Q3 2020 Harvest Capital Credit Corp Earnings Call

That's a question you want me to Raptor Star one on your telephone please be advised that todays conference is being recorded if you require any further if you still see rapid started sincerely. Thank you I would now like to hand, the conference over to your speaker today Mr., William Alfred Chief Financial Officer. Please go ahead.

Oh, Thank you operator good.

Good morning, everyone and thank you for participating in this conference call to discuss our financial results for the quarter ended September Thirtyth 2020.

I'm joined today by our Chairman and Chief Executive Officer, Joseph Joseph and by Richard Buckanavage, Our President.

Before we start I'll provide a disclaimer regarding any forward looking statements that we make during this presentation.

This presentation contains forward looking statements, which relate to future events.

RBC capital Credit's future performance or financial condition. These.

These statements are not guarantees of future performance condition or results and involve a number of risks and uncertainties.

Actual results may differ materially from those in the in the forward looking statements as a result of a number of factors, including those described from time to time in our filings with the Securities and Exchange Commission, including our most recently filed annual report on form 10-K, and quarterly report on form 10-Q harvest.

Harvest capital credit undertakes no duty to update any forward looking statements made herein unless required to do so by law now I'll turn the call over the joke.

Thanks, Bill our third quarter results exceeded expectations in part due to the pay off of clean tech, which accelerated or deferred fees into the quarter.

As we have de Levered, our balance sheet. Our net investment income will continue to be adversely affected until we can grow our investment portfolio once again.

On a positive note our net asset value per share was relatively stable in the quarter and our weighted average risk rating improved modestly despite the pay off of one of our larger one rated credits in the period.

In addition, one of our non accrual loans GNC emerged from bankruptcy in mid October with the substantial cash payment to harvest.

The new performing loan the net of all that I think we had a slight gain on the investment.

We remain hopeful that we will make more progress in resolving the.

The remaining four rated credits in the next few quarters, assuming the economy continues to be stable or gradually improve I'm going to turn it over to bill to go over the results from the quarter Rich will provide some color on our portfolio management that will make a few concluding remarks bill.

Okay. Thanks, Joe.

Net investment income for the quarter was point 9 million or 14 cents per share compared to 1.1 million or 18 cents per share in the third quarter of 2019.

Net investment income decreased by $217000 in 2020 as compared to 2019, primarily as a result of a decrease in investment income of $255000 offset by a slight decrease in operating expenses.

Interest expense increased by $81000 as a result of executing the previously announced amendment to our credit facility, which increased our interest rate from LIBOR, plus three and a quarter to LIBOR plus 4.5%.

Which was offset by a decrease in other operating expenses, including professional fees gene a in many management fees of $180000.

Net operating loss for the quarter was point 4 million or six cents per share compared to a net operating loss of $1 million or 17 cents per share in the third quarter of 2019.

$660000 improvement in net operating loss between periods, which resulted from the company recording a decrease in unrealized depreciation on investments and an increase in realized gains offset by lower investment income as a result of the lower weighted average effective yield on it companies and good morning portfolio and the addition of three.

The portfolio companies to nonaccrual status earlier in the year and an increase in interest expense.

Reflecting on the nine months ended September Thirtyth 2020, net investment income was $2 million or 34 cents per share compared to $2.7 million or 43 cents per share for the nine months ended September Thirtyth 2019.

The decrease of $629000 in the first nine months of 2020 as compared to 2019, primarily resulted from a decrease of $5.4 million in investment income as a result of a lower income running portfolio and an increase in expenses of $2.2 million principally interest.

Net loss for the nine months ended September Thirtyth, 2020 was 4.8 million or 81 cents per share compared to a net loss of 5.9 million or 15 cents per share for the nine months ended September Thirtyth 2019.

$3.9 million decrease was primarily attributable to $8.4 million decrease in investment income.

$1.3 million increase in unrealized depreciation a 2.8 $2.0 million increase in net realized losses and $8.2 million increase in expenses, principally interest, which was which increased by 8.6 million offset by 8.4 million of lower professional fees.

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The increase in unrealized depreciation during the nine months ended September Thirtyth 2020 is primarily the result of the immediate adverse economic effects of the COVID-19 pandemic, indeed, continuing uncertainty surrounding his long term impact.

During the quarter ended September Thirtyth 2020, we did not place any additional portfolio companies on non accrual status. Although we continue to have four portfolio companies on nonaccrual status, representing approximately 18.6 million of our portfolio at fair value as of September Thirtyth 2020.

Also.

As of September Thirtyth 2020, the fair value of our portfolio was $96 million for the cost basis of 107.5 million, reflecting $11.5 million of cumulative net unrealized depreciation in the portfolio as of the end of the quarter.

As of September Thirtyth 2020, we had a debt balance of 73.8 million.

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At quarter end, we had $37.7 million of cash and restricted cash on October Onest 2020, we repaid $27.6 million on our credit facility.

In addition, the revolving period under the credit facility was scheduled to end on October 31st 2020.

However on October Thirtyth, the company amended the credit facility to extend the revolving period through January 31st 2021 until which date the company may receive additional advances at the discretion of the lenders.

As of September Thirtyth 2020, our net asset value was $10.17 per share down a dollar six per share from December 31st 2019, principally as a result of paying 24 cents per share in distributions for the first quarter ended March Thirtyth 2020, and recording 81 cents of net losses from.

Operation operations during the nine months ended September Thirtyth 2020.

Now I'd like to turn the call over to rich will provide an update on our portfolio rich.

Thank you Bill.

Since the onset of the pandemic, we decided to take a pause on all new investments and focus all of our resources on dealing with portfolio issues emanating from COVID-19.

We have been and continue to be actively engaged with all of our portfolio companies on a regular basis.

During our earnings call last quarter, we reported that 14 of the 15 directly originated financings, which we have a debt investment at the suit loans under the exact protection program totaling over $30 million in the aggregate.

Providing valuable liquidity during this difficult period.

Public companies in our portfolio have augmented that liquidity with additional loans on the Yelp program.

We continue to monitor it and something closely to ensure compliance with the program requirements. So as to maximize the amount of loans that are essentially determined to be forgivable.

Because the portal, which borrowers may apply for forgiveness has only recently opened at a handful of <unk> participate in commercial banks, we cannot report that any of our portfolio companies have been granted forgiveness today whoever.

Whoever three of our portfolio companies have submitted their forgiveness applications and expect to receive 100% forgiveness of the PDP loans they obtain.

And we remain confident that the remaining borrowers in our portfolio will be granted relief for most or all of their obligations.

In addition to the liquidity provided by this.

Yes, yes loan programs. We also continue to benefit from equity infusions by several private equity owners.

Portfolio companies.

After much effort. This has been something capital from the mainstream loan program for several of our portfolio companies, we have seen them easy as them to participate by the commercial banking market cap it fast and not a single portfolio company as it stands alone under this program.

In terms of our core lower middle market portfolio, we would characterize the impact of the pandemic as mixed with some portfolio companies benefiting from this environment something.

Some impacted early but now recovering.

And a few companies that were impacted early and continue to be in that.

We are working collaboratively with militarism often teams of these companies, making prudent accommodations on a case by case basis.

The goal of our work with these businesses is to provide adequate flexibility to weather the storm, while reducing our credit risk where possible and positioning our capital for the best outcome when the economy returns to something closer to normal.

We believe we have made will continue to make progress towards this goal.

Progress achieved thus far we could do in part the fact that no reports of our portfolio is in the senior secured asset class and in many cases, we are the sold that provider to something.

Despite the challenging economic environment as of quarter end September Thirtyth, we had received approximately 87% of total interest payments due from borrowers not on non accrual status and that percentage percentage remained constant at just below 87% as of October 31st.

Rims and non accrual loans with no increase in the number of non accrual loans, which currently stands at four companies.

As we look ahead to Q4, we really don't see strong possibility that one of these loans with will commence cash payment of interest that in Q4 will be returned to accrual status based on significant financial performance improvement and its continued interest payment track record.

Additionally, as Joe outlined another one of our non accrual loans was.

Acquired out of bankruptcy, resulting in harvest receive approximately $3.3 million in cash, thereby reducing the dollar value of our non accrual loans all of them will further.

Furthermore, we expect to receive a performing second lien debt instrument as part of that transaction that will allow us to reclassify this loan to accrual status during the fourth quarter.

With that I'd like to turn call back over to Joe for some final thoughts.

Thanks Rich.

Just in closing I want to thank our hard working team that has been making really good progress at resolving or three four and five rated credits we no longer have any five rated credits.

In a very difficult economic environment, as well as doing a great job controlling our cost or fixed cost.

Reduce during this period.

And while at the same time, our primary goal of all of this has been to preserve net asset value for shareholders.

Net of the quarter end restricted borrowing on our line, we had $8.4 billion in unrestricted cash at the end of the September.

And we anticipate that.

The recent pay offs since quarter end.

That have already occurred.

Plus additional amortization on the line will reduce the amount of our line to under five and a half million by the end of 2020 without any additional pay offs.

We look forward to updating everyone on our progress when we report our fourth quarter results in March.

Operator, we'd be happy to take any questions.

Operator, yes.

Yes, Sir we do have a question from the line of Paul Johnson. Your line is open you may ask your question.

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Hey, Hey, good morning, guys. Thanks for taking my questions.

Congratulations on a positive outcome with GNC, obviously that kind of helps to pay down some of the leverage and the tier credit facility. So it sounds like the 3.3 million that you received that was from GNC and that was probably.

You know used in conjunction with some of your restricted cash post quarter end the pay down that facility.

Yeah right.

Yes.

Okay, well, we I don't know I also.

Hi.

Bill was it in the press release, the other pay off we had sorry, I apologize, yes, Joe.

Okay. So yeah, we had one more a payoff of Oh.

One rated loans.

As expected.

Happened at the end of October.

Okay, and how much was that pay off that additional pay off.

Hi, guys. This is a little less than 8 million Bill yes.

I think it was $7.1 million bill.

Well I was going to pay the line down by right or was that.

I don't brand do you have that number handy.

Yes, it's about some some point eightmillion right. Okay. They go.

Okay. Thanks.

And then I guess, you know and as you know.

First a note on that we have more cash than we owe on the line.

So weve right and that was the 26 million or so that you mentioned.

No. That's that's paid back that's just a quarter run borrow im saying, we have more unrestricted cash right now than what we owe on the line. So okay I feel pretty confident that it's not due for another year or little less than a year right.

So we think we've taken that issue of paying that back if necessary over time off the table.

Okay.

That's good news then.

And then I would ask as far as one of your other non accrual investments I'm. Just curious you know as far as infinite care, that's been on non accrual for quite a while you guys have any update on that business and how that's been performing or any hope for that.

Resolution there.

That's the credit that rich was referring to whose okay financial performance.

I mean, we essentially took over managing that company.

Okay about a year ago.

I apologize for that.

Log sport [noise].

I'll put on mute rich maybe you can give me an update on that.

Sure, Yes that is in fact, the the other credits that I referenced in my comments.

And as Joe mentioned, we've been actively.

Actively engaged managing that business.

And I am happy to report that the performance of the business has improved pretty substantially was impacted by a by the.

Pandemic early on to kind of April May June timeframe then.

Then kind of turned the corner and has had now for.

Very positive months with a significant positive.

EBITDA.

And as and is expected to become a cash interest pay or in the fourth quarter, which jobs, we will allow us to reclassify that mono on accrual status for Q4.

Okay.

Okay I mean, just.

Yeah, I mean, basically weve been one of our team members has been.

Acting CEO for the last four or five months and before that we were kind of the three guys were doing a tag team.

As co Ceos, So weve made some substantial improvements in the operating cost of that business and made it more efficient. So we think that those improvements are long lived as opposed to a temporary.

Great. Thanks for that and then.

I'd just like to ask one more credit if I can it was northeast metal works that was just mark down slightly but sort of marked at a stress level I'm. Just curious if you have any kind of commentary of the performance of that company.

Yeah, I mean does that company has been impacted by the pandemic earlier in the year several of their customers closed.

They were able to remain open deemed critical business, but several several customers what were closed for a period of time on the business.

No. This is having a an okay 2020 posts.

At the height of the pandemic, although one one could say, it's we're now in another high but they were as of late July.

All of their customers were back open and returning.

To order levels not.

Not at levels that were near 2019, but at levels that were above the the trough kind of in that April may June time frame.

Okay.

Good thanks for that color and then lastly, I would just ask you guys have any update on the dividend as far as the dividends that were declared in first quarter I'm is that something that you're going to have to do anything about take any action. This year or are we looking more into 2021 to resolve that well.

Funny, you should ask that because weve been discussing that and I think that depending on.

The state of our line in the next month and a half in terms of a paying it down further type of thing we may part with some of the cash we've accumulated and clean that up.

Okay.

Okay, Great. Those are all my questions. That's all from me.

Okay. Thank you.

Thank you again, everyone. If you would like Ross's question, you will need the breath of star one on your telephone keypad again that star one on your telephone keypad.

There are no further question from the line presenters please.

Okay, great well, we appreciate everyone Who's Ah Ah.

Been interested in our shareholders, who have been with us for a long time, we think we've turned the corner in a material way here and we'll pollo jives that.

You've got to suffer through this and also we apologize if for whatever reason it hasn't gotten reflected yet in our stock price but.

Hanging in there.

Things are improving so thank you we look forward to reporting our results next quarter.

Thanks, operator.

Thank you, Sir ladies and gentlemen. This concludes today's conference call. You May now disconnect presenters. Please stand by for your conference.

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