What happened
Shares of Triangle Capital Corporation (NYSE: TCAP) are down about 26% as of 1:00 p.m. EDT after the company reported a dismal earnings report, slashing its dividend by 33% from $0.45 per quarter to $0.30. Material underperformance in its investment portfolio has been a recurring problem for the Raleigh, North Carolina-based lender and investor.
So what
Triangle Capital has suffered from outsize losses in its investment portfolio, making it a likely candidate for a dividend cut. Investments it underwrote during a period spanning from 2013 to 2015 are to blame, producing the largest losses as they seasoned.
This quarter, Triangle Capital reported that it earned $0.36 per share in net investment income, which excludes investment losses. Including net losses from impairments, however, the company lost $1.20 per share this quarter alone, erasing a full year of dividends at the current run rate.
Poor investment performance leaves investors to wonder if Triangle Capital is investing with its eyes closed. Image source: Getty Images.
At the annual shareholders meeting earlier this year, Triangle Capital drew an imaginary line to differentiate between the "old" TCAP and the "new" one, which it calls "TCAP 2.0." The company noted that its newer investments went through a better screening process in which certain individuals had more power to strike down investments that didn't meet its standards. Management implied that its new processes should result in better investment performance, noting that all of its TCAP 2.0 investments were performing well at the time.
That changed this quarter, when the first TCAP 2.0 investment hit a rough patch. Passport Food Group was carried at an 8% premium to par value last quarter. This quarter, it was marked at an 8% discount to par.
Management discussed the investment on the conference call, noting that the food producer experienced an unexpected loss in the company's product line, resulting in lower sales and an overall performance decline. Triangle management said it took the possibility of a sales slump into account when underwriting the deal, but the writedown is a notable event given that management hinged its credibility on the success of its TCAP 2.0 portfolio.
Now what
Triangle Capital suffers a credit and credibility problem, evidenced by the fact that shares currently trade at massive 31% discount to its third-quarter net asset value (book value) of $13.20 per share. The median company in its industry trades at a 5% discount to net asset value.
Given continuous losses, investors are struggling with how to handicap the company's portfolio on a forward basis. Some particularly troublesome credits include GST AutoLeather. Triangle valued the investment at a 18% discount to par last quarter. This quarter, it marked the investment at a 90% discount to par value. In early October, GST AutoLeather filed for Chapter 11 bankruptcy.
Small losses turning into large losses is a recurring problem at Triangle Capital, leaving investors to question if its marks are really representative of the investment portfolio's value or just another step toward even lower valuations in the future.
Triangle said it would explore "strategic alternatives" in its third-quarter earnings press release, suggesting that the company may be entertaining bids to sell all or part of its portfolio. For now, though, investors are seemingly happy to simply put their losses behind them rather than hold out for a bid. Waiting for improvement hasn't been a winning strategy for Triangle Capital's investors.
