Q2 2020 Earnings Call

At this time, all participants R&D listen only mode.

Later, we will conduct a question and answer session and instructions will follow at that time.

If anyone should require assistance during the conference. Please press Star then zero on your Touchtone telephone as a reminder, this conference call is being recorded I would now like to turn the conference over to your host Mr. David Gladstone. Please go ahead, Sir well. Thank you marscher for that nice introduction.

And this is again, David Gladstone, Chairman <unk> quarterly earnings call for Gladstone capital for the quarter Andy.

First 2020.

Thank you all calling in we are always happy to talk to our shareholders and any of the analysts to get all ask us good questions.

Welcome we welcome the opportunity to provide updates on our company and investment portfolio that we have now we'll start off with our general counsel as we always do Michael accounts, the he'll make some statements regarding certain forward looking statements Michael that's David and good morning, everybody thinks report may include forward looking statements under this.

Carries active 1933 in Securities Exchange Act of 1934, including those regarding our future performance. These forward looking statements involve certain risks and uncertainties that are based on our current plans, which we believed to be reasonable no. Many factors may cause our actual results to be materially different from any future results expressed.

Through implied by these forward looking statements, including all risk factors in our forms 10-Q, 10-K, and other documents that we filed with the FCC you find these on the Investor Relations page of our website, which is www dot Gladstone capital Dot com.

You could also sign up for email notification service.

It also find these documents on the Fccs website, which is www dot Pepsi Si Dot GLP now we undertake no obligation to publicly update or revise any of these forward looking statements whether as a result of new information future events or otherwise except as required by law. Today's call is an overview of our results. So we'd ask you.

Review, our press release and form 10-Q issued yesterday for more detailed information again, you can find them on the rest Investor Relations page of our website now with that I'll turn the call over to Gladstone Capital's President Bob market Bob.

Good morning, Thank you Michael.

Thank you all for dialing in this morning, and give me a lot to cover let's get into the summary of the result for Gladstone capital for the quarter ended March 31st 2020.

Originations for the quarter totaled 29.8 million, including a new proprietary second lien investment and add on investments to support acquisitions or growth Capex and these funding did not include any co bid 19 related line drops.

Repayments in proceeds on the quarter totaled 26.4 million included in included the exit of our position in the most you guys come company, which resulted in a realized gain of 2.5 million in meridian, non earning asset which had previously been written off.

Interest income on the quarter declined 500000, or 4% to 11 million compared to the prior quarter with a drop in live war and the movement of one credit to non earning status.

Prepayments in dividend income also decline so total investment income for the quarter was down $700000 to 11.5 million.

Borrowing and administrative costs were largely unchanged on the quarter. However, net management fees declined by 900000 to 1.1 million with the increase in the incentive fee credit, resulting in net investment income of 6.5 million or 21 cents per share on the quarter.

Net assets from operations declined by 27.8 million or 89 cents per share, which included 31.4 million of net unrealized portfolio depreciation on the quarter largely as a result of coal that 19 market just.

Options, which I'll discuss in a moment.

It also included a 3.1 million dollar net realized losses from the exit of MACI in Meridian.

For the period and Navy decline $1.90 cents per share were 13.5% to $6 to 99 cents per share as of March 31st.

[laughter] with respect to the portfolio, we were fortunate that our portfolio diversity and focus on industries, which are generally expected to be more insulated from economic cycles, and our limited exposure to the consumer and retail site services sectors helped us fair reasonably well in the face of code.

The co bid 19 pandemic.

Most of the unrealized appreciation recognized last quarter is that as a result, as a broad market base moving investment yields which negatively impacted all of our debt investments.

And do not necessarily reflect the credit position, where the underlying financial performance of the majority of our portfolio companies.

With that in perspective, let me try to break it down a bit for you.

The Mark increase in benchmark yields can be best measure based on the valuation movement of are performing proprietary credit.

Unaffected by Cobot, 19, which represented unrealized depreciation of 6.1 million on a quarter or roughly 4% of cost.

Broadly syndicated credits were the most severely impacted by the market liquidity and based on dealer quotes are mostly second lien positions were marked down by 5.4 million or 18% of cost.

The coven 19 impacted businesses are relatively diversified and buried in the magnitude the impact and include a couple of businesses such as a restaurant chain a vacation rental company it chemical distribution business and energy brokerage business and.

Childcare learning chain.

These credits in total were marked down by 11.7 million or approximately 9% of cost.

Many of these credits a modestly leveraged senior unitranche loans, which are well supported by the cash flows of the business as well as the Underplaying enterprise valuation and we feel strongly this depreciation will be reversed over time.

Lastly, or the usual watchlist credits, which are undergoing some form of operational management restructuring and these credits represented an incremental approximately $5.5 million of depreciation were 7% of cost. The bulk of these companies are controlled by private equity sponsors who are fully engaged and continuing to provide.

Capital support these businesses.

In total 84% the unrealized depreciation is related to the write down the debt investments and the balance of 5.9 million is associated with the unrealized depreciation of equity investments principally the restructuring of entities and the write down on Fcs resources.

We are continuing to closely monitor our portfolio company to assure they have taken appropriate actions and developed contingency in liquidity plans to manage the evolving challenges posed by cobot 19 to date. The majority of our proprietary investments have been able to qualify for the government paycheck protect.

One program, which will serve to supplement liquidity and mitigate a portion of the near term kobin business direct disruptions.

The asset mix on the quarter shifted slightly with predominantly second lien origination in first lien loan exit reducing the first lien exposure to 48 point, 48% of cost and increasing the second lien exposure similarly to 42% of portfolio and cost.

With respect to our non earning assets during the quarter, we exit our position Meridian and classified our 7.2 million dollar investment in BNP, a wireless engineering contracting business is not earning.

Since he is well positioned to recover from the anticipated uptick in wireless carrier wireless carrier fiveg expenditures and represent 1.7% of the fair market value of our assets.

There are no other nonperforming assets as of the ended the quarter.

Since the ended the quarter, we have closed one sizable second lien investment of 30 million. We're currently working on selling down a portion of this position as well as certain other investments to increase our portfolio granularity and bolster our capacity to redeploy capital given the more favorable credit the pricing terms develop in the marketplace today.

Turning the outlook for the balance of 2020.

Given the current market dislocations and more limited competitive conditions, we're seeing a healthy flow of new new deal opportunities within sectors that fit our growth oriented and recurring cash flow profile at lower leverage and improved pricing terms.

We intend to selectively pursue these opportunity and will proactively manage our available investment capacity in the near term by selectively selling down a portion of these as well as some of our existing position to maintain our granularity and diversity.

Despite the unprecedented challenges of cobot 19, and some of the concerns about the performance of our lower middle market portfolio, we feel our portfolio composition underwriting discipline and active company engagement will affirm our lower middle market investment focus and positions us well.

As the markets recover to continue to grow our portfolio and net interest margin to enable us to improve returns to our shareholders.

Lastly, since we last had the opportunity speak with you the federal reserves decision to reduce interest rates to near zero to offset the covert 19 impact and stimulate the comedy economy is and will continue to negatively impact interest earnings on a port floating rate portfolio.

While interest rate floors will mitigate a portion of this impact. This interest income reduction will reduce our net investment income and we were compelled to reduce the dividend.

This decision was not taken lightly we want to reiterate our our earlier comments that as the economy improves and interest rates return to more normal levels, we will revisit the restoration of the recent adjustment.

Now I'd like to turn the call over to Nicole Hilton brand on the CFO for Gladstone capital to provide some of the detailed in funds financial reports results for the quarter and.

For the quarter.

Thanks, Good morning, everyone.

During the March quarter total interest income declined 500000, or 4% to 11 million, primarily due to lower average LIBOR rates in the effect of higher non earning assets.

This is portfolio average balance increased slightly to 404.3 million for the quarter compared to 401.4 million for the quarter ended December 31 to 2019.

The higher investment balance with more than offset by the 40 basis point decline in the weighted average yield on our interest bearing portfolio, which declined to 10.9% from 11.3% in the previous quarter, largely with a 24 basis point decline in the average LIBOR rate.

Other income decreased by 200000 compared to last quarter with lower prepayment fees and dividend income.

Nothing in total investment income for the quarter declining 700000, or 5.5% to 11.5 million.

Total expenses decreased by 13.9% quarter over quarter, primarily due to an 800000 dollar increase from the incentive fee credit granted by the advisor.

Net investment income for the quarter ended March 31st was 6.5 million, an increase of 2% as compared to the prior quarter or 21 cents per share and covered 100% of shareholder distribution.

The net decrease in net assets, resulting from operations was 27.8 million or 89 cents per share.

For the quarter ended March 31st compared to an increase of 700000 or two cents per share for the quarter ended December 31st.

The current quarter decrease is driven by 31.4 million of net portfolio depreciation as covered by Bob earlier.

Moving over to the balance sheet as of March 31st totaling 406 million, consisting mainly of 398 million of investments at fair value and 8 million in cash and other assets.

Liabilities were unchanged at 188 million as of March 31st and consisted of 92 million borrowings on our credit facility 57.5 million of six in a senior notes due 2023 and 38.8 million of five in three a senior notes due 2024.

You're in February at a weighted average price of $10.46 per share, which generated net proceeds at 1.5 million for the court.

Are now dropped from $8, an eight cents per share at December 31st two $6.99 per share as of March 31st 2020.

Are leverage as of March 31st increased from the prior quarter end at 86% of net assets.

From 75% with the net depreciation for the corridor.

As as the end of the quarter, we had an excess of 65 million of current investing capacity and availability under a line of credit. Our overall leverage continues to compare favorably and we believe we have sufficient levels of liquidity to support our existing portfolio companies as necessary and selectively deployed capital in new investment opera.

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With respect to distribution Gladson capital has remained committed to paying it shareholders a captive in in in in April Our board of directors declared monthly distribution to our common stock holders of six and a half and per common share per month for April may and June which is an annual rate of 78 cents per share.

The board will meet in July two to determine the monthly distribution the common stock holders for the following quarter.

At the current distribution rates are common stocks and with the common stock price at about $6.35 yesterday. The distribution brawn rate is now produce new deal of about 12.3%.

<unk> can use to be attractive relatives to most yield oriented alternative.

And now we'll turn it back to David to conclude the presentation.

Thank you Bob Michel Nicole you're all did a great job in forming our stockholders and analysts to that follow our company.

It's on Capitol had a good quarter and and it.

In a very unknown environment that we're in today much like all the other lenders in the middle market that are financing businesslike, we <unk> we finance.

The <unk> I personally am really bullish on what's going to happen going forward, even though we don't know what the governments are going to do with regard to meeting the opening of businesses and we don't know the reaction of the customers either.

The way this companies continue to cruise along and have some good things that have happening there originated at 30 million dollar new investment, which more than offset all the pre payments that the company's receive and the company did trigger a nice gain two and a half million dollars.

<unk> screen company that we had loaned money too.

And the team is really busy monitoring the loans that we have to middle market companies. The damage from closing so many businesses that the government decided to do.

No clear, what's gonna happen until those businesses open again, we can see what's gonna happen I personally am very optimistic about what's going to happen and think that things will go back and be strong much sooner than I think most people are thinking it's going to happen.

So in summary that company continues to invest in midsize private businesses always with good management teams. Many of these situations are supported by private equity funds much like our size there mid size and they're looking for experience partners to support the acquisition and the growth.

The business that they're investing in.

This gives us an opportunity to make attractive investments in interest paying loans.

Those loans of course support the ongoing commitment to pay cash distributions to shareholders.

I'm going to stop now and ask the operator to tell the color is how they can ask some questions are the team.

Ladies and gentlemen, if you have a question at this time. Please press the start and then the number one key on your touched on the phone.

If your question has been answered and you wish to remove your question.

Please press the pound key.

Nor first question comes from the line of Mickey chilling.

Yes. Good morning, everyone hope everyone. There is doing well my first questions for for David actually David at the new dividend level and and new.

It's still appears to me that external manager may need to subsidize the incentive fee Gladstone capital on on that basis to cover the dividend I definitely think is commendable.

Gladstone as a platform to prioritize shareholders interests, but I'd like to understand how are you in the management in the board or thinking about this dynamic over the medium term given the potential for higher Nonaccruals and frankly the costs so originate in managing.

Just run the portfolio along with the uncertainty over the length of the you know pandemics impact.

Sure make the as you know I'm, a large shareholder and so I like my dividends, so I'm going to push as hard as I can to keep the dividends up we had a long discussion about the dividend pay outs and we don't have a good answer yet because.

Quite frankly, we don't know how many companies are going to be around and what's gonna happen over the next six months to a year.

Yeah. So much is up in the air it's very difficult do a good forecast we did set things. So that we think we can make all the payments that we're trying to make and I feel really good about being able to make the dividends that we've said it that there are no guarantees in life, but that's that's where we are today.

Bob why don't you tune up on that one as well.

Mickey.

Obviously, we when we made the announcement we didn't have you know full scope and obviously, it's still evolving in terms of would be ultimate implications are going to be on the businesses.

When we looked at the dividend adjustment.

You know, we we saw the lie bore careening down and then subsequently dropped even more.

And we basically absorbs much of the draw between were library was and the floor protections in or underlying portfolio that was really the cause for the dividend adjustment.

At this point the floors in the portfolio or really supporting where the distribution is so your question is ultimately the degradation or non heightened nonperforming in the impact on the business.

This points.

We only have one investment on non accrual with with an opportunity to the not too distant future potentially correct that situation.

We're not seeing a huge amount of pressure.

It's certainly could happen given you know the slow recovery some of these businesses.

But I also wanted to emphasize little different than maybe some of the other middle market businesses.

The majority of our companies had either liquidity are relatively strong cash flow in the majority.

We're able to qualify for P.P.P. loan protections. So there was definitely liquidity that was created in those situations, which will help support the businesses two or three months from now.

You know they run out of that support it may be a different situation, but we didn't feel of the time it was appropriate to foreshadow what that might look like so we adjusted based on what we knew.

Wonder are correct framework, we feel we can support this but it's it's it's really a a moving target.

And it may require some measure of support.

As we've described that we feel comfortable where the did and it is in the in the portfolios currently performing.

Okay did you need additional information yeah, rather questions I have several other questions. If that's okay x. I noticed that the Mark you know fair value to cost.

On second leans was.

91, and a half but firstly it was only 86.6 my sense is that just may have to do with technical adjustments, but I I was this a little surprised by that so any granularity you can or or color you can provide there would be helpful.

I'm not exactly sure of the numbers, you're referring to if they were based on the Mike comments you know the the second lien.

Marks were fairly heavy.

Particularly in the syndicated realm, where they were down about 18%.

As it relates to the proprietary I think you're you're also than dealing with two factors. One is you know the the underlying portfolio position, but but more notably how impacted the businesses were based upon the.

Perception of the code Bad results give you an example.

If a child care facility.

Alone if there were certain of them.

Shut down.

There was uncertainty as to the collection of those revenues.

Was obviously it much more significant impact on the evaluation of that asset.

So it's very much dictated by the degree to which the businesses were impacted.

And it's.

Circular to the to the underlying portfolio. So I think we could talk more specifically about certain elements of your question, but I don't think we can look out at his abroad base. We look we you know we mark the the.

Senior more than more than the junior.

<unk> what percentage of the portfolio would you consider to be you know syndicated or lightly syndicated.

[noise] syndicated portfolio is roughly $30 million. So it's a little wonder, it's eight or 9% something like that.

Okay, and I I noticed that the weighted average risk rating on the proprietary deals declined only slightly from 6.7 to 6.3, how did how does that creating account for cove at risk in other words was there any sort of full.

Looking assessment in that greeting or is it really more into rears.

Yeah, I as far as the financial results you know, it's it's more on a rear is that we did on top of that nature, you know somewhat out of that Kobe type assessment and that's something that will be ongoing. There's you know depends on that that risk rating will go down a little bit next quarter, but it's something we continue to a sad.

And what are the major factors is our portfolio companies ability to pay and where that position was at 331.

That's actually my next question besides being tea.

<unk> borrowers make their payments during the core interest payments during the quarter.

Yes.

Okay, and and a couple more questions. If I may bother you you wrestling stuff like four floors, but I don't think you actually show them in your schedule of investments can you at least give us the average life or floor in the portfolio. So that we can get a sense of you know where things might look.

It's it's roughly one person.

Okay. So we're done.

We're definitely below that yeah. We we're definitely below every every one of the floors is now in place so between floors.

And in a few fixed rate assets.

We we blew through that last month.

And that's a mixture of one month and three months <unk> a level references it's almost all one month of life or some of the syndicated portfolios are three months my horn, but the majority of our portfolio is one month, yeah, Okay and my last question I do appreciate your patients, but there's so much going on just in terms of risk.

Assessment could you give us a sense of the portfolios average eat but most of the borrowers and the average debt to you but of the portfolio.

The.

Average g., but.

I would put in the five to 8 million dollar range, but you know.

Mickey.

We have credits that are probably three and 30.

The deal we disclose had 67 <unk>, so I'm not sure the average gets ya.

A lot given the variability.

The the way the portfolio tends to roll loud the vast majority of our.

Are senior secured assets are probably five $8 million of you, but the vast majority of our second lien assets are probably you know 10 to 15 million of these because there are larger companies were taking slightly are riskier positions in the larger businesses.

In terms of overall leverage.

I Yeah again.

Averages are somewhat.

Not indicative given what I've described if you exclude the syndicated credits.

Average leverage is the average <unk> probably in the low for for terms at the moment.

But that could be anywhere between you know two and six so you definitely have some outliers. The average is just probably north before.

That's really Oh pool.

And those are all my questions. Thank you. Thank you call. It it would be okay do we have some other questions.

Again, ladies and gentlemen, if you have a question at this time. Please press the start and the number one key on your touch tone telephone. If your question has been answered are you wish to remove yourself from the queue. Please press the pound key.

Any other questions.

Not at this time Sir.

Alright, well I was a short one and we thank all of you who called in and listened and.

And if we have other ways of communicating will definitely do press releases on things that are happening. So that's the end of this call him. Thank you off a calling in.

Ladies and gentlemen, just concludes today's conference. Thank you for your participation and have a wonderful day you may all disconnect.

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