Alcentra shifts focus to add lower-yield, senior secured investments

By Devika Patel

Knoxville, Tenn., March 15 – Alcentra Capital Corp. has revised its investment strategy to pursue more stable senior secured or second lien lower-yield investments rather than risky higher-yield unsecured subordinated investments.

“We have worked diligently to develop strategy across three key areas: our portfolio, the expansion and rotation of our investment strategy and other measures to boost ROE [return on equity],” chief executive officer and chief investment officer David P. Scopelliti said on the company’s fourth quarter and year ended Dec. 31, 2017 earnings conference call on Thursday.

“We are going to be making meaningful changes to these core areas of the business.

“The plan impacts five key areas our business with the focus on stabilizing net asset value and generating core earnings,” he said.

The company intends to cut its focus on unsecured and subordinated debt in favor of larger companies with senior secured debt.

“We want to reposition our portfolio, which will include reducing our focus on lower middle market, unsecured subordinated debt given the current and late stages of this credit cycle,” Scopelliti said.

“As well, we are going to focus the portfolio on larger companies and will more selectively look at smaller, sponsor-backed companies where there is a clear buy-and-build growth thesis.

“Subordinated debt is an episodic asset class and we must recognize that this is not the right time in the cycle to overweight these investments.

“Most of the private credit market has turned to senior secured uni-tranche structures which typically have lower risk profiles along with lower pricing.

“We are cautious on the current private credit market and believe that now is a prudent time to focus on repositioning our portfolio,” Scopelliti said.

The company plans for more liquid investments, seeking diversification and reinvestments into floating-rate loans, using undrawn capital from its line of credit.

“To expedite the portfolio repositioning, we will rotate into more liquid investments in order to more quickly provide enhanced diversification, increased floating rate exposure and efficiently deploy undrawn capital from our line of credit,” Scopelliti said.

“We believe these actions will better enable us to achieve results that are more consistent for our shareholders.

“We aim to reduce our non-accrual loans and harvest our under-performing investments and to re-invest these proceeds primarily into less volatile, interest-generating floating-rate loans,” he said.

In evaluating the company’s risk, Scopelliti said that the most risky investments were with smaller borrowers and within industries that had “higher regulatory or commodity exposure.”

“We saw credit losses generally came from investments with smaller borrowers, who by their nature have larger customer and revenue concentrations, limited management bench as well as certain industries with higher regulatory or commodity exposure,” he said.

The company’s past investments have resulted in volatility over the past year and management seeks to avoid more volatility by reducing its yields and increasing its investing in more-stable senior debt and second lien investments into larger companies.

“We have experienced volatility over 2017 as a result of our historic high-yielding, primarily unsecured subordinated debt and equity investments,” Scopelliti said.

“We are looking to avoid future volatility as we transition to a broader investment strategy that will include a range of senior, uni-tranche and second lien investments in larger companies that should provide more stability.

“Let me be crystal-clear: we would rather make lower-yield investments that do not lose value than high-yielding investments where there is more predilection to losing principal at this point in the credit cycle.,” he said.

Alcentra is a closed-end management investment company.

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