Q3 2020 TCG BDC Inc Earnings Call
Ladies and gentlemen, todays conference is scheduled to begin shortly please continue to stand by thank you for your patience.
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Ladies and gentlemen, thank you for standing by and.
Welcome to the TCT BDC Inc. third quarter 20, <unk> earnings conference call. At this time, all participants are not listen only mode. After the speakers presentation. There will be a question and answer session Ashley.
Ask a question during the session you will need to press star one on your telephone if you require any further assistance. Please press star zero I would now like to hand, the conference you're speaking.
Daniel Harris head of Investor Relations. Please go ahead Sir.
Good morning, and welcome to D.C.G. Bdcs third quarter 2020 earnings call last night, we issued an earnings press release and detailed earnings presentation with our quarterly results a copy of which is the bail.
And the TC GBDC investor relation website.
Following my remarks today, we will hold a question and answer session for analysts and institutional investors.
Call is being webcast and a replay will be available on our website.
Any forward looking statements made today do not guarantee future performance and undue reliance should not be placed on them. These statements are based on current management expectations and involve inherent risks and uncertainties, including those identified in the risk factor section of our annual report on form 10-K that could cause actual results to differ materially from those indicated Tc.
GBDC assumes no obligation to update forward looking statements at any time.
Matt I'll turn the call over to our Chief Executive Officer, Linda pace.
Thank you Dan Good morning, everyone and thank you for joining us on our call. This morning to discuss our third quarter 2020 results.
Joining me on the call today is our Chief investment Officer, Taylor, Boswell, and our Chief Financial Officer, Tom had again.
I'm going to focus my remarks today across three areas.
First once again start with a review of our portfolio, which continues to be in good shape.
Second I'll provide a quick review of our third quarter results.
And third will discuss all of the positive developments at TC GBDC, we've completed over the past year and has led to significantly improve performance.
Let's start with a discussion of our current credit position, which was stable in the quarter and continues to perform well despite the significant economic headwinds this year.
Several key measures highlight our strong and improving outlook.
We had zero new non accruals during the quarter inside.
In fact, the number of non accruals across our portfolio has been flat the past three quarters.
Both the fair value and cost basis, non accruals ticked down in the quarter.
The amount of investments in our risk level three to five buckets tick down 2% sequentially during the third quarter.
Recall that last quarter, we changed our risk rating methodology to be more forward looking based on business trends rather than backward looking.
The improvement in these ratings gives us further confidence in our forward credit profile.
And our watch list also continues to trend in a positive direction. We believe the vast majority of amendment activity on our portfolio is now behind us.
Along with other more granular factors these indicators give us increased confidence in the positive trajectory of our portfolio.
Moving onto an overview of our financial results for the third quarter we.
We generated net investment income of 36 cents per share net of our preferred dividend expense discussed.
Its comfortably covered or 32 cents fixed dividend that we announced for the fourth quarter.
We also announced a four cents special dividend. So in total we have declared a 36 cents dividend for the fourth quarter were just under 10% orally.
Net asset value per share increased 1.4% quarter over quarter to $15.01.
From $14.80 last quarter.
We had our second consecutive quarter of net gains in the portfolio.
In a stable macro and market environment, we would expect a continued gradual recovery in our end avi over the coming quarters.
Lastly, I'd like to put a strong position of our business today in perspective, which highlights our improved operating outlook.
Over the past year, we have undertaken significant steps some plainly visible well others are more behind the scenes to achieve our goal of delivering sustainable income to our shareholders.
The optimized our investment portfolio. We recently created our second joint venture shifting $250 million of loans from our balance sheet into this vehicle and earlier. This year, we sold approximately $200 million of loans in both cases. These actions created capacity on our balance sheet for new investment.
And reduce leverage.
We also identified and quickly extinguished an underperforming strategy in our portfolio are small borrowers last out Unitranche program, which helped drive improved credit performance.
In addition, we focused on our investment process, we implemented a strong sector alignment for all investment professionals installed a new head of underwriting beefed up our origination team and improved the process flows for all of our investment committees.
We also created a stronger all weather balance sheet.
Over the past year, we raised $115 million of unsecured debt and $50 million in convertible preferred equity with limited and Avi dilution and what your firmed, our strong relationship with Carlyle.
Financial leverage declined to 1.2 times as a three Q from 1.6 times earlier this year and pro forma for our recent second joint venture leverage declined further to 1.0 times.
Given the strength and performance of our balance sheet as well as the incredible value. We see in C.G. BD shares. We are now in a position to restart a steady repurchase strategy as our trading window opens.
Our board of directors recently increased our repurchase authorization to $150 million and extended the program to November 2021.
And lastly, we set a sustainable unattractive fixed dividend.
Our 32 cents fixed dividend currently equates to a current mid teens dividend yield with upside from special distributions and has been set to reflect the new operating environment, an exceptionally low interest rates.
We are incredibly confident in our ability to deliver this level of dividend to our shareholders over the long term.
These initiatives have all been done with a focus on improving shareholder value.
Our goal remains to deliver sustainable income and well coal did impact is CBD and our entire industry in 2029.
I remain confident in our ability to meet this objective.
Let me now turn the call over to our Chief investment Officer Keller Boswell.
Thank you Linda.
As usual I will begin today with a summary of what carlyle's proprietary macro research is telling us about the global economy.
After that I'll provide comment on both the evolution of credit in our portfolio as well as the new deal environment.
[noise] from Carlyle's purge, we witnessed the global economy continues its recovery in the third quarter.
Significant dispersion has emerged across industries and geographies.
China continues to lead the global recovery largely driven by domestic demand.
In Europe, the travel and tourism sectors are bearing the brunt of the economic impact from a second wave of infections supposing risk to many southern European economies, while activity continued to improve in other areas of the continent.
In the U.S., the economic impact of new infections has similarly been focused in the hospitality travel and energy sectors as hotel occupancy remained stuck at half capacity.
Airline passenger volumes hover, 70% below year ago activity and gasoline demand has stagnated, 10% below 2019 levels.
However, more broadly business and consumer spending remain robust and continue to drive the U.S. recovery led by software and services companies and surging online spending.
More recently, we've been carefully monitoring the impact of second waves cobot across several geographies, including the U.S.
While our current view is that future disruptions will be less severe than those of the first half of 2020.
We do not expect the past recovery will be without volatility.
This is a perspective, we have held since the beginning of this crisis and one which continues to strongly inform our portfolio management decisions at CGP D.
On the portfolio side. The last several months have generally played out as expected.
Transitioning out of an active period of coal good related covenant amendments and into a third more tempered and likely longer running stage of this credit cycle at.
At this point less coping impacted borrowers are generally seeing recoveries in demand and financial performance.
Now for more coal that impacted borrowers problems have been fully assessed and sufficiently addressed.
As such there are now now very few known pending covenant breaches or liquidity issues across our portfolio.
In general heavily kobin impacted borrowers have secured sufficient liquidity and covenant breathing room for the forward three to six quarter period, providing significant runway for value recovery to both credit and equity participants in these capital structures.
[noise] CG Bds portfolio level credit metrics are evidencing. These same trends as Linda mentioned earlier, but it's certainly worth reiterating we had no new non accruals in the third quarter, while also experiencing positive valuation and risk ratings migration.
With regards to new investments.
Tick in activity, we noted at the time of our last call transitioned into a brisk transaction environment in recent months.
Our new originations in Q2, and Q3 concentrated in attractive incremental financings typically at low leverage points with high quality borrowers that we know well.
As well as in the A.B.L. space, where we have transacted on a number of compelling opportunities.
Today, the preponderance of new deal activity is related to regular way M&A demand, both new platform and add on acquisitions at sale processes delayed by cope in Brazil, while others seek to transact ahead of potential changes in tax and regulatory regimes.
With higher transaction activity, we expect both repayments and new deployment to increase in the coming quarters.
Concurrently we are also seeing a normalization of the competitive environment.
Syndicated markets reopening and the private credit market continues on its path to healing.
Competition for assets and the technology and health care spaces has been particularly robust.
While other profiles continue to offer differentiated relative value.
That said more broadly speaking spreads leverage and documentation terms generally remain comparable to or more favorable than the pre cobot market.
In our estimation it remains an attractive environment for new deployment, and we are very active across our footprint.
Before concluding my comments allow me to share a few additional thoughts.
First let me say, how pleased I am by the performance of our team here at Carlisle through the last several quarters.
It feels as if we have compressed an entire economic cycle and the five years worth of hard work that come with it and that just six months.
Layering on top of that the personal challenges. This crisis has thrown at many has only increased the degree of difficulty.
We are deeply appreciative and proud of the team's efforts.
Second it should also be noted that this cycle is in many respects. The first severe credit test for what is a young private credit industry.
Given that the preponderance of this market's growth and evolution have occurred and the relatively benign environment over the last 10 years.
Encouragingly.
36 cents per common share, which is right in line with the general guidance, we provided last quarter when we set the regular dividend.
On November 2nd our board of directors declared the dividends for the fourth quarter of 2020 as Linda noted at a total level of 36 cents per share, which is payable to shareholders of record as of the close of business on December 30 Onest.
And I'll reiterate we remain very confident in our ability to meet the 32 cents regular dividend and anticipate continuing to pay special dividends each quarter, there will be sized based on the prior quarter's actual earnings.
Moving on to the JV performance the dividend yield on our equity was about 11% in the third quarter again, consistent with the at 9% to 11% expected range.
Following very light repayments across the BDC and JV portfolios over the last two quarters, we've seen a sharp increase in expected repayment activity this quarter, particularly at the JV.
So this could weigh on JV earnings and distributions in coming quarters.
And evaluations are total aggregate realized and unrealized net gain was $12 million for the quarter.
Similar to the second quarter, we still valuation increase based on the continued rebound in market benchmark yields and our stable to improving credit outlook.
With reference to the buckets outlined last quarter.
First performing lower cobot impacted names plus our equity investment in the JV, which accounts for a combined 70% of fair value at 930, increasing value about $17 million compared to 630.
The assets that had been underperforming pre pandemic.
Some which have cobot exposure were flat on an aggregate basis, the second consecutive quarter of stability.
The final category as a moderate to heavier cobot impacted dams similar.
Similar to last quarter, we attempted to be appropriately conservative in our assessment of these names, which resulted in a $5 million mark down across these investments.
Ill turn next to a more granular look at the portfolio and related activity.
We continue to be encouraged by the outperformance of our borrowers relative to our expectations set back in March when we conducted a full re underwriting of our portfolio.
That outperformance ranges from recovery in revenue and EBITDA to fewer financial covenant issues to overall improved borrower liquidity.
This is very evident in the revolver activity across our borrowers utilization levels across revolvers, historically about 20% increased almost 65% in early April but.
But now as normalized close to pre pandemic levels.
That said, let's largely behind US now we definitely experienced a notable uptick in a more material amendment activity during the third quarter and into early October.
Getting back to March we've closed credit enhancing amendments for about 20% of our debt investments at fair value, which is up from about 7% at the end of the second quarter.
These amendments typically included some combination of increased economics tightening of documentation terms and when necessary sponsor equity to support liquidity.
Over half. These amendments we received additional yield which added on average 125 basis points of spread on those investments.
And you won't see this until next quarter's filings, but in early October we completed balance sheet restructurings for two investments that were already on non accrual status as of 930.
In both cases, we think with lenders now into controlling equity seat, we're better positioned to drive longer term recoveries.
I'll finish with a review of our financing facilities and liquidity.
Total debt outstanding was about 1.1 billion at quarter end, that's up about $40 million from 630 based on the modest net deployment for the quarter.
Both statutory leverage and net financial leverage were roughly flat at 1.3, and 1.2 times, respectively. However.
However, it net financial leverage improved to about 1.0 times after giving effect to the recent closing of our second JV.
Let me provide a bit more color on this new investment vehicle, which closed on November threerd.
It consists of a portfolio of $250 million of assets contributed by CGD and is generally representative of our current portfolio.
It's intended to be an extension of our existing investment strategy and the underlying financing vehicle has an initial 18 month reinvestment period.
CGD maintains an 84% equity interest for governance is shared with our partner to the vehicle is not consolidated on the balance sheet.
Initial use of debt proceeds will be to repay debt.
With the improved leverage and liquidity profile provided by this transaction.
We feel very well positioned going forward.
Whether to withstand another possible leg down the economy from the second wave.
Or under more normalized market conditions to pursue both attractive new investment opportunities and share repurchases.
With that let me turn the call back over to Linda for some closing remarks.
Thank you Tom.
Delivering a sustainable dividend to our shareholders alongside a stable or growing in a they are our top priorities, which all begins with strong credit performance.
We're on the right track to deliver on these goals for our shareholders.
Thank you all for your time and attention this morning, and I'll now turn the call back over to the operator for Q and a.
Thank you Peter as a reminder to ask a question you'll need to press star one on your telephone.
Rich I a question on Crystacomm key please standby really compare the current day roster.
Our first question comes from Rick Shane with JP Morgan Your line is open.
Hey, good morning, everybody and thanks for taking my question.
I'd love to go through the core endeavor.
Investments on non accrual and put them in context of there but.
Maturity dates when we look at central security and durable growth Central Securities at 21 maturity derm growth as a 22.
Based on the timeline of when they went on non accrual. It appears that that was idiosyncratic because it was before any COVID-19 related write downs I'm.
I'm curious what the sort of.
Outlook for both of those is particularly central security given the timeline to maturity.
Hey, good morning, Rick Thanks for the questions. This is Tom.
On both of those.
You're correct in that they were idiosyncratic credit issues not related primarily to coated.
On Central Security I'll note that was one of the transactions that we restructured in early October so that deal now I'll say has a new capital structure fit for the earnings profile and an extended maturity date. So that one we have we have.
Appropriately restructured.
Dermatology Associates is one we are we have been engaged in were and remain engaged and we anticipate.
A similar resolution on that transaction or that current capital structure within let's call. It the next couple of quarters.
Got it Okay Thats helpful and then moving to the two.
Investments that are potentially more.
Cobot related direct travel obviously that that appears to be highly correlated to what's gone on.
With developments, there that's maturing and 21.
How are the sponsors behaving and how are they looking towards that maturity and then and I apologize if I mispronounce it.
But salerno technologies.
I cant figure that one out there that business theory, making panels satellite opportunity solar panels for satellites shouldnt be impacted but it does look like softbank cold financing potentially related to COVID-19 issues.
Is that business fundamentally impacted and by the way I'm, sorry pulled financing of their largest customer I should say.
Right.
Good observation so on cilantro, that's a deal we actually restructured about a year and a half ago that had just fundamental issues based on the industry.
Solid industry, it's just highly cyclical and you're exactly right that business had had some issues based on its ties to oneweb. That's.
Thats one that.
We're in the equity seat in that transaction and it's one that we see a positive resolution going forward or at least we're in negotiations and hoping to have positive resolution in terms of the accompanying turning the corner and working with their top customer oneweb as oneweb emerges from their bankruptcy.
Got it and then on direct travel dries.
Direct travel your.
Direct travel probably one of if not the most severely cobot impacted name on our books and that was the other transaction noted we had two deals that restructured that deal also restructured in early October timeframe and the lenders again supporting that business.
And.
We are the majority owners going forward and providing the capital for that for that business.
Got it okay. Great. Thank you. Thank you very much and sorry, if I recovered some materials. We've had so many companies report today, it's a blur I have no no no problem at all and bringing the one thing I will say that each each all four of those situations. What I'd highlight is we are the our original debt and existing debt is in the first lien position.
In each case in three cases, the lenders are now on the equity or we anticipate will only equity. So we think we're in a good position based on our senior already and based on our equity position to drive strong outcomes in recoveries in those situations.
Great. Thank you so much.
Thank you. Our next question comes from Finian O'shea with Wells Fargo. Your line is now open.
Hi, good morning. Thanks.
All reiterate Rick's comments up my questions might be a bit element three here.
But.
Can you first the.
Talk about the NAV improvement.
You had a bit less of a write up than than many of your peers.
Is this.
Is this a function of a neighbor to.
Idiosyncratically or is it less of a.
A benchmark spread it has but any color you provide there.
Hey, John It's Tom.
When we look at across the board you I mentioned, our three buckets and categories. The performing book, primarily valuations up based on stable credit and outlook.
And improving credit outlook, and then the benchmark yields improving I think our legacy underperforming deals flats, we should really good about those in terms of just stability and again those are more driven based on enterprise value.
And not necessarily market benchmark yields and then that last bucket. The cobi bucket is where we saw a little bit more deteriorations. We'll say is that direct travel investment I mentioned, the 5 million that represented more than half that bucket to declines.
Net debt valuation went from roughly 80% to 70 round numbers, so I'd say that we're.
Limited on the idiosyncratic besides direct route we think overall, we feel really good about the overall performance of the book in what we call modest migration upward and which we expect to continue to see that migration going forward.
Yeah, and then on cylinder let me let me let me just add that.
As Tom kind of explained.
On the terrific on his question we were we're pretty busy in the third quarter started getting resolution on some of these.
Restructured names and whatnot, so now that that's kind of that.
What we see given how we our visibility into the portfolio now is kind of a path to get continued improving an a b cell. So we feel pretty good about what's what's on the horizon.
And what would kind of guide you too.
Not necessarily a step function up, but you know kind of slow and steady progress on increasing in a day.
For her.
Yes that.
That's helpful and on the.
The second joint venture.
Q.
Let me just go through the sort of basics of kind of what.
Segment of of loans will will go in there and what.
Well its leverage will look like as well.
If insurance Tom maybe.
Maybe the best way to if we compare to what I'll call JV one the existing JV JV. One focuses primarily on first lien loans with a lower price point, it's let's say L. Plus 400 and that vehicle has ranged anywhere particular target leverage recently about five times right now we're running at about half that 2.5 times to distinct.
Jim This JV, a too is primarily more unitranche loans and a higher percentage of second liens of the weighted average spread in that portfolio is running around L plus six and based on a little bit more risk in that book to leverage is lower the leverage will only be 1.7 times.
Thats, a singular credit facility with a 63% advance rate.
Okay. That's helpful. Taylor, maybe I'll just touch on the strategic rationale there quickly as well.
We really think Thats a transaction that that serves us well in any variance of the forward macroeconomic scenario. So in a in a downside case of course.
Liquidity enhancing and the like in in a base case or an upside case frees up a fair amount of balance sheet for us to both pursue in this new and investment environment, which we regard as attractive and also.
I'll get going again on the share repurchase front.
Yes.
Yes, and that sort of this.
Segue into my last question and I'll hop off.
Where does this.
Pro forma rate, you're one times.
Is that about where you want to be.
Given obviously, what we've gone through in coated.
But you know you have obviously the opportunity buyback stocks is accumulating parts. So just like where if your leverage profile.
Profile target has.
Changed at all in light of these joint ventures in today's environment.
Thank you.
Sure and I think Oh go ahead, Tom you pick this one up.
Oh sure.
Theres fit again with our focus on net financial leverage that's the 1.0 times and I think we still feel very comfortable based on the composition of our current portfolio. The composition of both jvs at running in that anywhere from one all right now we're at the lower end up to 1.4 times, we think ultimately we're very comfortable settling right in the mill.
All of that range, we anticipate we will continue to operate within the range. Obviously at the low end now which is quite frankly, we feel very good about based on just more uncertainty in the market with all the cases rising who knows what's going to happen.
Noise with the elections, we feel very well positioned right now to feel that we're at a lower leverage position and casings turned negative but also we're seeing quite frankly right now a lot of very attractive opportunities in the markets.
So to potentially put new money to work and then as we noted the share buyback, but we expect to remains remain again in that one out of 1.4 range.
As a target.
Yes, and it.
It's Linda adjusted started to drive at home.
And in a way we do continue to see really good value and TBD shares.
So were looking forward to restarting the repurchase program and you know in the past, we we weren't market timers right. We just kind of we get it really really steady Eddy and.
And we would we would take that that same position going forward.
Sure that's all for me and congratulations on a very good quarter here.
Thank you.
Your next question comes from Paul Johnson with KBW. Your line is now open.
Hey, good morning, guys. Thanks for taking my questions.
Both have already been asked but.
Two short questions one I was.
Just curious the slight tick up in portfolio yield this quarter was that driven more.
Our upon.
In men's to.
This quarter and last or or was there something else driving that.
Hey, Paul its Tom It Thats exactly right to 10 basis points is roughly the 125 basis points across roughly 10% portfolio.
Okay, Great and then my last question.
Just on the E.
Perfect you guys issued from the advisor.
I'm just curious if that's something that is possible to be retired early and then I also realize that theres conversion price attached to that.
Thats something you would evaluate retiring if the price.
Price at the start of the conversion price or if you have any sort of plans with the with the preferred.
Now I'll I'll take that.
Carlisle, obviously is the is a strategic investor in in the BDC and they investment it is looked at with with that high.
It's where.
Clearly long term constituents with.
Huh.
With that money coming from from the firm.
So never say never say never but there's there's really not an eye towards it.
So that's what you're talking about like right now, it's it's kind of a looked at it as.
Part of our of our balance sheet and is meant to be able to position us to have not only inappropriate leverage profile and an all weather balance sheet as we mentioned, but really to be in a position to Act act accordingly, when we see good opportunities to put money to work in the market.
So.
I would if I would I would call.
I caution you to look at it.
Kind of a long term.
Piece of capital in our in our balance sheet.
Okay. Thank you very much that's all for me.
Thank you next question comes from Derek Hewett with Bank of America. Your line is now open.
Good good morning, everyone. My first question is more of a clarification. So what is that the target leverage of one to 1.4 times was that based off of regulatory or statutory leverage or was that purely financial leverage.
Hey, Mark its Tom to clarify the one node one four currently right now we look at it manage the business based on net financial leverage.
Okay great.
Great and then how should we think about the kind of the ongoing special dividend in terms of sizing that is it more formulaic.
Or are there other considerations being made.
Hey, Derik, it's Tom again, right now our work on our run rate earnings, we feel very comfortable that give or take each quarter based on repayment activity fees that.
That will be in a mid Thirtys territory.
At our current normalized earnings. So we anticipate every corner, we'll be paying the stated 32 cents loss effectively the outperformance above 32 cents.
Okay, just like we did much like for third quarter. We earned 36. So we declared 32, plus we're going to pay the four cents next quarter.
Okay.
Understood great. Thank you.
Thank you I'm not showing any further questions at this time I would now like to turn the call back over to Daniel Harris for closing remarks.
Thank you everyone for listening and your time today.
We do look forward to speaking with you again next quarter. If you have any additional follow ups. After the call feel free to contact Investor relations at any time. Thank you very much.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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