Q3 2019 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the T.C.G. BBC third quarter 2019 earnings Conference call.
At this time, all participants' lines are in listen only mode.
After the speakers presentation, there will be a question and answer session to ask a question during especially you would need to press Star then one well your telephone.
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I would now like to have the conference over to what are your speakers today Mr. Daniel Harris, Sir please begin.
Thank you Howard good morning, and welcome to TCG Bdcs third quarter 2019 earnings call last night, we issued an earnings press release and detailed earnings presentation with our quarterly results.
Copy of which is available on T.C.G. Bdcs Investor Relations website I.
I Wonder remarks today, we will hold the question and answer session for analysts and institutional investors. This call is being webcast a replay will be available on our website.
Any forward looking statements made today do not guarantee future performance and undue reliance should not be placed on.
These statements are based on current management expectations and involve inherent risks and uncertainties, including those identified in the risk factor section of our annual report on Form 10-K that could cause actual results to differ materially from those indicated.
Do you see GBDC assumes no obligation to update any forward looking guidance at any time.
With that I'll turn it over to our President Linda pace.
Dan.
Good morning, everyone. Thank you for joining us on our call. This morning to discuss our third quarter results.
Joining me on the call today is our Chief investment Officer, Taylor, Boswell, and our Chief Financial Officer, Tom had again.
Before handing the call over to Taylor and Tom I'd like to focus my remarks today across three areas.
Summarizing our financial results for the quarter.
A closer look at our portfolio and the change in any any be this quarter.
And a brief discussion on our dividend and capital position.
Let me start with an overview of our results for the third quarter.
We generated net investment income of $27 million were 45 cents per share and we declared our regular 37 cents dividend.
Our company has consistently produced net investment income well in excess of our quarterly dividend. We expect to continue this going forward.
Our net asset value per share declined to $16.58 from $17.06 last quarter.
Net investment income substantially exceeded the dividend, but was offset by realized and unrealized losses of approximately 60 cents per share.
Well share repurchases or four cents per share accretive to any they.
Let me shift to a slightly deeper discussion on our portfolio and change it and maybe this quarter.
Our bdcs portfolios highly diversified and heavily weighted with first lien positions, which represent about 70% of our portfolio last at the third quarter.
We have over 140 investments in the portfolio diversified by size and sector.
No single sector accounts for more than 12% of the portfolio.
This portfolio construction represents our defensive approach to sustainable dividend creation, which is our investment objective.
However portfolio construction alone does not immunize the portfolio from idiosyncratic risk.
Well, we expect to outperform the industry over the long term our results. This quarter were negatively impacted by a couple of investments that drove the vast majority of the 2.8% quarter over quarter decline in a navy per share this quarter.
We have aggressively move to manage our remaining risk leveraging the broader Carlyle global credit workout team and other platform capabilities.
As I mentioned last quarter, our team is focused on stabilizing and navy through prudent underwriting standards and active portfolio management.
We are confident we can deliver strong long term credit performance and drive shareholder value.
Any individual quarter may exhibit some level of volatility.
The core tenets of our investment philosophy are unchanged.
Continue to invest in the best relative value opportunities.
Maintained a strong bias towards senior debt and defensive industry exposures.
And directly originate from sponsors with whom we have meaningful relationships.
Let me conclude with the discussion of our dividend and capital position.
Dividend stability remains an important feature of our BDC and represents an attractive yield to holders.
At today's price this equates to a dividend yield greater than 10%.
Without factoring in the impact of any special dividends.
Last quarter, we paid a special dividend and our position to declare a further significant special dividend in the fourth quarter.
At the end of the third quarter or spill over income was approximately 31 cents per share and we intend to balance the future special dividends with capital preservation.
We continue to be active and share repurchases during the third quarter as we do not believe our valuation reflects the intrinsic value of our company with a broad capabilities at the Carlyle platform.
We repurchased $17 million of shares during the quarter and inception to date is $52 million in repurchase activity has led to 14 cents in accretion to anybody.
We have approximately 48 million remaining on our 100 million dollar repurchase authorization, which earlier this week our board extended for another year.
It is our intent to continue repurchasing shares at or near our current valuation.
To reiterate we remain extremely focused on portfolio performance and stabilizing in Navy.
Let me now hand, the call over to our Chief investment Officer Taylor Boswell.
Thank you Linda.
Allow me to begin by sharing carlyle's read on the macroeconomic environment.
If you recall last quarter, we set our firm's proprietary research does not pointing towards an eminent recession.
Today, while we continue to see weakness in trade linked activities as well as certain categories of short short cycle industrial demand and we acknowledge the data has softened somewhat in the last few months our house view remains unchanged.
That is we still do not expect a recession through year end 2020.
That said, we're not other macro investors nor market timers.
Rather we are fundamental investors building portfolios designed to perform across cycles. This is certainly the case with CGP D, where our investment objective is the delivery of defensive sustainable income to our shareholders.
And this pursued as Linda mentioned, we've constructed a portfolio, which is heavily anchored in first dollar senior secured instruments and its highly diversified by borrower. It also possesses less than half the exposure to cyclical industries, a broader leveraged finance markets as such we're happy to report that any economic weakness Carlyle sees emerge.
Thing, it's not evidencing itself in CGP these portfolio.
We remain confident in our ability to outperform through a cycle.
We spoke last quarter about our portfolio sensitivity to movements in LIBOR, the progression of which continues to be unfavorable for us and our peers as our market navigate this transition we're focused on maintaining price discipline and seeking to maintain yield by increasing spreads.
Our progress in this respect has been solid, especially in light of the highly competitive environment in which we are operating.
You can see the same with our book yields roughly flat on a quarter over quarter basis.
While the private markets rarely see immediate transition of public market signals. We do see initial signs are competitors are taking similar approaches and we have confidence and this market's ability to deliver absolute return across macro environments.
But at Carlisle, we're not gonna be passive and rely on this competitive market to deliver us what we need.
Instead as you would expect we continuously evolve our business to adjust the changing market conditions.
The core thrust of that evolution today is driving deeper integration of our efforts across Carlisle.
This means a widening of our funnel to source from across the firm's broad capabilities as well as the use of our scaled capital base and deep sector expertise to allow us to control transactions and move faster with conviction.
We're pleased to begin to show early results of this effort in the quarter booking both large and lead sponsor finance transactions as well as transactions leveraging our software asset backed European and non sponsored lending capabilities.
In the coming quarters, you will see us build upon these efforts as we believe the yield and diversification benefits of these differentiated strategies are compelling for our shareholders.
Our platform also opens up very interesting opportunities to compete with traditionally syndicated financing markets, which are currently experiencing meaningful technical dislocations.
We've been actively stepping in with the spoke private capital solutions, namely in privately placed second liens large scale unitranches and taking advantage of a bifurcated first lien market.
For example in the third quarter, we worked with one of our top sponsors to privately structure incremental first lien and second lien loans for a well regarded seasons leverage loan issuer in the aerospace sector.
The sponsor did not want to take us and execution risks in liquid markets and needed a trusted partner that could invest with scale in multiple parts of the capital stack.
We work together with them to design, a bespoke financing package that facilitated a partial monetization deliberate critical dry powder for M&A and integrated without issue into their existing capital structure.
As we and a small number of other direct lenders have achieved significant scale. We expect to continue to open up new opportunities by taking share from traditionally syndicated leverage finance markets.
Stepping back we had another strong quarter of origination activity, both in quantity and quality with 284 million of commitments over 75% of which were in first lien instruments I.
Similar percentage of this capital was deployed in support of repeat sponsors. While we served as lead arranger on approximately 80% of our transactions demonstrating our significant influence in the marketplace.
From a credit perspective, the key metrics for new originations remain largely in line with our broader portfolio in prior quarters. The loan to value was under 50%. The average leverage multiple was roughly five and a half times average EBITDA was 90 million significantly higher than our average portfolio EBITDA, reflecting progress both deploying our.
Capital more effectively as well as inroads made displacing syndicated markets.
I'll now turn the call over to Tom had again to discuss our financial results.
Thanks Taylor.
We had another solid quarter in terms of core income generation.
Total investment income for the third quarter was $56 million down slightly from 57 million in the second quarter.
The decrease was primarily due to lower oil idea accretion and prepayment fees given the elevated level of repayments experienced last quarter.
However, this was offset by growth in core interest income from a higher average investment balance.
Total expenses were flat for the quarter at $29 million as higher interest expense from an increase in the average debt outstanding was offset by a decline in incentive fees.
This resulted in net investment income for the quarter of $27 million for 45 cents per share and that compares to an average of 43 cents over the prior eight quarters dating back to our IPO.
On November 4th our board of directors declared a regular dividends for the fourth quarter of 2019 at the same 37 cents per share and that's payable to shareholders of record as the close of business on December 30 Onest.
Shifting to the financing front, we finished the third quarter with total debt outstanding of about 1.2 billion. That's up from 1.1 billion as of 630. The increase was driven primarily by funding the net growth in the investment portfolio.
We recently increased a revolving credit facility by about another $100 million. So we still up about 330 million of total unused commitments under our credit facilities.
Statutory leverage was 1.23 as of 930, which is right in the middle of our stated target range of one hour to 1.4 times and that's up from 1.07 at the end to the prior quarter.
And as we highlighted on last quarter's call given the more favorable rate environment for issuers, we continue to evaluate alternative financing solutions with a primary goal to further optimize our liability structure.
Moving onto the JV is performance the dividend yield on our equity in the JV was again about 13% for the third quarter.
Repayments outpaced new originations at the JV during the quarter a trend we see continuing through year end. So this could weigh on the JV is dividend yields in 2020.
Regarding valuations in NAV, our total aggregate realized and unrealized net loss was about $36 million for the quarter. One bar work dimensional dental contributed over half of this loss and over two thirds of our NAV decline as we marked our position down to almost zero.
This companys financial prospects have deteriorated materially over the last quarter.
Given we hold the junior debt Traunch, we expect minimal recovery on our investment.
This is one of the remaining credits from a legacy last hour program that is not made any new investments since 2017.
No, we're making a conscious effort to reduce exposure in that program over the next few quarters.
Regarding exits we noted on last quarter's call that we sold our investment in totes, the realized loss of $11 million for the quarter, primarily represents a reversal of prior period unrealized losses on this position.
On the positive front in September we receive repayment in full on our debt investment in 2080 and in the last week, we received equity proceeds from the sale of the remaining business lines. This was alone we restructured back in early 2017, and with right combination of capital corporate governance and patients with respect to recover over 100%.
Our original loan investment.
Regarding the overall portfolio the weighted average internal risk rating remain 2.3, and the total watchlist was flat quarter over quarter with no new additions.
With that let me turn the call back over to Atlanta for some closing remarks.
Thank you Tom.
Delivering strong risk adjusted returns to our shareholders remains our top priority and getting to a place where we have stabilized and Navy is a focus area for all of us on this call.
We are on the right track.
Thank you for your time and attention this morning, and I'll now turn the call back over to the operator for Q and <unk>.
Thank you as a reminder to ask a question you will need to press star one on your telephone.
To withdraw your question press the pound key.
Please standby, while we compile the Q and a roster.
And our first question comes from the line of Fin O'shea with Wells Fargo Securities. Your line is now open.
Hi, guys. Good morning, Thanks for having the on.
First question for Linda Your you got some.
Extended remarks on the dividend this quarter.
But it seemed to be saying that.
Yes, its a.
That's correct and going forward essentially are you communicating anything and.
Your your view as to the long term sustainability of the regular dividends.
Yes, hi, good morning, Thanks for thanks for dialing in answer to question.
Yeah, I think you know our message to to you on to our investors is that were very comfortable with the long term sustainability of the dividend.
Our net interest income is is well in excess of you know the 37 cents that that we declared this quarter in prior quarters.
And you know where.
We're not going to give any guidance on the special for for Q4, yet it's a bit too early.
But you can see by the level of this spillover income that.
We will be in a position to declare one and we do expect that a special dividend, which was 20 cents last year already declared eight cents last quarter.
We'll be well be in excess of the combined 20 cents from last year.
I appreciate.
Sure.
And as a follow.
Oh look with the marks this quarter.
It looks like a couple of the or more.
Severe experiences have come from the.
Yes.
Some capital joint venture the you know last out program.
Is there anyway.
Right there.
You know in hindsight, whether it be you know industry or structure.
And is there a change on how you look at this.
We knew going forward.
Yes.
Something that we've talked a lot about as a team here.
So when we started out yeah, we had the program without us in capital that essentially was a first out last out program, where Carlyle took the last out we've stopped investing through that program back in 2017.
We're still working through some of the legacy issues that came through that program and you saw I.
Mainly in.
National Dental this quarter.
You know I think one thing you know I'm not sure I would blame it on necessarily an industry, though there is a little bit of that but it's more so the structure.
Last out position when a company gets into trouble and has to restructure its balance sheet.
The recoveries there or are tend to be relatively poor.
And.
So yeah. So.
That's.
The main driver for us wanting to not continue to invest in that program I think more importantly, going forward we've got.
Some exposure residual exposure that came from that program. We've got a really good line of sight to.
Fully exiting whether it's through just getting repayments or sales or just general portfolio management.
Oh.
Thank you and then.
Sorry to tailor just one point I would add on to that which is.
That Madison program, we were running.
Generally in smaller issuers and so as you see us taking incremental exposure in junior debt Slash second liens.
This environment, what you see us doing is further up market with larger companies is another way that were sort of responding to the experience with that program, which led to mentioned we're winding down.
Appreciate the color on that and one.
Third question, if I may it looks like a couple of the the names I think.
Legacy Dot com.
Superior health plans.
Good.
Okay components.
That is that UBS borrower concession of any farm or are they trying for covenants and and you know the rate ticks up [laughter] or anything anything to read into an on those names.
Hey fin, it's Tom in both those scenarios, we had covenant issues in negotiations with the sponsor and Inking an amendment revealed the increased price and in both cases, we increase the price in a form of pick.
Okay. Thank you for the color that's all for me.
Thank you.
Next question comes from the line of Rich Shane with JP Morgan Your line is now.
Good morning, it's Melissa on for today.
So can you guys can touch on how you're thinking about.
Taking leverage higher on at this stage at the cycle and whether or not.
The extent to which you have even more ability to kind of leverage.
If we were to form a final dislocation Mike.
And with its Tom Thanks for the question when we received approval from our board and shareholders last year.
You always with that we could comfortably run leverage in that one hour to 1.4 range keeping the same investment mix and not being a relatively conservative mix weighted more heavily towards first lien and you see in a broader markets. So do look at our portfolio still with roughly 70% true first lien loans, we think that based on that risk exposure.
As you are in the portfolio weighted towards first liens as well as as Taylor noted.
Well typically low level of risk of cyclicality in the portfolio, we feel quite comfortable running at the current leverage levels enough stated target range given the risk in the aggregate portfolio.
Okay. Thank you could you also talk about think derm growth partners three.
And that's something another one that you're carrying.
But it.
Discount to cost I'm not sure if there's something incremental that happened this quarter or can you just give an update on the company. Thank you.
Yes.
Update I'd give on that credit is.
It's we're working through some operational and financial performance challenges with the sponsor in the company, but but unlike some of the other positions such as dimensional which was the other large mark down. This quarter. This is a first lien traunch. So we expect in this situation a very different outcome than we had on demand.
And show, which obviously being junior debt in a in a underperforming situation the recovery prospects in that one much difference. That's it that's an important distinction I would draw between the two borrowers.
Thank you and our next question comes from the line of Paul Johnson with KBW. Your line is now open.
Hey, good morning things for us.
Good.
You guys talked about.
Taking on.
Transaction.
Bigger companies.
Syndicated market.
The result of what sort of.
Yeah.
The adult market for it about a this year or is that more of an internal ship strategy.
Yes. Thanks.
Linda Thanks for the question in large part it is.
Driven by the dislocation that we're seeing in the broadly syndicated markets.
Whereby were seeing more opportunities.
Come come our way and leave the syndicated market and just you know I think a good way to maybe illustrate that is.
To give you an example kind of in house here at Carlisle.
You know in talking with kind of our capital markets team that covers our private equity side.
We recently did a deal that normally would've gone to the syndicated market given its size, but decided to come to the you know the more middle market direct lending space and that was really not because not not because direct lenders don't have the same.
Yes.
Credit prowess or or the way. They look at credit is any different there is still very discriminating, but really because there is much more execution risk in that broadly syndicated market. These days.
And there isn't the direct lending market and having having certainty around execution, having speed around execution is pretty valuable so.
So that opportunities coming to our markets.
We're seeing we're seeing more and more of that.
Great Thanks for that.
And then.
A little bit.
The middle market credit.
We noticed that originated.
Slightly during the quarter repayments were pretty big.
Anything going on there that.
Higher prepayments during the quarters, that's more of a.
An anomaly.
Yeah, I'd say that we needed to Tom.
I'd say given when you look at the broader BDC.
The repayments, obviously difficult to predict we have some quarters repayments are very heavy somewhere there light I'd say right now we just happen to be experiencing very heavy repayment period for the JV in particular, some larger positions and that's why you see the in particular the repayments are outpacing the new originations for the third quarter and we anticipate likely the same for the fourth quarter.
Okay.
And then a one other question on growth partners.
Just to add on the question for that particular company that a.
Strategy of health care product.
Hey, Paul that's correct.
Okay.
Good.
Lastly, I'm just curious.
Carlisle.
Are you guys.
Any other additional changes.
Your process.
No other thing.
He is a takes over it.
Aside from.
Greetings further in.
<unk>.
Thanks.
Thanks, Paul I'm.
Short answer is no.
Last quarter about additional resources that we've added.
To the team both on the underwriting side it on the senior management side and you know as Taylor pointed out earlier on the call.
Focusing on integrating within the broader Carlyle credit platform and and the overall from those are those are the two main points and there.
There are done it ongoing so you shouldn't expect anything anything else.
Thank you I'm showing no further questions at this time I will now turn the call back over to head of Investor Relations Daniel Harris for closing remarks.
Yes. Thank you for your time today. We appreciate your interest if you do have any follow ups feel free to contact Investor relations at any time, otherwise, we'll look forward to speaking with you again next quarter.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating and you may now disconnect.