Q4 2020 Capitala Finance Corp Earnings Call

Yeah.

At this time I would like to welcome everyone to <unk> Finance Corp's conference call for the quarter ended December 31 2020.

All participants are in a listen only mode. A question answer session will follow the company's formal remarks todays call is being recorded and a replay will be available approximately three hours. After the conclusion of the call on the company's website at Www dot.

Group Dot com under the Investor Relations section.

The hosts for todays call on a couple of Tele Finance Corp's, Chairman and Chief Executive Officer, Joe Alala, and Chief Financial Officer, and Chief Operating Officer, Steve Arnall.

GAAP Toric Finance Corp issued a press release on March eight 2021 with details on the company's quarterly financial and operating results.

A copy of the press release is available on the company's website.

Please note that this call.

Contains forward looking statements that provide information on.

Other than historical information.

Statements regarding the company's goals beliefs strategies future operating results and cash flows on.

Although the company believes these statements are reasonable actual results could differ materially from those projected in the forward looking statements.

Statements are based on various underlying assumptions and are subject to numerous uncertainties and risks, including those disclosed under the section titled risk factors and forward looking statements in the company's annual report on form 10-K Cup of Tele undertakes no obligation to update or revise any forward looking statements.

At this time I would like to turn the meeting over to Joe Alala.

Thank you operator, good morning, everyone. Thank you for joining our call today.

We ended 2019 with a portfolio without any non accrual loans and a robust robust pipeline of investments expected to support our earnings allow us to sustain the payments from distributions.

Fast forward to March 2020, and all that changed.

Global pandemic negatively impacted our portfolio of investments and small businesses, especially consumer facing businesses.

The pandemic forced us to place eight investments on non accrual status as of March 31 2020.

In the spring of 2020 capital call up again, focusing on portfolio liquidity, reducing portfolio leverage and supporting the many small businesses in our portfolio.

That were impacted by the pandemic with ultimate goal just debt stabilize the company's net.

The company's NAV has stabilized since the onset of the pandemic and we are encouraged to report our third consecutive quarter of NAV stability and appreciation.

During the second quarter of 2020, we generated 51 million of liquidity through repayments and the wind down of capital low senior loan fund two L. L C stabilize NAV and reduced the balances on non accrual status during the third quarter of 2020, we substantially reduced our GAAP debt to equity ratio.

To one nine from 2.7 at March 31, 2020, we accomplish this through the repayment of $59 million of SBA debt debentures, and the repurchase of $2.2 million of our 6%.

Retail bond notes.

At year end 'twenty 'twenty NAV remains stabilized up approximately 7% since the low at March 31 2020.

GAAP leverage was at 1.98 at year end, but will decline as a result on the $20 million repayment to SBA during the first quarter of 2021.

We are currently sitting on over 50 million of cash EBITDA.

Undrawn senior secured credit facility and expect to monetize several of our larger investments over the next several quarters.

Company continues to have a green light from the SBA for the submission of an additional S. B I see license to replace the existing license.

At this point I'd like to ask Steve provide more color on the financial results.

Thanks, Joe Good morning, everyone.

Total investment income was $5 7 million during the fourth quarter of 2020.

Compared to $9 6 million for the fourth quarter 2019.

Interest and fee income declined by $3 2 million from the comparable periods.

From a decrease in debt investments outstanding.

Dividend income decreased by <unk> 4 million for the comparable periods, noting that the company's investment in capital. The senior loan fund two was wound down during the second quarter of 2020.

Total expenses for the fourth quarter 2020 were $5 7 million a decrease of 2.0 a million from the fourth quarter of 2019.

Interest and financing expenses declined by $1 4 million, resulting from the 59 million repayment of SBA guaranteed debentures and $2 2 million of repurchases of our 2022 notes during the third quarter of 2020.

Net realized gains totaled 0.6 million or <unk> 23 per share for the fourth quarter 2020.

Compared to net realized gains of $1 2 million for the same period in 2019.

Net unrealized depreciation totaled 12000 for the fourth quarter of 2020.

Compared to net unrealized depreciation of $3 1 million from the fourth quarter of 2019.

The net increase in net assets for volume, resulting from operations totaled 0.5 million from 20 cents per share for the fourth quarter 2020.

Compared to a net decrease of 0.1 million for the fourth quarter of 2019.

Net assets at December 31, 2020 totaled $108 9 million from $40 19 per share compared to 39.

Dollars 99 cents per share at September 30 of 2020.

At year end, we had $49 9 million in cash and cash equivalents. In addition, we had zero drawn and 25 million available on our senior secured credit facility with Keybank.

Also the company had SBA debentures outstanding totaling 91.0 million with an annual weighted average interest rate of 274%.

$72 8 million of fixed rate notes bearing an interest rate of 6%.

$52 1 billion of convertible notes bearing an interest rate of 575%.

The company's total debt to equity ratio at December 31, 2020 was $1 98 to one compared to 2.72 to one at March 31 2020.

Subsequent to year on the company repaid $20 million of SBA guaranteed debentures of which 6 million was due to mature on March <unk> 'twenty 'twenty, one and of which 14 million was scheduled to mature on March one 'twenty to 'twenty two.

At December 31, 2020, our investment portfolio included 36 investments with a fair value of $274 7 million the cost basis of $277 7 million.

First lien debt investments on a fair value basis at year end comprised 69% on the portfolio second lien debt investments represented 14, 3% and equity warrant investments represented 24, 8%.

Please refer to our fourth quarter Investor update on our website for additional information regarding the trends in our portfolio.

At year end, we have four debt debt investments on non accrual status from the cost basis, and fair market value of $37 5 million and $20 8 million respectively.

At this point operator, we would open the line for questions.

Yeah.

As a reminder, ladies and gentlemen to ask a question you will need to press star one on your telephone.

To withdraw your question press the pound key.

At least on violently compile the Q&A roster.

Our first question on income from the line of Christopher Nolan from Ladenburg Thalmann may begin.

Yes.

Joe in your comments in terms of monetizing investments in coming quarters, how much of that do you think is going to be your equity investments.

Hey, Chris Good morning.

Yes, that's a great question, we do have.

Several of our larger investments in the BDC.

<unk> engaged or engaging investment banks to sell or refinance and we do believe so.

Some of those will be our larger equity positions that are will monetize in this market because it's a do you have a strong small business. It's a good time to monetize in a lot of these management teams and sponsors are pursuing those.

Exit options that we do expect to monetize substantial portion of our equity in 2021.

Great.

In terms of debt pay downs.

Is the priority to pay down the SBA debt or would you.

Potentially if you had the cash balance redeeming the 2020 to be an option as well.

That's what that's.

This is Joe Steve is going to have a answer to my.

My all debt is a priority. So we're going to have a focus on the repayment of all debt. We do have a green light outstanding with SBA on of the opinion that the more debt, we repaid to SBA debt.

Closer we are to obtaining a subsequent spi see license there, but all day, it's a priority for us and as you can see we're monetizing a lot of assets and addressing our debt repay down in a very successful manner.

Yeah, Chris This is Steve.

Specifically I think we've still got capacity under our repurchase program that we put in place last year or two buybacks the notes and the convertibles. So we will still consider doing that in addition, we are evaluating alternatives for the partial or full call up to 6%.

Notes, which are callable. So we are we are in hand with some some some options to consider that we're actively reviewing those when considering the best way to push some of those maturities out to a later date.

Great final question is monetizing the investment portfolio, a more of a priority than you know a reinstating the dividend.

This is Joe dividends are always important we do need to address these mature.

Maturities that we were just discussing.

We're sitting on a lot of cash we've de levered nicely on a on a GAAP debt to equity ratio since the pandemic. We believe the best way to grow earnings is really true.

To reestablish a subsequent spi see license in the BDC.

You know leverage that up with with SBA low cost long term capital to grow our earnings.

But now we're very mindful that distributions are important.

And we're just trying to repurpose and rebalance the balance sheet you get a subsequent Sps see license and what would you add to that Steve.

That's good.

Okay. Thanks, guys.

Thanks, Chris Thanks, Chris.

And once again that follow.

Once a question star one one more on for questions.

Our next question will come from line of pilot Joseph from Jefferies. You may begin.

Hey, good morning, Joe and Steve Upgather doing well just two follow ups from me one on the credit side. It does look like non accruals ticked up but can you give us a sense for you know a broader portfolio performance in terms of revenue and EBITDA growth and how that compares to earlier in the year.

Yes.

Yeah. This is Joe.

<unk>.

A lot of our portfolio companies are in market and the.

Pursuing exit opportunities.

As you noticed we saw Burger flex.

That was a nice monetization that a company that really started to perform post pandemic and sort of re.

Reshuffled their their operations on their business and really began to improve earnings.

<unk> portfolio of companies.

Our improving a lot of them are seeking.

Transactions to monetize and we do believe that we sell a big portion of our portfolio, especially our larger positions in the BDC over the next couple of quarters.

Got it helpful and then I know on yeah.

Debt Paydown remains a key focus for you guys, but I'd be curious to get your thoughts on that on the new issue deal environment right now.

Yeah.

Yeah. This is Joe again.

<unk>.

Yeah, we had hoped to receive an SBA license in the BDC to replace the existing license in the fall of 2020 that did not happen. However.

However, the fall of 2020 in our private funds, we had probably one of the most active deployment quarters, we've ever had and we did seven deals.

Over $200 million of deployment very diverse deals mainly firstly had some warrants first line of warrants had some in our in our equity practice, we had some equity only buyout deal. So it's a very robust.

Market for small businesses. The pandemic has created a big dislocation from the small businesses and we are hopeful to get a subsequent SCLC license in the BDC to really begin.

Vesting again with the rest of the platform into these small businesses, but it's a very robust.

Environment and our private funds have really taken advantage of it.

Got it thanks for having me on an answering my questions.

Thanks Chuck.

And once again that sells for one for question.

And I'm not showing any further questions at this time.

Well. Thank you everyone for participating today, Steve and I are around all day.

Email us or contact us and we.

We look forward to answering any of your questions everyone have a great day. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

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