Barings BDC (BBDC) – Tender Offer – 10% Upside

Current Price – $10.63

Tender Price – $10.2 – $11.72

Upside – 10% (if priced at the upper limit)

Expiration Date – September 6th, 2018

SEC Filling

 

Couple members suggested to look into this situation. Barings BDC launched tender offer to buy c. 8%-9% of shares, with odd-lot provision. If priced at the upper limit this tender would represent 10% upside, however due to reasons outlined below I am skeptical that this will happen.

The company recently sold its whole asset portfolio (so kind of cash shell at the moment) and signed new asset management agreement with Barings with rather standard fee structure. More details on these transactions and investment strategy going forward can be found in this presentation. Current tender offer is also part of the new asset management agreement. NAV/share stands at $11.72.

BDCs on average trade at 9%-10% discount to NAV (see here). For this tender to be priced at the upper limit shareholders should be willing to sell only at NAV or premium to it.  Relatively high market liquidity ($5m daily volume) at 10% discount to NAV is a clear indication that there are plenty of shareholders willing to exit the position at lower pricing. Before Barings proves the new strategy to investors I do not see any reasons for the discount to narrow.

On a positive note (i.e. in favor of higher tender pricing):

- Barings bought $100m of BBDC stock at NAV.

- Barings committed to buy another $50m of stock in the open market over the next two years.

- Barings paid $85m in dividends to previous BBDC shareholders out of its own pocket.

From a longer term perspective it seems that Barings interest are aligned with those of the rest of BBDC shareholders – 15% ownership, stock acquired at premium to current prices, huge upfront payment (equivalent to 10+ years of management fees). This investment will pay off for Baring only if their strategy generates large incentive fees, which in turn means either BBDC investment income is above 10% or there are significant capital gains from asset sales.

 

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