Q3 2019 Earnings Call
<unk> third fiscal quarter ended Septemberthirty 2019.
It is my pleasure to turn the call over to me Sabrina Rusnak Carlson General counsel of THL credit incorporated.
And I caution you may begin.
Thank you operator, good morning, and thank you for joining.
With me today, that's fine our Chief Executive Officer, Jim Kelliher, Our Chief investment Officer in Terry Olson, our chief operating.
And Chief Financial Officer.
Before we begin please note that the statements made on this call may constitute forward looking statements within the meaning of the security back in 1930 treat as amended.
Such statements reflect carries assumptions by THL credit concerning anticipated results that are not guarantees of future performance.
Our subject to known and unknown uncertainties and other factors that could cause actual results could differ materially from such statements.
The uncertainties and other factors are in some ways beyond management's control and include the factors included in the section entitled Risk factors in our most recent annual report on Form 10-K .
As updated by our quarterly report on Form 10-Q in our periodic in other filings with the Securities and Exchange Commission.
Well, we believe that the assumptions, which any forward looking statements are based on our reasonable any of those assumptions could prove to be in accurate and as a result, the forward looking statements based on those assumptions also could be incorrect.
Should not place undue reliance on these forward looking statements.
Joe credit undertakes no duty to update any forward looking statements made herein.
All forward looking statements speak only as of the date of this call.
Earnings announcement in 10-Q ever released yesterday afternoon.
Copies of which can be found on our website along with a Q3 earnings presentation that we may refer to during this call.
A webcast replay of this call will be available until November 15th 2019, approximately two hours. After we conclude this morning to access the replay. Please visit our website at www Dot THL credit BDC Dot com.
With that I'll turn the call over to Chris.
[noise] sites, the Brenda and good morning, everyone [laughter] I will begin today's call with an update on our Q3 financial results Hamilton move on to the progress we've made and managing a repositioning our portfolio.
Our net investment income for the quarter was 22 cents per share versus our dividend of 21 Centsper share.
Our NAV was $8 in 34 cents per share as of September thirtyth represent a modest decline of less than 2% quarter over quarter.
Now decline was berman isolated the one credit Holland, which we highlighted on our last year earnings calls as a credit that we're closely monitoring.
Interest in the Logan JV were also marked down this quarter largely due to market technicals in the syndicated market.
The small markdown owner equity holders and OEM.
These changes were offset.
Bye.
The incremental navigate honor sale of copperweld, and a 5% accretion for much stock repurchase.
Hollander, the first lien investment and one of our three remaining energy credits the business continued to face market had ones. This quarter due to overall reduced M&A activity in the energy space. It was marked down accordingly.
Aside from the Mark down the Hall, and we continue to believe the fundamentals of our portfolio. We're moving into right direction. We're very pleased with the results were comfortable that's it this quarter Copperweld is one of our control equity positions was originally a non sponsored deal that we took through restructuring in 2016.
It was managerial changes in the retention of an advisor operations were stabilized EBITDA grew positioning the company for sale cash proceeds received in dollars escrow totaled $35 million, which were 1.6 times, our original investment and a 1.5 million dollar Mark up for merchant from June Thirtyth.
The total return on this investment, including interest and dividends was 3.2 times our original investment.
The proceeds from Copperweld, one of the most concentrated positions at over 7% of the portfolio as of June can now be deployed across several new investment. What's on proved the overall diversity of the portfolio and they also used for additional share buybacks under 15 million dollar Tenbfive one stock repurchase plan.
Since we initiated this plant in March 2019, we have repurchased 13.7 million of our stock for 91% of the target plan.
Substantial discount to NAV repurchases in Q3 were accretive to book value by five cents per share.
At the current repurchase plan in place, we expect to hit the 15 million dollar amount by the end of the next month at which point, we will reevaluate a new plan.
Moving onto our portfolio repositioning efforts our objective since 2009 has been to reduce the risk in our portfolio by one and proven diversification to continue into exit legacy noncore assets and three continuing to grow our first lien senior secured assets.
We're doing this by proactively after getting exiting concentrated names control equity positions ordinated and Unsponsored investments.
[noise] and transitioning those assets into senior secure positions in growing our Logan joint venture.
And we continue to provide more color on our progress first we're substantially improved overall diversification or for portfolio by proactively exit to exit in more concentrated positions and added smaller ones.
As of March 31st 2018, we had 14 positions of the hold size greater than 2.5%.
Yes, it was copperweld, a 7.1% position unfair stone the 3.3.
0.3, 0.3 different physician and Q3, we've now exited eight of these.
This is sort of 2018, the average size of our 21, new investments is 5.9 million for 1.5% well below our target Mac told the two and a half.
TCR de continues to benefit from our co investment capabilities across a private funds in middle market sale of platform, allowing us to take smaller positions and achieve our diversification goals.
As a result, the average size of our investment portfolio cost as decrease in $14 million in Q1, 2000 $18 million to $8 million as of Q3 2019.
While we are focused on our remaining concentrated positions from a risk in diversification to see this perspective, we continue to be especially focused on Holland, which I mentioned, an OEM, which continues to execute on its plan.
We're actively working with both companies on some strategic options to de risk, our right to de risk or exit our position in the first half of 2000 2020.
The second thing I'd like to emphasize what we continue to make progress on our remaining legacy non core investments and significantly reduce the overall risk in our portfolio.
At the beginning of 2018 and what the sale of copper World, we have reduced the number of investments and Unsponsored companies from six to two.
We control the remaining two investments and then see anything and OEM.
We reduced our total equity from 12% to 5%.
Our portfolio over that same period.
More importantly, non income producing equity from 7% down to 2%.
For all equity investments has also been reduced from five companies to three OEM Sanjay and loadmaster.
Third we have successfully successfully redeployed our proceeds from the core first lien investments and the Logan joint venture, 100% of our new investments in 2018 or 2000 I can have been first lien loans and we've continued to grow the Logan JV, which is comprised of predominantly first lien loans.
Slogan now represents 20% of the portfolio as of September Thirtyth, which is right in line with our target size for this vehicle and generates an 11% to 12% return on equity.
Returns over the last two quarters of and closer to 11% did recent LIBOR contraction and leverage optimum optimization.
Jim will talk to this.
More on Logan shortly.
Overall, we believe the portfolio risk profile continues to degrees outside of the too concentrated credits that I highlighted.
Performance all of across our non core assets across our core assets in the broader portfolio has been strong.
For the remainder of 2019, our focus remains to substantially complete the rotation of our portfolio away from legacy noncore assets and concentrated positions into highly diversified first lien loans.
As we look forward to 2000 2020.
I want to highlight several factors that we believe will position the BDC for continued progress in performance.
First the vast majority of our portfolio, 87% as of September Thirtyth has invested in first lien senior secured assets and our Logan JV, which we believe will provide more sustained stable earnings second since our shareholders approve the reduced asset coverage requirement earlier. This year, we have the ability to take on increased leverage our plan is to target modest leverage levels.
1.05 to 1.15 range in to 2020.
The to successfully mini doctor of credit facility.
This will allow us to continue to diversify and grow the portfolio.
Third and I can't emphasize this enough we expect to BDC to continue to benefit from the growth in the resources are broader THL credit platform, which currently manages $17 billion.
And assets and employees 93 investments as 93 professionals across this direct lending and tradable credit strategies.
We continue to have success raising private funds in middle market Fellows in our direct origination has never been stronger.
Since 2018 or direct lending platform is committed over 1 billion across 43, new portfolio companies.
Our co investment capabilities across these vehicles allow us to.
Take smaller positions within the BDC and achieve our diversification goals, while still executing our strategy as being a leading investor and originator of middle market private credit.
As we look forward, we strongly believe we underwrite team in place and come to to complete the execution of a repositioning plan.
We believe this action we've taken in 2018 or thus far in 2019 by the right once in the overall risk of the portfolio decreased and become increasingly isolated.
We expect continued improvement and diversification result in more stable and predictable returns to the BDC and for our shareholders that will position us well going forward with that I'll turn the call over to Jim talk more investment activity in the Logan joint venture.
Thanks for us and good morning, everyone.
For some highlights on our investment activity.
2019 has been a strong year for originations across THL credit's platform.
The broader THL direct lending platform has closed over $500 million a commitment across 18 investments of which the BDC has participated in 12.
During the third quarter, the BDC close to new firstly investments in calmly data and simplicity, which together will follow on investments made during the.
Quarter totaled $19 million.
Historically, the fourth quarter of the year tends to be the most active in terms of deal flow. However, this year, we're seeing deal activity actually flow.
Pretty much over the second half of this year and this is likely due to increase market volatility in the larger broadly syndicated loan market and record high purchase price multiples for albeit a transactions.
Quality of deals we are seeing has declined a bit as leverage has crept up a bit we continue to maintain a strong credit discipline, firstly sponsored let transactions in industries, where we have a favorable outlook.
During the quarter, we recognize proceeds from realizations totaling $68 million, which included the sale of our secondly, and control equity investment in Copperweld as Chris mentioned earlier.
Repayment of our first lien loan and fair Stan repayment of our size personally turnaround in the conclusion of liquidation of or charming Charlie physician.
Lastly, I will touch upon the Logan JV, which continued to perform well in represented 20% of the portfolio at 930.
The 350 going to our portfolio of a 132 issuers.
Continues to generate attractive returns for shareholders. We believed long term yield expectation continues to be in the 11% to 12% range absent any market.
Conditions.
In Q2 in Q3, we saw further declines in Lahore and has contributed to some yield compression.
Logan was marked down by $2.3 million or seven cents per share for the quarter due to broader market movements.
Syndicated loan market has been fairly shot but fairly choppy over the past six months.
We continue to believe that that will continue over the next three months.
Overall, the portfolio continues to perform well and credit quality remained strong. It was one loan on nonaccrual status as of June 30 for the cost basis of $2.4 million, representing less than 1% of the Logan portfolio.
With that I'll turn the call over to Terry to give you some more.
More information on our Q2 Q3 financial results.
Thanks jump and good morning, everyone first a few portfolio highlights as of September Thirtyth, our portfolio $404 million invested 67% first lien senior secured debt and 20% the Logan JV.
As a reminder, the Logan JV is 97% invested in first lien assets.
The remaining 13% of TC already portfolio was held in second lien subordinated debt other income producing an equity holdings or you can see slides 13, or 14 or earnings presentation, which highlights these trends over the last two years.
The weighted average yield on the debt income producing portfolio, including Logan was 10.1%.
Non accruals of the percent of two CRD portfolio at fair value when costs decreased to 2% in 3.2% respectively.
With the liquidation of charming Charlie in Q3, loadmaster reveal the company on non accrual as of September Thirtyth as no no new names were added during the quarter.
Moving on the financials for the third quarter as Chris mentioned, our net investment income of 22 cents per share and looking at some of the components of our $12.8 billion of investment income this quarter.
Income of $3.8 million decrease this quarter from last primarily due to the portfolio contraction.
Tightening spreads LIBOR, sorry, and the dividend income was 3.6 million and reflected dividends from copperweld seem to in the Logan JV.
The decrease in other income quarter over quarter was related primarily to the one time.
$1.5 billion, there could be realized in connection with the sale of late in Q2.
On the expense side total expenses for the quarter were 5.9 million compared to 6.5 million in Q2. The decrease was primarily due to lower interest and fees.
Borrowings as we paid down a substantial portion of our revolver in Q3 with proceeds from the realizations Jim mentioned.
Moving onto the balance sheet items, our cash balance of $14 million at September Thirtyth was higher than normal just due to the timing.
It included proceeds from the realization assigns a quarter ends screws and other receivables increased in Q3 with the liquidation of copperweld and charming Charlie we expect to receive.
Proceeds from the Finalization of the charming liquidation in Q4 and most of the remaining copperweld proceeds are expected in early 2020.
The realized loss of 7.7 million in Q3 was primarily related to charming Charlie that are realized gain on the sale of copperweld. This net realized loss was offset by a corresponding change in unrealized appreciation.
From a leverage and liquidity perspective leverage levels were lower at September thirtyth at around 2.7 times with the repayment of the three positions in Q3, and we anticipate increasing leverage back to the 0.75 0.8 times range in the near term.
With that ill turn the call back to Chris for some closing remarks. Thanks area. We appreciate that we appreciate the opportunity to update you on our continued progress in Q3, we believe are continued diligence.
Execution of our plan is a clear pathway to more stable predictable returns. Thank you and we look forward to your questions with that I'll turn the call back over to the operator to start to two way. Thank you and as a reminder to ask a question if we need to press star one on your telephone.
So your question please press the pound key.
Please stand by we composite culinary roster.
And our first question comes from the line of Lee Cooperman with Omega family Office. Your line is now open.
Thank you very much just the Threeq few questions, Chris if I may.
I missed it if you said something but is the cash flow.
Covering your dividend. If you took your incentive fee per you arrangement. That's number one so are we still subsidizing a distribution, who we no longer have a need to separate distribution.
Secondly, if you have take a stab at the question. If you took you know the question bless it.
Wrote them down to what you thought it was a reasonable level what impact would that have when the book value.
And third I think you're doing the right thing and buying back stock, but you obviously shrinking the size of the company's shrinking a friend footprint, we economically viable as it kind of into the restructured presently just three questions. Any hope you can be would be appreciated. Thank you.
Thanks, Lee appreciate the questions.
The the first.
As it relates to.
To the incentive fee as it relates to our our dividend.
I'll be honest I don't recall the last time, we actually took an incentive fee on the BDC. So.
It's been quite some time, so if we pro forma that and on our existing results. The that the earnings per share would be less it's about a letter about three or four cents.
Reduction.
But given our existing.
Structure that we had as it relates to our fees and the look back over time, we're not anticipating taken an incentive fee given the losses that we've incurred during the portfolio.
For the remainder of 2020, so we think the dividend itself is mid sized accordingly, and is is okay to the extent the.
Portfolio itself has been diversified enough to enable us to add more leverage I think the leverage that we put on the system would enable us to potentially earn an incentive fee in the future and still covered the dividend as as outlined.
Your second question as it relates to the assets, we obviously value of these assets in what we believed to be the fair market value each quarter.
Unfortunately.
We've got two names that are that are sizable as it relates to the overall concentration around those you see them. We've highlighted in its not that were not being transparent. It's it's fully in the Holland, our both areas of focus and.
Folks can do the math on on on what that risk is but we value those assets.
Every.
Every quarter on what we think the fair value as and then I think your last question.
Regarding the economic viability of the of the BDC itself as a as a standalone entity I think you're right it would be difficult for.
As we were sitting here only managing a 500 million dollar vehicle for us to say that it makes sense, but the fact is we're not we're we're part of a much larger platform, we don't manage $500 million and managed $17 billion.
And we'll try to make that point than the prepared remarks that our ability to execute on our strategy of being a lead investor across.
Unique proprietary middle market senior secured loans, because there is alive and well and we've done more than $1 billion of that program.
Over the last 18 months, so that that part is is working and it's just we're much more efficient and practical as it relates to our allocating assets down to the BDC.
Part of the issue with this and we've said this in past calls is that we went public to small and we didnt have a diversification of capital around our.
The around the BDC and that forced us into our fourth the vehicle into some outsized concentrated positions and that's no longer in the case so.
So yeah, I think as part of the larger platform like we have here today I think the.
The BDC is able to do that it if we are booking concentrated names again, if we were doing unsponsored deals that were doing other things in the past that let us down this path.
I'd say that.
Shareholders have the right to be to be upset. The fact is we booked a number of names were holding less than one to one of the asset positions and we're doing on a diversified away and covered our dividend and we feel great about that.
I think as I've said frequently the past nobody I know this gone more out of the way to support would they brought to the public than you guys are the other than we've done a very poor job I was really referring to is the cost of running a public company.
Being absorbed by the shareholders as opposed to the.
10 to 15 to 17 billion the a private company, but we don't have to belabor that now I just that was the point I was trying to make I think there were just.
Marginalizing themselves as we shrink.
Lee I don't disagree, we need to get bigger not smaller but as there is still a dislocation between our book value on our stock price will continue to.
Aggressively buy back stock and create that to our shareholders as as a good use of capital, but you're right. The long term ultimate goal is to get bigger not smaller.
Good luck. Thank you.
Thank you and our next question comes from the line of Paul Johnson with KBW. Your line is now open.
Thanks, Good morning, guys. Thanks for taking my question.
Versus wanted to ask you on.
From.
Voller this quarter that due to the non it.
JV.
Hey, Paul you're facing now that I'm, sorry, we were having a hard time here and you can you are going to repeat that sorry about that can you hear me now.
Yes, okay.
I was just asking on the distribution from the JV. This quarter was slightly lower than previous quarters was that due to the non accrual in the new non accrual and that in the joint venture and also would you expect that to.
Pick back up in the future.
Paul Paul This is Terry appreciate the question.
There Wasnt nonaccrual last quarter this.
But obviously as rolling through there and obviously the impact of decreasing Livewatch has put a little bit of pressure on the earnings which you can see in the.
As we stated just been under 11%.
So look I think it will go up we can probably operate closer to 11 11 went below and a half.
But I would expect probably.
Stabilization of that number.
Go to what we paid this quarter.
Okay. Thanks.
And lastly, just on your progress and the rotation you guys have made pretty good progress over the last several quarters in rotating out of that noncore stuff.
How would you describe I guess, how you stand today and that process I mean.
Really the substantially completed.
Most of that are more.
You expect to have.
You have any sort of transactions on the horizon.
And you to expedite that how would you describe that.
No. That's all I appreciate the question.
We've made very very good progress I mean, it's it's not as easy as this same you want to exit. These names you actually have to.
Take time, we've got a handful of of names that are still concentrated underperforming in our we're on our process Oh working through a reducing those but the two main areas of focus as we said in the call where are our OEM and.
And in Holland and.
We were were pushing forward as fast as we can too.
Turn that turn those investments into into cash.
Okay. Thanks, those are all my question.
Thanks, Paul.
Thank you and one last question comes on line of Matt Jade with Raymond James Your line is now.
Hi, guys is actually it's well, but hey.
On.
The timing during the quarter of the repayment looks to me like they were late in the quarter. So can I assume you've got the normal dividend.
Copperweld this quarter, but we should expect that to go away next quarter or would that be fat.
Robert Stereos, we took a dividend in Q3 similar prior quarters, and we would not expect a dividend in Q4, given the investments gone with respect to the first statement.
Between Copperweld in science.
About 42 ish million dollars of proceeds those science close in the last there the quarter and the Copperweld was.
Before quarter end, so as very backend.
Thank you and then you've given comments on OEM in Holland and.
And I see in K, because obviously thats.
As a good asset and has been doing levels have been paying your dividend is there any outlook you can give on that whether you've had.
That's been incoming expressions of interest or anything like that or do you expect to exit that in 2020 as well.
Our expectation is to be out about investment in the first off the 2020.
Along the way we will continue to.
Receive a dividend the company continues to perform well and be able to support the dividends from taking on quarterly basis.
Got it got it.
And then on on that yet about the the pipe plot well now take me about the pipeline, but you said you know you see the disruption in the market is maybe reducing deal flow a little bit I mean, we've heard that in particularly in the upper end to the syndicated market Thats been district.
Option and that has created may be more incoming inquiries to private lenders that then.
Syndicate us so can you give us any any kinda I mean, you. Though are you seeing are you seeing that as well that there's less activity in in the syndication markets in the syndication.
Uh huh enquiries, but is any of that showing up more so in the private markets that obviously you guys have all exposed.
Yes. Thanks rubber appreciate the question I think.
I think that I think that statement is true.
But not necessarily reflective of our traditional origination source. So if you think through.
Larger issuers they have the ability to go to the syndicated market or to a much larger direct lending platform. These are businesses that are average EBITDA is a north of $50 million to $100 million.
The syndicated market is there's a bit choppy to use Jim Fellows is description and therefore some of those assets are moving into a more of a underwritten or buy and hold strategy on on the on the direct side.
Our our core investment focus is on smaller businesses that tend to 40 in EBITDA. Our average you've at the end of portfolios right around 20. They traditionally don't have the access to the syndicated market anyway. So the fact that market may be closed periodically is not a does not really affect our.
Our traditional our traditional resources, what what we're seeing on our side is there is we're trying to see some price discipline. If you will as as you see larger issuers pricing gap out we feel from a relative value standpoint, you should see increased pricing on on.
In our issuers as well and and that has not played through yet.
And that's why we're being patient with our capital we're going to.
Wait until we see good value.
On assets that we like and.
Execute accordingly, so a little bit of a bifurcation, if you all versus the broader market and what I'd say the core middle market, but those are those are the comments as it relates to the question the summit.
Got it. Thank you I appreciate there's a there's about questions. Thanks. Thank you.
Thank you.
This concludes today's question and answer session I would now like to turn the call back to Chris Flynn for any further remarks.
Thanks, everyone. We look forward to provide any with another update on our progress in 2020.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.