Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the Gladstone Capital Corporation fourth quarter and year ended September Thirtyth 2019 earnings call. One webcast at this time, all participants are any listen only mode.
For the speaker presentation, there will be a question and answer session to ask a question. During this session you'll need to press star one on your telephone.
Please be advised today's conference is being recorded.
You require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker David Gladstone. Please go ahead Sir.
Good morning, everyone. Good to have you on the phone with US. This is David Gladstone Chairman and this is the quarterly earnings call.
I, just don't capital for the quarter, handing and the fiscal year ending September 30, 29 name.
Again, thank you all for calling yen certainly happy to talk to our shareholders and some of the analyst and we welcome the opportunity to provide an update.
All my company and the investment portfolio and now I hear from General Counsel, Michael were like Kelcy, who will make some statements regarding forward looking statements Michael Thanks, Dave and good morning, everybody.
Thanks Report May include forward looking statements on Securities Act like in 33 into Securities Exchange Act of 1934, including those regarding our future performance.
I wouldn't have been statements involve certain risks and uncertainties that are based on our current plans, which we believed to be reasonable. So many factors may cause our actual results could be materially different from any future results expressed or implied by these forward looking statements, including all risk factors that are forms 10-Q, 10-K, and other documents, we file with the FCC because.
Find these on the Investor Relations page of our website, which is www dot Gladstone capital Dot Com. It also sign up for email notification service, where you could find these on the Fccs website at Www Dot SCC that GLP now we undertake no obligation to publicly update or revise any of these forward looking statements whether as.
The result of new information future events or otherwise, except as required by law.
A reminder, today's call is simply an overview of our result, so we ask that you review our press release and Form 10-K , both issued yesterday for more detailed information again, you can find them on the Investor Relations page of our web site with that I'll turn the presentation over to Gladstone Capital's present.
Let's don't capitals, President Bob market Bob.
Good morning. Thank you all for dialing in this morning, I'll focus my bulk in my remarks on the results for the last quarter and conclude with some summary comments on fiscal 2019 and the outlook for fiscal 2020.
The headlines for Gladstone capital for the quarter ended September 30.
2019.
Originations on the quarter were 24.7 million, which included included one new investment and to add on investments to the existing portfolio companies.
Exits and prepayments on the quarter totaled 28.8 million the majority of which were associated with the sale of our interest in 80 C, which yielded proceeds of 18 point Threemillion and included the repayment of our debt position at par or realize equity gain of eight point sevenmillion as well as differ.
Third interest and success fees.
Well the total investments on the quarter fell slightly earning debt investments actually increased by approximately 7 million before an evaluation movements.
Interest income on the quarter rose almost 6% to 11.8 million over the prior quarter with a collection of approximately 900000, a previously deferred AIDC interest.
Excluding the AIDC impact the average yield on our interest bearing portfolio declined slightly to 11.6% with the approximate 30 basis point decline in LIBOR in the quarter as the average outstanding investment balance was largely unchanged.
Prepayment fees exit fees and dividend income declined to 900000 from 1.7 million last quarter, which was the primary reason the total investment income for the quarter fell slightly to 12.7 million.
Borrowing costs fell slightly on the quarter as lower average borrowings in LIBOR rates more than offset higher unused.
Facility commitment fees on the quarter.
Net investment income rose to six point Fourmillion were 21 cents per share its operating expenses were unchanged and net management fees declined 200000 compared to the prior quarter as incentive fee credits increased slightly.
The net assets from operations declined to 5.4 million or 18 cents a share as a result of 1 million of net portfolio depreciation on the quarter and Nab dropped one cents to eight $8 in 22 cents per share at September 30.
With respect to the portfolio the asset mix as of the ended the quarter shifted slightly with the portfolio activity in the exit the BDC, resulting in earning assets, increasing 2% to 90% of the overall investment portfolio at fair value.
Well, we maintained an almost equal split between senior secured assets and second lien assets.
For clarification purposes, our senior secured assets do not include any assets, where we have sold off a first out position in the investment which is consistent with how these assets are classified for collateral purposes under our credit facility.
The largest contributor to the portfolio appreciation on the quarter was the additional 3.3 million realized gain on the extra vadc well positive bookings and strong operating results lift the devaluation of our defiance and Targus investments.
Attracting from this momentum where the headwinds experienced with the energy within the energy services and auto parts sector, which resulted in the depreciation of our investments in Fps resources and Meridian.
During the quarter there was no change in the status of the two non earning investments in the portfolio, which represented an aggregate cost of 8.5 million or 2.2% of debt investments at cost, which as of September 30 have largely been written down to fair value of only 100000.
Since the end of the quarter, we've closed on an additional 17 million of addition of additional debt investments, including one new proprietary investments.
And repayments were exits on the quarter of totaled 2.4 million. So our earning assets are up about 15 million as of today.
Reflecting on the overall results for the fiscal year, there were a couple of points of note.
Over the course of fiscal 2019, we successfully stepped up our origination activities closing on 147 million of new and follow on investments, which was up 38% over fiscal 18, however, repayments and exits nearly doubled on the year to 131 million, which limited our fair value.
Growth during the period to approximately 13 million.
The weighted average yield on earning assets rose to 12.3% on the year from 11.8%.
Aided by the 800000 in deferred interest received from AIDC exit and approximately 55 basis point rising LIBOR over the year, which more than offset any general market spread compression.
While we were disappointed that the performance of select credits there depreciation was largely offset by appreciation elsewhere and our net book value was largely unchanged on the year.
We ended the year with our core proprietary investment portfolio conservatively leveraged at approximately 3.88 times EBITDA on a weighted average basis.
Over the last year, we've successfully improved our capital position by raising $17 million of common equity.
Well above our and Navy under our ATM program and as of September 30, our debt to equity stood at 71% well below most of our peers.
After the end of the quarter, we called our 6% series 2024 term preferred stock Gladden, which was we funded with 38.8 million a five year debt gladhill at a yield of approximately 5.375% and additional bank borrowings in addition.
To this small interest savings achieved this refunding removes the final hurdle to permit glad to take advantage of the higher permitted BDC leverage going forward.
Turning to the outlook for 2020.
We've been able to source a healthy level of new deal opportunities in the past summer months, which is not unusual for this time of year that said competitive pressures have also increased particularly for senior unit tranche investments where margins are intra inching down in spite of the downward movement in LIBOR since mid year.
However between Glads long term longstanding focusing relationship puts and within the lower middle market and management singular focus and alignment with class performance. We're confident we will overcome these near term competitive pressures.
Given our current investment backlog and near term pipeline, we expect to be able to continue to outpace the anticipated portfolio liquidity events. However, it will likely take a number of quarters to prudently deploy the nearly 70 million of incremental investment capacity, we have as of today just to.
Approach, a one to one debt to equity ratio.
In conclusion, we believe we're well positioned to take advantage of our strong capital position.
And leverage relief to grow our investments and generate incremental cost efficiencies and enable us to improve our.
Returns to our shareholders going forward.
And now I'd like to turn the call Overdone coal Hilton brand, our CFO of Gladstone capital to provide some additional details in the funds financial performance for the quarter in fiscal year Nicole. Thank Bob Good morning. During the September quarter total interest income rose, 6% to 11.8 million as the AIDC deferred interest more than us.
Thats, a 30 basis point decline in the average yield on the investment portfolio.
Other income recognized during the quarter of 900000 was largely associated with success fees received upon the exit of anything.
Other income declined by 800000 compared to the prior quarter, mainly due to the decrease in prepayment penalties receipt.
Total investment income declined 200000, or 1.3% to 12.7 million on the corner.
Total expenses for the quarter declined by 300000 of financing expenses fell slightly by 100000 to 3.1 million also net management and incentive fees declined by 200000 for the period as net base management fees rose by 200000 with fewer credit associated with a lower level of origination.
Incentive fees declined by 400000 with an increase in advisor fee credit.
Other expenses are unchanged in the quarter at 800000 or 75 basis points on average assets.
For the quarter ended September Thirtyth net investment income was 6.4 million or 21 cents per share and covered 100% of our distribution.
Moving over to the balance sheet.
As of September Thirtyth, 2019, total assets for 426 million, consisting of 430 million and investments at fair value and 23 million in cash and other assets. Our cash balance was elevated at the ended the year to support the funding for new investments, which close shortly after the end the corner.
Liabilities rose by 8 million do 177 million as 930 and consisted of 67 million borrowings on our credit facility.
The 5.7 million of six senior notes from 2023, and 52 million of serious 2024 term preferred stock.
Net assets rose by 3.1 million since the prior quarter end with 1 million of net realized and unrealized portfolio depreciation and common stock issued under our ATM program, which generated net proceeds of 4.1 million for the quarter.
Specifically, we issued 442 common shares at an average price of $9.49 per share or 115.5% of net.
The accretive ATM issuance offset a portion of the portfolio depreciation and NAV per share dropped by only one cents per share from $8.23 as of June thirtyth to $8 in 22 cents at September Thirtyth 2019.
Our last our leverage as of September Thirtyth was up slightly from the prior quarter end at 71% of net assets at the increase in assets for the period.
As of the ended the quarter, we had an excess of 100 million of current investment capacity and availability under our line of credit.
Following the end of the quarter, we completed the call of our series 2024 term preferred stock at par and the amount of 52 million, which was refinanced with the issuance of the 38.8 million of five Andrey notes due 2024 and borrowings under our line of credit as of today the availability under our line is approximately 90.
Million of the $110 million on you.
With respect to distribution Gladstone capital has remained committed to paying at shareholders a cash dividend in October our board of directors declared our monthly distribution to our common stockholders of seven cents per common share per month for October November and December which is an annual rate of 84 cents per share.
The board will need in January to determine the monthly distribution to common stockholders for the first calendar quarter.
At the current distribution rate for common stock and with a common stock price at about $10.25 yesterday. The distribution run rate is now producing a yield of about 8.2%, which continues to be attractive relative to most yield oriented alternative.
And now I'll turn the call back over to David to conclude.
Thank you Nicole you did a good job Bob I call you did a good job of informing our stockholders and analyst that follow our company in summary, Gladstone capital had a good quarter, which capped a solid year originated $25 million.
Quarter, new investments and the total investments for the year of 147 million.
To more than offset the elevated levels of prepayments that continue to grow and continue to grow our assets.
Reported 12.7 million of investment income for the quarter and cleared $50 million for the investment income for the year, which was up 9.8%.
Generated an 8.3% return on equity net of all the portfolio gains and losses.
Maintaining a very conservative leverage balance sheet.
Maintained a strong balance sheet, which signifies dry powder and and given the recent regulatory leverage relief. So we've got plenty of room to grow the investments at attractive lower middle market businesses that refinance.
So in summary of the company's seems season, improving position in the private businesses that are mid size and with a good management team that we like to finance. Many of these are owned by mid sized buyout funds, we follow them around and finance their acquisitions.
They are always looking for experienced partners and I know if they get us involve that will carry on weight there in terms of doing due diligence and financing.
Leverage over their equity this gives us a chance to make an attractive interest paying alone which is supported by our ongoing commitment to pay cash distributions to stockholders.
We have a strong team in place to capitalize on this marketplace and think we will do a good job for the next year that will end in 2020 in September 2020, now operator segment would you come on until our call us how they can ask some questions certainly as a reminder to ask a question.
To press Star one on your telephone.
Withdraw your question please press the pound.
Our first question comes from the line of Mickey Schleien with Ladenburg. Your line is now open.
Good morning, everyone.
Question for Bob.
So there's been a good deal of stress in the more liquid loan markets and I think some of that weakness. There is two to the outflows as a result of declining life or but I also think the market's realizing that deal terms have been too aggressive and fundamentals are deteriorating.
Especially for some business models.
Theres also been increased bifurcation.
Between good credits and those that are perceived to be weaker so in the past.
Youve nibbled at the more liquid credits in your portfolio and given the volatility. We're seeing there are there areas of that market, where you're seeing interesting opportunities.
Do you think the market is mispricing.
Good morning, Mickey it's an interesting question.
There you're exactly right, we've been somewhat opportunistic where liquidity.
Has created opportunities.
At the moment I agree with you LIBOR is part of that but I think the other part is.
Most of the syndicated loan market place falls.
In the single B category and the seal those which are the biggest buyers of of those assets are pretty over weighted single b in concern of potential downgrades and what it might do to their buckets and the required.
Liquidations.
I think people are holding off so you're not seeing a whole lot of issuance in the single B category. These days, we've seen very little coming to marketplace through the syndicated banks.
So we really have not seen any particular opportunities.
I will also note that if you.
Follow the some of the other bigger bdcs in private funds pools.
Last week, there was announcement of three underwriters to kind of 1.6 billion dollar syndicated loan with three BDC.
Participants so what you're starting to see is a migration of some large assets that would have otherwise been syndicated.
To.
The large commitments.
Cities of some of these bigger bdcs.
The other thing that's noteworthy that I think is beginning to filter.
Is.
I think the investor marketplace is beginning to recognize that buying syndicated loans given the documentation all elements of those transactions are not very attractive were protected in a downward environment and they are opting to invest more.
Through private debt funds run by professional managers. So I think you're also seeing.
Thanks, who are looking for surety on execution and the marketplace. That's looking for professional managers to run those assets beginning to shift some of those opportunistic situations in favor of private debt funded alternatives. So we're not particularly optimistic at the moment on.
Having syndicated opportunities that we might find attractive in the marketplace today.
Okay I understand that's interesting, but we appreciate that just one follow up question in terms of the portfolio structure I did notice to the allocation.
Second lien increased quarter to quarter.
But as you've said in the past.
That includes last out pieces of units launch, which as we know some other bdcs was limited label as first lien. So could you give us a sense of how much less doubt unitranches in the portfolio.
Was that what drove the increase quarter to quarter.
As I indicated on my comments Mickey we don't classify last outs in second liens and at the present, we don't have any last out.
In our portfolio, we have sold off senior loans.
Two participants.
On a straight up basis, not as a part of our existing facilities. So that is not.
Part of the mix I think.
More traditionally in the past.
The unitranches that we've done have been larger dollar amounts because it's a deeper it's a larger multiple of the underlying EBITDA. So.
It it's not uncommon for us to have prepayments.
Of those unitranches, given the market pressures and it will cause some swings in our assets.
As my comments looted there's a lot more pressure in the senior asset category today, that's where most of the private debt funds are looking to put their money to work and so it's a little bit been a little bit more challenging for us putting on assets in that category.
The deal we closed after the ended the quarter was a unit was the unit tranche and a number of our current pipeline activities. Our unitranches. So I would not look at the shift.
As a permanent event $20 million in a transaction can swing those numbers fairly easily and.
We are committed to the continued.
Roughly equal mix of first lien in the second lien going forward.
Okay I understand that Thats helpful. Appreciate your time. This morning those are all my questions. Thanks. Thank you Mickey.
Okay do we have any other questions.
Our next question comes from Henry Coffey with Wedbush.
Your line.
Good morning, it's always good to go after Mickey because these are detailed in focus so thank you Sir.
Thank you Mick.
But but in more general terms.
When you look at your portfolio companies.
We've got two issues that you both afterward volatility in the most of you see a lot of rate volatility, which could affect how your business performs and then a lot of sort of economic shifting going on and then obviously, we're going into an election.
When we close if we just ignored all that and talk specifically to your company's how how quote how are they doing I mean, what what are their business their actual business outlook, what's it like out there in the field is kind of I'm asking the question.
Okay.
Hey, we're pretty diversified so I think you have to recognize.
There are some sectors, where things are are going reasonably well.
Domestic manufacturing.
Is going reasonably well.
Some of the service oriented businesses are doing reasonably well.
If it's Scott in international flavor to it.
Or if it's Scott.
Okay.
You know the terrorists.
You know issues that they've had to manage around.
Those obviously had been more challenging.
Most of the investments that we've been focused on have a core organic growth.
Opportunity to them and well in excess of what the economic growth is today and so they even if they are slowed they're still doing fairly well so.
If we looked at the sectors, where we play today.
It's it's pretty diversified diversified manufacturing diversified services are pretty strong.
But I would also say that.
Weve steered clear of anything that's housing related weve steered clear of anything thats kind of.
Retail oriented given the continued consolidation and uncertainties of those marketplace.
But overall I think the majority of the movement that you're seeing in the portfolio appreciation or depreciation has more to do with our outside pricing service, which you set the price for a significant portion of our loans and as you've seen theres, probably you know.
Typically in the recent market a point to a point and half of depreciation because of.
Because of just the general market trends and and.
Valuation levels so.
I can't be more specific without drilling into its individual names Henry and that's obviously not something we can do on this call.
And then and then when you do you jump to the other side of the discussion and look at just the.
Where rates are right now and we almost have.
We were going to tweak of of an inverted do you have a have a steep this in the yield curve not not not nothing to get really exciting excited about in the we have some some recent increase in the 10 years. So.
And that certainly over the last five days so.
You know.
When you look at the current rate environment, how do you think the company's positioned in terms of spreads in margins.
And.
And what your investment rates will look like.
Okay.
Well look I think.
A year ago, we were all thinking that LIBOR was going up and we were going to reap some lift on our commute cumulative margin in our modest leverage.
I think in the current environment.
It does not feel like the rates are going to go down much from here.
So any any decline I would continue to point towards.
You know over exuberant competitive pressures and frankly, that's not that's not something that we're going to we're going to chase.
We are very focused on.
Growth oriented businesses.
That are looking for capital flexibility and follow on investments to grow.
There are companies and ultimately by giving them those flexibilities, they're able to compound the return and expand their equity their equity appreciation and that doesn't change because interest rates move 25 basis points and so we're continuing to pursue those opportunities that's the key.
Core of the marketplace I think from our perspective.
Yes, we refinanced some of our fixed rate structure debt down a little bit.
We've reduced the waiting on the fixed side a little bit.
It also venture to guess that.
There will be a discussion coming early 2020 with respect to spread on our bank line and.
All of those things weighted together will give us.
Some incremental flexibility as it relates to the net interest margin, but our net interest margin is held fairly consistent and we're going to be disciplined around that.
So I don't I don't think it narrows from here, but.
I also don't think in the near term given the competitive pressures, it's likely to widen I think we can we can make it work where it is.
Well just have to work a little harder.
To to keep our costs low or lower them and and we will look to increasing our leverage slightly over what we experienced last year to enhance the returns to the shareholders.
Great. Thank you very much.
Thank you.
Next question.
Thank you I'm not showing any further questions at this time I will now turn the call back over to Mr. Gladstone for any further remarks.
Alright, Thank you very much for listening and now we'll see you next quarter. That's the end of this call.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.