Friday, August 11, 2017

Distribution Cuts and Verbal Sparing

It is time to take a trip deep into the woods.  I recommend reading the transcript of yesterday's FSIC earnings call.  FSIC announced a distribution cut of about 14%, dropping the quarterly distribution from $.22 per share to $.19.  FSIC is waiving .25% of its asset management fee for a year as a partial offset, which is about the same percentage reduction as the distribution.  FSIC blamed the distribution drop on a borrowers' market and "non income-producing equity" investments from restructurings.  Non income-producing investments from restructurings are former income producing debt investments that are now equity investments.  There was no discussion as to how the value of the new equity positions compares to the FSIC's original debt investments.

I am seeing across various income oriented BDCs and mortgage REITs that spreads are tightening, which means that the returns on the riskier assets these funds specialize in are dropping.  The situation is not unique to FSIC.

In an almost casual comment at the and of his prepared statements, FSIC CEO and Chairman Michael Forman stated that FSIC's "board is evaluating the timing and benefits of a merger with FSIC II, which remains a key focal point and could be a 2018 event."  This is news.  There is no date or definitive announcement, but a merger that remains liquid is positive news. 

The sparing is between FSIC management and Wells Fargo analyst Johnathan Bock and came during the question and answer session.  Bock questions the value of Franklin Square in the relationship with GSO as sub-advisor, wondering, "Of the deals that GSO submits to you, how many deals either early or late in the process do you at FS reject, given you are the final investment authority?"  Basically, he is wondering what Franklin Square does to earn a portion of the management fee because, according to Bock's implication, GSO does all the work.  FSIC does not directly answer his question in several answers from its executives, choosing to instead focus on the collaboration between FS and GSO.  Bock gets the final word by questioning FSIC's commitment to transparency as stated on its website. 

Do not think it random that Corporate Capital Trust abandoned its advisor / sub-advisor relationship before its planned listing.