Wunderlich Stepping To The Sidelines On Capitala Finance To See How Dividend Cut Plays Out

Shrinking Portfolio

The firm noted that the company's portfolio continues to shrink, as the lack of confidence and difficulty in generating growth-characteristics of the new normal economy have made it difficult to zero in on credit-worthy borrowers. The firm is skeptical about the likelihood and timing of middle market companies regaining momentum.

NAV Downside Limited

Even if all its energy-related and every discounted credit were to go bad, the firm quantifies the hit to the bottom line only as $2.50 per share. However, the firm sees this as remote possibility, as oil remains fairly supported above the $45 level.

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Credit Quality Compromise: A No-No

Wunderlich also called upon the management not to compromise on credit quality, even as the company cribbed on a drag on net investment income from portfolio repayments and a lack of investment activity. The firm sees more downside to earnings than NAV, as it holds its energy exposure to 32 percent of par.

Nevertheless, the firm expects the stock to retest the lows before stabilizing. Wunderlich said it needs to see the management recreating an investment portfolio that covers distributions without fee waivers for considering an upgrade.

At time of publication, Capitala was down 9.70 percent on the day at $13.16.

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