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Indaba Capital Issues Open Letter to Kenneth A. Hersh, Chairman of the Board, and Shareholders of NGP Capital Resources


Believes Shareholders Do Not Have All Information Needed to Have a Fully Informed Vote on Oak Hill Transaction at NGPC's Upcoming Annual Meeting

Challenges Board's Past Performance and Fiduciary Commitment to Shareholders

Calls for Increased Transparency and Accountability on the Part of NGPC and Oak Hill

Believes Oak Hill Must Align Its Incentives with Shareholders

SAN FRANCISCO, Sept. 23, 2014 /PRNewswire/ -- Indaba Capital Management, L.P. ("Indaba"), the beneficial owner of 2.99% of the outstanding shares of NGP Capital Resources Company ("NGPC" or the "Company") (Nasdaq: NGPC), today issued an open letter to Kenneth A. Hersh, Chairman of the Board of Directors (the "Board"), and the shareholders of the Company in advance of NGPC's 2014 annual meeting, currently scheduled for September 29, 2014, at which shareholders will vote on a proposed investment advisory agreement with a new investment advisor, Oak Hill Advisors, L.P. ("Oak Hill").  In its letter, Indaba, among other things:

  • Questions the Board's lack of meaningful disclosure surrounding recent developments in the ATP/Bennu litigation, which Indaba believes removes a material overhang on the Company's valuation and the strategic review process conducted by the Board and, therefore, merits a reconsideration of potential value-maximizing alternatives available to the Company;
  • Documents the Board's track record and 10-year history of value destruction (including its failure to return capital through a significant share repurchase), while the current investment advisor has received over $53 million in management and incentive fees;
  • Questions whether the transaction with Oak Hill is in the best interests of shareholders; and
  • Calls upon the Company and Oak Hill to honor management's promise to hold a joint conference call with Oak Hill management so that Oak Hill can elaborate on its strategy and plans for the Company and field shareholder questions.

The full text of the letter follows:

September 23, 2014

Kenneth A. Hersh, Chairman of the Board
Shareholders of NGP Capital Resources Company

NGP Capital Resources Company 
909 Fannin Street, Suite 3800
Houston, TX 77010

Dear Mr. Hersh and Fellow Shareholders:

We are writing in our capacity as the investment manager for Indaba Capital Fund, L.P. ("Indaba"), owner of 612,125 shares of common stock of NGP Capital Resources Company (the "Company" or "NGPC"), or approximately 2.99% of the outstanding shares. We believe that the shares of NGPC trade at a substantial discount to their intrinsic value and that there are numerous paths open to the Company to recognize that value for shareholders.  Shareholders have an important decision to make about that future path at the Company's 2014 annual meeting currently scheduled for September 29, 2014, at which the Company is asking shareholders to vote on a proposed investment advisory agreement with a new investment advisor, Oak Hill Advisors, L.P. ("Oak Hill").

We are cautiously optimistic regarding the potential of the proposed transaction with Oak Hill.  We believe prospects for the business have improved materially in the past months, and that there is significant further upside possible from the pending Oak Hill transaction.  However, given the lack of meaningful disclosure from the Company on important valuation and transaction issues, as well as the lack of access to the prospective investment advisor, there remains substantial uncertainty and misunderstanding about the Company's prospects in the market and among current shareholders.  Accordingly, we have not yet determined how we intend to vote on the Oak Hill transaction.

As we endeavor to be open and constructive partners with both the current and prospective management teams, we sent a letter to the Board of Directors of the Company (the "Board") and Oak Hill posing a series of questions, similar to those below, that we believe are critical both to having a fully informed vote at the annual meeting and the future direction of the Company.  However, the Board has refused to answer these questions or engage in a dialogue on the issues.  We think shareholders deserve a complete and candid response to these questions before making a decision as to whether to effectively "turn over the keys" of their Company to Oak Hill:

1.      Has the Board revisited its consideration of strategic alternatives available to the Company in light of the recent positive developments in the litigation relating to the Company's overriding royalty interest ("ORRI") investment in Bennu Oil & Gas, LLC ("Bennu")?

NGPC recently concluded a strategic review process that began on September 10, 2013.  We understand the litigation associated with the Company's ORRI investment in Bennu (originally ATP Oil & Gas Corporation ("ATP") when the investment was initiated in 2011) acted as a material overhang throughout the course of the strategic review process, and may have limited the options that were available to the Company.  Mr. Gardner, CEO of the Company, noted on its first quarter earnings call that "if we had resolution … with ATP, I think it would certainly facilitate the [strategic review] process," a sentiment he repeated to us on other calls as well.

However, we believe recent developments in the Bennu litigation may go a long way towards alleviating this burden on the stock's valuation and the limitations that plagued the strategic review process.  On September 3, 2014, Bennu, as the successor to ATP in this matter, filed a series of motions with the United States Bankruptcy Court for the Southern District of Texas, including a Motion to Dismiss Claims by and between NGP Capital Resources Company and Bennu Oil & Gas, LLC.  In its filing, Bennu definitively states that "Bennu hereby unequivocally disclaims any intention to sue NGP regarding the characterization of its ORRI as it relates to the Purchased Assets," and "Bennu will not refuse to pay any future amounts due from the Purchased Assets with respect to the NGP ORRI based upon an assertion that NGP's ORRI should be re-characterized."

Clearly, this should be viewed as a significant positive development for the Company and all shareholders. Based on prior comments by management and our review of the court filings in this matter, we believe it is highly likely that $42.8 million (the $26.9 million of NGPC's unrecovered investment in the ORRIs plus the $15.9 million in potential disgorgement related to the ORRIs in the Telemark properties), or over 75% of the Company's litigation exposure, will be mitigated due to Bennu's actions. This reduces the potential impact of this litigation on the Company from over $2.72 per share to approximately $0.63 per share, and the uncertainty related to the remaining potential liability could now be substantially diminished as a result of the positive developments related to the Bennu claims.  

The Company's NAV at June 30, 2014 was $8.57, but the stock traded around $6.00 per share prior to this news.  This discount roughly matched the potential impact from this litigation due to the uncertainty associated with the case, but the gap has failed to close materially since.  Although it would certainly appear that this significant weight on both the Company's valuation and the strategic review process has now been largely removed, the Board appears to be avoiding this issue rather than focusing on how it potentially changes prospects for shareholders.  Only after we sent the Board a private version of this letter did the Company disclose this development, buried in a September 16, 2014 press release primarily related to the dividend.  Although the release downplayed the significance and failed to quantify the magnitude of the Bennu litigation developments, the Company, in a private letter to us, insisted that it had complied with its disclosure obligations under applicable law and given shareholders the material information necessary for them to make an informed decision.  We believe that is far from the case and that, without adequate disclosure or clarity from the Company, the marketplace is unable to fully appreciate the magnitude of this benefit to the Company, contributing to the substantial uncertainty about the Company's intrinsic value.  Thus, shareholders are not able to form a fully informed view on whether the Oak Hill transaction is in their best interest or whether the strategic review process should be revisited.

2.      Has the Company considered share repurchases as a means to return value to shareholders?  Will Oak Hill consider such a strategy?

Despite the steep discount to NAV at which the stock currently trades, the large and growing cash balance at the Company, and the improving credit quality in the underlying portfolio, the Company has not repurchased any of its shares.  We believe a share repurchase would be hugely accretive for shareholders and could substantially increase not only the stock price, but also the underlying NAV per share.  For example, if the Company were to use its current cash balance ($35.26 million as of June 30, 2014) to repurchase shares at the most recent closing price of $6.46, it could raise book value from $8.57 to $9.33, an over 8.9% increase in NAV, which is more than the Company has achieved in any year since its inception.  Of course it is likely such action would cause the trading price of the stock to rise, implying a smaller increase in NAV. Nonetheless, we would expect that this trade-off would be gladly welcomed by shareholders.  We believe shareholders deserve to know why the Company's investment advisor has chosen not to return capital through a share repurchase, especially due to the investment advisor's potential conflict of interest inherent in this decision (i.e., a share repurchase would reduce the fee income to be received by the Company's investment advisor).

Benefitting at the expense of the Company's shareholders is not a new phenomenon for NGPC's current investment advisor.  Since the Company's initial public offering at $15.00 per share in November 2004, NGPC's investment advisor, NGP Investment Advisor, LP, has earned $53.6 million in management and incentive fee income.  Over this same period of time, shareholders have received $8.21 per share in dividend payments, and currently hold shares trading at $6.46, an aggregate per share value of $14.67, which is less than the Company's IPO price almost 10 years later.  This is truly an abysmal performance track record on both an absolute and relative basis, meaningfully underperforming all relevant benchmarks:


Performance (11/30/2004 to 9/22/2014)

S&P 500


Russell 2000


Wells Fargo BDC Index


NGPC Common Stock + Dividends



One would think this result is not altogether surprising given the structural issues of the business development company ("BDC") model, with the potential conflicts of interest presented by external management contracts, combined with ownership limitations imposed on many institutional investors by the Investment Company Act of 1940, restricting the shareholder base to largely retail investors who are constrained in their ability to hold investment advisors accountable.  Regardless, the majority of BDC investment advisors do achieve attractive returns for shareholders, as evidenced by the Wells Fargo BDC Index above.  In this case, however, the evidence clearly indicates that, historically, NGPC's investment advisor has profited significantly at the expense of NGPC's shareholder base.  We would note that a majority of the Board has remained in place throughout this entire period.  Nevertheless, shareholders remain the true owners of the Company and its assets, and the Board has a fiduciary duty to act in their best interests.  There is no BDC we are aware of that would be a stronger candidate for a share repurchase, and we think shareholders would welcome the Company's and the prospective investment advisor's views on this topic.  We call on NGPC's Board and investment advisor to act in shareholders' interest and not their own.

3.      Although the Company's proxy statement indicates that the Board identified a liquidation of the investment portfolio as a potential alternative, the lack of any detailed disclosure regarding this option suggests it was not seriously considered.  Why was this alternative not pursued?

In addition to NGPC using its current cash to repurchase shares as discussed above, we believe that it could continue judiciously selling positions and repurchasing more shares or distributing the sale proceeds, effectively liquidating the Company.  Considering how much of the Company's current market capitalization is comprised of either cash or readily salable instruments, and that the price of its shares remains at a nearly 25% discount to NAV, we have considerable difficulty believing that a liquidation would not be a simple and highly favorable outcome for shareholders.  We believe it would be customary and instructive for the Company to provide its liquidation analysis to help shareholders understand why it chose not to go down this path.

4.      In view of the other alternatives that appear to have been available to the Company, why does the Company believe that the Oak Hill transaction is still in the best interests of all shareholders?

The terms of the transaction appear to be very favorable to Oak Hill, given the minimal up-front investment required and the fact the Oak Hill is not paying any purchase price for what may prove to be a valuable management contract.  It is making a mere $1 million investment at the closing of the transaction at NAV.  Furthermore, Oak Hill has been granted a full year to complete its remaining $4 million investment by buying shares in the market, creating a clear incentive for it to keep the stock price down, not up.

Yet it is our understanding from the Company's proxy materials and management commentary that there were numerous parties potentially interested in the Company's assets over the course of its strategic review process, including a proposal that came forward after the Oak Hill agreement was announced.  This proposal, which was subsequently revised, even prompted the Company to seek improved economic terms from Oak Hill, a request that was summarily denied.  We also understand from management that some parties may have been willing to pay for the management contract, a payment that could be passed on to shareholders or used to offset the change of control payments that are due to the current management team as a result of the Oak Hill transaction.  However, the proxy materials offer little detail as to these alternative transaction proposals, or the Board's rationale for accepting Oak Hill's financial terms (either as originally agreed upon or after the Company's request to modify these terms was rejected), that would enable shareholders to determine whether the Board has a valid justification for proceeding with the Oak Hill transaction.  This lack of information is especially troubling given that Robert Bass is a meaningful owner of Oak Hill and you, Mr. Hersh, and David Albin, another member of the Board, formerly worked for Richard Rainwater, the former CIO for the Bass family, and Robert Bass, respectively.

5.      What are Oak Hill's specific plans for the Company to enhance shareholder value?

The Company's proxy statement contains some broad generalizations regarding Oak Hill's investment strategy, but we believe shareholders would be curious to learn how Oak Hill intends to tailor its investment approach to the Company's fairly unique set of circumstances.  NGPC's common stock currently trades at approximately 0.75x book value.  This is by far the lowest valuation of any dividend-paying BDC.  Based on our research, on average, the Company's peers trade at 0.95x book value.  No other dividend-paying BDC trades below 0.8x NAV, and only a few outliers trade below 0.9x.  The discount at which the Company trades is especially puzzling in that greater than 25% of its market capitalization is in cash.  Although the Company has indicated on public conference calls that it believes the stock should trade up to NAV under Oak Hill's stewardship, shareholders have been provided with markedly little analysis to help them understand why this is the case, and how this valuation might be realized. 

We believe that Oak Hill is capable of serving shareholders well in the future.  Our concern is, simply, will they serve shareholders well?  Given shareholders' total lack of access to Oak Hill and the relatively limited pertinent information that has been provided to them thus far through the proxy materials, this case has yet to be made.  Judging by the lack of the stock's reaction to the Company's announcement and proxy filings related to the proposed Oak Hill transaction, it is clear to us that shareholders remain unconvinced.  It is our sincere hope that Oak Hill will make a clear showing of its bona fide intentions, act in the best interests of shareholders, and make a clean break from the agonizing past under your stewardship, Mr. Hersh.

6.      Does Oak Hill intend to raise additional capital for the Company in the foreseeable future?

In our view, NGPC has long suffered from being subscale, with operating expenses that were disproportionately high as a percentage of its earning assets.  We believe Oak Hill has a platform that can mitigate this issue for the Company.  However, we understand there is a real possibility that Oak Hill would want to raise capital in order to make the Company a more material presence in its current portfolio.  A discussion of Oak Hill's intentions in this regard could serve to allay any concerns current holders may have.  Assurances from Oak Hill that, for example, it will not dilute shareholders by issuing equity at a discount to NAV could help to inject confidence in the market and narrow the gap between the share price and NAV, even before the operational and investment improvements we hope that Oak Hill will be able to make.  Under proper stewardship, we are confident the Company should be able to raise capital going forward at or above NAV, similar to many other BDCs in the market today.  We are concerned, however, that Oak Hill has not made any commitment to this vision and has structured its investment with incentives to the contrary.

7.      The proxy statement contains no information on the background or experience of the three independent directors proposed to be added to the Board by Oak Hill:  Stuart I. Oran, James A. Stern and Frank V. Tannura.  What are their qualifications for serving on the Board?

If the Oak Hill management agreement is approved by shareholders, the Company's Board will be entirely overhauled, with the five current directors replaced by five new directors selected by Oak Hill.  However, shareholders have been given no information regarding the qualifications and experience of the three independent directors who would serve as stewards of their capital.  We believe this information is vitally important to the shareholders' decision, and believe that this omission demonstrates a lack of regard for shareholders' interests.

8.      When will shareholders hear about Oak Hill's plans, as promised by management?

On the July 22, 2014 call regarding the Oak Hill agreement, Mr. Gardner noted that the Company expected to hold a joint conference call with Oak Hill management, at which time Oak Hill management would elaborate on its strategy and plans and field shareholder questions.  If management and the Board truly believe that the Oak Hill agreement is in the best interests of shareholders, even after the significant progress that has been made in the Bennu litigation, we would strongly encourage them, together with Oak Hill, to make the case to shareholders in a clear and public fashion prior to the annual meeting (which is quickly approaching) so that the shareholders may make a fully informed decision.  Given that the Oak Hill terms have been public for months and the stock price remains at an approximate 25% discount to NAV and well below where it traded during the majority of the Company's strategic review process, it is evident to us that NGPC could derive tremendous benefit by promoting greater understanding of the Company, the developments in the Bennu litigation, and the proposed Oak Hill transaction in the marketplace. 

We remain hopeful about our investment in the Company and the prospect for rewarding shareholder returns going forward.  That said, we believe that shareholders deserve a Board that puts their interests first and answers these important questions so that shareholders have all the facts needed to fully inform their vote at the impending annual meeting.  In our view this is an important first step towards the Company and Oak Hill demonstrating the transparency and accountability that we and other shareholders expect and demand now and over the long term.  We look forward to opening and continuing a productive dialogue that paves the way to a promising future for the Company and its shareholders. 


Indaba Capital Management, L.P.

Hank Brier
(415) 680-1180

SOURCE Indaba Capital Management, L.P.

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