TICC Capital Corp TICC
December 31, 2008 - 2:17am EST by
2008 2009
Price: 3.36 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 88 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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TICC Capital Corp is an externally-managed BDC with a focus on lending to technology companies (however, they are free to invest outside of the technology sector).  While many BDCs are trading at depressed valuations, TICC is unique in that it is the rare combination of: a) trading for an extremely low multiple of book value (36% of book value), b) it has a completely unleveraged balance sheet, and c) its investments portfolio is almost entirely senior debt, with virtually no equity or subordinated or mezzanine debt.  I believe that these 3 factors combined make the possibility of a capital loss here extremely remote, with a lot of upside when panic in the markets subsides.  On top of that, we are getting paid a 24% yield to wait for the market to re-value the company at a much higher level.

This writeup is shorter than some of my past ones as the idea is very straightforward and I believe most VIC members are already fairly familiar with the BDC-RIC structure (if not, see past write-ups of ACAS, GAIN, ALD, ARCC, NGPC, etc.)  If not, I can provide more detail for you in the comments.

BDC Overview
The universe of BDC companies has been hit particularly hard this year for obvious reasons: loan quality is deteriorating, they tend to lend to smaller-sized companies which are likely to be hit harder in a recession, they are dependent upon the capital markets to finance any growth in the portfolio, etc.  BDC-RICs are restricted from leveraging their balance sheet beyond 2-to-1 assets-to-equity, however, which helps to mitigate the risk that is prevalent in any lending operation.  This is especially true for those BDCs that focus on senior debt, which is more typically leveraged beyond 4x at commercial banks.

3 Key Attributes
1 and 2) It trades for only 36% of book value.  It has no net debt.  Furthermore, that book value has already been marked-down, so it actually trades for only 27% of its investment portfolio at cost.  This is very important in thinking about the downside here.  They would need more than 3/4 of the portfolio to default with 0 recoveries for the asset value here to erode below the current market price.  With a more realistic estimate for recoveries, they would likely need 85-90% of the portfolio to default before the asset value begins to erode.  However you choose to look at it, I think the downside here is quite minimal.

3) The nature of portfolio gives me confidence that the net asset value here will ultimately prove to be substantially in excess of the current market value.  The portfolio investments are almost entirely high up in the capital structure with 96% of the portfolio in senior debt and 85% classified as senior secured debt.  Less than 4% of the portfolio is in equity and warrants.  Where BDCs and similar lenders have run into problems is generally with their equity investments and more junior debt instruments that possess high default rates, and much worse recoveries than senior secured debt.  The one offset to this is that their focus on technology-oriented companies likely means lower recoveries relative to other industries.

Furthermore, there is no concentration in any single investment; the largest position is the senior secured notes to NetQuote, which are just under 10% of the NAV.  

While credit quality in the portfolio has declined, that is not surprising, and I don't think there are any alarming concerns that would justify the current market price.  Management still believes that only 4% of the portfolio at market value (12% at cost) is in investments where they expect there to be reductions in either interest income or principal.  More detail on these estimates can be found in their most recent 10-Q.

Also, it should be noted that their interest income is clean with virtually no PIK income or OID.

Finally, while I don't have any strong opinions on the management here, I do take a bit of comfort in that Jonathan Cohen was formerly at Royce and Charles Royce is still the Chairman at TICC.


No catalyst here, but you receive a 24% dividend yield to be patient.
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