Q2 2020 OFS Capital Corp Earnings Call
Good day and welcome to the Oh, I've asked capital Corporation's second quarter 2020 conference call. All participants will be in listen only mode. So do you need assistance. Please signal conference specialist by pressing the star P. followed by zero. After today's presentation, there would be an opportunity to ask question. Please.
Note that this event is being recorded I went out what to turn the conference over to Steve Altebrando. Please go ahead Sir.
Good morning, everyone and thank you for joining US also on the call today's Bolivar, She chairman and Chief Executive Officer, both that's capital and Jeff Cerny, The company's Chief Financial Officer and Treasurer. Please note that we issued a press release. This morning at Altira second quarter results Press release was subsequently filed on form 8-K, with yes, you see both documents to be up.
And on the Investor Relations section of our website it off that's capital Dot com.
Before we did again please note that the statements made on this call webcast may constitute forward looking statements as defined under applicable securities laws.
Such statements reflect various assumptions expectations on opinions like well that's capital management concerning anticipated results are not guarantees of future performance and are subject to known and unknown risks uncertainties and other factors that could cause actual results to differ materially from such statements.
Uncertainties and other factors are in some way beyond management's control, including the risk factors described from time to time in our filings with the FCC.
Although we believe these assumptions are reasonable any of those assumptions could prove inaccurate and as a result, the forward looking statements based on those assumptions also could be incorrect.
Should not place undue reliance on these forward looking statements Oh, that's capital undertakes no duty to update any forward looking statements made herein and all forward looking statements speak only as of today isn't school with that I'll turn the call over to chairman and Chief Executive Officer, well all Rashid.
Thank you Steve.
Good morning, and welcome.
We hope that you and your families continue to be safe and healthy.
Given the challenging economic and public health impact of the ongoing Corbett 19 pandemic.
We are pleased that during the quarter our portfolio companies performed above our expectations.
In the second quarter, you had only one known placed on non accrual out of a portfolio of 73 investments.
In fact, we are encouraged that in this environment some of our portfolio companies have identified opportunities for growth.
Both organically and through acquisitions.
We are prepared to support these companies as they pursue these opportunities.
Our NAV per share increased in the second quarter, approximately 4% from the prior quarter to $10.10.
The quarterly increase in NAV per share was largely due to unrealized gains related to fair values determined at the end of the quarter.
Our net investment income of 19 cents per share.
It was greater than our distribution or 17 cents per share.
As you would expect we continued to maintain close contact with our portfolio companies and remain focused on working without borrowers to get through what is clearly it's challenging and uncertain period.
As mentioned.
We have been positioning got long portfolio more defensively in terms of both industry selection and seniority in the capital structure.
As a percentage of fair value approximately 87% of our loan portfolio was senior secured at the end of the second quarter.
Fair to 77% two years ago.
We have been concentrating on non cyclical sectors with minimal direct exposure to oil and gas metals mining restaurants and airlines.
We have also been prudent and not approach and limiting the number and amount of revolving loan facilities offered to our borrowers.
We had just $9 million in revolving debt commitments $4.3 million of which what undrawn at the end of the quarter.
It has been our longstanding practice to keep our revolving debt exposure to a minimum.
Which we believe has once again helped us good that current liquidity position.
Turning to net investment income, we generated 19 cents per share for the second quarter.
The decline in net investment income was related to various factors.
First.
We paused our origination activities during the second quarter due to uncertainties related to the covert 19 pandemic and to slow down in M&A activity.
In addition, we decided to hold a large cash position throughout the quarter, which we believe was a prudent approach despite its impact on earnings.
Jeff will provide more details on other contributing factors later in the call.
We anticipate that as we begin to deploy capital into add on and new investments and optimize our portfolio. Our investment income will grow. This morning, we declared a 17 cents per share distribution for the second quarter.
Same as we did last quarter.
Given the significant uncertainty related to the covert 19 situation, we continue to take a cautious approach to our distribution.
We believe that this decision will enhance our liquidity and strengthened our balance sheet.
Going forward he believed that our liquidity position will allow us to support our portfolio companies and use our capital Opportunistically as the broader economic picture becomes more clear.
With regard to our balance sheet P. believe that we have ample capital on hand at approximately $31.8 million in cash and additional capacity to draw on our credit facilities.
Turning to our liabilities.
Our flexible financing improves our ability to withstand market dislocation.
As of June 30 over 90% off on debt had stated maturities in 2024 or later.
Our long term unsecured debt mix up 45% Oh for debt outstanding as of June 30.
Our senior loan facility matures in 2024 and is non recourse to the BDC.
And our corporate line of credit is flexible as well with no mark to market provisions.
We expect that this will provide us with operational flexibility in the current environment.
We believe that the Bdcs adviser has the expertise and scale to invest across the loan and structured credit markets with more than $2.1 billion and assets under management.
In an unprecedented environment like this we believe that we are able to identify relative value credit opportunities across multiple markets.
The BDC advisor has a team of investment professionals with longstanding experience and credit underwriting and restructuring across industry verticals.
Our advisors credit platform has been in existence since 1994 and has gone through multiple credit cycles, navigating recessionary environments to maximize potential recoveries.
As you know the advisor owns 22% off the outstanding shares off the BDC.
And our view this key alignment of interests.
As always important but in this environment, we believe even more critical.
You can be assured that we are working hard every day to protect our investments and drive the business forward for the benefit of all our shareholders.
At this point I'll turn the call over to Jeff Cerny, Our Chief Financial Officer to give you more color and details for the quarter.
Thanks, and good morning, everyone like Paul said, we recognize it continues to be at trying time, and we are grateful for the health of our families and employees.
We appreciate you joining us today, and hope youre doing well and staying safe and healthy.
Turning to our financial results.
Starting with our balance sheet, we had approximately $31.8 million of cash at the end of the quarter $22.7 million of the cash was in RSP I see which may be used in part to support our existing portfolio companies.
Our debt equity ratio at the ended the quarter, excluding RSP I see that was approximately 1.5 times at the end of the quarter, our regulatory asset coverage ratio was 166%.
As you may recall, the FDIC leveraged does not count towards the regulatory asset coverage ratio.
Our net asset value per share at the end of the quarter was $10.10 compared to $9.71 in the prior quarter. It's approximately 4% increase was primarily driven by higher fair value marks on our investments.
The 73 investments in our portfolio, we added just one new non accrual in the quarter.
Third rock gaming as a first lien senior secured investment.
We have rescheduled third rock gaming is June thirtyth principal and interest payment.
The impact of co bid on its customers, which include gaming venues has been substantial due to social distancing needs.
The delays and reopening the venues and the timing associated with the return of significant customer traffic is unknown.
The fair value as a percentage of cost was taken down to 61.5% this quarter from 81.4% last quarter.
We currently have 4.9% of the portfolio on non accrual at fair value.
Turning to the income statement total investment income for the quarter was approximately $11 million a decrease from $12.9 million into first quarter.
This decrease was primarily driven by three factors.
Lower interest income during the quarter due to declining LIBOR rates, the new non accrual I just mentioned.
And the decision to hold a large cash balance during the quarter due to the uncertainty in the current environment.
We have since used some of that cash to repay a portion of our pacwest line of credit.
Total expenses of $8.4 million were down approximately $500000 due to lower management incentive fees as well as lower professional fees.
Resulting net investment income per share was 19 cents for the quarter.
As Bill all discussed we declared a distribution of 17 cents earlier this morning.
We believe that this rate will enhance our liquidity and strengthen our balance sheet. So that we can continue to support our borrowers and capitalize on potential new opportunities.
Turning to the portfolio.
We continue to actively work with our portfolio companies to help them get through the challenges associated with Cobot 19.
We're working through liquidity solutions and other actions that will allow our portfolio companies to maximize value.
At this point, we're still not sure how the linked and depth of this virus will play out and how it will fully impact our borrowers.
We believe that are highly selective investment process and focus on capital preservation may positively impact tower portfolio performs.
As far as our investments at the end of the corridor, we had investments in 73 companies totaling approximately $438.4 million on a fair value basis.
90% of the fair value of our loved investments one senior secured loans, 87% of our loan investments were floating rate loans, we had a LIBOR floors on approximately 89% of our floating rate loan portfolio with an average LIBOR floor of 1.16%.
This compares to three month LIBOR, our June thirtyth of approximately 30 basis points.
As a percentage of cost our investments were approximately 74% senior secured loans, 12% subordinated debt, 7% structured finance notes and 7% equity of which approximately 54% of our equity wasn't preferred equity securities.
Our portfolio remains diversified with an average investment in each portfolio company of approximately $6 million or 1.4% of the portfolios total fair value.
The overall weighted average yield to cost on our performing debt and structured finance no investments remained consistent quarter over quarter at approximately 10.1%.
With that I'll turn the call back over to below.
Thank you Jeff.
In closing, we believed that our solid liquidity position will help us to weather the current economic situation.
Take advantage of potential investment opportunities and support our existing portfolio companies.
Currently we are evaluating bought new investments as well as add ons for a couple of our borrowers that are pursuing growth and acquisition opportunities.
We remain focused on strengthening our balance sheet.
We continue to proactively manage our portfolio and help our borrowers to navigate this difficult an uncertain economic environment.
Since the beginning of 2011.
Well Fs has invested $1.4 billion.
Good day cumulative net realized loss of principle of only $14 million or just 1%.
While generating attractive yields on our portfolio.
We have been steadily increasing our allocation to senior secured loans and our portfolio consist primarily of such loans.
You have also been increasing our exposure to larger borrowers.
Our financing is primarily long term.
As of June Thirtyth, 90% off our debt matures in 2024 and beyond.
We believe that this gives us operational flexibility in the current market environment.
Lastly, we benefit from the experience so quite advisor, which manages it $2.1 billion corporate credit platform.
Advisor as part of an asset management group with over $30 billion in assets, but broad resources, including longstanding banking relationships.
Our advisor has gone through multiple credit cycles over the past 25 years.
And we believe it has a strong alignment of interest, but all shareholders <unk>, 22% ownership interest in the BDC.
We also believe that we have a strong team of investment professionals, but industry expertise and restructuring experience to help us through this period.
Finally, I want to thank our employees, who have done an incredible job over these last several months.
We remain committed to their safety and well being.
Well Fs continues to work diligently to respond to the continuing situation, especially by supporting our portfolio companies.
With that operator, please open up the call for questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then to you at this time, we'll pause momentarily to assemble our roster.
And our first question will come from Mickey Schleien with Ladenburg. Please go ahead.
Yes, good morning, everyone hope.
One is safe and healthy I have a handful of some high level question than one housekeeping questions. So let me start out by asking you about your investment thesis on the loan market because prior to the pandemic. Most market participants were in general agreement that we were late stage.
As of the cycle, but dependent Mick effectively accelerated the process.
What is your view on the possibility that we're now in the early stages of Oh, the news cycle effectively.
Thanks, a lot.
That's a good question I think that.
The I think.
In the beginning of a new cycle.
It's obviously different than the prior cycles.
Just because of the.
Uncertainties around this ER this time around I think we're.
I have some.
Significant uncertainties around the healthcare situation still.
And so I think a the pieces going forward at least in the short run for us as it relates to a investments as a.
Focusing our attention on what we believe a at least in the near term.
On a <unk> you know what we called covert defensive.
Sectors, and I'm staying away from sectors that.
I have some you know exposure.
A significant exposure to a the health care.
Situation.
And then I think the other piece a a fund pieces is two fold.
Focus at least initially on a portfolio companies.
In which we already have existing ER.
Exposure, so I think from that standpoint, I think there you know the big benefit is that these are companies had been very familiar with.
And ER and or these are companies.
That out actually doing well.
During this environment and a need money for expansion or.
Looking for capital.
Two.
To acquire some you know potential competitors so.
The pieces again to summarize is too.
You know, even though it's early stage in this new credit cycle.
It is too.
Focus initially on add on investments and then focus at least in the short run here on sectors that we believe our Corbett defensive.
Yeah. Mickey This is Jeff I would also note that you know weve been in the process of this over the last.
Two years, but continuing to focus on moving up the capital structure.
Focusing on first lien senior secured borrowers.
And slightly larger companies. So this is a process that we began as part of the last cycle I think it proved well as part of this recent downturn and I think we're going to continue to focus.
Moving up the capital structure and seek more senior secured loans, yeah, I understand Jeff I'm I'm, just I'm curious I mean, the leverage the broad broadly speaking the leverage loan market has had a very strong recovery from the lows in March and and spreads are are tightening, but I sort of agree.
With you that the the next few quarters seem to have a great deal of and certainly at least in my mind. So.
There seems I mean do you think there's a disconnect between prices in the leverage loan market and.
Risk.
And as you know apart from follow on deals in companies that you know well that Ur cobot defensive.
Do you think the risk reward ratio in the market is interesting today.
Yeah, I think I think beyond those.
The two types of investments that.
You know that I spoke about earlier I think.
I I agree with you on that front I think that.
It is possible that at least abroad.
Broadly syndicated loan market.
May have gotten a little bit ahead of itself.
Because I think in many of those situations, we still haven't received.
Q2 financial yet.
And so I think that that's the reason why our initial focus is going to be on you know add ons and sector that up fairly you know covert defensive and I think and.
Because I think there still demand.
Quite a bit of remains quite a bit of uncertainty.
You know.
Going forward or not just on the health care front, obviously, you know it and you know.
There's uncertainty related to a vaccine and other treatments, but I think just the impact.
Okay, almost 35% degrees in GDP in the last quarter I think those impacts.
Are unfolding.
Yeah, I definitely agree and in terms of the effect of the pandemic, Paul how how how's that playing out in terms of competition amongst direct lenders like you in the middle market. You know, we did see a dislocation deal terms seemed.
To be improving or maybe not so much in terms of spreads but structure seem to be certainly better today than than pre covert is that attracting actually more competition into the market and making it more difficult for you.
Actually a you know.
What I would say is that a the and the middle market space I mean the.
Did flow has not been.
That's great so far.
And ER and then I think that.
I from what I hear from others is that a other that also.
Focusing on companies that they are very familiar with.
And ER and so the.
Investing in a new company, where potentially you know it's hard to do the due diligence because you know it just practically speaking it's hard to travel and you know meet the borrowers and and you know visit the plant et cetera.
I think because of some of those oh restrictions there hasn't been a lot of a activity in new issue transactions within the middle market.
So it's hard to.
Which you know.
How much you know.
Competition will have a once.
The deal flow.
Starts becoming normalized.
But but I think that Oh.
No.
It.
At this point I would say, there's just not enough information.
To opine on on on on that.
I understand and my last question sort of a housekeeping question, but Jeff you mentioned climbing the capital stack up could you break down your senior secured loan bucket between you know first lien and second lien. Please.
Sure Mickey Oh about a 23% of our overall senior secured loans, our second lien and those do tend to be too you know some the larger borrowers.
And so they have some liquidity in the market and they are tradable, if we want to create liquidity with those loans are less than less than one for four or second lien, that's 23% of senior secured or 23% of the total portfolio.
23% of the senior secured okay. That's helpful. Maybe one last question that just came to mind yep.
Given the fact that you have a broad platform and you know you invest across.
The space.
Do you have a sense that the ratings agencies are sort of waiting to see.
How second quarter results developed before they make decisions on potential additional downgrades or or not.
You know.
I would say that there was a significant wave of downgrades in in early April.
Following year end numbers, but they did you know begin to bring in more forward looking you know expectations a into that process and take action on those and sometimes the ratings actions by the agencies tend to be clustered around around payment dates. So I guess the show.
Got answered I I'm, not sure, but I think that.
You know the downgrades been fairly significant they slowed in in May and June.
I I I I.
No I don't know how they're doing the future quite frankly, I don't know blog do you have anything you want to add or.
Yeah, I mean, I would say that you know 50 initial.
Onslaught of.
Rating downgrades.
Right. After the pandemic hit I mean, they've been relatively Simon and I think it is possible as a micky has your.
Mentioning that they're looking to wait.
Two towards the Q2 number that come out.
In early August generally for these companies.
Ah to decide whether they want to take further action or not I think they.
It took action in many of the situations you know based on the expectations and my guess is that if the numbers actually come out.
Worsened expectations then.
Are.
There could be.
Anymore downgrades, so I think its a.
Probably a week or two weeks away.
And that's really helpful color Bull all those are all my questions. This morning I. Appreciate your time. Thank you.
Thank you Mickey.
Again, if you have a question. Please press Star then one.
This concludes our question and answer session I would like to turn the conference back over to below Rashid for any closing remarks. Please go ahead Sir.
Thank you all for joining our call today, and we look forward to speaking with everyone again next quarter.
Operator, you May now end the call. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.