a new program to repurchase up to $75 million of common stock through June 30, 2016.
- Interest Rate Sensitivity: The company notes that a 1% increase in LIBOR would decrease net investment income by approximately $2.0 million annually due to floors on variable-rate investments, while a 5% increase would result in an increase of approximately $9.9 million.
Investor Verification Checklist
- Transaction Outcome: Verify the status of the BSP transaction and the proxy contest, including the results of the special shareholder meeting and any court rulings on the NexPoint litigation.
- Asset Coverage Ratio: Monitor the asset coverage ratio closely; if it remains below 200%, the company cannot increase leverage, potentially limiting investment origination capabilities.
- CLO Valuations: Review the specific valuations of the CLO equity portfolio, which constitutes approximately 25.6% of the total portfolio and was a primary driver of unrealized losses.
- Accounting Policy Impact: Assess the long-term impact of the shift to the effective yield method for CLO equity income on reported net investment income versus taxable income.
- Share Repurchase Activity: Track the execution of the new $75 million share repurchase program authorized in November 2015.