$100m sen unsec cb coming overnight from CS/CITI/MER/DB. Terms: 5y 4.625-5.125% up 10-15%, full pctns. UOP = repay debt/gcp. Will be relatively quick: positives = potential BBB- rating, yield scramble will mean long only bond funds who can’t buy 9% up 0% stock will buy 4.875% up 12.5% w/theo SBV of 97.5 (PSEC/ARCC/STWD/NLY all cash in point), small issue (key is be small w/good long only demand or hit the $500m index inclusion threshold). Negative = not cheap in model (L=475/17vol/stock unch = 99/100.4/101). STWD surprised us today by magnitude of move (+1.5 points o/swap) demonstrating again that the model is increasingly academic within this tape. We know this will get done & most likely off the CHEAP end but we’d avoid unless on cheaps.
Blackrock Kelso Capital (BKCC) announced an overnight $100mm 5yr senior convert. Px talk 4 5/8- 5 1/8s up 10-15. BKCC is structured as a business development company. Without putting a lot of reliance on the underlying Blackrock name, bond pricing looks aggressive. Using L+600 at mid-range of px talk, bonds imply 23% vol, which puts it square on top of 180d and 260d realized vols. Using L+600/18v, bonds model to a TV of 97. Compare with ARCC ($6bn AUM) 2018 notes at L+450/23 impl vol, PSEC ($3bn AUM) 2019s at L+600/18 IV and recent TICC ($538mm AUM) 2017 deal which priced L+850/18.5 IV. For this deal to be worth more than par at the mids, you need to believe credit is L+450 (18v), in line w/ ARCC, which is 5x bigger.
Common stock pays a 9.8% dividend and stock is valued in line w/ comps at 1.1x 2013E book value. Company has 6.5% senior secured notes outstanding, issued in 2011, though no pricing is available on those, though we note that BB-rated credit has tightened a net 50bps since Jan 2011, while BBB- credit has remained flat. Purely on the numbers, we would put fair value on the credit in range of L+600-625, reflecting its rather small portfolio size ($1.1bn) and $385mm of secured debt and bank loans ahead of the proposed converts. That said, we concede convert size is small. If portfolio value drops 30% (currenty booked at avg of 102% of face), converts should still be covered by just over 3.5x net of secured debt, which should provide a reasonable margin of safety for bondholders.
BKCC’s portfolio composition consists of 75% senior secured loans and 2/3 of the portfolio was underwritten in 2010-2011. While we cannot speak directly to the margin of safety of these loans given a resumption of loan term slippage since 2010, at the very least it should reduce the near term risk of reduced income from loans being refinanced at lower rates. Avg portfolio yield was 12.2% at 3Q12, consisting of 11.6% on the senior secured loan book and 13.5% on all other loans and debt. Company’s funds $310mm via its TL and revolver at L+300-325bps and has $175mm of sr sec’d notes at ~6.5%. At 3Q12, its largest industry exposures were to Personal Services (ex. fitness) at 12.5%, Healthcare (12%), Business Services (10.2%) and Manufacturing (10.1%). Avg exposure size is $21.6mm, with largest exposure of $50mm and top 5 exposures representing 21% of the portfolio.