Q3 2021 Saratoga Investment Corp Earnings Call
[music].
Please note that today's call is being recorded during today's presentation. All parties will be in a listen only mode. Following management's prepared remarks, we'll open the line for questions. At this time I would like to turn the call over to Saratoga investment corporations, Chief financial out compliance officer, Mr. Han waste.
Income Sir please go ahead.
Thank you I would like to welcome everyone to Saratoga investment Corp. fiscal third quarter 2021 earnings conference call.
Today's conference call includes forward looking statements and projections we.
We ask you to refer to our most recent filings with the FCC for important factors that could cause actual results to differ materially from these forward looking statements and projections we.
We do not undertake to update our forward looking statements and that's required to do so bundle.
Today, we will be ready for taking a presentation. During our call you can find out fiscal third quarter 2021 shareholder presentation, and the events and presentations section of our Investor Relations website and linked to IR page is and the earnings press release distributed last night.
A replay of this conference call will also be available from one PM today through January 14th Peach referred to <unk> earnings press release for details.
I would now like to and the cool other than to our chairman and Chief Executive Officer, Christian Oberbeck, who will be making a few introductory remarks.
Thank you Henri and welcome everyone.
And other volatile and challenging quarter across our businesses and the world. We continued to see improvement and market conditions and improved visibility on the immediate prospects from our portfolio companies.
We continue to believe and Saratoga and our portfolio companies are positioned well at this point in time to weather potential future economic challenges, we look forward to for sending our most recent results and reviewing the solid structure of our capitalization and continued improvement and liquidity on today's call.
Well no business can anticipate clarity how long the displacement in the market and global economy will last we have confidence and our historically conservative approach to investing strong capital structure solid levels and liquidity organization and management experience will enable us to effectively navigate this challenge and current and uncertain for.
And your environment.
To briefly recap.
For the past quarter on slide two for.
First we continued to strengthen our financial foundations quarter by maintaining a high level investment credit quality with nearly 93% of our loan investments for training or highest credit rating after incorporating the impact of changes to market spreads EBITDA multiples and to our revised portfolio company performance related to cope with 19. This.
It's up from 90% and Q1.
Importantly, more than two thirds of the reduction and the valuation for the overall portfolio and the first quarter has been reversed since may 30, Onest 2020.
Generating a return on equity and 11% on a trailing 12 month basis and Q3 net of the nine month cope with 19 impact to the portfolio.
This significantly exceeds the BDC industry average of negative 3.6% and.
And yet registering a gross unlevered iroar, 16.6% on total realizations and 523 million.
Second our assets under management increased to $547 million this quarter and 8% increase from 508 million as of last quarter and up 13% from 486 million as of yearend.
Despite the unprecedented uncertainty and turmoil and the markets, we originated a healthy $51 million, new investments offset by $18 million and repayments importantly, our new originations included three new portfolio company investments.
Our capital structure our.
Our capital structure portfolio performance and recently improved liquidity have enabled us to remain open for business and important differentiator in today's market.
Third as we continue to look ahead to the persistent challenges presented by the cold with 19 pandemic for the economy, and particularly to small businesses.
Liquidity and and they'd be preservation are paramount both for our portfolio companies and ourselves our.
Our current capital structure at quarter end was strong with $300 million Mark to market equity supporting $108 million and long term covenant free non SP, I see debt and $176 million and SP I see debt.
Our available liquidity enables us to grow by.
By 42% currently.
We had $30 million and committed undrawn binding commitments as of quarter end and $19 billion and discretionary funding commitments.
Our quarter end regulatory leverage of 377% substantially exceeds our 150 per cent requirement.
Finally, reflecting on our improved liquidity and overall portfolio resiliency. The board of directors decided to increase our quarterly dividend by one cents to 42 cents per share for the quarter ended November Thirtyth 2020.
We will continue to reassess the amount of our dividends on at least a quarterly basis as we gain better visibility on the long term economy and fundamental business performance as discussed on previous calls we have historically managed or Rick compliance obligations conservatively such that we have had no ordinary income.
Obligations going into this fiscal year, and therefore suspect substantial spillover flexibility and consequent liquidity.
Payment of this increased dividend further preserves our spillover and liquidity position.
This quarter saw continued solid performance within our key performance indicators as compared to the quarters ended November Thirtyth 2019, and August 30, Onest 2020 and for.
Considering the current economic environment.
Our adjusted Eni is $5.5 million this quarter unchanged versus $5.5 million last quarter and down 10% versus $6.1 million last year.
Adjusted NII per share is 50 cents this quarter up from 49 cents last quarter and down from 61 cents last year.
Latest 12 months return on equity was 11% currently the second highest and the BDC industry.
And our NPV per share is 26 80 for.
6% from 25, 30 last year and up 1% from 26 68 last quarter.
This is the 11th quarterly increase in the past 13 quarters, and the highest year over year growth and the BDC industry with only one other BDC haven't grown and Avi per share over the last 12 months Henry.
Henry will provide more detail later.
And the past we continue we remain committed to further advance and the overall long term size and quality of our asset mix.
As you can see on slide three our assets under management has steadily risen since we took over the BDC and the quality of our credit remains high and.
And you and increase to $547 million and fair value and Q3 and.
8% increase since last quarter.
With that I would now like to turn the call back over to Henry to review, our financial results as well as the composition and performance of our portfolio.
Thank you Chris.
Slide for highlights our key performance metrics for the quarter ended November 32020.
And adjusting for the incentive fee accrual related to net capital gain and the second incentive fee calculation adjusted Eni of $5.5 million was unchanged from last quarter and down 10% from $6.1 million as compared to last year's Q3 adjust.
Adjusted and I appreciate with 50 cents down 11 cents from 61 cents per share last year and up 1% from 49 cents per share last quarter.
The decrease in adjusted Eni from last year, primarily reflects the non recurrence of the $1 million income tax benefit recognized last year and the impact of low and LIBOR rates on the overall, mostly variable rate portfolio.
The decrease was partially offset by a higher level of investments with a you end up 12.3% from last year and lower interest expense following a repayment of the $74.5 million, it's a baby bonds last year comps.
Compared to Q2 slightly higher interest income generated from the ink priest AIU and this quarter was mostly offset by lower other income and higher operating expenses.
Of note is that this quarter does not include the full impact of the increased and you add as all of this quarter's originations occurred and the second half of the quarter with a repayments mostly in the first month of the quarter. Once all available assets deployed the impact of that cash will be fully accretive to and I.
In addition to the above the decrease and adjusted Eni per share from last year was due to the highest number of shares outstanding this year.
And that average common shares outstanding increased by 11.3% from 10 million shares last year Q3.
To 11.2 million shares for both Q2 and Q3 this year.
Adjusted and I yield was 7.4%. This yield is down 230 basis points from 9.7% last year and down 20 basis points from 7.6% last quarter, reflecting primarily the and packed about growing and maybe they reduce LIBOR over this period and the effect of our currently and deployed.
Capital.
For this third quarter, we experienced and net gain on investments of $1.9 million or 17 cents per weighted average share, resulting in a total increase in net assets, resulting from operations of $6.4 million or 57 cents per share the $1.9 million net gain on investments was comprised.
$6 million in net unrealized depreciation on investments offset by $3.8 million of federal income tax paid and I realized gains on investments and point $2 million up net deferred tax benefit on unrealized depreciation and other block and subsidiaries the $6 million unrealized depreciation and reflects a one.
And 2% increase and the total value of the portfolio, primarily related to improvements and market spreads EBITDA multiples and or revise portfolio company performance data for more than two thirds of the reduction and the value of the overall portfolio in the first quarter has been for this since may of this year.
Thinking about the total impact since 'cause. It 19 began this year and as outlined in the Mdna and for 10-Q that was filed last night. The cumulative nine months and packed is now as follows there are two investments with year to date unrealized depreciation of more than $3 billion and only five assets.
Reductions of more than $1 billion. The two largest reductions of C education services with $3.0 million and known and group with $3.5 million.
Return on equity remains an important performance indicator for us.
Which includes both realized and unrealized gains our return on equity was 11.0% for the last 12 months, which places us second and the industry for this period and well above the industry average of negative 3.6%.
Total expenses, excluding interest and debt financing expenses base management fees and incentive management fees increased from $1.5 million for the fit and quota and second quarter. This year to $1.6 million. This quarter. This represents 1.1% of average total assets for all three quarter.
We have also begun added the Capex I slide starting from slide 26 through 29, and the appendix at the end of the presentation net shows our income.
And and balance sheet metrics for the past 13 quarters and the Equitrans we have maintained.
A particular note is the consistent and navy for shade credit on slide 26.
And slide 29, net highlights how and net interest margin run rate has almost quadrupled since and Saratoga took up and management of the beat and see and has continued to increase in Q3.
Moving on to slide five and Navy was $299.9 million as of this quarter for in a $1.7 million increase from last quarter and a 17.7 million dollar increase from the same quarter last year and maybe per share was $26.84 as of quarter.
And up from 26 68 as of last quarter and up from 25 30 as of 12 months ago.
For the three months ended November 30, 20, $24.5 million of net investment income and $6.0 million of net unrealized appreciation and should.
Offset by $3.9 million federal tax paid on net capital gains realized in fiscal 2000 $20.2 million deferred tax benefit and the unrealized depreciation and Saratoga block and subsidiaries and $4.7 million up dividends declared in addition point $8 million of stock dividend distributions were made through.
Companies Drip plan and 50000 shares were purchased for zero point $9 million for swing to the share repurchase plan all in this quarter.
Our net asset value value has steadily increased since 2011 and is up 6% for the past year.
Very importantly, this growth is being accretive as demonstrated by the increase it and they'd be per share no. Other BDC as credit and they'd be per share like we have over the past 12 months and in fact only one other has grown it at all and that at any 0.9 per se. We continue to benefit from our history of consistent realized and unrealized gains.
On slide six you will see a simple reconciliation of the major changes and and I and and Navy per share on a sequential quarterly basis.
Starting at the top.
And I appreciate increased once and from 49 cents per share last quarter to 50 cents per share and Q3 and once seemed decrease in non CLL and net interest income and once and increase and operating expenses was more than offset by three cents increase in CLL interest income.
Moving onto the low pay off of the slide this reconciled for 16 cents and maybe per share increase for the quarter.
40 cents of Eni and 54 cents of net unrealized depreciation and investments, but partially offset by the 55 cents tax impact of net capital gains realized in fiscal Twentytwenty, two sales and they change and deferred taxes on net realized gains and their total investments blocker subsidiaries and 41 cent dividend paid and Q3.
Slide seven outlines the dry powder available to us as of now for them to 30, 2020, which totaled $227.9 million and Swiss grade between available cash Undrawn, and Sps debentures, and Undrawn mats and facility this quarter and level of available liquidity allows us to grow our assets by an additional.
42% without the need for external financing.
With $84 million of it being cash and thats fully accretive to and I, when deployed and $149 million and Sps debentures with and all in cost of mixed and 2% also very accretive.
We remain pleased with our liquidity position, especially taking into account the overall conservative nature of our balance sheet and the fact that all that day is long term and nature and mostly fixed rate.
Now, we'd like to move on to slides eight through 11 and review the composition and yield of our investment portfolio slide eight shows that our composition and weighted average current yields have changed slightly as compared to the past, we net of $547 million of AIU and that fair value invested and 42 portfolio comes.
Needs and wants the low fund.
15% each represent 75 per cent about total investment of which 9% and that is in first theme low staff positions.
On slide nine you can see how the yield and core BBCA assets, excluding mcl CLL as well as our total assets yield has dropped below 10% yet remains healthy this quarter overall yield decreased slightly by 20 basis points to nine point focused sales and our core assets yield by the same margin to 9.7 to sales as compared to.
Q2, and it was LIBOR already be low flow. This was purely because of the increase in fair value. This is demonstrated by our core assets yield based on cost remaining unchanged at 9.5 per se.
As a reminder, for 100 basis points is our lowest flow. So we did not expect to see further decreases and libel and really impact interest income I see a low yield at 11.8% and our COO low its current and performing.
Turning to slide 10, our investments remain highly diversified by type as well as in terms of channel Christian during the third fiscal quarter, we made investments of $51.3 million and three new portfolio company and five follow ons and had 18.3 million and two exits plus amortization, resulting in a.
The net increase in and basements of $53 million for the quarter.
On slide 11, and you could see the industry brick and diversity that portfolio and present, our investments are spread of 52 distinct industries with a large focus on education software.
T. services and education and health care services. In addition, our total investment in the Cielo is reflected as structured finance securities.
Our total investment portfolio, 5.7% consists of equity interest, which remain an important part of our overall and based and strategy.
For the past nine fiscal years, including Q3, we had a combined $59.6 million of NATO realized gains from the sale of equity interest for sale of and the redemption of other investments. Other two thirds of these gains were fully accretive to enable you to the unused capital loss carry forwards that were carried over from and Saratoga took other management.
And of the BDC. This consistent performance highlights our portfolio credit quality has helped grow our and Avi and is reflected in our health for the long term. Our early in fact, our six year are are we average is now almost 13% with an on for one year below 9% and compares very favorably to and.
Industry average over the same period of 5%.
That concludes my financial and portfolio review I will now turn the call over to Michael Chris Yes.
Chief investment officer for an overview of the investment market.
Thank you Henry.
I'll take a couple of minutes to describe the current state of the market as we see it and then comment on our current portfolio performance and investment strategy and.
Light of a continued impact of COVID-19.
And the unique economic environment.
Market conditions continued to be affected by COVID-19, but to a for lesser extent than earlier in the crisis.
We are seeing rebounding transaction volumes.
Tightening credit yields and a general lessening of risk aversion and the market.
Earlier in the crisis deals were mostly limited to existing portfolio companies either pursuing growth initiatives are seeking liquidity.
That's starting to change and our Q2 and this trend we saw in Q2 more originations with new platform companies continued into Q3.
Quality deals are helping widen leverage and tighten pricing.
Albeit not quite to pre cobot levels.
That said Q4 was quite robust and there appears to be a positive outlook for 2021.
Lenders and our market share for the most part staying disciplined with covenants and requiring deals to have healthy equity capitalizations.
And uncertain economic times, such as these are underwriting bar remains higher than usual.
Nonetheless, we are actively seeking and finding opportunities to deploy capital.
We believe that compelling risk adjusted returns can be achieved by deploying capital and supported those highly select businesses that have demonstrated the strength and durability in the midst of this difficult environment.
We have invested in 10, new platform investments since the onset of the pandemic, including five in this past calendar quarter alone.
We also remain actively engaged with our portfolio companies.
We have found that our portfolio companies have generally take and the right steps to help mitigate both the near and long term effective COVID-19 on their businesses.
And as we've mentioned before many of them were also able to avail themselves of the paycheck protection program or PPP loan relief.
All of our loans and our portfolio are paying according to their payment terms, including now rasco since this quarter, we have opted to keep it on non accrual for now as it still has past due interest only.
Taco Mac and my alarm center are the other two investments that remain on non accrual.
There have been no new non accruals during calendar 2020.
We also recognized an additional $6 million and unrealized depreciation this quarter, which brings our recovery of the Q1 fair value reduction primarily related to COVID-19 to almost 70%.
As an overall portfolio the fair value of non legacy assets originated by Saratoga has approximately recovered to its cost basis.
We believe this strong performance reflects certain attributes of our portfolio that we expect will help us as we navigate through this economic environment and we remain confident thus far and the overall durability of our portfolio.
75% of our portfolio is in first lien debt and generally supported by strong enterprise values and industries that have historically performed well and stress situations.
We have no direct energy exposure.
In addition, the majority of our portfolio is comprised of businesses that produce a high degree of recurring revenue and have historically demonstrated strong revenue retention.
However, there are still plenty of uncertainties, and therefore potential future adverse effects of Cove, and 19 on market conditions, and the overall economy, including but not limited to the related declines and market multiples increases and underlying market credit spreads and company specific negative impacts on operating performance.
Could lead to unrealized and potentially realize depreciation being recognized in our portfolio in the future.
Now despite this lack of clarity we continue to believe that our well constructed capital structure and liquidity will help us to navigate the challenges presented by COVID-19.
We believe sticking to our strategy has and will continue to serve us best especially in the market. We currently face.
Our approach has always been to focus on the quality of our underwriting and as you can see on slide 13. This approach has resulted in our portfolio performance being at the top of the BDC space with respect to net realized gains as a percentage of portfolio at cost.
We are close to the top of the list of only eight bdcs that had a positive number over the past three years.
Furthermore, a strong underwriting culture remains Paramount and Saratoga, we approach each investment working directly with management and ownership to thoroughly assess the long term strength for the company and its business model.
We endeavor to appear as deeply as possible into a business in order to understand accurately its underlying strength and characteristics.
We always have sought durable businesses and invested capital with the objective of producing the best risk adjusted accretive returns for our shareholders over the long term.
Our internal credit quality rating reflects the impact of coated and shows and nearly 93% of our portfolio at our highest credit rating as of quarter end up slightly as compared to last quarter.
Now looking at leverage on Slide 14, you can see the industry debt multiples are trending downward from calendar Q1 to Q3.
We expect that trend to have continued and Q4.
Total leverage for our overall portfolio was 4.03 times decreasing from last quarter, reflecting strength and portfolio company capitalization and the lower leverage of certain new deals.
As we frequently highlight rather than just considering leverage our focus remains on investing and credit with attractive risk return profiles and exceptionally strong business models, where we are confident that the enterprise value of the businesses will sustainably exceed the last dollar of our investment.
In addition, the slide illustrates our strengthening ability to generate new investments over the long term even in the midst of a difficult market dynamics.
During the calendar year 2020, we added 11, new portfolio companies and May 26 follow on investments, including eight follow ons that supported portfolio the company's liquidity during COVID-19.
This is easily the year and which we have executed both the most new portfolio company investments and most deal closings.
Reflecting ongoing emphasis on broadening our origination capabilities.
Moving on to slide 15.
Our team's skill set experience and relationships continued to mature and our significant focus on business development has led to new strategic relationships that have become sources for new deals.
We recently hired and additional senior resource to continue to grow this important function and demonstrate our focus on the strategic priority.
The number of new business opportunities and has been greatly impacted by COVID-19.
Although we are beginning to see more active deal pipeline.
But what is especially pleasing is that a quarter of our term sheets issued over the past 12 months.
And for of our 11, new portfolio company investments are from newly formed relationships, reflecting notable progress as we expand our business development efforts.
There are number of factors that give us measured confidence that despite a decline and deal activity.
We can continue to grow our U M.
Steadily in this environment as well as over the long term.
First we continue to grow our reach into the marketplace as is evidenced by several investments we have recently made with newly formed relationships.
Second we have developed numerous deep long term relationships with active and established firms that look to us as their preferred source of financing.
Third we continue to see plenty of investment opportunities and industry segments that are experiencing long term secular growth trends and within which we have intentionally developed expertise.
As you can see on slide 16.
Our overall portfolio credit quality remains solid.
On the chart to the right you can see the total gross unlevered IR are on our $502 million of combined weighted SP I see and BDC unrealized investments is 12.5, percents and Saratoga took over management.
More than two thirds of the Q1 marked down to bounce back since then and.
And what remains is across a wide variety of companies.
We do not believe that the remaining unrealized depreciation changes our view of their fundamental long term performance.
The three largest depreciations and our in our Nolan Group C education, and arbiter sports investments.
All three of which are more dependent on in person human interaction.
Our investment approach has yielded exceptional exceptional realized returns.
The gross Unlevered IR, our unrealized investments made by the Saratoga investment management team is 16.6% on approximately $523 million of realizations.
And moving on to Slide 17, you can see our first us be actually license is fully funded with $222.3 million invested.
Cost as of quarter end, our second SPDC licenses already been funded with $69 million of equity.
Of which 98 million of equity and Sps debentures have been deployed.
There are still point 7 million of cash and $112 million of debentures currently available against that equity.
And looking back at Q3, and really the whole year. The way the portfolio has proven itself to be well constructed and resilient against the impact of COVID-19 really came to the for the past nine months.
Constraining the strength of our team platform and portfolio and.
And our overall underwriting and due diligence procedures.
Credit quality is always our primary focus.
And while the World has changed significantly this year, we remain intensely focused on preserving asset value.
And remain confident and our team.
And the future for Saratoga.
This concludes my review of the market and I'd like to turn the call back over to our CEO Chris.
Thank you Mike.
As outlined on slide 18, following Saratoga Investment's recent capital raises and the current performance and its portfolio. The board of directors has decided to declare a 42 cents per share dividend for the quarter ended November Thirtyth 2020.
This reflects a one cents increase from last quarter.
The board of directors will continue to reassess and assign it at least a quarterly basis, considering both company and economic factors.
Moving to slide 19, our total return for the last 12 months, which includes both capital appreciation and dividends has generated total returns of negative 12% in line with the BDC index of negative 12%.
Latest 12 months total return was impacted by COVID-19, which has caused volatility severe market dislocations and liquidity constraints and many markets, particularly impacting the smaller bdcs with average lease 12 months returns for Bdcs with and Abby below $300 million closer to negative 16%.
Our longer term performance is outlined on our next slide 20.
Our three and five year returns placements and the top 15 and top two respectively of all Bdcs for both time horizons.
Over the past three years or 17% return outperformed the 4% return of the index and over the past five years, our 123% return greatly exceeded the index is 33% return.
On Slide 21, you can further see or outperformance placed in the context of the broader industry and specific to certain key performance metrics and.
We remain above the industry average across diverse key and key categories, including interest yield on the portfolio latest 12 months return on equity and latest 12 months and easy per share growth.
Continue to focus on our latest 12 months return on equity and and 80 per share outperformance, which are which for top two and first respectively and reflects the growing value our shareholders are receiving.
Not only are we one of the few bdcs and have grown and Avi we have done it creatively by also growing energy per share one of only two bdcs have done that in the past year.
Moving onto slide 22, all of our initiatives discussed on this call are designed to make Saratoga investment and highly competitive BDC that is attractive to the capital markets community, we believe and our differentiated characteristics outlined and the slides will help drive the size and quality of our investor base, including adding more institutions.
Yes.
Our differentiating characteristics include maintaining one of the highest levels of management ownership and the industry at 15% and.
Access to low cost and long term liquidity, which with which to support our portfolio and make accretive investments receipt of our second FDIC license, providing sub 2% cost liquidity.
A triple B investment grade rating and active public and private baby bond issuances solve.
Solid historic earnings per share and and I'll yield strong and industry, leading historic return on equity accompanied by growing and Avi and NPV per share putting us at the top of the industry for both.
Hi quality expansion of assets under management and attractive risk profile.
In addition, our historically high credit quality portfolio contains minimal exposure to conventionally cyclical industries, including oil and gas industry.
We remain confident that our experienced management team historically strong underwriting standards and tested investment strategy will serve us well and battling through the substantial challenges and the current and future environment and that our balance sheet capital structure, and liquidity will benefit Saratoga shareholders and the near and long term.
In closing I would again like to thank all of our shareholders for their ongoing support and.
I'd like to now open the call for questions.
Thank you and ladies and gentlemen to ask a question and you will need to press star one on your telephone to withdraw your question press the pound key please stand by while we compile that Q and a roster.
Our first question comes from the line of Casey Alexander with Compass point. Your line is open.
Hi, Good morning can you hear me.
Yes, and you are right.
Good morning, Alright terrific.
And Mike couple of questions for you.
$20 million per quarter over quarter increase and control investments can you give us some idea what changed at all.
Net net trio.
That caused it to become a control investment or was it.
Investment decision that you made and give us some sort of feel of what kind of company. It is.
Yes, Casey I'll just quickly as jump and just on the classification. So net trio has always been a control and basin and so we actually have quite a substantial ownership and that Mike and talk through that in more detail. The change that you are probably seeing and dollars in be control category is the additional $20 million that low.
And our unsecured line that we invested in our T. low warehouse and potentially in advance of our refinancing about CLS and Thats the change and dollars. Mike do you want to expand just a little on our our equity ownership and they true.
Yes happy to good morning, Casey the Demetrio investment is one where we have a significant equity ownership, there's there's no change.
That occurred in the quarter as it relates to that.
It's a business that we feel very good about and feel like it's got.
A lot of confidence that we can grow the the enterprise value over time the market that it operates and is one that has is ripe for.
Expansion, and we feel and companies really well positioned.
And the products for this offering.
All right great. Thank you for that clarification. Secondly, there was an increase an unsecured term loans and those term loans are at a yield that is.
Pretty far below.
The weighted average yield of the entire portfolio did did you guys.
Grab and investment and a broadly syndicated loan during the quarter or what caused that change.
Now you know Casey Thats actually exactly that that $20 million low warehouse low and so because it's an unsecured loan any loans that you put into your CLO warehouse it falls into that category and so thats exactly to my earlier point it at the refund that category increased as well. So it's it's an addition.
No.
Investment in our CLO warehouse ahead of the re Fi.
So does that give you the flexibility to.
By some new paper prepping for the refinance of the CLL is that what that's for.
Okay. So this is Chris yes.
That's what that's what we use it for.
Okay, great. Thank you Mike also could you expand some C. Education, you mentioned that there was a mark down there and that seems to be a vertical that that has done well during the pandemic, although I see it.
Tutoring and college prep business could you give us a little more color as to.
What's going on there what led to the markdown and what the prospects are for C.
Happy to and of course, I've I've got to limit my remarks.
Right.
Typically remind folks these are obviously private companies. So we cant get into all the nitty gritty, but this is a business that provides tutoring services to high school students that are.
Looking to get into the top colleges its not just us a t. prep, but it's also tutoring around the application process and things of that nature, and helping them with ATP exams, and so forth, but their model is.
Has historically been predicated upon in person meetings with with.
With tutors direct and person meetings.
That part of their businesses naturally been challenged.
The business has I think reacted very well and they've Dave.
Introduced much more remote.
Sessions, and that's worked very well the biggest challenge that they are facing now is really attracting new customers because the parents that are engaging their their kids to do that typically want to have a one on one.
In person interaction before they sign onto that.
And they are they are we think holding up quite well under the circumstances and this is a business that we feel really good about we've been in it for quite some time, we're in a really good spot in the balance sheet. It's one of the key players and the industry. It's outcomes are it was which is what we always look at when we look at education deals are very soon.
For on so.
So we have come in as good sponsors good good sponsorship support as well so we feel.
Good in the long term, but certainly it's a business that's been challenged we have not really materially changed or.
Valuation in recent quarters, we certainly devalued it.
On the with the onset of the pandemic recognizing that it would be a business that would face some.
Headwinds and Weve the revaluation that you see now reflects.
Continuing.
Experience for the company's having in that respect.
Okay, great. Thank you.
And lastly on.
Chris I think I guess I'll ask this a view.
Noting that the significant.
Capital gains tax.
Can you explain for us again and.
Is will there be a capital gains distribution.
Or is there some manner of of deferring.
That capital gains distribution to shareholders.
Yes, Thats a good question Casey I think as as.
You recall historically.
From when we took over the BDC, we had some capital loss carry forwards significant amount and over time those were used to shelter the significant capital gains and we've had and build our and Avi and maybe per share.
In the past set of realizations.
Last year, primarily coming from easy eyes.
We utilized a portion of the final remaining amount of those capital loss carry forwards and then we incurred what with what would be a capital gain.
Under the tax rules for for Rick for for Rick's.
Theres a choice you can distribute that or you can or the at the BDC level, you can pay a 21% capital gain and retain them.
As for our historical practice has been to retain our capital gains we have done so with this payment.
And so what it does is allows and increase in the and net asset value of the company.
Without incurring any other costs of selling additional equity for example, and a further benefit because of the way Rick's are structured and if that were distributed those shareholders, who pay state taxes and those people are not fortunate to live in the few the five states that don't pay state.
Yes.
They do not incur that state tax so so by retaining it there's only a federal tax paid at the BDC level and so to answer your final part of your question.
That will be retained and they will not be a capital gain distribution.
Okay, great. Thank you Thats all of my questions and I appreciate your taking my questions. This morning.
Thank you guys.
Thank you our.
Our next question is from me case and land with Ladenburg. Your line is open.
Good morning, everyone hope everyone is doing well.
Ask about liquidity at the borrowers.
You know, it's been we're getting close actually to a year of the.
Onset of the pandemic, obviously at the beginning of that timeframe. There was a lot of liquidity provided through PPP and by private equity sponsors I'd like to understand how you're generally viewing liquidity amongst your borrowers now that we've been through.
Through several quarters of the pandemic and we're still and.
Stage, where the pandemic is increasing rather than decreasing and do you think they have enough liquidity to make it through to the to the end.
Good morning, Micky I'll take that question, you're right. The majority of our portfolio companies took advantage of the PPP program and that was quite helpful. As they were managing liquidity through the early stages of the pandemic.
We're actually quite pleased and we're monitoring this very carefully and it's it's something that we switched to his job one when things started in March is managing the.
And making sure that we're on top of the liquidity position of each and every one of our portfolio companies, but as things have settled in general.
Except for the handful of deals that you see that have material write downs and we've discussed them.
The other day.
Portfolio companies are actually per foot per day.
The performance of the other portfolio companies have stabilized significantly and by and large we feel very good about their liquidity position, even those businesses, where we have a significant write down we have worked with management and the ownerships to to make sure that we understand their liquidity needs and.
We feel good about the position that they're in in that respect we got sponsorships, it's very good or the company is put themselves in a position where they reduce their cost and manage to.
Keep their their profitability that's appropriate for the environment that they are dealing with right now.
Mike in terms of those price, let's call and problem deals are.
For those old sponsored transactions.
The the three that we referenced are all sponsored transactions of course.
We we invest in non sponsored transactions as well, but my comments on the portfolio overall apply to both okay and amongst those sponsors are these three.
Investments deals that they believe will ultimately survived the pandemic and do you think they are willing to write more equity checks to keep those two businesses afloat until later this year when when the backdrop improves.
Well I think.
The important the important thing and I want to make sure that we make this message clear because we referenced those three.
Businesses.
And there they they constitute the largest portion of our remaining.
Devaluation in the portfolio due to coded.
Each one of those businesses, we feel very good about their long term prospects.
And in no one's case, and and Arbiters case, they are each day, the absolute leader in their market niche and both supported by for very good sponsorship and their liquidity position is strong.
And see Twos case also sponsored they're not the absolute leader and their space. It's a space that has some other competitors, but it's one of the leading companies in that space and in each each one of these businesses and this is really important because it's how we think about underwriting on the front end.
The value proposition that they're making for their customers.
Has fundamentally not changed so we don't feel like.
If the world returns to any sense of normalcy.
These companies won't.
Recover we.
We think that there will still be right back to where they had been before now there's never certainty around that but that's our expectation and we think that there are all adequately capitalized to ride the storm if you will.
Excuse me that's very helpful. Mike Thank you for that.
Turning to the the Seo low I have a couple of questions I noticed that the equities estimated yield increased quarter to quarter.
And and I realize it's at the end of its reinvestment period was there anything.
We should understand in terms of the dynamics of that investment that cause the estimated yield to go up.
It's really primarily a reflection of the pullmantur.
And so the CLL for this past three three months at the past quarter and Micky CLL had a really strong performance and as you can see it was actually up quarter over quarter and valuation and actually would have been up and valuation even more if not for the fact that we did change one of our assumptions we.
Increased our prepayment rate from 10% to 20%.
Reflecting the information were getting from the desks and be prepayment.
Trends over the past quarter, or so which offset some of the increase in value, but the full impact of the strong performance came through and the actual and the actual cash.
Cash flows and that's in the effective interest rate.
Okay and Henry.
Hi level.
What it looks like your and do you.
Expect to see a low to be upsized.
On refinancing and what sort of timing are we looking at in terms of the refinancing.
Maybe I'll step and for that one.
We do have a warehouse.
Attached to our low and as we discussed earlier, we have funded into that and so we do have assets in the warehouse and so we already have.
Some assets that could allow us to upsize and we also have additional leverage which we have not fully utilized in the warehouse and and so so we're prepared to upsize should the market environment.
Be conducive to that from and in our judgment and.
In terms of the refinancing we as as you've seen over the years.
Generally speaking this is the time zone in which we would.
To refinance and so we are and in the process of engaging with the market as you can also appreciate.
For the last six months the market has evolved very dramatically so.
Six months ago, basically it was closed and that now its more much more robust and it has been.
I definitely agree with that Chris and given sort of market terms available right now and see a low.
And can you give us a sense of what level of estimated yield we might see on that see a low once its refinance and what level of fee income the manager for the BDC can earn from the upsize flow.
Well make EPS it gets us a little preliminary for us to to.
To actually know that low.
Let alone and communicate that so so we're we're still in the market place right now so it's just a little early.
I think our next conversation, we would have probably have it done by them.
Okay and.
And one just sort of last housekeeping question, maybe for Henry what what is the level of the undistributed ordinary taxable income.
Per share.
I don't have an exact amount for you're making about I guess a way to think about it is we sort of went into the go with net spillover and so basically breakeven.
And then of course Weve declared now this is the third dividends. We've declared since then and obviously had record and and has over and by between six and eight cents each quarter.
The dividend thus far so I think hopefully that gives you sort of a parameter and sort of how to think about what the current amount is.
But Henry there was also one quarter, where you didnt pay and dividends so correct.
Correct taxable and undistributed taxable income is fairly meaningful right now.
Well exactly as you said, yes, I mean that is the one quarter and and that's probably six to eight cents for the other corn and.
Thats more or less what the via and does not having said that you know.
There is obviously still unknowns and CLL refinancing CLS consolidated for tax purposes. So that could also obviously impact that as that progress since over the next couple of months.
Right and then can you just remind us then and under Rick rules when are you required to.
Either distribute that or.
Consider options for that spillover share. So so we went into the low with no spillover that means and this full.
<unk> taxable income through February 2021, so the end of this coming February.
He has to be distributed eight and off months off to this February so only I think its metal November of this this year. So there's still quite a period until.
The February spillover amount would have to be distributed and all of the dividends post February, but obviously count towards that as well right right. Okay. That's it for me. This morning, Thank you and congratulations on your performance.
Okay. Thank you and you make it.
And now.
Our next question is from Sarkis Sherbetchyan with B. Riley Securities. Please go ahead.
Hi, good morning, and thanks for taking my question here.
Just wondering what sectors or industries are you guys currently seeing the most opportunities to recycle capital I supposed, especially in light of increased prepayments and the rate environment. Thank you.
Good morning.
I'll take that.
I think we are we are.
The way, we think about it is.
More the the flip side of that which is where are we not seeing opportunities are where we avoiding.
Investing capital and certainly they are generally the obvious ones in the cobot environment and so were avoiding anything in the doing anything new in the hospitality space and the travel and leisure space certainly restaurants those types of industries that are most greatly affected and coded and those happened.
Those industries that.
Require a good deal of human interaction and especially group interaction.
Those are areas, where we've avoided I think.
By and large any of the businesses that are holding up well and there certainly are significant subsets of the economy that have held up really well some of even flourished in this marketplace.
We see lots of activity increasing activity there.
If anything what's what's happened in the marketplace for those businesses that have performed well in this environment. There is even greater interest you start to see valuation more.
Multiples expand and.
Hello.
I have a fair amount of aggressiveness towards lending to those business business models that have proven themselves.
One example, there would be.
The businesses that are delivering their product through a SaaS platform. So a software as a service product form that happens to be.
And industry sector or business model type that we have particular expertise in and we're seeing quite a bit of activity in that space. For example, but I would point out and this is one of the things that we're super excited about as we build out our business development group and and further penetrate.
The lower end of the middle market.
Two of the last three port from Newport for the three new portfolio companies in this last quarter that we invested in two of them were in businesses that we're in and the software space their businesses that or when does it dental practice management.
Company on other one is.
Heating and air conditioning business for.
Residential customers and those are businesses that are holding up exceedingly well, but.
But it's very much case specific.
Got it thanks for that color and can you maybe make some comments regarding kind of the interest rate environment and what you're seeing on spreads given the the bulk of the portfolios floating.
Well as Henry pointed out the good news on.
Spreads is that all of our all of our.
Assets are.
At their floor. So we've got if there is any further erosion in LIBOR for which we won't experience it in our portfolio, but what we have witnessed is that.
The marketplace is getting very aggressive on spreads and I would say that for strong credits.
The spreads have returned to kind of pre coded levels.
And there is certainly at this distinction people are drawing between businesses and kind of the sectors that I already described but for those businesses that are performing people are being quite aggressive in lending to those businesses and we're kind of back to pre cobot levels by and large.
Thank you that's all for me.
Thank you great. Thanks, sorry.
Okay.
Thank you.
And this concludes our key on a cash on for today I will turn the call back to Christian Oberbeck for his final remarks.
Well, we'd like to thank everyone for joining us today, and we look forward to speaking with you next quarter.
Thank you for your participation in today's conference you may now disconnect.
[music].