TICC Capital (NASDAQ: TICC) is in the middle of one of the most interesting stories in the world of business development companies. On a post-earnings conference call in August, management discussed its desire to hand the company over to a new manager, Benefit Street Partners.
But competing managers aren't willing to let this deal happen uncontested. There are now three very different offers from three management teams who want to decide the future of TICC Capital.
Option No. 1: What TICC Wants
TICC Capital originally planned to hand over the company's external manager to Benefit Street Partners in a deal that would essentially keep the status quo. The only thing that would change is the investment strategy: TICC Capital would likely shed its structured-products business to reinvest in more traditional BDC assets, like the debt and equity of private companies.
TICC Capital proceeded as if it were already a done deal. It sought, and received, approval from its lenders to continue to finance the company when Benefit Street Partners becomes the new manager.
The terms call for Benefit Street Partners to manage TICC Capital and for the management fee to be permanently reduced to 1.5% per year on all assets, down from 2%. In addition, Benefit Street Partners has agreed to buy $20 million of TICC Capital stock within 12 months after taking over management control.
|
Benefit Street Partner's Proposal | |
|---|---|
|
Management Fee |
1.5% on gross assets in perpetuity |
|
Fee Waiver |
None. |
|
Common Stock Investment |
Agreed to purchase $20 million of TICC Capital common stock in the first 12 months after it becomes manager. |
Source: Proxy filing.
Option No. 2: A competitor appears
Shortly after the announcement that TICC Capital would seek a new manager, NexPoint Advisors threw its hat in the ring, promising investments in the company's common stock and more fee concessions. This is what set off the initial war on fees.
As it stands today, NexPoint's most recent agreement called for a permanent reduction in the management fee to 1.25% of assets per year, down from the current rate of 2%. In addition, it would waive the first $20 million in fees, invest up to $20 million in TICC's common stock, and maintain the company's current investment strategy.
|
NexPoint's Proposal | |
|---|---|
|
Management Fee |
1.25% on gross assets in perpetuity |
|
Common Stock Investment |
Up to $20 million |
|
Fee Waiver |
Agreed to waive the first $20 million in fees |
|
Investment Strategy |
Maintain TICC's current strategy |
Source: Proxy filing.
Option No. 3: TPG suggests a buyout
On Wednesday, the market learned that TPG Specialty Lending (TSLX +1.04%) offered to acquire TICC Capital in an all-stock transaction. TPG Specialty Lending offered to pay the equivalent of $7.50 per share for TICC Capital. That's a slight discount to the company's last-reported net asset value of $8.60 per share.
This offer is different because it's essentially a merger of equals in which TICC Capital assets would be rolled into TPG Specialty Lending. Therefore the assets would presumably be managed under the current management agreement between TPG's manager and its shareholders.
Thus the proposal is summarized as follows:
|
TPG Specialty Lending's Proposal | |
|---|---|
|
Type |
Merger |
|
Consideration |
TPG Specialty Lending shares worth $7.50 for every TICC Capital share. |
|
Management Fee |
1.5% of assets, per the current agreement between TPG and its external manager |
Source: Proxy filing and 10-Q.
What's the best deal?
NexPoint and TPG Specialty Lending have announced that they intend to submit their offers directly to TICC Capital shareholders for a vote. Starting from the top, the Benefit Street Partners deal is likely not the best option, given that the NexPoint proposal includes a lower fee in perpetuity, plus a fee waiver. NexPoint believes its offer puts $50 million more in shareholder pockets than Benefit Street Partner's proposal.
That leaves us with NexPoint's proposal vs. TPG Specialty Lending's offer. This is where it gets difficult.
I find TPG's offer the most compelling, given that it provides an opportunity for TICC Capital investors to exit with an immediate return. The all-stock offer values TICC Capital at a 20% premium to its Sept. 15 trading price and only a modest discount of roughly 13% to net asset value.
Though you won't get a substantial reduction in management fees or incentive fees, TICC Capital shareholders will receive shares of what is, in my view, one of the best-managed companies in the industry. In addition, economies of scale favor a merger. TICC Capital would enjoy the benefits of lower funding costs on its assets thanks to TPG's investment-grade rating and bigger size. As TPG Specialty Lending owns 3% of TICC Capital's common stock, it already has an upper hand when the votes are counted.
Of course, long-time shareholders who are currently underwater may prefer to stick it out with TICC Capital as a stand-alone company, managed by NexPoint at a lower management fee. I regard this as a slightly riskier proposition. The fee cut and waiver, though they should help support the dividend, don't necessarily guarantee that the share price will rise.
There are still many details to be worked out. Nothing is set in stone yet, but one thing is clear: The deal TICC Capital's management prefers -- a deal with Benefit Street Partners -- is, by far, the worst of the bunch. As both NexPoint and TPG are filing their own proxies to take their offers direct to shareholders, it's clear they have an interest in duking it out. Let them. Another improved offer may be around the corner.
