|Shares Out. (in M):||14M||P/E||0||0|
|Market Cap (in M):||142||P/FCF||0||0|
|Net Debt (in M):||130||EBIT||0||0|
Joining the chorus of “cheap” BDCs that have been written up recently – I am pitching CMFN, which hasn’t been mentioned much. I think it has several interesting characteristics outside of just being valued on a cheap price to book multiple.
With a 13% yield, I view as reasonably likely that the fund can trade at 90% of live NAV (which I estimate at ~$13.50). So without assuming a bounce in the credit markets, this is a base case 30%+ ROR opportunity over a year with very limited downside risk.
CMFN is the BDC affiliate of Cyrus Capital, a long standing distressed investor that spun from Och Ziff in the late 1990s. The CEO and CIOs are Michael Mauer and Christopher Jansen, whose backgrounds are below. The BDC obviously leverages Cyrus Capital’s team for its investment decisions.
Michael Mauer formerly worked for Icahn Capital where he was a Senior Managing Director and a member of the investment team. In addition, he was in charge of the firm’s Marketing and Investor Relations. Prior to that, Mr. Mauer spent over eight years at Citigroup, where he was a Managing Director. During that time he led several businesses including roles as the Global Co-Head of Leverage Finance and Global Co-Head of Fixed Income Currency and Commodity Distribution. From 1988 to 2001, Mr. Mauer held several positions at JPMorgan including Head of North American Investment Grade and Leverage Loan Syndicate, Sales and Trading businesses. Mr. Mauer began his career in 1982 at Price Waterhouse & Co. where he was a Senior Accountant and a C.P.A. Mr. Mauer received a B.S. from the University of Scranton and an M.B.A. from Columbia University.
Christopher Jansen formerly was a founding Managing Partner and Senior Portfolio Manager for Stanfield Capital Partners from its formation in 1998 through the sale of the Company in 2010. His responsibilities included investment oversight and administration of the investment process and the implementation of portfolio management procedures of the Company’s sub-investment grade/leveraged loan businesses. In addition, as a member of the firm’s Management Committee, Mr. Jansen was involved in planning the strategic direction of the firm. Prior to founding Stanfield, Mr. Jansen was Managing Director and Portfolio Manager at Chancellor Senior Secured Management from 1990 to 1998. From 1983 to 1990, Mr. Jansen held various positions at Manufacturers Hanover Trust Company, served as Vice President in the Bank’s Acquisition Finance Group and LBO Management Group. Mr. Jansen received a B.A. from Rutgers College and an M.M. from the Kellogg School of Management at Northwestern University
As far as management pedigree goes, they are a step above the average BDC. Additionally, not only does Cyrus own a majority interest in CMFN, but management has purchased shares in the open market on a personal basis multiple times post-earnings when prices were above today’s levels.
We have entered into an investment advisory agreement (the “Investment Advisory Agreement”) with CM Investment Partners, as our investment adviser, pursuant to which we pay the Adviser a management fee equal to 1.75% of our gross assets, payable in arrears on a quarterly basis. In addition, pursuant to the Investment Advisory Agreement, we pay the Adviser an Incentive Fee equal to 20.0% of pre-incentive fee net investment income, subject to an annualized hurdle rate of 8.0% with a “catch up” fee for returns between the 8.0% hurdle and 10.0% as well as 20.0% of net capital gains. From February 11, 2014 (the completion of our initial public offering) to December 31, 2014, the Adviser agreed to waive its fees (base management and incentive fee), without recourse against or reimbursement by us, to the extent required in order for us to earn a quarterly net investment income to support a minimum dividend payment on shares of common stock outstanding on the relevant dividend payment dates of 9.0% (to be paid on a quarterly basis). For the periods from January 1, 2015 to December 31, 2015 and from January 1, 2016 to December 31, 2016, the Adviser has agreed to waive its incentive fees, without recourse against or reimbursement by us, to the extent required in order for the Company to earn a quarterly net investment income to support minimum dividend payments on shares of common stock outstanding on the relevant dividend payment dates of 9.25% and 9.375%, respectively (to be paid on a quarterly basis).
At 1.75% vs. the standard 2% the headline fee is lower. However it also excludes cash, has a catch-up provision, and a three-year look back feature. While not cheap, this is a best in class fee structure for the industry. CMFN also provided a waiver of its fees to get the dividend stable through 2016 (the waiver is no longer needed since the portfolio is ramped).
The table below provides a listing of all positions, Bloomberg tickers where available, pricing on 6/30 (per the company), and pricing on 9/30 and 11/5 from Bloomberg and dealer runs. The goal is to calculate a “live” NAV. I’ve left the unmarked positions flat to 6/30, except for AAR (which I discuss later), which I’ve taken down 5 pts, and the warrants which I've written to 0. Apologies for the challenged formatting in the table below...
|First Lien:||Bloomberg Ticker||Principal Amount||Fair Value (6/30)||30-Jun||30-Sep||5-Nov||$P&L through 9/30||$ P&L through 11/5|
|ASV||Not Marked / Brand New||$19,750,000||$19,355,000||98.0%||98.0%||98.0%||$0||$0|
|AAR Intermediate Holdings****||Not Marked||$18,449,153||$15,681,780||85.0%||80.0%||80.0%||($922,458)||($922,458)|
|AM General, LLC||BL093928 Corp||$8,690,025||%7,994,823||92.0%||78.0%||72.0%||($1,216,604)||($1,738,005)|
|American Gaming Systems, Inc||BL118325 Corp||$29,737,025||$29,439,655||99.0%||98.3%||96.5%||($223,028)||($743,426)|
|Crestwood Holdings, LLC||Sold||$9,490,434||$9,371,804||98.8%||98.8%||98.8%||$0||$0|
|JACPRO 11 1/2||EK499288 Corp||$11,750,000||$12,102,500||103.0%||99.5%||99.8%||($411,250)||($381,875)|
|New Standard Texas||Repaid at Par||$7,553,718||$6,798,346||90.0%||100.0%||100.0%||$755,372||$755,372|
|PR Wirless||BL130746 Corp||$16,830,000||$15,567,750||92.5%||94.5%||93.0%||$336,600||$84,150|
|US Well Services||Seaport Makes Market||$6,552,623||$6,421,571||98.0%||94.5%||91.0%||($229,342)||($458,684)|
|YRCWorldwide, Inc||BL122784 Corp||$19,762,342||$19,268,283||97.5%||98.0%||95.0%||$98,812||($494,058)|
|AP NMT Acquisition||BL135519 Corp||$20,000,000||$19,300,000||96.5%||90.0%||88.5%||($1,300,000)||($1,600,000)|
|Bird Electric||Not Marked||$15,000,000||$14,700,000||98.0%||98.0%||98.0%||$0||$0|
|Caelus Energy||BL125972 Corp||$26,000,000||$21,580,000||83.0%||71.0%||66.5%||($3,120,000)||($4,290,000)|
|Maxim Crane||BL116286 Corp||$10,000,000||$10,075,000||100.8%||102.4%||101.9%||$162,500||$112,500|
|North American Lifting Holdings, Inc.||BL116372 Corp||$16,200,000||$14,904,000||92.0%||90.5%||90.0%||($243,000)||($324,000)|
|Physiotherapy Associates||BL172193 Corp||$5,000,000||$4,950,000||99.0%||101.3%||101.4%||$112,500||$118,750|
|Telecommunications Management, LLC||BL096570 Corp||$11,539,815||$11,193,621||97.0%||94.9%||95.6%||($245,222)||($158,673)|
|Telular Corp.||BL104641 Corp||$7,500,000||$7,481,250||99.8%||98.8%||100.0%||($75,000)||$18,750|
|TNS, Inc.||BL090664 Corp||$15,725,000||$15,646,375||99.5%||99.3%||99.0%||($39,312)||($78,625)|
|Trident USA Health Services, Inc.||BL106145 Corp||$21,878,285||$21,440,720||98.0%||95.0%||97.0%||($656,349)||($218,784)|
|Nexeo||NEXEOS8 ⅜ 03/18 Corp||$9,000,000||$8,280,000||92.0%||95.5%||98.1%||$315,000||$549,000|
|Language Line||BL174324 Corp||100.0%||99.9%|
|Land Holdings||Brand New / Not Marked|
|**RCHP is a liquid loan that appears in multiple BDCs priced at par. I haven't been able to pull its ticker on Bloomberg.||% Change in NAV||-3.94%||-5.37%|
|Discount to NAV:||75.1%||76.3%|
The NAV projection is done as follows:
The company may have traded these positions (for better or for worse), so there is no guarantee this number is perfect.
Oil & Gas Exposure and Downside Risk:
The oil and gas exposure comes from two names (now that the scary sounding New Standard Texas was repaid at par, and Crestwood Pipeline sold in the secondary market).
Caelus Energy: This is a large Apollo backed deal loan, I won’t dive into its merits here, but our credit team has a positive view on it.
AAR Intermediate: This is a lightly levered services business originated in the Fall of last year. The CEO has discussed this position several times and I quote the Q1 2015 conference call:
AAR is a Colorado-based oilfield services company. This is a great example of a dislocation in industry that creates opportunity. There are a lot of bad deals out there in oil and gas space generally and a lot of those should never be done. This is an environment that also causes good deals to struggle. AAR is a good investment and a good deal, where we spent months doing diligent meeting customers, multiple site visits. We are very focused on the structure on top of the health of the company. Our loan is less than two times levered on a run rate. It has significant amortization and strong maintenance covenants. As part of our investment, we received warrants in addition to 15.6% yield on our first lien loan to the company that with a 13% coupon. This investment was a result of our strategic relationship with Stifel.
As a metric of margin of safety – you can set both Caelus and AAR to be worth 0 (I don’t think this is realistic), but you will still see a NAV in the 11 handle.
To get the NAV down to today’s price (giving no credit for the dividends earned over the period it takes to get there), you’d have to write all the energy to 0, and then have NAV decline another 9%
The company is working towards an SBA license which would allow it access to extremely attractive financing and added portfolio leverage.
The company pays an attractive 13.5% dividend yield, so no immediate re-rating is required. However, the following may help
Do the high fees make the discount irrelevant?
While the fees are high, the BDC structure here does provide tangible value:
What is the variant perception?
I think most investors haven't done the work on the underlying portfolio (and recent changes) and just view this is an illiquid, very oil and gas sensitive lender. Hence the rally in the Spring and subsequent sell-off in late summer.
The company pays an attractive 13.5% dividend yield, so no immediate re-rating is required. However, the following may help
|Entry||11/09/2015 10:52 AM|
1) The dividend is well covered. NII last quarter was .47. The fee waiver backstop to the dividend was not utilized. Even without origination fees, prepayment fees, etc (though there will be some this quarter as well). Dividend is fine.
2) Debt is ~1.7x net assets (net assets of 196.9 vs. debt of 133.4). There is some room before they reach the cap in terms of additional leverage. Leverage should be managable given portfolio is fairly liquid. SBA license would be upside in terms of capacity.
3) No buybacks by the company, but management have been aggressive buyers on dips PA. Given the limited liquidity of the stock, and the relatively short periods where its been depressed, i dont think this is crazy. To the extent the stock trades poorly for a prolonged period I'd expect management to consider a buyback.
|Subject||Re: Re: Questions|
|Entry||11/09/2015 04:05 PM|
NAV came out in the earnings at $13.65, a penny away from my projection in the write-up.
|Subject||Re: Re: Re: Questions|
|Entry||11/12/2015 09:09 AM|
Quick update, RCHP Inc, which is one of the loans I didn't have a BBG ticker for (it is actually BL126825 Corp) will be repaid (at 102) as it was announced this morning that Apollo is buying the company from Warburg Pincus.
|Entry||02/26/2016 09:07 AM|
CMFN sold off dramatically in January/February to levels that just dont make sense. In Q4, the company increased their dividend, but saw NAV losses in the portfolio which i think set off the selling.
The stock currently prices in that all names in the portfolio trading below 90 (that includes all privates originated more than a quarter ago) are all worth 0. In that list of <90 px, are Endemol, North American Lifting, AM General, YRC Worldwide - all of which trade and have broker indications at least weekly. They all sit in the 70s/l80s today, so to assume they all go to 0 is extreme. I am also writing off AAR, and Bird Electric which are private, and Caelus energy, which is public but trades in the 40s.
I see today's NAV in the m11s (a little bit lower than the $12 reported for Q4) based on MTM, primarily in Endemol 2nds and Caelus which have broker indications.The stock is currently trading at $7 with a dividend coming in early March. The major difference between actual Q4 and my NAV projection in early November, was a write-down in Bird Electric which I did not anticipate.
If Cyrus' underwriting turns out OK - the portfolio is worth just over $15 at par, and you would be pocketing $1.40 a year in cash dividends.
There are alot of BDCs for which i am sure you can make similar arguments, the difference here is that this portfolio has real marks on the vast majority of it and a fee structure for the manager that actually makes sense.
|Entry||12/20/2016 11:59 AM|
Given its been a year since we posted the idea, we wanted to provide an update. The trade has generated a high single digit return since inception, which is dissapointing relative to the stronger performance of the BDC index. That said - CMFN is currently one of the cheapest, and easiest to underwrite BDC names out there. Unlike most other BDCs, the vast majority of CMFN's portfolio can be priced via dealer runs/Bloomberg. We also think that oil will be a tailwind, rather than a headwind to performance going forward.
We see CMFN's NAV as up a little over a point in Q4 to $12.02 vs. its current $9.30 trading level. This would imply its trading at 77.5% of NAV, vs the index which is trading at 98%.
Given a recently adjusted dividend, stabilizing oil prices - we think the stock is likely to re-rate into the mh80s as a percentage of NAV, as well as see some NAV appreciation. If we assume the stock trades at 88% of NAV (and assuming no NAV improvement) by the end of next year - the total return would be 25% including the dividend over a year.
The below table shows where we see line item pricing. Liquidity in these names varies. Names like Endemol, AM General and American Gaming are quoted by multiple dealers several times a week. PR Wireless, TNT and most of the other second liens generally have less price transparency. Often times, the 1st lien in these names has better price transparency.