In April, small-market lender Patriot Capital Funding announced it was considering strategic alternatives. What the struggling BDC (business development corp.) didn’t say was that the company had already shopped itself widely and was kicking off a full auction.
Last week, Patriot took first-round bids from eight parties, according to two lending sources who asked not to be named. One source said the bidding pool included two or three fellow BDCs and one private equity firm, adding that bids ranged from $2 per share to “full valuations” of $3 per share. As of 2pm this afternoon, Patriot Capital was trading at $1.91 per share, or a $40 million market cap.
A year ago, the BDC’s shares traded at more than $9 per share, but in recent months, Patriot Capital has met difficulty. In April one of the company’s credit facilities was terminated because the value of assets provided as collateral had dropped.
An outright sale isn’t Patriot Capital’s only option. The firm could agree to a new debt structure that goes ahead of the equity but behind the senior lender, allowing the senior lender to be paid down to some degree, one source said.
The list of natural BDC buyers for Patriot Capital includes industry peers like Main Street Capital, Triangle Capital, Prospect Capital, Ares Capital, Apollo Investment Corp. and Fifth Street Capital.
Fifth Street CEO Len Tannenbaum, however, told peHUB that his firm already looked at the deal and passed. “We’d rather work with new capital than devote time to running down another firm’s assets,” Tannenbaum said. “The question with all of these (BDCs for sale) is how much work will you have to do? Is it worth the time versus originating new deals?”
Tannenbaum said that his firm, which went public last year, would rather take advantage of the new cycle of deals in the works. He said he’s “cautious and confident” that Fifth Street will be granted an SBA license, which would allow the firm to take to up $135 million in leverage.
Fifth Street’s decision to bow out of the process is not likely to disappoint Patriot Capital’s CEO, Richard Buckanavage. In November, he responded to a peHUB Q&A with Tannenbaum, who included Patriot Capital in a list of lenders that were on the sidelines.
In the comments section, Buckanavage wrote that the firm had deployed $53.5 million in the most recent quarter. He continued: “As of third quarter end (9/30/08), we had approximately $9.5 million of cash on hand as well as approximately $47 million of additional capacity under our revolver. … As such, I would be interested how then Mr. Tannenbaum could characterize Patriot Capital as being out of capital.”
For its part, Fifth Street Capital cut its Q3 dividend by 24% on April 15, to account for non-accruing investments.
Patriot Capital is not the only BDC that’s fallen on hard times. This week GSC Investment, a New York-based specialty finance company, hired Stifel Nicolas to advise it in evaluating strategic alternatives. Meanwhile, American Capital faces a potential bankruptcy if it cannot negotiate a deal with lenders to deal a default on its debt, although CEO Malon Wilkus said in the firm’s latest earnings report that he is “confident” a deal will be reached. Discussion of consolidation amongst BDCs has increased in volume since the end of 2008, when plummeting stock prices and mark-to-market accounting rules diminished the firms’ collateral against lines of credit, which in turn, diminished their ability to lend. Buckanavage did not respond to an email requesting comment.
In March, I quoted Michael Arougheti, the CEO of Ares Capital, saying that even though Ares has shown there are benefits to going it alone, there also are benefits to consolidation. “Over time, consolidation is necessary to bring more efficiencies and get the sector moving in the right direction again,” he said.
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