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A Closer Look at Griffin Capital’s BDC/Credit Fund Reorganization

by Jacob Mohs

On September 18, 2017, shareholders in the BDC formerly known Griffin-Benefit Street Partners BDC Corp. (now known as Griffin Capital BDC Corp.), approved the company’s interval fund reorganization plan by a wide margin. Once this transaction is complete, the investors in the BDC will hold Class F Shares in the Griffin Institutional Access Credit Fund (Griffin Credit), an interval fund also organized under the 1940 Act. As discussed below, investment in an interval fund is subject to structural differences as compared to a BDC. Additionally, while both funds have similar investment objectives, Griffin Credit has a broad credit focused investment mandate, of which the BDC’s lower middle market directly originated loans are just one sleeve.

Griffin Capital’s BDC launched in March 2015, targeting a $1.5 billion capital raise. It struggled to raise capital, and ultimately suspended its offering in March 2016 after raising $45 million. Meanwhile, Griffin’s first interval fund, Griffin Institutional Access Real Estate Fund, had gained traction and by that time had raised more than $1 billion in assets (now near $2 billion), quickly becoming the largest real estate-focused interval fund. Based on regulatory and structural challenges affecting BDCs, the growing acceptance of interval funds, and Griffin’s desire to seek a broader credit mandate, the BDC’s advisor recommended to the board that it pursue a plan of reorganization with Griffin Credit.  

The following table outlines the pro forma merger, based on recent public filings:

 

BDC Pre Merger

Interval Fund Pre Merger

Pro-Forma Adjustments

Interval Fund Post Merger

Net Asset Value

$ 39,056,000

$ 20,155,000

$    -

$ 59,211,000

Shares Outstanding

 4,563,196

 802,538

 (3,007,697)

 2,358,037

Net Asset Value Per Share

$8.56

$ 25.11

 -

$ 25.11

 

Structural changes to understand

There are several key corporate governance and structural changes that will impact BDC investors turned interval fund shareholders. Here are three to be aware of:

  • Lowered management fees: The BDC’s advisor charged a management fee of 2.0% of gross assets per year. In contrast, Griffin Credit charges 1.85% of net assets per year.
  • Liquidity profile: By definition, an interval fund has a fundamental policy consistent with Rule 23c-3 under the 1940 Act to make repurchase offers at regular intervals for at least 5% of outstanding shares. Like most retail focused interval funds, Griffin Credit will make tender for at least 5% of its shares every quarter. Although still a long term investment, the interval fund structure generally allows for more consistent liquidity than a non-traded BDC, which is under no obligation to make repurchase offers.
  • The interval fund has an “opt-out” dividend reinvestment plan (DRIP), meaning that investors will automatically be enrolled in the DRIP, unless they opt out. In contrast, the BDC’s DRIP had been suspended since March 2016, and prior to that was an “opt-in” DRIP plan. This will impact decisions at the individual account level.

 

How the transaction affects investment strategy and portfolio composition

Perhaps the most significant thing to understand about this transaction is that the Griffin Credit has a much broader investment strategy than did the BDC. A BDC is required to invest 70% of its assets in “qualifying assets,” which for practical purposes usually means US based lower middle market companies. In contrast, an interval fund structure has no investment restrictions. Griffin Credit’s investment mandate includes not only in lower middle market companies, but also other opportunities in the credit markets, including broadly syndicated high yield securities in the U.S. and abroad, and CLOs and other structured products.

Prior to the reorganization, portfolios of the BDC and Griffin Credit both consist primarily of senior secured floating rate loans.  However, the BDC’s portfolio contains a higher concentration of directly originated loans to lower middle market companies with EBITDA ranging from $5 million to $100 million, while Griffin Credit’s portfolio is focused on broader opportunities in the syndicated loan market, and with less direct originations.  Once the transaction is complete these portfolios will be combined. The transaction will tilt the mix of the Griffin Capital’s portfolio balance in the direction of lower middle market companies, at least until it raises a larger amount of capital. If Griffin Credit raises capital anywhere close to the pace of Griffin Institutional Access Real Estate Fund, the overall impact of adding the BDC’s investments to Griffin Credit’s on eventual portfolio weightings will be minimal. 

Asset quality and valuation can be controversial issues in affiliated transactions. Most of the BDC assets were originally acquired by Benefit Street, the former BDC subadvisor, but were subsequently re-underwritten by an affiliate of Bain Capital Credit, Griffin Credit’s subadvisor (a Bain affiliate is also interim subadvisor to the BDC). Approximately 40% of the BDC’s assets are Level 3 assets under GAAP, meaning they are valued using assumptions and models rather than through the observation of any market activity (generally assets in this category have no regular market activity to observe). As of its most recent quarterly filing, the BDC valued its Level 3 assets using a discounted cash flow method, with a weighted average discount rate of 9.44% for senior secured first lien loans, 10.61% for senior secured second lien loans, and 11.22% for equity. Based on public filings, the valuation processes for both the BDC and Griffin Credit are similar, although Griffin Credit did not have Level 3 assets as of the interval fund’s most recently filed semiannual report.

 

Where to find ongoing coverage

FINRA-registered broker dealers and registered investment advisors can access additional details, as well as ongoing coverage of Griffin Institutional Access Credit Fund and other public non-traded investment programs, by visiting the FactRight Report Center.

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Filed Under: Due Diligence, Credit