Q2 2020 First Eagle Alternative Capital BDC Inc Earnings Call
It's called for a second fiscal quarter ended June Thirtyth 2020.
It is my pleasure to turn the call over to Sabrina Rusnak Carlson, the first Eagle alternative capital BDC, Inc.
It's rusnak Carlson you may begin.
Thank you operator, good morning, and thank you for joining US with me today, our crisply in our Chief Executive Officer, Jim Fellas, Our Chief investment Officer, and Terry Olson, our chief operating and Chief Financial Officer.
Before we begin please note the statements made on this call may constitute forward looking statements within the meaning of the securities active 1933 as amended such statements reflect various assumptions by proceed alternative capital BDC concerning anticipated results that are not guarantees of future performance and are subject to known in.
No uncertainties and other factors that could cause actual results to differ materially from such statements.
Uncertainties and other factors are in some ways beyond management's control and include the factors increase included in the section entitled Risk factors in our most recent annual report on form 10-K.
<unk> updated by our quarterly report on form 10-Q, and our periodic and other filings with the Securities and Exchange Commission.
Although we believe that assumption so much any forward looking statements are based on our reasonable any of those assumptions could prove to be an accurate and as a result, the forward looking statements based on assumptions also could be in correct.
Should not place undue reliance on these forward looking statements.
First Eagle alternative capital undertakes no duty to update any forward looking statements made herein.
All forward looking statements speak only as of the date of this call.
Our earnings announcement and 10-Q for relief.
Yesterday afternoon copies of which can be found on our website along with the Q2 earnings presentation that we may refer to during this call.
A webcast replay of this call will be available until August 17th 2020.
Aarding approximately two hours after we conclude this morning.
Access the replay please visit our website at Www dot.
AC BDC dotcom.
With that I'll turn the call over to Chris.
Like Sabrina good morning, like people joining us on on his call today.
Before we start I want to say I hope all of your same safe and healthy in these challenging times I also want to take a minute to thank the entire first legal team with a focus on execution as we continue to manage <unk>.
There is about business remotely during the stands on it.
On today's call. It will provide somebody just doesn't succeed provider overview of our Q2 results Terry will discuss our portfolio and financial results in more detail.
We've been very busy this quarter.
With a number of significant developments first we completed a 30 million equity raise the book value in April.
Second the new management contract. The first Eagle was approved by our if your older. Good a social media in May.
Third we completed an accretive tender were approximately $20 million lots of shares at a price of $3.75 in July.
It was in in the 30% discount to the $5.34 per share book value reported on April 16.
We believe this tender was an overall success in that all of those exit or stock at an attractive premium to the market, we're able to do so [noise]. So as we were not oversubscribed. Additionally, the tender offer provided notable level of accretion to our existing shareholders, who elected not to tender.
Before we officially rebranded the BDC earlier this week and change the name from THL credit Nick in for Siegel part of this capital BDC and a corresponding changed in the ticker Hep C or D.
Finally, we continue to make progress on our portfolio.
Now, let's turn to our results.
We're pleased to report the book Valuable company increase this quarter by approximately six months went from $5.22 per share.
$5.34 per share at the end of Q2.
Book value increased due to portfolio appreciation driven by a recovery in the loan markets from a low point in the prior quarter.
Additionally, the completion of the tender offer a July wasn't created by 31 cents per share or an additional 6%.
And I for the quarter on an unadjusted basis was five cents compared to our given it depends on.
The decline in deny this quarter is primarily due to a number of one on temporary items.
First we held the full amount of or new equity raises you too for the purposes of determining the amount and able to completion of a tender offer. These additional shares at a one cents drag on it.
Order.
No one time fees associated with the amendments or credit facility also reducing I'd say approximately one cents per share.
On a pro forma basis, if you exclude the equity in the tender timing.
And the impact of the C.
Hi, I would have been seven cents per share.
Our temporary smaller Logan JV all for greater the two cents drag on earnings in Q2.
Given the increased risk of the potential stressed in the portfolio due to market dynamics is a fruit and sets of reducing leverage in the loan portfolio.
Take advantage of some opportunistic trading windows during the quarter.
Well burden from a balance sheet perspective, these actions caused a temporary negative drag on the local distribution.
The overall loan market continues to stabilize with local distribution increase overtime.
As a reminder, we took a similar except the better positioned the bdcs balance sheet for potential NAV volatility like February early March.
We sold approximately 20 million at $44 million more liquid legal syndicated loans.
In the March and April or manager proactively agreed to waive or management fees beginning in Q3 2020 through the end of Q1 40 41.
I will add an additional three cents per share.
For a quarter.
We knew there would be pressured in the background. This year from the economic impact, it's probably my team and from exiting the last of our concentrated legacy positions.
We recognize that there might be some sort of pressure on.
On the earnings near term, we took those factors into consideration.
He said or didn't a level of 10 cents per share in may and executing this plan because the utilized waivers the buffer to get up more climate increased flexibility.
Our portfolio is levered at one time as of June Thirtyth pro forma for the tender offer in July.
Well this remains elevated to the near term guide people died at a 0.7 0.8 times. It is down significantly from the 1.25 points at the end of Q1.
As stated on previous calls, we will target longer term less leverage levels and the 1.1 to 1.2 range. When we think the portfolio is ready.
We are targeted to reach these levels beginning in early 2021, as we said because because that's what that's where the second after the are related to folded.
That said, we're near the end of our portfolio transition that expect portfolio growth. After these levels, which will be accretive to and I.
Excluding the onetime temporary items I previously mentioned modestly higher leverage and additional deployment in the coming quarters, we expect the generic levels in line or exceeding or sensibility.
Moving onto the portfolio.
We continue to make progress on our goal of estimate our remaining concentrated positions if you too.
I'll take this opportunity did update and provide comments on a few names.
Oh I am continues to represent the largest investment on our portfolio at 9%.
We can do tend to look Brexit opportunities and rightly so considering strategic partners.
We believe will be in a position to de risk our position with a strategic partner in the near term.
And an arrangement with a strategic partner would reduce our risk going forward eliminate the need to provide capital.
Allow us to return a portion of the security to earning status in Q3 or a few for 2020.
Second Sankay market, which has been in our portfolio. Since 2010 remains on track to complete a sale transaction at Q3 weeks that will return to substantial portion of our capital.
Okay, as a 5% positioning the portfolio as of June Thirtyth.
Well controlled investments in OEM TNK represent the last two notable on sponsored investments in the portfolio. We do continue to have a small equity position on wheels up.
So we're happy to report mobile progress while these exits.
Well the nonaccrual front, we added one kobin related name in Q2 Smartboard.
Mark towards that looks and centered on sponsoring and organizing high end travel a vacation for around the world and as a result was quoted as experiencing tremendous pressure getting probably churches.
Yeah, certainly early stages of working on the solution with the management team and the equity sponsor and we'll be providing them more fulsome update and becoming more.
Nonetheless, I'd like to highlight the this is the first won't put on non accrual loans originated after 2014.
Consistent with our portfolio discipline.
More toward the 5 million dollar investment represents less than 1% of the portfolio based on fair value given its small size and our focus on money diversified did not at the material effect in our book value, even though the loan with Mark down to 55 cents.
Overall, the remainder of the portfolio continues to hold up well, we don't have increased visibility into how many of our companies will perform and how quickly we expect them to bounce back.
In most instances were called the 19 has had a primary impact on the business, we're seeing more about demand delay burton's demand destruction, which is which is encouraging.
Our primary focus continues to be on managing liquidity and working with responses to extend duration for these investments that needed.
Overall, these discussions and related efforts had gone quite well.
The overall dealmaking in the market has been down the last several months our pipeline is starting to pick up in the last month.
The where I'm going to become much more lender friendly and we're seeing higher pricing coupled with structural enhancements.
We're being very selective about where we deploy capital now in a very disappointed about sticking to our strategy of investing in first lien highly to their supply position and select industries, where we had experience.
And let's walk through that we know that be supported partner.
Before turning the call over to Terry I wanted to highlight a few personnel changes that we're excited about for we're pleased to announce additional handy jointed recording investment committee sells at a portfolio in underwriting and her addition to the committee recognize their contribution since joining for Siegel formally THL almost four years ago.
She will join myself, Jim fellow their CIO and Terry Olson.
The primary member of the committee along with our five rotating industry experts.
Second we added Larry class and leases letter for direct lending team to lead a new asset based lending solution for the firm.
Larry and lease or industry veterans, joining us from Gordon Brothers Finance company. We're very excited about this addition to our platform as assets. They funded has a very complement complimentary to our direct lending platform.
And we'll provide another source of high quality risk adjusted return for our investors as well as additional opting for our portfolio companies with that I'll turn the call over to Terry.
Thanks, Chris and good morning, everyone first from investment portfolio highlights.
Why did the uncertainty around code 19, Q2, as Chris mentioned, we did not make any new investments so that the investment parameters of the BDC.
That's been activity in Q2 consisted of.
Funding, the big lift the revolver and GTL commitments.
Since the other Q2, we've added two investments for the portfolio at a blended yield of 8.3%.
Yeah, It's one of our investment in hone in Q2 and also restructured our first lien are best when an ALOG onto an equity like that investment.
Hello, and Allied with the two remaining two of the remaining three legacy energy credits.
As of June Thirtyth portfolio of 331 million with 71% invested in first lien senior secured debt.
17% of the Logan JV as a reminder, the Logan JV of 97% invested in first lien outlets.
Remain 12% of the company portfolio was held and secondly in other income producing an equity holdings.
Weighted average yield on the doesn't income producing portfolio, including Logan was 6.8% was flat quarter over quarter.
Total non accruals in the percentage of our portfolio at fair value in Cogs decrease from the prior quarter to 12.2 at 16.2%, respectively with the whole index it on the Allied.
Repositioning in Q2, partially offset by the addition of smart towards which was our only new credit on non accrual this quarter.
Chris mentioned represents a 5 million dollar position.
Loadmaster and OEM are the only other companies on non accrual as of June Thirtyth.
Let me give a brief update on the Logan JV before moving onto our financials for the quarter, Chris mentioned, we proactively reduced slogans leverage in light of the risk that's about the market.
We reduced the size of the portfolio by $67 million based on cost and sold out of 26 names.
Well smaller in the short term the volatility have been reduced.
In power, we expect to continue to rotate the portfolio or the higher yielding opportunities to grow the book in the latter part of the year.
We remain pleased the blowguns overall credit quality of the portfolio has only what loans on non accrual with a cost in fair value of 2.3 $1.2 million, respectively, Relypsa, 1% of Logan portfolio.
I've you'd expect the improvement in the market was most notably seen them a logan portfolio broadly syndicated loans loan prices increased in Q2.
And drove an 11 million dollar now the increase in the tea.
CRD portfolio.
Moving on to the financials for the second quarter.
Chris highlighted the now to increase on the net investment income bridge earlier in the dressing dividend coverage I'll highlight some of the components of our $7 million endorsement income this quarter.
Interest income or 4.6 million decreased slightly this quarter, primarily due to their daughter accrual.
Dividend income in dividend income decrease this quarter to 2.3 million due to the smaller dividend from Logan.
Which contributed two cents to be an eye on a per share declined this quarter.
I'd also note that there was no prepayment.
Premiums earned or any accelerated amortization of ideals result of exits of one would expect.
On the expense side total expenses for the quarter or 5.3 million more like Q1.
On the reversal of deferred pick incentive fee of 411000 benefited benefit in expenses in Q1 was matched by.
Matching Q2 by lower management fees, resulting from a lower out so Dave and lower borrowing cost reduction of our commitment under our credit facility.
Put it in the expenses quarter similar Q1 was a 230.
Well if at all at one time accelerated amortization of deferred financing costs related to the April amendment of our credit facility.
With respect to items below the line net realized losses of 26.6 million in Q2.
Was primarily related to the Holland exit and Allied restructuring of this loss was already baked into our Q1 that now.
The leverage and liquidity perspective leverage decreased the 0.9% doesn't June thirtyth versus the 1.2 times at the end of Q1.
Due to the markup of the portfolio and train down to the revolver with $10 million and proceeds from our equity raise pro forma.
Tender offer as Chris mentioned, the leverage level based on the Q2 Dalvance approximately one times.
We believe the diversity and flexibility where capital structure strengthened in the industry. During this call bid price it slipped from 40% of our outstanding debt.
The new senior secured credit facility with the remainder of unsecured bonds, we have ample capacity to borrow addition capital our senior credit facility.
Which as a reminder, we proactively amended in April to increase our leverage capacity to 1.55 times or 165% asset coverage ratio.
And provide overall more flexibility to weather the effect will depend the dynamics of the pandemic in coming quarters, we have ample liquidity to fund new investments and follow along or unfunded commitments to our portfolio companies.
As a reminder, we have only $8 million remaining callable unfunded commitments over $54 billion total commitments, we're well positioned from a liquidity standpoint to fund these commitments.
If necessary.
With that I'll turn the call to the operator for Q1 day.
Thank you and as a reminder, if he would like to ask a question. Please press Star then the number one on your telephone keypad to withdraw your question press the pound key.
And your first question comes from Lee Cooperman with Omega family Office.
Terrific. Thank you appreciate it to congratulations hope your new Oh, it or are you guys had it off well and you're very successful just some housekeeping questions, which I probably should know the it's too, but I don't know morph into my head the 554 book value.
As of June to tender was not completed until July is there a pro forma book value was that the pro forma.
Lee Terry said of some sort of.
The 5.5 54, Liam actual the pro forma book value was five beauty five which occurred in July.
So far the five is pro forma for the tender okay. Good great.
Okay and the.
The.
If if Oh you would you made a comment I got distracted do set another call came in this is it's come for school, having this week or did you guys make a comment about.
And if it flow for the year expected.
We definitely we tried to provide guidance. If you look at obviously, we came in low today adjusted for one time items worth seven cents.
But the management fee waivers that'll add three cents a share we could increase that if we felt it was prudent to take leverage back up slightly and add some more exposure to.
The Logan the fact that we have the waiver set.
For the coming quarters, we're pleased that the financial flexibility, we don't feel compelled to do that we believe the market stable.
Memory, CIBIL, which we feel comfortable with attempted to share.
And of course the the.
CP was $10 million left on the potential repurchase do you guys have any comment about your intentions about the 10 million.
Yeah, No thankfully I appreciate the question if you look at the tender itself. It was not fully subscribed. Therefore, everyone wanted the tender was was with fully tendered out.
As we sit here today, given the size of our balance sheet from management's perspective, we don't want the BDC to keep shrinking we'd actually like to see it grow.
It was nice to report a quarter, where ever word NAV actually increased as opposed to decrease so if the tender was two times oversubscribed and people were cut back substantially I might still more compelled to allocate that $10 <unk> $10 million to meet that demand.
The fact is that the tender basically went out the tender 20 million shares at $20 million worth of shares and we got almost exactly that month amount again with a with no one cut back.
And you had to hand, you paid 375 and the stock now 340.
So is it a better by 340 than it was the 375.
Yeah perfectly mathematically it is but the BDC I think we all know subscale and we were looking to take steps to be more proactive.
And actually grow the balance sheet, but we hear your point at the discount to book continues to.
Grow will obviously work in conjunction with the team of the board of directors to see if another program that is in the future makes sense what I've expressed this view before I think it's 100% right.
I want to restate it to make sure. We're in the same page. There's you know where like you guys are respect you guys you stood behind your shareholders. Despite the results being crappy, but you know you've done that she can but you know wall Street has created a lot of companies in the BDC.
No p.
T spaced at only work only work with the stock showed a premium to any the PC games you guys players so stock well, yes, its raised the dividend.
Well, yes, it so the stock raised the dividend and when the stock goes with discount any V. Its game over the guys that or do the right thing by the show this either get back to my their shareholders by either liquidating, the company's or buying back stock as you're doing and I was just ask you did any new loan you make be looked at again.
Just a stock that yields.
They have stuck as you and the here the last sale.
40, send dividended deals and 11.75% and it shows that a big discount and Navy you know its 585 and easy.
Against the stock price of 340 that you look at every loan you make against the benchmark of what you're stuck represents the way value and that you do the right thing for the shareholders, including the possibility, which I'm sure you're not going to do.
Calling it a day returning the money.
That's it same speeches I, given before but I believe in it.
No I personally think thanks, and I wish I wish you. Good luck I wish you good like you.
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Your next question comes from Robert Dodd with Raymond James.
Oh, Hi, guys Lee addressed one of the topics quite quite completely that so I'll move on.
If we look I appreciate.
The color you gave on on the concentrated positions. If we can look back at the post 2014 vintage assets on the books.
Could you characterize hundreds of eligible obviously smocks was hard because again coming back to companies travel is highly impacted what kind of would you say is the valley the relative proportion of all the more recent book that's hi this.
Still have coping impacts, particularly if things get additionally dropped disrupted in the back.
Excuse me back after the.
Yeah, Todd Robert appreciate the question, we've actually scored and weighted our portfolios.
No just speaking in ranges you know yet tier one direct impact I'm, all the way down the tier three which would be tertiary and Pat.
Smart towards obviously is the most severely impacted as you can imagine we don't anything else in the portfolio is significantly head as it has more torch, but we're where we have a heightened level of focus I'd say on you know good 20% to 25% of the portfolio, where we believe there is a you know this what we reference in the script this more demand.
Delay not demand disruption.
So the businesses are still operating will continue to work with the sponsors thus far the portfolio companies have done a very very good job managing liquidity.
So I don't see anything else in the portfolio. That's added meaningful have an impact as a has a smart doors, but you know we are we are watching everything and the book very very closely.
Oh, yes, just touch upon that kind of tied into my my question because in your prepared remarks, you said, most instances where could that impact because it had an impact demand delay most instances so what proportion of.
Those were well most versus.
Delaying purchases destruction I mean, most is not hundreds.
Yeah again, I'd just go back and say the only business that we put on non accrual related to called was with smart doors. So.
I don't want to get too nuanced over what the definition of most is but you look at our number of portfolio companies. We have one one out of the entire portfolio.
Got it I appreciate it thank you guys.
Yep.
Your next question comes from Paul Johnson with KBW.
Good morning, guys. Thanks for taking my questions [noise].
I wanted to ask about the JV and just try to understand what the purpose was.
Contention was for the teaching the commitments there and then also what is your intention or the Jamie going forward because it just seems like that was.
You know a big part of the portfolio and your strategy and growth going forward. So I'm just trying to get a sense is what your intentions are with that.
Thanks. This is Chris I appreciate the question Paul our intention is to continue to manage and run Logan. We think it provides a very good high quality risk adjusted return or are we to our shareholder.
The Logan facility was put in place I think back in 2014 or 2015, we were substantially larger.
The reductions in the equity commitments from ourselves and from our Ah from our partner just really reflected the new sides of our balance sheet.
Logan JV itself is limited inside we've given guidance at the range. The wants to be we didn't need to add that incremental capital set back if you will too.
For the potential side that it can be going forward. So our relationship with a partner very good we had a bull intention of continuing to work.
Work with them and continuing to manage the program and to the extent, we can grow that because the bdcs growing you know we feel confident we'll be able to attract and add that capital back if needed right now it just it was unnecessary because mathematically we would never be able to draw down the for the full amount. So we just right size that they selected balance sheet.
Okay understood and then on the on the distribution yield I mean, the income was obviously lower for this quarter is this.
I mean do you expect this the you know sort of normal run rate earnings from the JV distribution to be a little bit higher than where it is were given the current low yield environment in the state of the.
Leveraging the chain need the expected to kind of stay where it's at this quarter.
In the near term, we'd probably expected to stay where it is you know we manage multiple levered vehicles. Logan is just one of them than we thought it was prudent and as the market recovered to the fell into that recovery to de risk the position.
The good news as I said earlier, we had the we have a three cents cushion to providers incremental flexibility and when and if we needed to bring that end. So that's three cents for perfect for quarter I'm, sorry, recent to share per quarter for the next three quarters.
Well it able to be very very good when we when we bring it back up but.
What's the market has stabilized we feel confident that we can take the leverage back up on Logan in to return to historic levels of distributions. It's just given the increased volatility and the fact that we have that that that cushion with management fee waiver Baltic Britain to reduce the leverage not push the the risk envelope.
Okay appreciate that.
And then I'm just on the you know the remaining portfolio or you don't broadly speaking I'm for your existing borrowers how have your conversations going on around amendments or waivers and that sort of thing, having and they slowed down a moderating pretty materially or you still seeing you know pretty high demand request from keep.
We'll seeking to gets in the covenant release and that sort of thing.
Yeah, no. It's a good question that there was a a wave of activity as you can imagine when when a Q2 started.
That is subsided substantially and I'd say the conversations we've had for the most part of all been productive with good contribution do that from us and to end the sponsors of which were which we're working through.
For the most part most of these discussions that had were for providing short term extensions not not so long term plays so there could be a an uptick in activity coming back into September or October depending on where the economy is not much of the economy in reopened but as of today. We you know we feel like the discussion.
That's gone well the sponsor community has done a very supportive of the portfolio companies.
Appreciate that and then.
My last question just has to do with investment activity and you mentioned recall you know when the portfolios ready reserving resuming normal course.
Investment activity in growth I'm, just curious what do you see I'm kind of the.
Back at that point, where.
You can kind of resumed investing again is it more portfolio stabilization or is it something anymore economical with with the broader U.S. middle market and in conditions there.
Yeah. That's a great question I think it's really a function in stages. The first one is portfolio stabilization I would say balance sheets stabilization.
Given the fact that we were able to.
De lever Logan and and a good to get the unnecessary amendments remark.
Supported Bank group, we feel very comfortable with the balance sheet, how its position than out that becomes a function of where we want to invest and when we see unique opportunities. You know by no means are we looking across every single sector as as being open for business, if certain sectors and specifically consumer facing that we think are very very difficult. These days.
But there are other industries such as tech.
You know software, where we'll see an attractive opportunities than we are deploying capital across the entire platform.
We'd anticipate the BDC participating to the extent the the asset made sense and it fits our investment parameters.
Well the do it on a highly diversified basis as we as we've been doing in the past.
Thanks for that I appreciate that thanks for taking my questions today.
Yep.
And once again, ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad.
And at this time you have no further questions.
Thank you operator, I also want to thank our shareholders for their support and voting for the management contracts in May we are excited about starting this next chapter with a BDC and completing the portfolio rotation look supportive for legal.
We'll continue to face challenges from the October 19 in fact, we are confident or strategy and the team to weather. The storm thinking we look we're talking to you next quarter.
Ladies and gentlemen. This concludes today's conference call you may now disconnect.
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