Q1 2020 Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to stand by and thank you for your patience.
[music].
2020.
It's my pleasure to turn the call over to Sabrina Rusnak Carlson of THL credit Inc. Miss Rusnak Carlson you may begin.
Thank you operator good morning, Thank you for joining US with me today, our Chris Flynn, Our Chief Executive Officer, Jim Fellows, Our Chief investment Officer, and Terry Olson, our chief operating and Chief Financial Officer.
Before we begin please note that the statements made on this call may constitute forward looking statements within the meaning of the Securities Act of 1933 as amended.
Such statements reflect very sumption by THL credit.
Turning anticipated results that are not guarantees of future performance and are subject to known and unknown uncertainties and other factors that could cause actual results to differ materially from such statements.
The uncertainties and other factors are in some ways beyond management's control and include the factors, including the section entitled Risk factors in our most recent annual report on form 10-K.
As updated fire quarterly reports on form 10-Q.
Our periodic and other filings with the Securities and Exchange Commission.
Although we believe that the assumptions on much any forward looking statements are based on our reasonable.
Any of those assumptions could prove to be an accurate and is the result before looking statements based on those assumptions also could be incorrect.
You should not place undue reliance on these forward looking statements.
THL credit undertakes no duty to update any of these forward looking statements made herein.
All forward looking statements speak only as of the data this call.
Our earnings announcements and tank here were released yesterday afternoon.
Copies of which can be found on our website along with the Q1 earnings presentation that we may refer to during this call.
Webcast replay of this call will be available until May 18, 2020, starting approximately two hours. After we conclude this morning.
Access the replay please visit our website.
Www THL credit BDC dotcom.
With that I'll turn the call over to Chris.
Thanks, Brad Good morning, everyone first let me say, we hope you and your families are safe and healthy during these challenging an unprecedented times.
I'm, sorry April Twentyth, we issued a letter to stockholders, providing a business update including the recent $30 million stock issuance.
Then we just felt a proxy for social media on May 28.
Today's call will expand on some of these topics discussed in the letter and our proxy.
First will provide an update on our response to called at night team. Some high level financial results for the core and then recent business updates Jim will provide some additional color.
On the market and our managing the portfolio.
I will discuss our financial results and portfolio under its been more detail.
Our first priority. During this pandemic has been to health and safety of our people I could not be more proud by the way our team seamlessly transitioned to working remotely beginning back in mid March.
Bus technology infrastructure has made it possible for 100% of her phone to work productively from home and our business has been able to operate with minimal disruption.
The team continues to effectively manage all aspects of our business, including TCR need and we're already benefiting from the scale and resources of the larger first Eagle asset management platform.
While there was no certainty and how long term conditions will persist or what shape rebounded will take we're confident.
Experiencing capabilities and her team and the supporting infrastructure to continue to manage the approximately $23 billion and credit assets, we have under management.
Breadth and scale under platform that first eagle positions us to steer beyond these challenging times and continue to support our investors.
Moving onto discussions of the highlights for the first quarter.
Now for the quarter declined to $5.22 per share. All this decline is significant approximately half of this is related to our Logan joint venture, which value was driven by loan prices in the broadly syndicated market.
As a reminder, we're running two distinct portfolios and T C or D won a direct lending portfolio held directly on the balance sheet and two highly diversified portfolio, primarily broadly syndicated senior secured loans held off balance sheet and the Logan joint venture.
Other joint venture had total assets of 330 million with loans to over 128 unique issuers as of March 31st 2020, and represents the single largest investment on our balance sheet, whether equity valued at $46 million as of March 31st 2020.
The broadly syndicated market experienced unprecedented volatility since early March but as Rick.
But it rebounded quite meaningfully in recent weeks as Jim will discuss shortly.
That's reflected somewhat in our NAV increased to $5 on 34 cents per share.
Variable 13, I'm, sorry as April 15th.
It was recently reported in connection with a 30 million dollar equity infusion.
We've been actively managing this portfolio one of Opportunistically traded out of select names reduced leverage.
We remain in compliance with the Logan joint venture credit facility did not anticipate any restrictions as it relates to our ability to continue to pay a dividend T C or D exactly position and and the Logan joint venture.
There are many NAV redemptions relate primarily to assets held on our balance sheet and increased credit risk associated with told at 19.
Unrelated to covert 19, only in with our largest right now for the quarter 30 cents per share and our holdings were put on non accrual status.
We also took a 14% write down on allied wireline and put that loan on nonaccrual status is kind of a restructuring of the credit.
She has been accepted significantly impacted by the drop in oil prices.
We're operating optimistic for the longer term prospectivity I like business.
I like to provide some additional color on OEM.
Oh I am continues to feel pressure from customer delays in Q1 that impacted liquidity. The company has responded with prudent cost cutting initiatives and remains active and assessing strategic alternatives to monetize certain business units and technology that is enhanced in recent quarters.
Net investment income for the third quarter was nine cents a share or 10 census for one time adjustments associated with downsizing amending our credit facility.
The decline quarter to quarter is primarily due to oh, yet and allied wireline going on non accrual.
As highlighted in her last earnings call, we expect to take more aggressive actions to exit or legacy investments like going on.
As a result these markdowns on the credits in the portfolio do not support the current dividend level. Accordingly, the board of directors has reduced the barb.
The board of Directors has approved a reduction of our dividend of 10 cents per share for Q2 2020.
While we believe this dividend level appropriately reflects the current earning towers or portfolio. We will continue to evaluate the dividend each quarter in light of cobot 19.
Next I'd like to highlight the amendment the T C or D syndicated credit facility by on Angie.
He or she was modestly levered compared to many other bdcs at about 0.7, 0.8 times going into the cold crisis.
We were able to successfully was that covenants to us.
Well the needed headroom to run our business I continue to pay a cash dividend.
From a liquidity perspective, the balance sheet of D C or D is well positioned with cash and credit facility availability.
We have been conservative in providing undrawn capital commitments to borrowers.
Given the uncertainty a market many of our issuers in our portfolio did draw under the revolvers.
Do you see already has been and continues to be well capitalized to meet these obligations.
Finally, I want to highlight the 30 million dollar equity offering that closed in April.
As noted in our press release and shareholder release on April 20th first Eagle into formal owners of THL credit advisors purpose $30 million worth of newly issued shares for time TCR needed an add.
On a pro forma basis, such persons now collectively own approximately 20% that's easier to use outstanding stock.
These journey intends to use these proceeds the tender for shares if and when the shareholder approval the management contract at the upcoming special meeting scheduled for May 28.
The advisors also agreed to waive the management fee and incentive fees for both the third and fourth quarter of 2020 in the first quarter of 2021 also subject to shareholder approval.
The management contract.
The fee waivers are intended to provide support to T C or D journeys unprecedented times and we're pleased to be able to given the size and scale of the first Eagle platform I will now turn the call over to jump balls to discuss what we're seeing on the broader market and how we're managing a portfolio theres a pandemic.
Thanks, Chris and good morning, everyone.
The first quarter was the worst that the syndicated loan market has seen since the 2008 financial crisis.
With the broadly syndicated loan market following roughly 12.5%.
The Logan JV is directly correlated to these prices in its portfolio was marked down accordingly in Q1 contributing to nearly half the total.
Portfolio Mark down for the quarter.
We have seen improved conditions in the liquid markets. Since then as prices have rebounded to some extent.
This is largely determined based off ratings and liquidity of the underlying loans.
Next I will talk a bit about how we're managing the portfolio in light of covert 19.
We've been in regular dialogue with our sponsors in borrowers.
Since the start of the pandemic earlier this year.
We've implemented a steering system for all of our credits.
Base.
On a scale of one through three.
Largely determined by the amount of direct exposure these credits have to the virus.
Our primary focus now is on managing liquidity and working with our sponsors to extend duration for these investments that needed.
To the extent releases required in the form to interest three amortization deferral, we expect to be appropriately compensated.
We believe now more than ever that having a portfolio that is predominantly first lien loans will be crucial and managing through this crisis.
With that I'll turn the phone over to Terry.
Thanks, Jim and good morning, everyone for some portfolio highlights as of March 31st our portfolio of.
A three day fourmillion wasn't up to 75% and senior secured debt and 15% in the Logan JV as a reminder.
The Logan JV is.
90% invested in first lien assets the remaining 10% of the portfolio was held in second lien and other income producing equity holdings.
A weighted average yield on the doesn't income producing portfolio, including Logan decreased to.
6.8% decline quarter over quarter is primarily a result of out in the new non accruals.
Which as of quarter end on a cost basis increased from 14% for the portfolio just 21%.
Loadmaster and hall and we're the only other car companies. In addition to Oh, we have an allied on non accrual at 331.
Moving to the financials for the fourth quarter looking some of the components of our 7.9 billion of investment income.
Interest income represented four point Sevenmillion <unk>, a decrease related to the non accruals dividend income was basically flat quarter over quarter 3 million.
The 2.3 million from Logan and about $700000 from TNK.
Let me expense side towards motions with quarter, a flood of 5.2 million, but Q1 did include.
But one time charge of <unk>.
$318000 related to the acceleration.
The amortization certain deferred.
Financing costs in connection with the amendment of our credit facility.
From a leverage and liquidity perspective leverage levels increased to 1.25 times as of March 31st due to the sizable markdowns in the portfolio.
One of the credit facility Amendment, the Chris mentioned, we increased our leverage capacity to 1.55 times or a 165% house a coverage ratio.
Reduce the net worth to us from 175 to 140 million.
Outsized our facility from 150 million 220 million exchange for 25 basis point rate increase the L. to 22 75.
We believe with the smaller slightly higher priced facility provides us more flexibility with structure.
Leave us with adequate cushion to manage through the Coca 19 crisis.
We saw an uptick in revolver draws in March and April.
C or D. A 22 million of cash.
On the balance sheet at March 31st largely as a result of selling our broadly syndicated holdings purchased in December in late February.
We currently have remaining unfunded commitments of around $8 million and are well positioned from a liquidity standpoint to fund these commitments if necessary.
With that I'll turn the call back to growth.
Thanks, Eric.
While we've made progress on our strategy. There's then there's an pain as the result of the anticipated health and economic crisis.
Nonetheless, we remain committed to continue this portfolio repositioning we've diversified our bulk over the past two years and sponsored back first lien positions and remain well positioned to manage the portfolio going forward with good liquidity in the market.
We have made all of our decisions the T C or D and the stockholders that's done for some minor we believe longer term committed to tease you already is evident in the financial support.
In the form of non dilutive equity contributions fee waivers and a commitment to a sizable and accretive tender offer.
We believe a vote on May 20, eightth in favor of the contract renewals in the best interest to the shareholders. When we look forward to a favorable outcome. So we can to complete the execution of the surgery plan. We laid out two years ago now and tried to particular platform with that I'll turn the call up to the operator for questions.
Ladies and gentlemen to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q1 a roster.
Our first question comes from Lee Cooperman of Omega family Office.
Yeah, Hi, what was the F. <unk> good morning, hope, you're safe and healthy.
What was the F. if so in the quarter.
I think you choose to read the release yet.
That's okay, you're saying that free cash flow from operations like yes.
Yeah. It's a it was 10 cents a share I'm, excluding the the fee that we paid a to amend the credit facility.
Okay, and if in the future when you're paying the new owner, new operator, a full see what would that reduce the a AFFO quarterly basis, a few pennies or.
No that is a fully loaded a number going forward at the contracts approved we would add three cents a share so you're being paid that 10 cents was included a management fee. It's nice to see what it's doing season until they're ready for that was already included okay, if including okay. It can explain to me I have.
And read the a document the yet but the.
If the approved if the deal with first it was approved what is the cost of terminating them and how long do they have the contract for before they can be terminated.
Yeah, I'll answer that in some bright our general counsel will correct me, if I'm wrong, but there's no breakage fee associated with the contracts being terminated its just the contractors approved I believe there is a two year window before we would be up for renewal at the end of that to your window, though again, there's no up there is no breakage fees. That's if that's what you are implying.
Got you. Okay. So the 10 cents is after accruing a fee that we're not paying so the actual.
Cash flow was 13 cents.
Excluding the management theater been 13 cents, yes.
Right right, which is being excluded until the end to the first quarter of next year.
Yes, so again, all things being equal without a management fee and Q3 in Q4, he would have been a 13 cents a share.
Right right and.
One other things Lee.
With with OEM is our largest position.
We put that on non accrual because it's a it was important for us to to make the determination that we need to preserve the assets as you've said it as weve recognized has been too much now deterioration in the portfolio.
We need to.
Take some capital reinvest back into the business to a to ensure some more NAV stability.
We've taken cost cutting measures in the business, we've invested a lot of good technology. We've got some very very good discussions with strategic partners that we think and.
Create a situation our solution where sometime in the future. There's a chance it can come back on but right now just given the size and scale the position felt it prudent to ER to put it on non accrual to ensure a or to take steps necessary to to minimize any further now deterioration.
What is the size of the OEM commitment.
[noise], which leaves and Terry insight at around 29 million.
And what does their business.
In the semiconductor space it makes a.
Wafers that up.
We're up.
For for up end markets.
I think about Fiveg products.
Well that's got a good it's gotten good technology. It just has its doesn't have the size and scale for distribution and.
You dig boat like we can make a really really good product, but if we can't sell it if we can't push it to the channel.
That's where we're having issues on the on the on the revenue side, that's one of the.
Main focus is our right now for US. This line you know get strategic partner to us to monetize that technology that we've invested over the last two years.
The you have a qualitative view, whether you think be 522 LTV at the end of the first quarter was the bottom of the cycle or you. Just don't know you don't have a view it's difficult to say Lee just given the uncertainty many economies gonna come back.
You will see from 331 at 522, the Logan portfolio moved up almost 12 cents a share so the NAV that we actually purchased the $30 million of stock was $5 on 34 cents.
The loan market continues to stabilize so we feel good about that and again that was almost half of our of our NAV deterioration was associated with Logan.
The good news is we've repositioned the portfolio is 90% first lien, including Logan. So we are the top of the capital structure. We've we have.
Manage liquidity in or trying to extend duration on all of our portfolio companies until the economy turns that Don so listen if the economy turns back on quickly I'm not suggesting that is going to happen, but with internal quickly I feel pretty good but at this as it turns out to be a protracted cycle, where you could see further deterioration I don't think we're unique to that end.
That would be across all asset managers.
If the economy does not turn on so there's going to be continued pressure on on assets that tell me a little bit about the allied wire commitment and exactly what they do.
Allied wirelines in the oil and gas industry as you can imagine tremendous pressure and in that portfolio. We're we're a small investor in a fairly large business.
The decision was made to convert our debt into into equity.
Process is ongoing once it's done we'll own a combination of a small debt security a preferred equity security.
In the business.
There's a chance if a bit when oil comes back at this can go back on on a on an earnings status, but right now given oil prices and demand for the for the company's a.
Services, it's a it's fairly low.
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Mm Hmm.
It was one of the question escapes me Oh, Yeah, you keep talking about tender offer his dedication commitment that you've already made it you are going to do it tend to refer or is it the change that you might go a different <unk> route.
No I appreciate the question. So we've we've raised $30 million specifically.
Earmarked to to do a tender or continue to have discussions with our board and with ER with advisors on the best way to execute that.
You know there there's two different right ways, we can move forward.
You could do a Dutch auction.
We can do fixed price, we may end up stage unit over time, depending on the stock price and current market conditions, but the $30 million as highlighted is a.
Was raised this is my poor did you keep talking to tender offer but it may not be tend to have we may be just open market purchases. It may be over extended period of time that decision not yet be made.
Right I mean, they're not even raise the do a tender that subject to the contract being approved I want to contract is approved we plan on outlining or at a minimum step one or what the tender will be.
Thank you stay healthy southeast Asia talk to later, but like I care.
Our next question comes from Robert Dodd Raymond James.
Hi, guys like how can you talk a little bit about.
Alex I stress if the pandemic hadn't happened, we know kind of where you wanted to allocate capital.
Personally loans et cetera, et cetera, obviously now I'm you know Oems on non accrual for example, they may have more capital needs.
Which potentially could improve ultimate recovery, but what's your appetite to put.
It's potentially more liquidity into some of these already.
<unk> dance trucking positions to maximize amongst them probably.
This is I'm trying to minimize staff that segment in the pool, probably I mean, how does that going to be balanced over the next call. It gets to be six nine months.
Yeah, No Robert it's a great question. We appreciate it so maybe just step back and expand a little bit on what what Jim cover. So when we when we stepped into the pandemic, we along with many other asset managers tried to start a score weight our portfolios into categories tier one two and three on who had the most exposure.
Part of direct impact the second part that we've done now is dive back into these businesses to try to evaluate.
Which which companies will come back sooner.
When the economy opens back up.
And were ranking knows so my our focus right now is is extending it extending the duration at managing liquidity and into terms to the extent there is incremental capital needed to bridge that gap you know, we're going to start with the business that we think are going to.
I'm going to come back because we think those will be good investments. The good news is were primarily a sponsor backed portfolio. Most of the conversations we've had that and I'd say in good partnership with.
What the sponsors so to the extent there as a solution needed were we're optimistic that will be something that will work on it do together.
In a downside scenarios to sponsor is not willing to step in it we have to provide that liquidity as Jim said will be compensated for that and if we have to run the businesses we will.
Okay I appreciate that thank you enough. The sponsor question just a follow up so you already answered that as well. So thanks, a lot guys and staying healthy.
Thanks Robert.
Our next question comes from Paul Johnson of KBW.
Good morning, guys. Thanks for taking my questions.
My first question was around the credit facility I believe you have about 38 million a salable capacity undrawn is that wholly attributable today or is any of that subject sort of thing borrower faith restrictions.
Hi, This is a Paul's Terry Olson.
Can't draw the full amount today don't have an expectation of drawing more in the near future given the cash levels. We are running with on the balance sheet today, but it is subject to borrowing base borrowing base governors.
Hey, Paul the only thing I'd add to that if you look at our unfunded commitments. Viet revolver draws are are delayed draw term loans. The amount that's not funded on our balance sheet as is less than $10 million and today, Terry or sit on what $22 million of casual up from 20, just about $20 million of cash. So we we do not added liquidity issue as it relates to our.
Our need to.
To access that revolver, Paul let me clarify if and when we do have sufficient borrowing base to draw the full amount, we wouldn't draw to that level of utilization.
Right.
One thing I'd want to why did that tie in June we don't have a capital needs to do that just let me say that another way apologies, yes. The okay leverage is again I think leverage as important as you've seen certain managers get off sides of it either what their manager or over extended on unfunded commitments, we manage a lot of leverage vehicles, not just TCR d. and I think.
And very very prudent you've seen that.
In a in the fact that we've stayed on sides with I am Gee, we're able to get that amendment done in where we can continue to pay a cash dividend.
We've been able to manage our our Logan facility.
You know aggressively to manage leverage there so while we don't like to volatility in the market. We do have a tremendous amount experience across the platform managing leverage vehicles and from that standpoint, we feel like we've got we've got a very very good team in place, namely with magenta offices, our CIO.
Okay. Thanks for that.
And my second question was around the dividend I'm, just hoping to see good and understanding of what the policies going forward, obviously earnings or are still a little bit on certain at this point you guys have higher non accruals. How are you looking set that is that something that can fluctuate going forward.
Or or are you looking to.
Potentially hold the dividend, where you've said it today what are your thoughts around that.
Listen we've come into this pandemic wanting to be conservative obviously, we took a steep discount or cut to the dividends at 10 cents.
All things being equal in a in a pretty bad quarterly we earn that 10 cents and that's what we paid out.
We've got some incremental cushion going forward with.
What the management fee waivers that at about three cents per share.
But you know we're no different than anybody else with a with a with a fixed income portfolio of lever borrowers that the pandemic continues for an extended period of time, you know there could be incremental pressure. We we don't have a we don't have a crystal ball on that that asked that so that's why we made the commentary that we'll we'll continue to manage it quarter to quarter.
It was another part of the decision and moving OEM to non accrual.
Again, no one likes that we prefer to be in a position where that wasn't the situation but.
Again, as we try to signal to the market.
Our earnings power is what we're doing this and generating that 10 cents with our single largest investment not not being paid.
On an earning our current basis.
Okay. That's that's very good detail things for thanks for that.
And then on the team the obviously that was mark some fairly heavily this quarter I'm, just curious where was the markdown in the JV with that entirely.
Due to the market CRAD related credit spreads related adjustments or were there any credit issues in there I think there was one non accrual. This quarter's a couple last quarter I'm just any commentary on the credit quality in there'd be great.
This is Terry Paul appreciate that because two two loans on non accrual very minor minor positions.
85 ish percent of that portfolio is tied to what I'll call them more broadly syndicated or more syndicate aside of the market, which took a much heavier hit.
This quarter, so I would say, it's it's more market driven across that portfolio than anything credit related big picture.
Okay.
And lastly, you guys mentioned that you're already seeing benefits from the first Eagle platform. Today I'm. Just curious if you could talk about what those benefits are so far.
Sure. Thanks, Paul I appreciate that question so.
The good news is when we announced the transaction in December we were able to close very quickly in January we did a tremendous amount of work upfront. So we know the exact team that we wanted to put on the field going forward.
We're probably slightly overstaffed after that.
Process was was done which quite frankly, given where we are today is a positive. So we feel good about the team and we feel good about the experience one of the benefits, though being part of the larger asset manager as to the extent there is issues. We had to we have the size and scale to continue to invest in the team. So.
Spent a lot of time, Jim has spent a lot of time talking to the folks.
That are managing is individual portfolios so to the extent, we need to beef up teams that experience on workouts or restructurings, we as we have a large enough out.
Balance sheet and income statement to up to add those resources you know much smaller platforms. Unfortunately wont be able to make those same investments as you see potential pressure on management fees are up our carry income.
Great Okay.
Okay. That's all my questions. Thanks.
Thanks, Paul.
I would now like to turn the conference back to Chris Flynn.
Thank you all for joining our quarterly update this morning, I Hope you all leaving this call with a better sense of the meaningful progress you've made in executing our strategic initiatives will also work into navigator portfolio, the economic consequences of the self crisis.
I hope you on your family's remain healthy and safe as we navigate these empress it is that at times and by the next earnings call wheel well on our way to return to normalcy. Thanks again.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may all disconnect.
Yeah.