TriplePoint Venture Growth BDC Corp. Sells a Baby Bond
By: Tim McPartland,
By Tim McPartland
July 24, 2017
In a “refinancing” move, TriplePoint Venture Growth BDC Corp. (NYSE:TPVG) has sold a baby bond with a fairly meager coupon.
The proceeds from this offering primarily will be used to call in an existing baby bond issue that has a coupon of 6.75%. The new issue has a meager 5.75% coupon, with a short maturity date of July 15, 2022.
The business development company’s (BDC) bonds will be available for early redemption on July 15, 2019 at $25 plus accrued interest. With the current low coupon, we would be surprised if the new issue was redeemed prior to maturity in 2022.
TriplePoint Venture Growth is a business development company and, as such, it is regulated by the Investment Company Act of 1940. This act limits the amount of leverage a BDC can use to fund its investment portfolio. A BDC must have $2 worth of assets for each $1 in senior securities (preferred stock or bonds) to provide a margin of safety to the holders of senior securities. However, many of the assets of BDCs are level 3 investments, which means the value of the investment can only be determined by wide estimates. Thus, investors must place their trust in management to provide reasonable and accurate numbers.
Please note that we consider BDCs to be good investments during times of economic growth, but it may be very “dicey” when entering recessions. The loans they make are at high interest rates to newer companies. TPVG’s loans are at an average interest rate of 16.8%. Such a high rate of interest means they are fairly risky.
The new baby bond just began trading on the NYSE under the ticker symbol of TPVY and closed on Friday at $25.49. This strong share trade shows that the marketplace is still trying to satisfy a voracious appetite for income shares even though the coupon is just 5.75%. No doubt investors like the five-year maturity of this issue.
Often, it is beneficial to know what the distribution on the common shares of a BDC are so that one knows the “margin of safety” this provides to holders of senior securities. TPVG currently pays a strong dividend of 36 cents per quarter ($1.44 annually) for a current yield of 11.2%. If the dividends on the common shares begin to be lowered by either significant amounts or for a number of consecutive quarters, investors in baby bonds should consider whether to maintain their investment or exit.