Q3 2020 Ares Capital Corp Earnings Call
Good afternoon, and welcome to the Aeris Capital Corporation September Thirtyth 2020, <unk> earnings Conference call.
Hi, all participants are in a listen only mode.
As a reminder, this conference is being recorded on Tuesday October 27 2020.
I will now turn the call over to Mr., John still more still more managing director of Investor Relations.
Thank you let me start with some important reminders comments made during the course of this conference call and webcast as well as accompanying documents contain forward looking statements are subject to risks and uncertainties.
We didn't get pockets.
Well, they did change isn't based rates and significant market volatility our business and our portfolio companies.
These forward looking statements can be identified by the use of words, such as anticipates believes expects intends will should make some more subjects brushing.
<unk> actual results could differ materially from those expressed in such forward looking statements for any reason, including those listed in its actually two questions.
Aeris Capital Corporation assumes no obligation to update any such forward looking statements. Please.
Please also note the past performance or market information is not a guarantee of future results.
During this conference call. The company May discuss certain non-GAAP measures as identified by FCC regulations, such as core earnings per share according to <unk>.
The company believes that core EPS provides useful information to investors regarding financial performance because it is one method. The company uses to measure its financial condition and results of its operations.
A reconciliation of core EPS to the net per share increase or decrease in stockholders' equity, resulting from operations. The most directly comparable GAAP financial measure can be found in the accompanying slide presentation for this call.
<unk> reconciliation of these measures may also be found in the earnings release filed this morning with the FCC on form 8-K.
Certain information discussed in this presentation, including information relating to portfolio companies was derived from third party sources and has not been independently verified and accordingly, the company makes no representational more jeez with respect to this information.
The company's third quarter ended September Thirtyth 2020 earnings presentation can be found on the company's website at Www Dot Aeris capital Corp, Dot com by clicking on the Q3 20 <unk> earnings presentation link on the homepage of the Investor resources section of its website.
Aeris capital Corporation's earnings release, and 10-Q are also available on the company's website I'll now turn the call over to Kipp Deveer various capital Corporation's Chief Executive Officer.
Thanks, John let everyone and thank you for joining us I've.
I'm joined on the line by our co President niche Goldstein and Michael Smith, Our Chief Financial Officer, Penni roll and several other members of the management team I.
I will start by highlighting our third quarter results and then provide some thoughts on the company's position.
This morning, we reported third quarter core earnings.
39 cents per share concern.
Consistent with our second quarter earnings and we believe another strong result, given the impact on coated.
Our Q3, GAAP EPS of a dollar and a four cents increase meaningfully driven by strong net appreciation in our investment portfolio.
Our net asset value per share climbed to $16.48.
An increase of 19 cents per share or approximately 6% since March 31st 2020, we registered the most significant impact from co bid on portfolio values.
During the third quarter, we also capitalized on strong market conditions to further extend the duration of our unsecured liabilities by raising over $1.1 billion of unsecured notes across two successful offerings.
Our available liquidity now stands at more than $4.4 billion at quarter end, putting us in a good position to make investments in a more active market and they continue to support portfolio companies as needed.
In terms of market condition investor risk appetite is improved due to some continuing signs of economic recovery.
Better than expected corporate earnings and the positive effect of fiscal stimulus.
All of which have been supportive of the broader liquid credit markets.
With his firmer tone in the market and a slower new issue calendar secondary market loan prices rose and loan spreads on new deals begin to decline.
These trends have flowed through to the middle market and it had a positive impact on the value of our portfolio.
Observing is overall trends, we're generally seeing management teams and sponsors shifting their focus from risk management and value preservation to growth and value creation.
We are also now seeing an acceleration of M&A activity and our deal flow.
Businesses are increasingly seeking acquisitions to reposition their business models, where to capitalize on new growth verticals in a postcode world.
And there is pent up demand from a very slow period. This spring and summer many transactions that were being considered pre co bid are now returning to the foreground and seem actionable.
Furthermore, some sponsors are seeking to lock in gains for 2020, especially ahead of the upcoming elections.
With these dynamics, we would expect to see busier quarters in the future compared with what we saw in both the second and third quarters.
One interesting trend that we're observing is that the average company than seeking our financing solutions is increasing in size.
The average EBITDA company as our new deal pipeline is right roughly twice that of the company is that we are evaluating during the third quarter of last year.
This trend reflects the expanding market opportunity and a growing desire by our clients to tap the increased certainty that direct lending solutions offer versus public syndicated alternative.
Given our long term relationships significant scale.
An extensive positions of incumbency, we believe RCC remains well positioned to benefit from both the reemergence of activity and the continued secular growth opportunity indirect lending.
Shifting back to the portfolio as we mentioned at the outset, we saw net increase in the fair value of our portfolio driven largely by supportive market prices and stable to improved improving earnings across the portfolio as a whole.
Underscoring the health of our overall portfolio during the third quarter, we collected 99% of contractual interest do.
Had a 60% drop in the amount of new amendments and continued to see net revolver repayment from our portfolio companies revolver drawings are now back to drawing levels that are near pre Copeland.
We believe this highlights the improving liquidity profile of a number of our portfolio companies.
We also continue to see evidence that our focus on upper middle market businesses resulted in a more resilient and stable portfolio.
Companies as compare to lower middle market companies.
Across the portfolio portfolio companies with EBITDA of $100 million or more showing greater earning stability or growth on average compared to our companies with less than $25 million of EBITDA.
Regarding the health of our portfolio, our weighted average portfolio grade of 2.9 remain stable versus last quarter and less than 5% of our portfolio company changed grades.
The ratio of upgrades to downgrades with greater than three to one which we believe highlights the steady to improving cash flows of our portfolio companies that is followed with partial or complete reopening to many businesses.
For the more coven impacted names, which we largely see in our grade one and grade two names, but we believe we have an informed view of their path to recovery, but we do think this recovery will take time and likely be quite uneven with the ever evolving cobot health crisis.
We believe many of these companies are generally strong franchises with every reason to perform as they did pre covet and that they will recover during more certain economic times. Our confidence is further supported by the fact that a significant number of them have already received additional sponsor equity beneath our loan positions, which provides a cushion to our cash.
Capital and a validation for the future of these companies.
Given our stable earnings our strong balance sheet and the improving outlook for investment activity. We declared a 40 cents per share quarterly cash dividend for the fourth quarter of 2020, we.
We believe we can continue to support a steady dividend level through varying market conditions.
I'll now turn it over to penni to provide more details on our third quarter results.
Thanks, Kevin and good afternoon.
Our core earnings per share were 39 cents for the third quarter of 2020 plot was 39 cents for the second quarter and down from 48 cents for the third quarter of 2019.
We had GAAP net income per share for the third quarter of 2020 of one dollar and four cents.
This compares to 65 cents for the second quarter of 2020, and 41 cents for the third quarter of 2018.
Our GAAP net income per share for the third quarter of 2020 of one dollar four cents per share includes net unrealized gains of 71 cents per share partially offset by net realized losses of six cents per share.
The net unrealized gains primarily reflects further tightening of credit spreads relative to the end of the first and second quarters of 2020, and some performance improvement and select names.
The unrealized gains were partially offset by increased unrealized depreciation for certain investments experiencing the continuing impact of the COVID-19 pandemic.
The $306 million of net unrealized gains on investments for the third quarter of 2020 or approximately 2% of our total assets at fair value and 4.4% of net asset value.
Total portfolio at fair value at the end of the quarter was 14.4 billion.
As of September Thirtyth 2020, the weighted average yield on our debt and other income producing securities at amortized cost was 9.1% and the weighted average yield on total investments at amortized cost was 7.8%.
As compared to 8.9% and 7.7% respectively at June 32020.
Our higher yields were primarily due to certain repricing within the existing portfolio as well as an increase in the yield on the SDLP subordinated certificates.
At September 32020, 83% of our total portfolio at fair value was in floating rate investments. Additionally, excluding our investment in the SDLP certificates, 84% of the remaining floating rate investments had an average LIBOR floor of approximately 1.1%, which as well.
Above today's current three month LIBOR rate.
Now, let's shift to discussing our shareholders' equity.
At September 32020, our stock holders equity was $7 billion, resulting in a net asset value of $16.48 per share.
Versus $6.7 billion or $15.83 per share at the end of the second quarter of 2020.
The increase in our net asset value was primarily driven by the net unrealized gains that we recognized in the third quarter of 2020 that I mentioned earlier.
As of September Thirtyth, our debt to equity ratio net of available cash of $213 million was 1.07 times, which remains right in the midpoint of our stated target leverage range of <unk> 0.9 to 1.25 times.
And is essentially unchanged from 1.8 times at June Thirtyth.
Due to our successful investment grade bond issuances during the quarter, we ended the quarter with available liquidity of more than $4.4 billion up by nearly $1 billion since June thirtyth.
Specifically, we issued an aggregate $1.15 billion of three and seven eights unsecured notes that mature in January 2026.
The first $750 million was issued in July.
$400 million later added through follow on offering in September as we took advantage of increasingly issuer friendly market condition.
The follow on was issued at a yield that was over 40 basis points lower than the original issuance yield.
Collectively these 2026 notes represents the single largest aggregate principal issuance in our history, helping to lower the overall weighted average cost of our unsecured debt and significantly reducing any refinancing risk around our next unsecured note maturity, which isn't until 2022.
We believe that the strength of our capital structure represents a clear competitive advantage for us in today's environment and that an important component of our capitalization is having diverse funding sources, including a diverse mix of unsecured and secured debt capital to complement our permanent equity capital.
As of September Thirtyth over 75% of our outstanding borrowings were from unsecured debt.
Which resulted in 85% of our assets being supported by unsecured debt and equity this.
This approach to maintaining a largely unsecured capital structure provides us with significant overcollateralization of our secured credit facilities, which positions us well to fully accessed the total borrowing capacity available.
Before I conclude I want to discuss our undistributed taxable income and our dividend.
Our spillover income from 2018 for distribution in 2020 with $410 million or 96 cents per share.
As we said many times in the past, we believe having a strong and meaningful level of undistributed spillover supports our goal of maintaining a steady dividend through varying market conditions.
As Kipp mentioned this morning, we declared a regular third quarter cash dividend of 40 cents per share.
Our fourth quarter dividend is payable on December Thirtyth 2020 to stockholders of record on December 15th 2020.
Now I will turn the call over to match to discuss our third quarter investment activities and our portfolio positioning in more detail.
Thanks, Patrick and good afternoon.
During the quarter, our team originated $706 million of new investment commitments across 24 transactions.
94% of the commitments issue were senior secured and it's typical for us over 60% of the transactions work to incumbent borrowers.
Consistent with our focus on non cyclical industries two thirds of the newly issued commitments were to software healthcare services commercial services and life science companies.
With expanding M&A activity and favorable competitive dynamics, we are finding the market for new investments to be attractive for.
For new first lien commitments originated this quarter, we achieved about 100 basis points in higher yield than the senior loans originated back in the first quarter of 2020, the last full quarter before the credit crisis.
We have also found compelling fee opportunities in todays market as our senior loan structuring fees in the third quarter were nearly 20% higher than the fees on senior loans from the first quarter of 2020 and.
Importantly, we were able to achieve these returns with more conservative leverage levels. For example, the senior loans, we originated in the third quarter had a half a turn of lower leverage than existed in our senior loan portfolio at the end of 2019.
Going forward, we expect the market to remain attractive as banks have tightened balance sheet lending standards. This year and the competitive environment remains favorable while greater M&A activity is creating a wider opportunity set in which to invest.
Shifting to our portfolio in terms of risk management, we remain focused on maintaining a highly diversified portfolio, which today includes 347 different companies with an average whole position at fair value only 0.3% we.
We believe this diversity is a differentiator as it underscores the performed any single investment is unlikely to have a material impact on the aggregate performance of our company.
We also believe that it highlights the strength of our origination platform.
The diverse portfolio supports more stability in our investment income and with that we anticipate our dividend.
Furthermore, with a weighted average loan to value percentage across our loan portfolio in the low Fiftys, we believe our portfolio has significant value protection.
We also believe that our portfolio, which is focused on high free cash flow non cyclical industries is resilient and defensive as Kipp stated our focus on upper middle market companies is benefiting our performance as our companies with over $100 million of EBITDA are experiencing better than the portfolio average EBITDA growth.
Shifting to our non accrual rate during the third quarter. One net new company was added to non accrual. This resulted in a modest increase to our non accruals to 5.1% at cost and 3.2% at fair value as compared to 4.4% at cost and 2.6% at fair value last quarter.
Based on where we are today with recovering corporate earnings and healthy financial markets. We believe that in future quarters, non accrual levels may stabilized or could improve from these third quarter levels.
Now before I turn the call back over to Kipp for some closing remarks, let me provide a brief update on our post quarter investment activity from October Onest through October 21, 2020, we made new investment commitments totaling 419 million of which $340 million were funded.
As of October 21st our backlog and pipeline stood at roughly $1.6 billion collectively note that our backlog contains investments that are still subject to approvals and documentation and may not close or we may sell a portion of these investments post closing.
With that I will turn the call back over to Tim.
Thanks, a lot Mitch.
In summary, we delivered another quarter of strong and consistent financial performance, including significant growth in our net asset value and we did it during a challenging time.
We believe market activities, improving heading into year end and that we're well positioned to take advantage given our strong balance sheet and liquidity.
Managing the portfolio and mitigating risk and our cobot impacted NIM will remain the utmost focus however, we feel that we've identified the situations that require this extra effort and we have them under control.
To conclude let me remind everyone that our company is modestly leveraged and has the liquidity needed to support portfolio companies.
Aeris capital has a strong financial profile today, and even if the recovery from that health crisis is uneven and takes longer than expected. We believe the core earnings and net asset values are stabilizing or could improve from third quarter levels.
Ultimately.
We remain confident that our company will emerge stronger unlikely in a better competitive position than ever before.
That concludes our prepared remarks, we'd be happy to open the line for questions.
At this time, if you would like to ask a question. Please press Star then one on your Touchtone phone. If you would like to withdraw your question. Please press Star then two please.
Please note as a courtesy to those who may wish to ask a question. Please limit yourself to one question and a single follow up.
If you have additional questions you may reenter the queue we.
The Investor Relations team will be available to address any further questions at the conclusion of today's call.
Our first question will come from John Hecht with Jefferies.
Morning, guys. Thanks, very much congratulations on a good quarter.
I kept you seemed a little bit more optimistic constructive I guess, just thinking about market trends and where your portfolios going and you talked about a.
Pick up an opportunity as portfolio companies, either invest in growth or transitioning business model.
So that seems like you had from a pipeline perspective, there may be more opportunity, but at the same time. It yes, yes. It is.
Seems like there's still a lot of economic uncertainty about how this might unravel next year, Yes, I guess the question is how do you guys internally balance those.
Uncertainties and opportunities.
The same time.
Yeah, Hey, John It's kept can you hear me okay.
Hi, Ken Thanks, Alright good.
Yeah, you know its a good question, that's obviously, what we're talking about.
Internally everyday thinking about the investing business, both new and managing risk I mean, I would tell you I think I am a little bit more optimistic.
It's hard it's hard not to be versus seven months ago.
You know and I think the positive is our we have a lot more certainty around the portfolio and the situation.
That we think are challenging I mentioned in the prepared remarks that we feel we have much more control and more understanding of what's happening there.
And we don't see any negative migration, yet as we mentioned path. We kind of think we have our arms around the situation that need extra attention and then yen terms of optimism going forward. It's it's a much much busier environment, it's much more constructive around getting a deal done and I tried to lay out some comments too and what I said.
But there.
There was really not a lot of activity through I'd say July and our pipelines picked up substantially so as I look forward I'm more optimistic on having some busier quarters and potentially with that.
Continued good and maybe even better earnings from here right.
But look I mean, I think that this recovery is going to be longer than we all expected and I think it's going to be uneven as I mentioned in the prepared remarks, so am I.
I Wouldnt say were out.
Running and gunning, so to speak, but we're a lot busier and I definitely I'm more optimistic.
Alright. Thanks Thats helpful. And then you also cited that the average size of company has materially increased over the past few quarters in terms of where you can participate.
Obviously, you some sense of that is just you guys getting market share maybe market awareness of how your end market unable to do things, but is there any power.
Part of that that might be tied to banks pulling back in certain categories or other competitive factors.
Tickets all of that I mean, I think we as we've done larger and larger deals it's become obvious to people that were capable.
Im doing these right you're seeing.
Really over the last five years just growth in private markets right more acceptance in private market transactions versus syndicated transactions.
We're still seeing the banks active but I think that they are active.
And even larger deals than the ones, we're focused on so they're they're trying to create.
Security is for liquid credit investors, so to speak to buy that really have good liquidity and as you know and others know billion dollar deal just doesn't have a lot of liquidity in the aftermarket. So I think at the preference on our.
Part on the part of banks on the part of companies to continue to support our direct lending in.
Larger transactions.
I think my last.
Point would definitely be look uncertainty.
In the markets brings a desire to find partners that are.
Willing and able and I think we've proven that we are right to the uncertainty that we have continued to encounter here I think only leads to probably more large private deal going forward.
Yes, hi.
All right that helps thanks very much thanks.
Thanks, a lot John.
Our next question comes from Finian O'shea with Wells Fargo Securities.
Hi, good afternoon.
First question.
Suppose Kippur, Kipp and Penni I think.
You referenced maybe.
85% of assets.
Our secured by our finance by unsecured and equity now.
Which.
We've seen that number grow over time is as you've been able to access unsecured impressively.
Is that something we should expect to continue.
Given the elevated levels and assuming you.
Want some bank financing and not too much of it.
And then I guess second part to that is.
Does that or will that drive any shift in your overall strategy.
Would you take more risk from.
A security perspective or.
Balance sheet perspective, a RCC as that would allow.
Sure Hey, Ben Thanks for the question I'm going to let penni chime into but also.
Our liability structure is not going to change our investing business right. It's been the same for 16 this years with a couple of new.
He wants is added on over the years with things like.
Yes, its LP than the SDLP, Ivy Hill et cetera, but the core investing business isn't going to change at all and I'll, let penni talk a little bit more but the only comment I'd make is we think we positioned ourselves really well with.
Out of unsecured debt that we had going in we saw some others have seen it would not be so well positioned and have to do some things that they probably didn't want to do.
So.
We're we're really trying to keep flexibility during an uncertain period, but I would kick it over to Patti and let her out any comments if you'd like to.
Yes, thanks, Kevin Thanks, Finance, so yeah, 85% honestly is probably on the higher side for us generally, but I think the most important thing we're trying to do right now is to build a fairly strong balance sheet and that's always been something that we focused on and.
Given the opportunity to issue any unsecured markets.
During Q3, it gave us an opportunity to just increase that and thinking about having stable funding sources and laddered maturities overtime I would reiterate that when we go to the market. We look at it is trying to do it in an opportunistic way as usual and we don't have any mature.
Parties due until 2022. So this is really focused more not on refinancing needs are worrying about anything in 21, but more just continuing to build out a strong laddered capital structure and as we move through time.
That percentage may come down a little bit as Lee.
Our able to roll off some of those.
Maturities that because they don't come till 2022 will probably run with a higher percentage of unsecured for a little while.
Thanks, So much and then just one follow on on a post.
Post quarter Gil Capstone.
Can you just.
Give color on the nature of how the.
PDC participated it was a syndicated deal I think you guys.
You guys have had a small.
Revolver commitment for some time is that something that.
For the first lien syndicated to the BDC participate in that.
In.
An investor sense, or a arranger sense, but any color you could provide there would help and that's all for me. Thank you.
Yes, I mean, it hasn't closed yet so we're not entirely sure how it plays out but it's obviously an ongoing syndication where we intend to have.
Yes.
Some buy and hold in the name.
Probably not.
Appropriate with a market deal to talk about what our intentions are going to be what we plan to hold and securities and all that at the mine.
Yes, I understand thanks again.
Yeah.
Our next question will come from Rick Shane with JP Morgan.
Good morning, everybody and thanks for taking my question.
Wanted to talk about slides 16 and 17.
Our investment activity post.
The end of the quarter and non accruals.
The 326 million that you cite exited is that fair value or cost.
Okay all.
Yes. This is Tony I can help out here.
The cost basis, because that's our total committed amount that we cite as exited so therefore to the extent is funded at the cost.
Got it and so when we look at the non accruals we should take.
The non accruals at costs down by 30% of the $326 million.
That would be the right now on a pro forma basis.
Yeah, and I would just add to that that the exits that we had were near the fair values at 930. So.
Got it yes that was actually part of my question I'm, assuming that this is already reflected in that.
The.
Hi, I'm not sure I Didnt hear part of your response or I wasn't sure. If you were pausing to just think about.
The response, so I apologize, but when.
When we.
Think about the realized losses of $83 million were dosed disproportionately concentrated in the 30% that were on non accrual.
Okay.
I think those.
Those were probably all of the Nonaccruals you know because what happens is when we actually exit something then we will remove the cost basis, and then to the extent, there's an embedded loss we had record the realized loss. So it really just moves the unrealized to realized.
So it is concentrated in those names that were on non accrual.
I would just remind everyone too that when we exit or have some kind of restructuring event. We often also or we do need to look at anything that we exchange at fair value So that way.
We would be able to.
We would have to record the loss, but then we have the new basis, effectively and anything that we exchange. So therefore as our history would show when we do restructures that only take upside in those companies, we have the opportunity to make that loss back where we have those potential.
Upsides through new securities that Weve exchanged and Tim.
Got it okay Thats very helpful. Thank you very much.
Thanks, Rick.
Our next question comes from Devin Ryan with JMP Securities.
Thanks, very much good afternoon.
First question here just on credit clearly you've seen a pretty substantial recovery here I think better.
The many work is creating a couple of quarters back early into the pandemic I'm just curious on.
How much spread tightening you're seeing on new deals.
And deals going on today relative to a few months back and the investments that we made earlier in the quarter.
I'm sure you.
I think the the any of the increase is obviously off.
Yeah pretty substantial mark back from Q1.
I think when there was a lot more uncertainty and obviously to the liquid credit so the liquid credit markets that we reference we're in a different place than we've seen you steadily improving performance, we talked about sort of the amount of upgrades versus.
Downgrades in the portfolio, but a lot of it is that just retracement in yield I'd say over the summer the markets in my estimation anyway, others on the team could.
Agree or disagree, but had probably widen in two to 300 basis points and capital from a lot of folks just really.
Wasn't available I would say today, we're probably in the 50 to 100 basis points wide of where we were.
Pre coven and typically at lower leverage levels.
And with materially better documentation.
And then sort of other aspects around the underwriting being better.
Quality of underwriting better.
Got it very helpful. Thanks.
And then maybe a follow up on earlier question just around investment opportunity is clearly the M&A backdrop its recover.
Recovered materially over the past few months, we're back to kind of pre pandemic levels, and so thats, providing a lot of opportunities around deal flow.
Sounds like the election, maybe driving some pull forward just ahead of potential tax changes depending on the election outcome and just wanted to think about.
Whether that's affecting how you guys are thinking about areas to lean into wearable way just given the potential for some more structural changes whether it be around taxes or regulations or Raven industries that are being viewed less favourably into different administration.
Yes, I mean, so I think that the election is certainly increasing activity with people.
Whether you have any counterparty sponsors owners of businesses whatever it may be being uncertain.
About I guess, a biden victory.
It's not really changing our view.
And yet in terms of the types of industries right for the most part.
[noise], we stuck to the same industries for a lot of years.
The same types of companies. So I don't think until we see what happens next week, we'll really start to have a lens on whether things will shift.
If we begin hearing things from potentially a new administration, obviously that will be part of part of our thinking in terms of the new investing business.
Okay, great hold it there thank you.
Yeah, you're welcome.
Our next question comes from Ryan Lynch with KBW.
Hey, good afternoon, thanks for taking my questions guys.
First one I had was just on a kind of revisiting your comments talking about the market activity and your deal funnel you.
You talked about you know you expect to see busier quarters than what you saw in Q2 in Q3.
But when I look at your guys' backlog.
Did you guys report are you guys had $1.5 billion hundred and backlog.
Currently and I like that over a year ago. It was only about 665 million. So when you talk about seed in increasing funnel of deals and more market activity are you talking kind of deal.
Deal activity being back to kind of pre cobot levels or are we just more like you're not kind of a steady increase kind of ramping up from Q2 to Q3, and then just kind of a steady increase into Q4 any any kind of color you kind of the magnitude of where activity has today.
I mean I think.
Currently I would characterize this as.
Pre coded levels I wouldn't say that I think it will necessarily remain there.
Yeah.
Yes. So we are we're very busy I think it's a combination of again pent up demand folks you didnt get much done for a six month period during a more severe lockdowns enclosures and all of that trying to get some things done that they wanted to get done and I think devins question as well about the election pointing forward as part of it too.
So I think it's a little bit of catch up from the past a little bit of pull forward from the future and it's hard to tell if it's sustainable at this point that'd be my thought.
Okay.
And then just my follow up or maybe it's better for Penni, you guys had a big increase in other income this quarter.
I thought that was maybe going to be due to more amendments being made but.
But you guys also said you had a 60% drop and you knew about mix. This quarter. So can you just talk about what drove that that big increase in other income this quarter and how sustainable.
You are any of those items.
Yeah, we did have our other income was about double this quarter or what it was last quarter, but it is still driven by kind of.
One time, one off amendment and other fees related to portfolio activities and yes as you know in these environments.
Lends itself to higher than normal levels of fees from various sources. So I would look at it as more of a one off increase and as the amendment to start to subside then our opportunity for making those types of fees will be reduced but that was more of a one off thing for the quarter that you shouldn't.
It into the run rate.
Just on that though.
Are you guys still seeing similar level of amendment activity, so far in the fourth quarter and the third or has that started to trail off.
So it slowed down a lot.
We talked about the decrease in this quarter and that's probably kind of steady and even at that level. I mean, I think the question will be.
The significant amount of amendment that we did.
Last quarter I think we mentioned our approach was to keep them reasonably short right. So today, it's pretty steady at those lower levels. The question will be how to how to companies looked in terms of year end performance and going into Q1, and what is the winter potentially hold or not hold for covance. So it's hard to tell but.
Today, it's still at that much more light.
Light or reduced level that you saw in this quarter.
Okay I understood.
Thanks for taking my questions and really nice quarter guys.
Thanks appreciate it.
Okay.
Our next question comes from Casey Alexander with Compass point.
Hi, yes, good morning, or good afternoon, I only have one question what percentage can you guess at what percentage of the backlog is from income borrowers.
Who I'd have to go look through it I mean, it's typically a pretty consistent around that 50% level, but I actually don't know I don't think I have that number off hand, I can go see if I can pull it up 40 cases here, if the finance and accounting team has been here just in our note.
Yes, yes.
Yeah its around.
Its over half theres more new than in comment. So the estimate is around 70% of income at deals.
Well I'm I'm not sure you just said more news an incumbent and then 70% income deals.
Confused me I'm, sorry, I [laughter], yes, I think I misread it it's more new then in combat sorry, so it's.
Around 70% as now so so.
So 70% is new okay, great all right. That's what I was looking for terrific. Thank you sorry for the confusion. That's it that's my only question. Thank you. Okay. Okay. Thanks, a lot for the question, sorry for confusing or getting their numbers backwards, but well being taken that from.
Our next question comes from Derek Hewett with Bank of America.
Hi, Good afternoon, everyone. What are your maybe kipp what are your thoughts on the rising level of Pik income and when do you think we can see pick up peak at this point since I think it was mentioned on the call that non accruals could potentially stabilize prospectively and then I do realize that liquidity is stronger than ever.
Capital structure.
Yeah, I mean, certainly as part of all that amendment activity, that's really what drove the increase in Pic I mean, typically we started pre coveted just as a reminder, with pik income at high single digits kind of 8% to 10% of the portfolio because some of the.
Junior investing that we do whether it's in sub debt or preferred and all that tend to come with a coupon. So some of its natural but it's definitely elevated Brian I think the good news is it really hasn't changed much from quarter to quarter you saw the real increase.
Call It six months ago with a bunch of these amendments and to your point I don't want it to remain at that elevated level for an extended period of time I don't think it will.
But it's one of the things that we've had to allow for obviously the patient and take a long term view around the recovery of some of these more co been impacted names. So from a liquidity perspective, I don't think it creates an issue for us I will say I know it doesn't create an issue for us.
But it is elevated and I'd like to see it come down and the shape of the recovery will dictate how quickly that can happen.
Okay, Great and then one other somewhat housekeeping question, what was driving that significant increase in the SDLP yield on a cost basis quarter over quarter.
Are you talking about the fair value going up or you're saying.
No just the actual yield I think it was up about 80 basis points on a quarter over quarter basis.
Yeah, maybe kipp I can take that one we if you looked at the yield at year end. It was around 14.5%, we reduced that on Q1 and Q2 to about 12.5% coming in to call that maybe a little conservative on our part just to look at the underlying.
Performance of the companies, but if you look at the way they've performed it's been better than expected. We've had rebound in performance were and then also some of the amendments that led to some higher yields in the underlying portfolio. So if you couple that with improved cash flows and more rate than we sell more comfortable bringing that back toward.
The year end yield on SDLP. So we ended for Q3 were at 13.25% yes.
I hadn't.
I think it's just sort of in line with the existing portfolio you know what I mean, some amendments some additional pricing all of that.
Okay, great. Thank you very much everyone.
Our next question comes from Kenneth Lee with RBC capital markets.
Hi, Thanks for taking my question just given the prepared remarks comments on seeing potentially busier quarters going forward [noise] wondering if you could just share some any updated thoughts on how leverage could trend and then in the near term.
Perhaps more broadly what factors could bring leverage either to the lower or the upper end of the targeted range. Thanks.
I mean, I think we've said in the past and we're still.
I will echo the same comment we feel comfortable with the leverage ratio kind of eating up from here to the one 101 to add.
And one in the quarter, we'll probably sort of evaluated but but the way that the company operates obviously is when we see what we think are attractive investment opportunities and I think you heard we think we are seeing a whole bunch of data here.
Yeah, we're going to drawdown on the credit facility that we have and grow the liability is a little bit too hopefully support some asset growth. So that's how we see it but I don't think we'll get.
Beyond that one in a quarter times because the company does have a lot of liquidity, we're still seeing repayments and all that so there is a natural kind of counterbalance to a busier investment environment. So at this point, we still feel like we'll be in that one to 1.2 range for for a little while here.
Great. That's all I have thank you very much.
No problem.
And our next question comes from Robert Dodd with Raymond James.
Hi, Congrats on the quarter I mean, I can go back to the amendments I'm just basically kept them you said down 60%, which obviously is a big improvement can you give any color on kind of the relative materiality of those amendments I you with a more modest this quarter than they were.
Last so but you know if it's down 60 entail what was it down in seriousness. It's if you will.
That's an interesting question, it's kind of a hard one to answer I would say the.
The most serious issues that we felt that we were addressing we're the one.
You know that we encountered in March April and may be even into may so that as a generalization I would think that the amendments that got done.
This quarter were of the west Sirius variety, but I'd have to go back and look at the list that that would be my sense.
Got it I appreciate that color. That's helpful. One more on follow up you talked about spreads being wider by call. It 50 to 100 basis points go quite honestly I presume, you mean that unclear, but I like the like asset and given the the the pipeline is is in general much larger EBITDA businesses.
Normally carry a lower spread.
Could you give any any relevant colour on what the total blended.
A spread changes I is the logic business is going to offset the fact that spreads are wider to the same type businesses and that effectively spreads are going to be act.
Pico bid levels or is it the 50 to 100 applies even on the kind of logic business as you're looking at right now and obviously this is that separate from that adults et cetera, et cetera, but any color on that one.
Yeah, I mean, I think the 100 the generalization you can think about it I think about it sort of the crops.
Across the company the weighted average capital structure.
I think your second point is actually more interesting to be honest, which is.
We feel like there is a little bit of a sweet spot above what a lot of folks think of as the traditional middle market.
Probably offers.
The same pricing or materially better pricing and a larger deal than we'll see in lower middle market companies. These days.
The reality is the competition.
The lower middle market and frankly, the deal flow I think is a little bit lesser at about the deal closed a little lesser and the competition is a little bit more staunch because you know at a 100 million dollar deal you.
You can line a lot of folks up they can right 25 million dollar checks and really drive terms down, but when you come looking for a complete capital solution that 750 million to a billion now.
Not a lot of people that you can go to and I would tell you I think we're able to drive some unbelievable value in these larger companies. So I don't view, the increasing EBITDA size as sort of an enemy to our returns today I actually think we may be getting better risk adjusted returns there than we would be getting in these smaller deals.
Were you know.
We played those deal too and were blown away sometimes by what the terms look like right. Your point is the right one which is your financing smaller companies you're supposed to be getting premium returns and we go in and we compete for these deals with others and we tend to lose on pricing.
We are always a bit surprise, saying well I can't believe it $20 million EBITDA company can borrow at the same cost of capital is $100 million EBITDA company, but it seems that Ken These days so for us yes.
Doesn't make a lot of sense and will sort of stick to what we're doing.
I appreciate that and it does show up.
Ubiquitous when you get a higher coupon of second lien and have low.
Non accruals on second lien the industry clearly the biscuits and sped up the way you're doing it in your market segments. So I appreciate the answers. Thanks.
Thanks for your question.
Hi, Dan if you have a question. Please press star and then one to join our question queue.
Our next question will come from Chris Kotowski with Oppenheimer and co.
Yeah, good good afternoon and thanks.
Just trying to Peel back the onion on your relative optimism about the non accruals just kind of looking through the big.
Big area bigger Chunkier names, you know you see to dental centers, a couple of restaurants, some oil and gas okay.
Movie production company I mean, those were kind of the bigger.
Figure chunky ones and it's obviously easy to see how a lot of them would have been.
Impacted by co bid and I'm wondering is your optimism based on the fact that like these.
These companies are kind of.
Found a way to to.
To at least partially function and the gold world or is it just that the.
Yeah.
Are these companies able to to function in the in the kind of partially opened the world that we're in.
You're talking about companies that are.
Existing non accruals or the rep, yeah, yeah yeah.
Now your existing Nonaccruals, that's what I was wondering about is that was that the basis of your optimism.
[music].
Generally yes.
The existing nonaccrual as you know we think.
For the most part they're all pretty darn good businesses that to your point are operating in Greece impacted by co bid and through a combination of equity coming into those companies.
And potentially providing some concessions in the near term they figured out how to operate but yes, I think there will be a path to recovery for most if not all of them. So I think it's being reason.
Reasonably optimistic on the existing non accruals, but I think I'm optimistic to around the portfolio because that's when you. When you look at our non accrual if thats pretty small lift right.
And we've talked about the grade one and two.
Kind of being I think in my mind ring fence at this point and that we understand where the issues are and we think that we have them under control as I mentioned in the prepared remarks, so definitely a lot more effort optimistic than I was then in April.
Okay.
All right. That's it for me. Thank you, yes, you are welcome.
This concludes our question and answer session I would like to turn the call back over to Kipp Deveer for any closing remarks.
Nothing beyond wishing everybody well and hoping we can all get back together in person one of these days, but thanks for all the questions we'll sign off now thanks.
Ladies and gentlemen, this concludes our conference call for today, if you missed any part of today's call an archived replay of the call will be available approximately one hour. After the end of the call through November 10th 2020 at five P.M. eastern time to domestic callers by dialing eight.
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