<<<<<......From the 2008 Annual report/10K... I confirmed they have no Treasury Stock, so these are shares that have never been issued in the secondary market, or the company may purchase them from the open market:.....>>>>>>



KCAP is authorized to issue up to 100mm shares of their common stock. They have issued 22,077,720 per the most recent 10-Q.

The shares issued for DRIP investors are new shares issued from that 100mm.

BDC's can issue shares to pay their dividend even if the share price is less than NAV, with no shareholder approval.




KCAP makes several references to these new DRIP shares in their 10-Q's.


For example, using their most recent 10-Q (Q209), on page 45 under "Stockholders Equity" it states:

".....During the six months ended June 30, 2009, the Company issued 301,201 shares of common stock under its dividend reinvestment plan. ....."



Also, if you go to page #29 under "Financial Highlights" and look at the "Per Share Data" for the first six months of 2009, you will see that the issuance of those DRIP shares added $0.05 to KCAP's NAV over that period.


And for one last reference to the newly issued DRIP shares go to page #3. Looking at KCAP's "Statements of Changes In Net Assets " under "Capital Transactions" you will see the dollar amount those newly issued shares represent when they are calculating their NAV.


------------


Yes, this is a dilutive share issunace. The discount to NAV is so great that the likelihood of them finding investments that can make issuing shares at a 60-70% discount to NAV accretive are slim to nil, although I've got to say KCAP buying the class B-2L notes of KDA 2007-1 looks pretty darn good.

This investment was purchased at 10% of par which is $10.5mm. At par the notes pay a 6.1% yield. At KCAP's cost of about $1.07mm this investment will yield 59.5% annually, and they were able to mark it up to over $7.5mm at fair value on their balance sheet. I think it was a great investment.


---------


Lets' not lose sight of the bigger picture here. KCAP needs to hold onto as much cash as possible. This minimal amount of dilution is much better than KCAP exceeding their 1:1 debt requirements and thus unquestionably violating the terms of their credit facility. The cash they retained by issuing those new shares keeps their NAV that much higher than it would be if they paid those dividends in cash or went out and purchased the shares on the open market (basically the same as paying the dividend in cash). And, as shown in an earlier post, those shareholders who did take the new shares instead of a cash dividend have been well rewarded for doing so.

Also, since KCAP does not currently have enough unencumbered cash to pay all of their expenses & their dividend, issuing those new shares helps keep KCAP from having to sell other unemcumbered assets to meet their cash needs.

Considering the situation here, I have absolutely no problem with the issuance of new shares for the DRIP program. I'd be surprised if they weren't doing this.

And I guarantee you this, if they resolve their credit facility problems and get the shares price to within 15-20% of NAV they will do a secondart to raise cash, as well they should.

They need to raise capital to lower their debt to equity ratio and to have money for new investments. Most all the BDC's have been raising capital at less than NAV prices and KCAP will be no exception.


JMHO,


RC