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Sends Letter Highlighting Need for Immediate Change in Light of Appalling Performance of TICC’s External Manager, Value Destructive Capital Allocation Strategy, Highly Concerning Governance Issues, and Poor and Costly Investment Strategy
Nominates a Highly Qualified Candidate for Election to the Board at the 2016 Annual Meeting
Submits Proposal to Terminate Investment Advisory Agreement between
TSLX Affirms Commitment to Highly Compelling Proposal
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TSLX, one of the largest stockholders of TICC, has taken these actions out of increasing concern that the Board’s leadership and the external manager’s actions will continue to destroy stockholder value. The need for an independent, highly qualified voice in the boardroom is overwhelmingly clear and the external manager’s decade of failed returns demands immediate change.
TSLX encourages interested stakeholders to visit the website, www.changeTICCnow.com, to view the letter and other materials relating to TSLX’s efforts to affect positive change at TICC to maximize stockholder value.
A copy of the letter follows:
Attn: Board of Directors
Dear Members of the Board:
We are once again writing to you both as one of the largest stockholders
By nearly every measure, TICC and its external manager,
As we approach TICC’s annual meeting, your silence has made it clear to
us that once again you do not intend to take any meaningful actions to
deliver stockholder value. That is why today we delivered a formal
notice of our nomination of a highly qualified and independent candidate
We have taken these actions because we are gravely concerned that the Board’s leadership and the external manager’s actions will continue to destroy stockholder value. The need for an independent, highly qualified voice in the boardroom is overwhelmingly clear and the external manager’s decade of failed returns demands an immediate change.
These changes would positively impact TICC stockholders by:
1. Bringing in a new, independent perspective to the boardroom by adding
Mr. Millet to the Board. His more than 30 years of proven industry
expertise across the financial sector and particularly in credit markets
coupled with his proven leadership as a director make him the ideal
candidate to effect change at TICC. Of note, Mr. Millet, currently CEO
2. Once and for all severing ties to a failed external manager that has not only delivered shockingly terrible stockholder returns but pursued a strategy that has impaired TICC’s financial future and served to enrich a few at the expense of the company’s stockholders.
3. Creating a path for TICC to fully and thoroughly explore strategic alternatives with a view to maximizing value for all TICC stockholders.
This is not our preferred course of action but the Board’s complete failure to act leaves us with no other choice. There is still time to avoid a costly proxy contest. We urge you to immediately seat Mr. Millet on the Board and reconstitute the Board with independent, highly qualified individuals willing to act aggressively in the interest of TICC stockholders. We also urge you to immediately terminate the existing investment advisory agreement with the external manager, and following the reconstitution of the Board, engage with us and other TICC stockholders in a comprehensive strategic review process to identify the best path forward to deliver value to stockholders, including but not limited to the sale of the Company’s assets and/or liquidation of the business. We feel strongly that change is needed at TICC for the following reasons:
1. The company’s past performance — delivered by the current external manager and overseen by the current Board — is appalling;
2. TICC’s value destructive capital allocation strategy has continually eroded NAV and diluted stockholders;
3. The TICC Board has ignored highly concerning conflicts of interest and seems to have prioritized wealth creation for the underperforming external manager, which provide little confidence that the Board, or the manager, is capable of focusing on driving value for stockholders; and
4. TICC’s poor and costly investment strategy disproportionally rewards its failed external manager at the expense of stockholders.
Since inception — and over almost any measurement period since — TICC has woefully underperformed all relevant benchmarks. It is shocking and unacceptable that in a historically low interest rate environment a TICC stockholder would have generated higher returns by investing in U.S. Treasuries rather than holding TICC stock. Consider the scope of TICC’s underperformance:
|TICC Relative Underperformance|
By any measure and over any time period, the external manager’s
performance has been abysmal. Stockholders know full well that despite
this massive value destruction the external manager has collected
Value Destructive Capital Allocation Strategy
These abysmal returns have been exacerbated by a capital allocation strategy that has eroded NAV, diluted stockholders and left TICC in a financial position in which it is essentially unable to take the actions necessary to deliver real value to its stockholders.
Contributing to this erosion of NAV is most certainly a flawed and value destructive dividend payment. By TICC’s own admission, its past dividends are in part a return of investor capital which, as five independent analysts have stated, is unsustainable. TICC has under-earned its dividend by a cumulative 31.6% in the four most recent quarters and likely would have under-earned its dividend in previous quarters if not for an accounting error by TICC disclosed in the first quarter of 2015.
Further, TICC has issued equity in the public markets ten times since
its IPO, and once issued equity below NAV, in
This failed management has resulted in a precipitous decline in net asset value per share and a high debt to equity ratio of 1.07 that severely limits TICC’s ability to raise additional capital or repurchase shares because of regulations that effectively limit business development companies to debt to equity ratios of 1.0x.
It is plain and simple that the external manager’s actions have not only delivered abysmal results but have resulted in a situation that severely limits the ability of any manager from rescuing TICC’s stockholder investments. The time to replace this manager has passed.
Highly Concerning Conflicts of Interest and Poor Corporate Governance
Equally concerning are the actions and oversight of this Board in enabling the external manager to inflict on stockholders more than a decade of mismanagement. This is a result of a static, entrenched Board that is in dire need of new, independent views.
The Board’s mismanagement became appallingly clear when TICC shocked the
market and its stockholders by pursuing a transaction that would have
resulted in a third party acquiring, and thereby replacing, the external
manager—a transaction that was initially estimated to pay the external
manager as much as
- The Board refusing to meaningfully engage in any alternative proposals, and instead pursuing a transaction in which TICC Board members stood to personally make millions of dollars;
One “independent” Board member approving the transaction with glaring
conflicts of interest, notably being paid
$280,000per year by other businesses associated with another conflicted Board member and owner of TICC’s manager;
- The belief that TICC’s manager was forced to recut the transaction under pressure multiple times;
- Three independent proxy advisory firms recommending stockholders vote against the transaction—with one of these firms ultimately changing its recommendation in large part due to the potentially adverse consequences for stockholders under the current Board regime;
- Five of the six equity analysts covering TICC publicly expressing their opposition to the deal; and
- TICC and the Board being found by a federal judge to have misled stockholders and likely violated federal securities laws by, among other things, omitting the amount to be paid to the interested directors of TICC in its disclosure to stockholders.
These actions by themselves are concerning, but the fact that members of the TICC Board stood to receive millions of dollars from the new adviser in this transaction is simply unacceptable. The exhibited misalignment with stockholders demands an independent voice to protect stockholder investments.
For 12 years, the TICC Board has gone unchanged and overseen drastic underperformance and management enrichment, while each director has received hundreds of thousands of dollars in compensation. We have grave concerns that these actions indicate the Board is either unwilling or incapable of acting independently to protect stockholder value.
In arguing for the conflicted transaction, TICC itself stated that a negative outcome for stockholders would be to leave stockholders’ investments burdened by the “same adviser” and “same Board.” However, by taking this line—and making these threats—the Board has blatantly disregarded its fiduciary responsibility to act in the best interests of stockholders.
Despite the Board’s own admission that change was needed, we have been
shocked by the subsequent silence—particularly since the failed
stockholder vote. Although TICC stated it intended to solicit the views
of stockholders, no representatives of TICC have contacted us, one of
your largest stockholders, to engage with us since the failed vote. As
we outlined in our
- Immediately seating Mr. Millet on the Board and further refreshing the Board with a new slate of independent directors, in consultation with us and other stockholders;
- Immediately terminating the existing investment advisory agreement with the external manager; and
- Promptly following the reconstitution of the Board, conducting a comprehensive strategic review process to identify the best path forward to deliver value to stockholders.
By failing to take meaningful action, TICC’s Board has left its stockholders with the failed status quo—the same failed manager and the same conflicted Board.
It is hard to see how even the 35% of shares eligible to vote who voted in favor of the conflicted transaction reflects positively on the Board or as support for the external manager. We believe that this 35% was desperate for a change in management, even if it meant an underperforming manager would receive millions. On the other hand, those voting against the transaction were opposed to seeing a failed manager get rewarded in a conflicted transaction and, like us, are demanding the Board seek better options.
Poor and Costly Investment Strategy
Perhaps most egregious is that given the composition of TICC’s
portfolio, management has taken a disproportionate share of Total
Economics of TICC stockholders’ investment.8 TICC’s total
stockholder fees and expenses have been well above the BDC Composite
median since 2012.910 The numbers show that, since 2012, for
Moreover, TICC’s management is also vastly overcompensated given that its portfolio is largely the same as a class of mutual funds that charges far lower fees for the same service. In this sense, according to certain industry analysts, TICC has charged approximately six times the fees it should properly be entitled to.11
The bottom line is that, when considering the nature of TICC’s assets
and incorporating the expected return,
The Time for Change is Now
Time is overdue for TICC to become a professionally governed public company with a focus on maximizing stockholder value. Our director nominee, Mr. Millet, brings the independent, highly qualified background to effect meaningful change within this stalled boardroom. In addition, after more than a decade of failed performance, the external manager contract must now be terminated.
As you know, we previously made a highly compelling proposal to acquire TICC. Despite your lack of response, we stand by this offer. We are steadfast in our belief that a combination with TSLX is the strategic alternative that offers the most value to TICC’s stockholders and we remain willing to engage in discussions with the Board.
However, the Board’s complete refusal to maximize stockholder value, regardless of our offer, has brought us here today. The need for an end to the external manager and an independent voice in the boardroom are the first priority for TICC stockholders.
As you acknowledged, the status quo is unacceptable.
It is time for stockholders to take action. The time for change is now.
Very truly yours,
|Joshua E. Easterly|
|Co-Chief Executive Officer|
|Co-Chief Executive Officer|
A biography of the nominee follows:
Mr. Millet, age 56, is the CEO, Vice Chairman, Treasurer and member of
the board of
Reconciliation of Certain Non-GAAP Financial Measures
Fees as a portion of Total Economics of your investment, as set forth in this letter, may be considered a non-GAAP financial measure. TSLX provides this information to stockholders because TSLX believes it enhances stockholders’ understanding of the relative costs stockholders bear in relation to the assets generated by operations of TICC and comparable companies included in the BDC Composite as defined above, respectively. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance with GAAP, and non-GAAP financial measures as used by TSLX may not be comparable to similarly titled amounts used by other companies.
Total Economics = Economic Profit + Shareholder Value Gained / (Lost) due to the Change in Premium / (Discount) to Average NAV
Economic Profit = Increase in Net Assets Resulting from Operations + Total Shareholder Fees & Expenses
Shareholder Value Gained / (Lost) Due to the Change in Premium /
(Discount) to Average NAV calculated as the change in premium (or
discount) to NAV per share between the close of the trading day
following the filing of
The table that follows illustrates the reconciliation of the net increase in net assets resulting from operations since 2012 to Economic Profit and the calculation of the ratio of Total Shareholder Fees and Expenses to Total Economics for TICC.
TSLX believes that Total Shareholder Fees & Expenses and Total Economics for each company in the BDC Composite was calculated on a substantially equivalent basis to the methodology shown for TICC.
For companies that reported management or incentive fee waivers in the periods subsequent to 12/31/2011, including AINV, FSC and NMFC, which are included in the BDC Composite, Total Shareholder Fees & Expenses and Economic Profit are calculated pro forma as if (i) the fee waivers had not been applied and (ii) the corresponding reduction in pre-incentive fee net investment income resulted in a reduction in incentive fees (calculated by multiplying the amount of management fees waived by the incentive fee rate for each company). No pro forma adjustments were made to NAV per share in the calculation of Shareholder Value Gained / (Lost) Due to Change in Premium / (Disc.) to Average NAV.
|Net Increase in Net Assets Resulting from Operations (GAAP)||$ 68,323||$ 58,945||$(3,348)||$ 1,122||$ 125,041|
|($ in thousands, except per share amounts and where noted)|
|Shareholder Fees & Expenses:|
|Compensation expense (GAAP)||$ 1,183||$ 1,648||$ 1,861||$ 965||$ 5,657|
|Investment advisory fees (GAAP)||11,223||19,096||21,150||15,574||67,043|
|Professional fees (GAAP)||1,874||1,996||2,150||2,331||8,351|
|Insurance (GAAP) 1||69||69||69||0||206|
|Directors' Fees (GAAP) 1||261||323||317||0||900|
|Transfer agent and custodian fees (GAAP) 1||129||229||284||0||642|
|General and administrative (GAAP)||1,028||1,590||1,398||1,673||5,689|
|Net investment income incentive fees (GAAP)||5,460||6,581||5,604||(930)||16,715|
|Capital gains incentive fees (GAAP)||5,509||(1,192)||(3,873)||0||444|
|Total Shareholder Fees & Expenses||26,735||30,339||28,959||19,614||105,646|
Economic Profit (Net Increase in Net Assets Resulting from
|$ 95,058||$ 89,284||$ 25,611||$ 20,735||$ 230,688|
|TICC NAV Per Share 12/31/2011 (Released 03/15/2012)||$ 9.30|
|TICC Share Price 03/16/2012||10.09|
|Premium / (Discount) to NAV 03/16/2012||9 %|
|Shares Outstanding (millions) (as of 3/16/2012)||37|
|TICC NAV Per Share 9/30/15 (Released 11/9/2015)||$ 7.81|
|TICC Share Price 11/10/2015||6.45|
|Premium / (Discount) to NAV 11/10/2015||(17)%|
|Shares Outstanding (millions) (as of 11/10/2015)||60|
|Change in Premium / (Discount) to NAV||(26)%|
Shareholder Value Gained / (Lost) due to Change in Premium /
Total Economics (Economic Profit + Shareholder Value Gained /
|Ratio of Total Shareholder Fees & Expenses to Total Economics||84 %|
|(1)||For the nine months ended September 30, 2015, directors’ fees, insurance, and transfer agent and custodian fees, which previously had been separately reported, were included in “General and administrative.”|
Information set forth herein includes forward-looking statements. These
forward-looking statements include, but are not limited to, statements
regarding TSLX’s proposed business combination transaction with
Such forward-looking statements are inherently uncertain, and
stockholders and other potential investors must recognize that actual
results may differ materially from TSLX’s expectations as a result of a
variety of factors including, without limitation, those discussed below.
Such forward-looking statements are based upon management’s current
expectations and include known and unknown risks, uncertainties and
other factors, many of which TSLX is unable to predict or control, that
may cause TSLX’s plans with respect to TICC, actual results or
performance to differ materially from any plans, future results or
performance expressed or implied by such forward-looking statements.
These statements involve risks, uncertainties and other factors
discussed below and detailed from time to time in TSLX’s filings with
Risks and uncertainties related to the proposed transaction include, among others, uncertainty as to whether TSLX will further pursue, enter into or consummate the transaction on the terms set forth in the proposal or on other terms, potential adverse reactions or changes to business relationships resulting from the announcement or completion of the transaction, uncertainties as to the timing of the transaction, adverse effects on TSLX’s stock price resulting from the announcement or consummation of the transaction or any failure to complete the transaction, competitive responses to the announcement or consummation of the transaction, the risk that regulatory or other approvals and any financing required in connection with the consummation of the transaction are not obtained or are obtained subject to terms and conditions that are not anticipated, costs and difficulties related to the integration of TICC’s businesses and operations with TSLX’s businesses and operations, the inability to obtain, or delays in obtaining, cost savings and synergies from the transaction, unexpected costs, liabilities, charges or expenses resulting from the transaction, litigation relating to the transaction, the inability to retain key personnel, and any changes in general economic and/or industry specific conditions.
In addition to these factors, other factors that may affect TSLX’s plans, results or stock price are set forth in TSLX’s Annual Report on Form 10-K and in its reports on Forms 10-Q and 8-K.
Many of these factors are beyond TSLX’s control. TSLX cautions investors that any forward-looking statements made by TSLX are not guarantees of future performance. TSLX disclaims any obligation to update any such factors or to announce publicly the results of any revisions to any of the forward-looking statements to reflect future events or developments.
Third Party-Sourced Statements and Information
Certain statements and information included herein have been sourced from third parties. TSLX does not make any representations regarding the accuracy, completeness or timeliness of such third party statements or information. Except as expressly set forth herein, permission to cite such statements or information has neither been sought nor obtained from such third parties. Any such statements or information should not be viewed as an indication of support from such third parties for the views expressed herein. All information in this communication regarding TICC, including its businesses, operations and financial results, was obtained from public sources. While TSLX has no knowledge that any such information is inaccurate or incomplete, TSLX has not verified any of that information. TSLX reserves the right to change any of its opinions expressed herein at any time as it deems appropriate. TSLX disclaims any obligation to update the data, information or opinions contained herein.
Proxy Solicitation Information
The information set forth herein is provided for informational purposes
only and does not constitute an offer to purchase or the solicitation of
an offer to sell any securities. TSLX intends to file a preliminary
proxy statement with the
TSLX STRONGLY ADVISES ALL STOCKHOLDERS OF TICC TO READ THE TSLX PROXY STATEMENT AND ITS OTHER PROXY MATERIALS AS THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION. SUCH TSLX PROXY MATERIALS WILL BECOME AVAILABLE AT NO CHARGE ON THE SEC’S WEB SITE AT HTTP://WWW.SEC.GOV AND ON TSLX’S WEBSITE AT HTTP://WWW.TPGSPECIALTYLENDING.COM. IN ADDITION, TSLX WILL PROVIDE COPIES OF THE PROXY STATEMENT WITHOUT CHARGE UPON REQUEST. REQUESTS FOR COPIES SHOULD BE DIRECTED TO TSLX’S PROXY SOLICITOR AT TPG@MACKENZIEPARTNERS.COM.
The participants in the solicitation are TSLX and
Security holders may obtain information regarding the names,
affiliations and interests of TSLX’s directors and executive officers in
TSLX’s Annual Report on Form 10-K for the year ended
|1||As of the date hereof, TSLX directly beneficially owned 1,633,660 shares of common stock of TICC|
|2||TICC and benchmark returns indexed to November 21, 2003. Total return calculation includes share price appreciation and cumulative dividends paid. BDC Composite comprised of ACAS, AINV, ARCC, BKCC, FSC, GBDC, HTGC, MAIN, MCC, NMFC, PNNT, PSEC, SLRC, TCAP, and TCRD, and are calculated through February 1, 2016.|
|3||This figure is calculated through February 1, 2016.|
|4||Total return calculation includes share price appreciation and cumulative dividends paid, and are calculated through February 1, 2016.|
|5||TICC and benchmark returns indexed to November 21, 2003.|
|6||BDC Composite comprised of ACAS, AINV, ARCC, BKCC, FSC, GBDC, HTGC, MAIN, MCC, NMFC, PNNT, PSEC, SLRC, TCAP, and TCRD|
|7||This calculation includes investment advisory fees, net investment income incentive fees and capital gains incentive fees paid by TICC to the external manager since inception through the end of the third quarter of 2015.|
|8||Total Economics defined as Economic Profit + Shareholder Value Gained / (Lost) due to change in Premium / (Discount) to Average NAV. Economic Profit equals Net Increase in Net Assets as a Result of Operations + Total Shareholder Fees & Expenses. Shareholder Value Gained / (Lost) due to change in Premium / (Discount) to Average NAV calculated as the change in premium (or discount) to NAV per share between the close of the trading day following the filing of 12/31/2011 financial statements and the close of the trading day following the release of 9/30/2015 financial statements multiplied by the average NAV between those trading days (calculated as shares outstanding on such trading day multiplied by the then-most recently reported NAV per share). See table below titled “Reconciliation of Certain Non-GAAP Financial Measures” for a reconciliation to the most recent comparable financial measures presented in accordance with GAAP. Source: Company Filings. Capital IQ, Financial data as of 9/30/2015.|
|9||BDC Composite comprised of ACAS, AINV, ARCC, BKCC, FSC, GBDC, HTGC, MAIN, MCC, NMFC, PNNT, PSEC, SLRC, TCAP, and TCRD. TSLX believes that Total Shareholder Fees & Expenses and Total Economics for each company in the BDC Composite was calculated on a substantially equivalent basis to the methodology shown for TICC in “Reconciliation of Certain Non-GAAP Financial Measures,” including pro forma adjustments to exclude effects of any management or incentive fee waiver, where applicable. Source: Company Filings. Capital IQ, Financial data as of 9/30/2015.|
|10||Pro forma to exclude effects of management fee waiver. See “Reconciliation of Certain Non-GAAP Financial Measures.”|
|11||TICC Reiterates Rejection of TSLX’s offer, Wells Fargo, September 22, 2015|
TPG Specialty Lending, Inc.
Robert Ollwerther, 212-430-4119
TPG Specialty Lending, Inc.
Lucy Lu, 212-601-4753
MacKenzie Partners, Inc.
Charlie Koons, 212-929-5708
TPG Specialty Lending
Luke Barrett, 212-601-4752
Tom Johnson / Pat Tucker, 212-371-5999
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