Q3 2020 Gladstone Capital Corp Earnings Call
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I'd now like to turn the call over to David Gladstone. Please go ahead.
All right. Thank you Michel Nice introduction Gotta saw warmed up this is David Gladstone Chairman.
Carl quarterly earnings call that we normally do every quarter and this is the third quarter for this company. It's year ending September 30, and really thank you off of calling in we're always happy to talk to shareholders and analysts and welcome the opportunity to provide an update on the company and its investment for portfolio.
It's really hard today to give you much determination on which way they are blowing the government gets to decide most everything and you've got the state government. The county government the national government, and it's really hard to figure out which way the wins are blowing, but we'll start out here. The way, we always do general counsel, Michael Accountancy, who will make some.
Statements regarding forward looking statements and thanks, David and good morning, everybody. Today's report May include forward looking statements under the Securities Act of 1933 Securities Exchange Act of 1934, including those regarding our future performance.
These forward looking statements involve certain risks and uncertainties that are based on our current plans, which we believe to be reasonable. So many factors may cause our actual results to be materially different from any future results expressed or implied by these forward looking statements, including all risk factors that we listen to our forms 10-Q, 10-K and certain other documents that we filed with the FCC.
You'll find needs on the Investor Relations page of our website, which is www dot Gladstone capital Dot com.
On that website you can also sign up for our email notification service you can also find to our information on the Fccs website and Thats at Www Dot FCC that GLP.
No we undertake no obligation to publicly update or revise any of these forward looking statements with for as a result of new information future events or otherwise, except as required by law remind everybody that today's calls an overview of our results. So we ask that you will review our press release, some form 10-Q again, both issued yesterday for more detailed information these can be.
Well on our website Investor relations page at Www Dot Gladstone.
Capital Dotcom now I will turn the call or capitals, President Bob markup up Thank you Michael.
Good morning, and thank you all for dialing in this morning in anticipation of what we might have a few more cobot related questions. This quarter, let's get into the summary for the results for the Gladstone capital for the quarter ended June 30.
Originations on the quarter totaled 56.5 million, including two new proprietary investments.
Repayments in proceeds on exit totaled 17.1 million.
And included the exit of three smaller positions. So net originations for the period were 39.4 million.
Interest income rose on the quarter to 11.6 million or up 6% over the prior quarter with the increase in average investments as the portfolio yield was unchanged at 10.9% as most of our investments are well below the applicable LIBOR floors.
Prepayment and dividend income was nominal so the investment income overall was up slightly to 11.7 million.
Borrowing and administrative costs fell in the period with lower LIBOR rates and unused commitment fees. However, net management fees rose by 900000 with the reduction of incentive fee credits, resulting in net investment income of 6.1 million or 19.5 cents per share.
Net assets from operations Rose to 15 million or 48 cents per share, which included $9 million of net unrealized portfolio appreciation on the quarter.
As the reduction of market based spreads and strong performers more than offset the weakness in our energy in auto related investments.
For the period NAV rose to 28 cents per share or 4% to 70 point $7.27 per share as of June 30.
With respect to the portfolio as we discussed last quarter on our call. We were fortunate that our portfolio diversity limited our exposure to the consumer retail or travel service sectors. Most impacted by the cobot 19 been temp pandemic.
That said much of last quarter was focused on working with our companies to make sure appropriate actions were instituted do adjust cost.
And bolster liquidity to whether any disruptions, including supporting their access to PPP funding.
For the period, we did not experience any payment defaults and our one non accrual investment.
Our non accrual investments declined to 1.5% of the portfolio at fair value.
You will note that we did move one investment to pick for that the next couple of quarters in connection with the PE sponsor contributing new equity to bridge the disruption in the order flow from the auto manufacturers that serves.
From a valuation perspective, the top three companies that increased were driven by improved operating performance and they were closely followed by a number of our broadly syndicated investments that recovered on average about 60% of the last quarter's depreciation with the reduction in applicable market spreads.
Much of the unrealized depreciation this quarter can be attributed to our auto in energy sector related exposures.
The auto plant shutdowns and subsequent ramp up of water flow is hampered the recovery of our two investments in their sector in this sector, which represents about 4.2% of our investments at fair value.
However, as both companies are track our on attractive high profile vehicle platforms.
And they are continuing to win business.
And have ample liquidity, we expect these companies to improve in the next couple of quarters.
With respect to our energy sector exposures, the pricing volatility in severe production contraction last quarter impact that our investment in an oilfield chemical distribution business.
While we've been through energy swings with this company before and the team has adept at managing their cost structure. The speed of the production curtailment in the Permian was unprecedented.
Fortunately many of the shut in wells have already restarted with the improved crude prices and we expect their revenues to a bottomed in may and trend up this quarter.
Lastly, the extreme price swings disrupted the volume of energy property and lease sales last quarter, which negatively impacted our investment in the leading broker of government and auction services for these properties.
The company has taken significant cost reductions bolster liquidity and is well positioned to benefit from postponed government sales and auctions of distressed and restructured operator properties.
The asset mix at the end of the quarter was relatively unchanged based on the net originations as first lien loans dropped to 47% of cost and second lien loan exposure increased to 43% of cost.
Our only non earning asset is our $7.2 million debt investment in BMT wireless energy engineering in contracting business, which represents one of them at 5% of assets at fair value.
BMT is well positioned to recover with the increase in wireless fiveg expenditures.
Which we are beginning to see.
Since the end of a quarter our investment in survey health care of approximately 14 million was repaid prepaid at par plus a prepayment fee of $300000.
We also sold a 6 million dollar piece of our second lien exposure to the kinetics at par, which represents a significant gain over where this position was marked last quarter.
Turning to the outlook for the balance of 2020. Despite the unprecedented challenges opened 19, we feel we weathered much of last quarter's challenges in our portfolio composition and diversity underwriting discipline and active company management.
Has affirmed our lower middle market investment focus and position us well to grow.
On the new deal front, we're being cautious regarding any lasting co bid related financial impacts and we have recently seen a pickup in the level of deal inquiries.
Given the current market dislocations and more limited competitive conditions, we expect these opportunities to carry more modest leverage levels and improve yields.
We intend to continue to proactively manage our investment capacity and sell existing assets to support these new investments.
Thank you Smith sorry.
We we intend to sell existing assets to support our new investments to maintain our targeted leverage level, while enhancing our net interest income and now we'd like to turn it over the call over to the Nicole Schaltenbrand. The CFO of Gladstone Capital's will provide an update on the details of the funds financial performance perform.
It's for the quarter.
Thanks, Bob Good morning, everyone.
During the June quarter total interest income increase.
5.7% to 11.9, primarily due to an increase average balance of our interest bearing investment.
Investment portfolio weighted average balance increased by 24.79 or 6.1% to 429 million compared to 404.39 for the quarter ended March 31.
The weighted average yield on our interest bearing portfolio was unchanged at 10.9% compared to the prior quarter as the decline in LIBOR had a minimal effect given interest rate floors in fact in our predominantly floating rate assets.
Other income decreased by 400000 compared to last quarter with lower prepayment fees and dividends, resulting in the total investment income for the quarter, increasing 200000 or 2.1% to 11.7 million.
Total expenses increased 700000, our 4.2% quarter over quarter, primarily due to a 900000 dollar decrease in incentive fee credit grants abiding by there and small reductions in interest expenses and fees and other expenses.
As a reminder, we continue to credit closing fees received directly to the manager, which were 675000 last quarter and we continue to provide a credit to review reduced the management feed on broadly syndicated.
50 basis point, which was 92000 last quarter.
Net investment income for the quarter ended June Thirtyth 20, 26.19, a decrease of 7.1 performance compared to the prior quarter, our Nike and a half cent per share uncovered 100% shareholder distribution.
The net increase in net assets, resulting from operations at 15 million or 48 cents per share for the quarter to quarter ended June 30, compared to a decrease of 27.8 narrowing our 80 per share for the prior quarter.
The current quarter increase is driven primarily by 9 million of net portfolio appreciation Bob covered earlier.
Moving over to the balance sheet as of June Thirtyth total assets or 458 million consisting of 447 million investments at fair value and 11 million in cash and other asset.
Liabilities rose to 231 million, averaging 30 and consisted primarily of 133.5 million borrowings on our credit facility.
57, and a half line and fixing these senior notes due 2023, and 38.8 million inside and creating against key 2024.
Net assets rose by 8.9 million from the quite prior quarter on with 9 million net realized and unrealized.
Nation.
The NAV rose from 6099 cents per share at March 31st to $7 in 27 cents per share the June thirtyth.
Our leverage as of June Thirtyth increase from the prior quarter on Q1 hundred 80% of net assets from 86% within that originations for the period.
As of the ended the quarter, we had an excess of 53 million of current investment capacity in availability under our line of credit.
In April we successfully extended the revolving period end date on the credit facility by six month July 15th 2021.
Our overall leverage continues to compare favorably and we believe we have sufficient levels of liquidity to support our existing portfolio companies as necessary and selectively deploy capital investment opportunity.
With respect to distributions Gladstone capital has remained committed to paying its shareholders a cash dividend and in July our board of directors declared monthly distributions to our common stockholders of six and a half cent per common share per month for July August September, which is an annual rate of 78 cents per share.
We will need in October to determine the monthly distributions to common stockholders for the following quarter.
At the current distribution rate for our common stock and with the common stock price at about $7.31 yesterday. The distribution run rate is now producing a yield of about 10.7%, which continues to be attractive relative to the extra ordinary low yields generally available in the market today.
Now I'll turn it back to David.
These super Nicole very nice and good that presentation, Bob and Mike keeping us all up to date.
Challenging quarter for the participants.
Marketplace. These days and Gladstone Capital's no exception, we did well in delivering numbers on the on this.
This good company our originated 56 million, we had about 17 million and pay down. So we ended up with about $39 million increase in our assets and hopefully all of those are produced some good income over the next six months and.
We'll be able to report to use them.
Good things on that front as well we are working hard with our portfolio companies trying to keep the nonperforming assets, where they are today about 1.5% and.
The total investment.
Higher assets drove a nice increase in the company's core net interest income about 8.9 million.
And we've maintained a strong balance sheet, including existing assets, making additional capital available.
To provide for more loans to middle market businesses. That's the business were in its the original business that I started out in many years ago.
In summary, the company continues to invest in mid sized private businesses with good management. Many of these situations are support supported by private equity funds. So we hang around with those guys look to provide the debt that they need to buy something this gives us an opportunity to make attractive interest paying loans.
In support of ongoing commitments to pay cash distributions to shareholders.
As I mentioned at the beginning forecasting today is very difficult because.
Quite simply we have no way of knowing which way to state and local governments as well as the national governments are going to do to what's going on if you walk down some streets in Washington, DC come onboard and we wonder how that's going to on button at some point in time.
We've given the government the power to do most anything in the name of Covet 19, and it has some good things and bad things with it but.
Lets stop here and have the operator come on if you would michel come on and tell people how they can ask some questions about.
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Please standby, we compile it una roster.
Our first question comes from Mickey Schleien of Ladenburg. Your line is open.
Good morning, everyone.
Congratulations on whats.
What appears to me to be a very strong quarter given difficult.
The environment is so well done.
I see that your investment activity was much higher in that quarter that over the last.
Several quarters and I'd like to understand how much of that was from deals in the pipeline that perhaps you've been working on for awhile.
The came to fruition.
Now versus opportunistic investing.
During a period of high dislocation.
Good morning Mickey.
Both of those investments it takes a while for these deals to come to fruition I mean.
So both of them actually predated.
The quarter.
And were adjusted modestly as a result of the quarter activities, but feel very comfortable as both of those deals are relatively low leveraged.
You know more like two's versus fours times it turns of leverage so we're happy with those investments nice yields, but but lower risk exposures.
Okay. Thank you for that's helpful.
Bob I see that your weighted average risk rating on your proprietary investments improved which certainly books trend I've been seeing generally in the sector.
Theres some particular.
Outliers that drove up the rating.
Uh huh.
Some of those numbers are little bit lagging since the financial results for the second quarter.
Our in the nine the 630 numbers rate, we don't have 630 numbers as of 630 for all of our company. So there is little bit of lag in there. The second is I would attribute mostly to the deals that were recently closed when we put on deals that are leverage at less than.
Three in that order of magnitude, it's certainly going to improve.
The rating and thirdly.
Per my earlier comments.
The appreciation of the top three performers had to do with improved.
Performance. So we had three historical companies dramatically improve their financial performance.
Which is going to wait up the number so.
It maybe a little bit of an anomaly given the timing.
But some good assets as improvements on some core positions I think.
I think were the result, but we will definitely go back and make sure we understand what that swing laws.
I appreciate the color that that's really interesting so Bob your leverage at least in terms of debt to equity now is within your target range unless youve, which.
Plus some I looked I think you mentioned was point.
Two five and it sounds like from your prepared remarks that you're not willing to go higher into the target range given the current market conditions is that correct.
I don't think that that's I think we are we're floating around the one to one leveraged that level now.
We obviously had some subsequent prepayments that we brought us back down I think gave us about 20 million additional capacity based on prepayments, we certainly will go back up.
On leverage, but we're going to as we go up over one to one we are going to be looking at our existing assets closely to determine how much further we want to go.
Obviously, we're going to maintain a cushion.
To deal with any portfolio related matters once we get over a certain threshold were going to keep an amount of reserve.
As you may recall.
Before we moved our leverage multiple.
We typically didnt go much past, 80%, even though the rule was one to one.
So we're going to we're going to keep a cushion to that 1.25.
Going forward and I think the last comment that I would make is we also want to be very careful that.
Between the line capacity and whats available in the marketplace to make sure that the marginal funding cost that we are using to fund those new assets is accretive so again.
It's going to be.
Around or guardrails around the one to one leverage.
And.
We're going to closely manage the go forward basis.
I do understand and appreciate it.
And David Gladstone mentioned, how difficult it is too to make forecast right now.
I realize that the decision to issue common equity takes many factors into account.
But you mentioned cushion several times and that decision to potentially should common equity obviously, we'd have to take into account the opportunity to put capital to work.
Simply put do you have appetite to issue common equity given that the stock is trading above a navy.
That's a tough question Mickey I got to say.
We're going to have to have some really attractive continued investment opportunities.
At it added 10 purse at a 10.7% yields on that stock today, yes.
When you factor in the marginal debt financing costs, which are probably higher than what is currently in our on our book today.
It's going to have to be a pretty accretive investment opportunity to be able to cover that marginal funding cost and that marginal equity cost.
Would we consider it yes, but it's not going to be significant volume.
We obviously believe that there's.
There's a path to which this this stock is generating a very attractive yield and it should continue to appreciate we continue to maintain the quality of the portfolio.
So.
Backing up the truck today is probably premature I understand so if I could summarize based on those last couple of answers it sounds like the strategy would be more too.
Just rotate the portfolio, perhaps as repayments come in or from lower yielding investments to higher yielding investments as you find them while constraining leverage.
In the midst of all of this uncertainty is that fair statement.
It's a good recharacterization Mickey its.
It's a day to day situation that we're managing yeah.
I mean, the other thing that I would add is.
When we think about issuing equity we opted into Spain, where the market is going we're already beginning to see some.
Price compression and some competition is the market normalizes.
So I wouldn't want to issue a bunch of equity in anticipation of a particular spread in the marketplace and to see that get get bid down.
So we're we're certainly going to manage it very closely and if we do anything it may be a small amounts under our ATM program as the market dislocation support.
Understand that those are all my questions for this morning I appreciate your time and thanks for calling in every one of the team stays healthy. Thanks.
We're all in good shape, so far so michel come on and get the next question.
Our next question comes from Henry Coffey of Wedbush. Your line is open.
Morning.
Good morning, and just kind of following up on Mickeys questions.
Well when new.
Loans to put in front of you.
Of note.
What who is looking for capital in this market and or is it just people looking not for capital for growth, but for capital to survive.
What is what is the nature of the Beast. It comes walking in the door looking for capital right now.
And Kennedy, there's a fair amount of folks that are looking to recap out existing lenders.
Folks that are under stress folks that have come to the end and have had enough.
Probably had a bump in the road and they've reached their five year hold period. So those are tough situations. We generally are not.
We're generally somewhat skeptical in those situations, if they've had five years and can't can't de leverage or.
Our payout, it's certainly a telltale sign that we should be careful.
There are certainly some new transactions going on.
Folks are beginning to think about how to due diligence in a coven environment travel is starting to work and focus or even thinking about doing zoom diligence calls with management teams, but those transactions are just beginning to percolate.
I've been pretty much on hold for the last four to three to four month.
Where we see additional opportunities coming on our also in some add ons.
Folks that are in the business and have the opportunity to acquire creatively.
But for the most part.
I would still sponsored financing transactions.
Albeit the overall flow is certainly only beginning to to reemerge.
You also talked about spreads tightening.
I don't want to characterize the comment but.
It what it is what is the correlation right now between actual real life trends in businesses.
And.
Trends in quote bond values and spreads and.
And and loan values.
How are those two lining up or is there a disconnect there in your opinion.
I only can I think about a two ways one is.
In the broadly syndicated marketplace, we have a number of those investments in our portfolio.
They are still mark.
Well below where I would expect them to be.
And I think thats indicative of the leveraged loan market has not fully relief related.
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Although market conditions.
Investor funds flows have not bid up.
Syndicated marketplace.
As much as I would expect.
You still have assets trading in the eighties not necessarily the nineties.
And.
But I think you're also talking about higher level of levels that leverage and instruments that don't have quite the same.
Controls and covenants in them and protections that we would require in the current environment. So.
That's more of a macro funds flow issue that it's going to take longer to resolve I think as I mentioned on the comments, we're only back at about 60% of where we marked it down last quarter.
In the direct origination fronts.
Where proprietary investments.
Senior loan funds.
Continue to proliferate.
We're talking about.
Insurance companies and plenty of folks looking for yield in the current market environment.
And to be able to put a unit tranche piece of paper in the port.
On your investment portfolio and talk about you know and L plus seven eight.
Or more.
That's a very attractive yields relative to the marketplace and the leverage levels are are probably half of what some of the syndicated levels are we are seeing and more active investment.
Activity there I mean.
Without sharing names you know major insurance company.
Pulls in four or five guys and opens up the checkbook for 750 million dollar fund last quarter I mean take advantage of the marketplace recognize there is some dislocation and putting on.
Paper with four protections that is going to yield almost high single digit rates.
Thats a good return for that investors. So we're definitely seeing more interest in the direct proprietary investments.
Then we are the market in waiting or Reflating, the leveraged finance syndicated loan market.
And is that Dennis just does that then create a challenge for you in terms of wanting to put out money because you've got an insurance company bid to compete against or is that an opportunity because you'd rather be involved in a more liquid dynamic situation as no bid mark.
It can be very scary as we all know.
Well, if you've got to 750 million dollar fund they got four people you're not going to see the market. You are brand new you don't have reputation you don't have the flexibility. So we're still going to compete pretty well in that situation and we are focused on the lower middle market, they're not going to want to touch business at least initially that might be sub $10 million.
EBITDA, so the competitive barriers for that company getting into where we play is still.
Meaningful.
They are a potential participant is that company grows. So if we go in and do a unit tranche and the business grows we will may need a partner or we may decide to such a good business that will bring in a lower lower cost senior as part of building a business. So if it starts it.
8 million and on the acquisition or two later is 20 million of EBITDA, we're very happy to start in that transition grow the business and go from a unit tranche players subdebt player in that situation and make money.
Over the entirety of our duration of our investment so.
Im not worried about it I will think that it will drive down the margins at the upper end of the size range initially and that's what we're beginning to city.
Okay. That's very helpful. Thank you for your comments.
Thanks for calling in.
Okay.
Okay No further questions.
No further questions.
Ladies and gentlemen. This concludes today's conference call. Thank you for participation you may now disconnect everyone have a great day.
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