Q4 2019 Earnings Call
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Ladies and gentlemen, thank you for standing by welcome to the PC GBDC incorporated fourth quarter 2019 earnings Conference call.
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I'd like to hand, the call every speaker today Mr., Daniel Harris head of Investor Relations. Thank you. Please go ahead Sir.
Thank you Daniel Good morning, and welcome to TC Gbdcs fourth quarter 2019 earnings call last night, we issued an earnings press release and detailed earnings presentation with a quarterly results a copy of which is available on T.C.G. Bdcs Investor Relations website.
Following my remarks today, we will hold a question answer session for analysts and institutional investors. This call is being webcast and a replay will be available on our website.
Any forward looking statements made today do not guarantee future performance, an 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 statements at anytime and with that I'll turn the call over to our Chief Executive Officer Linda piece.
Thanks, Dan.
Good morning, everyone. Thank you for joining us on our call. This morning to discuss our fourth quarter 2019 results.
Joining me on the call today is our Chief investment Officer Teller, Boswell, and our Chief Financial Officer, Tom Henighan.
I'd like to focus my remarks today across three areas.
First highlighting the strength and momentum of our business as we exit 2019 and begin 2020.
Second summarizing our financial results for the quarter and third a brief discussion on our capital position and dividend.
I'll start by discussing the strength of our platform.
2019 was a year of change for our company and and as we enter 2020, we're well positioned to capitalize on the opportunities ahead of us.
Well I normally assumed the role of Chief Executive Officer of our BDC on January 1st our company's entire senior leadership team has been extremely active over the past few quarters working to optimize our portfolio ensure that we have the right team in place to drive our investment process.
Continue to wisely manage our capital position.
Hello, and die along with our entire team.
Valuating every part of our investment process.
Yeah, we will go into more detail, we quickly identified a small piece of our loan portfolio. It had accounted for an outsized amount to floors.
Losses, excuse me and we move rapidly to minimize that risk.
We sit here today, having largely eliminated that exposure in a relatively short period of time.
Our goal is to deliver stable and navy and sustainable earnings coverage for our regular dividend.
Disciplined underwriting standards prudent usage of portfolio leverage and active portfolio management will help us achieved that goal.
Our investment philosophy is anchored in three core tenants.
Directly originating investment opportunities from sponsors with whom we have deep and meaningful relationships.
Maintaining a strong bias towards senior debt and defensive industry exposures.
And utilizing the full breadth of carlyle's capabilities scale of our capital and depth of our expertise to deliver differentiated investment opportunities and create better outcomes for our shareholders.
Let me move onto an overview of our results for the fourth quarter.
We generated net investment income of 43 cents per share and we declared a regular 37 cents dividend as well as a special dividend at 18 cents per share.
As we have done in every quarter since our IPO or company generated net investment income in excess of our regular quarterly dividend.
Well lower lie bore continues to be a headwind for overall portfolio yield we're confident in our ability to pay or standard quarterly dividends going forward.
Our net asset value per share decline two cents to $16.56 from $16.58 last quarter, which includes the impact of our special dividend.
Excluding this net asset value per share would have been $16.74 up 1% quarter over quarter.
Our portfolio experienced a two cents gain in net realized and unrealized appreciation and ongoing share repurchases were six cents per share accretive to any they.
Let me conclude with a discussion of our dividend in capital position.
At the end of 2019, we took advantage of receptive market and carlyle's strong distribution team to privately placed a 115 million dollar unsecured bond.
We're pleased with our initial execution in the unsecured market, which Tom will touch upon further during his remarks.
We have also been active repurchasing shares as we continue see great value in our company at current levels.
During the fourth quarter, we repurchased over $17 million in chairs does it today you have approximately $22 million remaining on our current authorization.
Over the next quarter or two we intend to seek board approval to authorize additional repurchases.
Since we initiated the program at the end of 2018 repurchases have added approximately 20 cents store and Navy.
We feel confident about the quality of our portfolio today and expect to take advantage of are deeply discounted low relative valuation I remain active buyers of our stock.
At our currently deep discounted share price of approximately $12, an 80 cents per share a regular quarterly dividend represents an attractive yield to shareholders were approximately 12%.
In 2019, we announced 26 cents per share a special dividends compared to 20 cents in 2018.
That said as we've previously noted we intend to balance future special dividends with capital preservation.
So to reiterate we remain extremely focused on portfolio performance and stabilizing in a v.. We believe TBD shares offer investors a high quality recurring dividend stream at an attractive valuation.
Let me now hand, the call over to our Chief Investment Officer, Taylor Boswell [laughter].
Thank you Linda and thanks, everyone on the call. This morning for their interest in support of CGP D.
As usual I'll start by briefly sharing an update on carlyle's current read of economic and credit market conditions.
I will spend most of my time on the topic of credit performance and the reasons why we expected to improve in the coming quarters as compared to the experience of 29 team.
On the economic front at the time of our last report there was concern, which Carlyle did not share of entering a recessionary environment.
Since then Carlyle has seen clear signs of stabilization in the global economy and continued growth in our portfolio companies.
Easing of trade tensions should provide further support in 2020.
As everyone here knows the emerging economic risk is corona virus, the impact of which we are closely closely monitoring across our global footprint.
Well early our view is that this is likely to flatten or postpone but not reverse the pickup we expected this year.
That said, we expect impacts from Corona virus on our portfolio will be relatively limited due to our strong overweight in non cyclical domestic demand driven activities.
All in all we judge the current environment to be supportive of the continued performance of C.G. Bds portfolio.
Meanwhile, Levered corporate credit markets are currently experiencing a period of strong technical demand that's fixed income asset classes suffer yield compression alongside rates markets.
The dislocated conditions in traditional leverage finance markets of the fall of 2019 feel like a distant memory and repricing activity has been heavy over the past several months.
In private credit markets, where nearly all of our investing is conducted competition remains steph, putting a premium on breadth and quality of ones are direct origination footprint.
Our broad platform positions us well in this respect and we're able to generate attractive investments across market cycles.
Regardless this is a moment for relative caution as the relationship between financing execution outcomes and quality of underlying investment just type.
Turning to credit.
Over the last 12 months credit migration has been a detracted from our results and in our opinion the principal driver of our otherwise unwarranted discounted valuation relative to book value.
We have not been pleased and our team has been actively working on strategic initiatives to improve credit performance as well as tactical actions to maximize value with the physician level.
Due to those efforts we reported strong results this quarter with NAV up excluding special dividends.
Importantly, we stand here today more confident we will deliver go forward performance inline with our investors and our own expectations.
There are three reasons for that increased confidence.
First our losses have been highly concentrated in a single strategy exposure the Carlyle Unitranche program, otherwise known as Cup.
As a result of our efforts in market activity Cup is now largely accident.
A refresh coupled with an origination partnership we ran from 2015 to 2017, where CGP de took last out exposure and Unitranche financings offered the small borrowers.
Since our IPO Cup has generated over half of C.G. Bds net realized and unrealized losses and nearly two thirds of the same figure in the last 12 months, despite representing only 8% of our portfolio.
We have now reduced cup exposure to a single sub 1% position.
Further this position, which had been on our watch list was recently upgraded as a result of improved performance.
Can no longer produce the outsized negative results, which weighed on our performance in the past.
[laughter].
Second.
As we analyze prospects for our portfolio's performance away from Cup, we take comfort from the structural positioning of our investments.
We run a senior heavy portfolio with historically around 70% of assets in true first dollar risk positions.
This allows us to exert more controlling workouts experienced less ongoing volatility and sustain less permanent earnings erosion in the case of losses.
Consequentially essentially all of the fair value of our watchlist credits today, our first dollar exposures limiting the prospect of more of the high severity outcomes, which characterized our week credit performance in recent periods.
Dermatology Associates a recent addition to our non accrual list is in this first dollar category and as a name from which we ultimately expect to receive significant recoveries and restore income generation to see GBT.
So.
While we are by no means immune to future credit losses. The first dollar orientation of our portfolio and watch list leaves us better positioned to perform going forward.
And third where we do have junior debt exposure, namely the 11% of our portfolio in second lien instruments, we're comfortable with our risk position and track record.
We focus our second lien investing on larger borrowers currently averaging over 100 million of EBITDA.
This compares to an average EBITDA of 20 million for the Cup program.
For obvious reasons larger borrowers make for sounder credit profiles and we have benefited from an exceedingly strong track record and true second lien investing with positive realized and unrealized performance since inception for CGD and these loans.
Shifting from credit income generation, you should expect us to replace legacy Cup exposures with a combination of large borrowers second lien, which we are well positioned to source in an increasingly privately placed market.
And additive yield enhancing strategies offered by the Carlyle platform, such as our ABL business, which generate on average 150 to 200 basis points of incremental spread as compared to our overall portfolio.
By integrating these capabilities, we have the of the opportunity to concurrently drive incremental yield and diversify our risk factors.
In the fourth quarter, we had significant success doing exactly this sourcing from Europe to compelling second lien opportunities that are expected to close in the first quarter.
These and other recently made investments will significantly offset the temporary yield compression experienced in Q4 from cup exits.
To conclude our initiatives of the last nine months to improve portfolio performance are off to a strong start.
With these efforts and cup effectively behind US we're confident in our ability to deliver improved performance and continue to meet our core investment objective the delivery of sustainable yield to our shareholders.
I'll now turn the call over to our Chief Financial Officer, Tom had again.
Thank you Taylor.
As Linda previewed we had another solid quarter of total income generation.
Total investment income for the fourth quarter was $53 million.
From 56 million in the prior quarter. The decrease was primarily due to lower interest income on the core investment book driven by repayments of higher yielding investments the decline in live War and one addition to non accrual.
This was partially offset by higher Allied you acceleration from an elevated level of repayments during the fourth quarter and higher total income from the JV.
Total expenses for 28 million in the quarter down from 29 million last quarter, driven by lower interest expense, primarily from over LIBOR and lower management and incentive fees.
This resulted in net investment income for the quarter of $25 million were 43 cents per share which is in line with the average since our June 2017 IPO.
On February 24th our board of directors declared a regular dividend for the first quarter of 2020 at the same 37 cents per share.
And that's payable to shareholders of record as of the close of business on March 30 Onest.
Expanding and some of our earlier comments on yield compression as a 12 31 the yield on our core loan portfolio based on cost was 8.2% down about 65 basis points from the prior quarter.
The largest component was repayments of higher priced assets, but as Taylor noted we have a strong pipeline of second lien investments that will allow us to recapture about 20 basis points of that decline.
As we look forward to the impact of lower yields on 2020 earnings.
More continues to be a headwind, but no surprise to us as we've highlighted this the past few quarters.
When combined with lower oil idea acceleration in the first quarter 2020, we see Eni closer to the 47 range.
But even though we see some earnings pressure in coming quarters, we still anticipate consistently covering our regular 37 cents dividend.
Moving onto the JV is performance the dividend yield on our equity the JV remained consistent at 13% for the fourth quarter.
Repayments again outpaced deployment at the JV during the quarter, but we're focused on reversing this trend in early 2020 with increased resources dedicated to the JV origination effort.
Shifting to the financing from total debt outstanding was about 1.2 billion and statutory leverage was 1.23 times.
Consistent with prior quarter.
Mitch on last quarter's call that given the more favorable rate environment for issuers, we were continuing to evaluate alternate financing solutions.
To that end, we successfully closed to 115 million dollar unsecured note offering in December our first issuance of unsecured debt.
I notice a standard five year maturity and a 4.75% fixed rate, which we think is quite attractive given the private execution flexible covenant package and the all in cost savings from leveraging our internal business development team for distribution.
The offering provides us the financial flexibility and risk management tool to comfortably run leverage within our target range of one zero to 1.4 times.
Proceeds from the offering were used to repay debt under our revolving facilities.
Regarding the overall portfolio the weighted average internal risk rating remain 2.3, and we had a modest increase in the watch list based on fair value.
Undervaluations, our total aggregate realized and unrealized net gain was about $1.5 million for the quarter.
No position accounted for an outsized gain or loss.
The sizable realized loss in the fourth quarter is related to writing off our investment in product quest, but that investments been a zero a fair value since September 2018, and read an equal reversal of prior period unrealized losses.
And at all we placed our investment in dermatology associates on non accrual. This quarter evaluation was flat given we're seeing signs of credit stabilization of the company.
Regarding other realizations in the fourth quarter, we successfully exited our investment in 28.
This was alone we restructured back in early 2017.
And given our first dollar risk position, we're able to maximize recovered during a prolonged working.
Resulting in a return in excess of 100% of our original loan investment.
So all in all we characterize this quarter of one of stability in overall credit quality.
With that let me turn the call back over to Linda for some closing remarks.
Thank you Tom.
Before turning to your questions I'd like to conclude by reinforcing a 2019 was a year or considerable change and progress for our company.
We have taken advantage of being part of the Carlyle group to grow and enhance our underwriting team our investment process and our origination capabilities.
At this point, we have the resources firmly in place to execute on delivering attractive returns for our shareholders in 2020 and beyond.
With that I'll turn the call back over to Daniel our operator for questions.
As a reminder to ask a question you will need a press star one on your telephone to withdraw your question press the pound key please standby, while we compile the keep an eye roster.
Our first question comes from Finian O'shea with Wells Fargo Securities. Your line is now open.
Hi, good morning, Thanks for having beyond congratulations on the quarter.
First one on.
Derm Associates I appreciate your commentary on the hopeful recovery.
But can you you know help reconcile that it was placed on non accrual.
Implying that you don't expect full recovery, but the.
The valuation was up so you know I would think said either it should have been on non accrual last quarter or the valuation would be down just any context, you could give as to those.
Conflating movements.
Hey, Good morning, Finance, Tom what I do as I'd bifurcate two different discrete decisions is what's the right valuation is in a non accrual valuation again, a mark to market based on our view at this particular point in time not necessarily indicative of what we ultimately think we're going to recover but we think the right fair value is at any point in time non accrual related to.
Ooh getting our interest income payable at the current moment in time, so really want is cash flow based one is fair value market based so that's why you see a one I would say valuation stable and obviously the non accrual what would you consider negative viewpoint in fourth quarter versus third quarter on current income.
Proceeds.
Okay. That's helpful. Thank you and also Tom will have you.
On just a question on the the Unitranche program appreciating that.
Are you all identified that as a source of stress and.
It's like there's.
Sure rotation out of that this quarter.
The first thing that comes to mind is you know I assume that was a good source of your topline given its you know effectively second lien, although the low loan yields are harder for us to reason they move quarter to quarter, but you know.
I assume you get what I'm asking.
Replacing that income.
Do you do you have you know another similar strategy or.
Well this kind of just migrate to firstly.
Through a more conservative posture.
Sure Hey fan its Taylor speaking I think that what you should expect a is for that cup exposure to be replaced with two things one incremental investments and our large borrowers second lien portfolio, which we've conducted for a long time and have a good track record in in fact, we've already booked a couple of those assets in the.
Fourth quarter that close in the first quarter, which will help us.
Drive some incremental yield in the portfolio and then secondly, I think you've heard from us over the course, the last couple of quarters that were more proactively using some of the other strategies available to us around the platform, which do offer us incremental yield versus that core U.S. middle market sponsor finance asset class. So between those those two less.
Others, we think we're pretty well positioned to replace.
The income that we rotated out of in Cup and are well on our way to doing that already.
Okay. Thank you and just one more on the.
As to US similar regard the credit funds.
That's been a very good.
Return, you know top and bottom line for you.
Pretty stable.
I think 10 10 ish percent of the portfolio can you remind me us if was that the target or are you trying to make this you know more of a 15, 20% item.
Or higher it's Tom we've always stated that our target return is in the mid teens. So I'd put that 13 to 15. So were certainly towards the bottom end of that range. We've been historically, but I'd say, we're you know we see that 13%.
Relatively stable level right now were aspirations right now or that that will that will not be a 15, 20% number sorry, sorry, Tom I meant to I meant to say size of the portfolio will you have more grow the FID.
I think we're looking at it relative stability there too.
Okay.
Yes.
Okay. That's all for me. Thank you so much.
Thanks.
Thank you. Our next question comes from Ryan Lynch with KBW. Your line is now open.
Hey, good morning, Thanks for taking my questions first one had to deal with the exit of the does a couple alone the last out loans this quarter.
There was a significant exiting a that portfolio was that normal course runoff or were you guys selling those loans to other parties the kind of accelerate that that that those actions this quarter.
Hey, there its Taylor again.
It was two actions it was sort of normal market activity M&A activity and then some proactive refinancing work by us, but no sales of the positions.
Okay.
And then on that I was very interested in your comments you. You mentioned you know that that cop <unk> decision to exit the cup loans, because they generate half your realized losses that you had a which I think you know can make sense, but I was interested they did you said you know some of that couple loans or how.
We are yielding loans given that their last out that youre going to replace those with with a large borrower second liens as well as some other yield enhancing strategies, but specifically on the on the large borrower second liens I mean, I view last out Unitranche loans is basically synthetic second lien loans and those are low.
Owns a new set of caused you meaningful realized losses over the last several years and that was your your reasoning for exiting knows but then you're going to replace them with just larger borrower standards secondly loans. So it seems like youre not really changing your risk profile from exiting the last out units.
Tranche Cup loans, and then replacing those standards secondly, long and can you help me reconcile those.
Yeah.
The primary differences the size of borrower. So we think I'm one of the key problems with Cups historical performance was the smaller borrower orientation of that junior debt investment about $20 million average EBITDA size.
When we talk about larger borrowers second liens, we've been doing that and these portfolios since inception and have a really strong track record.
Up in that marketplace, which is about 100 million of average EBITDA in our positions today.
It's also coming at a time in the marketplace, where there's some structural changes in the way the market is working where there is a technical gap and in demand for second lien assets. So it's actually a nice place to be right now from a technical demand perspective risk reward perspective, and on the pure risk point the scale of the borrowers.
And our proven track record in that space leave us a lot more confidence that will that will drive better performance out of that junior debt exposure.
And Ryan This is land I would just I would just add to that you know when you talk about a small borrower that has 20 million EBITDA like we saw the Cup program inherently you're talking about borrowers that have less proven business plans and less tested management teams and you would with companies that.
Have already.
Then in existence and have grown and have a 100 million plus of EBITDA and you know so you can have any of you want as to where we are in the cycle or or what some headwinds might be ahead of us, but we feel much more comfortable going through any periods of economic volatility or or other.
They are types of risk with I, just larger companies that have more access to capital more optionality within their business models and more proven management teams.
Okay. That's helpful. And then you know over around all of last excuse me last 12 months, there has been pretty significant a management and high investor professionals turnover at the BDC you know started with the President CEO.
Head of originations head of West coast originations that that's more than I can remember.
In other bdcs in quite a bit. So can you just comment on that level of of management turnover that that bdcs experience over the last year in and how investors can get comfortable with with the you know the current team running it and and and how they should feel about that level of turnover.
Sure.
Sure Ryan No problem, you know as as you kind of heard all of us over the recent quarters and Taylor today.
Really werent I'm pleased with the performance of the underlying portfolio.
For the BDC and Yeah. This is this is a very important business for for US obviously in for further Carlyle group overall, and we want to make sure that we're putting.
The right resources and the right number of resources towards towards this business. So in that and you know it's not so much you know necessary the change, but we're really adding more senior investment professionals, both at the investment committee level or the the underway.
Writing level the origination level, so really putting what we look carlyle views as our best in most experience investment professionals at work on this BDC to make sure that our performance does not repeat itself.
As it did in 2019, but really goes into right direction for both for Carlyle, but really more importantly for our shareholders.
Okay understood. Those are all my questions I appreciate the time today.
Thanks line.
Thank you. Our next question comes from Arren Cyganovich with Citi. Your line is no.
Thanks, I just wanted to ask about the they get another question on the Cup.
But I guess strikes me is that.
I would assume that you had decision making ability in terms of proving loans and it's the severity issues or what they are based on where you were in the capital stack, but nonetheless, you chose to invest in those loans in.
What's what's to give investors.
Better feel that the default.
Frequency is going to be better going forward.
Sure and thanks for thanks for your question you know it I think it harks back really two to the answer to Ryan's question and that we've put additional.
Resources across the platform in place.
We have more personnel very highly skilled qualified experience investment professionals in place to really make sure that we're not making decisions like that again and you heard from tailor that where our strategy lies a you know the strength of what we bring.
To the table and the was the main keys to our success going forward.
We'll be in utilizing.
We have across the Carlyle global platform.
To help us source.
Differentiated investments that don't look like the ones, we had in the Cup program, but have a much better.
Risk profile to them so we.
Weve you know.
The proof will be into putting obviously and you can judge us out over the next number quarters.
But we feel very confident in the team we have in place the process we have in place.
And the fact that we've learned from our mistakes.
Okay. Thank you.
Thank you ladies and gentlemen, this concludes today's question and answer session.
I'd now like to turn the call back over to Daniel Harris for any further remarks.
Thank you for your time and attention. This morning, if you have any follow up questions feel free to reach out to Investor relations. After the call. We look forward to speaking with you again next quarter.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.
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