Q1 2020 Earnings Call
Ladies and gentlemen in today's conference is scheduled to begin shortly fleets continue to stay about you think you for your patience.
[music].
Ladies and gentlemen, thank you for standing die and welcome to the fight as first quarter 2020 earnings Conference call.
At this time all participants on in listen only mode.
So to speak this presentation. It would be a question and answer session to ask the question doing the section you will need to press Star then one when your telephone.
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I'd now like to hand, the conference over to your speaker for today.
Tony Burfening you may begin.
Thank you Twanda and good morning, everyone. Thank you for joining us for by this investment Corporation's first quarter 2020 earnings Conference call.
Yeah. This morning or had Ross why this investment Corporation's Chairman and Chief Executive Officer, and Shelby Sherard, Chief Financial Officer.
By this investment Corporation issued a press release yesterday afternoon with the details of the company's quarterly financial results a copy of the press releases available on the Investor Relations page of the company's website that ft U.S. Dot com.
I'd like to remind everyone that this call is being recorded a replay of today's call is available by using the telephone numbers in conference I'd provided in the earnings press release. In addition to an archived webcast replay will be available on the Investor Relations page of the company's website. Following the conclusion of this conference call.
I'd also like to call your attention to the customary safe Harbor disclosure regarding forward looking information included on today's call.
The conference call today will contain.
Statements, including statements regarding the gold strategy beliefs future potential operating results in cash flows a fight this investment Corporation.
I was referring to.
A reasonable based on estimates assumptions and projections as of today May one 2020. These statements are not guarantees of future performance time sensitive information may no longer be accurate at the time it 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.
I just 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 had.
Good morning journey and good morning, everyone.
Welcome to our first quarter 2020 earnings conference call.
I hope all of you and your loved ones are doing well.
Given where we are today in light of the carbon 19 pandemic and associated government actions and uncertainties around the duration in depth of an economic downturn.
I'm going into but most of my remarks today discussing the impacts on our portfolio companies at this time and on our management priorities going forward.
Shelby will cover the first quarter financial results and our liquidity position.
Once we've completed our prepared remarks, we'll be happy to take your questions.
Through mid March or portfolio is performing well deal flow in M&A in the lower middle market was reasonably healthy.
We were deploying the proceeds from repayments in February is equity sale into income producing investments.
As the business in economic implications of the pandemic have become increasingly in Paris apparent.
We had been acutely focused on our portfolio companies working closely with the senior management teams and sponsors of these businesses.
We have found that across the board our portfolio companies have taken the necessary actions to manage business disruptions and have prepared plans to withstand a slowdown in economic activity.
As of today, the vast majority of our 62 portfolio companies are operational.
[laughter], Nevertheless, well a little more than 80% of our portfolio companies remain in the low to medium risk range.
The adverse consequences that government mandated shut downs on the future financial performance of some of them and mark to market fair value accounting at quarter end, let us to write down the fair value of our portfolio by approximately $44 million.
As a result in a b declined 8.8% to $375.5 million or $15 in 37 cents per share as of March 30, Onest 2020.
Compared to $412.3 million or $16 in 85 cents per share as of the December 31st 2019.
In addition, we proactively placed two portfolio companies on nonaccrual and one on Pik non accrual.
Companies that until the pandemic hit us had been performing in a solid manner.
Excellent Foodservices remains on non accrual in total we ended the first quarter with nonaccruals equal to 6.7% of our portfolio on a fair value basis.
Without knowing how long or how the become in 19 induce recession will be our focus for the foreseeable future will be on maintaining.
The strong liquidity position, while funding in supporting our portfolio companies as warranted.
In light of the unprecedented uncertainties that we're facing and to give us additional liquidity on our balance sheet. We were Mac, we recommend it a reduction in the quarterly debit into the board of Directors Directors agreed and on April 29, The board declared a second quarter dividend of 30 cents per share which will.
He payable on June 26 to stockholders of record as of June 12.
At the same time, we have elected to waive 20% of the income incentive fee for the second quarter.
Moving to a review of the first quarter adjusted net investment income, which we defined as net investment income, excluding any capital gain incentive fee attributable to realized and unrealized gains and losses.
$8.5 million.35 per share compared to $10 million or 41 cents for share for the same period last year.
In terms of originations, we invested a total of $68.2 million and debt and equity securities during the quarter.
Primarily in first lien debt in connection with debt recapitalizations.
Investments in new portfolio companies totaled 36.9 million.
And consisted of 11.9 million in a revolving loan in first lien debt and combine systems Inc., a leading designer and manufacturer and marketer of non lethal security products for the global defense in law enforcement markets.
$50 million in first lien debt in route where inc., a leading provider of highly integrated fleet automation software and systems for waste haulers and municipalities.
And $10 million in first lien debt and westerns smoke out LLC the preferred manufacturing solution for the top brands and retailers in premium crafted protein snacks.
Subsequent to quarter in we invested $12.5 million and subordinate debt in common equity VCM industries, LLC, a global manufacturer and supplier of electrical products through a wide range of premium brands.
In terms of repayments and realizations, we receive proceeds totaling $73.8 million, including 35.9 million in net proceeds and the net realized gain of 20.4 million from the partial sale of a group of equity investments that we announced on her last earnings call in February.
In addition, we receive payments totaling $9.2 million related to repayment in full.
Of our first lien debt investment in hundred defense technologies.
And payments totaling $10.4 million related to the sale of fiber materials, Inc.
Recognizing a net realized gain of $9.8 million on our equity investments.
In Q1, we monetized approximately $46.5 million in equity investments, recognizing net realized gains amounting to $30.3 million in connection with our strategy to redeploy equity proceeds into yielding assets.
Turning to our portfolio construction and metrics the fair market value of our investment portfolio as of March 31st.
2020 was $718.9 million.
Equal to 98.3% of cost.
We ended the quarter was 62 active portfolio company and for companies that have sold their underlying operations.
On a fair value basis, the breakdown of the portfolio by investment type as of March 30, Onest was as follows first lien debt, 19.1% second lien debt, 52% and subordinated debt 19.5%.
I mean monetize a sizable portion of our equity portfolio equity investments now account for only 9.4% of the portfolio on a fair value basis compared to 17.6% as of December 30, Onest 2019.
Overall, while we continue to clean keep close tabs on our portfolio companies operations.
At this time, we believe our portfolio is in reasonably good shape to weather the crisis for.
From an industry perspective, our portfolio of high quality lower middle market companies is well diversified.
On a fair value basis. It is comprised of a mix of manufacturers in service providers with oil and gas related businesses accounting for 4.3% and a little more than 3% in retail on a cost basis.
Our focus on investing in companies with defensive characteristics business model that can withstand economic stress is strong free cash flows and resilient and positive long term outlooks.
Positions us to make it through this difficult time.
I mentioned earlier that our priority is on maintaining liquidity until we have more clarity on the pace of the economic recovery.
We believe this is a prudent response to uncertainties that none of us a phase before.
And facing nodes, we are operating with an abundance of caution protecting our conservative capital structure, while continuing to focus on capital preservation.
In the long term interest of our shareholders.
Now I'll turn the call over to shelving to provide some details on our financial and operating results Shelby.
Thank you Ed and good morning, everyone I'll review, our first quarter results in more detail and close with comments on our liquidity position. Please note I would be providing comparative commentary versus the prior quarter Q4 2019.
Total investment income was $20 million for the three months ended March 31st 2020.
A point 5 million increase from Q4, primarily due to an increase in fee income from investment activity.
Total expenses, including income tax provision were 2.6 million for the first quarter, approximately 11.6 million lower than the prior quarter, primarily due to a decrease in the capital gains incentive fee accrual related to net unrealized depreciation in the fair value of the portfolio.
As of March 31st the weighted average interest rate on our outstanding debt was 4.6%.
We had 373.8 million of debt outstanding comprised of 156.5 million of SBH debentures 182.3 million of public notes and 35 million outstanding on the line.
Our debt to equity ratio was onetime or 0.6 times statutory leverage excluding exempt SBA debentures.
Net investment income or in <unk> for the three months ended March 31st was 71 cents per share versus 22 cents per share in Q4, adjusted in <unk>, which excludes any capital gains incentive fee accrual reversals attributable to realized and unrealized gains and losses on investment was 35 cents per share in Q.
One versus 34 cents per share in Q4.
For the three months ended March 31st Vitesse had approximately 30.3 million of net realized gains.
Mentioned from the sale of 50% of our equity investment in 20 portfolio companies and the exit of our equity investment in fiber materials.
Turning now to portfolio statistics as of March 31st our total investment portfolio had fair value of 718.9 million.
Our average portfolio company investments cost basis was 11.8 million at the end of the first quarter.
We have equity investments in approximately 90.9% of our portfolio companies with a weighted average fully diluted equity ownership of 4.8%.
[noise] weighted average effective yield on debt investment was 12% as of March 31st the weighted average yield is computed using the effective interest rates for debt investments a cost, including the accretion of original issue discount on loan origination fees, but excluding investments on nonaccrual if any.
Now I'd like to briefly discuss our available liquidity.
As of March 31st our liquidity and capital resources included cash of 27.2 million 65 million of availability on our line of credit, resulting in total liquidity of approximately 92.2 million.
We also have access to 161.5 million of additional SBH debentures under our third FDIC license subject to regulatory requirements and approval.
Now I will turn the call back to add for concluding comments Ed.
Thanks, Shelby and as always I'd like to thank our team and the board of directors and find is for their dedication and hard work and our shareholders for their continued support.
I'll now turn the call over to Towanda for QNX Twanda.
Thank you, ladies and gentlemen, as a reminder to ask the question you would need to press Star then one on your telephone.
The withdraw your question first the <unk>.
So I want to ask the question. Please stand by we compile the culinary Boston.
First question comes from the Monopolar Johnson with KBW. Your line is open.
Good morning, guys. Thanks for.
Taking my questions hopefully you guys are doing well.
Hi, I recall that I believe you have a one times debt to equity leverage covenant in your credit facility and correct me, if I'm wrong there but.
Now that two to one leverage is effective for you guys. As of April are you planning on going back to amend or asked for an amendment of that covenant.
And as you know that again possible in today's environment.
Let me that's a Shelby let me just kind of point out one thing you are correct and that's the covenant in our line of credit. However, that's based on regulatory leverage so right now we have 0.6 times regulatory leverage on and if you'll recall, we have a fair amount of SP IC debentures.
In our capital stack and so as a result to really hit one times or regulatory leverage we would have to add an incremental hundred 50 million of whether it be on line of credit or unsecured debt. So we have ample room, even with the existing coverage because again it does take into account they exemption for us.
I see debentures.
I see okay. Thanks for thanks for clarifying that.
And then maybe a little bit more on that I know you guys said that Youre you know at this point focusing more on liquidity and being more defensive you know I'm using repayments.
Build cash and perhaps.
You lever a little bit.
But I'm wondering with that FDIC those those available debentures I mean are you comfortable accessing additional leverage under the FDIC license at this time or are you you more focused on just conserving liquidity.
Great question, Paul I think where we sit today.
We are we kind of hit the pause button with regard to you know new investment opportunities.
We and you know we think that's what's prudent there's a there's a lack of clarity on how the economy is going to restart.
And we think operating again with an abundance of caution makes a ton of sense and so we we are looking to deliberately increase our leverage in a material way.
Is how I would say it.
It doesn't mean, we don't have the capacity to and then but that's a that's how we're thinking about it at this point.
Okay. Thanks for that.
And then on your portfolio companies I'm curious I mean, I think you had a very manageable unfunded.
Commitment liability.
Have you seen a high demand from any of your portfolio companies for additional financing and also an addition that have any of your company has been able to access and benefit from any of the fed reserve.
Pp loan programs are already available lines of support.
Sure Great question fall.
I think I'll take the first one in terms of high demand from our portfolio companies at this morning to this point the answer to that is.
No it's been relatively low I think.
As of today, I think to help round out situations we've funded.
$1.5 million to just help with liquidity situations typically that's in connection with the you know what private equity group doing something as well so sharing.
During the pain, if you will.
But that's that's how we have or other capital structure constituents quite frankly, but thats how weve.
Approach things and to date that.
That dollar amount has been relatively low as I just mentioned I think I'm right don't hold me to improved 1.5 million at this point.
But we're prepared for more if that is necessary.
No as warranted in as makes sense and that's that's a position that we want to want to be in.
[noise] Kara Anderson in on.
Yeah, and then on the TPP loans on or any of the fed reserve.
Programs have you heard of four have you.
Do you know of any of your portfolio companies have been able to access any of those lines. Yes. The short answer is yes, given our focus on the lower middle market.
The number.
It's not good number of our poor portfolio companies did access to BPP program.
And obviously that's improved the liquidity for those companies that did access the program.
Which in our mind is a positive in times like this thankfully we have a short list of companies in tight liquidity situations at the moment.
But as with all things. These days that also can change, but that's the situation at the moment.
Thanks for that and my last question I'm, just I'm curious on that the deal that you did post quarter. The cm industries and believe that was in a new portfolio company can you just tell us a little bit about that deal maybe perhaps.
Possible what the yield was on the deal you know what sort of opportunity was presented the business and that sort of thing.
Yeah, Interestingly I mean, the fact that situation that we committed to that kind of pre pandemic.
And so that the yield was I think 11.5% I don't have an in front of me, but I think I'm right.
It's a larger business you know very high quality very high free cash flow in our opinion will be resilient over the long haul so we're not.
Scared that we made that investment, but we fully committed to that prior to that pandemic and so that's that's a situation there.
Okay. Thank you very much those were all my questions.
Thank you good talking to you Paul.
Our next question comes from Milan, Mac Jaded with Raymond James Your line is open.
Hi, everyone morning.
So first question just to kind to hammer down on the language from the press release.
The new non accruals when you say proactively should we take that to mean they paid interest in one Q and were placed on non accrual. After just how should we interpret that.
Sure. It's interesting that's a it's a great question and you know what I would say is the facts and circumstances were were different in all three scenarios.
One was one company was late pain us.
And the other was not fully operational.
Due to shelter in place orders.
They both did pay us.
Our quarterly interest so those are the full nonaccruals and you know what similar is that shelter in place direct is meaningfully impacted both companies.
One of those as Ed blends into retailer in the northeast.
And the second was Virginia tile that had some operations and.
In Michigan and they've obviously were.
Meaningfully impacted as well do that S&P orders there.
Our pik non accrual Mirage also experienced shelter in place orders, but actually was later designating a central business.
So that's out that unfolded.
Hopefully that's okay.
They all did pay us what they were supposed to.
But we did put them on non accrual due.
Risk points.
I guess moving onto accident foods, so kind of just from a long term outlook perspective.
Given their focus on as I understand it you know breakroom solutions and things like that even with people were turning to work. It seems like the breakroom operations and things like that or are definitely going to be a while off and returning to normal. So any any color you can give a long term outlook for that asset.
Long term outlook is a very difficult thing to answer with with regard to any.
Credit from my perspective at this movie.
I wouldn't say any creditors, we actually have reached 80% of our portfolio that we think is and.
You know very.
Sounds shape doesn't mean, perfect, but sound and well over 80, and so but what I would say with regard to accent is that management.
Is doing a great job of.
Kind of managing the situation that they're facing which is this company was impacted as you might imagine or I'm sure I understand.
By the shelter in place orders and so they have done a very good job managing.
You know thus far through the situation.
How is the company comes out of it how we navigate the situation there's a lot of uncertainty with that and it's very difficult to.
To to handicap, so I'm not going to try to for that reason.
Okay.
And then last question would just be beyond and they'd be so some of the the markdowns. We saw can you give any color on.
How much of that incorporated forward outlook versus actual credit deterioration quarter to date and or spread widening.
What I would say.
In Shelby can jump in in the second is.
Spread widening.
Finally was part of it right and that was.
According devaluation policies and whatnot.
In terms of credit deterioration from a backward looking which is how most you know how does the information we have them, we're doing evaluation at March Thirtyth.
I would say that was not the case.
So the valuations were taken into account.
Various situations in the outlooks that we could see.
And.
So that's how we went about it.
Shelby you want and I would just.
I would just add that you know obviously for all Bdcs you know fair valuations. This quarter's a bit of a challenge just in light of volatility and uncertainty and GAAP mark to market requirements.
So as Ed mentioned, you know obviously, we did take into account higher cost of capital assumptions.
I would say some of the movements, particularly on the equity side religious had to do with calibration of multiples.
In line with its kinda public comps granted you know given where we invest it's hard to find a true public comp, but from a fair value methodology perspective, it's an appropriate thing to do to calibrate multiples downward and to your point, yes, we did as opposed to solely relying on trailing 12 month financial metric.
For valuation drivers.
Particularly four portfolio companies that we expected to be more materially impacted by economic shutdowns.
We did either factor in uncertainty discounts or you know, it's probably early for updated forecast, but in our conversations with portfolio companies and management any insights we head into forecasted financials, we would factor into whether it be unforecasted driver or kind of a blend but recognizing that trailing 12 months is probably not the best.
Indicator of future performance in this point in time.
Great. That's all for me appreciate it.
Thank you.
Talking about.
Our next question comes from a lot of Bryce Rowe with National Securities.
Okay.
Thanks, Good morning, and Shelly.
And and rights hope you're well.
I am thanks for I think for that.
A couple a couple of questions here and you mentioned the 80%.
Being in that lower to comedian risk type type bucket.
Do you do you think about that in terms of.
Dollar <unk> dollar volume or just actual number of companies.
Within the portfolio.
It's more a dollar volume quite frankly.
So what we did just to put a little color on it out you know what we've been doing you know it was twice a week now we're doing a once a week to get our hands around the different situations, we kind of split our portfolio into higher risk and higher risk would you know have look we're going to have a most likely a covenant default and.
To work through a situation companies that are being impacted or projected coverage covenant default in companies that are being impacted in a meaningful manner by this stay in place orders in particular.
And then we have medium risk and you know what we considered low risk from a capital preservation doesn't mean that may not be a covenant is going to happen, but just in terms of managed to manage it you know.
How can the company manage through this and you know do we are we pretty comfortable with a getting paid b.
Capital preservation and so.
Thankfully the large you know good majority large majority is in the low risk category and then the next step is the medium and again, we feel good about those assets. They may require more work over the next you know nine months to a year by or covenants and things like that but things we're comfortable with and then you've got more hands on one ones that are.
Sure you know.
Down right now for instance, and.
That would be in the highest risk category and so that that falls in the you know.
It's less than 20% on a dollar basis, but it and not all of them are shut down by any stretch for just higher risk category.
From a shutdown perspective, we have three that are.
You know not really fully up not operational today in a meaningful way.
And then from a portfolio company perspective, and then.
Obviously, we've got a couple others that are impacted by shelter in place orders mean, one of their plants may be shut down or several their plants may be shutdown that kind of thing and then we got others that are.
You know just being impacted by the end market in the molaison the economy, but.
So hopefully that's helpful. But that's that's how we.
That's how we're managing the business and that's how we you know kind of came up with that statement. Okay. That's helpful.
Hi, I'm curious on indeed, the portfolio has.
Decent amount of second lien.
Type exposure.
Subordinated exposure, obviously, you've grown in the first lien portion.
But but curious how how how you are interacting with sponsors and maybe into more senior lender in the deal.
Throughout this this this processing and how.
Hello, how well you are kind of working together with with the different parties involved.
Sure I mean, I think that I think we're working together very well. There's there were some you know near term needs that took place and I'd partially mentioned those earlier give me. An example, a company got ahead of this they knew they were going to need to be shut down and they want they put in.
You know two and a half million of liquidity to help get to the other side and quite frankly, the banks in us or the first lien lenders.
You know also collectively put into and a half million to give the company liquidity and that was 500000 from us.
And.
So that was an example of everyone working together to get to the other side and you know and having a supportive sponsor. The so that was near term and those happened what I expect to happen as we move forward is that.
Conversations where it will increase over the next two quarters.
We do expect some financial covenants to be broken in Q2.
And then I'm sure there'll be a couple more in Q3.
How things are dealt with will be a on a case by case basis and as you know.
I mean sponsors unit tranche lenders and that could be us or second lien or sub debt, which can be us as well will be all participate in multi party negotiations and the go forward solution.
So clearly there is risk that you know incremental non accruals over the next 369 months could transpire.
And from our perspective, we have you know a very resilient in high quality group of portfolio companies, which from is the most important factor in the long run.
For those portfolio companies impacted more meaningfully from the shelter in place orders there there's a limit less number of go forward solutions to consider.
And I think we're going to be at the table, having those negotiations but.
You know, it's there's uncertainty with regard to all of them quite frankly, but I think we feel good about the underlying assets that we have in our portfolio and I think that's the place to start from from our perspective.
Okay. That's helpful.
If I could ask one question about the dividend and certainly understand the.
Yeah, the news lower.
Yes.
As a cautionary news if if if nothing else.
Just curious how you how you weighed the dividend reduction again.
The level of spillover income. They did you had at the ended the year and then did that the spillover income having kind of grown here in the first quarter with with the realized gains you've book.
Sure.
Well, let me let me give you.
Little bit on the dividend.
Figure you asked that question or some version of it.
I think you know.
To start and it's in the approaches given the high level of uncertainty that everyone's experiencing.
And the current volatile economic environment that.
As is difficult to handicap.
You know we feel like it's in the best long term interest of our shareholders to operate with an abundance of caution.
Including with regard to our dividend distribution policy and.
Operating with a conservative mindset is how we have always operated this company.
We're highly focused on maintaining a strong balance sheet in a resilient won and we're equally is focused on maintaining a strong liquidity position.
And in particular to be able to support our portfolio as warrants in it as necessary.
So capital Preservation is has been always in is just a critical and top of mind subject for us.
And then it gets back to the quality of the portfolio for us and we believe it's very resilient over the long run.
You know it was constructed with an eye towards investing in companies that we believe possess.
Long term cash generating abilities.
There are more defensive in nature, good market positions and.
Possessed you know positive long term outlooks.
And this interim and very uncertain environment.
We believe it's best to focus on the long run.
And to me hands on in doing so which is exactly what we're doing.
So when you think about it from a we have not and I'd say really factored in.
Our dividend decision, you know or we didnt factored in spill over when we determined our dividend decision.
Having said that we know it's there.
We think thats, a very very good thing.
But it was not how we came up with what I would say is our thought process was the following on the dividend from a scenario perspective.
We wanted to be in a position to cover our debit in dividend in eight out of 10 scenarios, meaning we didn't cut so far that we will cover our dividend in all of the worst of the worst downside scenario scenarios that anyone can construct.
We don't think those scenarios will materialize, where we wouldn't be able to cover at 30, but we're clearly need to me in a position to weather that if it does happen.
And so we feel like we're in a position to to whether anything that's thrown at us and that's our plan.
Yes. So you know, we're all Lebanon unprecedented times and we're prepared to do what we need to do to be as well positioned as possible as we get to the other side is Alexander.
Hopefully that's helpful. Just from a thought process process perspective, yes, that's really helpful that I appreciate it. Thank you.
You're welcome.
You're talking they Bryce.
Our next question comes from amount of quit Koski with Oppenheimer. Your line is open.
Good morning. Thank you most of mine I've been asked but I guess, just you know if you look at I'm curious about the decision to put some companies on.
Non accrual of proactively but then you know there are other companies, where you know you see the fair value marks and they're kind of in the same area as as go the ones that you did put on non accrual.
King.
You know Palmetto Moon Telco Sds.
Brent fitness yami, they're all kind of.
Not not deep deep discounts, but at significant discounts and what was the decision process between keeping some of those on accrual versus [noise].
Not and then I guess.
Lastly, before when you mentioned that 80% you think is in good shape, presumably the.
The other 20% is that universe of companies that up and Mark.
That's probably generally correct I mean I'm not looking at the list right now Chris on that last question.
So I think generally correct the ones that have been impacted obviously would you would think that'd be reflected.
By the stay in place orders in particular.
Those would be the the ones that you, where you would see material depreciation relative to the quarter before so that's definitely the case I think with regard to.
How we made the decisions I think it comes with you know uncertainty.
No I went through a few minutes ago, where you know and sponsor came to the table wanting to get ahead of it and put money in the lending community because there were five people involved in this situation.
Participated in helped as well and gave the company running room for six months, you know on a shutdown bases quite frankly.
That's different and that's a first lien situation that's different than a situation, where I don't have that that.
That clarity of the future and so hopefully.
That gives you a sense and how we're thinking about it where we had more clarity.
Where someone's late you know for by 15 or 20 days, you know and quite frankly, they just didn't know what they have and I'll tell you in that situation things are better than they ever thought they would be right now which is great.
But they you know they were they were worried and then they finally paid that in.
So I.
You know I hopefully that tells you really comes down to clarity and and uncertainty from my perspective on how we made those there.
And then I guess my my second question would be.
And you've been if you haven't really.
John on the your.
SPD debentures for you know.
Roughly two years now and.
And I'm wondering just with all the stress.
As is our there you know more.
More cases, where.
You know you some of your portfolio companies might be eligible for SPJ funding. These days than they have been over the last two years.
Great question, well I think a couple of things you know we.
We got our license our third license up and running really it.
Call at the beginning of the second quarter last year. So no we haven't.
Ramped it that's that's for sure.
Have started using that our first license was in wind down until last year right.
And our and we repaid down our second one was fully.
Utilized quite frankly.
For the past couple of years and when we had repayments, we recycle that capital, but so that's a little bit of the dynamic you know we've had that SB eight.
Really for less than a year right now operational a new fund.
The second thing I'd say is you know.
We you know obviously, they're they're very strict.
Regulations on what qualifies and what doesn't qualify and we follow those rigs, including the unwritten ones and so some don't qualify and we don't we don't put them in there.
We don't put them in that fund and so that I'd say those are the two factors. There's certain you know if you do a private equity financing or private equity driven financing. There are some that have fun types and I'm not going getting specifics that don't qualify for this BA theres some that front types that do.
So those are we follow those rigs so.
That's a dynamic.
Chris I would just added Ed mentioned, it but a big part of the equation is just cash management and so to the extent we had the third lightens up an operational let's call. It for the past year. However, if we received a repayment and our second FDIC fun and I was sitting on idle cash we would put that to work first before barring.
Additional Sps debenture, so that's part of the equation.
Okay understood already thank you that's it for me.
Thanks, Chris good talking to you.
Our next question comes from the line.
Mickey Schleien lending Sir your line is open.
Good morning.
I will be a lot of good questions.
This morning, just a couple more if I if I can.
And I'm trying to understand whether there's any deal flow out there that even looks modestly interesting.
You Theres, obviously, some candidates that that would be great somebody's selling disposable medical supplies to hospitals or things like that but.
To the are you seeing anything at all like that and to the extent that you or.
How are you approaching underwriting given how tough certainly the second quarter will be in all the uncertainty about the second half of the year.
Sure.
It's a it's a great question, what I would say.
Mickey is you know our focus is on is on the portfolio right now for two a large large extent.
And that's representing 90% of our time.
And there's a lot of reasons for that including we're not going to deliberately tried to grow the portfolio in a meaningful way right now.
Just given uncertainty and given the ability to underwrite.
So what we've done is we've hit what I would call and to be honest most lenders have the.
The pause button.
Just to wait and see.
You know where where we are here you know as we continue to come out of.
You know, whereas the restart kind of unfolds and make sure we have some clarity and you know with regard to it. So there's a lot at play we're not going to be aggressive put deploying capital given where we are from a leverage perspective, we want to maintain very strong liquidity.
And but if we are going on right and we are looking at a few things and we know we're not going to make huge investments I would say, but.
We are looking at him, but I will tell you that what we are looking at would be very much recurring revenue businesses, which has been a big focus of ours for a long time.
And ones, where you have you know a comfort with that revenue line and profitability line and.
So there's a fair number of businesses out there I told you our low risk categories, a large majority of of.
What we have or large majority of our portfolio companies in dollars.
We have invested in you know there's a lot of businesses that are actually doing just fine too and then there are others been forced to be shut down so.
You know that's.
Actionable regard to new business, we're going to.
You know be very prudent we are still in the middle of a pause button.
Situation, but you know as we come out of it we're going to obviously be highly highly selective and focused on.
The best of the best credits and and but more focused on our portfolio because we think thats the right thing to do right now.
I understand and.
Fair enough.
Most of the portfolio, obviously in terms of the debt investments or fixed rates, but clearly there was an overall.
Downward trajectory for interest rates.
Could you give us some context of prepayment risk in the portfolio I I suppose it's a difficult question given that the borrowers themselves don't know what what to expect in.
The market's effectively shut down but.
Anything you could say about that would be helpful. When you when you say prepayment risk so make sure I'm following you.
In other words.
Do you have borrowers are strong in a position to.
Go to their lenders and say look interest rates are dropping.
I want a one a better price.
Sure we do have some that fall in that category and.
Interestingly I had an update from one of our partners yesterday on a deal with small less than 10 million in size that that is the intent of they were going to sell the company.
Now, they're going to hold onto it and they're focused on cash flow and reducing our interest rate. So we probably will get repaid on that one but.
I think we definitely have some of those scenarios I could see that happening over the next year, but.
You know I also will tell you there will be opportunity to redeploy that capital. So it doesn't concern me in more than welcome and quite frankly.
Then.
So that's that's I think about that.
And in terms of understanding the portfolio's risk it could you give us a sense of the portfolio borrowers average EBITDA I know you publisher range, but it's a fairly broad range.
And there was all these philosophical discussions weather.
Lower middle market is actually riskier than upper middle or not but.
That number or at least a tighter range would be very helpful. If you could give it to us.
I think the average none have in front of me, but I think it's in the $11 million to $12 million range right now don't hold me to but I feel pretty comfortable that statement the aggregate with D.A. I will tell you. The ranges you know we've got.
Couple several hey, our loans that are less focused on EBIT da more focused on the contractual revenue.
From us so think of a software company and we have first lien investments in those situations and feel great about the the.
And they obviously you can cut expenses and get the EBIT da way up.
So those would be you know.
Smaller EBIT da businesses, but we feel great about the assets and were first lien and then we've got a couple that are 125 million in EBIT da not a lot. This big part of it so there isn't a wide range.
And but the averages in the low double digits.
From a weighted average perspective.
Okay. That's helpful.
And likewise, what does the portfolios.
Debt to EBITDA ratio and I guess that would be as of March in and.
Given the trajectory of EBITDA any sense of where you think that's headed and I think you alluded to.
Potential to violate probably this covenant.
Any guidance you can give us a man [noise].
Sure.
I think our leverage was 4.7 times, but that does not reflect.
Yeah, that's more you know February numbers right right.
And that does incorporate the our loans incorporates everything but.
The.
Yeah. So you know I'm undoubtedly I would expect the leveraged.
To go up on an average basis for the enters the interest coverage is 3.4 times.
February but you know are obviously, our priority eras, focusing more on the on the going forward as opposed to the backwards. So.
Understand and just a couple of.
Sort of housekeeping questions I think you mentioned in your prepared remarks that.
Voluntarily waiving, 20% of the.
Income from Sanofi is that correct.
That is correct, okay I didnt.
See that elsewhere in the queue or the press release, so that a voluntary.
Yes. So that's a go forward right is that it's for the second quarter. So you'll see it in the second quarter numbers.
And the.
Form from our perspective, you know what we're all experiencing fear of infection shelter in place orders jobs being eliminated all around US you know, it's incredibly unfortunate and it's it's also.
Sat in many cases and very sat in many cases.
So needing to reduce our dividend because of coven 19, and they you know the stay in place orders are shelter in place orders falls in the exact same category of sad and really unfortunate.
So we've always put our shareholders first and this decision is a reflection of in.
Of that in its also a reflection of who we are as a firm.
So hopefully that's helpful. That's how we've thought about no I appreciate it.
I'm sure shareholders do as well and just to confirm its voluntary it's for the second quarter, it's not a permanent change in the management contract.
Thats correct, Okay, and let me work before.
I'm sorry, no no I mean look the facts and circumstances are changing all the time in this environment as we're all aware and so we're going to continue to keep our shareholders top of mind.
And you know.
We want to do something here in the second quarter that that felt good kind of the right thing to do.
Okay, and maybe for Shelby.
Why so much cash on the balance sheet show the it.
Now 27 million, which is I mean, you've been there before but.
I would have expected a lower number is there can you walk us through that.
Sure its a fairly simple answer because you're absolutely correct, making that I kind of like to run the tight ship and minimize interest expense, but the practical reality was.
We have their subsequent events, we did have one new deal close here I'm quite frankly, the continent, Ed mentioned had been in the pipeline. We've made a commitment a while back and so as events in kind of certain mid to end of March started unfolding just the timing of that transaction slipped I had kind of cash reserves ready to fund that deal and so that's part of the.
Explanation as to why my cash balance was higher at the end of March.
Okay, that's fair enough I understand.
So those are all my questions I appreciate your time and hope everybody stays a safe and healthy up there. Thank you.
Thanks, Mickey and.
You're talking to you.
Next question comes from the line of Tim Hayes with B. Riley.
Yes.
Good morning out in Shelby Thanks for taking my question.
Most of them have been answered, but just a quick one and it might be tied to gauge this plane, but Shelby do you have an estimate of approximately how much of the spread driven in multiple driven marks had been reversed so far in the second quarter as the broader market has rallied spreads have tightened.
I I really don't just because as you're aware all of our investments are really level three on observable inputs and so our valuations process is somewhat dependent on getting to the end of the quarter. So end of Q2 with updated financials, which we don't yet have and then taking.
Look at public company comps at that point in time, you know, it's not something that we can easily value on kind of a weekly basis.
Sure, Yes makes sense.
I'll just ask one one more quick question on.
It sounds like it kind of the worst is yet to common that the first quarter results have been truly reflect the the headwinds.
That you'll face from the economic impacts of the outbreak, but I'm just curious if you ever any measures you took in the first quarter to provide relief or forbearance to borrowers or if that's something that you probably have to work through in the near future going forward. How do you at this point granted extended it in.
Just only periods deferred principal payments or eliminated covenants or anything else and just.
Curious, how you think about that going forward.
Sure.
Great question.
But I can't in general we haven't had to do a lot of what you're suggesting at this point as I mentioned in the you know around Q1 early on there were a couple.
You know come in we you know weve.
You know another situation just to give me. An example, someone we already we're been covenant default had been for a while we're working through it situation sponsored put in cup, two and a half million dollars and.
With that we put a set of projections that we think can withstand.
The next 12 months and at the same time, we feel very comfortable with those levels.
Very not every lever very liquid situation so.
We will obviously worked through situations with the bars. We obviously expect a you know every one to participate it's not a one sided conversation and so there will be more of that as we move forward I would say that the ones that needed.
Attention.
I have gotten it and I think in general what we're seeing is people are trying to get ahead of.
You know any potential covenant breaches or any liquidity issues and.
Obviously with the idea of positioning those portfolio companies to get to the other side.
And so those conversation as more of those conversations to have no question and there's risk with some of those conversations.
But.
There's also again this is where I go back to.
We've got a pretty good portfolio that we feel great about quite frankly, it's not going to.
You know, it's not going to be without fault, but it's one of the underlying assets are in our opinion.
Good ones in ones that should be make it to the other side and so we've got to do the best that we can to help those companies do that as well as at the same time protect our interest in our capital so, but there's a lot more of those conversations to take place with regard to all bdcs, So and we're not.
Right. Okay. That's helpful I'll leave it there thanks again.
Thank you appreciate it you're talking to you.
At this time I would like to turn call back over to at Wolf for closing remarks.
Thank you to Wanda and thank you everyone for joining us. This morning, we look forward to speaking with you on our second quarter call in early August.
Everyone. Please be safe.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation you may now disconnect everyone have a wonderful day.
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