Q3 2020 Capitala Finance Corp Earnings Call

For the quarter ended September Thirtyth Twentytwenty, all participants are in a listen only mode. A question and answer session will follow the companys formal remarks.

Today's call is being recorded and a replay will be available approximately three hours after the conclusion of the call.

On the company's website at Www Dot Capitola group Dotcom <unk> under the Investor Relations section.

The hosts for today's call are Capitola Finance, Corp.'s, Chairman and Chief Executive Officer, Joe Alala, and Chief Financial Officer, and Chief Operating Officer, Steve Arnall.

Capital loan Finance Corp issued a press release on November Thirtyth Twentytwenty with the details of the company's quarterly financial and operating results.

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

Please note that this call contains forward looking statements that provide information other than historical information, including statements regarding the company's goals beliefs strategies future operating results and cash flows. Although the company believes these statements are reasonable actual results could differ materially from those projected in the <unk>.

Forward looking statements.

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

Capital <unk> undertakes no obligation to update or revise any forward looking statements at this time I would like to turn the meeting over to Joe Alala. Please go ahead.

Thank you operator.

Good morning, and thank all of you for joining us today.

As noted in our third quarter earnings release.

We were successful in executing on a number of topics mentioned in prior calls.

What are the key areas of focus was to decrease leverage.

During the third quarter, we repaid 50 million of SB eight debentures, and we purchased 2.2 million of our 6% baby bonds.

The result was a total debt to equity ratio of 1.99 at September 30 of 2020 down from 2.64 at June Thirtyth 2020, and 2.72 at March 31 2020.

In summary, we have reduced leverage over 27% since the end of the first quarter of 2020 and during a pandemic.

Stability of NAV per share remains a key measure for the second quarter in a row NAV per share increased to 39.99 per share at September 32023.

3% from the prior quarter and up 6% since March 31.

Our investment portfolio continues to improve from a credit quality perspective.

Net investments rated three and four collectively account for 8.4% of the portfolio on a fair value basis, the lowest percentage in over four years.

We currently have three debt investments on non accrual and a risk rated for where the fair value of 18 million down from eight investments were 42.9 million at the end of the first quarter.

Equally as important is that we currently have four investments risk rated three are what our internal watch list totaling 5.6 million down from seven investments are 39.3 million at the end of the.

First quarter.

Cash balances are approximately 44 million at quarter end, we anticipate using a portion of this cash to advertise and FDIC subsidiary, giving us access to low cost long term fixed rate capital.

To be used to make investments in the lower middle market and grow our net investment income.

Subsequent to quarter and we're pleased for close on a senior secured credit facility.

This slide will provide the quality for new investment activity in general working capital.

Distributions remain suspended for the fourth quarter of 2020, we understand the importance of resuming the payment of quarterly distributions.

Utilization of our dry powder for new investments, including advertising and that's the ATSI subsidiary will help us grow net investment income and generate future distributions.

Looking ahead, we are in a great position from a liquidity standpoint, what's the capital of finance Corp. and across our entire entire platform, our direct origination platform and underwriting team or in various stages of route reviewing investment opportunities opportunities in the lower middle market.

We approach the ended the year with a lower Levered company, a senior secured debt portfolio stability of NAV per share and are working to resume quarterly distributions and 2021.

At this point I like it I like that you could provide some comments on quarter result.

Thanks, Joe Good morning, everyone.

Total investment income was $6.7 million during the third quarter of 2020.

3.4 million lower than the third quarter of 2019.

Interest in fee income declined by 2.1 million, resulting from a decline in average debt investments outstanding.

Dividend income declined by 1.2 million as 2019 included zero point Eightmillion dividend from a portfolio company zero point Threemillion from capital a senior loan fund two which was wound down during the second quarter of 2020.

Total expenses were 6 million for the third quarter 2020, compared to 7.1 million for the third quarter 2019.

Interest and financing expenses declined by 0.7 million, resulting from lower average debt outstanding well base management fees declined by zero point Threemillion resulted from a decline in total assets.

Net investment income totaled 0.7 million or 27 cents per share for the third quarter 2020.

3 million or dollar 11 cents per share for the third quarter 2019.

Net realized losses totaled 12.3 million for the third quarter 2020, but did not have a material impact to any deeper share as realized amounts were in line with previously reported fair values.

During the third quarter 2020, we converted our class B common shares of U.S. well services incorporated.

For class a tradable common shares.

While the conversion to this new security generated a realized loss of 6.2 million.

The number of shares and our continued equity ownership the U.S. well services remain unchanged.

Net real funds net unrealized appreciation totaled 14.8 million or $5 to 46 cents per share.

Third quarter 2020.

Compared to net unrealized depreciation of 1.3 million for the comparable period in 2019.

The net increase in net assets, resulting from operations totaled $3.4 million or $1.24 per share for the third quarter 2020, compared to a net increase of 1.7 million for the comparable period in 2019.

Net assets its attempt at September Thirtyth, 2020 totaled 108.4 million or $39.99 per share compared to $54.84 per share at December 31, 2019.

Atlas at September Thirtyth, 2020, we had $43.7 million in cash and cash equivalents.

Also as of September Thirtyth, 2020, total and regulatory debt to equity was 1.99 and 1.15, respectively.

During the third quarter 2020, we repaid $59.0 million of SB eight debentures 19 million debt matured on September 1st of 2020, and 40 million that was that was to mature on March 1st of 2021.

In addition, we repurchased approximately 2.2 million of our 6% notes through our repurchase program.

Lastly, subsequent to quarter end, we've announced a new senior secured credit facility to 25 million dollar line will provide liquidity to fund lower middle market investments and provide general working capital.

At September 32020, our investment portfolio included 36 investments the fair value of 280.2 million on a cost basis of 283.2 million first.

First lien debt investments on a fair value basis at September Thirtyth 2020 comprised 66.7% of the portfolio second lien debt represents 13.4% and equities last war investments represent 19.9%.

At September 32020, we had three debt investments on nonaccrual status status totaling 18 million on a fair value basis compared to 23.9 million at June Thirtyth 2020.

As Joe mentioned, we're in various stages of review on a number of investment opportunities and our pipeline is very active.

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

At this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad again to ask a question. Please press star followed by wine <unk>.

We will pause for just a moment to compile the company roster.

Your first question is from the line of Christopher Nolan with the Ladenburg Thalmann.

Hey, guys.

Oh good morning.

Going Oh, Steve what was the driver for the realized losses aside from the U.S. wells.

Yes.

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On a strategy basis I noticed that you guys.

According to my estimates made roughly $250000 new investments in the quarter.

And had about $10 million and repayments and your de leveraging.

Is the strategy going forward to further de leverage.

Chris or Joe here that were.

We've been talking about deleveraging I think we've done a really good job of de leveraging for to under two point ex gas leverage.

We are sitting on cash we do have a new revolver in place now.

We see the best way to really grow and accrete earnings is through investing through another FDIC subsidiary.

Currently that's the.

Cost of capital when issued through an FDIC is around 1% slightly over long term its fixed is a very attractive financing.

We received a green light as mentioned in prior calls and I think April may of this year to pursue another SPLC license, we're in constant contact with the SP, a although we don't control their timeline.

Our goal has always been to receive a subsequent SPLC subsidiary in Q4 of this year and we hope that still the case, we don't control the timeline, but.

Oh, that's the FDIC Threed and the BDC are performed as we have mentioned over.

The past few quarters. So we're confident it's coming our way, we just don't control the timeline and that is really accretive to growing our earnings and producing dividends Chris Chris This is Steve.

On that line.

With the repayment we made on September 1st we've only got 6 million due on March 1st and SBH debentures maturing will decide you know sometime before that date, whether we want to repay any of these.

Remaining bonds, but they don't mature until 2022 beyond that so to.

To be determined.

Yeah. My thinking is the is right now the stock price is trading roughly.

2% Oh no.

Per share.

And I saw in the quarter that there really wasn't any incremental investments and.

You know.

Possible strategy could be simply just to de lever the balance sheet and you're not paying a dividend also de lever the balance sheet, taking cash and with that the valuations and the stock price will go up and you can fight another day as it were.

Well, Chris is as Juergen.

As the platform, we have actually been very active investing.

We'll probably have the most active quarter as a platform Q4. This year as we've had in the prior many years.

We're really prefer to invest our liquidity at the BDC through a new FDIC subsidiary.

That way, we can really enhance our earnings growth and future distributions, but we have no intention of just not being active in providing capital to small businesses.

We are very active on pools of capital in our platform and we expect BDC to be active too in the future.

Got it and then I guess final question any consideration for share repurchases.

Not right now.

Good question, but not at this point when we talk to our board about that on a quarterly basis, but not not at this time okay.

Okay. That's it for me guys. Thank you.

Thanks, Chris.

Your next question is from the line of Kyle Joseph with Jefferies.

Hey, good morning, guys. Thanks, very much for taking my questions and congrats on the progress in terms of credit performance as well as the deep the de levering. So Joe you talked about your pipeline be being active I just want to get a sense for you now that the deal the in that pipeline how they live.

Look on spreads in terms and how that compares to kind of deals you are seeing pre kill that.

Oh, that's a.

Well, that's a great question.

The deals we're seeing now it really does depend someone the size I think the largest companies.

20 million plus in EBITDA in the smallest is five ish million of EBITDA I will say the pricing is materially better.

Unless theres a few industries, maybe some tech or healthcare that pricing is probably about the same but in general pricing is better almost double digit first lien deals sometimes we're a few deals were actually getting warrants.

A penny warrants and the deals.

We're very excited about the pipeline this clothing and we've already closed two or three.

And this is outside the BDC weve already closed two or three if you like to close three to seven more by the end of the year or early next year and as soon as the BDC begins investing again, which we expect that to be through a new FDIC since the theory. It can begin co investing in these deals immediately and that.

As we have an active pipeline of all first lien some equity co invest some warrants penny warrants. So it's a very good pipeline right now that in the in the lower middle market.

Got it very helpful. And then I guess question for Steve Yeah. Obviously, your Eni has been been choppy there is a.

I'd comment on that in the pandemic and everything but just in terms of modeling going forward, you know X kind of the deployments to the FDIC is this is this a decent run rate in terms of the Eni right now or are there some headwinds or tailwinds you highlight versus at the level, we saw in the third quarter.

I think that's a reasonable run rate, taking all things into consideration. We've got some portfolio companies that are performing very well it depends on whether we get taken out or not get our debt repaid. So I think from a modeling standpoint, that's a that's a reasonable assumption in the short term, but again longer term as Jeff.

I mentioned, the real growth and then I come from we can.

Actually has some of that lower cost capital and invest that money in the lower middle market.

Got it very helpful. Thanks for answering my questions and nice work turn it around.

All right. Thanks, Thanks, Scott.

There are no further questions.

Thank you everyone for your time today.

Sure one's watching the news, it's one of those interesting days, but we're here all day, please contact us and they further questions. There will be a pair of watching the news and working hard for you. Thank you for your participation.

Thank you for your participation. This concludes today's conference call you may now disconnect.

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