Q2 2020 Earnings Call
For joining oaktree strategic income corporations fiscal second quarter 2020 conference call.
Today's conference call is being recorded.
At this time, all participants are in listen only mode, but well be prompted for a question and answer session. Following the prepared remarks.
Now I would like to introduce Michael must achieve up Investor Relations, who will host today's conference call.
Mr must did show you may begin.
Thank you operator, and welcome to Oaktree Strategic income Corporation second fiscal quarter Conference call our earnings release, which we issued this morning and the slide presentation that accompanies this call can be accessed by many investors section of our website at Oaktree strategic income dotcom. Our speakers today are making that was in.
Chief Executive Officer in Chief Investment Officer that 10, Dell, President and Chief operating Officer.
Carlyle Chief Financial Officer and Treasurer.
I'll be happy to take your questions following their prepared remarks.
We began I watch remind you that our comments today will include forward looking statements, reflecting our current views with respect to among other things a future operating results financial performance and actual results could differ materially from those implied or expressed in forward looking statements.
Please refer to our assay filings for a discussion of these factors, we undertake no duty to update or revise any forward looking statements.
Like to remind you that nothing on this call constitutes an offer to sell or solicitation of an offer to purchase any interest in any oaktree funds.
Investors know there she got that Oaktree strategic income news at the Investor section of its corporate website turned out to real information the company encourages investors the media and others to review the information that a chairs and its corporate website.
I'll now turn the call over to Matt.
Thank you, Mike and welcome everyone to our fiscal second quarter earnings Conference call. We appreciate your interest Oh see outside.
Hello, everyone listening is safe and good health, we understand that these are challenging an unprecedented times I wish to extend our since your thoughts to those impacted by the cope with 19 virus want to assure you that oaktree and by extension Oh C. S. I, that's taken several measures keeps employees safe and business Fox.
<unk> operational.
Okay has implemented a firm wide business continuity plan.
Operating successfully as a virtual company after seamlessly transitioning to a remote working environment in mid March we're capitalizing on Oaktrees first rate technology platform, and our fully operational and well positioned to safely and effectively manage the portfolio for the duration of this public health crisis.
As you've heard US discussed many times, we have defensively positioned oh see a size portfolio over the last two and a half years, what the knowledge that we were in the late innings or the credit cycle. We would never have imagined that a global health crisis would serve as the catalyst for the in the that cycle.
Net investment income for the second quarter was 15 cents per share down a penny from the prior quarter. The decline was primarily due to lower lie bore and a restructuring that we implemented in the glick JV, which Matt will discuss in more detail in a few minutes. Additionally in lights as a lower investment income.
Oaktree fully way incentive fee for the second quarter.
We entered the second quarter with nearly all of our debt investments at the top of the capital structure, a very small number of noncore holdings remaining and none of our holdings I'm not a cool however, the market environment grew challenging in March and our portfolio was gonna be onto the market disruption of volatility that occurred across risk assets.
Causing their valuation that deteriorate with historic speed.
As a result, we reported second quarter NAV per share of $7 in 17 cents down from $9. It's 71 cents per share in the previous quarter.
Over the past one half years that we've been managing O C. A side, we've found attractive relative value opportunities in publicly traded liquid debt securities and as a result, our exposure to these types of investments has been higher than that of a typical BDC.
Well, we generally invest with the expectation there. That's that's will be held to maturity. One of the benefits have you liquid that investments is that allows us to actively manage risk in the portfolio and move in and out of positions. When we believe it is off the ball one drawback to this active badgered approach is that our portfolio is notably impacted by Mark.
To market volatility as we experienced in the March quarter.
Following the sharp price declines and the leverage loan a bond markets, resulting from the pandemic the price for liquid that investments declined 13% during the March quarter, which impacted NAV by $50 billion or $1.69 per share.
Another driver of the decline in Dav during the quarter was Oh see a size investments and the Glick JV as a reminder, the joint venture primarily in fast and liquid first lien loans and it utilizes leverage to increase its investment capacity the JV underlying portfolio experienced unlevered mark to market price declines.
A 14% in March and when factoring leverage which was 1.6 times at December 31st Oh see outsized investment the JV declined by $16 million a 30% during the March quarter.
Following the broader credit market rally in April we have experienced some recovery in the prices of our liquid that investments, which rebounded by approximately 3% during the month of April.
As a result of the uncertain environment do the pandemic. The recent decline in LIBOR and our desire to be more cautious the board decided to reduce our devoted to 12.5 cents per share. We believed that this reduction is prudent and will help oh see aside to navigate the current environment.
Importantly, we have liquidity to meet existing funding me and continue to Opportunistically invest.
After the volatility in March we were under Levered relative to our target range. We also continue to receive support from our lenders and in late March we amended our credit facility with Deutsche Bank to extend the maturity date.
Actively invested during the quarter, particularly in March when the markets dislocated.
No investment commitments totaled $94 million, all of which were first lien loans.
We continue to evaluate opportunities in our pipeline and selectively deploy capital. We have continued to opportunistically invest post quarter end. It as result of our ability to invest alongside other oaktree funds. We believed that we will participate in additional opportunities going forward.
Well the market continues to evolve and it's difficult to determine the timeframe and ultimate impact and Koeppen 19, we're committed to proactively investing in managing risk and situations that may arise in our portfolio with that I'll now turn the call over the army.
Thanks, Matt Hello, everyone.
Before I share or view on the overall market environment I'd like to amplify Matt opening message, we hope everyone listening is healthy and managing well through this challenging period.
The unprecedented event that slowed economic activity in March Royal markets businesses and daily life for people around the globe fallout from the Pandemics rose more than a quarter of the U.S. economy.
Investor sentiment soured as macroeconomic conditions grew weaker risk assets in both equity and fixed income markets sold off quickly in March I made worries about business closures spiking unemployment rate and expectations for Steve GDB contraction.
Liquid credit markets sold off dramatically as the high yield bond in the leverage loan markets were about were both down over 12% for the March quarter as measured by their most widely followed indices as Matt noted this weighed on our portfolio and caused the southern downward pressure on or an AB.
Extraordinary fiscal and monetary stimulus actions, however, since provided equity to boost and looked at some credit sectors from their lowest points. As a result, we experienced some recovery in prices of our liquid debt investments through the end of April.
That said the pandemic has not run its course and the timing of recovery remains unknown.
Sustained volatility in the liquid credit markets also continues to keep deal activity in private credit and direct lending relatively light.
M&A activity is essentially on hold and we believe that most of the investment opportunities. In this segment of the market will be highly structured financing involving businesses that are in need of liquidity was that are seeking to bolster their balance sheets. This is especially apparent in the non sponsored space, where traditional capital market avenues may not be available to certain borrowers.
Now turning to the overall portfolio.
We're generally confident the quality of our portfolio given its defensive posture prior to the pandemic. The portfolio consists predominantly a first lien positions to larger more diverse companies that we believe can bridge the gap to recovery.
However market pressures have affected companies within the portfolio and we're closely monitoring all of our positions or analysts are carefully tracking each credit speaking with management teams private equity sponsors industry experts and advisors.
Fortunately, we have mostly avoided significant levels of holdings and industries that are facing challenges as we haven't steadman lending to companies that we believe operate and less cyclical or structurally growing industries.
Our largest concentrations are in software information technology services, and commercial services and supplies.
[noise] energy was limited to 5.1% of the portfolio at fair value at quarter end three portfolio companies. The bulk of our current holdings are in large diversified businesses operating in the midstream and refinery sectors, which we believe have limited downside due to strong structural protect and significant asset coverage and generally low come.
Why did you risk.
Leisure and entertainment positions collectively accounted for approximately 3.4% of the total portfolio at fair value at March 30 Onest.
Turning now to investment activity.
The second quarter was strong overall with the $94 million of new investment commitments as Matt noted.
These new investments, we're diversified across 27 borrowers operating in 20 different industries and all were first lien loans.
In January and February our originations were marked by mostly private we placed club transactions some of which are highlighted on our last earnings call.
As the volatility took hold in March we became more active in the public markets via our trading desk and made opportunistic purchases across the primary and secondary markets in industries, such as health care pharma infrastructure and telecom.
In total we deployed $31 million in the secondary market during the month of March.
While we are maintaining modest overall exposure to virus impacted sectors. We have identified some unique highly selective opportunities in these industries with very attractive risk reward profile a case in point is our recent investment in air Bnb.
Oh, so yes, I was allocated $5 million of a $120 million pre investment in a 1 billion dollar first lien club transaction to air being beat the platform that connects travelers with property owners for bookings.
The company decided to bolster liquidity to provide a cushion as a result of coated.
The transaction price at 97, and Uh Huh with a LIBOR plus 750 coupon has a very good structure, including two year call protection.
While this business is of course under near term pressure, we believe the company's best in class platform popularity and strong growth profile prior to the pandemic provided a solid foundation for recovery would travel reserves.
We believe the coming weeks and months will provide those he aside with additional opportunities in both public and private investments.
Now I will turn the call over to mill to discuss our financial results in more detail.
Thank you Arlon.
Net investment income in the second quarter was four point sixmillion or 15 cents per share.
This is compared to 4.7 billion.
Or 16 cents per share in the previous quarter.
The slight decline was due to lower investment income and partially offset by lower <unk> expenses.
Total investment income was lower quarter over quarter, mainly due to the restructuring that we implemented at the Glick JV.
Which resulted in placing our subordinated note investment in the partnership on non accrual.
In addition investment income was negatively impacted by downward pressure on the average yield of our floating rate debt investments, mainly due to continued decreases in LIBOR.
To expand on the actions taken out to Glick JV.
We restructured our subordinated notes in order to realign the vehicle for current market conditions.
As part of this we extended the maturity date of the notes to October 2028.
Reduce the spread forensics and a half percent before and a half person.
And we elected to forgo payment of the April 15th 2020, and July 15th 2020 scheduled interest payments.
On the last 0.4 going this interest allows us to keep the JV cash base net investment income related to the March and June quarters in the JV to support NAV.
As a result, we did not recognize income from the JV during the March quarter and placed our $38 million subordinated note on nonaccrual status at quarter end.
The JV represented Oh sheer size only nonaccrual.
Net expenses for the quarter totaled 5.8 million down 1.1 million from the previous quarter.
The decline was due to lower incentive fees, which were down 721000 on a gross basis and were further reduced by 272000 permit waiver of second quarter fees.
Interest expense was up slightly due to modestly higher average borrowings.
Partially offset by lower average interest rate paid on those borrowings due to lower LIBOR.
Turning to credit quality, excluding the glick JV all of our portfolio companies made their scheduled interest payments during the quarter.
With the exception of two companies, representing 20 million a fair value.
That modified their interest payments to pick in order to preserve liquidity.
Moving to the balance sheet as Matt noted our leverage ratio increased to 1.55 times from 1.07 times at December 31st.
After taking into account nearly 22 million an unrestricted cash on our balance sheet at quarter end, our net leverage ratio was 1.44 types.
We funded 101 million in investments and received 84 million in pay option exits during the quarter.
While net debt only increased by approximately 9 million our leverage ratio was driven higher during the quarter, mainly due to the reduction in our navy.
As of March 31st total debt outstanding was 327 million and had a weighted average interest rate of 3.8%.
Which is down from 4% at December 31st due to lower library.
At quarter end, we had total liquidity of approximately 100 million.
Including 22 million of unrestricted cash.
And $78 million undrawn capacity on our revolving credit facilities.
Our total liquidity to April Thirtyth remained at approximately 109 million.
As Matt said in March we amended our credit facility with Deutsche Bank, extending the revolving period and maturity date and reducing the total size of the facility to 200 million.
Now I will turn the call back over to Matt.
Thank you Michelle we entered this crisis in solid financial shape.
The defensive repositioning we carried out over the last two and a half years has largely been completed.
Given the significant size and scale of Oaktrees investment platform, we are well positioned to invest in this market environment as opportunistic special situation credit lending is a hallmark of oak trees investment approach. However, we will remain patient disciplined and defensive in our deployment of capital.
As we believe there, albeit an increasing number of opportunity that will arise overtime as the crisis persist and the economic fall out continues that said, we will continue to focus on investments at the top of the capital structure.
While we are maintaining our leverage target of 1.2 tied to 1.6 times, we expect to keep our current net leverage ratio near where it was at quarter end.
As we invest the new opportunities, we will likely rotate out of our existing positions rather than increase overall leverage we believe that this is prudent given the uncertainty over the duration of the current economic pull back in.
In conclusion, we remain confident that we will be able to manage through any challenges that may arise in our portfolio as well as identified new attractive risk adjusted investment opportunities.
Thank you for joining us on todays call for your continued interest in L.C.S. <unk> with that we're happy to take your questions. Operator. Please open the line.
We will now begin the question answer session to ask a question you May Press Star then one on your Touchtone phone.
If you're using a speaker phone we ask that you. Please pick up your hands I prefer pressing the keys.
To withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble the roster.
[noise].
Once again, if you'd like to ask a question. Please press Star then one.
And our first question comes from John Glass or of J M. P. Capital. Please go ahead.
Good morning high arm and how are you.
Good how are you a couple of questions for so are there or any of the borrowers. If you look at book for the directional businesses right. Now do you have any borrowers who are basically zero zero revenue businesses or.
You know some of you want to be restaurants, but you know sort of that as an example, do you have any any companies that really are doing no business right now.
You do have a couple you know we have a business called circus tricks that does its kind of like indoor trampoline parks.
Actually that's impacted I would say by and large though our portfolio.
It is.
As I have more moderate or low impact from growing of ours, but there certainly are something like maybe 10% of 10% to 20% of the portfolio that has more direct impact.
But very few that I can think of that or virtually zero businesses because.
We really haven't been in retail or restaurants, I'm. So it's not going to be material and it is that trampoline business, a private equity sponsor business.
It is its Ah I I get a school idea, it's Matt Palladium equity partners and there is lots of their yep. Okay.
Okay and then what is the in two questions related to the JV one is.
I Didnt see you MCU, the unfunded commitment amount and GLIC and then the second question would be if you look at your the the leverage in GLIC.
Are you, including that in your total leverage number.
'cause it seems like prior we were looking at like one times Levered, but if GLIC is you know one of the have times or 1.6 times.
His was that included in your your total leverage number because it's a it's off balance sheet. It's not included.
Yes.
We did it started its not included in is the equity investment in the JV as an asset of the BDC.
But the leverage of the of the JV is not consolidated the BDC.
Okay, and you know what the unfunded commitments or in the JV.
It's very small it's around 1 billion okay great.
Thank you.
Yeah.
You have any other questions John.
Because I don't want to take <unk> I do have a few but if anyone else those questions I should go ahead.
But once you go ahead.
When you when you said the portfolio is you're up 3% since since March is that on a a is that the portfolio itself or is that any the you know if you took 3% times the leverage or should we just look at 3%.
It's all the assets not not a navy.
Okay. So if you're so we can say your four or five if you.
Include both the leverage.
It's probably about right, okay closer to five four yeah. Okay, and then do you own any it's all your publicly traded stuff in the JV or do a publicly traded stuff outside of that.
Oh, it's in the JV and outside of that added about at about 70% of RBC portfolio is is publicly quoted so it's a very high percentage of a publicly traded a troubled.
Okay and my last question is so you you extended up credit facility, one told the fall and one till next year.
September 30, ophuls, probably sneak up on us rather quickly. So you anticipate any issues extending that further.
Yeah, I mean, I want to have no yeah. Yeah go ahead, and I'm, sorry, but again.
That the them.
No. It's the reinvestment period that September the maturity is is 2021 and then 2023.
So the maturities are there I mean, we've had we continue adding could do you have.
That being a very strong relations with.
Oh, each entity, which had the too you know to lead banks and its one advantage being part of Oak tree that you know that this is the kind of a firm wide relationship. So.
We don't anticipate you know any any issues with that those.
Sure to date to longer than than you then you referenced got it okay and purchase I mean, just its more bose.
Psychological question I mean.
You know people invest CNO C of O I generally we're looking at it is a more conservative vehicles and the no CSL and yet you don't see all actually held up better.
So.
I guess, because it's it's due to the leverage and the JV. So you know how have you looked at this going forward from if it turns out you know that's can sort of portfolio is actually maybe not as conservatism as we thought.
So its a few things we want is leverages higher and Oh shift side, that's certainly piece or the the assets are almost entirely first lien, though as opposed to those CSL, whereas a considerable portion of second lien and in other securities.
As well as a larger portion of the portfolio that is non core essentially inherited from the prior manager.
So that's why I am I. The statement is true that it was he aside is a is the portfolio that is positioned in a way to have sort of less downside I'm just given that the makeup of the underlying assets. However.
The leverage being higher as well as larger portion of that portfolio being a publicly traded and quoted.
You know the impact that that has on mark's quarter to quarter or month to month or that you suffer the the impact on down on the more real time basis as opposed to in a largely private credit portfolio. The the various valuation processes I take place ER morphine.
Because the actual fundamental performance or judgment round actual fundamental performance rather than a mark to market, you know anticipation and whatever the market to anticipate stressed or distressed and therefore, the trade down in advance of I'm seeing the actual performance.
So you actually get a pull forward of the impact of Kuroda virus into the marks sooner than in a private credit portfolio that may not need to be more because of the backward looking performance is.
It's not reflective of future performance so.
It's a little I would say that's where the disconnect is between.
Portfolio that is largely private.
We're in liquid versus one that is predominantly a publicly traded I think at the end of the day the economic impact of these names whether public or private aren't gonna be meaningfully different it within a particular sector.
But but the timing of experiencing those marks a maybe different.
Great. Thank you.
Any other questions.
Our next question is from Jim Young of West family investments. Please go ahead.
Yeah, how you'd mentioned that the.
At the end of March triggered Monday April that.
[laughter] tighten and they're up by about 3% about five.
Oh Saturday. The question is no no one can they tried to lead in the prepared and we've seen in America me.
And you get [laughter] everything further tightening in the bond.
And the like or.
They should have been flattish. Thank you.
Yeah, I don't have the numbers in front of me, but I you know just generally speaking in the in the markets that we are most dr. than it's been relatively flat. It's only been a few days, but it's been relatively flat.
All right. Thank you.
[laughter].
Our next question is from Chris guest at <unk>, a private Investor. Please go ahead.
Hey, Thank you and a clear to hear everybody's well.
Just one question can you give any guidance on what do we take for the quick sub notes to go back on accrual status is it a retention as capital rebound to market values or some combination or or something else.
Yes.
Yeah sure. This is the this is a belt Mel Carlisle.
Or current plan is to retain E cash net investment income for a couple of quarters.
And in connection with the October payment to a place it back on accrual.
Now given the uncertainty around the pandemic.
That may not happen, but that's our current plan.
Okay understood and thanks for that additional color that that answers my question. Thank you.
There are no further questions Mr. most did you.
Thank you again for joining us for earnings conference call. A replay of this call will be available for 30 days and Oaktree strategic incomes web site, and an investor section or by dialing 87734475 to nine for U.S. collars or one for one to 317 008 eat for.
Non U.S. collars, but the replay access code 101 for 1938, beginning approximately one hour after this broadcast.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
[noise].