Q2 2020 Ares Capital Corp Earnings Call
Good morning.
From two Aeris capital corporations June Thirtyth 2020 earnings conference call.
At this time all participants are in a listen only mode. As a reminder, this conference is being recorded on Tuesday August 4th 2020, I'll now turn the call over to Mr., John Stilmar, managing director of Investor Relations.
Thank you very much let me start with some important limiters comments made during the course of this conference call and webcast as well see a company documents contain forward looking statements.
Subject to risks and uncertainties, including the impact of covered 19.
The related changes in base rates and significant market volatility businesses and our portfolio.
Many of these forward looking statements can be identified by the use of words, such as anticipates believes expects and trends will should say similar such expressions. The company's actual results could differ materially from those expressed in such forward looking statements for any reason, including those listed.
Cc filed.
Aeris Capital Corporation assumes no obligation to update any such forward looking statement.
Please also note that the past performance or market information is not a guarantee future results.
During this conference call the company May discuss certain non-GAAP financial measures as defined by.
If you see regulation G such as core earnings per share <unk>.
He believes the quarterly P.S. provides useful information to investors regarding financial performance 'cause. It is one that the company uses to measure its financial condition.
<unk> operations.
A reconciliation of quarterly P.S. to that that per share increase or decrease and stockholders equity, resulting from operations. The best directly comparable GAAP financial measure can be found in encompassing slide presentation for let's call.
In addition reconciliation of these measures may also be found to GAAP earnings release filed this morning with the FCC on form 8-K.
Certain information discussed in his presentation, including information related to portfolio companies is derived from third party sources and there's not been independently verified and accordingly, the company makes no representation or warranty and perspective its information.
The company's second quarter ended June 30, 2020 earnings presentation can be found on the company's website.
<unk> W Dot Aeris capital Corp. Dot com.
On the Q2 dashed 20 earnings presentation link on the home page of the Investor resources section, but website.
Aeris capital Corporation's earnings release intense you are also available on the company's website I'll now turn the call ever to kept Didier Aeris capital Corporation's Chief Executive Officer.
Thanks, John Hello, everyone and thank you for joining us I'm joined on the line by our co Presidents, Michael Smith, and much Goldstein, our Chief Financial Officer Penni roll in several other members of the management team.
I will start by highlighting our second quarter results and then provide some thoughts on the company's position.
This morning, we reported second quarter core earnings of 39 cents per share, which we believe is another strong result in light of the difficult economic conditions. During this public health crisis.
Our GAAP, yes, that's 65 cents rebounded this quarter in was supported by net gains in our investment portfolio.
Our net asset value per share climbed to $15, an 83 cents, a 25 cents per share increase reflecting 2% growth from March 31st.
We also deleveraged, our balance sheet, and we meaningfully enhanced our available liquidity to more than $4.2 billion as of quarter end pro forma for a successful July notes offering.
The second quarter give us more visibility into the economic disruption caused by cobot 19, and with this we've had more time to evaluate the health of our portfolio and understand how the duration of the economic recovery may affect our investments under a variety of potential scenarios.
Overall, we're feeling more confident in the financial and liquidity position of our portfolio companies [noise], Despite the second quarter being a more difficult quarter for some of them.
And I say all of this while acknowledging that the pandemic is creating a kind of uncertainty that we'd never witness before.
The good news is that our portfolio is highly diversified with the average investment representing just 0.3% of the total portfolio.
And remains weighted towards defensive sectors, such as health care software and business services.
We're fortunate to be meaningfully underweight many of the most impacted sectors like travel entertainment restaurants, retail and oil and gas and this was by design as we were more cautious in the new deal market over the last few years.
We believe the portfolio remains a solid collection of defensive upper middle market companies, which we believe had significant franchise value over the long haul.
The weighted average EBITDA of our portfolio companies is over $140 million and the weighted average enterprise value remains over a billion dollars.
Our weighted average loan to value for our portfolio is approximately 50% to 55%, which provides a significant capital cushion for our long positions when we take a long range for you.
These upper middle market businesses are very different from lower middle market businesses in terms of resiliency access to capital and depth the management.
Rethink proskauer default study on the middle market corroborated disbelief illustrating that defaults amongst middle market companies about $50 million EBITDA were 40% lower than those with less than $25 million an EBITDA.
We're seeing this trend of larger company outperformance play out in our portfolio as well.
Where borrowers with EBITDA of $100 million are more are showing greater earnings stability or growth on average is compared to our companies with $25 million were less than EBITDA.
For the second quarter is a whole we saw net increase in the fair value of our portfolio, we collected 98% of contractual interest due and witnessed a significant decline in outstanding revolver borrowings our portfolio companies, indicating that the liquidity of a number of our borrowers has improved.
On the other hand to key metrics that we used to provide transparency on portfolio company performance non accruing loans and portfolio grades trended modestly negative during the quarter.
Which is consistent broader market credit trends and it's not a surprise given the magnitude of the economic disruption in the second quarter.
The recovery and the economy and that was most impacted portfolio companies. We'll certainly take time. However, we feel confident that we have the tools required to achieve good outcomes.
Specifically as it relates to our portfolio grades at the ended the second quarter. The weighted average grade of our investment portfolio at fair value was 2.9.
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This modest aggregate change reflects an increase in grade two rated names as the performance of certain companies have deviated from our original underwriting expectations, primarily due to the economic impact of Cove at 90.
Overall, we believe the companies will recover during more certain and predictable economic times and we take comfort that the owners and management teams of these businesses agree.
Significant number of these underperforming companies have already were received additional sponsor equity capital injections that or subordinated to our lunch for positions, which we believe validates the long term enterprise value of these companies beyond these challenging times.
In situations, where we have been asked to be part of a near term solution portfolio companies, we've executed amendments to address covenant breaches and liquidity needs.
As a general matter Weve provided short term concessions measured in months, we're quarters, rather than yours, and we have often been able to get some combination of enhanced pricing improved terms and tighter documents along with the sponsor equity.
Shifting towards our new investment opportunities, it's been very quiet on the new deal front. However, due to the size of our portfolio and our wide range of relationships, we're still finding interesting opportunities to pursue typically with much lower risk and higher returns.
Our existing portfolio provides significant built in origination advantages and most of our new investment activity has been focused on incumbent borrowers either providing add on financing or buying loans in the secondary market.
While new transaction flow has been slow activity is beginning to pick back up and non cobot impacted sectors, and we're seeing compelling relative value in these situations.
We believe there can be a long runway of attractive investment opportunities during what we expect to be a slow recovery.
Importantly, the flexibility of our capital capital has enabled us to focus on follow on transactions to reprice risk capture attractively priced and deeply discounted more liquid names that we believe we know well and then a few instances provide opportunistic rescue financing for more coven impacted names.
And he will spend some time in a moment on our capital and liquidity position, but I'll reiterate from our call last quarter. The balance sheet is in great shape with our consistent earnings strong balance sheet and our portfolio positioning we felt highly confident and acquiring a 40 cents per share quarterly cash dividend for the third quarter 2020.
And we believe that we can continue to support a steady dividend level for the foreseeable future.
Ill now turn it over to Penny to provide more details on our second quarter results.
Thanks, Kevin and good morning.
Our core earnings per share were 39 cents for the second quarter of 2020 compared to 41 cents for the first quarter and 49 cents for the second quarter of 2019.
We had GAAP net income per share for the second quarter of 2000, 2065 cents, which compares to a net loss per share of $1.42 cents for the first quarter of 2020, and net income of 47 cents per share or the second quarter of 2019.
Our GAAP net income per share for the second quarter of 20 2065 cents includes net realized gains of two cents per share and net unrealized gains of 24 cents per share.
The net unrealized gains primarily reflects some tightening of credit spreads relative to the end of the first quarter of 2020.
Offset by increased unrealized depreciation for certain investments, including from the continued impact of the covet 19 pandemic.
The $107 million of net unrealized gains on investments were approximately 1% of our total assets at fair value and 1.5% of our net asset value.
Our total portfolio at fair value at the end of the corridor, that's $13.8 billion.
As of June 30, 2020, the weighted average yield on our debt and other income producing securities at amortized cost was 8.9% and the weighted average yield on total investments at amortized cost was 7.7 for such.
As compared to 8.9 for site and 7.9% respectively at March 31st 2020.
Despite significant declines in life or we were able to maintain the yield on our dad and income producing securities at a steady level, primarily due to the benefits of LIBOR floors, along with the incremental spread on new investments and from certain repricings within the existing portfolio.
At June 30, 2020, 84% of our total portfolio at fair value was in floating rate investments. Additionally, excluding our investment in the SDLP certificates.
79% of the remaining floating rate investments had an average LIBOR floor of approximately 1.1%, which is well above today's current three month LIBOR rate.
Now, let's shift to discussing our shareholders' equity.
At June 30, 2020, our stockholders equity was $6.7 billion, resulting in a net asset value Ussixteen dollars, an 83 cents per share versus $6.6 billion or 15 58 per share at the end of the first quarter of 2020.
The increase in our net asset value was primarily driven by the net unrealized gains that we recognized in the second quarter of 2020 that I mentioned earlier.
As of June Thirtyth, our debt to equity ratio net of available cash up $260 million was 1.08 times, which is in the midpoint of our stated target leverage range of 0.9 times to 1.25 times.
And down from 1.19 times at March 31st.
The decline and leverage during the second quarter resulted primarily from that investment repayments as well as from the net unrealized gains on investments in the second quarter.
Net repayments for the quarter were $702 million and included proceeds from sales of loans to funds managed by Ivy Hill asset management or I am.
Mitch described last quarter I am sources middle market loans from Aeris capital and other middle market credit managers to build new or maintain existing see yellows for its investors.
Throughout our history, we have sold first lien senior loans and the ordinary course to I hand at fair value on an arm's length basis.
During the second quarter, we sold $747 million and loans to I am.
To support the activity of I hand, and its managed funds during the quarter RCC made an incremental 175 million dollar investment and I am.
We believe our investment and I am remained highly attractive and provides a significant strategic and differentiated relationship that enhances the position of Aeris capital.
Given the net repayments along with the addition of new borrowing capacity. We ended the second quarter with available liquidity of $3.5 billion up by approximately $900 million since March 31st.
During the second quarter, we expanded air she sees borrowing capacity with a new 300 million dollar secured credit facility with BNP Paribas, <unk>, which is very similar in structure to our existing revolving funding facilities.
While we didn't close the BNP transaction until June we had largely negotiated the new facility and the depth of the pandemic crisis in April when new secured financing was very hard to come by.
We believe that the depth of Aries capitals bank relationships was instrumental in procuring this facility and demonstrates the power of the Aries platform.
Well this quarter and in July we further strengthened our capital position created additional liquidity and effectively prefunded. Our next turned out maturities, which aren't due until 2020 to.
Hi, issuing $750 million, a 307, 8% unsecured notes due in January 2026.
We believe that an important component of our capitalization is having a diversity of funding sources, including a diverse mix of unsecured and secured debt capital to complement our permanent equity capital.
Pro forma for the July unsecured notes transaction over 70% of our outstanding borrowings were from unsecured debt, which resulted in over 85% of our assets being supported by unsecured debt and equity.
This approach to maintaining a largely unsecured capital structure provides us with significant overcollateralization of our secured credit facilities, which positions us well to fully access the total borrowing capacity available.
The strength of our capital structure presents a clear competitive advantage for us in today's environment.
Pro forma for the $750 million unsecured notes issuance in July we increased our available liquidity at June 30, 2022, more than $4.2 billion, which equates to over three and a half times, our unfunded loan commitments and gives us significant dry powder to capitalize on the improving investing.
Environment.
Before I conclude I want to discuss our undistributed taxable income and our dividend. We currently estimate that our spillover income was $408 million or 96 cents per share at the end of 2019.
As we've said many times in the past, we believe having a strong and meaningful level of undistributed spillover supports our goal of maintaining a study dividend through varying market conditions.
As Kent mentioned this morning, we declared a regular third quarter cash dividend of 40 cents per share, which is consistent with the regular quarterly dividend paid in the second quarter.
This third quarter dividend is payable on September Thirtyth 2022 stockholders of record on September 15th 2020.
No I will turn over the call to Michael to discuss our second quarter investment activities and our portfolio positioning in more detail.
Thanks Penny.
During the second quarter and excluding the 175 million dollar investment and I had that Penni mentioned earlier, our team originated 692 million at new investment commitments across 21 transactions.
95% of the commitments issued which senior secured and as highlighted by Kip earlier, 76% of the transactions were to income to borrowers.
We remain extremely focused on large borrowers as the weighted average EBITDA of the company's to whom we issued commitments during the quarter exceeded $160 million.
Typically in our first lien investments the average EBIT da side of the company's refinanced doubled as compared to the same quarter a year ago.
For those new first lien commitments, we also achieved a higher spread over LIBOR and captured approximately 130 basis points of incremental fees.
Going forward the market for new investments and should be meaningfully more attractive.
Many of our competitors will be less active as they focus on portfolio issues and capital availability.
Furthermore, while banks are in better financial position than they were during the great financial crisis.
They have been less aggressive and seeking to make new loans.
As a result, we believe turns pricing and documentation will be very attractive and we are optimistic that the shifts and the competitive landscape will persist for sometime during an uneven slow recovery period.
Turning to the credit quality of our portfolio as Kip mentioned, one way, we evaluate our portfolio performance history, the rating system with grades up one through four one being the lowest grade and for being the highest grade for investments that evolve the least amount of risk in our portfolio.
Yeah.
It's important to note that our grading system, which has been in place since our IPO in 2004 may not be directly comparable to other bdcs investment ratings and many of them have different criteria for how loans are graded.
Based on our current assessment of the portfolio approximately 80% of our portfolio at fair value is performing roughly in line with or above our original underwriting expectation and about 20% of the portfolio is performing below our original underwriting expectations.
This 20% segment of the portfolio, we see is either a grade one or agreed to using our rating system.
Increase and the grade two investments this quarter is largely a result of the coded 19 situation.
There's not a surprise to see an uptick in underperforming names due to the unusual and broad impact. This pandemic has had on all businesses and we are seeing strong equity support.
For the subset of our portfolio that is more impacted by coded 19.
Furthermore, as we have demonstrated in the past, we had an experienced and cycle tested team with a strong track record of working through issues with underperforming portfolio companies.
The other key metric to observe regarding credit quality, it's our non accrual rate, which includes the those companies that are not currently able to make interest payments.
During the second quarter, we added three new companies.
You are non accrual list with which increased non accruals to 4.4% that cost and 2.6% at fair value as compared to 3.1% at cost and 1.7 at fair value last quarter.
It is important to note.
Our differentiated approach to managing nonaccrual assets.
Managers are quick to exit their non accrual loans early by realizing losses and reporting lot lower non accrual rates.
We typically take a different approach, which we believe allows us to achieve better recoveries.
Pro active portfolio management approach enables us to be very patient, allowing us to seek the most favorable outcomes to maximize our recovery.
Much of our confidence in receiving favorable outcomes from struggling companies stems from our focus on large franchise businesses that believed to be will ultimately be able to return to normal levels of profitability in a post covered world.
In addition.
Our position in a significant number of these situations as a lead agent or having a controlling position and the capital structure.
Often provides us the ability to positively influence our outcomes.
With our deep sources of liquidity and the experience and size of our team. We believe that we have an opportunity to actively engage our borrowers and execute on this position up control.
Providing support for these businesses through challenging times.
And eventually benefiting from their recovery.
As an example.
This past quarter, our total net net realized gains included gains on two previously underperforming investments that were graded one or two one of which was previously on nonaccrual status.
Our ability to control and manage these investments over many years allowed us to convert what could have been a significant loss into the recruitment of our entire cost basis for these original positions.
We have a strong track record with respect to exits of restructured investments, where we have taken control.
Specifically more than 250 million of the nearly 1 billion of cumulative net realized gains that we've realized since our IPO in 2004 are attributable to exits from restructured portfolio companies.
Well, it's certainly not our goal or intention at the onset of an investment to take control of the portfolio company.
We believe that are significant liquidity position of over $4 billion will give us the opportunity to selectively take ownership in companies as needed at a relatively low cost basis.
Support the companies with new capital and capture the potential upside through a recovery.
Since they are Ccs inception, we have realized total proceeds of investments on nonaccrual status equal to more than 90% of the excess capital extended to these borrowers.
Many of you have attended our Investor days are familiar with our restructuring track record.
And our proactive approach to value creation and risk mitigation in these situations.
Lastly, another way, we're creating value in the portfolio today, it's by repricing the risk in our loans with incremental yield and tighter documentations.
In more challenging situations, we can provide companies with flexibility largely in the form of shark short term covenant relief.
And we have been benefiting from an improved position with additional sponsor equity enhanced pricing and tighter loan documents.
I'll now turn the call back over to kit for some closing remarks.
Thanks, Michael in summary, we delivered another quarter of strong financial performance and we remain optimistic despite the current challenges facing the economy and our country generally.
Time has given us more clarity in our portfolio and we feel confident that we have the playbook to navigate these uncertain times and work with the most impacted portfolio companies to help get them back to pass levels of profitability.
Our ability to support these borrowers during this period of volatility only serves to strengthen our relationships and our market presence, which we believe further position aeris capital as a market leader.
Over the last several years, we've positioned ourselves defensively in anticipation of weaker economic conditions.
We have a strong liquidity position no near term debt maturities highly diversified portfolio and a fabulous team with the capabilities required to deliver during uncertain times.
We believe Aeris capital remains well positioned to navigate and prosper despite the challenging economic environment and to capitalize on today's attractive investment opportunities with a view to driving strong returns on equity at the company going forward.
That concludes our prepared remarks, operator would you. Please open the line for questions.
Thank you.
At this time, if you'd like to ask a question. Please press Star then one on your Touchtone phone.
I'd like to withdraw your question. Please press Star then too. Please note as a courtesy to those who may wish to ask your question. Please limit yourself to one question Andy single follow on if you have it additional questions you may reenter the queue.
Investor Relations team will be available to address any further questions at the conclusion of today's call.
We will pause momentarily as we gather a roster.
Okay.
Our first question comes from Chris York from JMP Securities. Please go ahead.
Hey, good morning, guys and gals, thanks for taking my questions.
So my question is a strategic question on active portfolio management and portfolio diversification. Michael appreciate your prepared comments on restructurings. So obviously the emergence of cold it was unexpected into unprecedented it's disruptive business models, So I'm curious kit or maybe even Michael.
How is your approach to portfolio construction and door diversification within the portfolio for new loans Bald as a result, as a result old spike in default correlation or the likelihood that loan default at the same time.
Hey, Chris It's kept can you hear me.
I got you got.
I think that the easy answer to that as it hasn't changed much I mean, the philosophy historically has been defensive industries less prone to default. So we've been position well in that regard and it's also been to Ron you know highly diversified it's one of the benefits of us being a large company relative to some of the smaller bdcs. So.
Always the way that we run things and I don't expect it will change much.
Got it and then maybe just a follow up does it does it in terms of portfolio management and product does it cause you to maybe think about shifting towards growth blending or putting more HDL in the portfolio as opposed to more cash flow loans.
Look I mean, we're always trying to diversify our origination strategies rights over the years Weve built industry teams and different verticals, whether it's you know software health care.
We do have an active ABL business. It Aries most of the ABL lending that we've done outside the BDC in areas has been in much much smaller companies and typically with rates of return that maybe don't approach, where we'd like to see assets coming into the BDC.
For the points on growth I mean look some of these companies are.
Pretty growth oriented businesses right, so I'd say growth for sure and.
You know current portfolio as is but I don't I don't expect to real shift in what we're doing we kind of like the way the portfolios position and I think we've got a lot of origination advantages.
Great all due respect brothers I'll leave it there and how back in the queue. Thanks. Thanks, Chris.
The next question comes from John Hecht from Jefferies. Please go ahead.
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John either.
<unk> John is your line on mute.
Okay Iron.
Next question, sorry, sorry can you hear me.
Gotcha, Hey, Jeff Hi, Yeah, Strange times strange things happened since sorry for that I was on mute. So you guys know during your prepared remarks talks about it.
<unk> expectations for an improving investment environment, you cited improving terms and so forth. Yeah. How do you think that works drew investment spreads over time as you're gonna be an opportunity. Despite the low rate environment to get some wider spreads in the portfolio.
Yeah, I think for sure I mean anytime you see you know a downturn in credit it doesn't have to be an economic contraction of the severe its typically default start rising spread start widening folks feel.
Like the environments Riskier and command premium pricing, we've definitely been seeing that on anything that we've done since the middle of March right. So.
And then even in things that really have had no coven impact whatsoever. So software companies you know we closed the deal at the end of the first quarter that I think we talked about on the Q1 earnings call, where we actually took an existing name and lowered leveraged tighten the document on sponsored a sponsored buyout and widen the pricing out on the overall capital structure by probably 300 base.
Since points.
The other thing that we're doing is looking at existing names where folks are looking for incremental capital rights are delayed costs have expired and they're saying you know I've gotten interesting acquisition to do.
Again, a couple of hundred basis points wide I think of where we would have seen that back maybe in early March.
Okay. That's very good color. Thanks also looking at the deck Hey, Jay.
It talks about the that the.
Excuse me have a income based fee of $41 million that was deferred maybe can you talk about the circumstances around deferring that.
Got to how did the look backs or.
Yep.
Some people I think no that we've got to.
Different sort of performance fees, but I think the one you're referring to is what we typically call part one it's the income based.
Fee payment it does have a hurdle associated with it a 7%.
So actually the fleet was earned Q1, so to be clear the company expense that fee because we expect it will be payable and we're going to reserve liquidity to pay that.
But at the Rolling four quarter test right. So importantly, again, we expensed it and our manager Aries management is booking as revenue because we view it as something that we'll get paid in the future, but what is it sort of the fact that an old fee structure back, though for its a little clunky in it it actually deferred for a little while if people remember back nine.
What it does is it just try it basically cash trapped the fee for a little while so it was put in place to pick up book value declines. So the reason for it is really that Q1 book value decline.
As we roll forward the ROI we test.
It's in there to basically trapped some cash that the concept way back when it's a little bit clunky as I mentioned is if a company is seeing continuous book value declines.
There are probably not able to get to the equity markets. There were concerns around with the company have liquidity and it became a deferral right. So again, we think it will be paid down the line.
Once the are we test catches backup, but its deferred on a cash basis this quarter.
Okay. Appreciate the color and glad to hear you guys are a well thanks very much yeah, you John Thanks.
The next question comes from Finian O'shea from Wells Fargo. Please go ahead.
Hi, good morning, good afternoon.
To start with a market question.
How are Ya Kip.
Good.
Oh I think it was now you're mostly focused on follow ons and liquid opportunities.
You you did anticipate a comeback in regular way deal flow <unk> can you add any color on on the timing. There is that is that happening right now or when do you see that return and regular activity. Yeah, it's kind of slowly happening right now right and I'd say typically the things that continued even though they probably had the paused.
Button hit you know throughout.
April into May the things that we're continuing I'd say, we're the things that we're kind of well in process right. So.
[noise] processes that that again got pause, but but where you know prospective buyers that actually met management teams and have the ability to go see plants and just the physical aspects attendance aspects of trying to buy a company or our material right. So the things where many of those boxes have already been check, but it had an x. actually gotten.
To a sale or things that are back in process.
I'd say you know the interesting prospect maybe beyond that is they're certainly going to be folks looking for liquidity you know, particularly.
So much that we do with private equity firms you know they have finite lives are not going to hold companies forever and what we've seen as some of those businesses are actually getting sold.
For potentially being sold from a sponsor to another sponsor who may have had high familiarity with that company.
Right. So perhaps there was a process 40 years ago, where buyout from a b C. One over you know buyout from X Y Z well, certainly X Y Z was interested in buying that company and if it becomes available for sale again has the same management team they understand the operations, while they've been tracking it that's something that's you know easier to get done in this environment.
Bill at home so much so we see it picking up but it but it's happening now and definitely hitting a little bit of a summer slowdown too. So I think we'll all be interested to see what the fall breaks.
Sure. That's very helpful. In just a sort of natural follow on there does that portend a.
Hey drop any change of pace in your volume.
Assuming for a quarter or to your you're doing follow ons and liquid.
Should we see Oh, a lesser clip of origination yeah, I think you well I mean, you saw this quarter for sure. So we do have the ability to find from good stuff as I mentioned in a in the prepared remarks incumbency and the portfolio help follow ons et cetera, but you know, it's it's certainly going to be a floor back half of your than last year.
Yes, that's my expectation Yep.
Austin I can Raptor I think you mentioned rescue financing as well in some instances.
Is that what would be sourced by your group in the you know given those opportunities in today's market or is that a market collaboration with saying up credit or another group in Aries.
Yeah, we really have kind of.
A nice triangle form between a couple of the really strong opportunistic credit in private equity strategies today for corporates. It's really are special opportunities fund that we run out of private equity that does.
Stressed and distressed investing on behalf of private equity, but certainly also in collaboration with credit direct lending, which is very capital Corp, and actually our alternative credit business, which has raised a fair bit of money to do deals.
More around asset based type transactions to the to the prior question. So.
Looking at things like mortgage Reits and others that may have needed to de leverage or look for some runway extending capital. So those three groups in our from right now are focusing and are focusing together and collaborating really well and those types of deals.
Okay. Thanks, so much yeah, you're welcome to take care.
Next question comes from Ryan Lynch from KBW. Please go ahead.
Hey, good morning, Thanks for taking my questions first one yeah, you talked a bit about the new investments have you guys made in.
Yeah ill and selling down some loans.
To that entity historically, you guys. It paid about a 17 and a half million dollar dividend from Ivy Hill that you guys have any guidance.
Asian for that going forward, given it's a stronger capital base in larger portfolio.
Yeah, I mean, we don't really have any guidance, but you know typically.
And we're making those investments you are seeing increased dividend income this one's a little bit different because we actually have the of the 170 525 million.
So small portion was an equity investment.
150 at 175 was actually a subordinated line down to the company that pays an interest rate of LIBOR plus 650.
So it has CMC already to everything else, but also has a cash coupon with it. So the income will start to get recognized a little bit differently.
You want to follow up or anyone wants to follow up.
Afterwards, right, we've typically seen dividend income an Ivy Hill come in and the dividend income line, it's going to change a little bit.
But.
Yeah look I mean with more investment we're not lowering our return expectations for Ivy Hill, how about that so I hope and time will see commensurate income with the larger investment.
Okay.
And then I think you mentioned you know like 20% to your portfolio. So it is performing below the expectations. When do you guys. Originally I made that investment, but I think you also said that you were seeing strong equity support from some of those sponsors and some of those more coal bid.
Related names can you maybe just talk about how those conversations are going and why those equity sponsors are willing to to continue to put more money in fresh new equity capital into a company. That's that's no.
Having a downturn it clearly impacted by this cold the downturn and with just the uncertain. How this plays out being so great.
Yeah, I mean, we tried to either to the prepared remarks right. I mean, there a lot of these companies that are obviously experiencing very difficult conditions, you know with cobot I think it's improved.
Which is which is why our book value deterioration in Q1, I think was worse than Q2 right. The prospects for where we were going March 30, Onest at least in my mind were not as good about the prospects as to where we are now because at least we've had some partial reopenings and I think private equity shares the shares the view that they own and we lend to some really high.
Quality long term assets, where despite depressed performance today, it's going to come back you know the real question Mark is when it comes back but in a lot of these circumstances. The discussion is look you guys on the company company needs liquidity, we're happy to talk about amendments and modifications and be part of the solution, but it's not our responsibility to.
To deal with liquidity challenges, because we don't on the company.
And we've seen.
More than a handful of equity infusions in companies that obviously values.
Below where we're sitting from a lending perspective and that gives us confidence that they share argues that theres a recovery here and and a lot of these names that we marked down you know aren't impairments down the one.
Okay understood kit those are all my questions I appreciate the time today, okay. Thanks for you to take care.
The next question comes from Kenneth Lee from RBC Capital markets. Please go ahead.
Hi, Thanks for taking my question just a follow up on a short term concessions that you mentioned a into prepared remarks, one if you could just a share with us further details and as well you know, perhaps how broad based these concessions were either in terms of numbers of companies or or percentage of the portfolio.
Yeah.
Yeah. So we in the quarter 40 amendments amount about 2 billion a fair value.
And they typically look very similar as I mentioned, there shortened nature right, so not years, but quarters.
Sometimes they come with a partial deferral of cash interest and sometimes they don't but in all circumstances that allows us to reopen the documents and tighten our covenants up.
Lot of discussions about minimum liquidity covenants, which should become the new thing in the market folks are obviously trying to make sure that companies can get through the while remaining liquid and then you know we're just taking out a lot of the nonsense that crept its way into loan documentation over the last five years, you know as as the lawyers.
And private equity firms in particular, pushing much harder on documentation were allowed to where we're able to sorry reverse a lot of that so that's the.
That's sort of the playbook and give you a sense as to how active it's been it's been it's been really active on the amendment front.
Got it very helpful and just one a one for Bob if I may.
And this is just related to the other question about so seeing very attractive investment opportunities.
Just wondering if you could just characterize.
How aggressive you could be in pursuing new investment opportunities in the current macro environment and also especially given your comments around what you're seeing and be competitive landscape. Thanks.
Sure I mean again do you have deal flows down follow on activity is down and all of that but it's there and I think I tried to give some color around.
Wider pricing with materially lower leverage right. So you know the six and a half times deal that used to exist with adjusted EBITDA is now probably more like a five and a half times the all without adjusted EBITDA in with higher pricing a better document.
But you know, it's it's slower for fins question about.
New originations for the back half I think it's going to take awhile for everything to do come back.
But I get your question I'm, sorry, if I missed one there.
Okay. That's it that's very helpful. Thanks again.
Thanks.
The next question comes from Rick Shane from JP Morgan. Please go ahead.
Hey, guys. Thanks for taking my questions. This morning.
Correct.
How are you Oh goodness.
[laughter] I'm, sorry, I'm, a big about a little too much.
Hello.
[laughter] anyway.
About rescue opportunities and he'd also put that in the context of the broader platform distressed or Oh I am curious how to think about the risk associated with that versus your core business in the framework that you're applying for loans that you're looking.
Yeah, I mean, because of the uncertainty of where we all are today I'd tell you the bars unbelievably high right now this is not.
At this early in Aeris capital comment here for a second but but just an aries comment around the collaboration of these groups that I mentioned, you know I think we and a whole host of other.
Firms had very long list of these things back to the middle of March and particularly the high yield market, but the public markets really sort of use or some of it it at what I'd call much much lower pricing. We've got a couple done for sure at the platform that we're thrilled about and we still have a long list, but it is a little bit different.
Right and that kind of core middle market lending strategies that we always employee but look this is a time, where you need to actually use your capital wisely and if you can drive what you think are really exciting risk reward.
More opportunistic financings, that's the way that we can actually add value and or are we to the company over time and you can't be afraid you just have to be selective.
Got it and are these generally speaking.
Financing transactions she company that you might have looked at.
A year or two ago, Palestine, and now Youre in a position where you can look at how how the company's performed versus plan and you see a more attractive return.
Yeah for sure.
And we talked about the small deal that we did with another part of Verizon Outfront media, which is that public you know.
Outdoor advertising business, but I don't think it was rescue because they certainly are not a distressed company by any means of [laughter] measure, but you know in those uncertain times. This is a company that we'd spent years talking too.
Either about lending to were making an equity investment in and we'd observed that and had met the management team and all of that's it felt knowledgeable about it and I think the security that we were able to.
Put into that company to give them extra liquidity to weather. The storm. It was probably more expensive than they would have liked and certainly more expensive than they would have liked you know a little while back Ryan but look they made a smart decision on the shored up their situation and.
Yes, I think it was that there was a good outcome for everybody and we're thrilled to finally got invested in the company. That's just one of the examples that we referenced.
That's helpful context, Thank you guys very much.
The next question comes from Terry Moore from Barclays. Please go ahead.
Hi, good morning.
One of the follow up on the concession question, but can you maybe just talk about your appetite cigarettes additional concessions that this crisis drags on or even gets worse from here and how you maybe think about the risk reward or branching additional concessions.
So most of the concessions to date again have been shorten nature and have come with equity investments.
We think that we've positioned you know those concessions to allow for a pretty good runway for these companies.
There are few where the leases are a little bit shorter and as we get towards yearend we wanted to.
I have another look are you have another bite at the Apple potentially with our equity owners and management teams.
So it's really hard to generalize curious kind of it's all over the map, but look I think with with additional concessions in that want to certain circumstances at year end I think you know unfortunately, we'd be looking for additional compensation in some regards.
Yeah.
Okay. Thank you that's it for me.
Yep Okay.
The next question comes from Casey Alexander from Compass point. Please go ahead.
Hi, Good morning, most of my questions have already been asked but but I will ask you know historically the company's used a credit cycle to look for an accretive acquisition.
I understand that you probably wouldn't wouldnt want to execute on anything until 2021, what are you starting to see anything or smelling anything out there that looks like an opportunity that you might want to take advantage of in the future.
Yeah, Casey not you know the answer is simply the kind of not yet.
I think if you'd seen another.
You know material downdraft in book value across the BDC industry or elsewhere, you would have found some companies that really we're not in wonderful positions.
From a leverage standpoint, you know you did see a couple of folks do rights offerings, you saw a couple of companies do.
What I'd characterize is reasonably expensive from a coupon perspective bond deals to kind of shore up liquidity. So I think it's a little bit longer.
Little bit longer range out if at all I will say, okay. Great. Thank you yeah, you're welcome.
The next question comes from Matt Jayden from Raymond James. Please go ahead.
Hi, everyone. Good morning, most of my questions have been answered just a quick follow up with like hand on the loan modifications.
I know from one Q the count was around you know less than 10 modifications during the quarter. There any color you can give on the number into Q and kind of what type of composition, where those modifications.
Specifically the number of pick toggles, if any would be of interest.
Yeah, Sorry, just said we did about we did 40 amendments in Q2, you know relative to the 10.
I'm looking here to see if I've got that number handy is we're all sort of separate.
I can't quite fine that number certainly some of it is some interest deferral more often than not at the partial interest deferral, where we're actually increasing so say alone is paying 8% cash it would turn into something and then when 5% cash plus the 3% pick and then we would put a pick at.
Around it obviously is additional compensation and we typically do that for the life of the amendment or the loan depending on the situation, but I'm, sorry, I'm flipping through like you and I know, it's here and I just can't quite fine that number offhand, but we'll follow up with you.
Okay. Thank you.
Yep.
The next question comes from Chris Kotowski from Oppenheimer. Please go ahead.
Yeah, Good morning, and maybe your crystal ball isn't any better than anybody else's, but fitch currently puts like the leveraged loan default rate at around 3.9% and.
Most of what you see is still in the obvious areas like energy and retail.
I mean, if you had to look out six or nine months. A you know does does this start.
Impacting you know the the non directly.
[laughter].
It impacted borrowers are there second order effect should do you have any any any speculative guesses wherever we see that a headline default rate be six or nine months from now.
I appreciate the question I'd.
A crystal ball is not out today, it's very cloudy.
[laughter] such a crazy time, you know the second order effect is kind of not where we're spending the most of our time right. When we look at sort of the increase in watch list names or the increase in grade two names for Q2, you know what's really the obvious spots as I think I said on the last quarter, it's business as the required people to show up in a 10 what.
Over you know service are good they're providing or selling right. So it was dentist office. It was retail you know in all of that but I mentioned in the prepared remarks, we're pretty under exposed to all of those sectors with the with the exception of things like consumer and certain health care services, where you know the lack of people being.
Another house attending things and buying things and doing things.
In Q2 is pretty obvious right. So those are the ones that that are in.
Those are the ones that really are in the discussion and in that 20%.
Okay.
All right. Thank you.
<unk>.
Again, if you have a question. Please press Star then one.
Next question is from Cameron Baxter from Anfield Capital Management. Please go ahead.
Hey, Thanks for taking the questions. So first wanted to drill down a little more maybe into that 20% of the portfolio is performing below expectations.
Can you comment on if you've seen maybe a decline in trends just in July with the outbreaks in cases.
And how that fares maybe towards versus May and June.
Yeah. That's an interesting question I wouldn't say that it's materially different Ryan again that the point that I made on book value deterioration in Q1 versus Q2 I think was.
Trying to highlight that we felt that we thought things actually did improve with partial reopenings, obviously there have been.
Some setbacks, but we haven't seen anything materially different in the last stand the companies that are having this cobot issue, we're very close to where you know daily or weekly conversations with management teams and owners I wouldn't say, there's a mark change in July versus call. It the middle man it feels about the same.
Okay. Thanks, that's helpful. And then just a follow up in terms of.
Where you think.
The non accruals is going to go maybe for the back half of the year, how does additional government stimulus and.
Support either fiscal and monetary factoring into kind of your expectations of how maybe additional concessions how the portfolio companies are going to do how does that kind of factor into your tier thinking.
Yeah I mean.
It factors in a bit obviously, when we looked at things like PPP, which help some of the non sponsored companies with government stimulus or you know the carriers Act that had some impact on a few companies, but for the most part a lot of this has been.
Oriented to the public markets in our companies investing in private companies right. So there's no.
Pretty difficult for the fed to have an impact on driving consumer traffic in a mall REIT or getting people to go buy things in retail stores.
Right.
So it's helpful. But I think there is this a bit of a disconnect where the market seem to feel that the fed can fix everything and and I don't think thats quite the case for most private companies that that obviously you'd see in their business models in certain industries disrupted and we're just going to have two unfortunately.
Get the.
The virus in the health crisis under control before things will.
Returned to normal and I think that's more of a.
Health and.
Human interaction issue than it as the fed issue, but look any help from the fed is helpful stabilization in markets, certainly, which we saw you know the retracement during Q2. It helped our book value right. We saw some mark to market just increases purely on the back of the loan in high yield market being stronger so I just thought the.
Yeah, the nice to have but I think there other issues out there that are not really issues that the fed can can handle it off.
Got it thank you.
<unk> thanks for the question.
We have time for one more question and the next question is a follow up from Chris York from JMP Securities. Please go ahead.
Hey, guys. Thanks for taking the follow up it's on singer selling a it's a sizable investment and you did reference a positive recovery outcome for shareholders indirectly in your prepared remarks. So the term loans now marked at a healthy premium to cost so did that fair value reflective receipt of anymore.
Tier you'll fees that could hit the income statement and then an expectation that it could be prepaid.
So we typically don't talk too much about a single portfolio company, but this.
Maybe deserves a couple of second.
The company that we you know that its struggle add people, probably now that they make sewing machines.
And with private equity owned and we now on the company.
Didnt didn't used to but sort of had too and that's a couple of years back and look this is testament to the portfolio management team. We've gone in we've literally reengineer the entire business running it in terms of its board its management team at strategy and all of that and the markup is simply.
Reflection the profits are up and we think the values higher than it was last quarter and we think the prospects for the business are much much better. So this is just going in and doing what we actually tell people that we do which is roll up our sleeves and get involved in the underperformers and create value. So hopefully we're we're on a path.
Down the line to a two a realization, but I don't think Theres anything you know happening tomorrow.
Okay, and then just last one into class a common that you do have an awful lot to that point 5 million unit, 100% yours.
Do we own 100% of the company and I'd have to go look I'm sure management on the piece and are probably a few others I don't think we own 100%, but we are though where the majority investor.
But that's it for me thanks, Ken.
Thanks, Chris.
Hi.
Loser question and answer session I'd like to turn the conference back over to Mr. Kipp Deveer for any closing remarks.
No just thanks for the great questions hopefully people have continued confidence in supporting the company.
Trust that we're hard at work.
You guys enjoy August the bad.
But will catch up with you next go around them on our call next quarter. Thanks.
Ladies and gentlemen, this concludes our conference call for today, if you missed any part of today's call an archived replay of the coal will be available approximately one hour. After the end of the coal through August 18th 2025 PM Eastern time to domestic callers by calling 8773447.
Five to nine into international callers by dialing one for one to three one 708 for all replace.
Please reference a conference number 101455 to five an archived replay will also be available when a webcast link located on the home page of the Investor resources section of Aries Capital's websites.
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