Q3 2020 First Eagle Alternative Capital BDC Inc Earnings Call
Good morning, and welcome to the first Eco alternative capital D. D. C Inks earnings conference call for each Street, Cisco Martha and that's September 30th 2020.
It is my pleasure to turn the call over to Sabrina.
Oh first <unk> I'm, sorry, I just got this all D D C E.
Mister Rosner Carlson you may begin.
Thank you operator, good morning, and thank you for joining US with me today are crippling, our Chief Executive Officer, Jim Fellows, Our Chief investment Officer, and Terry Olson, our Chief operating and Chief Financial Officer Officer.
Before we begin please note that statements made on this call may constitute forward looking statements within the meaning of the security back in 1933 as amended.
Such statements reflect various assumptions by first Eagle alternative capital P. D. C concerning anticipated results that are not guarantee of future performance.
And are subject to known and unknown uncertainties and other factors.
That could cause actual results to differ materially from such statements.
He uncertainties and other factors are in some ways beyond management's control and include the factors included in the section entitled Risk factors in our most recent annual report on form 10-K.
Updated by our quarterly report on form 10-Q, and our periodic and other filings with the Securities and Exchange Commission.
Although we believe that the assumption so much any forward looking statements are based on our reasonable any of those assumptions could prove to be inaccurate and as a result, the forward looking statements based on those assumptions also could be incorrect.
You should not place undue reliance on these forward looking statements first Eagle alternative capital undertakes no duty to update any forward looking statements made herein I'll forward looking statements speak only as of the date of this call. Our earnings announcement and 10-Q were released yesterday afternoon copies of which can be found.
On our website along with a Q3 earnings presentation that we may refer to during this call.
A webcast replay of this call will be available until November 12th 2020.
Approximately two hours. After we conclude this morning to access the replay. Please visit our website at Www Dot F E. A C B D C dot com.
With that I'll turn the call over to Chris.
Thanks, Sabrina good morning, and thank you for joining us on earnings call on today's call will provide an overview of our third quarter results. It's a portfolio highlights the material to discuss our portfolio and financial results in more detail.
Let's begin our results for the quarter. We're pleased to report the book value of F. CRD increase this quarter by approximately 13%.
From $5 with 54 cents per share in $226.25 per share at the end of two three this represents a 20% increase is march 31st when the Mark for most significantly impacted by the effects of Covid.
The 13% increase from cue to cue three was due to two factors.
First appreciation of the value of our portfolio driven by further recover it alone market and credit performance improvements with a portfolio company level resulted in a 7% increase in Nab accretion and second the completion of our $20 million tender offer in July that resulted in the repurchase of $5 2 million shares provided accretion of 31 cents per share.
Or 6%.
And I I for the second quarter was 10 cents per share in line with our dividend.
I don't know I benefitted from the management fee waiver that will continue through 212021 with add approximately three cents per share per quarter.
The management fee waiver was intended to reduce the impact of the shareholders as we exited our remaining concentrated non-core positions and is provided support to the portfolio during covid.
Our portfolio transition is nearly complete an overall we were very pleased with how the portfolio is performed through the pandemic where.
We're currently level of 0.94 times, and we intend to target longterm leveraged levels between 1.1 at 1.2 by the end of the queue to 2021 weeks.
We expect the portfolio growth up to those levels to be accretive the NII and we expect to continue to generate an eye level and live with or exceeding our 10% dividend.
Now, let's move over to our portfolio.
Overall as noted earlier the portfolio continues to hold up well despite the ongoing nature of the pandemic.
The Logan joint venture continue to benefit from recover in the broader loan market and they have increased again in Q3.
Logan is thus far recovered 52% of its initial covid related markdowns in Q1.
And our traditional direct lending portfolio, we observed stable to improve and trends across almost our entire portfolio.
90% of our portfolio companies were either flat or increase in value in Q3.
Several of our portfolio companies pay down the revolvers during the quarter and the median leveraged through our security for the portfolio decrease from five two terms of June 30th to four eight terms as of September 30th the.
The number of new amendments that we would consider material also declined during the quarter.
Took interest.
Also declined this quarter and now represents four 6% of the total interest in Q3.
We do not add any new nonaccrual, so the portfolio during the quarter.
Smart toward Ah business centered on sponsor and organizing high and travel vacation tours remains are only portfolio company that is on nonaccrual due to the impact of Covid the.
The company filed for chapter 11 bankruptcy in October implants, the exit within 60 to 90 days we.
We can use to be aligned with the sponsor on this credit and reached an agreement with respect to a balance sheet restructuring.
Let's includes $10 million capital support split evenly among the lenders and the sponsor term loan equitation and other modifications as.
As a reminder, consistent with our disciplined portfolio diversification guidelines.
Toward there's only a 5 million dollar investment and we're less represents less than 1% of our total portfolio based on fair value.
During two three we also continue to make progress is our goal of exited derisking remaining concentrated positions.
We completed a restructuring of our largest holding and OEM.
Which represent a 9% of the portfolio. This resulted in the return of a portion of her holding back to income producing status, we get into the queue for.
Our new seven $5 million, Firstly term loan will accrue income at LIBOR, plus 750 basis points.
The remainder of our investment which was converted into a second lien term loan to retain our credit of rights and maintain priority comparable to the trade, but as more equity like in nature. Since we restructured this with the expectation that will not earn income on this asset.
We completed the restructuring, but are still actively pursuing exit opportunities, including potential strategic partnerships proceeds of which will be used to pay down our alone.
C K markets, a 5% position, which has been in our portfolio. Since 2010 remains on track to complete a sale transaction in queue for we expect to receive the spiritual portion of our capital back upon the sale.
C N K has been one of our top performing credit during the pandemic was marked up accordingly this quarter.
While our primary goal continues to be supporting our portfolio companies through the pandemic are directly platform as seen an uptick in both knew what she wants as well as M&A activity at our existing portfolio companies. The BDC continues to benefit from deal flow generated by a $5 billion direct lending platform and this provides more opportunities for diversification.
This is the beginning of the pandemic are directly platform is deployed just shy of $700 million across the 19, new investment in various follow on investments were.
We're being very selective about where we deploy our capital and a very disciplined about sticking to our strategy of investing in firstly highly diversified positions and select industries, whereas the expertise with the sponsors we know to be supportive partners.
Our goal is to can you to diversify imprudently, rather bdc's portfolio as a complete our portfolio rotation and modestly increased leverage headed into Q2 thousand 21 with that I'll turn the call over to Terry.
Thanks, Chris and good morning, everyone through some investment in portfolio highlights as Chris mentioned, we fold increase in deal activity in Q3 with the BBC, adding 12.
$12 million across for new investments follow on investments that are blended yield of eight 8%. We also added $12 million, thus far in queue for four additional names.
With an aggregate yield of eight 3%. We also had one notable realisation in Q3 with the exit of our $6 million position and it's just lunch at par.
Although september 30th or portfolio of 343 million was above to 65% in first liens secured debt and 18% of the Logan JV.
A reminder, the Logan JV of 19, 96% invested adversely now if that's.
The remaining 17% of the BDC portfolio withheld and secondly in another income producing an equity holdings, including a restructured equity leg secondly, an investment in OEM, which was previously classified as the first lane.
Weighted average yield on the debt and income producing portfolio, including Logan was 7% an increase over the for a quarter.
Chris mentioned, we had a new non accruals.
End of Q3 total nonaccrual as a percent of the portfolio fair value and caused for 285.
5.1% respectively.
We have a brief update on Logan before moving onto the financials as we mentioned in our last earning calls we were <unk>, we proactively reduced logan's leverage in light of the risk presented by the market in Q1.
We've started to add to.
The portfolio again with the intention of increasing leverage in 2021, we remain pleased with the overall credit quality of the portfolio to have only one lone on non accrual.
With our costs and fair value of $2.3 million 1 million, respectively or less than 1% of the portfolio.
To move over for the financial for the third quarter profile editor now a increase in our net investment income in line with the dividend for the quarter.
I'll highlight some of the components over 737 $3 million of investment income. This quarter components include interest income four $6 million was flat quarter over quarter dividend income that increase of quarter to two $6 million due to a larger dividend from C. N K.
Total expenses for the quarter work for 2 million down from queue to primarily due to the management fees waived.
Lower interest and fees on borrowings as a result of lower Outstandings and an overall reduction in our credit facility commitments.
With respect to blow the line NII items and have realized loss of $17 5 million in Q3 with larger related to the OEM restructuring and was already reflected in are cute.
From our leverage perspective or slate.
Our leverage increased slightly to 0.94.
For as Chris mentioned at the end of the quarter. This is due to the completion of the tender offer which was offset by appreciation of the value of the portfolio.
We also completed amendment to our senior credit facility in October you may have seen with the recent eight case that was filed that included a reduction of our commitments from $120 million to $100 million with the option to increase the facility up to $200 million.
The revolving period maturity was extended to October 2024, and there was a reduction in the asset coverage tests from 165% to 150% along with the amount of the price increase to LIBOR 300.
We believe the diversity and flexibility of our capital structure continues to be a strength the challenges presented by the pandemic continue.
We have ample capacity to bar additional capital on the facility flexibility to whether any unforeseen effects over the next several quarters in a fun new investments.
And follow ons or unfunded commitments in our existing portfolio companies.
With that I'll turn the call back over to Chris.
Thanks, Terry overall this is a strong quarter for F. CRD, we continue to see improvements in NAV positive trends in our portfolio companies in an uptick in deal activity.
Continue to make progress exited reducing the overall risk profile of our last few remaining concentrated names. We are in the late into this rotation are confident in the underlying portfolio in our strategy going forward.
With that I'll turn the call over to the operator for questions.
Thank you ladies and gentlemen, if you have a question at this time. Please press the start and then the number one on your Touchtone telephones.
Questions have been answered arguments to remove yourself from the can you <unk>.
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What passed for a moment to composite kidney roster.
Your first question comes from the lineup per.
From Omega family Office your line is open.
Hope everybody safe and healthy.
Just a few questions if I may.
Not not in order of importance what are the actual shares that standing at the end of the period as opposed to an average second with the new credit agreement what flexibility do you have any regarding stock repurchase and what is your attitude towards stock repurchase.
Third question would be on this OEM I gather from reading it and listening to your comments, we didn't get any cashback, we just restructured wrote down the value of the loan and restructure it but didn't get any cashed yet enforced where are we heading as a company I mean, we have an 85 million dollar market cap, which is irrelevant, we're showing at 44.
Per cent of book value wheel, 14% sequester capitals extraordinary high the question of public ownership is high.
$85 million we.
We better off just giving the money back to shareholders.
Book value would let the shows the subway to do with their money what is your attitude about that so for questions. If you could help me out. Thank you yeah perfect thankfully.
Terry answer your first question on the actual shares and I'll take the other Lady outstanding shares at the end of September or 31 million shares.
It's a cute.
Got it and.
<unk> yeah.
Yeah. So it could be updated agree with my back with the with the <unk> facility.
We are precluded under the amendment that we did too.
We're not able to buy shares back until April 2021.
Part of the the amendment process, we went through.
That has not changed we obviously to the $20 million tender back in July and just as a reminder to the shareholders.
We tend to her for $20 million, we actually received exactly $20 million to tender wasn't undersubscribed are oversubscribed. It was right right in line.
As I sit here today and look at the discount.
The math that you just said leave that we would be buyers of the stock.
And given this given the discount for sure.
Your question on OEM, you're right. It was a recalibration of the balance sheet. Our goal in doing this is just a probably provide more color to the market.
It's a single largest position that we have it's been sitting for quite some time.
And I think there was.
More unknown unknown and how to evaluate that security so with what we've done here is give an indication to the market on what we think is.
Fairly conservatively current pay.
So people can evaluate that and then the balance that we've restructured as equity we're looking to hopefully liquid monetize that in the future and redeploy that capital and and learning and earning income.
Your last question I get frustrated.
Frustrated as well and the performance of the stock.
Felt like we've done the right things here we've performed.
Well in line with our expectations as a transition in the portfolio but.
Stock has not moved.
I would have expected there to be downward pressure on the stock at the at the tender that we did in July was three or four times oversubscribed. It wasn't yet they are still is.
There's still this pressure there the good news if we step back and think about it from a broader platform now that we're part of a much bigger asset manager and first Eagle.
I do believe we have other tools that are at our disposal to to add value. If we're not able to grow organically. Maybe there is a pauper probability for us to to increase our size through through M&A. So we continue to monitor it I think it's a very fair question is given where the stock trading but at.
As I sit here today or goal is to.
Continue to try to drive value in the normal course, and if that's not working then we have to call a different play we will what would it cost you to go back to the lenders and try to get permission to buy stock back now rather than waiting to April of 2021, I mean, it's so accretive you retrying, a 14% yield in less than half of book value.
Is it plausible if you had to pay a little bit to get that done it's pretty hardly in this environment. Most of the lenders are looking to derisked of their portfolios not take on risks I think if there was further clarity on Covid you can see a a little bit more flexibility, but right now most most leveraged providers are saying no to stuff not saying, yet so I don't think it's a cost of.
An amendment fee or increased pricing.
It's it's an unfortunate position to be in but it's one that we think it's near term at at the stop continuing to trade where it is well obviously take advantage of in 2021.
April 2021 magnitude what would it be available based upon your credit agreements assuming everything else is the same.
It's not necessarily driven by that Lee we can certainly we can certainly put in place something in the neighborhood of 10 plus million dollars repurchasing those are mostly I've got you any but we'd have to calibrate it at that time.
Pay a function of the liquidity in the portfolio as well okay. Good luck stay safe stay healthy. Thank you.
Thankfully thankfully.
Again for any questions. Please press one on.
On your telephone keypad. Your next question some <unk> some keeps W. Youre my knees open.
Okay. Good morning, Thanks for taking my questions I apologize I misheard, sorry, Harry hopped on a little bit late but.
With the restructuring that.
You guys did this quarter.
Oh yeah.
Vaccines up your non accruals by quite a bit I understand we're still in the midst of a downturn, there's still other credit issues credit concerns.
But do you feel like your balance sheet and your portfolio is in a position where you guys can actually.
Start growing.
Folio and utilizing some additional leverage annual over the last several years I've kind of been focus on.
And that repayments, let's just wondering how do you feel that.
Portfolio under balance she's physician today.
Is a position today to potentially start getting some growth in there.
Hey, Ryan is correct and I appreciate you asking the question yet we do actually.
There have been a point in time, when we when we didn't feel comfortable with the balance sheet and taken on the incremental leverage and that's why you've seen us.
Hesitant to to move deeper into the leverage facility, even though I think we've had the ability to take leverage up for for a number of quarters now.
A lot of portfolio transition isn't complete it's fairly isolated in a couple of names and I think you can see in the marks on the AMC and cave is marked up eagerly was marked up OEM. We've recalibrated. So I think we've taken pretty definitive action on on what we consider to be the overhang that would've historically, given us pause to move move the lever facility high.
<unk>.
The good news given the discipline that we've deployed over the last 18 months.
While we did have one non new accrual, which is obviously and smart towards which is a disappointment.
5 million dollar hold inside the BDC, it's that type of diversification that if you do have something that goes bump in the night, where we are in a position where we can wet.
Whether that with with a slight increase in leverage it again just as a reminder, we're at nine four times today, we're only talking about moving at the 0.1.
One one to 1.2, it's not as if we're trying to double leverage it's a fairly modest increase but one that we feel good about as we sit here today with with our new lending group.
And the provisions inside the documents and and without the rest of the portfolio is is positioned.
Terry I'd just.
Kind of highlighted is a bit in the script, we've done eight new investments, we put eight new investments in the BDC since July to date.
Pipelines pretty robust across the Dl platform and as you can see we're putting that you've been at three $4 million commitment sizes, so continuing to diversify and as Chris mentioned, you a couple of hours.
Improvement of the portfolio that provides.
Path too.
Continued improvement and growth.
Okay.
If you guys are looking to potentially grill.
The BBC portfolio more than you potentially have done in the past.
What would that look like would that be taking on more deals or would there be any thought.
Take it on larger home slot site.
<unk> excuse me, there's no chance, we're going to take on larger hold cycle platform. Okay.
I appreciate the question we ran concentrated historically prior to 2014, we're never going to run concentrated again.
I think the key to getting comfortable with the incremental Leverages. The fact of the portfolio is is as diversified as it is that's how we gain comfort that's how our lenders gain comfort and I think that's all our shareholders should gain comfort so.
The good news is we said in the prepared remarks, it's not as if we're not busy we are.
<unk> balance sheet and it's available capital is somewhat limited it's participated in eight new transactions.
That we put out over $700 million across the platform. So as these avenues open up we anticipate the BDC to participate in it and it's appropriate amount, but we're not going to change our guidelines from running these things with.
Greater than 101 five for example, I think the average positions we've taken on and the last name is what three or 4 million three or $4 million. That's three to four up to seven or eight that's the right size for a balance sheet like this and that's what we're going to stick with.
Okay.
One last one for me.
Logan had a nice recovery in this quarter.
Still.
Still barked at a pretty good.
Discount evaluation.
To the extent that that leveraged slow markets are stable or.
Potentially back that you could even cheekbone prices continue to trade how can we as we've seen over the last several quarters.
Are you guys expecting or hoping that that that you can continue to have you know increases and it's fair value Trent Trent higher similar.
You kind of reverting back to levels that we were going to pre pandemic or have burbank sort of permanent credit issues.
Air during the downturn that that that it's really not going to be achievable.
Yeah, I think Brian with.
As I mentioned, a little over 50% of the hit we took in Q1. We've recovered we did have some losses. We took in April as a result of <unk>.
Positioning the portfolio, but those losses were mitigated by the fact, we are able to sell a bit on the uptick in April.
As we Delever the book I still think there's plenty of room for now to continue to appreciate because roughly $16 million ish dollars at the Logan level.
Television TCR D share would be around 80% so.
We've continued to see the portfolio.
Lone prices improves in September 30th.
I can't predict the market, but there's definitely room to go the overall credit quality strong within the books. So it's just a matter of time.
If not through trading prizes that will just be a natural turn on the portfolio is.
Repayments pick up at some point in time down the road.
Okay, Ron the only thing I would add to that.
The good news bad news with Logan.
To Terry's point the good news is we feel comfortable with the underlying portfolio.
Bad news or not but it is subject to the market and.
The bank loan market in the last few days is backed up slightly I'm, not suggesting that is going to be the new trend but.
It will move as the market moves so.
There's nothing inside the portfolio gives us gives us pause that would be a concern that we're not going to get back to where we should be trading but it's.
It's still a subject to movement in the market and and let's be honest the covid.
Pandemic is not over we're not declaring victory so we're positioning ourselves accordingly.
For potential future stress and you may see some movement there but.
As I sit here today, it's not on a named by name basis is more of a technical overall market basis that'd be driving them.
Okay Yeah.
Fair enough.
Those are all my questions I have to data appreciate I appreciate your time.
Thanks, a lot I appreciate it.
I am showing no further questions at this time I would like I would like to turn it back to Mister crystalline for any further comments.
Thank you operator.
Just in closing we're excited that Nab was up it's the second quarter in a row.
The portfolio rotation is nearly complete.
We are going to be very disciplined and deploying capital. We appreciate all your support look forward to provide you with an update on our efforts in 2021. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you all for joining you mean how disconnect.
Crispy standby.
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