Q1 2020 Earnings Call
Good day and welcome city.
Capital Corporation first quarter earnings Conference call, all participants will be in listen only mode.
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After today's presentation, there will be an opportunity to ask questions to ask your question.
And one.
Rich all your question. Please press Star then two leased at this event is being recorded I'd now like turn conference over to Steve Altebrando, Vice President Investor Relations. Please go ahead.
Good afternoon, everyone and thanks for joining US also on the call today's ball Richey, Chairman and Chief Executive Officer about that's capital and Jeff Cerny, The company's Chief Financial Officer and Treasurer. Please.
Please note that we issued a press release this morning announcing our first quarter results. This press release was subsequently filed on form 8-K with the FCC.
Documents can be obtained under the Investor Relations section of our website at <unk> that's capital Dotcom.
Before we began please note that the statements made on this call and webcast may constitute forward looking statements as defined under applicable securities laws, such statements reflect various assumptions expectations and opinions bioprocess capital management's concerning anticipated results are not guarantees of future performance and are subject to known and unknown risks.
Uncertainties and other factors that could cause actual results to differ materially from such statements.
Uncertainties and other factors or in some way beyond management's control, including the risk factors described from time to time in our filings with the FCC.
Although we believe these assumptions are reasonable any of those assumptions could prove accurate as a result, the forward looking statements based on those assumptions could also be correct you should not place undue reliance on those forward looking statements OFS capital undertakes no duty to update any forward looking statements made herein all forward looking statements speak only as of the.
This call.
I'll turn the call over to Chairman and Chief Executive Officer Bilal Rashid.
Thank you Steve.
Good afternoon and welcome.
He's a very challenging times, what everyone and we hope that you and your loved ones are safe and healthy.
He also offer a talks and best wishes to those who have been affected by the covert 19 and dynamic.
And our deepest gratitude for those on the front lines working hard every day.
Through this difficult time.
What today's call I want to primarily focused on three topics.
Our performance in the first quarter.
Oh, we have positioned on balance sheet, what this unprecedented time.
And how we have been working with our portfolio companies.
Navigate the impact of the Cobot 19 pandemic.
First our performance for the quarter.
Our net investment income per share was 30 cents for the first quarter.
The decline in net investment income was primarily due to a decrease in the you know portfolio.
As we continue to position it more defensively into lower yielding assets.
In addition, we paused on origination activities towards the end of the quarter due to uncertainty related to Kobin 19.
You also had one new loan on non accrual in the quarter.
Our net asset value push here at the end of the quarter was $9.71.
Compared to $12.46.
In the prior quarter.
Quarterly decline and Navy was largely due to unrealized losses related to fair values determined at the end of the quarter.
The fair value Mark well not portfolio declined by 7.2% in the quarter.
Second.
With regard to our balance sheet, we are focused on maintaining liquidity.
And compliance with both the regulatory asset coverage test and debt covenants.
As of today, we believe we have ample cash on hand with approximately $47.2 million in cash.
Additional capacity to draw on our two lines of credit.
With respect to our portfolio.
He had just $9 million and revolving debt commitments all of which were fully drawn last month.
It has been our longstanding practice to keep our revolving debt exposure to a minimum.
Which we believe has helped us with our current liquidity position.
We believe that liquidity position will help us navigate the current economic situation.
Allow us to support portfolio companies.
And use the capital Opportunistically as the broader economic picture becomes more clear.
With regard to our financings, we believe that be had been talked well.
In order to increase the likelihood oh, but standing periods of market dislocation.
In that regard as of March 31, well were 93% upon that.
Stay didn't maturities in 2024 or later.
Our long term unsecured debt makes up 44% off on debt outstanding as of March 31.
Which should give us operational flexibility in the current environment.
A senior loan facility matures in 2024 and is non recourse to the BDC.
And our corporate line of credit.
Its flexible as well, but no mark to market provisions.
As we announced earlier this morning <unk>.
We declared a 17 cents per share distribution for the quarter.
Given the unprecedented uncertainty related to the covert 19 situation.
We took a cautious approach to our distribution.
We believe that this rate and enhance our liquidity and strengthen our balance sheet. So that we can continue to support our borrowers and capitalize on new potential opportunities.
Lastly, I want to discuss our portfolio itself.
We have maintained close contact with our portfolio companies and have been encouraged by the steps they are taking to manage their businesses. During this time.
Yep focused today on helping our borrowers get through this challenging period.
Well during the passage of the cares Act.
Which among other things provided eligible companies with up to $10 million and 100% S.P. a guaranteed paycheck protection program loans.
More than 25 or four portfolio companies have collectively secured approximately $78 million and BBB loans from the S. P.
We believe this is a significant number to support these businesses, where we have investment exposure totaling approximately $240 million at cost.
It is hard to predict the impact of the bend that make on our portfolio.
However, we believe that you have been positioning our loan portfolio defensively for sometime now.
As a percentage of fair value approximately 91% of our loan portfolio was senior secured at the end up the first quarter compared to 76% two years ago.
Our view is that this seniority in the capital structure would provide greater downside protection.
We have been concentrating on non cyclical sectors with minimal direct exposure to oil and gas metals <unk> mining restaurants, and airlines do you believe that the bdcs advisor and expertise to invest across the loan market and structured credit markets.
But more than $2.1 billion and assets under management.
As such and then at environment like this.
Believed that we are able to identify relative value credit opportunities across multiple markets.
The BDC advisor as a team up investment professionals organized by industry verticals.
I would advise us credit platform has been in existence since 1994 and has gone through multiple credit cycles, navigating recessionary environments to maximize potential recoveries.
As we have mentioned to you many times on these calls the advisor owns 22% off the outstanding shares of the BDC.
And our view the ski alignment of interest is always important.
But in this environment.
I believe it is critical.
You can be assured that we are working hard every day to protect our investments.
And drive the business forward, what the benefit of all of our shareholders.
At this point.
Turning the call over to Jeff Cerny.
Chief Financial Officer.
To give you more color and details for the quarter.
Well, thanks, and good afternoon, everyone like Bill All said we recognize these are trying times, we are grateful for the health of our families employees.
We appreciate you joining us today, and hope youre doing well and staying safe and healthy.
Turning to our financial results.
Starting with our balance sheet, we had approximately $2.1 million of cash at the end of the corridor.
As Bill noted as of today, we believe we have ample cash on hand, with approximately $47.2 million in cash and additional capacity to draw on our two lines of credit.
The cash build up after quarter end was largely related to $31.5 million of proceeds from the payoff and sale of assets.
Which were greater than the aggregate fair value as of March 31st and approximated our cost.
We also had not draws of approximately $15 million our lines of credit.
Our debt equity ratio at the end of the quarter, excluding honesty I see that was approximately 1.6 times.
At the end of the quarter, our regulatory asset coverage ratio was 162%, which was above the required ratio of 150%.
Please note that the FDIC leverage does not count towards the regulatory asset coverage ratio.
At the onset of the market impact from covert 19 during the first quarter, we sold $35.5 million of loans at approximately cost to lower our leverage.
These sales occurred prior to the broader dislocation alone market, which we believe turned out to be a prudent decision.
Our net asset value per share at the end of the quarter was $9.71 compared to $12 in 46 cents in the prior quarter.
The decline was driven by 7.2% decline in fair value Mark on our investments during the quarter.
We added one new non accrual in the quarter online Tech is a subordinated debt investment with a cost of $16.1 million and a coupon of 13.5%.
Performance had suffered it missed its march 31st interest payment and the fair value was taken down to 45% this quarter.
We currently have 1.6% of the portfolio on non accrual at fair value.
Cost, we currently have 5.5% of the portfolio on non accrual.
Turning to the income statement total investment income for the quarter was approximately $12.9 million decrease from $13.4 million in the fourth quarter.
This decrease was driven by lower interest income during the quarter due to decline LIBOR rates and as I, just mentioned, one new non accrual as well as proactively selling $35.5 million of loans at approximately cost at the onset of the covert 19 market disruption.
Total expenses net of incentive fee waiver were in line with the prior quarter at $8.9 million.
The advisor way, 50% of its incentive fee this quarter to support the earnings in this particularly challenging environment.
Resulting net investment income per share was 30 cents for the quarter.
As Bob discussed we declared a distribution of 17 cents.
We believe that this rate will enhance our liquidity and strengthen our balance sheet. So that we can continue to support our borrowers and capitalize on new potential opportunities.
Turning to the portfolio, we are actively working with our portfolio companies to help them get through this challenging time.
As Bob mentioned, our portfolio companies were able to secure approximately $78 million through the paycheck protection program.
Clearly, we like all lenders expect to see an impact from cobot 19. However at this point, we're still not sure how the length in depth of this virus will play out and how it will fully impact our borrowers.
We believe that are highly selective investment process and focus on capital preservation.
Maybe positively impact our portfolio performs through this initial period of disruption as well as the long term.
As far as investments at the end of the corridor, we had investments in 77 companies totaling approximately $465.7 million on a fair value basis.
88% of our loan commitments weren't floating rate wrong laws, we have LIBOR floors of approximately 87%.
Of our floating rate loan portfolio with an average LIBOR floor of 1.15%.
As a percentage of cost our investments were approximately 75% senior secured loans, 11% subordinated debt, 7% structured finance notes and 7% equity of which 54% of our equity wasn't preferred equity securities.
Our portfolio remains diversified with an average investment in each portfolio company of approximately $6 million or 1.3% of the portfolios total fair value.
The overall weighted average yield to cost in our performing debt and structured finance note investments was approximately 10.1% at March 31st compared to 10.4% at December 31st with that I'll turn the call back over to belong.
Thank you Jeff.
In closing, we believed that our liquidity position remains solid but should help us whether the current economic situation and take advantage of potential investment opportunities due to this dislocation.
Remained focused on strengthening our balance sheet, we continue to actively managed portfolio.
And help our borrowers to navigate this difficult and uncertain economic environment.
Since the beginning of 2011, well if that has invested $1.4 billion, but the cumulative net realized losses principal.
Only $12.9 million or just 0.9% well generating attractive yields on our portfolio.
We have been steadily increasing got location to senior secured loans and not portfolio consists primarily of such loans.
You have also been increasing got exposure to larger bottles.
Our financing is primarily long term as of March 31, 93% of our debt matures in 2024 and beyond.
We believe that this gives us operational flexibility and the current market environment.
Lastly.
The benefit from the experience so part advisor, which manages a 2.1 billion dollar corporate credit platform.
Our advisor is part of an asset management platform. They know what 30 billion of assets with broad resources, including longstanding banking relationships.
I would advise it has gone through multiple credit cycles over the past 25 years.
It has a strong alignment of interest with all shareholders.
22% ownership interest and the BDC.
We also believed that we have a strong team up investment professionals with industry expertise and portfolio management experience to help us through this period.
And finally I would like to say thank you.
Employees, who have worked extremely hard over the last two months.
We remain committed to their safety and wellbeing.
Well that pets continues to be fully operational and we are working diligently to respond to the evolving situation, especially by supporting our portfolio companies.
With that operator, please open up the call for questions.
We will now begin the question and answer session to ask your question you made press Star then one that's true.
If you're using speakerphone, please pick up your handset.
Yes.
Withdraw your question. Please first started into at this time, we'll pause momentarily to assemble the roster.
And our first question today comes from Mickey.
Alan from Ladenburg. Please go ahead.
Yes, good afternoon, everyone.
Okay.
Today I just have.
Series.
Straightforward.
Housekeeping questions.
To the Pacific.
And.
Measure collateral at fair value.
Hey, Mickey.
Good afternoon. This is Josh both of those facilities.
Have a borrowing base that measures it at at par.
Our ore costs in certain circumstances, okay and.
Covenants in those facilities.
For net worth I assume those are measured at fair value correct.
That is correct. There is a tangible net worth covenant in the a.
Pacwest documentation and that is measured.
Yeah or or <unk>.
Okay and do they also covenants for you requiring you to continue to meet the minimum regulatory asset coverage ratio.
The the pack West credit facility does have that yes.
So.
And in terms of portfolio risk.
Give us at least a sense of what the portfolio average <unk>.
And debt to EBITDA.
So as you know we had been moving.
We've been moving up market. So the loans in our BNP financing have they an average EBITDA.
Well in excess of.
$100 million in many cases several hundred million dollars.
And then the more.
Market and pack west portfolios.
The.
Average EBITDA in the.
You know 20 ish kind a million dollar range and you know we do have some lower middle market companies that are in RSP I see as well so depending on the bucket of assets. It varies but a generally as you know we have been moving up market.
Yes, and in terms of going up market, where do you stand now in terms of the breakdown on senior secured between first and second liens.
But 25% of the portfolio senior secured portfolio is second liens and those do tend to be larger larger borrowers.
Okay.
And lastly, since we haven't seen the 10-Q yet.
Could you at least Directionally described.
The portfolio grading your internal grading looked.
March I noticed in the K for December.
10% was in the.
For category, which is special mention nothing really meaningful below that.
How did it look in March.
Yeah. So as you know we do have an internal portfolio management tool, where we do risk rate.
The four rated credits have increased a bit this was probably.
One of the larger quarters for risk rating changes.
Internal risk ratings that we look at every single month and.
And we.
I did have a slightly higher than normal.
Moved from three writing before and now we had one tried it moved into the Fibrate in Canada.
Which was the non cool.
Okay and are we going to see the Q Tonight.
Yes that is the expectation that women so.
Okay. Those those are all my questions I appreciate your time.
Thanks Mickey.
And this will conclude our question and answer session I'd like to turn the conference back over to go overseas for any closing remarks.
Thank you all for joining our call today, and we look forward to speaking with everyone again next quarter.
Operator, you may now end the call.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Your lines. This time another good.