Q2 2020 Harvest Capital Credit Corp Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the Harvest Capital Credit Corporation second quarter 2020 earnings call.

This time, all participants are in listen only mode.

30 speakers presentation, there will be a question answer session.

Classic question during the session you will need to press star one of your telephone keypad.

If you require any further assistance please press star zero.

I would now like they had to conference over their speaker today Mr. William Albert.

Chief Financial Officer, Sir. Please go ahead. Thank you operator, good morning, everyone and thank you for participating in this conference call to discuss our financial results for the quarter ended June Thirtyth 2020.

I'm joined today by our Chairman and Chief Executive Officer, Joseph Jolson, and by Richard Buckanavage, Our President.

Before we start I'll provide a disclaimer regarding any forward looking statements that we make during his presentation.

This presentation contains forward looking statements, which relate to future events or harvest capital credit future performance or financial condition.

These statements are not guarantees of future performance condition or results and involve a number of risks and uncertainties.

Actual results may differ materially from those in these forward looking statements and results of a number of factors, including those described from time to time in our filings with the Securities and Exchange Commission, including in our most recently filed annual report on form 10-K, and quarterly report on form 10-Q.

Capital credit undertakes no duty to update any forward looking statements made herein unless required to do so by law now I'll turn the call over to Joe.

Joe.

Sounds like we have a a technical issue with Joe.

Yeah.

Hello, how are you guys have turned over to called U.

Okay, sorry, I got cut off there for a second I'm the one with power out here to unlike the two are viewing in Connecticut that the Star Wars country, Connecticut.

Thanks, Bill our second quarter results reflect the negative impact on certain of our portfolio companies that resulted from the sharp economic recession. Since February 2020, due to force business closures in the U.S. caused by the Cobot 19 global pandemic.

Well as a high cost associated with the recent short term extension of our revolving line of credit.

We continue to work with our portfolio companies that had been hurt by the economic environment with a focus on minimizing the negative impact wherever possible to net asset value included by lowering cash interest rates for double levels.

We are also focused on maintaining high levels of liquidity given the uncertainty about replacing the agent bank in or credit line in the context of this difficult environment.

These tactics will continue to happen negative short term effect on our net investment income.

We are optimistic that they will support shareholders value window business conditions normalize overtime.

Turned over to build to go over some of the financial results for the quarter and then ritual.

Provide some color on our portfolio before it make some concluding remarks bill.

Hey, Thanks, Joe.

Net investment income for the quarter was <unk> point $2 million or three cents per share compared 2.8 million or 14 cents per share in the second quarter 2019.

Net investment income decreased by <unk> point $6 million in 2020 as compared to 2019, primarily as a result decrease in investment income a point fourmillion.

And an increase in expenses, principally interest <unk> point $2 million.

Increase in interest expense results from exiting executing an amendment to our credit facility, which extended the revolving termination date to July 31st 2020, and increased our interest rate from LIBOR, plus 3.25% to LIBOR plus 4.5%.

Net operating loss for the quarter was point $8 million or 13 cents per share great operating income of one.

Point 1 million or one cents per share in the second quarter 2019.

The decrease in net operating income of point $9 million between periods, principally resulted from the company recording lower investment income as a result, a bit lower weighted average effective yield on the company's income earning portfolio.

And the addition of two portfolio companies to nonaccrual status, an increase in interest expense and an increase in realized losses offset by an increase in unrealized appreciation on investments.

Reflecting on the six months ended June Thirtyth 2020, net investment income was 1.2 million or 20 cents per share compared to 1.6 million or 26 cents per share for the six months ended June Thirtyth 2019.

<unk> $4 million decrease in the first six months of 2020 as compared to 2019.

Primarily resulting from a decrease of point to mean in investment income.

The result of a lower income, earning portfolio and an increase in expenses and point $2 million.

Net loss for the six months ended June 30, 2020 was 4.4 million or 75 cents per share compared to net income of point 2 million or two cents per share for the six months ended June Thirtyth 2019.

The $4.6 million decrease was primarily attributable to a point $2 million decrease investment income a 1.9 million dollar increase in net unrealized appreciation a 2.3 million dollar increase in net realized losses and $8.2 million increasing expenses principally interest.

The increase in unrealized appreciation during the six months ended June Thirtyth 2020 is primarily the result of the immediate adverse economic offense effects of the cobot 19 pandemic and the continuing uncertainty surrounding its long term impact.

During the quarter ended June Thirtyth 2020, we placed two additional loans on non accrual, bringing the total to four nonaccrual loans, representing approximately $17.8 million of our portfolio at fair value as of June Thirtyth 2020.

Also as of June 30, 2020, the fair value of our portfolio was 104.3 me and where the cost bases of $114.3 million roof, reflecting a $10 million of cumulative net unrealized appreciation in the portfolio as of the ended the quarter.

As of June Thirtyth 2020, we had a debt balance of $73.8 million consisting of $45 million of bank debt and 28.8 mean in 2022 notes for an asset coverage ratio of approximately 183% compared to approximately 192% at December 31st 2019.

At quarter end, we had $30.2 million of cash unrestricted cash.

Addition to revolving period under our under the credit facility was scheduled to end on July 31st to say 2020. However on August six 2020, the company amended the credit facility to extend the revolving period to October 31st 2020 until which state the company may receive additional advances at the describe.

One of the lenders.

As of June Thirtyth 2020, our net asset value was $10.24 per share down 99 cents per share from December 31st 2019.

Principally as a result of paying 20 presents per share in distributions for the first quarter ended March 31st 2020, and recording 75 cents of net losses from operation during the six Smith months ended June Thirtyth 2020.

Now I'll turn the call over to rich will provide an update on our portfolio.

Thank you Bill.

Since mid March we are focused all of our resources on dealing with portfolio issues emanating from the Corona virus Pandemics.

We have been and continued to be actively engaged with all of our portfolio companies on a regular basis since that time.

Yeah earnings call last quarter, we reported that 14 of the 15 directly originated financings, which we have a debt investment had been approved for loans under the paycheck reduction program.

Over $30 million in the aggregate is adding valuable liquidity during this very difficult period.

We are monitoring these companies closely to ensure compliance with the program requirements. So as to maximize the amount of the loans that are eventually determined to be forgivable.

At this juncture, we're confident that had material portion and in some cases, 100% loan proceeds received by these 14 companies will be gains forgivable.

Jay second round of financing become available under the PDP program that is currently being discussed in Washington, We are confident that many of these 14 companies will be eligible for additional forgivable loans.

We're also considering the benefits of the main street loan program four portfolio companies, while the program guidelines will limited its impact to only a few situations. We do believe there will be opportunities to reduce our exposure to those companies being the criteria.

Magnitude of the existing PBD loans is material relative to the enterprise value.

Each of these businesses.

He is infusions, along with the tightening of credit spreads during the second quarter and help harvest mitigate.

And recapture some of the unrealized depreciation incurred in the first quarter and what have been present in the second quarter.

In addition to the liquidity provided by the PPP program. We're also continues to benefit from several equity infusions I'd prevalent private equity owners of our portfolio companies.

It's also worth noting that as quarter end June Thirtyth, we received approximately 88.4% total interest payments due from borrowers not on nonaccrual status and that percentage remained at about 86% as of July 30 Onest.

While we did remove one of our nonaccrual investments during the quarter choice Pat.

We are forced to place to syndicated debt investments on nonaccrual status GNC and GK holdings, given negative events at these companies, bringing our total nonaccrual investments to poor at quarter end.

In terms of our core lower middle market portfolio.

We're pleased with the resiliency demonstrated by these companies despite the strong headwinds from the pandemic.

We are working collaboratively with the owners and management teams of these companies and making prudent accommodations on a comp case by case basis.

Goal of our work with these businesses is to provide adequate flexibility to weather the storm, while reducing our credit risk where possible and positioning our capital for the best outcome. When the economy returns is something closer to normal.

We believe we have made and we'll continue to make progress towards this goal.

Yes achieved thus far we attribute in part to the fact that nearly three quarters of our portfolio is in the senior secured asset class in many cases, where the sold that provider to the company.

This dynamic enables us to control our own destiny and manage to quicker and more favorable results then club or syndicated financings.

As we look forward to the remainder of two three in terms of deployment or activities will be limited to advances under committed revolving lines of credit for which borrowers were made eligible for further draws as well as protective advances and if you select cases were doing so improves our chances for full recovery of interest and principal.

I'd like to turn the call back over to John for some final thoughts.

Thanks Rich in closing we were hopeful that preserving our borrowing capacity in the last few years to wait better risk adjusted investment returns would have positioned our company well to take advantage of the current for attractive lending environment and grow our portfolio up to our targeted 1.3 to one.

Four times leverage.

However, bad luck in receded in the form of in April 2020 anniversary to renew our revolving line of credit.

As a result, we find ourselves forced to preserve liquidity and de lever until we can replace the facility in a difficult environment.

We're working hard to do just that its preserve shareholders value as we navigate our path forward.

I want to thank our team it's hard working professionals all of with all of whom have been working remotely for the past six months now and our shareholders for their patients and support with that operator, we'd be happy to answer any questions.

At this time I would like to remind everyone in order to ask a question. Please press star one in your telephone keypad.

Again that Istar wondering your telephone keypad.

Your first question comes from the line of fall Jensen.

From KBW your line is open.

Hey, good morning, guys I know you taking the questions.

Okay, everybody as well.

I just want to make sure unclear on the credit facility because there's been a couple of amendments in the past month.

So the reinvestment period or the amortization period or D is is that the October Dave you referenced in your call.

No. This is the the amortization period the principal amortization will begin this month in August.

Okay. So.

Currently the he facility is actually in the amortization period.

That's correct.

Okay.

And then what what is the actual maturity date for the facility.

The maturity date for the facility I believe it's 18 months from from from now I don't know branded do you had that exact date friendly.

Yeah. Its October 2021.

Thank you okay.

Okay appreciate that.

Thanks for clarifying that I. So then I would ask 'em I guess what is the the plan going forward, if youre not able to get that amended by.

In the next couple of months.

The well the Bulls, we're working hard to be able to replace it but we see a path to liquidity.

Through may be the ended the year to just.

Actually.

Hey off the facility through repayments.

Okay.

Okay.

Well before it matures. So we don't view that is a significant risk right now with the caveat that you know the economies still relatively uncertain with the with the pandemic.

Sure understood.

And then I would just ask you know at on the portfolio I'm sure you've had a.

Conversations with you know the majority of your borrowers I'm just curious as far as.

Amendments or waivers and that sort of staying with your portfolio companies.

Have you provided a lot of those do you still see a demand high demand for such waivers and I'd also ask when you do provide any kind of relief are you guys seem a little sort of compensation such fees are higher interest for doing so.

I'll, let rich handle that.

I have some other comments rich.

Yeah.

Yeah.

Prepared remarks, as I mentioned that we're making certain accommodations on a case by case space and so no no two situations are identical and yeah. We are making accommodations in terms of in some cases.

Waivers in some cases.

As we as you mentioned our prepared remarks, lowering the cash interest rate temporarily during this difficult period.

In terms of receiving compensation.

The answer is it depends.

And then.

Typically what we're trying to do right now is focused on liquidity.

And if it's an owner or a private equity groups is supporting the business with additional equity.

In some cases, we might forego some some upside.

And in return for providing that valuable liquidity in some cases, we are getting additional.

Additional compensation in the form of.

Primarily back ended exit fees, yeah, given given the liquidity issues.

Piling on more.

More cash.

Current.

Demands is probably not to divest move but it really is on a case by case basis.

Thanks for that.

And my last question is just on the dividend I'm just seeing as you guys are not declared a dividend for the year yet is the plan to kind of just probably.

Basically retain capital preserve liquidity, maybe no intention to declared even in the near term or.

You guys have any other plans for that.

Well, we have declared 32 cents year to date and dividends.

24 in Q1, and an eight cents for the month of April.

There's no.

Payment record date, you know set yet.

For that last.

Dividend payment I think.

You know from the standpoint of going forward will comply with or whatever the Rick rules or and.

Depending on what the next two quarters look like we may have to.

Declare a dividend you know prior to the ended the year and the way that the rules work Bill correct me, if I'm wrong way I understand them, though it's it's tied to our tax return to doesn't need to be filed till September October 2021.

So you know it might be possible too.

Delayed.

Any cash payment until then or potentially pay 80, or 90% of good and stock, but bill Hollis did I answer that are was or something else. You wanted that yes, that's correct Joe that we have to.

Look at what are our tax.

Requirements are under direct rules and and any additional distributions we have until September of Ah of 2021 to true it up so.

So thats the case, they're actually were two dividends that we actually.

I had the board had approved but but we basically have not paid them and there will be paid at some point in time to future.

Understood.

Thanks for taking my questions Smart.

Okay. Thank you.

Again, if he would like to ask a question. Please press star one in your telephone keypad again that Istar wanting your telephone keypad.

Excuse me for centers, there I know more phone questions you may continue.

I appreciate everyone's can choose interest in our company and we.

We look forward to giving you an update in three months with our progress. Thank you.

This concludes todays conference call you may now disconnect.

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