Q4 2019 Earnings Call
[music].
And your ended 2019 earnings call.
I'd like to remind our listeners that remarks made during the call may contain forward looking statements forward looking statements are not guarantees of future performance or results and involve a number of risks and uncertainties that are outside the company's control actual results may differ materially from those in forward looking statements as a result of a number of factors.
Including those described from time to time and I will brought capital corporations filings with the securities and exchange can affect commission.
The company assumes no obligation to update any forward looking statement as a reminder, this call is being recorded for replay purposes.
Yesterday, the company issued its earnings press release and posted an earnings presentation for the fourth quarter and year ended December 31st 2019. This presentation should be reviewed in conjunction with the company's form 10-K filed on February 19th with the FCC. The company will refer to the earnings presentation throughout the call today. So please.
I have that presentation available to you as a reminder, the earnings presentation is they fail available on the company's website I will now turn the call over to Craig Packer, Chief Executive Officer of Allograft Capital Corporation.
Thank you operator, good morning, everyone and thank you for going yesterday for a fourth quarter earnings call. This is Craig Packer and I see all alcohol Corporation cofounder of Al Roth Capital partners.
Joining me today, it's Alan Kirshenbaum, our Chief Financial Officer, Chief Operating Officer, Dan on the our head of Investor Relations.
Welcome everyone, who is joining us on the call today.
I'd like to start by highlighting our fourth quarter results, providing an overview of our investing activities in the quarter.
Alan will then provide more detail on or after Brussels, and they're not doing or financing activities.
Uh huh.
Yes.
And fourth quarter results today.
[laughter].
We saw another quarter of robust origination activity and continue to maintain our strong track record for the credit quality.
We ended the quarter with a net asset value per share centene doors, and 24 cents Oh, two cents from a third quarter as we continue to over our dividend.
Our net investment income covered our dividend this quarter by approximately 106%.
Looking forward for the first quarter. Our board has declared a dividend of 31 cents per share. In addition to the previously declared a special dividend of eight cents per share for a total first quarter dividend of 39 cents per share.
Which equates to an annualized dividend yield and.
No.
Last quarter, we'd be down Oh my.
Great.
Okay.
Okay.
Our continued focus on expanding I'll try liabilities.
Yes, we can actually coupled with our market last month issuing $500 million a senior notes, the five and a half year maturity.
Alan will cover this in more detail later, but we continue to see improved financing costs as a public credit markets become more familiar with our story and expect to contain is half these markets overtime at attractive rates.
I'd also like to cover an important milestone.
After quarter end, which was the first release of the share market.
A reminder, we issued 11 and a half a million primary shares at our IPO last July and 100% of our pre IPO shareholders or subject to a lock up on about 375 million shares outstanding.
This lockout provided for the release of one third of these shares at six 912 months post the IPO.
Approximately 125 million shares became freely tradable on January 15th.
Greasing or Ccs flow to 146 million shares for approximately $2.3 billion attorneys stock price.
Another 125 million shares will be released from lockup on April 14.
And the last one third will be released on July 18.
As expected owing to walk up release, we saw increased trading activity in our stock and believe it is positive for shareholders to have a larger public float.
Our IPO also included a number of shareholder friendly features which remain in effect.
These features include 150 billion dollar tend be five one buyback program.
Starts by a share of the average daily trading volume and the stock trades below net asset value.
Will run through February 2021.
Today, we have not utilize this buyback and not a single sure has been purchased as we have trended above NAV each day since our IPO.
We also announced at the time right.
Board had approved series of six consecutive quarterly special dividends, which began in the third quarter of 2019 will run through the fourth quarter of 2020.
Alan will remind you of the detail later in the call.
Moving onto our investment activity fourth quarter was another active one from originations perspective 1 billion of new investment. This 795 million of new investment on things and 526 million of net on the investment activity, which was net of 269 million.
Sales and repayments.
We added seven new portfolio companies this quarter and served as an administrative agent on most of this origination volume.
We also provided additional capital to three of our existing portfolio companies or who are consuming add on acquisitions.
Team to be excited to support our portfolio companies as they seek additional capital for growth.
We used to have a growing roster of incumbent lending relationships, which can drive.
Future investment activity.
While repayments remain modest this quarter, we expect to see them pick up in 2020.
Of note, 100% of our new origination activity. This quarter was first lien or unit tranche term loans you may recall that last quarter. We saw increased second lien activity. As we noted then our conservative investment posture and focus on first lien lending has not changed even though we may see a shift.
In market opportunities from quarter to quarter.
This quarter, we saw attractive unitranche opportunities in five of the seven new investments this quarter were unitranches.
As we've highlighted previously we liked unitranche loans as their first lien loans with attractive spreads and the protection of the dollar one attachment point.
As the size of deals and borrower demand for Unitranches increases given our scale and available capital. We believe we're well positioned to take advantage of these trends.
This quarter, we continue to see the benefits of our strategy, we're focused on upper middle market and on primarily sponsor backed companies.
We believe our scale as a differentiating factor as we were able to lead or anchor deals between 200 million and 600 million in size.
We remain highly focused on quality book, we are building.
Our portfolio now stands at 8.8 billion of high quality directly originated senior secured floating rate loans across 98 portfolio companies.
Consistent with historical quarters, the portfolio ended the quarter approximately 81% personally positions.
Neutron because this is accounted for 36% the total portfolio.
We continue to focus on large stable recession resistant businesses. The weighted average EBITDA of our borrowers was approximately $79 million at quarter end remains squarely on the upper end of middle market companies.
We remain well diversified across the 27 industries in our portfolio this quarter, our exposure to the distribution sector increased to 8.6%, making it our largest industry, we expect to see some movement among the largest sector each quarter, depending upon deal flow.
I know the breadth of our industry groups for this quarter as we execute deals at cost six different industries.
Further no individual investment represents greater than 3% the fully investment portfolio and our top 10 positions now represent 24% of the current portfolio.
The asset yield of our portfolio was 8.6% for the quarter versus 3.9% in third quarter, which reflected the drop in LIBOR that we saw as a result of the fed cutting rates.
Although lower rates reduced our assay deal we're focused on minimizing the impact I see wider spreads.
Weaker market conditions in the syndicated market helped us to successfully obtained wider spreads the weighted average spread on new investments. This quarter was 5.9%, which was very attractive given all investments were firstly or unit tranche, we didnt know second liens, which typically carry a higher spread.
The weighted average spread of our portfolio is 6.3% overall the highest of the last four quarters.
If you do a sense of the deals we've done this quarter I wanted to highlight two of our new investments.
First was the Unitranche loan to support Kelso's acquisition of individual foodservice or with us.
With us as a distributor foodservice and janitorial products and supplies across the aisle rock platform, we committed to the old $250 million acquisition facility, serving as administrative agent, we like the company given the attractive not cyclical nature of the foodservice end market leading share in the markets. They serve.
And revenue stability driven by the highly recurring product purchases.
This quarter. We're also pleased to support harvest partners acquisition of wage or spot the $325 million acquisition facility.
A lot led and structured the first new financing and serve as administrative easier.
We just thought provides transportation services within distribution centers in manufacturing facilities.
As the only national player the company benefits from economies of scale for smaller competitors and exposure to largely economically resilient end markets, such as food beverage and consumer products.
Both ISS and laser spot had the attributes we like in our investments businesses when attractive market positions in recession resistant areas structure with attractive spreads maintenance covenants in a reasonable loan to value ratio.
In addition to our strong origination activity. We are pleased to report that we continue to have no investments on nonaccrual status and since our inception in 2016 have not had any principal losses or defaults.
We continue to closely monitor our portfolio companies for any signs of changing credit performance.
Let's see on page 13 of the earnings presentation across our five point internal performance rating scale.
Oil mix remains consistent with that of previous quarters, we continue to see solid performance across our borrowers with growth in line with a modestly growing us economy, which reflects our focus on recession resistant sectors that we believe helped mitigate economics cyclicality.
Once again, we're very pleased with our investment activity portfolio performance. This quarter I'll now turn the presentation over to Alan cover additional detail on our financings our quarterly results.
Thank you Craig good morning, everyone to start off you can follow along starting on slide six of our earnings presentation. We ended the fourth quarter with total portfolio investments of 8.8 billion outstanding debt of 3 billion and total net assets of 6 billion, our net asset value per share with $15 in 2000.
Four cents as of December 30, Onest compared to $15 in 22 cents as of September Thirtyth, our dividends for the fourth quarter was 31 cents per share plus a four cents per share a special dividend and our net investment income was 37 cents per share over earning our dividend again.
On the next slide Slide seven you can see total investment income for the fourth quarter was $202 million. This is up $14 million from the previous corridor, where approximately 7%. We should generally expect to continue to see revenue increases for the next several quarters as we ramp back to our target leverage.
Building up to approximately $10 billion in total investments when the portfolio is fully invested.
As for expenses total expenses, none of our fee waivers for the fourth quarter was $57 million. This was up $7 million from the previous quarter or about 13%, which was almost entirely due to higher interest expense in connection with increasing leverage quarter over quarter.
Our net asset value saw an increase of two cents per share. This quarter you can see an NAV bridge on slide eight of our earnings presentation. As you can see on this slide the increase in net asset value was driven by over earning our dividend this quarter.
As a reminder, in connection with our IPO, we waived our best in class public Bdcs fee structure for five quarters to keep our industry low private phase fee structure 75 basis points management fee and zero performance.
The way you will see that flow through the income statement is our management and incentive fee expense line in our 10-K will represent the one and a half in 17.5% fee structure and the waiver line effectively a contra expense shown just under our total operating expenses in our 10-K reflects a portion of our fees that we are waiving.
For the fourth quarter, we weigh $41.7 million a fees.
In total so far since going public we have weighed $73.4 million of fees.
We are passing this fee waiver on to our shareholders in the form of the special dividends. Our board has previously declared.
For the first quarter of 2020, our board approved the dividend of 31 cents per share, which we think of as our long term dividends as a reminder, our board set this dividends with a long term view at a level, which we felt was an achievable conservative dividend level in connection with our IPO. Our board also approved a series.
As of six consecutive quarterly special dividends, you can see a picture of our dividend structure for the rest of 2020 on slide 15 of our earnings presentation.
These special dividends effectively the fee waiver I just mentioned is the shaded portion of each bar at the top of this slide. These started in the third quarter of 2019 and run through include the fourth quarter of 2020.
As you can see for each quarter. This year. The special dividend is eight cents per share per quarter. So in 2020 alone. The total special dividend at up to 32 cents per share. This is effectively an additional full quarters dividend that we're paying throughout 2020 on top of our regular dividends as you can also.
On this slide we provided ourselves or ramp with our special dividends from the third quarter of 2019 through the first quarter of 2020, as we ramp back to our target leverage ratio.
Again, all of these special dividends have already been approved by our board of directors for shareholders of record as of the last day of each respective quarter.
On the back of another strong quarter of origination activity, we were able to continue to progress towards ramping back to our target leverage.
As a reminder, leading up to our IPO. We are operating at a 0.75 times debt to equity level and just prior to our IPO, we de Levered to 0.24 times debt to equity as we call the remaining capital commitments from our private phase investors.
We increased leverage to 0.39 times debt to equity by the end of the third quarter and ended the fourth quarter at 0.46 times debt to equity.
Based on our progress this quarter, we currently expect to get back to our 0.75 times debt to equity target and approximately six months.
As it relates to our financings we were very active again this quarter you can see an overview of all of our financings on slide 14 of our earnings presentation.
To sum up our activity here, we did another CLL takeout from one of our dropdown SPV facilities and we did two unsecured public bond issuances in October and January we will continue to remain very active in both of these areas.
As a quick overview, our initial public bond issuance, we priced at 312 and a half over five year treasuries and our most recent deal last month, we priced at 220 over five year treasuries, almost 100 basis points a spread tightening we are clearly very pleased with this execution I think there's still room for some further titan.
Okay and future issuances.
These public bond issuances price at five in a quarter percent fixed coupon, 4% fixed coupon and three and three quarters percent fixed coupon as a reminder, we swapped the first issuance to floating rate, but have not swapped either of the last two deals due to the unattractive level of economics. The continues to be a negative carry.
Enter into swaps, we made the decision to not swap if the economics are not attractive and if the fixed rates are low enough. So under current market conditions, you should expect to see us to keep a portion of our balance sheet as fixed rate.
I had commented a few quarters ago that our cost of debt would go up a little before coming down since we pay down our inexpensive capital call facility in connection with our IPO due to the recent financings I just mentioned the COO takeouts and unsecured issuances our cost of debt has gone down as you can see on slide 12 of our earnings.
His presentation. The decrease in LIBOR of course has also added to our lower funding costs.
So to wrap up here with two closing points.
First as it relates to the build out of our financing landscape. We feel very good about where we are today and what we have achieved to date, we have a diversified set of financings in place that are well matched from a duration perspective with the left side of our balance sheet, we are diversified across lenders and we're off to an initial good balance of unsecured.
Bond issuances of about 1.5 billion unsecured lending facilities of about 3.5 billion, which include our corporate revolver dropdown SPV facilities and have now completed two CLL financings, which are very efficient way to finance the right side of our balance sheet.
We will continue to focus on issuing more unsecured bonds and doing more CLL takeouts from our dropdown SPV facilities overtime, we expect that 50% or more of our financing could be an unsecured bonds. The overall financing conditions are strong. So we believe we can continue to execute efficiently on this plan.
Second we put in place a number of shareholder friendly structural features in connection with our IPO that are all working well. These include our fee waiver the special dividends the lock ups and the Tenbfive one buyback program.
Thank you all very much for your support and for joining us on todays call Craig back to you.
Thanks Alan.
In closing I thought I will touch on the current direct lending market environment.
The fourth quarter marketing conditions in the broadly syndicated loan market were weak as the market experienced a risk cost sentiment and investor appetite weekend for new issues due to global macroeconomic concerns.
One benefit of the weakness in the public markets does that in the fourth quarter. We saw some high quality investment opportunities shift away from the syndicated market to the direct lending market and also saw the direct lending market as a whole moved towards improved spreads and documentation terms, which we are able to capture on our new investments in core.
Sure.
I hope this trend will continue into the new year. However, the central banks have continued to sing signal commitment to low rates and the economy continues to grow modestly the broadly syndicated loan market has strengthened alongside most other markets as short term. We expect this to remove some of the tailwind from market conditions, we had.
Experience in the fourth quarter.
And Allen's earlier comments keep highlighted we expect to be back toward target leverage level, a 0.75 times and approximately six months or the ended the second quarter.
We have previously indicated that we would achieve this target at either the end of the first or second quarter, but are now trending to the wider end of that range given our current visibility on our deal pipeline.
This reflects several factors first thing and generally slower activity level amongst financial sponsors although sponsors are plus with cat activity in the first quarter has been subdued.
Additionally, we continue to be as we have always been highly selective on credit.
However, as we move closer to being fully invested we're even more focused on return profile for incremental new deals and expect to pursue fewer lower yielding opportunities.
Finally, we expect to see increase repayments as the portfolio continues to season. So for these reasons, we expect to get to our target leverage level on the warmer end of our original estimate.
As most of you are aware we've been quite successful is finding attractive new investments over the last few years and scaling our portfolio and we believe our franchise and capabilities are stronger than ever.
We've been very successful competitively at finding deals we like and are confident we will continue to find high quality opportunities at attractive returns.
We're equally comfortable that at this point recycle it is prudent to be highly cautious on credit selection and disciplined on capital deployment.
In closing, while we don't want to be complacent, we feel we're operating from a position of strength.
We've built a very strong franchise will be demonstrated track record of originating high quality middle and upper middle market deals typically backed by Perm year financial sponsors, we continue to grow and invest in our investment team and portfolio management capabilities.
We are just beginning to see the benefits of having a large number of incumbent lending positions, which should lead to incremental portfolio company growth.
We believe we are lender of choice from private equity community and that was on display again. This quarter. We are pleased with both our origination activity and financial results are excited to continue to deliver strong returns for our shareholders.
We are proud of what we've accomplished but remain focused on maintaining our credit discipline and the overall quality of the portfolio as we look to further build on our progress.
On behalf of myself Allan and the entire our rock team want to close by thanking everyone again for your time today and for your interest in our look forward to maintaining an ongoing dialogue in keeping you apprised of our progress.
With that operator, please open the lines for questions.
At this time I would like to advise everyone in order to ask your question. Please press Star then the number one on your telephone keypad again stronger than the number one on your telephone keypad. Our first question comes from the line as Mickey styling from Ladenburg. Your line is open.
Good morning, Craig and Alan One question I wanted to ask is about the and other income which client quarter to quarter could you give us a little more background on what drove that increased.
Sure we had some pay downs this corridor.
And if you look back to two Q. We also had a decent level of fee income coming through as you can appreciate it's a bit idiosyncratic.
So we had to pay down with a couple of our portfolio companies Hillstone.
City brewing and on a smaller extent connectwise.
These are prepayment fees and Alan.
These are the acceleration of I'd and prepayment fees from Hillstone and then we took into the syndication fees on selling down some pieces of Citi brewing in Connectwise.
It's pretty much split evenly between oil I'd call protection.
Okay, I appreciate that and could you discuss a little bit the outlook of fair value.
Given go I noticed.
Their valuations are down quarter to quarter end.
I understand their private companies, but any background you can give us going.
Sure.
You know Teradata is a magic is manufactured housing products.
It's owned by private equity firms Snow Phipps elements investment we made in May of 2017.
The company has.
Has strong little bit it hasn't certainly hit our expectations are snow Phipps is expectations. They continued to be very supportive of it and put additional capital and we've had some amendments and we still feel ultimately expect to get a par recovery audit of the based on its performance of felt at appropriate to market awareness.
So I.
I can say on that one and given go on I believe that when actually marked up this quarter.
It has a lot mark so I understand what you might have crossed the radar screen.
Thats a company.
In the food space it's.
Troll by peacefully buyout from May have had some operational issues and some cost structure issues.
Instead, they did have a fairly large up publicly traded first lien term loan where a fairly modest part of a smaller second lien term loan.
I think there's there's probably folks you can tap into the get a broader view on how the companies doing but this past quarter. It's condition I would say had improved modestly assuming market up up a little bit. Similarly, we expect ultimately get apart recovery, there, but feel like it's it's marked appropriately.
Thanks.
Okay.
I think someone talked you can't here.
Thank you we can hear you I know we come out areas.
Okay.
Yes.
Thank you fading out now Mickey.
Hello.
We can barely area.
But we always switch over the next question and maybe you could throw it to.
If you would like to queue up again, Please press star one. Our next question comes from the line of Casey Alexander with Compass point. Your line is open.
Yes.
Hi, good morning.
That's not the worst thing I'd been called Kathy.
[laughter].
I have a couple of questions first of all.
Have you guys.
Polling gear portfolio companies to determine exposure to and potential supply chain issues from China, and how do you feel about that looking through your portfolio.
Yes, the answer is yes.
And.
While it's still early.
For sure I would say, we feel fine about where we are we don't feel like we have any.
Yes, any great degree of exposure our businesses are primarily us oriented businesses and we financed a lot of services businesses. If you look at some of our biggest sectors healthcare software distribution.
Generally not businesses that have big global industrial supply chains, we have a few that we're going to pay close attention to so I don't want to say, it's theres no exposure or that we were complacent on it but I would say one of the virtues of blending a BDC is it's primarily us businesses and we.
Particularly our more oriented towards service businesses, which we generally think are more recession resistant than big industrial businesses that are going to cycle.
All right.
Thank you for that and I'm sure you can appreciate Thats probably question that we're going to have to ask almost every BDC just a matter of course, given what the current conditions are.
On your cost of debt is that cost of debt at 4.6% does that include the unused fees.
Yes, it does.
Okay terrific well I mean, it appears as though you guys are controlling everything that you can control, except for LIBOR, which we really.
Out of pure control.
Hey, Craig you discussed.
That you like unit tranche and any kind of characterize it as first lien, whereas I've always thought that kind of the definition of unit tranche is something that combines first lien and second lien exposure. So when you describe it as first lien are you talking about its location in the capital stack or.
Or youre Uni tranche, it's kind of the attachment point that doesn't actually reach into the land of secondly.
Sure.
So all all be as clear as I can look unit tranche of the term of art.
On different lenders will call different instruments unit tranche Theres no universal definition.
When we describe unit tranche, we're describing an instrument that has the falling characteristics.
It's a first lien term loan.
However, the leverage level for that loan extends to a point, which is more typical of.
Secondly, or something beyond a typical firstly.
So it's a date as a contractual matter its first lien debt on there's no doubt ahead of it. It's got first claim on the company's assets. However, we acknowledge by calling eight unit tranche that it's at a higher leverage level than we'd be typically the case of a first lien low historically in the space.
Folks would do Unitranches and then in an effort to boost the return on that loan they would sell let's call the first out position or at four.
Additional loan within the unit tranche itself to another lender.
At a lower spread so they would boost the return on the remaining last out piece and al rock, we typically have not done that we've done it once or maybe twice because we prefer to just control entire loan and so for US. It is it is a first lien we call out the percentage because I know.
So you and others find it's helpful to know exactly how much you the trucks there is.
And so we call that percentage out.
As I said, a moment ago, we like it because you're getting the blended rate between a first and second lien. However, your attaching dollar one so to the extent that there's an issue with the credit you have all the downside protection of being a first lien lender and as I said, a moment ago. We don't typically have a first out lender in there. So we don't have.
Any lingering intercreditor issues that I know some folks have concern on.
So we're not trying to be pewter all of the words. It is first lien, but we also make a point of highlighting what percentage. We also disclose in our 10-K.
Equity helmets Unitranche, we have so you can check that number every quarter.
We do quarterly quarterly to a quarterly so every quarter you can see exactly how much we have different lenders may characterize the same low as unit tranche or not to unitranche because the judgment of how of the leverage point is on.
Just subjective.
That does that help.
Perfect. Thank you very much and I appreciate you taking my questions.
Great. Thank you Kathy.
Our next question comes from the line of Mickey styling with Ladenburg. Your line is open.
And it for me.
We can't Mickey Yes, terrific. So I just wanted to follow up Alan you're carrying a pretty good amount of cash on the balance sheet over $300 million.
So I understand there's lot of moving pieces, there and that could be a timing issue, but obviously, that's not optimally efficient Alan what kind of run rate can you expect in terms of spend.
Sure.
You're right Mickey it is a bit idiosyncratic it gets driven largely by two factors. One we have a series as you know if dropdown SPV financing facilities in place and we were on quarterly waterfalls that release, the cash from those facilities and that happens I think shortly after quarter.
Iran.
And the other part of that is just idiosyncratic based on what the timing of when deals are funding and we could always have a little more a little less if for closing a deal immediately after quarter end.
Okay Fair enough and my last question.
Curious how dispose the board is to consider raising the target leverage given the portfolio structure and current market conditions, and obviously your relationships with your stakeholders, including the credit rating agencies.
Sure.
Of candidly management is not engage the board with that discussion.
As weve as we've outlined here today, we're still working our way back to our target leverage level. We've got some work to do to get to that level much less considering an increase.
We this is a topic, we talked about a lot in the context of our IPO, where we de levered quite significantly.
We have.
Very much placed a strategic priority but.
Keeping access to the investment grade bond market.
We were very fortunate to be able to get investment grade ratings very early in our lifecycle as a private BDC before we went public.
And we we very much.
Now you that those ratings and as you. We've highlighted we've passed that I'd be bond market on multiple occasions, and so strategically important that we not do anything to disrupt on that ratings profile, given where we are given the return profile, we were able to generate we feel like we've got the right balance it with our current leveraged.
Yes, so it's not.
It's not something we've even discussed with the board upsize sure I would want to characterize their disposition to it we feel like we're in the right place right now.
Okay. That's helpful and I understand thank you for your time Thats It for me.
Thank you thank you making.
Our next question comes from the line.
Mark from JMP Securities. Please go ahead your line is open.
Good morning, guys and thanks for taking my questions. So so Craig we hear from here Bdcs that both in terms of deals are growing more borrower friendly some of the peers tend to attribute this to bake new entrants. So how should investors reconcile this comment with your growth at the big new entrant, but.
The fact that other bdcs tend to continue to seek your deal flow there often clubbing with you on many deals.
Good.
Well.
That's a great question.
Well I guess, what I would say rather rather than really answer. Your question, you are making it observation, which which I would share, but rather talk about what our competitors, saying I guess I just tell you what we're seeing.
What I think it's been happening over the last few years is the private equity community is becoming more and more comfortable with direct lending solutions in part because they are much bigger pools of capital available to provide them from firms like ours that have trusted relationships with those sponsors.
Really big investment in investment team the ability to provide solutions that are not only competitive with but in many ways have attractive features relative to the syndicated market.
And so they're doing more more deals with direct lenders like Iraq and yes. I think we are we are on a leader in that because we built a business around come up being a great partner financial sponsors every investment we make has to pass our credit spectrum first and foremost we continue to close on less than five.
Percent of the deals we look at.
We care deeply about documentation quite experienced it that we negotiate our documents bilaterally with the sponsors there is no bank in the middle we almost always lead our deals and we care about leaving our deals because we get the control that documentation.
The vast majority of our first lien term loans have maintenance covenants and the return profile you can see yourself. We just report our results and we think our returns for the risk in our portfolio. We think office are very attractive risk reward for for our shareholders as for our competitors or what were saying.
You'll have to ask them I think thats.
As a new entrant I understand that we've come into it to a market and there may be some jealousy your frustration around that and maybe that reflects itself and some folks comments, but as you noted many of those competitors.
Our coming into our deals so you'd have to ask them how they reconcile that.
Fair enough.
I wanted to switch gears so.
The manager recently received investment by the aisle so.
Does that recent investment provide the external manager with the opportunity to grow the platform.
Which could allow you to potentially increased origination team, maybe even expand into specialty niches. So can you just comment on.
On that potential opportunity and what those growth opportunities could be.
Sure and the answer is yes, and the reason we took the investment from dial all that capital, it's going to be used to help grow the all rock platform.
As folks know, we we really.
Bootstrapped Al Rock My partners and I further with our own capital we did take outside investors start the firm.
We have today still.
It's a $112 million personally invested in RCC and more than $200 million invest in the very solid rock funds.
So we have tremendous personal commitment.
Great success in growing our platform we continue to find.
Investors don't want to invest with us and borrowers that want to borrow from us and so we tend to use the Dol proceeds to continue to grow our platform.
What we've talked about generally is additional investment in direct lending product, we'd like to direct lending space. So I would expect new funds that we were too to wants to be in the direct lending arena leveraging the relationships, we have in our underwriting process and not get into.
You are much more far flung areas, but we should you should absolutely expect to see us continue to invest in our team both the investment team origination credit underwriting portfolio management.
And.
We'll continue to do that so I think it's a positive we've highlighted on here and in other cases, you highlighted that our size of our platform at ability to write a large check is we think is a huge competitive advantage. So I think all investors in all of our funds will continue to benefit as we grow.
Thanks, a lot of sense could you elaborate maybe just let us know what.
FTD number fulltime employees were at the platform.
And then 19, and then maybe to year over year growth.
Sure Chris.
We're at about 140 employees today.
And a year ago, we're probably in.
80 to 90 95.
Thanks, John.
Next question is.
No you on that your second liens, so the portfolio mix hasn't moved.
Materially over the last year, but I do know that you guys are comfortable taking that mix its highest 40%. So how should investors think about the expectation for any changes in the portfolio mix going forward in today's environment.
Sure. So just to remind folks of the history here when we started investing in 2016, obviously the portfolio at that point was not skill.
But in that first year or so you'll recall, we were as high as 40% second lien.
Today is it's really low on the second lien is sub 20%.
I think at this point the credit cycle, we're very focused on being defensive and doing only loans that were extremely confident are good loans in that will withstand cycle.
And so that has led us to drive our first lien upset north of 80%.
And we don't have a.
Expectation about will change in the near term given where we are on the economic cycle of second liens offer an attractive spread when we do second liens, we typically only do them in very large upper middle market companies that have significant equity cushion beneath us and typically in businesses that we don't.
Expect to cycle or have any volatility so that we don't find ourselves in a disadvantaged position of if we found those in this environment and when you get an attractive spread we would do them.
So, but we haven't seen that many of those in the third quarter, we happen to see three we did them the fourth where we didn't see any within do adding.
So I think in the near term I would expect us to be.
20, low Twentys high teens.
But I see I don't want to.
Oh, I don't have a crystal ball and so if the market cracks in the middle this year and we saw better opportunities and we thought it was prudent for our shareholders should take that percentage up to the high Twentys and we would do that but I don't expect that to happen.
But I wouldn't rule it out if market conditions allowed us to do it don't imagine anytime soon we get to 40%. So I think in the Twentys is probably where we'll live certainly.
We'll have update calls between now and when we might guess at 30% given we're at the only 90% to 90% today.
Got it.
Context, and insight is very helpful.
Last question just housekeeping interest coverage was 2.5 times at year end 2018 for the portfolio what was the year end interest coverage for 2019.
I think we're going have to go I think we're going have to we have we have a lot of folks here, but saw nobody's refinance that question would be happy to give a call offline and provide that to sorry.
Sounds good that's it for me thanks, guys.
Thank you.
Our next question comes from the line of Robert Dodd with Raymond James. Please go ahead. Your line is open.
Hi, guys morning on trend what are your comments in the prepared remarks at the beginning with do you expect repayment activity to pick up in 2020.
Generally we note repayment repayment activity accelerates in periods, where spreads come crashing and given that some of the other typically and given some of the other.
Cala you gave about.
You know low let low yield loans et cetera, I mean can you let couldn't side.
Way to think about it that repayments could a company compressing yields and how far are you willing to go.
On that by yields I mean spread too early to uncontrollable.
How far they are you willing to go on that spread I mean, this quarter, obviously portfolio spreads.
New investment spreads were down slightly so you'll be pace on some of the the lowest that investments, but can you can you reconcile that flows.
Sure I guess I would dumb.
Intently on adjust the sub position of the way you asked the question I don't already payments on while certainly raised the rate environment will impact the companys ability to refinance us there are lot of other factors that drive that decision.
Oftentimes, we get repaid when that when the portfolio company gets sold it may get sold to another financial sponsor and make it sold for strategic maybe it will go public there'll be some corporate catalyst, where the the company's revisiting its capital structure oftentimes thats driven by the company's success.
Company sponsored might have done Inovio refinances, it's grown and so its credit profile has improved so regardless of market conditions. It may get a lower cost of financing just by virtue of the fact, the credit environment as the credit has improved.
Maybe the company's for a large enough to give them.
Got a syndicated market to take us out maybe it's a second lien than they decide to do all first lien structure because the leverages improved just a lot more that goes into it and then purely.
The rate, obviously rates can help companies refinance, but I would say and I don't this is in scientific at all but I think generally speaking that that is not what's been happening its improvement in the credit or sell the company thats driving off refinancings. So.
So I guess that that's what I think will drive the reason why comment ours will increase is because our portfolio still relatively young and our repayments are still relatively modest as you know our loans are typically five to seven years, we assume on average there are three year life.
We have started investing in 2016, but obviously our pace of investment has picked up considerably in 17 18 and 19 in so it's natural and we would expect to have our repayments increase just as companies go to to refinance.
Please don't generally even if their business as an improved in the rate environment Hasnt improved companies generally don't like to wait until their maturity to refinance their dad and so companies our portfolio that has done just fine and are going on just refinance at the same exact spreads or we'll do that early and we would expect to obviously be well positioned to do that given our incumbencies.
So I hope that answers your question, but I think thats, that's how I think about it got it got no that does that does have the question I appreciate and then one follow up.
Sure.
You'll you'll end the that I mean, you said that.
All investors all funds could benefit from expanding the platform into tangential areas.
Private credit which stands.
How much in the event if you do add another vertical the lack of a better Tim.
So the platform as a whole.
Yeah, if that's eligible.
So we all thought process to go into awash see see how much.
Kind of a heads up would you give to investors.
About any any change in type of assets I mean, even if that high security you might be difficult coins.
So can you give us any color on on on how much notice investors shareholders with gets about.
Changes in any kind of mix concept at the BDC.
Even if it's the same security level.
Well I'm not sure I'm totally following your question, but I would say as you know RCC. The public company, we are and take our responsibility about disclosure on our strategy and what we intend to put in the fundamental quite seriously. We have these calls and obviously, we speak to you and the research analysts on the arm.
Investors on a regular basis and our strategy is sort of well defined and laid out.
To the extent that we'd have additional funds are underneath the Iraq in the Iraq platform.
We today and we'll continue to invest deals across funds of subject to our FCC.
The relief on Weve, a very very thorough and detailed allocation policy that governs that but we think it's an advantage of our platform to be able to put deals across the different funds.
And I don't want to I don't want to spend too much time talking about what other funds might be or with a strategy might be but just to say to the extent that we had a fund it had a different strategies in RCC thats on those investments when going that funding, we're not going to alter RCC strategy, just because there's a different funded under the all rock platform that.
I might that might have a different flavor to it. So I certainly wouldn't want to raise any any concern for folks our call that because we're going to grow our platform that it would change our strategy our strategy at or to see is is very clear and we're executing on it.
I appreciate it.
Thank you Robert.
Our next question comes from the line of Ryan Lynch with KBW. Please go ahead. Your line is open.
Hey, good morning, guys.
First when you guys kind of talked about.
Opportunities.
Fourth quarter coming from the broadly syndicated loan market and those guys that are not taking the direct lending route.
I'm just curious to have those those borrowers that are maybe choosing the direct wendy drought versus the broad syndicated loan route.
Hey brigade over kind of at terms confidence and structures are broadly syndicated loan market to direct lending market or are you able to negotiate slightly better terms.
X structures on those those those cross over loans.
Sure I'm glad that you asked that because I think this is a topic that some there's there there is not theres. Some confusion on when we make alone regardless of what the borrowers are turned Saar, we structure that low tar satisfaction.
Vast majority of our first lien term loans have maintenance covenants as you know the broadly syndicated market almost all of it is covenant lite.
In addition to the cut the maintenance covenants are documents are quite extensive and govern everything about the company how much they can borrow weather liens. They can put on dividend second payout.
Everything is there 100, plus page documents and we spent incredible amounts of time negotiating every aspect of it when a borrower chooses a direct lending solution. They are agreeing to a much tighter document than they would have an broadly syndicated market.
But they're getting some benefits from that we provide certainty broadly syndicated market is doesn't provide certainty there deal execution depends upon market conditions, we hold the paper broadly syndicated market doesn't hold the papers. We don't know what your lenders are so sponsors are choosing to live with tighter documents and higher spreads in exchange for.
The certainty and the direct lending relationship that they value.
Our again, our economics are clear you can see what they are we get a premium not only in terms of the spread versus where an issuer could potentially borrow and the broadly syndicated market, but we also get I'd, which typically would be given to the banks there arranging the financing the combination of that additional spread plus the IP.
We think is very attractive is one of this core virtues of direct lending along with the approved documentation and lastly, maybe most importantly, the much more detailed level due diligence we got to do on the borrowers versus the broadly syndicated so as a package I feel really good we're delivering to our investors a much more attractive pack.
Then they could otherwise get investments in India, and the broadly syndicated market. The sponsors are finding that tradeoff attractive again. This is at a time where markets are generally quite strong we've gotten a period where markets were more volatile divided even more attractive.
Okay, yes that makes sense.
And then in your prepared comments you did mention you guys you're trying to seek some wider spreads loans to help offset the decline in line or can you just provide a little color on how you're doing that just because it doesn't seem as an overall overall spread to the market are changing media Felicia. So how do you guys.
And to seek wider spread tightening accomplish that.
Of course, it's like anything else.
Got it will.
You got to find a credits that you like and you've got to find that economic package that you're willing to do in the fourth quarter, we were able to do that on a as I'd signal windows in the first quarter it's harder.
But it's going to move up and down based on market conditions, not only does public markets, but general amount of capital general amount of fuel the supply demand for revealed and financing.
We will.
We will we want to get properly compensated for our capital our first and foremost as credit, but we want also make sure as we put dollars out we're getting properly compensated for it we had good success in the in the fourth quarter and pushing for additional spread.
As a market has heated up in the first quarter that's harder.
It's going to move up and down quarterly monthly depending upon market conditions, there's all sorts of things that disrupt the market.
Again, it's all on the margin.
When the sponsors are buying a company.
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Another 25 or 50 basis points generally speaking is not going to have a profound impact on their ours. We think it's important for our shareholders that we push to get the most attractive spread that we can.
And so we'll continue to do it it's a it's a battle and on deal by deal basis.
So that's I guess thats the best I can characterize it for you.
Okay. That's all for me I appreciate the time today.
Thank you thanks Ryan.
Our next question comes from the line of Finian O'shea with Wells Fargo Securities. Please go ahead. Your line is open.
Hi, guys. Good morning, Thanks for taking my question.
A lot talked about today, which I appreciate it.
Just to.
Portfolio Company Connectwise.
You.
Really recapitalize upsize that this quarter just a question on the spread there was 600.
Versus 550 can you break that down for us in terms of how much was the market.
Widening in the fourth versus anything on.
Leverage attachment point structure and so forth.
I don't want I don't think it's appropriate to get into too much detail on any one deal on.
I'll just say generally.
There are things that happened.
In our portfolio companies sponsor may come to us the context of an acquisition are doing additional financing.
And.
Similar to pricing on new deal, we may from time to time adjust the spread up or down based on what theyre doing without getting into and into anything I connect wise.
I don't think anything market driven what's happening there that was specific to the credit and.
We have reached a.
An adjustment in the rate with the sponsor and that is what it is.
Got it. Thank you and you mentioned there were some syndication fee income related to that.
The BDC able to retain all of the upfront fees on the circumstance or was there a split with the advisor.
So I think send that might go back to my comments I was referring to income that the BDC took in in the current corridor.
My comments were accelerated though I'd and prepayment fees when companies pay down in partnering fall and also from time to time, we will sell down positions from a risk perspective and from time to time, the BDC warrants syndication fees on the sell downs and we saw little of everything I just mentioned in the current quarter.
Okay. Thank you.
That's helpful and just on the matter of the upfront fee.
As you have scaled up materially now and Sunil sort of revert to the.
The market fee structure can you give us.
Day on how you look at.
The capital structuring fee, whether that goes to the advisor or the BDC.
Sure I mean, we filled with you as we've talked about with you in past quarters.
I mean theres no there's no relationship between the fee structure, we're charging on the fund and how we may.
Handle fees on an individual deal, they're just not related to each other as we've disclosed and as we've talked about on this call with you. We from time to time will take fees to the advisor per certain services. The advisor performed performance for the companies.
We've talked about that as a practice that we have it's only done in selected circumstances have done and they're certainly not done in every deal anywhere close to every deal, but we do do it on selected basis.
That process has been in place we talked about its going to be ongoing has nothing to do with our fee structure and it's not there is nothing to really to talk about there.
Okay. That's all for me thanks for taking my question.
Yes.
As a reminder, if you would like to ask your question. Please press Star then the number one on your telephone keypad.
Next question comes from the line of Kenneth Lee with RBC Capital markets. Please go ahead. Your line is open.
Hi, Thanks for taking my question.
Wondering if you could elaborate on your prepared remarks on sting slower activity among sponsors wondering how how much is due to seasonality and whether you expect to see some kind of pick up.
The year goes through thanks.
Sure.
I.
Hi, this sponsor activity will go up and down idled, some maybe different views even in this room on this I don't think its seasonality I just think it's a little bit of a slowdown in sponsor activity sponsors a tremendous amount of capital and they would like to be deploying that capital.
So I don't think just any change in their disposition.
But they can only put capital out when they find new opportunities and I think that we're seeing in the first quarters, just let's deal flow.
I see it could change quickly it could change on a dime.
But I, we thought based on what we're seeing and again were midway through the quarter. We thought it was appropriate supply that it has been slower this quarter I think thats consistent with what other of our peers are seeing as well.
I don't I don't expect that to be some a prolonged.
Period of time, because they have capital they've raised that they want to deploy.
And economic environment is still attractive valuations are still attractive I think it's just idiosyncratic for where we happen to find ourselves in the first quarter of 2020.
Understood. That's all I have thank you very much.
Thank you Ken.
There are no further telephone questions at this time I'll now turn the call back to Craig Parker for closing remarks.
Great all right well thanks, everyone for dialing in thanks for your questions were always available. If if you have additional questions just reach out to a separately. We appreciate your time and look forward to seeing and speaking with you soon.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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