Q2 2020 Capitala Finance Corp Earnings Call

At this time I would like to welcome everyone to the Capitala Finance Corporation conference call for the quarter ended June 30 of 2020.

All participants are in they listen only mode.

A question and answer session will follow the company's formal remarks.

Today's call is being recorded replay will be available approximately three hours. After the conclusion of the call on the company's website at Www Dot capital group Dot Com under the Investor Relations section.

The hosts for today's call Capitala Finance is run its course, chairman and Chief Executive Officer, Joe alone and Chief Financial Officer, and Chief Operating Officer, Steve Arnold.

I would tell the final court issued a press release on August four 2020 with details of the company's quarterly financial in afraid to resell.

A copy of the press release is available on the company's website.

Please note that this holiday.

James forward looking statements that provide information other than historical information.

Coding statements regarding the company's goals.

These strategies.

Future operating results and cash flows.

Although the company believes these statements are reasonable actual results could differ materially from those projected in the <unk> looking statements.

These statements are based on various underlying assumptions and are subject to numerous uncertainties and risks, including those disclosed the section titled risk factors in forward looking statement in the company's quarterly report on form 10-Q.

Cabot talent undertakes no obligation to update or revise any forward looking statement.

At this time, let's turn the meeting over to children.

Thank you operator, good morning, and thank all of you for joining us today.

During the second quarter, we model.

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Yeah.

If you're really reducing portfolio exposure to covert sensitive company.

We currently have approximately 95 main.

What.

The balance sheet.

<unk> 30, 20 26.46 per share.

From 6.27 per share at March 31, 2020.

The increase was the result of appreciation in our investment portfolio.

At June Thirtyth, we had 95.2 million of cash during the second quarter. We received 51.1 billion of repayment, resulting from the wind down of capital a senior loan fund too.

In a number of repayment.

Including the repayment of investments held in curbing sensitive and consumer facing businesses.

As a result, the company isn't that great position to reduce leverage through the repayment of bad debt maturities, and the prepayment and or buy back up or debt outstanding.

And we.

Debt investments on nonaccrual status down from eight at the prior quarter end.

[noise] portfolio management team will continue to work with all of our portfolio companies management teams and sponsors where appropriate.

In an effort to reduce the level of nonperforming investment.

Distributions remain suspended for third quarter of 2020.

We understand the need to rebuild net investment income and support the future distributions.

Focused on that in.

Continued progress on reducing non accrual loans and the closing of new investments during the second half of 2020 will help in this regard.

Looking ahead, we were in a good position from a lit liquidity standpoint, both a capital finance corp across our entire platform.

Our direct origination platform and underwriting team is in various stages of review.

That's what opportunities are lower middle market.

Our commitment to lower total and regulatory leverage should provide future gross.

Net investment income and ultimately resumption of quarterly distributions.

As a platform.

We are currently pursuing approximately a $100 million of new investments to be completed in the next few weeks.

As a platform we continue to have an active pipeline of over $700 million of active small business investment opportunities.

At this point I would like to stage.

Some comments on our second quarter results Volte.

Thanks, Joe Good morning, everyone.

Total investment income was $7 million during the second quarter of 20 24.6 million lower than the second quarter 2019.

Interest and fee income declined by 4 million.

Resulting from a declining average debt investments outstanding and the impact of nonaccrual investments, which approximated nine cents per share for the current quarter.

Dividend income decreased by zero point Fourmillion due to the wind down of capital a senior loan fund to during the second quarter 2020.

Total expenses were 7.6 million for the second quarter 2020 and 2019.

During the second quarter 2020, the company recorded one point mid 1.1 million in deferred financing charges related to the early termination senior secured credit facility.

Net realized losses totaled 13.3 million for the second quarter 2020.

Paired to net realized losses were 15.1 day for the same period and 29 team.

Net realized losses during the second quarter of 2020 did not have a material impact and 80 per share has realized a mouse.

Generally in line with the previously reported fair values.

Net unrealized depreciation totaled 17.0 million or one dollar four cents per share the second quarter 2020.

Compared to net unrealized depreciation 17.4 million for the comparable period in 2019.

Net assets at June Thirtyth, 2020 totaled 105.1 billion were $6.46 per share.

$39.14 per share at December 31st 2019.

At June 30, 2020, we had 95.2 made in cash and cash equivalents.

Also as of June 20 June 30, 2020 or asset coverage ratio was 182.7.

If our asset racing ratio coverage ratio Buffalo hundred 50% due to reclining fair value over portfolio, including the result of economic impact to cover 19.

We may be limited our ability to raise additional debt.

During the second quarter 2020, the company terminated its senior secured credit facility.

It is our intent to replace this line to during the second half 2020.

No it's premature to provide details at this time.

In addition on July Thirtyth 2020, our board approved a bond repurchase program under which the company may repurchase up to an aggregate of $10 million worth of the company's outstanding 5.75% convertible notes due in 2020 and or 6% notes due in 2000.

22.

The company will repay $19 million I'm SBH debentures maturing on September 1st 2020, and is evaluating the prepayment of all right portion of the 46 million that mature in March 1st of 2021.

At June 30, 2020, our investment portfolio included 37 investments at fair value of two or 87.3 million cost bases on 305 million.

First lien debt investments on a fair value basis at June 30, 2020 comprised 67.4% of the portfolio second lien represents 13.3% and equity weren't investments represent 19.3%.

At June Thirtyth 2020, we had five debt investments on nonaccrual established atish totaling 23.9 million on a fair value basis.

Hard to 42.9 million at March 31st 2020.

Could you imagine, we're very stages or review and a number of investment opportunities and our pipeline is active.

At this point, we'd like to turn it over for questions.

At this time I would like to inform everyone. If you would like to ask a question. Please press Star then the number one on your telephone keypad.

Well pause for just a moment to compound acuity roster.

Your first question comes from the line up how Joseph with Jefferies.

Hey, good morning, guys have everyone's doing well and Ah. Thanks for taking my question.

First question Yeah.

Hey, you showed up your liquidity in the quarter.

But just really wanted to hone in on your capital capital allocation priorities, you talked about the debt pay down servicing existing bars, and then as well as adding new investments is there any range to those priorities or is it really more of a blended those three.

Oh This is Steve I would say, it's a blend of all three.

Well you phrase that certainly want to make sure our existing portfolio have liquidity that it needs to that to make it through the cycle.

You know that certainly delevering the balance sheet is a high priority and then thirdly, I'm certainly would love to evaluate some new investment opportunities.

As we had liquidity available to do so a blend of all three.

Got it that makes sense and then yeah, you repayments were elevated in the quarter can you give us a a sense for the outlook there would you expect.

More repeat that I've Sallie you guys have done quarter to date, but you know going forward would any big maturities coming out that you're looking to term out or or or.

What's your outlook for repayments going forward.

You know as far as repayments nothing this is just echo nothing out of the ordinary I do think last quarter. We were actively managing those repayments, we wanted to reduce exposure and sort of consumer facing industries, which we didn't materially we wanted to unwind the senior loan fund.

Two which is part of our de leveraging also create liquidity.

So we didn't canceling a salt repayments to create liquidity.

There's a lot of that was not just passive repayments as active management and Uh huh.

Greetings repayments and we did it one proving that we think that was it's easy to sell things below your park, but when you're getting your mark for those on an average basis improving now we think that was very good.

We continue to maintain a very active pipeline of opportunities as I mentioned the platform in our private funds were closing about $100 million of deals. The next few weeks the pipelines over 700 million.

The BDC once it begins reinvesting has an active pipeline and it can start right right away, we continue to balance.

Oh, the wind down of a legacy yes, yes. The fund we do have a green light that we received in May of this year to pursue at U.S. Biasi fun.

So we're sort of managing all the liquidity with those things and mine too.

I understood and then last one from me and it's not back in the queue, but you know there's been some some moving parts in terms of the portfolio recently in yields you know we have the rate environment. Some N P. Eight fluctuations and then you theoretically wider spreads in the market today can you give us a sense for your outlook for the yield going forward of the.

Overall portfolio.

Got you break it up a little bit our oriented you could you asked how to get I'm sorry.

Oh sure I was just.

Talking about your your outlook for the yield on the portfolio going forward. A you know balancing some movements in M.T. age the rate environment or floors, and and all all of those factors and now you see in then you know theoretically wider spreads on on need new deals.

Yeah. This is this is Joe again, a the current deals pending on the credit side yields are double digit.

In nature.

[laughter].

The loan to values are materially lower than pre kind of it so.

So it's a nice set of assets.

We continue to pursue and close in our private funds and when the BDC is.

Ready to participate it'll play right into those opportunities, but it's a it's a that's a good time to be providing investments to small businesses in the right industries.

And we're in a unique position that we have seven offices.

We're able to visit companies and participate in participating on site onsite diligence meetings were primarily doing that by driving to opportunities versus flying and that's something unique about our origination platform is that we have these seven offices throughout the country and were visiting companies and completing diligence on these deals and and getting them.

Closed.

Got it well thanks very much for answering my questions and congrats on a nice recovery in the quarter.

Thanks I appreciate it.

Your next question comes from the line of Christopher Nolan with Landenburg Thalmann.

[laughter].

Okay.

Hi, Chris.

Steve can you tell me what the drivers of the realized losses were please.

[noise] certainly really related to two items if you'll note in their one was related to an investment and maybe ask where we really converted the debt to equity. So just kind of a change in our in our and our structure.

And they'll end up and the other one was related to our investment sort of top where we sold our position in the company.

Oh third party.

Okay. Neither one of those were non accrual last quarter.

Yeah, I think both up more.

Great.

[laughter] comedy debt repayment priorities, if I heard you correct.

Let's see I see because the maturities in early twenties once is that'd be the priority.

Okay to maturity is one in September 1st of this year and the other ones March 1st of next year.

19 at 46 million, respectively. So clearly those our priority we're going to repair the 19 and some portion.

All of the maturity from March as well, which have Evan.

Haven't determined the amount yet but yes.

Okay, and I guess.

[laughter].

[laughter].

Those who increased.

Hi this.

No PD, let some repayments and sort of from fleets couldn't investment opportunities or solutions like that.

Holding felons go down.

Do you hasn't one more time, you broke up just a little bit I'm sorry.

Sure is the plan to hold off on new investments in the second half of the year or is it too.

Making new investments like from what Joe said, it's it seems like you guys are going to be making investments in the second after year.

Yeah, Chris This is Joe I think the second of half of the year, we will make new investments. The platform continues to be active in completing new investments, we would like to get as many of these new investments into a new MSP I see so we can leverage that at the very attractive low cost long term leverage that the FDIC pro.

Hi, Graham provides.

And that's we do have a substantial liquidity and we're balancing the de leveraging the funding of and you asked me I see the repurchase of bonds and the support of our existing portfolio companies. So it's it's a balance that we're evaluating on a daily weekly basis, but as soon as the BDC is ready to participate.

New deals the pipeline is active and it just needs to begin participating on it it's a pro rata basis.

Until one that news has to be I'd see license could be active.

Yeah that's.

It's very hard to predict the FDIC timeline.

Well, we received a green light in early May have a this year.

We need to enter the final stages, hopefully sooner rather than later and if I knew that timeline I can answer or sort of when do we begin you investing actively better but a that is a timeline that we do not set that set by the FDIC licensing process, but we hope sooner than later.

Great Okay perfect My question.

And at this time there are no further questions.

We do have a question from the line of Robert Dean here, sorry capital.

Yeah, Dave This is why but sometimes he'll said hello, and thanks for taking my.

Question I have two questions. One is that I guess presentation, you say that the a big correspond to as being eaten bench.

Is the subsidiary FDIC subsidiary now you also get close that the total assets.

Subsidiary was about $238 million could you clarify outcome that asset how much is cash and I'm not sure lawn.

Hello.

This is Dave sorry.

You know as it relates to the yesterday I see.

Did you are referring to you know we've got we've got a number of assets in there we've got cash and it's very fluid as we make payments and.

That's that's up that's up I would say on the 230.

Yeah.

$60 million a cash roughly.

The recipe in investment.

Yes, I think so 16 66 zero.

Oh, six real well okay great.

No My second question is that.

You.

Most of the all.

Liabilities concentrate seen on early to then continue to which is less than two years.

I'll now open and looking at your yes portfolio. It seems that doesn't mean that.

At that time early when do you continue to you might not have enough well.

That's.

Okay cool by that time to to pay down that's usually they're doing Dan so and they are on plan for the for the payment of the debt ceiling early when taking okay true when.

Oh, the notes and the.

The on demand, yes, the <unk>.

It's b bench [laughter] mature.

Yeah. This is Joe.

Regarding the debentures SPJ that there as you just mentioned there's more assets in there that liabilities.

At the BDC parents, there's more asset that then liabilities Oh, we're going to we've approved a $10 million bond repurchase so we can.

By some loads on open market or redeem them out and just retire them.

We also noted that the refinance mark is active again.

There was a similar of lower middle market focused a BDC that did a a a bond raise in the past several weeks. So those those markets are open again, a we think they'll definitely reopen it longer periods of time over the next.

Your next year and a half so we'll probably do a mixture of repay and refinance.

Oh just.

Just a follow up a little bit on basis.

I mean, I until one thing to think of bad they both equity and deal.

No and to date convertible notes.

Away undervalued.

But I I do so you say that you.

Plan to rely on both the the payments from your existing portfolio companies, and then refinancing to pay down the debt well make sure in content can take too.

Give me the valuation on both equity and the note.

Do you still believe that it's a good idea to.

Rely on that refinancing the debt to paid on the debt.

Well I think a that's part of the slip we will use cash and monetize.

Well you can refinance some the markets are open for that you can also get some asset based facilities to refinance portion portions of those there's several options with those assets since assets are greater than the liabilities overt over the next period of you know till maturity date that we can refinance us.

Okay, Okay, well, thank you for taking my questions and a good luck.

Thank you. Thank you.

[laughter] in there no further questions at this time.

Oh, thank everyone for participating in the call, Steve or Kevin around all day today, if you would like to contact us.

We look forward to the next quarter's call. Thank you.

This concludes today's conference you may now disconnect.

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