TICC Capital: Income Opportunity in the Notes

This post is excerpted from a letter by Jim Roumell, partner and portfolio manager of Roumell Asset Management.

TICC Capital Corp. is a publicly-traded business development company (“BDC”) primarily engaged in providing debt capital to a wide-range of U.S.-based companies. The company holds assets in syndicated bank loans and debt and equity tranches of collateralized loan obligations. TICC’s focus is primarily on small to mid-sized companies. TICC generally invests between $5.0 million and $50.0 million in each of its portfolio companies.

The 6.5% notes, purchased at par, are a new issuance of notes. TICC disclosed that it will use the net proceeds from this offering to repay or repurchase a portion of the outstanding indebtedness under its 7.50% convertible notes due 2017. CEO Jonathan Cohen owns 2%, or about $7 million, of the TICC common shares.

Regulatory restrictions under the Investment Company Act of 1940 limit the amount of debt that a BDC can have outstanding. Generally, a BDC may not issue any class of indebtedness unless, immediately after such issuance, it will have asset coverage of at least 200%. For example, if a BDC has $1 million in assets, it can borrow up to $1 million, which would result in assets of $2 million and debt of $1 million. If TICC were to breach this regulatory limit it would be forced to take action to come back into compliance. These actions could include the sale of assets and repayment of a portion of the debt or the issuance of new common equity. In the absence of any such action, TICC would be required to suspend payment of its common stock dividend, which would effectively de-lever the balance sheet to the benefit of bondholders. The debt limit restriction brings us a great deal of comfort that our notes are well protected by significant asset coverage.

Read about Edgewater Technology and Liquidity Services, discussed in the same letter.

Read Jim’s take on investing in deep value stocks vs. great businesses.

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