S&P did revise the "outlook" (not the rating) for SLRC to "negative" because of the restructuring of DS Waters. That restructuring is not a new development. Stifel Nicolaus addressed the DS Waters issue in a February 17th report saying the restructuring certainly heightens portfolio credit quality risk at SLRC, but Stifel also reminded us that the annual EBITDA at DS Waters covers the payments due on the debt and preferred equity. That means that if things don't get materially worse at DSW, this loan will continue to perform as expected.
S&P did not change its' credit rating on SLRC. It affirmed the current rating.
Looking further at the DSW restructuring, it was necessary to refinance its' maturing capital structure which matures in a few months. The SLRC PIK notes were exchanged for PIK preferred equity (same principle amount). The resulting equity will have a dividend rate consistent with the old notes. In addition, SLRC achieves voting control and board control of DSW allowing SLRC to control the forward corporate actions of DSW such as future financings and exit alternatives. All of that helps SLRC hasten the future monetization of DSW.
And not too many folks got too nervous about the DSW restructuring. After the restructuring information became available, and after the discussion of DSW on the SLRC conference call, Evercore Partners, on February 23rd, conceded that "credit quality weakened modestly" but also said they are comfortable with SLRC's ability to expand its NII going forward. Additionally, Evercore pointed out the significant borrowing capacity of SLRC ($303 million) for future investment. On February 23rd, Deutsche Bank, increased their target price of SLRC to $26.50 while also pointing out the $300 million of capital SLRC had available for investment. Also on February 23rd, Stifel said that because the DSW debt above SLRC in the capital structure is now more expensive, the SLRC investment in DSW is now a higher credit risk. But Stifel also said that SLRC is managed by a quality team and SLRC is viewed as a quality player in the BDC space.
Let's look at DSW itself. This is an aggressive Company formed in 2003. Some of its acquired brands (from acquired companies) have been serving customers for over a hundred years. It supplies a valuable product, clean water, along with coffee and tea services and water filtration systems. DSW recently (March 23rd) purchased The Standard Companies, Inc. It also bought Deep Rock Water Co. last December (a Colorado Co.); bought Mount Olympus Waters, Inc. in November of 2010 (a Utah Co.); and bought the bottled water delivery service of Echota Beverage Group, Inc., also in November of 2010, (a Tennessee Co.). DS Waters operates 28 manufacturing facilities and provides its products and services across the United States. DS Waters not only operates in most major markets in the U.S. based on population, the company also maintains a significant market share position in most of the markets in which it operates. In late 2005, when DSW was sold to investment equity fund Kelso, DSW revenue was at about $800 million, and DSW has made a lot of acquisitions since 2005. DS Waters looks like a well positioned company with a needed product. And it now has a strengthened management team. It is also somewhat ironic that S&P said that if the restructuring closes as contemplated, it will RAISE the credit rating of DS Waters.
"We are placing our 'CCC+' corporate credit rating on DS Waters on CreditWatch with positive implications."
"We intend to resolve the CreditWatch listing when DS Waters completes the proposed recapitalization transaction. At that time we expect to assign a 'B' corporate credit rating based upon terms of the currently proposed recapitalization. If the company does not complete the proposed refinancing and balance sheet recapitalization, we would withdraw the new issue-level ratings for the proposed refinancing, and reevaluate the direction of the CreditWatch listing given the substantial near-term debt maturities that would remain at DS Waters."
So does the recent price hit on SLRC (because of the time dictated recapitalization of DSW) provide a current buying opportunity for SLRC. Well, each investor will have to decide that for himself or herself. But here are a few statistics based on Friday's closing numbers. Three of the best valued BDC's right now are MCC (young and growing), PNNT (solid and stable but with slower growth), and SLRC (proven player and undervalued). The dividend yields on each BDC in the order mentioned are 10.35%, 10.90%, and 11.48%. All of these yields, especially the 11.48% of SLRC, are well above the median yield of the BDC industry which is 9.3%. The potential total gains (price gain to analysts' target price plus dividend yield) are 23.35% for MCC, 27.74% for PNNT, and 32.15% for SLRC. Regarding NAV, PNNT is selling above book with MCC and SLRC selling below book. But SLRC is selling at a greater discount to the average peer group book than are the other two. (I use two BDC peer groups based on market capitalization. One group consists of those BDC's with a market cap. of greater than $400 million and the second group of $100 million to $400 million). Remember, all of these numbers are as of Friday's closing prices, but today, the SLRC stock price is down again and thus making the metrics even more compelling.
A couple more points of interest. Even after the completion of the DWS restructuring, 99.4% of the SLRC loan portfolio is on a "performing" status. And SLRC has stated that the realizable value of its' portfolio is north of $24 per share.
As always, the above is just one opinion. Good hunting to you all.
Jan
