Q1 2020 Earnings Call
[music].
Greetings welcome to the Bain capital, especially specialty finance first quarter 20, <unk> earnings conference call. At this time all participants are any of this and we know a question and answer session will follow the formal presentation.
Once you require operator assistance during the conference. Please press Star Zero on your telephone keypad. Please note. This conference is being recorded I'll now turn the conference over to your Whos got her insight you may begin.
Thanks to Malia good morning, everyone and welcome to the Dane Capital Specialty Finance conference call for the first quarter of 2020.
On Monday after market close this week, we issued our earnings press release, an investor presentation of our quarterly results a copy of which is available on Bain capital specialty finance Investor Relations website.
Following our remarks today, we will hold a question and answer session for analysts and investors.
This call is being webcast a replay will be available on our website.
This call and the webcast our property of Bain capital specialty finance and any unauthorized broadcast in any form is strictly prohibited.
Any forward looking statements made today do not guarantee future performance and actual results may differ materially.
These statements are based on current management expectations, which include risks and uncertainties, which are identified in the risk factor section of our form 10-Q that could cause actual results to differ materially from those indicated.
Bain capital specialty finance assumes no obligation to update any forward looking statements at this time unless required to do so by law.
Lastly, past performance is not guarantee future results and with that I'll turn the call over to our President and CEO Michael you all.
Driven by the findings of Undrawn investment commitments that we provided to existing portfolio companies alongside term lungs in the form of revolving credit and delay draw facilities.
We received unprecedented amounts of draw requests from these portfolio companies as many of them sought to preserve excess cash as a defensive measure in light of an uncertain market environment.
We met all of these bar request in a timely fashion and amended our credit facilities to allow for the inclusion of revolvers as collateral.
Furthermore, Adam in abundance of caution are adviser provided additional support to the company to the establishment of a 50 million dollar unsecured revolving credit facility maturing and 2023.
We believe this is evidence of being capitals commitment to our success and provide the tangible example of the resources that can bring to the company.
At the end of the first quarter, we had sufficient liquidity consisting of cash and under on credit facility capacity of approximately $211 million against all remaining $91 million of Undrawn investment commitments.
Representing coverage of well over two times.
We seek to capitalize the company's balance sheet and prudent manner, consisting of appropriate equity in debt capital based on the underlying a risk profile of our assets within the portfolio.
As a proportion of firstly in a risk within that portfolio increased in recent quarters, we've been operating at the outer band of our target leverage range.
However, our new investment fundings together with the decrease in nap during the quarter caused the company's ending debt to equity ratio to be higher than our target leverage range for the company get between one and one and a half times.
Specifically, we ended the first quarter at 1.86 times gross and 1.78 times net of cash respectively.
As many of our shareholders no our investment philosophies rooted in being capitals heritage ever disciplined and thoughtful approach to investing.
Consistent with this approach we're focused on safeguarding the stockholder capital and trusted to us.
Well, we believe our investment portfolios defense will be positioned the current economic environment remains uncertain, including the duration of the economic shut down in its full impact on the economy.
After <unk> careful consideration with P.C.S.S. board of directors, we announced or rights offering to our stockholders.
Believe strengthening D.C.S.S. balance sheet as a prudent unnecessary course of action in the uncertain market environment in which we are operating as it will allow us to maximize long-term stockholder value.
The capital raised in the rights offering will allow B.C.S.F. to strengthen its balance sheet at the new equity capital will initially be used to do Labrador structure in order to continue to maintain inappropriate debt to equity ratio when the challenging environment.
Oh, the company's currently in compliance with his dad requirements under its existing facilities and regulatory requirements. The additional capital will provide for greater cushion and increased flexibility.
Furthermore, we believe accompany we'll have a stronger balance sheet to be able to support existing portfolio companies and take advantage of new opportunistic investments, resulting from this period of extreme market volatility and this location.
We strive to structure the rights offering to be shareholder friendly as possible.
Been structured as a one for for offering that is one share a common stock for every four rights held <unk>.
That's the size of this offering minimizes dilution impact for stock holders, while it provide sufficient liquidity for the company to navigate he's on certain times.
We have also structured the rights to be transferable, that's providing some value to shareholders, who were unable or unwilling to participate me offering.
Total gross proceeds are estimated to be approximately $120 million based on current subscription price assumptions.
Oh advisors also providing support for this offering as being capitalists affiliates of indicated that they intend to oversubscribe and to invest up to $50 million pursuant to the oversubscription privilege.
While choosing to sell shares below map is it difficult decision, we take our responsibility to shareholders by exercising this option with the most care and responsibility.
We believe this was the prudent course of action for the company to take in light of its leverage profile and as a means to properly equipped the company to navigate uncertain volatile periods ahead.
Subsequent to quarter and our board declared a second quarter dividend distribution equal to 41 cents per share based on the current number of shares outstanding for record day shareholders as of June 30th 2020.
If all rights or exercise and approximately 12.9 million.
Shares are common soccer issued pursuant to this offering this will be adjusted to 34 cents per share.
This is intended to maintain our historical distribution rate of approximately 8% annualized unbook value.
Well now turn the call over to Mike Boyle, Vice President and treasure to walk through our investment portfolio in greater detail.
Thanks, Mike Good morning, everyone, Oh kick it off with more detail on our investment activity quarter, and then provide an update on our investments in credit quality Cross.
New findings are $276 million 52 portfolio companies operating across 23 different industry.
Mike highlighted earlier in the call the majority burn new investment funding driven by on drawn commit to existing portfolio companies.
The other portion included commitments for new company that refunded during the first half of the first or.
Bill and repayment activity totaled $181 million.
Driven by full repayment from three portfolio companies.
As of March 31st they fair value burned up or Bolio with $2.5 billion weighted average <unk>, well new yield any amortized pot with 7.3%.
Compared to 7.8% and the prior quarter decrease was primarily driven by the decline in library that occurred.
As we have discussed with their shareholders. During protocols you been this new York portfolio with the late cycle mentality.
We believe the attribute the investment portfolio that we put into place over the past several years provide the company with knowledge pudding with Dan.
Central market volatility.
First we have focused on first dollar Reds within our investment portfolio and then put that on the top of the capital structure maximize recovery value in the event and then potential default.
88 per cent it'd be investment portfolio is invested in its first lean debt, including 1% and the first lean left out that.
We have not been investing in highly leveraged structure as demonstrated by the median leverage by 0.2 times across the portfolio last dollar attachment.
<unk> <unk> highly diversified that accompanied operating intensive industries.
As of March 31st the company and 108 portfolio company, but the top 10 investments representing 24% the total portfolio.
As a result, no single investments are hundred significant impact on the company overall.
Our largest industries are comprised of durable sectors, such as technology, aerospace and defense and healthcare pharmaceutical.
In particular within within Aerospace and defense, we have focused on two main vertical.
I haven't defense contractors in business isn't the aviation maintenance and supply chain. For example, one portfolio investment the first lean loan to an engine repairing but.
Plane travel and certainly come down in recent months, we anticipate they continued focused on servicing existing we will provide stability to this company's overall operating.
<unk>, although we believe we have loads those roots of cyclical industry. Currently most impacted by code in 19, such an energy consumer transportation hotel gaming and leisure and retail.
Largest it'd be it'd be single industry exposures within our portfolio is less than 3%.
Next we have focused on investing in debt structures with strong loan documentation and voting control. So we can be in a stronger position to drive favorable outcome.
Period of just <unk>.
In particular, we have focused on ensuring our loan agreements had maintenance and financial Covenant protection, which help but I'd done by issues early on and allowed the team to take action.
92% of our dented that may have financial coming in.
92% of our done about.
We have affected buildings control.
Lastly, we in favor private equity sponsored back.
Within the core of the middle market segment that neither are more established that accompanied with diversified rubbed in east Green and multiple groups leverage the bill.
We have largely border avoided smaller businesses they tend to be less resilient during economic downturn.
The meeting you bit the about portfolio companies, it's $51 million.
Focus on sponsor back to the company has been driven by the professional management resources oversight and alignment necessary to guide them through various macroeconomic.
Turning to underline company performing well, we believe our overall investment portfolio with on solid footing there were certain companies within our portfolio that have a segment of their end market being more significantly impacted than others. As a result of Tobin 19.
In order to provide transparently to our investors regarding these increased risk factors employed an internal risk rating system across our portfolio.
This framework taken into consideration individual portfolio company performing business and industry trends in various factors such as compliance meant that coming in and started a loan payment due.
As of March 31st 2020.
86.3% the investment portfolio third value had an internal risk rating two or lower.
Represents an indication that the investment in performing as expected or above expectation relative to the time a bar underwriting.
Well, 0.6% the investment portfolio was categorized as a risk rating three indicating that the investment is performing below or underwriting expectation and there may be concerned about the port below accompanied performance weren't trends in the industry.
At this point the vast majority of this is not driven by underlying fundamental performing portfolio company result, but rather are ongoing proactive analysis.
The impact of Kobe 19.
On each of our portfolio companies.
1.1% of the total investment portfolio categorized as a restraining order in which the investments performing materially below or underwriting expectations.
Now I will speak to our fair share evaluation process in greater detail. During this call, but we believe our failed value marking approach reflect the increased risk within our investment portfolio based on the information we have to date.
The weighted average fair value right on portfolio in risk rating, one and two was 96% par as compared to 82 on R. rating three and four investment.
The March 31st 2022 portfolio companies were on non accrual representing 1.1% of the total investment portfolio for about.
Although their portfolio companies made their schedule interest in principle payments as expected for the period ended March 31st 2020.
Valuable now provide a more detailed financial repeat.
Thank you might think that morning, everyone. I'll start there. If you don't have first corner 20 tiny resolve the higher income statement.
How long are not spending time with 51 and a half million dollars.
On Saturday March 31st 2020, and packet 54.8, $9 93, my 10th of December 31st 2019.
But <unk>, primarily driven by decreasing <unk>, mainly to decrease in library over the corner.
Total expensive for that corner right $29 million in the first corner as compared to 33 and a half million dollars.
Decrease it didn't now and centipede assets quite big that they intend to see.
<unk>.
Yeah.
Against paying sent them not investment income credit purposes of cats or anything attentively.
We believe that's provided that the proper alignment with our shareholders.
That investment income for the corner with 22, and a half million dollars or 44 cents per share at compared to $21.3 million or 41, 10th of fresh air for the path right now.
[noise] given the large movement in focus on valuations is quite aren't we wanted to spend a few minutes highlight evaluation appendage <unk>.
<unk>.
You know, making framework consists of a multi layer evaluation.
Including internal and external or if you buy our entire.
Independent valuation fan and ultimately <unk> okay.
<unk> men are which market quotations.
<unk> <unk> I genuinely valued at such market criterion, However, given our investment strategy. It primarily focused on directly or engineering, Lance hi that middle market company and maturity of our investments.
Liquid investments are which market quotation I'm not available.
Our approach to determine value.
Utilize this area valuation technique that tested this kind of cash son assets Palo company mouth about 10 o'clock airline out that.
100 per cent of our liquid investments, Eric <unk> by an independent valuation friend each corner.
This corner.
Value Mac.
As a percentage of notion out on our investment portfolio decline from 99 as in December 31st 2019 94.6.
As of March 31st 2020.
Largely attributed to spread widening across our investment portfolio given the increase in risk premium Wow awesome factoring in elevated risk factors around certain portfolio company that may be more impact. It then others as a result that have at 19.
During the three months ended March 31st 2020 accompany hadn't that realize that I didn't realize laughing at $126.9 million.
Driven by unrealized appreciation across the fair value companies at the company.
Gap last per share for three months ended March 31st 20 $22.02 per share.
And moving over to our balance sheet as if March 31st I investment portfolio at fair value total two and a half a million dollars total assets of $2.6 million.
Hold on that at that were $900 million as of March 31st.
<unk> share with $17 and 29 fan.
19 dive in 72 cats at the end of the fourth quarter, representing a 12% decline quarter of an acquaintance.
Before going into outstanding debts amendments at quarter, and I would like to spend a few minutes kind of financing strategy.
First that's making loud mentioned earlier I risk management framework dictate the appropriate lab, while laughing that cap it off that the portfolio Ken with sand.
Within aren't that capital structure is we're focused on having diversified sources of funding.
We take into consideration number factors, including the financial flexibility within each structure, the tournament that that and the seconds versus floating nature various functions.
I liability structure had the matched funding profile as we have floating rate liability.
But flooding rate assets and hear it long date, immaturity and Medicaid refinancing man.
The maturity is on our existing facilities range from October 2022, 2031.
The company currently utilizing two main structure that that capital.
First approximately 46% of our principle that outstanding as of March 31st with funded with the L.S. securitization structure.
These were purpose supposed structures that were put into place because of the terrible nature.
Period the volatility.
These are non mark to market Pixelate at the marking mechanism is driven by private rating based upon fundamental company performance.
Or other main source of debt capital interest take care of bilateral facility. So I spent bank capital longstanding relationship, but very financial institution.
We chose to put in place bilateral agreements.
We are able to directly negotiate with our land there as opposed to having to go through a broader syndicate.
Marking mechanism on needs facility, hi, subject evaluation adjustment event, and we are required to Maine maintain a certain level Atlanta value.
As of March 31st 2020, the company with in compliance at all times under it secured credit facility.
During the quarterly made several amendments to both of our security facility first in January we amended I'd be yes that revolving credit facility.
<unk> area covenants, allowing have to better maximize topic already in addition, we amended R.J.P. Morgan credibility to improve pricing and extend the maturity data January 2025.
It's my turn you off highlighted earlier, we amended our security picture facilities in March two among other things provide for enhanced flexibility to file against revolvers and delayed profitability given to increase the amount of activity any facility during the quarter.
During the month of my actually entered into a 50 million dollar unsecured revolving credit facility muttering in March 2023 with hired by that.
Evolving advisor loan accrued interest that they apply cool federal rate as of March 31st this rate with 1.59%.
As of March 31st to be a total principles that outstanding at $1.7 billion comprised of it.
<unk>.
Three types that facility it that this guy.
For the three months that that March 31st 2020, the weighted average into straight on that outstanding with 4.1% as compared to 4.5% for the three months ended December 31st 2019.
Debt to equity ratio with 1.86 time, they end up keyuan compared to 1.55 times at the end up to four.
And that leverage ratio, which represents principle that outstanding less cash with 1.78 times at the end of Keyuan as compared to 1.48 times at the end up to four.
As of March 31st 2020, a company had cash and cash equivalent at four in cache of $55.8 million and $155.1 million at the aggregate capacity under its credit facility.
With that I will turn the call back over to Mike for closing remarks.
[noise] excelling in.
In summary, we are living in an unprecedented time, well a number of positive signs of emerging recently and different geography is around the world, we as an advisor and as a management team have invested together through a number of cycles and remain vigilant about protecting shareholder capital and D.C.I. stuff.
We believe we have curated local portfolio that will withstand current pressure as well and we were taking necessary steps such as the previously announced rights offering to ensure the fun structures that only able to withstand further unexpected turbulence properly situated to capitalize on new investment opportunities still to come.
Thank you for your support in this endeavor.
Operator, please open the line for questions.
This time will be conducting a question and answer session.
Back to ask a question. Please crestar one on your cool Keith that a confirmation tone will indicate your mind is in the question to you.
<unk> start to if you like to move your question from the cube.
<unk> equipment, it may be necessary to pick up your hands. It before person just aren't you.
I'm only please while he pulled questions.
Our first question is from Chris York from D.N.P. Securities. Please go see what's your question.
Good morning, guys and thanks for taking my questions.
Mike just a question on the right South Korean notice the findings <unk> this week.
Change the term of the upper income on non transferable to a trend verbal offering. So we might have a change can you let it snowed a reason.
For that and then.
Given that you had the option of coming out to the market with the transferable pretty much.
Sure. So yeah, when we first file back in March.
Yeah, there's a lot of on certainly you know in the World Channel you didn't know why are we really what what's going on I don't think any of US did if things are so I settled down a little bit here in terms of markets in terms of doing the work our portfolio and ensuring Ah we fully understand where it stands what evaluations come out et cetera. So when we first files, we didn't have a shelf in place so we needed to.
Just get something to the F.C.C.. So we factor we want with it with a worst case scenario, where we filed and it was bracketed yeah that that the one to two which it would surely some folks like you picked up on but it was really just a place holder to see yeah that that sort of see some more cards turnover and try to figure out what I'm out.
We felt like we needed to raise things have settled down here in the second quarter, we realized that one of the four would actually provide us with sufficient liquidity and d. leveraging tool to achieve that goal, while minimizing sure wouldn't delusion as it turns out if you if anything that is a bigger than the one for three you actually can.
For transferable rights, so yeah, when the one to two frame what we actually couldn't do it now that we're doing one to four actually allowed to with it's a regulatory issue you're allowed to issue transfer rights as well. So we figured yeah that would also make it a bit more shareholder friendly as well.
Okay that color helps.
Follow up question on capital Planning is you know why did you decide to issue the transferable rights and look straight common equity because you are 100 few P.D.C. to to receive shareholder approval issues stock below now and then historical rates offerings from industry have tended to be a little bit more expensive.
Even including P. it's.
2009.
Yeah. So yeah. The the the theory with their rights offering was since we're going to be issue blown out of here. We thought of your best to actually allow existing shareholders to participate in that so if we just issued shares.
Yeah, when applied to play spent or or just had a bank place them somewhere.
You wouldn't have been able to offer that that opportunity to existing shareholders automatically plus gives them. The actual transfer rate, which may have some value if they choose to sell that instead and so they get it was more of a matter of yeah, we understand Camille delude of even though we could do with another way you know let's go ahead.
Through a rice offering specifically.
<unk>.
It does.
A last question for me many investors know you have some aircraft leasing investments in the portfolio marketing is heavily impacted by like covert here today, Alternatively, though there seems to be a lot of airlines in need of liquidity. So would you want to increase your investment.
Closure to that industry and then if that is the case or sale leaseback transit transactions for airlines, an area, where you'd want to be more active.
Sure so about 2% of the portfolio currently using Ah aircraft leasing we we do you think it is an interesting there's interest and it's an interesting investment opportunity and will continue to be particularly as we see the world <unk>.
From the coated crisis.
We've been comfortable with our existing into.
And the castle profiles of those investment remains intact.
I think we'll we'll <unk>, we'll wait to see exactly how the the economy turns around and how travel turns around the back of this crisis before making incremental investment there, but we are we use that are positioning in about 2% is a is a meaningful underweight today and I think.
We'll be able to take that positioning up to the extent, we see interesting opportunities mediation they've been going forward.
Right. That's it for me I Hope you guys are well.
Thanks, Chris.
Yeah.
And our next question is from and she didn't know rich from C.D. pleased to see what's your question.
Thanks.
Somebody you talk a little bit about you you mentioned [noise].
Any of your industries being kind of.
Good a bit defensive.
There's.
It's still some that you can stand out to be hmm seem to be a little bit more cyclical.
Aerospace and defense is a big 12% on the portfolio, maybe you could talk a little bit about.
Oh.
Do that for for me and how that the more more.
Non Super Cool, you have construction and building, which slip like 4% of the portfolio. So you have you have a few these in I think of issues in the past but.
<unk>.
Trying to understand how be easier or defensive industries.
You think they're going to you to perform through this this tough time.
Sure Thanks for the questionnaire.
So I guess I'd start by saying highlighting that we have an average either about $50 million in our portfolio and that means that any company that in these industries has a diversified set of revenue stream and also has multiple levers to to pull from a cost cutting perspective and so.
At a high level I think our focus on the upper segment of the middle market is one way that that we've seen diversification benefits really flow through a flip through our investments.
Aerospace and defense, specifically I highlighted in my in my earlier remarks that we really focus it's in two different buckets, one of which is government contracting work, which we've continued to see the ability in the second which.
Manufacturers and manufacturers and suppliers, Indeed aviation channel and I highlighted one investment there and an engine.
Engine repair shop, effectively four planes and we've seen that actually hold in quite nicely. During this period as although plane travel has has been reduced there is that continued focus on sort of thing.
As we go through the whole portfolio, we see many of the businesses that are potentially most impacted by this slowdown actually white from flooding from a capitalization standpoint. So one aviation manufacturer was able to raise 100 million dollar incremental.
During that time, which should shore up at liquidity for the year ahead. So as we really look through it's not just an industry biting industry view that we're taking it is also accompanied by company view and that's what resulted in about 12% of our portfolio being put the risk rating three.
Those are whether it's a construction business, whether it's an aviation business. Those are all the company than our portfolio that that we do think has increased risk. We don't think there's capital impairment in that <unk>, but we do you know we do have our teams on on high alert as well as we're working three best treatable.
<unk>.
Okay, So full <unk> and what about the the international piece of your portfolio to how how how are those performing relative to the U.S.
Sure so it'd be they continue to perform reasonably well I would say that the the.
The fact that Europe is opening a little bit sooner than the U.S. has actually driven some stronger trends here in the in the very short term, we actually have none of those investments on our risk rating three or four currently so we are still feeling good about the opportunities abroad and that they do provide solid diversification.
Okay. Thank you.
And we have reached the end to the question and answer session and I will now turn to call back over to my you off hook will close remarks.
Thanks, and thanks to everyone for for drawings I don't recall today, you know certainly if there's any other questions do please reach out.
And we look forward to continue to to work with you in the future.
We want as good day, thanks, a lot.
<unk> Conference and you may just going into line or does time. Thank you for the participation.