Q3 2020 WhiteHorse Finance Inc Earnings Call
Good afternoon, My name is Christie and I will be your conference operator today.
At this time I would like to welcome everyone to the White horse financial third quarter 2020 earnings Conference call.
Our hosts for todays call are Stuart Aronson, Chief Executive Officer enjoy some Thomas Chief Financial Officer.
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It is now my pleasure to turn the poor ever to Sean Silva of Prosek partners. Please go ahead.
Thank you Christie and thanks to everyone for joining us today to discuss Whitehorse finances third quarter May Twentyth earnings results.
Before we begin.
I would like to remind everyone that certain statements, which are not based on historical facts made during this call.
Like any statements relating to financial guidance, maybe deemed forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Because these forward looking statements involve known and unknown risks and uncertainties. These are important factors that could cause actual results to differ materially from those expressed or implied by these forward looking statements.
What was finance assumes no obligation or responsibility to update any forward looking statements.
Today's speakers may refer to material from the workforce finance third quarter 2020 earnings presentation, which was posted to our website. This morning.
With that allow me to introduce Whitehorse finances, CEO Stuart Aronson Stuart you may begin.
Thank you Sean.
Good afternoon, everybody and thank you for joining us today.
I Hope you and your families continue to be safe and healthy as we navigate these unprecedented times and our thoughts remain with all of our stakeholders included the dedicated employees across white horse and our HRG family you.
We would also like to express our continued gratitude Walter health care and other front line into central workers.
Continue to send our sincere condolences to those families who have lost loved ones loved ones.
As you're aware, we issued a press release this morning prior to market open and I Hope Youve had a chance to review our results, which are also available on our website.
I'm going to start by addressing our third quarter results should market conditions enjoy some Thomas our Chief Financial Officer will then discuss our performance in more detail.
After which we will open the floor for questions.
We're pleased to report a very strong third quarter with virtually every key metric trending positively.
During the quarter, we earned our dividend.
We increased our Navy, we had strong asset deployments, we reduced our non accruals.
And we currently have the strongest pipeline in our history.
I will now provide more details on all of this.
The Navy increased by 4.8% to 15 31 in Q3 compared to 14 61 in Q2.
Q3, and they'd be eclipsed our pre called mid level and maybe a 15 23 at the end of 2019.
And he is also in excess of our 2012 IPO price of $15 a share.
Core and <unk> after adjusting for a $1.9 million capital gains incentive fees incentive fee are cool.
7.8 million or 38 cents per share compared to 5.42 million or 25, and a half cents per share in Q2 comfortably covering our quarterly dividend.
Our 1.9 billion dollar capital gains incentive fee accrual was the result of the $15.7 million in net realized and unrealized gains recognized in the quarter.
Which were driven primarily from the large mark to market gains recorded on our investments.
Net investment income was 5.9 million or 28.9 cents per share.
Core Eni all eyes is driven by interest payments received from EG change, where we will now be able to announce positive resolution to that situation I'll provide more details on this shortly.
Our strong origination activity and improved credit quality were key factors in our improvement during the quarter.
Despite a cobot impacted environment, we recorded gross deployments totaling $58.3 million, partially offset by repayments of 26, and a half million dollars, resulting in net deployments of 31.8 million.
Our weighted average effective yield on income producing investments was 9.9% in Q3 compared to 9.6% in Q2, an increase of approximately 30 basis points.
Our ability to deploy capital into high quality assets. Despite the current economic environment resulted in leverage at 0.94 times at the end of Q3 compared to <unk> 0.86 times at the end of Q2.
As a reminder, our.
Our target leverage range is up to one and a quarter times.
I'm also pleased to report that subsequent to the ended the quarter, we successfully issued $40 million of new senior notes in a private placement that matures in 2025 and pays a fixed interest rate of five and 3%.
This is materially lower than our prior issuances and demonstrates the strength of investor confidence in the quality of Whitehorse finance credit portfolio.
We used the proceeds of this issuance to pay down the outstanding balance of our JPM facility, which currently has approximately $216 million outstanding on the $250 million that's available.
The debt issuance results, an additional cushion the key advance rate thresholds on R.J.P.M. facility, while also providing capacity to opportunistically deploy capital at attractive rates, Jason will provide more detail shortly on this.
Now, despite our strong quarter and several positive mark ups across our portfolio.
We classified a larger and larger percentage of credits as high exposure to cope in during the quarter moving Grupo chemo up from moderate to high.
We also recorded martyr moderate markdowns during the quarter on four of our previously designated high exposure credits as a result, our high exposure credits represented 9% of our portfolio at the end of Q3 compared to 7% of the portfolio during the prior quarter.
With that said, we still firmly believe in the quality of the portfolio and continue to have productive conversations with our borrowers as we push through this environment.
Turning now to our investment portfolio.
At the end of Q3, the fair value of the investment portfolio increased to 595.3 million compared with 547.4 million at the end of Q2 as.
As mentioned earlier the increase in our portfolio during the quarter was due in part to our deployment activity totaling 58.3 million, which consisted of three new originations as well as several meaningful add ons to our portfolio.
Our originations were all first lien.
With our three new portfolio companies, consisting of one new sponsor deal and two new non sponsored deals.
Gross deployments were partially offset by repayments of 26.5 million during the quarter, which included full log realizations on two portfolio credits.
During the third quarter a portion of our debt did you kings was converted into a super priority dip loan that will pay interest during the bankruptcy bankruptcy process. As a result, this portion of our investments in EG Kings was put back on accrual during Q3.
During the quarter. We also began receiving payments on the last out term loan portion of our Kings investment approximately 2.9 million was quoted as interest income with an additional 3.5 million and payments being recorded as a recovery of our basis on the loan.
Further, reducing our cost and that investment.
As mentioned earlier in the call the bankruptcy auction, you'll do the buyer so the kings diabetes assets and that process is moving forward.
The final figures are still to be determined and the purchase is still dependent on the outcome of regulatory approvals.
However, based on the auction bid and the cash flows of the company. Currently we believe there is potentially modest upside above the blended mark we have across all our positions in king's at the end of the quarter.
It is important to note that this is unlikely to be an immediate process. We asked to meet the regulatory approvals could take anywhere between one to six months.
As compared to Q2, non accruals improved to 3.3% of our debt portfolios fair value from 7.4% with our position in our coal converting into an equity position in Q4.
Once Agee Kings is repaid upon completion of the bankruptcy sale. We project a further decrease in our non accrual level. Given these two non accrual positions account currently for 2.6% of the Q3 that portfolio at fair value.
Turning now to our pipeline.
As I mentioned in my opening <unk> opening remarks, we are seeing our strongest pipeline ever we are experiencing extremely strong business activity and the opportunities upon which we are engaged are more attractive than anything we've seen since the 2012 to 2013 vintage.
Origination force is at peak levels related to head count and number of offices were up to 19 originators and 12 offices across North America with our newest office space in Cincinnati, Ohio.
As our business and portfolio continue to grow we are seeing increased levels of repeat business from sponsors and add on opportunities are upsizing opportunities from our portfolio.
Already in Q4, we've closed four new deals all first lien sponsored loans.
We also have an additional seven mandated deals as well as three add ons.
Six of these total deals being sponsored deals and four of them being non sponsored deals all of the transactions are first lien transactions now as always we could make no guarantees that any of these transactions will close but we're certainly working on them in doing our best to get closure on as many as possible.
Following the end of the third quarter.
We exited our position Invesco holdings.
Certainly did this generate prepayment fee income, but there was also a significant gain on our coinvestment equity position invesco.
We believe our strategy of adding small equity positions into the portfolio provides upside or any d. and it's proven to be successful to date.
A key to our success in originations was up because of our underwriting discipline and conservative portfolio construction.
We were able to remain active throughout the entire koby correction period, whereas many other lenders were forced to exit the market.
Our continued activity positioned us to close 42.6 million and three new investments had a weighted average spread of L. Plus 710, and average leverage of only three times in Q3.
As an example, one of our deals is a transaction for a company at less than three times leverage the other lenders in this deal for banks, who are lending at LIBOR plus 300. However, we were able to secure a position on that loan at LIBOR, plus 750, with a three and three quarter percent closing C. and we are Perry pest.
With the banks that are lending at LIBOR plus 300.
We continue to endeavor to book assets that have yields such that when we get to the target leverage we would be able to consistently earned our dividend on a quarterly basis.
In terms of macro outlook, our pipeline is 30% higher than at this same time last year and more than double what it was at the lowest point of cold in.
The vast majority of our investments starts so senior secured first lien in fact, so far all of them are senior secured first lien.
With a nice mix of sponsor and non sponsor deals.
In the sponsor market, we're generally seeing much more competition compared to three months ago as parties, who were sidelined have reentered the marketplace.
Increased competition has in part led to more aggressive structures and lower pricing, but they're still not back to pre called at levels.
The non sponsor market has remained very conservative leverage multiples of between two and a half to four and a half times.
Pricing is approximately 50 to 150 basis points higher than pre coated with strong prepayment penalties available on these transactions.
With the banks, having become even more conservative about what they will or won't do we have several lower mid market non sponsored deals under mandate that are first lien deals, which we expect will command double digit pricing.
In summary, while we maintain our prudence and discipline in this uncertain environment.
We are encouraged by our performance during Q Q3 also by the activity we've seen thus far in Q4 and our position heading into 2021.
With that I will now turn this over to Joyce and to speak in more detail about our financials graduation.
Thank you Stuart and thank you all for joining todays call.
During the third quarter, we recorded GAAP net investment income of $5.9 million or 28.9 cents per share. This compares to 5.2 million or 25, and a half cents per share during Q2.
Core Eni was 7.8 million for the quarter or 38 cents per share covering our dividend of 35 and a half cents per share.
During the quarter, we recorded net unrealized gains in our portfolio of $15.2 million, which were primarily driven by mark ups on six investments aggregating to approximately $12.6 million and one mark down totaling 1.2 million.
Our investment in the Escharex JV increased to $50.4 million after the effects of transferring one position as well as from unrealized appreciation during the quarter.
As of September Thirtyth. The JV is total portfolio comprised 18 issuers for an aggregate fair value of $162.6 million.
Q3 fee income was approximately zero point $7 million compared with zero point $5 million in the prior quarter driven by amendment in prepayment fees.
After considering our net realized and unrealized gains we reported a net increase in net assets, resulting from operations of approximately $21.6 million.
As of September Thirtyth net asset value was approximately 314.6 million or $15.31 per share, which compares to $300.2 million or $14.61 per share in Q2, primarily driven by improved markups.
As a result, our risk rating improved meaningfully during the quarter, whereas in Q2, 64.2% of our portfolio carried either a one or two rating that number in Q3 has increased to 76.5% as a reminder, a one rating indicates that company has seen its risk of loss reduced relative to initial expectations.
Two rating indicates that a company is performing according to our initial expectations.
Turning to our balance sheet, we had cash resources of approximately $22.9 million has a cemetery to 2020, including $14.1 million or restricted cash and approximately $18.9 million of undrawn capacity under our revolving credit facility, excluding the $100 million accordion under the revolver.
As of September Thirtyth 2020, the company's asset coverage ratio for borrowed amounts as defined by the 940 Act was 206.2% well above a requirement under the statute of under 50%.
Our net effective debt to equity ratio after adjusting for cash on hand was 0.87 times at the end of the quarter.
Following the close of the quarter, we conducted a private notes offering of 5.375% unsecured debt maturing in 2025 for an aggregate principal amount of $40 million. The proceeds from the offering were used to repay outstanding balances under our revolving credit facility. We were very encouraged by the favorable pricing received and the corresponding.
I'd afforded to our capital structure.
Next I'd like to highlight a distributions.
On August 10th we declared a distribution for the quarter ended September Thirtyth, 2020, or 35, and a half cents per share for a total distribution of $7.3 million to stockholders of record as of September 21st 2020. The distribution was paid stockholders on October 2nd 2020.
This marks the companys 32nd consecutive quarterly distribution paid since our IPO in December 2012, with all distributions at the rate of 35, and five cents per share per quarter.
Additionally, during the fourth quarter on October nine we declared a special distribution of 12 and a half cents per share stockholder of record EPS October Thirtyth did.
The distribution will be paid to stockholders on December 10, 2020 and is related to income that was earned last year, which would about why spend taxable.
Finally, this morning, we announced our board declared a fourth quarter distribution 35, and a half cents per share to be payable on January 5th 2021 to stockholders of record as of December 20, Onest 2020.
Consistent with what we have said in prior quarters, we will continue to evaluate our quarterly distribution both in the near and medium term based on the core earnings power of our portfolio. In addition to other relevant factors that may warrant consideration I.
I will now turn the call back to the operator for your questions operator.
Thank you as a reminder, if you would like to ask a question Press Star then the number one on your telephone keypad.
And your first question is from Mike Smith of B. Riley Securities.
Hey, everyone congrats on a good quarter.
So my first question is if I look at slide 16, it looks like one rated company jumped pretty good amount from 2.3% to just over 14%.
It seems like kind of a big jumps Im just wondering is this just one large investment getting upgraded or several smaller ones and if that's the case is there any concentration that industry. I was wondering if you could provide any color here that would be that would be helpful.
Jason do you have the list of deals that were moved up to a one handily available.
We do a roughly speaking it was 11 borrowers that saw improvements.
Got you that's helpful and is there any condensate fishing with industries or anything like that.
Sure you have clarity.
We are seeing that outside of the directly cobot impacted companies.
The balance of the economic activity in our portfolio has been pretty strong very strong and so there.
There are more companies as choice in has highlighted that are performing at expected levels are above expected levels with choice and go ahead, you were going to share some more detail.
Sure I can share with you.
The names that saw improvements for the quarter that's helpful for you.
Yes that would be helpful.
NFC.
All TV.
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Our position in our call.
Alpha media.
Mills Fleet farm.
And in a services.
CHS therapy.
Operator.
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Vero parent.
She met Trueblue I'm very apparent.
Can't lift brands.
Gotcha that is that is helpful. And then another question would be can you given where the stock is trading revenue.
Confidence around credit how do you think about balancing act between potentially looking at buying back stock or.
In capital to work.
No any investing environment.
Our general philosophy is that we are investing in very strong assets that are generating.
Excellent returns for our investors and we hope that would be continued strong earnings and a trend line, where we hope to be able to earn our dividend on a quarterly basis from core net income.
That's a shares will trade better.
If the shares continue to trade very low or the board does discussed and we could consider a share buybacks, but that has not been determined to be the right thing to do so far.
Gotcha, Okay that is helpful. Thank you for taking my questions.
No problem have a good day Mike.
Thank you. Your next question is from Mickey Schleien of Ladenburg.
Good morning are actually good afternoon, certain choice and Oprah will.
Stuart a couple high level questions if I can.
Broadly speaking it seems like we can view credit today as it relates to sectors that are performing well. Despite the pandemic and those are things like software and grocers and then there are those that are struggling.
Our portfolio is quite diversified by industry. So I'd like to understand how you view the potential for that.
Potential for more detail some deterioration of credit.
In the companies that are underperforming if we were to see more stay in place orders as you know the Pandemics curve gets worse now in the fall and going into the winter.
Mickey its good to hear from you and it's a great question.
Number one we feel very fortunate that there is a limited portion of our portfolio that is called that affected.
I also feel fortunate that in the case of all of the sponsor companies.
Who are in our portfolio that had been affected the private equity firm owners have injected equity in order to help. These companies now as coal that has gone on longer than people originally hoped and it looks like it will go on a well notwithstanding this morning.
He's announcement go on for at least another quarter or two.
Some of the companies that have gotten equity injections have gotten.
C N on liquidity.
And we continue to work with the sponsors and the owners on those companies.
To help those companies get to the other side of coated.
If these companies get to the other side of co that frankly, all of them have the potential to return to part.
The these are otherwise fundamentally healthy companies that have been affected by the virus and the and the repercussions from it.
That said in the quarter.
Despite the fact that our any v. is above pre called the peak and above our original issuance. We did mark down four of our cobot impacted assets because of the continued pressure.
So we are trying to me remained very realistic about the valuation on these assets, but it does help that all of these assets are first lien and it does help that the majority of these assets or sponsor owned and we hope to get to the other side of coated and again see even more any be improvement.
As these these companies returned back to par if.
Cobot ends and if the owners of these companies invest in the company's through the the rest of the coping period.
If they don't.
And if we need to take over a company.
We certainly have the ability to do that.
We have restructuring experts in the company.
We have private equity professionals in the company and we do have the wherewithal to.
Run a company and turn around the company for our investors.
If the existing owners choose not to do that.
That's well I appreciate all that color story, that's really helpful and.
On the flipside.
There was a lot of yield hungry private capital out there.
And there are plenty of strong companies as you've mentioned in your remarks, and they're getting a lot of attention. So how would you characterize the prepayment risk in your portfolio.
You know three or four months ago, Mickey I would have told you I wasn't going to see anything get prepaid.
And yet as I mentioned VESCO.
Which is a credit that did an add on acquisition during co bid.
Was performing very strongly it was the Noncovered affected company and was sold at a very good price and as evidenced by our markup on the equity.
We will make a gain on that investment that is a multiple of the original amount invested in the equity.
We have seen several repayments.
There are not.
Many more that we expect between now and the ended the year based on the data we have.
But if the economy does.
Remain as strong as it is outside the cobot affected areas based on our most recent portfolio review.
We could see a number of current borrowers gets sold in the first half of next year. So.
So we do see there's a chance for some portfolio churn that said the markets are strong our origination is strong and we're going to strive to get to that one in a quarter times leverage level of Outstandings, and then especially on our non sponsored companies.
We have very strong prepayment protection and to the extent that these loans are repaying within three years of them being made we typically do get prepayment penalties on the deals that paid off this quarter.
Several of them did have prepayment penalties.
Including.
In Q4, VESCO had a prepayment penalty and acumen, which paid off in the JV also had a prepayment penalty.
I understand that but that's interesting story.
In terms of looking into next year are there any new portfolio management themes that perhaps you're thinking about are going to start to employ now that we know there will be a new administration and the new President may have new policies for some important segments has helped.
Care or alternative energy.
Is that is that impacting.
How you expect to allocate capital going forward.
We had already adjusted our.
Investing parameters.
Nine months ago based on the possibility of the change in administration. So.
So anything that we've been doing in health care or infrastructure or any of the affected sectors.
It has already been.
Been adapted to what we think the potential risks are of a Democratic administration. So there's not really a change right now based on the fact that Biden has one.
Because we've already.
Incorporated all of that thinking into our risk downsides on our portfolios really since the beginning of the year.
I've already but.
How about opportunities.
In there is there is the opposite as well right.
Do you think that the change in administration is going to provide you some opportunities that you can take advantage of.
You know.
Mickey from my perspective investing in debt is about avoiding outside our.
Our upside our upside is we are in LIBOR, seven like worried or library.
And so only in our equity co investments do we do we see that there's some upside and obviously if there is a stronger economy.
The equity co investments, we've made are more likely to do well and at the advice of frankly yourselves and many analysts and shareholders.
Starting a couple of years ago we.
We're looking to increase the number of small equity investments, we made in the BDC with a mindset that when they go well, we make 2345 times or money like we did on VESCO and what we do poorly based on the size of those investments, we only lose a million to a million and a half dollars. So.
Five to seven and a half cents a share so certainly on the equity co invest side.
We see upside, but that's a that's a small piece of what we do overall as you can see from our investment numbers I.
I understand my last question Stuart any comment you can make about the overhanging the stock from the affiliated shareholders just in the context that the equity markets have been strong theres certainly a lot more clarity today in terms of the government and now we're getting more clarity on hopefully.
At the end of the pandemic.
Any thoughts or comments, you can share with us about resolving that issue.
The the Bayside shares or of course are much much lower concentration than they were a couple of years ago.
And we have an ongoing focus too.
Try to make sure that we have stability in that situation, but there is nothing beyond the fact that we are focused on it that I can share at this time Mickey Okay. Those are all my questions I. Appreciate your time as always thank you very much. Thanks.
Thank you.
Thank you. Your next question is from Robert Dodd of Raymond James.
Hi, guys. So if I go back to your prepared remarks real quick <unk> Agee King <unk> correct.
Correct me, if I'm wrong that you definitely biased 2.9 million all of income and interest income on the.
The the first clean can.
Can you say.
So tell me if I I actually lived that that might be.
Be given that asset that particular lie low as malt.
Below cost and and on non accrual can you tell us or why you decided to take that into income instead of instead of applying it all along with the bit you did two to the cost basis this quarter.
[music].
Choice and can I ask you that question sure absolutely Robert So if you think about our position in King a portion of the last out loan could convert into that super priority debt <unk>. So the way to think about the $2.9 million in interest payments of approximately 2.1.
Million dollars all of that was received prior to the bankruptcy filing I Miss that excess cash.
That we accounted for as interest income of the previously written off interest that we had.
Again previously accrued that in connection then with about three and a half million dollars that we also received a allocated to the portion of our last out.
Add to that we had purchased in the prior quarter as a secondary.
Purchase that was accounted for as a reduction of our cost basis.
Got it thanks and then.
Oh go ahead, no I'm, sorry, so that so [laughter] then post the pre petition filing we received about another 800000 amongst both the super priority dip and that last out term loan as yes interest payments.
Got it got it understood. Thank you.
On on just then looking at the pub IVC close.
With deals in Q3, a really strong pipeline it looks like for Q4 can you give us any.
Any color on how you evaluate him obviously you have.
That's a great a constant a greater exposure and.
Pipeline access to two non sponsored deals than most other bdcs in contrast to just doing sponsored deals.
Oh, you evaluating the risks between the two right now given that things are going to obviously non sponsored so that that isn't that the potential with reduced potential for equity injections. Yeah. If there is trouble and the outlook is still quite uncertain.
Even with this morning's news so how are you evaluating sponsor versus non sponsor in the Empire, but right now.
Sure.
So Robert we've always made the case that the non sponsored deals that we do are done on much more conservative terms with much more conservative documents and much tighter covenants and our sponsor deals.
And we've put forth to the marketplace that in our experience.
Both as a firm is individuals that non sponsor lending when it's done it much much lower leverage.
Results in strong performance through market disruptions.
As Weve hit Cobot, and we've had a very severe market disruption.
The only asset that is in our high cobot impact bucket.
That is non sponsor is Grupo hemo and as you can tell from the March on that asset.
Had issues prior to coated.
So what's really happened is our non sponsor book on average has performed more strongly than our sponsor book because the starting leverage is so much lower that even if these companies have experienced 10 2030, 40% decreases in EBITDA.
The leverage is still modest the companies are able to service their debt load and while we've had covenant violations we.
We've taken fees or increase the rates.
On these deals so our experience is that in.
In the midst of a crisis the non sponsor loans are performing extremely well better on average than the sponsor loans are and our non sponsor pipeline.
Continues to be.
Much less competitive than our sponsored pipeline, especially because the banks are in many cases have been sidelined and so we are working on as I mentioned in my prepared remarks, we're working on non sponsored deals that are.
Three to three and a half times leverage that have pricing that.
Ranges from the.
L 850, the L. 12.
And some of these deals the leverage is so low that if the banks we're operating normally.
These might be bank loans at LIBOR 350, but on all of these deals we get call protection.
And so if the banks do get back to normal in six months and we get repaid we will get very significant coal penalties.
If these loans go away from us So we love or non sponsored pipeline.
And are aggressively trying to.
Put more of those loans on the books if the credits are good and if the risk return as appropriate.
Got it I I really appreciate that that that color that you can get a double digit yield on the other person you doing okay.
One final one if I can you put up repo Grupo Hema I mean, yes has had problems historically because it kept getting hit by hurricanes at full.
Full for this call what too to your point you you put into the high category. What can you tell us about why has that.
Why is it high this quarter, but it wasn't before has something changed in the the patient mix all for lack of a better term that that just that necessitates the switch this quarter.
Copa got worse in Puerto Rico, and the impact on the hospitals was also more severe.
So the other thing that was going on is if you go back to last quarter. The government was providing active support to hospitals across the country.
And as we know the government support of everything and everybody has been stalled a it is our hope and that is the hope of the owners of Grupo Hima that in the face of the cobot disruption.
If the government will continue to support hospitals through the cash flow disruptions with are having.
But there is no certainty of that happening at this point and therefore, we found it prudent to mark that asset down more.
Just because there is uncertainty looking forward.
As to what the government will do and when the cash flows that these hospitals will normalize from typical elective procedures being at a pre coated pace.
Understood. Thank you.
And once again as a reminder, if you would like to ask a question press Star one.
And your next question is from Rick Shane of JP Morgan.
Hey, guys. Thanks for taking my question. This afternoon and first of all I do appreciate the disclosure.
It is excellent and very helpful. I'm not sure if I missed this but was there a reversal of interest income as a non accruals came off is there anything that most of the interest income line that we should think of that sort of nonrecurring.
[noise], Rick there wouldn't have been anything.
This quarter given that we didnt put any additional.
Got it on non accrual, but in prior quarters, there could have been instances, where we would have reversed out.
A mindset that had been on the balance sheet and not received yet.
I I actually meant the question the opposite with benign with the non accruals coming down was there anything that added to interest income this quarter that was added back.
AG Kings state the amount that I had mentioned on AG kings whatever.
Okay, Great all right. Thanks a.
Pete a piece of that asset is now been rolled up in the Super priority dip and we are collecting ongoing cash interest on that.
But there was more AG kings interest that was accrued that was paid that that had originally been written off.
And.
Joyce and confirmed for me.
That's 2.1 million.
Plus point Eightmillion, where the two pieces that were both pre petition and post petition is that right.
That's correct.
Got it okay. Thank you that's helpful and then.
Again, just love to sort of revisit the question of share repurchases and I understand that it's a tricky issue in.
In terms of liquidity and there are some some issues associated with that just in terms of.
Investor investors wanting.
More float, but at the same time.
<unk> shares are trading at a 30% discount to NAV you pointed to some places within the portfolio, where you think there's opportunity for accretion back towards cost.
It strikes me in the <unk> in the array of investments that you have that it's a highly known vehicle that you'd be investing in and with a path.
Path to realization that seems to make a lot of sense why not be a little bit more aggressive there.
Right. All I can tell you is that we have had that conversation with the board.
The moment, where it might have been most interesting to do it.
Was is because the stock market was going through a major correction.
Shares traded to a much larger discount.
But at that point in time, as we shared with all of you and with our shareholders.
We were very focused on maintaining our liquidity because lenders, including JP Morgan were marking assets down out.
Out of out of both.
Both a reaction to what had happened in the marketplace and frankly out of here and so we wanted to make sure that no matter how severe the downturn seem to be that we would not create a liquidity problem for our shareholders and we would not have the disruptions and dividends. So.
When the shares were seven or $8.
We certainly have that conversation our hope is that as things normalize and we share good information with the markets the shares will trade back to a much better level.
If they if they don't the board will once again.
Convene and decide as to whether it makes sense to.
Use up the liquidity to repurchase shares in the marketplace.
No I appreciate that and again you know we can all look back at sort of bottom Texan stocks and wish we'd active but.
We also have to consider our own sentiment at that time and the responsibility that you guys need to maintain in terms of.
Liquidity as well so I appreciate that thank you guys.
Thank you. Your next question is from Chris Kotowski of Oppenheimer.
Yes, hi, good afternoon, I, just hate to go back to it but I wanted to make sure I understand the PG kings situation and I guess going back to the earlier question about kind of how much catch up interest. There is I mean, it's so am I thinking about that correctly, if I say, okay, you took 2.9 million into.
Income this quarter kind of on a go forward basis if.
If everything stays as it is you just have the $14 million Super priority secured loan that's got an 11% coupons, so that'd be about 400000, a quarter or so.
The extra.
Interest income in this corner was somewhere around two and a half million am I thinking about that right.
[noise] person does that sound right to you yeah, Chris So to clarify that point I think that is the right way to look at it.
Okay. We have the last out piece on non accrual that said.
While it's in bankruptcy there our expectation is that would be paid interest as well in that in addition to the super priority debt show in lets say for Q4, our expectation is we would potentially recover and record additional amounts of interest relating not only again to the deal.
Piece, but also that remaining last out.
Okay, alright, but he can but yes, I mean, but the difference delta versus just sort of priority piece that the debt pieces. Yeah. Okay, and then I guess I'm I'm kind of curious just you are much more encouraging about.
Loan demand and you experienced it sooner than most of the other bdcs. We cover a lot I mean, most of them had either flat or down.
Loan volumes quarter on quarter end.
Did I guess and what do you attribute that is it is it your greater.
Concentration in non sponsor demand or do you use it well do you see or is it just a.
Better opportunities in general.
It's a couple of things in our opinion a number one we didnt shutdown.
The I. I would tell you.
Based on what I saw 90% to 95% of the lenders shutdown in March April may.
And even though there were people who were claiming they were in business. They were putting forth offers a financing that were illogical like no one could take them.
So by not shutting down.
We enhanced our position in the overall market and we landed a couple of deals that were just super Super attractive you know that's a time everybody was afraid but in retrospect.
He looks like really good deals.
And then.
We have a direct origination mechanism.
That is in local markets that allows us to find deals that are are not coming through the.
Syndicated bank chain.
And we are finding deals that have.
In some cases literally no competition.
And you were working on a deal a while working on several deals right now for companies that are you know sort of.
10 to 12 million of EBITDA that did not have banker intermediaries.
That we have sourced directly.
One of them is Levered three times one of them is levered three and a half times. Both of these companies are worth seven to 12 times E. B and we are commanding pricing that is.
Reflective of the fact that we directly originated deals. So our pipeline you know what I heard from my compatriots in the marketplaces at the bottom of coated.
Pipelines were down 80% to 95% our pipeline never fell more than 50%.
And when I did our our transaction review this morning.
We had 136 deals in our pipeline now of course, a very small fraction of those close.
But but last year around the same time I think it was around 100.
Seven deals for something like that so this direct origination mechanism and having stayed in the marketplace has just positioned us very well and it's allowed us to continue to have disciplined the you know.
I mentioned it in my prepared remarks.
But in the sponsor market a lot of lenders have come back.
They werent lending for six months and so they are way way behind budget and so we see certain lenders doing things that look frankly pretty desperate and.
And were just able to walk away from those situations, we don't need to chase.
So so it's a nice luxury to have again lot of mandated deals for the quarter I can't be sure that any of them will close because we're in the midst of due diligence.
But if if we do close all the mandated deals or even most of the mandated deals.
We'll make solid strides toward getting to the target of one in the quarter leverage and having a core asset base that drives the income levels up on our portfolio.
Okay.
That's helpful. Thank you that's it for me.
Thank you Chris.
Thank you. Your next question is from Bryce Rowe of National Securities.
Hey, Brian Thanks.
Hi, good afternoon.
That's what I know.
Good okay. Thank you.
Wanted to ask a little bit more about that.
About the pipeline and kind of how it relates to.
Yeah, the balance sheet leverage target me clear.
Clearly your.
You're you're very encouraged by the pipeline.
The potential for some pushing growth here in the in the portfolio.
So kind of with that in mind, and then with with the context of the new unsecured notes offering.
I'm curious what really how you how you think about capital structure should you hit that 125 target I mean do you do you want to continues to expand the unsecured notes.
Note that as a percentage.
As you work towards that 125, where are you comfortable possibly.
Possibly taking down the you know the balance of the credit facility and an expanding it lithia with the accordion.
Yeah. It's a great question Bryce we continue to evaluate the situation based on the nature of the opportunity in pricing in the marketplace need.
Needless to say, we are able to borrow on a secured basis at a much lower rate than on an unsecured basis, even at the very attractive five and three is that we just issued.
And what we continue to do is look at downside scenarios to make sure that if you ever repeat.
March April where again and hopefully it won't be you know coated but things happen, we want to make sure in a downside scenario, we have tons of room before does any disruption to the dividends to our investors, which again, we shared with investors during March April may period.
You know we had successfully done we did we did not run into liquidity problems as you know several other players in the marketplace did.
And so we do that.
By a mix of secured unsecured we do that by minimizing the amount of revolver exposure that we have and we would take on more unsecured.
If we felt the pricing was right.
As we move to towards one in the quarter, but we don't need to take on more unsecured. So it will really be an opportunistic decision.
As the deployment of the capital continues to occur.
Okay. That's helpful and I would guess that said you.
Relative to three or four months ago, you know to talk about getting to that one in a quarter.
It seems like it could happen sooner now than they did what had happened you know.
Then you would have thought three or four months ago night, my thinking about that correctly, given you know given that the pipeline discussion that we're having here.
We were absolutely.
Delighted in.
August September October to see the surge in deal activity that we saw and no we did not predict that.
Three to six months ago, we thought frankly that deal activity would be.
Very limited through the balance of the year, but it but it has not been that it's very strong and you're hearing that from others as well I'm sure.
So the question the question becomes how many deals do you win and I've shared with you how many mandated deals I have and hopefully a good percentage of those close but but beyond the mandated deals as we get into a quite.
Caused by mid November.
There, there's more deal flow that could be mandated and frankly could close by year end.
And if some of those things break our way or in the direction of our clients.
We could make good progress towards getting to that one of the quarter.
Okay. Okay.
Okay. That's great one it I wanted to kind of figure out also just just so you know I should also mentioned that we don't keep all the assets directly on our balance sheet, we do use our JV and the JV is also highly accretive to income has the junior capital in that.
G B returns double digit returns and any deals that are priced l. success to get below which are generally in this market senior secured very good credits do go into that JV.
Okay, Yeah that that was going to kind of be my next line of questioning and tried to understand kind of what the pace of.
Uh-huh origination that the JV would be or at least the pace of your your continued investment into it. So it sounds like you know it sounds like you'll.
Yeah, you'll hit that that that $75 million.
Over the next.
Six to 12 months, perhaps.
We certainly could hit the full utilization over the next six to 12 months and depending on what the economics look like at that moment, we could make a decision to.
Increased the allocation into the JV, if that was accretive to our shareholders. Okay.
Okay.
Okay.
And then one one kind of Oh, I guess modeling question you talked about the our coal.
Getting getting restructured in intent into equity so you'll you'll you'll take a look take a realized loss on the on the debt and Im curious maybe choice and you can help me with this but what the but what the equity investment with the size of the equity that investment might look like you know and as as we see as we see.
The fourth quarter financials.
So before I pass it to Joyce and let me just share with you that the underlying company performance at our coal is very strong. The company has not had any significant covet effect.
And we.
We believe that there is.
Potentially good equity upside.
In that asset over.
Over the period of time that we choose to own it.
But in terms of how many dollars it turns out to be choice and can you share what the numbers look like.
Yeah, I think that in regard to the accounting treatment, obviously, we haven't finalized TV county in for the Q4 transaction, but I think our preliminary thoughts are that it's a non taxable transaction until we'd be rolling over our cost basis into the common.
Equity shares.
And so 60, where my understanding is I believe its you know.
Overall, we would have essentially 75%.
<unk> represented 75% ownership.
Through kind of common and preferred units.
Alright, well.
Thanks, Thanks for that choice and I think Thats all from me Stuart I appreciate your time.
Great. Thank you.
Thank you we have no further questions at this time I will now turn the call back over to management for any additional or closing remarks.
Everyone. I appreciate the time you spent with US if there are more things that come up we always strive to be transparent and I encourage you prior to our calls each quarter.
There are information flows that we can share with the marketplace and with you that are useful. Please try to let us know that prior to the call. So we can and corporate the corporate that.
In the prepared remarks.
But that's all we have and again I hope everyone does well through the rest of the covert crisis.
Thank you.
Thank you. This does conclude today's conference call you may now disconnect.
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