Q4 2019 Earnings Call

Ladies and gentlemen, and welcome to the H T H credit keep screening conference call fourth fiscal quarter end year ended December 31st 2019. It is my pleasure to make all over didn't miss more near term.

Director of Investor Relations that T H credit IEC miscarriage, you may begin.

Thank you operator, good morning, and thank you for joining us with me today or Chris Flynn, Our Chief Executive Officer, Jim Fellows, Our Chief investment Officer, and carry all 10, our chief operating and Chief Financial Officer before we begin. Please note that statements made on the call may constitute forward looking statements within the meaning of the Securities Act of like in 33 as Amanda.

Such statements reflect various assumptions by THL credit concerning anticipated results that are not guarantees of future performance and are subject to known and unknown uncertainties and other factors that could cause actual results to differ materially from such statement.

The uncertainties and other factors are in some ways beyond management's control and include the factors included in the section entitled Risk factors at most recent annual report on form 10-K as updated by our quarterly report on form 10-Q, and our periodic another filings with the Securities Exchange Commission.

Although we believe that the assumptions on which any forward looking statements are based on a reasonable any of those assumptions could prove to be inaccurate and as a result, the forward looking statements based on those assumptions also could be incorrect you should not place undue reliance on these forward looking statements teach I'll try to undertakes no duty to update any forward looking statements made herein.

All forward looking statements speak only as of the David that's call.

Our earnings announcement, and 10-K released yesterday afternoon copies of which can be found on our website along with the Q4 earnings presentation that we may refer to during this call a webcast replay of this call will be available until March 16th 2020, starting approximately two hours. After we conclude this morning to access the replay please visit our website at www.

That THL credit BDC dotcom with that I'll turn the call over depressed.

[noise], Thanks, Lauren and good morning, everyone before jumping into the earnings recap portion of the call I want to briefly talk about the first Eagle investment management.

We're excited about this transaction.

For Siegel investment management acquired THL credit advisors, the investment advisor to T C or D on January 31st.

I don't know first Eagle is a large investment firm with approximately 100 billion of assets under management and as a long history dating back to Eighteensix before the furnace privately held its investment capabilities include equities fixed income private credit multi asset strategies.

The furnace best probably know birth global value fund.

First Eagle alternative credit the name under which the combination of first seagulls existing private credit platform and THL credit advisors now operate.

23 billion of assets under management, including 7 billion indirect lending [noise].

The same THL team is continuing to run the business under first Eagle well ownership has changed your strategy as it relates to direct lending in the BDC really thing [noise].

We're looking to run a highly diversified portfolio first lien loans and sponsor backed companies with $5 million to $25 million anybody I.

After the basket hold size across the direct lending platform is increased which we believe improves or competitive positioning of the market.

To be successful at managing a public bdcs need access to directly originated well structured credit balance sheet large enough to execute you originated efforts, which allows you to underwrite quality transactions, while maintaining prudent diversification.

You also need access to capital to scale the business.

I believe our clients, including our BDC shareholders will benefit from the inquiry size scope relationship that work in investment capabilities.

Combined direct lending platform.

The broader first Eagle platform brings significant resources to access to a variety of investor channels as well as capital for M&A and new products, all of which will be good for the BDC.

Now I'd like to start by providing an update with respect to the bdcs on growing strategic plan.

The key components of the plan, which we communicated two years ago would have run a highly diversified.

A highly diversified first lien voting rights BDC with reduced concentration positions, specifically anything greater than 2.5% of the balance sheet introduce or not and converting equities since 2017, we've executed on the strategy.

Reduce non income equity positions from 7% other portfolio to 2% of the portfolio, we reduced our concentrated names from 14 down before it was added to 22, new direct lending investments are the portfolio with an average hold size is less than 10 million.

Lastly, we've increased the first one explodes are clearly Logan from 77% to 90%.

The legacy portfolio Predating 2015, there's no isolated to six names compared to 17 at the end of 2017.

Note that the stress in the portfolio has been in remains concentrated on this legacy book.

In fact at the net realized losses, we've taken in 2018 to 2000 Tonight and 100% of number correlated to the vintages of 2010 to 14 as illustrated on slide 17 over an updated investor presentation.

As we've communicated this first lien centric diversified portfolio strategy.

We saw permission during our last annual meeting to permit additional leverage on our BDC a proposal that receive clear support from our shareholders. We only intend to utilize this leverage one of the quality of our equity basis stable. Then we will seek the necessary approval from our senior lender group to increase leverage.

As a public shareholder I'm sure the question or the hand is so what.

You made significant progress with the stock still trades down and at a discount like many other bdcs.

What was that a few positive that's what's been the legacy portfolio Copperweld and Tristar. We've also had challenges as it relates to both exits in our inability to exit certain positions whats wrong and Charlie OEM in Holland.

Nonetheless, we're very close to closing this chapter moving forward, we exited marchex or less subordinated debt investment at a discount, but it's still generated a positive by or are on the investment.

Also exited Virtus Warner were concentrated positions at par to Q4.

Oh and what's it was added to the non accrual. This quarters now marked at a level, where we expect to realize proceeds in the coming months.

OEM, which has been marked down this quarter remains challenged but doesn't formal process is to be sold emerged in the coming months. What leaves. The company has made significant strides in the enhancement of its proprietary technology, there's still exist execution risk on the business plan.

We the company as advisors are actively managing several options that's what this position.

90% of the NAV declined this quarter was related to these names Martech Holland and OEM.

The names that we highlighted our last several earnings calls in the net investment income Miss relative to the dividend was primarily result of Holland going on non accrual Amar techs not accruing income in Q4 out of the accident that is from portfolio.

Ahead of the exit from the portfolio in December.

If you look at what's the most valuable in fixed income today, that's true directly originated loans that are high yielding well structured for the last two years, we've had a 22 of those investments whatever the solid execution has been overshadowed by our legacy portfolio workouts.

Next as noted in our release and 8-K filed yesterday with a supportive first eagle and the former owners of THL credit advisors, we've committed to by $30 million worth of newly issued shares of T. CRT at NAV.

Do you see or do you will use these proceeds the tender shares in the same dollar amount that's the one shareholders approve the management contract.

We believe isn't the most effective what is your support for the shareholders by taking action that we expect will be immediately accretive.

It also enables PC already to buyback public shares without continuing just right its balance sheet.

Has also noted on the earnings release for legal has agreed to waive 100% of the management fee and incentive fees for Q3 in Q4 in connection with the approval of the investment management contract as we continue to work towards that today. These legacy investments.

The management fee waivers being provided to act as a buffer to dividend coverage as we look to finalize these exits.

Moving onto the fourth quarter, we aggressively move to exit or many legacy credit the actions resulted in a significant markdown off let credits as I mentioned earlier, but then term pressure on the dividend as we look to finalize converting these positions the cash that we intend to reinvest in it and yielding credit.

However, we see the light at the end of the title we expect to be out of most of our concentrated legacy credits. This year, we will allow which will allow us to pursue increased leverage.

Could grow the portfolio and focus on running the highly diversified personally floating rate BDC with that I'll turn the call over to tear it to discuss our Q4 results in more detail.

Thanks, Chris Good morning, everyone first and portfolio highlights as of December 31st or $384 million portfolio was invested 69% in first lien senior secured debt and 21% Logan JV as a reminder, the Logan JV is 98% invested in first lien assets.

The remaining 10% of TCR D.'s portfolio was held in the second lien and other income producing equities.

You can refer to slides 12, and 13 or earnings presentation, which highlights the you've trends over the last two years.

Oh, the weighted average yield on the debt and income producing portfolio, including Logan was eight.

0.7% the decline over the quarters, primarily due to out in under non accrual and the exits from two of or higher yielding assets that were placed replaced with lower yielding assets this quarter.

Total non accruals as a percentage of GE CRD IV portfolio at fair value in cost increased 8.1% and 3.9% respectively. With the addition of hall in Q4 Loadmaster remains the only other company on non accrual at the end of the year.

We're not to the financials for the fourth quarter. The now declined by now declined 8.4% to $7.64 per share largely due to the write downs, Chris mentioned at a loss take on the sale of our position of Marchex outside of OEM in Hall, and the remainder of the portfolio continues to perform well.

And I only for the quarter was 16 cents relative to the dividend of 21 cents or spillover income, which was approximately 25 cents as of December 31st covered the difference.

Looking at some components of our 10.1 million of investment income this quarter interest income decreased this quarter, primarily due to the hauling and Marchex nonaccrual and then dividend income also decreased due to the realization of copperweld in Q3 in late Q3.

On the expense side total expenses for the quarter or 5.2 million compared to 5.8 million in Q3 of the decrease was primarily due to lower interest and fees on borrowings.

Net realized losses were 5.8 million in Q4 was primarily related to the sale of our position Marchex.

About half of this does it for about half of this loss was reflected in our NAV at September Thirtyth.

From a leverage and liquidity perspective leverage levels were within our targeted range as of December 31st at around 0.77 times during the quarter, we invested $24 million in the portfolio the broadly syndicated loans on a short term basis.

To manage excess liquidity from the repayment of Virtus, which was one of our more concentrated positions Chris mentioned.

We sold out of all of you physicians last week at a lot of gain on the proceeds will be used to fund additional direct lending investments and pay down our revolver.

Leverage currently sits around 0.7.

0.75 times.

Our plans to take leverage up modestly in the back half the year once we exit the remaining legacy assets subject to under the credit facility. We will continue to evaluate our debt stack from a size and structure standpoint, as we repositioned the portfolio.

And take on increased leverage as a reminder, our longer term leverage target is 1.1 to 1.2 times.

We continue to execute execute on our buyback share buyback from Q4, completing a 15 million dollar Tenbfive one program put in place last March and started a new program in December to date, we've purchased $2 million under this new player.

With that I'll turn the call over three operator for questions.

Thank you ladies and gentlemen, if you have at this time. Please press star one on your discount.

If your question has been answered or you wish to move your comes from the Q. Please press the pound.

To prevent any background noise can you. Please please your line on mute and your question has been stated.

Our first question comes from the line of Robert Dodd with Raymond James Your line is open. Please go ahead.

Hi, guys.

I mean, you mentioned, obviously in the prepared remarks into in pressure on the dividend I mean can you give us a I mean, obviously with the Navy has taken a dip this quarter to maintain and 84 cents dividend on the on a 760 or any of the likewise.

Double digit although we with you on you strategy, all fall well nobody knew but that the transition to mall.

More secure assets.

Do you.

Continue to believe that that 84, a sustainable in terms of coverage from an IRA at once the location is complete.

Hey, Robert its of course lend per Shacey I. Appreciate the question I think it's a fair question, obviously, there with with any type of volatility not only relating to.

Investments made on non accrual, but also the potential of taking a loss.

I would put pressure or could put pressure on that dividend. What we're trying to do on assesses clean the portfolio get stable equity base. We can drive there then we can drive the the the leverage higher.

What's fluid, which would enable us to.

Push for a higher ROI, we were not in a position right now to provide guidance on a on 2020.

Future earnings until until we have to these last few investments though.

Okay got it appreciate that and then on on the the can you give us any any color on on timing of.

The vote for the.

That approval.

Then you management contract and then also wet and obviously spoke a question for the board whether there's been any.

Oh the parties that.

Thats into the things so to speak.

Robert This is Terry appreciate the question are we intend to file a preliminary block products in the near term, we anticipate that the record date.

For any shareholder meeting to approve the new investment management agreement will occur after April.

21st which is a day, we've indicated that the shares will be acquired Thats. All I can say on this at this point on that.

Got it and then add.

To your knowledge has anybody else.

Approached the board with with an alternative off Oh, there's this this oh the.

Postal from the advice as as it stands the anyone on the table.

No Robert.

Okay. Appreciate it then one more if I got on OEM, obviously, I mean, it it's a concentrated position has been though it's really the first time that I can remember where it's taken it oh I'm a discount mark, though I think it's been mouth that.

Oh.

But most of it but at least the last couple of years that I can remember so can you give us any any color on on what.

What shifted back in and stress wise and and.

Confidence level in the Mark as it stands today.

Yeah, Thanks, you're right on the debt position that there has been much movement, we have a overtime written down what would've been a or equity positions. So there hasn't been some movement on NAV associated with the name.

Today as we sit back we're taking an accommodation of what we think the businesses is willing to are able to produce from a cash flow basis.

Indeterminant evaluation, we're also taking into consideration various applications. We've had from discussions regarding the M&A process, but rather than that were in the middle level as we speak.

Got it I appreciate it thank you.

Thanks Robert.

Thank you enter next question comes from the line.

Ryan Lynch.

Yes.

KBW. Your line is open. Please go ahead.

Hey, guys I just wanted to.

A follow up question regarding the discussion on the dividend I guess I'm just trying to understand the thought process. I know you said you guys are trying to work through a couple of things. So you guys didn't want to change the dividend.

Around as you guys are working through a couple of your issues, but.

With an 11% dividend yield on book value I mean, that's just in my opinion not anywhere close to sustainable given your guys risk profile that you guys, you're trying to target with the new BDC. So.

Are you guys make a correction with data you guys, you're just going to continue to to return capital and payout book value that as part of that dividend side, just I'm not understanding the thought process to why not take action sooner when in my opinion that dividend clearly needs to be from reduced yeah. No. Thanks, Ryan. It's a fair question I think from our position there's two things one.

If there was going to be a move on the dividend we want to do at once and we want to do it. The most accurate information that we have and second in an attempt to potentially buffer some of that potential volatility given the transition that was part of the decision process that was driving our a lesson to where the management fees for a for Q3 in Q4.

Yeah.

Okay, and then are you kind of tweaked the leverage target just a little bit can you maybe go over I mean, you mentioned a little bit about stabilizing the equity base can you just maybe provide a little more detail of what you need to see in your portfolio I know its credit statistics I don't know if its mass stabilization in office portfolio rotation.

Can you just go over kind of the metrics that you guys are looking at I've seen in your portfolio in your company before you guys kind of actually look at implementing that higher leverage target.

Yeah. Ryan this is Terry Thanks for the question I think it's to coverage of the chase, it's really the exit from.

A substantial portion of these legacy investments right, which have the most now volatility which is what we want to eliminate.

Before we start to take leverage up beyond where we historically carried and we've told that to a this group.

Several times before we discuss that with our lending group.

And we're not going to do something that doesn't make any sense.

<unk> head of that so.

When we talk about.

My remarks, I view it as what we think we can exit some of the stuff in the near purely the next couple of quarters, which will allow us to take leverage up from the 0.75 times pop up towards.

One to one by the end of the you're assuming things proceed accordingly, and were able obviously amend our credit facility, which we'd anticipate being a little bit people to do without this now volatility in the portfolio and I think if you think about the target that's a little longer term more into 2021. So I hope you know you're not going to see us doing this until.

These names are gone and if you do them you know if you could poke at us, but I think we're going to be responsible how we thought it and how we manage the portfolio over time here.

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And then.

Maybe just one is for you Chris I mean, if I take just a I kind of a higher level view of TCR de over the last several years clearly outside of the BDC THL credit had had been raising I know a decent amount of direct lending signs.

Cross your platform and now managing working with.

First Eagle you guys have you know I think a pretty significant direct lending platform, which keeps you guys relevant in the space and all that but but if we focus on TCR de for men and I mean.

Do you guys equity based at the BDC has.

As has dropped significantly basically band been cut in half the last several years discount to book value. You guys are now trading at 160 million market cap. Today, you guys continue to buy back shares which is the right thing to do but but but keeps basically shrinking TCR due from just the BDC standpoint from from what it.

Pastors are looking to investing.

Are you worried about did this entity just the BDCA force you guys haven't larger platform, but but the BDC just kind of continuing to shrink and fall less and less relevant from a BDC investor standpoint.

Thanks, Ryan its and I. Appreciate the question, obviously, we've been disappointed with the with the results in and TCR D.

Yeah.

Especially given the to your point the success, we've had and raising capital you know privately the platform itself is growing back in 2014, and if we had roughly three to $3 billion to $5 billion under management and.

He already stand alone it available to grow up to a to 17, so well.

These these losses of this underperformance.

Unfortunately has been somewhat concentrated in the in this and this public vehicle. So for that obviously like I said, we're disappointed with that said as we look about think about the the combination with first legal.

It it's much easier for us too.

You know carry a BDC either side I do believe once it gets stabilized.

Once we get finished lots and they did see few credits we actually think we've been turned this thing around and actually grow. It for you to brings a lot of incremental capital potential balance sheet and at the additional resources for for fruit for future M&A.

So it's it's it's it's something that was important.

The diligence process on us they recognize that the vehicle itself. It underperformed, but are they look to it as a as a as a very good is very good option for us for growth in the future. Once a once once these last your investments are up for our accident.

We're trying to show that support obviously with the 30 million dollar a 30 million dollar investments and the and the management fee waivers or they're going to be supportive of of the vehicle just as DHL was historically.

Okay understood. Those are all my questions I appreciate the time today. Thanks Ron.

Thank you I'm showing no further questions I would like to turn the conference back over to Mr., Chris Flynn for any further remarks.

I appreciate all taken time today to join the call for our fourth quarter earnings update I Hope we provided a helpful update on the BDC how to evolve over the last few years in that setting and as we exit these legacy assets.

The full supportive first Eagle will believe DCT is well positioned for success and we will continue to support our shareholders. We look forward to providing every one an update next and Matt. Thank you.

Ladies and gentlemen. This concludes today's conference call. Thank you for participation you may now disconnect.

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