Triangle Capital: Will Earnings Catch Up With Dividend?

Triangle Capital Corporation (ticker: TCAP), a Business Development Company (“BDC”) which lends principally to lower middle market borrowers, announced that it closed a $12.0 million investment in Media Temple, Inc. (“Media Temple”) consisting of subordinated debt and convertible debt. Media Temple bills itself as an industry-leading, privately held, web hosting and virtualization service provider based in California that provides businesses worldwide with reliable, professional-class services to host websites, email, business applications, and other rich Internet content.

Triangle is one of several BDCs with plenty of capital to spend thanks to a recent equity offering, untapped capacity from the SBIC (Small Business Investment Corporation, which provides long term monies to lenders who lend into the lower middle market) and from a recent rule that allowed TCAP to apply for another $75mn in additional SBIC money. (That may not be the end of it. The word is that the Obama administration may have more money to dole out to companies like Triangle). Our own estimate is that TCAP at the end of 2009 had $143mn in capital available (in the form of untapped borrowing and excess cash on the balance sheet). With the Media Temple deal, TCAP has booked 3 new portfolio companies in four months, totaling just over $30mn in new investments, principally high yielding debt. If the new investments earn 13% on average (we don’t know the full details of the deals done), that should increase Investment Income by nearly $4mn a year. Very roughly that suggests at least $2mn in incremental Net Investment Income to add to the $16mn achieved in the IVQ of 2009 (annualized for these purposes). Then there is the full impact of several deals booked in the final quarter of last year which should lift the numbers in 2010. So there seems to be no question Net Investment Income will be up in the quarters to come.

However, like many BDCs, Triangle has been raising new equity and increasing its share count. With the 1.8mn new shares added in December 2009, and with a dividend commitment of $1.64 a year, Triangle will have to generate $19.2mn a year in Net Investment Income to match its pay-out commitment. With another deal or two Triangle should be able to generate enough income to cover its dividend. However, we are unlikely to see the full results show up until the third quarter of 2010 at the earliest. As always the wild card is what happens to credit quality. A few bad apples in the portfolio might push back the time when earnings covers the dividend until 2011.

Disclosure: Long TCAP