Another day with egg on my face. Today, Vertical Capital Income (VCIP) announced that ahead of their pending closing with Carlyle, the fund had liquidated most of their portfolio of residential mortgage whole loans (which was a condition of closing) for a 17% discount to their last reported NAV on 6/30, a full 11 days ago. In their own words:
Based upon the expected proceeds from this sale, which resulted in aggregate proceeds lower than the book value of the combined assets due to the significant sale needed to facilitate the Transaction, the Fund has adjusted its net asset value per share ("NAV") from $9.96 as last reported on June 30, 2023, to $8.27 as of today.
Huh? Seems like there must be a typo or a word was deleted between significant and sale as there's an extra space in there.
The portfolio assets are residential mortgages, most of them are fixed rate, rates have moved slightly up in recent weeks but not enough to justify that discount. The old management, Oakline Advisors, is kind of an odd shell that is probably checked out at this point and the board of trustees barely own any stock (0.18% as a group). The incentives to execute a full competitive auction to get best execution just probably weren't there, someone got a steal. Carlyle doesn't care either, they just want to be handed a bank account with cash in it, doesn't matter to them how much is in the bank account, they're going to go through with their tender and subsequent investment at the value of the cash account. Not sure how management or the board of trustees can get away with having a shareholder vote a month ago to approve the transaction based on such a faulty mark. But that's above my head.
What does it look like from here?
Based on the press release, looks like the deal will close by the end of the month, this will all happen pretty quickly. Shortly after the deal closes, Carlyle (from the management company, not the fund) will pay $0.96/share in cash to shareholders and then will tender for $25MM at NAV. If we assume the market is fully pricing in the $0.96/share payment, everyone tenders in full, my math comes up with a proforma price of $7.26/share or 88% of NAV. Please check my math.
The other CLO equity funds trade above NAV. It will take time (6-12 months?) for Carlyle to ramp the portfolio up from zero, add some leverage, etc., to get to the point where it looks like one of other CLO equity funds. The world could change in the meantime. But Carlyle should be incentivized to make this trade close to NAV, they're one of the largest CLO managers, they want the captive CLO equity vehicle to grow that business. In its current size, VCIF is too small to accomplish that, if it trades at or above NAV, Carlyle will be able to issue shares accretively and everyone is happy.
Disclosure: I own shares of VCIF
Any prospects of a class-action here? From my experience (very little), you don't necessarily have to hold the shares to participate.
ReplyDeleteCertainly seems possible, but I'm not an expert in that area, hesitant to really comment one way or another.
DeleteHey MDC - Unfortunate mark (I think you nailed the dynamics...wonder if Carlyle or a related party bought the mortgages!) but looks like a great IRR from today. Are there any transaction costs? Given the small market cap just a few MM could crimp the return. Thanks.
ReplyDeleteHard to know if the NAV incorporates any transaction fees? It's a good point, maybe we should haircut it again by a few million.
DeleteSeems like a pretty complicated way to buy a subscale CLO fund at a 10% discount to NAV. That isn't a set up that would interest me absent the special situation wrapper. Post-tender all you are left with his hope that this trades like the comps. Carlyle might, or might not, be able to gin up some catalysts, but it seems like some of the easy ones (large buyback, liquidation) are off the table given they want the AUM. And that all assumes there are no more surprises in fees or other closing costs.
ReplyDeleteIt might trade up to NAV once it gets fully invested (which won't happen over night) but for me I'd like to see either a more obvious valuation opportunity or a more defined timeline & catalyst for the spread to close.
I agree with you. I've learned that the more complicated the special situation gets, the harder it becomes for me to predict the outcome. After this sale at such a big discount for no seemingly smart reason, I've just come to the conclusion that they're way too many variables here for me to partake in. The biggest driver here is that other CLO equity funds trade for a higher multiple to NAV and the recent selloff widens that margin, but given the arbitrary timeline there's no definitive answer to how much of that NAV will erode over time.
DeleteMy winning stub trade so far was 3U holdings over in Germany, where you got a little holdco at less than net cash because they sold a subsidiary for quite a bit. Uncomplicated.
DeleteIt does seem like a lot of the complexity here is not for the benefit of the common shareholder, but I bet the IRR from here is at least OK.
But, I’m opportunity cost bag-holding LRFC and SSIC, so I don’t think I can dive into more fund garbage. Maybe the lesson is that publicly traded funds are no bueno.
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