Q4 2019 Earnings Call
Thank you for standing by and welcome to the fight This investment Corporation fourth quarter 2019 earnings Conference call. At this time, all participants in listen only mode. After the speaker presentation. There will be a question answer session asking question during the session you'll need to press star one on your telephone. Please be advised the today's conference is being recorded you acquire anywhere.
Other assistance. Please press star Zero I would now like to hand, the conference over to your speaker today Jody Burfening. Please go ahead Mike.
Thank you Josh and good morning, everyone. Thank you for joining us for by this investment Corporation fourth quarter 2019 earnings Conference call.
With me. This morning are Ed Ross by this investment Corporation's Chairman and Chief Executive Officer in Shelby, Sharon Chief Financial Officer.
This investment Corporation issued a press release yesterday afternoon with the details of the company's quarterly financial results copy. The press release is available on the Investor Relations page of the company's website, It's Debbie said FC U.S. dotcom.
I'd like to remind everyone that todays call is being recorded a replay of this fall can be available by using the telephone numbers and conference I'd provided any earnings press release.
In addition, an archived webcast replay will be available on the Investor Relations page of the company's website. Following the conclusion of this call.
I'd also like to call your attention to the customary safe Harbor disclosure regarding forward looking information included on today's call.
This call today will contain forward looking statements, including statements regarding the goals strategies beliefs future potential operating results in cash flows Vitesse investment Corporation.
Although management believes these statements are reasonable based on estimates assumptions and projection as of today February 20, 2020. These statements are not guarantees of future performance.
Time sensitive information, we no longer be accurate at the time of any telephonic and webcast replay actual results may differ materially as a result of risks uncertainties and other factors, including but not limited to the factors set forth in the company's filings with the Securities and Exchange Commission.
Vitesse undertakes no obligation to update or revise any of these forward looking statements.
With that I would now like to turn the call over to Ed Good morning, Ed.
Good morning, Jody and good morning, everyone.
Welcome to our fourth quarter 2019 earnings conference call.
I'll open today's call with a high level commentary on our quarterly results and then I'll cover our investment portfolio performance and conclude with comments regarding our view of the market.
And activity levels for 2020.
Shelby will cover the fourth quarter financial results and our liquidity position. Once we have completed our prepared remarks, we'll be happy to take your questions.
Consistent with the first three quarters of the year, our fourth quarter results demonstrate the effectiveness of our strategy and inception to.
To build a well diversified portfolio of debt and equity investments in lower middle market businesses.
We believe will produce high levels of recurring income and offer us the opportunity to participate in equity gains, thereby overtime preserving capital in generating attractive risk adjusted returns.
We continue to build our portfolio carefully selecting companies that have strong yet defensible market positions and positive long term outlooks deliberately opting for quality over quantity.
As a result, we grew in a b to $412.3 million or $16.85 per share as of December 30, Onest 2019.
Compared to $16 in 47 cents per share as of December 31st 2018. This represents the fifth consecutive year of an AB per share increases.
Another way, we evaluate the effectiveness of our strategy is by tracking the net increase in net assets for 2019, we generated $1.98 cents per share amply, covering our dividend payment of $1.60 cents per share for the year.
For each year since 2015, the net increase in net assets as equal or exceed its dividend payments, resulting in a five year average of $1.95 cents per share relative to the dividend payment of $1.60 cents per share.
From our perspective these metrics demonstrate the deliberate value creation that our portfolios designed to produce overtime.
Finally, our return on equity is a testament to the effectiveness of our strategy for 2019.
Our motto generated in our or we have 11.9%.
Regardless of whether you measure or are we over three years or five years, our OE stands out in the BDC universe.
On December.
The December Twentyth 2019, brightest paid a regular quarterly dividend of 39 cents per share and a special dividend of four cents per share.
December 31st estimated spillover income or taxable income in excess of distributions was $15.3 million or 63 cents per share.
On February 12 2020.
The board of directors declared a regular quarterly dividend of 39 cents per share, which will be payable on March 27th 2022 stockholders of record as of March 13th 2020.
Our operating results for the fourth quarter were solid adjusted net investment income, which we defined as net investment income excluding any capital gains incentive fee attributable to realized and unrealized gains and losses was $8.3 million for 34 cents per share compared to 11.
$23 million.46 per share for the same period last year.
In terms of originations for the fourth quarter, we invested a total of $43.6 million and debt and equity securities during the quarter.
Similar to the third quarter. The majority of the fourth quarter originations were add on investments in aid existing portfolio companies, primarily in support of M&A activity.
Investments in new portfolio companies consisted of.
$6 million in first lien debt in common equity in hematologic technologies, Inc., a leading provider of biologic products and GMP compliant as say development and testing services to the biopharmaceutical industry.
$8 million in first lien debt and preferred equity in primary group Inc., a multifaceted architecture and engineering services firm focused on domestic infrastructure projects.
Subsequent to year end, we invested another $26 million in debt and equity securities into new portfolio companies.
These investments consisted of $11 million in a revolving loan in first lien term debt of combine systems Inc., a leading designer manufacturer and marketer of non lethal security products for the global defense and law enforcement markets.
And $15 million in first lien debt route where inc., a leading provider of highly integrated fleet up fleet automation software and systems.
For waste dollars and municipalities.
In terms of repayments and realizations, we receive proceeds totaling $21.8 million, which included payments totaling 8.1 million related to the exit.
Of our debt and equity investments in simplex simplex manufacturing company.
Payments totaling $9.8 million related to the exit of our debt and equity investments and us pack logistics LLC.
In connection with the exits of these two portfolio companies, we realized gains totaling $3.8 million.
Which was offset by $13.8 million realized loss on our investment in Oak tree Medical Center.
For a net realized loss of $10 million for the fourth quarter.
Subsequent to year end, we receive proceeds totaling $20 million, including a realized gain of approximately $9.8 million.
On a distribution of our equity investment in fiber materials think and a $99.2 million repayment in full on our first lien debt investment in hundred defense technologies.
Turning to our portfolio construction and metrics the fair value of our investment portfolio as of December 30, Onest 2019 grew to $766.9 million.
Equal to 108.9% of cost.
We ended the quarter was 61 active portfolio companies and three companies that have sold their underlying operations.
On a fair value basis, the breakdown of the portfolio by investment type as of December 30, Onest was as follows first lien debt, 14.1% second lien debt, 49.9% subordinate debt, 18.4% and equity 17.6%, but.
This mix or portfolio remains well positioned to provide us with a high level of current and recurring income from debt investments along with the opportunity for incremental returns from monetizing equity investments.
As of December 31, 2019, we had debt investments and one portfolio company on nonaccrual status accident foodservice equal to 4.3% of our portfolio on a fair value basis.
While the company and his management team implement operating improvements we are having to be patient until the company de levers.
We continue to believe in the long term prospects of the company as reflected in our Q4 fair value.
Greenfiber was moved back to accrual status as a result of its improved financial performance.
Moving to.
To our portfolio performance.
We track several quality measures on a quarterly basis to help us monitor the overall quality stability and performance of our investment portfolio.
First we track the portfolios weighted average investment rating based on our internal system.
Under our methodology or a rating of one is outperform in a rating of five is an expected loss at December 30, Onest. The weighted average investment ratio for the portfolio was too on a fair value basis in line with prior periods.
Another metric Retractors the credit performance of our portfolio, which is measured by our portfolio of companies combined ratio of total net debt through Friday is debt investments the total EBITDA.
For the fourth quarter. This ratio is 4.6 times compared to 4.7 times for the third quarter.
Third measure we track is the combined ratio of our portfolio company total EBITDA total cash interest expense, which is indicative of the cushion our portfolio of companies have in aggregate to meet their debt service obligations to us for the fourth quarter. This metric was 3.4 times compared to three per.
Three times for the third quarter.
We believe the soundness of these metrics reflect our debt structuring philosophy of maintaining significant cushions to our bars enterprise value in support of our capital preservation and income goals.
In closing 2019 was a year of accomplishment in terms of our overall portfolio performance.
Proactive portfolio management.
And equity appreciation.
Originations, which totaled a record $219.2 million continue to compensate diversified mix of first lien debt.
Second lien debt subordinated debt and equity investments.
Reflecting our ability to offer customized and flexible financing solutions to lower middle market businesses and steadfast commitment to underwriting disciplines.
Within this mix, we consistently deploy more capital in first lien debt investments during the year, so that an aggregate first lien debt accounted for $84 million or 38%.
2019 originations compared to $25.4 million or 12% of total originations for 2018.
Proceeds from repayments and realizations were $120.6 million for the year, including proceeds of $20.3 million from equity investments.
As a result of these achievements during 2019, we extended our track record of capital preservation grew in Avi per share for the fifth consecutive year and continue to create value for our shareholders.
Since the beginning of 2020, we received a distribution on our equity investment in fiber materials, Inc., which resulted in a $9.8 million gain.
We also just completed a significant transaction with an undisclosed institutional investor for the sale of 50% of our equity investments in 20 portfolio companies, including fan steel Inc., our second largest equity investment.
We received net proceeds of $35.9 million from this transaction and realized an approximate net gain of $20.4 million.
Reflecting our continued belief and these 20 portfolio companies, we retained 50% of our equity investment in them.
With this opportunistic transaction, we have proactively move the needle in a meaningful way toward our goal of reducing the percentage of equity in our portfolio in a fair value basis.
Generating $66.8 million in proceeds from equity investment dispositions since the beginning of 2019.
To be redeployed into income producing assets.
Looking ahead into 2020 M&A activity in the lower middle market is reasonably sound and with our strong relationships and deals which deals with deal sponsors.
Our industry expertise and ability to provide customized and flexible solutions originations should remain solid.
Our equity portfolio has given us incremental capital to redeploy into income producing debt investments and continues to offer us attractive opportunities to realized gains and boost returns.
Our debt portfolio remains well positioned to provide us with current and recurring income into withstand and economic downturn should one occur.
As always remain focused on managing the business for the long term with an emphasis on capital preservation in generating attractive risk adjusted returns.
Now I'll turn the call over to Shelby to provide some details on our financials and operating results Shelby.
Thank you Ed and good morning, everyone I'll review, our fourth quarter results in more detail and closed the comments on our liquidity position. Please note I will be providing comparative commentary versus prior quarter Q3 2019.
Total investment income was 19.5 million for the three months ended December 31, 2000, 19.3 million increase from Q3 2019, primarily due to a point 6 million increase in dividend.
Offset by a point 2 million net decrease in interest income primarily related to placing access services on nonaccrual status.
And a point 1 million decrease in fee income.
Total expenses, including tax provision for 14.1 million for the fourth quarter, approximately 2.3 million higher than the prior quarter, primarily due to an increase in the capital gains incentive fee accrual of 1.6 million related to meaningful appreciation in the fair value of the portfolio a point 5 million increase in interest in.
Related to the 63.3 million public notes offering completed in Q4 and annual excise tax expense in Q4, the excise tax expense with point Fourmillion as a result of $15.3 million or 63 cents per share spill over income.
As of December 31, 2019, the weighted average interest rate on our outstanding debt was 4.7% versus 4.6% in Q3.
As of December 31st we had 364.8 million of debt outstanding comprised of 157.5 million of SBH debentures 182.3 million at public notes and 25 million outstanding on the line of credit.
Our debt to equity ratio with 0.88 times or 0.5 times statutory leverage excluding exempt SBH debentures.
Net investment income or Eni for the three months ended December 31, 2019 was 22 cents per share versus 30 cents per share in Q3, adjusted NII, which excludes any capital gains incentive fee accrual reversals attributable to realized and unrealized gains and losses on investments.
34 cents per share in Q4 versus 35 cents per share in Q3.
For the three months ended December 30, Onest 2019, Vitesse had approximately 10 million of net realized losses related to at $13.8 million of realized losses on pain management associates offset by 2.9 million realized gain on the exit of our equity investment in simplex manufacturing cow.
And a point 8 million realized gain on the exit of our equity investment in U.S. pack logistics.
Now turning to portfolio statistics as of December 31st our total investment portfolio had fair valued at 766.9 million.
Our average portfolio company on a cost bases was 11.5 million at the end of the fourth quarter, which excludes investments and three portfolio companies that have sold their operations are in the process of winding down.
We have equity investments in approximately 93.7% of our portfolio company with a weighted average fully diluted equity ownership of 5.3%.
Weighted average effective yield on debt investments was 12% as of December 31st the weighted average yield is computed using the effective interest rate forgot investments that cost, including the accretion of original issue discount and loan origination fees, but excluding investments on nonaccrual status if any.
Now I'd like to briefly discuss our available liquidity.
As of December 31st our liquidity and capital resources included cash of $15 million.
75 million of availability on our line of credit and 6 million of available FMC three debentures, resulting in total liquidity of approximately 96 million.
Taking into account subsequent event. We currently have 125.6 million of liquidity and access to 161.5 million of additional SBH debentures under a third FDIC license subject to FDA regulatory requirements at approval now I will turn the call back to add for concluding kind.
Ed.
Thanks, Shelby as always I'd like to thank our team and the board of directors at fighters for their dedication and hard work.
And our shareholders for their continued support.
I'll now turn the call over to Josh for Q in a Josh.
Thank you as a reminder, that's the question you mean press Star 100 telephone to withdraw your question press the pound Keith Please stand by we've compiled Accuen a roster.
Our first question comes from Paul Johnson with KBW.
You May proceed with your question.
Good morning, guys. Thanks for taking my questions.
Congratulations on the equity exits and as well as the the Greenfiber recovery. Those are obviously two real positive developments for for shareholders and the exits obviously are always difficult.
The effect so.
Once again congratulations for that.
On the.
On the.
On the Greenfiber recovery.
I'm just curious was the investment accruing any income for.
The quarter or for any sort of partial period of the quarter.
I'll, let shelby answer that but it was we put it back on accrual status effective October Onest, though we had a full quarters worth of interest income.
Okay. Thanks, great.
And then.
Do sorry, excuse me did a portfolio exits them into those make any more comfortable around obviously operating earnings getting up back in to covering the dividend I mean, when I run the math I think I get to around three to four cents or so from redeploying the capital from both the.
The portfolio of equity investments as well as.
The individual separate exit that you had earlier in the year as well.
Sure.
So I guess just talking about dividend coverage for a second I think what our belief system is we have a well diversified portfolio that's performing in a very solid manner.
Very strong in now previously overweighted equity portfolio that can be rotated into higher yielding investments in a strong balance sheet, including a modestly leveraged one.
Over the past six months, we realized over $60 million of proceeds from equity investments and we plan to.
Invest a large.
Part of those proceeds into income producing assets that should enhance the current income portion of our BNL.
The quality of our portfolio because.
Positions us well the continue to perform well for our shareholders over the long term.
This recent equity monetization event only enhances the stability.
We also like having $15.3 million a spillover income to support any shortfalls falls along the way. So in short we're very comfortable with our dividend is we sit here today.
I think more importantly, we're we're confident in our strategy of investing in the debt and equity of lower middle market companies, we target.
90% debt and 10% equity asset mix on the cost but this.
We believe this approach generates high levels of recurring revenues and the opportunity for capital gains.
We also believe any preservation is imperative overtime, if you're going to run a BDC well and if you can.
Grow in Avi, while running a BDC well at the only puts you in a better position so.
Finally, we believe our track record our Navy track record and overall track record support these thoughts.
Yes, and I would just add to note that particularly the exit of fiber materials and monetization of a portion of our equity portfolio happen here. The subsequent event kind of mid to late Q1. So it will take a little while to redeploy those proceeds but big picture. Your math is right. It's just a question that timing in terms of later start it does redeployed.
Okay.
Sure sure and thanks for all that commentary there's no doubt that your strategy is obviously work.
Very well in the equity investments has been very beneficial.
Over time for shareholders.
And on that exit with the portfolio of equity investments this quarter.
Im just curious is there any sort of chance for future transactions similar to that take place either for a basket of investments or even just one off individual equity investments.
That's a great question and I'd say is there a chance I'd say absolutely.
But it's not something we are working on right now.
We very much like our equity portfolio and so plan to.
Take goes through the end if you will but.
If if there's a reason to.
Think about a similar transaction whether on a one off basis or portfolio, then, we'll clearly do that but.
We like the portfolio and in the construction of it as it sits today.
Sure.
Last question was just on the pressure the portfolio yield obviously, that's just been coming down.
Naturally over the years with declining rates, but just given that you have.
Less exposure to floating rate assets than than most other bdcs.
I'm just curious for the decline this quarter has that been because of lower LIBOR or just.
10, you spread tightening in the in the lower middle market or perhaps just some higher yielding investments that repaid during the quarter.
Sure. Let me give you a little perspective here I guess real quickly.
The debt yields in our portfolio have dropped about 100 basis points from 13 to 12, I guess over the last 24 months.
In 2018, new investment yields were lower than debt repayments, which is what you just mentioned the fact that new investment there were to 11.9% in 2018, whereas repayments were in the 13 in the half range.
In 2019, new investment yields were 11.8% and repayments were approximately 14.1%.
So to summarize I think in this quarter repayments for.
Higher yielding debt investments clearly impacted things I think.
The decline in LIBOR floor at a.
Really a impact as well and finally.
Moving X into non accrual also impacted so I'd say those three things where the reasons for this quarter's decline on a go forward basis I don't think we expect to see material declines.
So we I think we would plan on being pretty stable from from this perspective, but.
Small declines could happen good LIBOR go down more.
I would tell you on the LIBOR side of things, we have floors on LIBOR of one of the half to 2% and most of our floating rate deals not all but most so that largely pretax income improved incremental reductions.
In LIBOR.
Hopefully that's helpful.
Very helpful. Thank you for taking my questions.
Absolutely good talking to you Paul.
Thank you. Our next question comes from Matt Jayden with Raymond James You May proceed with your question.
Hi, all good morning.
Two quick questions on the equity exits on February 20 fit. So first can you could just give any general guidance were those exits the marks close to were at the 14 19 on marks.
Yes.
Great question and the answer that is the net purchase price was very.
Approximately the fair value.
Of the Q4 marks on all the names.
And then what about where there any I know wells to shield some of those gains.
There are few Anna wells.
Ed mentioned the net per approximate net proceeds of the 20.4 million we have taken into account that some of these equity investments in fact were held in some of our blockers, but then well with the Grand seem to think are not hugely material.
But we did have a few and allow them to blockers that offset some of it and I would all kind of mentioned.
It's a difficult thing to model, but.
For the Rick we do have some capital loss carry forwards that were further offset some of the gain recognized cyber risk in terms of distribution requirement.
Okay that is all helpful. And then I guess, one follow up quickly on that.
How should we be thinking about spillover income just but with all this coming back to us.
So again, that's where I would kind of point you to the capital loss carry forward that we have available at the Rick.
It's about call. It 20 to 22 million at the end of 19, so that will not completely shield the gain recognized by the Rick but it will it will definitely offset a large majority of it.
Okay.
And then to pivot a little on to accept food. So still some some pretty confident marks on the asset can you give any.
Guidance on kind of timeline I mean, it's still seems like things are looking okay. There any timeline on guidance of when we could see this may be coming back to accrual.
It's it's a great question and I wish I had a crystal ball, but.
Yeah, Let me, let me just touch on the the accident food situation.
Rich.
Again, we do have a fair bit of confidence in the numbers are pretty stable to improving but due to refresh for the group accent is a leading provider of of customized refreshment and break room food and beverage services.
To a diverse base of over 3500 customers primarily in the Texas market are they also are another geographic regions.
Our core services include vending services micro markets and coffee services focused on really the small and medium.
Size business segment also the government market. So it's very much a day in day out business and it has pretty meaningful size, which we like.
Since our involvement began the company has been acquisitive nature.
We've also invested in the infrastructure of the company to help facilitate its growth objectives.
Companies had some missteps along the way of this growth path.
Recently, though and thankfully the company hired a new CEO early last fall and new COO earlier in the year and more recently hired several several additional senior team members to round out the team.
To be succinct these were badly needed changes in hires.
We're seeing significant positive changes and meaningful change in the operating performance of the company.
To the situation is very stable and we're hoping for continued improvement.
As a second lien lender in this situation, we are having to be patient for the time being post negotiations with the sponsor in the senior lenders, meaning we're not getting paid.
And thus the nonaccrual status.
So hopefully that that gives you kind of some perspective on the whole situation that's about as much as I can talk about that.
Okay, Great and then I guess last question just a couple of quick one dividend and fee income came at a little lighter than we were expecting and I know it can be inherently lumpy, but is there anything structurally in the portfolio that's changed that could lead to lower dividend or fee income in the future that we should be taken note of.
Sure Great question, I'd say dividend income is truly episodic for us These days and.
We did have a dividend in the fourth quarter, but.
If you looked at it for the whole year dividends were down in a material way and so they truly are episodic and.
So it's hard to forecast dividends from our perspective on the fee side. The the quarter ended up being you know I would say lackluster from an originations perspective.
I think deal flow is pretty good but.
We did have two deals fall apart for diligence reason, so we had to walk away from two situations, which did impact.
Our final originations number.
But.
Again deal flow was fine. It's just that's kind of how that could be crumbled as a result of having kind of lackluster originations.
The fee income was down a little bit relative to some more robust quarters I'd say.
Yes on the dividend question only on the comment I'd make is that as Ed mentioned, we did sell a portion of our investment advanced Bill that was one of the portfolio company that provided kind of annual dividend. If you will so that will get reduced going forward subsequent to the sale. So looking forward to 2020 dividends will continue to be episodic, but we havent.
That in some of the portfolio companies that kind of generated some of the routine annual dividends.
Great all.
All right. That's all for me. Thanks, all great. Thank you good talking to you.
Thank you. Our next question comes from Mickey Schleien with Ladenburg You May proceed with your question.
Good morning, and Shelby.
High level question, if I could start.
As we look out through the balance of the year Ed what what are you thinking in terms of the performance of your borrowers. If you can give us an update on how the revenues and margins have been behaving and what is your expectation for demand for it or the sort of middle market loan capital that you provide.
This year.
Both great questions.
Right.
Star with the portfolio and what we've seen I think.
The we're pleased with the overall quality of our portfolio.
And what we've seen is revenue and EBITDA rate grew overall and grew in a good majority of our portfolio companies. So.
Through the end of last year, we saw.
I'd say healthy maybe not robust but healthy growth.
Which we were.
Pretty pleased with.
And your second question what was the second one.
Just over your overall sense of demand for middle market loans. This year, taking into consideration the dry powder that private equity still has and the likelihood that the economy will will continue to grow this year.
Sure.
Not it's it's a tougher year to forecast is what I'd say it is an election year.
We do have the Corona buyers out there that could impact probably will impact deal volume a little bit.
But there is quite a bit of.
Gunpowder out there in terms of folks wanting to buy companies and assuming a performance is stable I also think the M&A market will.
Remain.
Vibrant if you will maybe not robust but vibrant so.
For some reason, there's a slip it's going to slip on both the origination side as well as.
Repayments are realization side, so we're prepared for that as well we've either one of those scenarios is okay.
But I think it's tough to forecast, but we're anticipating at the moment a reasonably sound M&A environment.
Albeit I think it will slow a little bit in the second towards the election time.
Understood.
So.
And in terms of the virus I know, it's very hard to to determine with accuracy, what the ultimate impact will be but looking at your portfolio.
Are there any obligors in there that or just.
Where there are red flags already in the sense that we've seen stocks exposed to travel or anything dealing with the so the global supply chain. Those are obvious situations, where the virus is going to impact results, but bdcs in general tend to be domestically focused but we could see.
Situations, where they are importing products from abroad, or maybe they're selling their services or products abroad, and im trying to get to handle on whether that would be an issue in general and by this case specifically there are great question. Greg question. It's we are very domestically focus, which I think is.
As a positive year.
We have reached out to all of our portfolio companies over the past couple of weeks.
And what I would say at a high level, none of the company's expressed high concern.
Unfortunately in a couple of cases people have contingency plans that they were working on if.
If supply was delayed we clearly we have some manufacturers in our portfolio that do.
No do rely on parts of China, and other parts of the world, but thankfully they have.
Second sources and other places to get those materials and are solely dependent on China for instance, so.
So I'd say, what I'd say the situation dynamic and everyone, including our portfolio companies is is learning more.
Each day is that goes by.
At the moment, we don't see anything meaningfully problematic unaware of anything in our portfolio that is a big concern.
But as you would imagine we're staying close to our portfolio companies given the fluid nature of the situation.
And I'll just highlight I do think it's a bit of an unknown that will this grown a virus impact deal volume.
And if it does it will be both on the originations and the repayment side of things, but it's an unknown at the moment, we're still seeing deal flow as we sit here today, obviously in there.
I'm pleased with what we're working on at the moment so.
But what will be taken into account, obviously as we move forward.
Okay. That's that's really helpful and just a couple of sort of housekeeping questions.
Was there any reversal of previously accrued income for acts in foods.
There was not it's just that we did placed on nonaccrual status at the beginning of the quarter. So there was no interest accrued in Q4, Okay and Leslie Ed you mentioned LIBOR floors, which is an interesting topic given the shape of the forward curve, but im going to sort of asking about how documents.
Fixed early for older vintage deals handle the transition from life for two to so for is that is that language that generally exists in your documents.
Or do you have to go back to all of your borrowers and amend the documents because that that's supposed to take effect next year right.
Sure sure the documents.
If.
There is not available they go to different.
Avenues, if you will so they are already in the documents does it.
Still think theres going to be discussions.
But it will recovered in the documents. Okay. That's helpful. That's it for me. This morning I. Appreciate your time. Thank you very nice talking to you make likewise.
Thank you. Our next question comes from Tim Hayes B. Riley FBR you May proceed with your question.
Hey, good morning, guys. Thanks for taking my questions. Most have been asked and answered at this point, but just one from me.
Can you give us a little color on the pipeline right now if the.
Even mix of potential investment is largely consistent with what you've seen the as you think about redeploying capital from the equity exits and just as it makes in general do you see.
Shifting continuing to ship more first lien or does it just depend on what comes your way.
I mean, it I do think there'll be a continued shift towards first lien.
But it is what we're seeing in the market, we're having good success than the market with it and we're pleased with it the real the ultimate returns that were modeling in those situations and I think we're also providing solutions in the marketplace that are that are being well received from a pipeline perspective, we are working on a.
A couple deals that hopefully will make it.
To the finish line Edward and we're evaluating of a fair number of deals for later on but those aren't in kind of in awarded state. If you will.
So we are we're continuing to be.
Busy if you will.
And but I wouldn't say that the M&A market coming into this year is robust and now you've got the Corona virus that you've got at least everyone's got to be thinking about what is that how does that impact things, it's a little bit of an unknown.
But I do think the markets open there's theres equity capital.
Available, there's debt capital available and thus high quality companies I think people will be looking to transact on.
As we move forward.
I'd say, it's not robust, but its active and we're trying to participate in that activity. Okay. That's helpful and if I can just pick on that a little bit more though you know those deals that you're working on that may or may not close where they largely first lien are they kind of in industries that.
Our consistent with.
The ones you already playing in the portfolio.
Any just I guess any other characteristics that are either usual or unusual.
Yes, there they are primarily.
First lien.
And also say there is one.
Second lien deal that we are looking at.
And then another thing I would mention is our portfolio continues to be pretty active from an acquisition perspective and we are.
Obviously deploying capital in those situations where.
We see it being prudent so that's the third source of of deal volume. If you will see first lien second lien and then add ons to existing positions.
Understood. That's helpful. And then as you continue to shift a little bit more first lien how do you think about leverage on the portfolio.
Shifting as well.
I think you know.
I think it could come down over time I bet It will I do.
What I don't want you to come loose think we're just doing first lien because there's not the case, we are continuing to invest in second lien and subordinated debt securities. The bar has its high has been I always for US I think were primarily investing second lien and little bit larger businesses and really high quality ones.
And so we're still searching for those but I do think as a percentage over time, the first lien portfolio will grow.
And those generally speaking our our lower Levered deals. So you could see leverage come down a little bit.
Because of that but I don't want oversell that point that it's a good question, Okay, Yes, and I really appreciate those comments and I guess, what I meant leverage and it's kind of financial leverage on your balance sheet technically, but that's you know that was good color as well.
Got you.
So yes at the moment and what we've talked about as kind of 0.8 to one times GAAP leverage is is the target.
And.
Could we have if the portfolio more synta, mostly a first lien portfolio over time could we increased that a little bit I think the answer to that is yes, but at the moment.
We are sick into kind of what we've said and give them I don't think of mix will skew that much.
But from time to time, if we need to we can go over one but the goal is to stay kind of one in under.
As we look forward.
Got it kind of okay, great well, thanks again for taking my questions.
Absolutely good talking to him.
Thank you. Our next question comes from Bryce Rowe and National Securities. You May proceed with your question.
Thanks, Good morning, and Shelby.
Morning, Bryce how are you.
I'm good.
Couple of questions for you on the.
On the equity sale, obviously fan steel accounted for.
Good chunk of the of the dollars.
For the proceeds and again curious the other other 19.
Equity investments that were sold.
Do they all carry realized or unrealized gains as of 12 31 or was there was there some mix of of gains and losses.
I don't have the list in front of me, but substantially all of them had some birds.
Little bit of unrealized gain in them at Q4.
Maybe there was one or two that more costs, but I have the list. There was only one and that is a very modest loss.
Okay and any any commentary you can give around why those 20 versus the other you. Other 40 that are in the in the portfolio was it one that you guys had kind of targeted to to try to dispose of a portion or was there was there specific interest.
From that that institutional investor.
Sure Great question, I mean, we honestly, we sat down round table and said lets you know.
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Put together a portfolio that we think say very high quality portfolio.
And also accomplishes some of our goals I think it.
In.
So thats those we structured it for the most part.
Clearly there were some conversations.
With the institutional investor.
You know uncertainty names, but at the end of the day, we want to put something together that we thought at a high likelihood of getting done.
We felt really good about and.
So that was the group remains that they also there is there's a limit in situations. Like this is how many names you can put into portfolio, we actually push that limit I think there would go without fewer names and so.
But that's that's kind of how it came together.
Okay.
That's good that's good good color and then.
Next question now that you've got you've got obviously got some proceeds.
That is comment here here recently stocks been weak BDC stocks are weak.
Got plenty of uncertainty around this corona virus situation.
You've got to buy back in place any any thoughts on being acted what that buyback now.
It's a great question prices.
We have been.
Getting close closer and closer to NAV until the last five or six that trading.
And so it's something.
We haven't put a ton of thought into but I have been actually in the last two or three.
What I'd say to be more formal as we have a $5 million share repurchase program in place that was reaffirmed.
In the fourth quarter of last year.
We're obviously mindful of the that the value of our investment portfolio may not always be reflected in our stock price and.
For that reason, we continue to look for ways to enhance shareholder value in this buyback may be one of those ways.
When we evaluate it I just want to highlight we're going to look at the liquidity of our you know we're going to look at our capitalization Relook at our Bank group.
Treatments, our leverage ratio and just make sure we're being prudent but if the opportunity arises and we think it's.
The right thing to do than we clearly are we'll be evaluating.
Excellent that's all for me I appreciate the time.
Thank you good talking to you Bryce.
Thank you and as a reminder to ask a question you wanting to press star one on your telephone one moment. Please.
And I'm not showing any further questions at this time I would now like to turn the call back over to add Ross for any further remarks.
Thank you, Josh Josh and thank you everyone for joining us. This morning, we look forward to speaking with you on our first quarter call in early May 2020.
I have a great day integrate weekend.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
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