Q4 2020 Stellus Capital Investment Corp Earnings Call
Good morning, ladies and gentlemen, and thank you for standing by.
At this time I would like to welcome everyone to the Astellas capital Investment Corp. Your end of 'twenty 'twenty results Conference call.
At this time all participants have been placed on a listen only mode. The call will be opened for a question and answer session. Following the Speakers' remarks. Please note. This conference is being recorded today Friday March 5th 2021, and it's now my pleasure to turn the call over to Mr. Robert Ladd, Chief Executive Officer of Astellas Capital Investment Corp.
Mr. Ladd you may begin your conference.
Thank you Holly.
Everyone and thank you for jobs for the call welcome to our conference call covering the quarter and year ended December 31 2020.
Joining me. This morning is Todd, let's consider our chief financial Officer.
Who will cover important information about forward looking statements and then I'll also cover an overview of our financial information.
Yes.
Thank you Rob.
I'd like to remind everyone that today's call is being recorded.
Please note that this call is the property of surplus capital Industrial Corp. Any unauthorized broadcast of this call of any form is strictly prohibited.
A replay of the call will be available by using the telephone numbers provided in the press release announcing the school.
I'd also like to call your attention to the customary safe Harbor disclosure in our press release regarding forward looking information today's conference call May also include forward looking statements and projections.
We ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these projections.
We will not update our forward looking statements unless required by law to obtain copies of our latest SEC filings. Please visit our website at www Dot Astellas capital Dot com under the public investors link or call us at seven three to 19 five for zero zero.
At this time I would like to turn the call back over to our Chief Executive Officer, Rob Ladd.
Thank you Todd.
The best year of certainly been challenging one for everyone.
Thankfully, but the numbers of arc from that remains healthy and that we've been able to operating remotely without interruption.
Our portfolio has performed well throughout the unprecedented pandemic and we would be.
Been able to significantly improve our liquidity and available capital position.
In addition, our net asset value has risen back about $14 per share.
For 2021, we've seen an increase in the investment opportunities and as the result is on a $58 million on the cost basis, thus far in the first quarter.
Since year end of portfolios increased by 43 million net of payoffs.
We'll begin by discussing the operating results followed by a review of the portfolio folio of including asset quality and on the outlook that Todd will cover our operating results now.
Thank you Rob.
For fiscal year 2020, we covered our dividend.
$2 14 to $14 <unk>.
Turning to the fourth quarter, our distributions of 25 per cent per share, which was declared in the third quarter were covered through net investment income of 26 per share and core net investment income of 28 per share.
Net asset value per share increased 86 during the quarter from $13 17 of $14 three due to the early declaration of the fourth quarter dividend of net appreciation on our investment portfolio.
We recorded a net realized loss of $7 7 million, primarily related to one investment which was offset by unrealized gains during the quarter of $19 6 million.
Due primarily to the reversal of previously recorded unrealized losses on the debt portfolio and unrealized gains on our equity portfolio.
Okay.
Over the last nine months, we've taken a number of steps to improve our liquidity and capital position. During 2020, we increased our bank facility by $10 million for $230 million amended the covenants to increase our maximum regulatory leverage to one five times net asset value.
And extended the maturity to September 2025.
In January 2021, we completed an institutional bond offering of $100 million of notes due in March 2026, the fixed rate of $4, 875%.
We used the proceeds to redeem our $48 $9 million of notes in 2022, the remainder to pay down on our bank facility.
We actively worked during the year decrease our unfunded commitments from $37 $5 million at the beginning of the year to $24 $2 million today.
Finally, we've continued to provide the equity capital to our second Spic's subsidiary, which allows us to draw of low cost 10 year debentures on acute of one basis.
With that I'll turn it back over to Rob.
Thank you Todd.
Now I'd like to cover the following the area and so I'd like to date review ports.
Portfolio of asset quality, and then turn to outlook.
Relative to the likes of day since our IPO in November of 2012, we've invested approximately $1 $7 billion and over 130 companies.
Received approximately $983 million of repayments, while maintaining stable asset quality.
Life to date, we paid over $161 million of dividends to our investors, which represents $11 per share to an investor of our IPO in November of 2012.
Relative to the portfolio and asset quality, we ended the year with the investment portfolio at fair value of $653 million across 66 portfolio companies. This was up $629 million.
Up from $629 million across 63 companies back a year ago in December 30, <unk> of <unk> 19.
During 2020, we invested 152 million and 10, new <unk> existing portfolio of companies and received the $129 million of repayments for a net portfolio growth at cost was about $23 million for the year.
Our portfolio of companies.
Continue to be weighted towards secured lending at floating rates. Therefore at December 31, 97% of our loans for secured in the 93% were priced at floating rates.
Let's move to coincide with greater first lien unitranche lending.
We continue to maintain good diversification for the largest industry sector at 17% of the total or.
Our average investment per company is about $10 million and our largest investment is 21 6 million both numbers measured at fair value.
And of the 66 portfolio of companies 62 are backed by private equity firms.
Overall, our asset quality of stable at a two point of <unk> on our investment rating system or on plan.
13% of the portfolio is rated a one of our ahead of plan and the.
Approximately 11% of the portfolio of market investment grade of three or below.
No.
And then relative to the non accruals, we had three of loans on non accrual, which comprised 1% of fair value of the total loan portfolio.
Now turning to outlook, so as I've said in the past part of our strategy has been to index on the equity of our portfolio of companies and the modest way that enable to generate realized gains sufficient to offset losses over time.
As the business has matured over the last seven to eight years, we began to see what see somewhat regular realized gains from the portfolio.
During 2019, we generated $19 6 million of net realized gains and those gains were helpful. On offsetting approximately $10 billion of real losses realized losses during 2020.
Like the day, we generated net realized gains of $8 4 million.
Beginning on the fourth quarter, we began to see a significant increase in our actionable pipeline.
As I mentioned previously since year end, we funded $58 million of cost and for new portfolio of companies.
One repayment of $14 8 million.
We've identified likely fundings of approximately $28 million for the balance of this quarter. So therefore on the month of March.
And are wary of approximately $25 million of potential repayments over the next 30 to 60 days.
Well with that opened up for questions.
Thank you of how you may begin the Q&A session. Please.
Thank you so much ladies and gentlemen, if you would like to ask a question. Please signal of a pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure give me a function of turned off for your signal to each of our equipment again net of <unk> wanted to ask a question on our first question today will come from Christopher Nolan with Lindenberg Thalmann.
Hey, guys.
Good luck.
I guess the cod could track the as I recall that was on non accrual last quarter and still longer there is a fair read of it for its back on accrual.
Hi.
Well, we've got we've got a preferred equity position.
And that's been it's been written up the Rob you may want to address it more slowly than that.
Yes.
The two things that happened one.
There is no sort of about $1 million five and on the equity preferred equity position for for the.
The equity position of written up based on really outstanding performance since the summer and the loan amount was put on accrual.
So that's the task on non accrual.
Okay.
The question is more strategic.
Gratulation for on the investment grade offering, but given the coupon is so low and given the risk of inflation coming back.
And given that you guys have relatively low leverage ratios is there a temptation to actually put on more investment grade debt and we use the revolver of less going forward. That's it for me. Thank you.
Yes, it's a good question, Chris so on our revolver, we borrow at the margin at $2 75 per cent and think about the.
On the fees associated with other have already been paid so that's the marginal cost.
And the bond offering which was attractive at $4 seven eighths and placed on sales while it is the little over 5% all in costs. So additional bonds certainly the more expensive than the bank facility.
<unk> got the right mix currently in terms of both fixed rate and floating rate of one.
The ability structure, and but having said that if we saw bond yields come down even more from the $4 seven eights, we might look at debt in a modest way.
Great. Thanks, Rob.
Thank you Chris.
Thank you and our next question will come from Robert Dodd with Raymond James.
Hi, guys congrats on all.
On the quarter on that and then maybe back of it.
On the.
The pipeline of Rob.
You say, you're seeing increased opportunities you funded a lot of Debbie.
How many of those.
Ill put unities that looked like they could close this quarter.
Richard.
K duo attention so to speak of in Q4, I mean is the pipeline continuing to we fill in Q1 or is this kind of spillover from Q4.
Yes, so rob.
But I'd say that it's pretty constant pipeline and.
I'd say, it's something's closings in the first week of March.
We would have likely seen it in November or December.
Perhaps his latest January so there is the gestation period here so.
But again, we're seeing lots of interesting opportunities one thing. So we would continue we would expect this to continue.
And.
Probably some pent up demand from an M&A perspective, certainly coming out of Covid.
And then also interestingly.
Historically about half of what we looked at was FDIC qualifying.
And.
If it's helpful over the last in the fourth quarter and including what we're doing this quarter Rob.
For the 80% of what we're closing as the Suse qualifying.
This is very helpful because of our second margins.
That is very helpful on the FDIC has.
The cost of capital as well.
Rob.
Thanks.
One of the just to kind of flip you gave us some color on repayments of over the next 30 60 days, possibly payments.
They are very hard to predict.
But can you give us any color on kind of how you feel that may flow through the course of the of do you expect it to be of high repayment yeah.
And then obviously that was the balance where the <unk> seen that a lot of opportunities.
To offset that.
Can you give us any color on the island and I guess, what I'm getting.
Over the course of the year do you expect the portfolio to two.
To grow.
For the.
Round of little button and come out.
<unk>.
Yes, yes.
So again hard to predict the future, but that our goal this year with after the.
Fundings of this quarter, we finished up the month of we're in.
We would expect our portfolio to be roughly $700 million and our goal. This year is to get that the $800 million by the end of the year. So we would expect.
Additional investments net of repayments.
We'll probably grow the portfolio of close to $100 million this year.
On a lot of that will kind of an Sps the finances.
Got it.
That hum.
For the Gulf.
On the just the last kind of on.
On this the the quality of the the deals you see.
When obviously secured unitranche et cetera.
Is leverage starting to rise of those deals is a structure of starting to weaken or how is that how is that going given given the amount of cash.
The pent up end of May.
The company.
Yes so.
The good news is debt.
First almost everything we're looking at is personally in the tranche.
Casey we see an interesting second lien. So you may see us sort of in one or two of those might come forward, but most of everything we're doing now is in the first lien unit tranche.
The leverage quotient of stayed the same.
And all of that Leverages of the low as three times.
We looked at something Thats in the morning, there was under three times and then you know as high as high force, but on average around four times EBITDA multiple so leverage has not changed.
And then the same structure, we've always had equity checks approximate 45% to 50% of the capital structure.
And if the business is being purchased for let's say 12 to 13 times debt.
The leverage quotient hasnt changed but debt equity component is much higher.
So so again it could be in AR.
Very extensive business. It's the purchased for 12 or 13 times on our leverage might be for and the Delta is being covered by equity so a much larger percentage of the capital structure.
And then we continue to have sort of serious covenants on all of the lending we do and so good news on our market, that's not changed and we don't expect it to change.
Yeah.
I appreciate all of that tolerant and debt.
For the rest of the year. Thanks.
Yes, okay. Thank you very much Rob.
Thank you and next we'll hear from Ryan Lynch with K B W.
Good morning, Hey, good morning, Thanks for taking my questions and really nice quarter guys.
My question I had was of the roughly $20 million of unrealized gains that you guys recorded this quarter.
Can you give us the ballpark breakdown of what percentage of that was driven by.
Recovery of previously recorded unrealized losses on debt investments versus.
The upside that you recorded.
On an unrealized gains on your equity portfolio.
Yes, Brian of side I'll cover that so.
Of the 19 about $19 million of unrealized gains roughly $10 million of it was related to the reversal of unrealized.
Unrealized losses previously for the for.
Primarily related to <unk> so.
With that realization.
We had about a $2 million pickup from that and then the remainder of it is the debt was up a little bit with respect to.
The spreads generally and then the rest of of the majority of it was on our equity portfolio, where we had had.
<unk>.
One investment made up of about half of that and then the rest I would say or most of them are under $1 billion, but just kind of across the board in may of any invest in the equity portfolio. They were written off.
Okay, and maybe I might.
I'd add to that line so it's the.
Some spread impact on our model, but more company specific.
In terms of either equity appreciation of our realization as Todd said like for <unk>, which was sold in November.
Okay.
Understood.
Rob.
And then maybe kind of a higher level question.
As you all you know over the last several years per our prior to Covid I think you are all well aware of how.
Far back the last credit cycle was in I think we're investing as such.
The credit cycle coming.
Now that the 2020 happened with the frequency of our credit cycle. It seems like the.
Of the economy is now on a little bit of an upswing.
As the economy gradually recovers and reopens.
Does your investment philosophy change at all of of how you approach the market in 2018 2019 versus how you're approaching it in 2021 in terms of.
Either targeted sectors, you guys are focusing on or just where you are willing to go into the capital structure.
Yes, so I would say that our investment philosophy of approach is really not changed.
The reason I'd say that is the the characteristics we're looking for in companies.
<unk>.
Some of the days it would have been the best of times.
And one of those that we're looking for is.
On this business again the sector survive the downturn in the recession. So that's our initial.
Underwriting screening is can the company survive the recession and so as an example would be looking for a business that has.
The low maintenance capital expenditure some of it can change the cost structure quickly in response and we saw that in the number of the businesses at the outset of Covid last year, and then of course of the things came back.
They were able to ramp up the other way the so I'd say, a very open minded to sectors in the approach.
But if itself, although a lot of characteristics, we look forward, but but I'd start with the how does this business day during the downturn.
Okay understood.
Kind of on that note.
Thanks for your seasonality.
That's the philosophy at the core really Hasnt changed.
For the driving force behind so many more of your investment per day.
Being eligible for the debt as the ICD versus in the past.
Yes, so I'd say, it's somewhat of a natural flow of service could you know we operate the national business and are active with.
As many of the 100 sponsors and maybe a onetime 50 yourselves. So all over the the sponsors all of the country and the cash.
The investing are all over the country.
And in all kinds of sectors and frankly in all kinds of sizes other than I think it's too large we would probably not get the.
So that natural flow that we see throughout the year.
Currently it's producing more and the FDIC qualifying way.
So I'd like to say, we targeted it but but it's more naturally coming out of the flow. We're seeing now implied in the Sps on qualifying investment.
Does the kind of a nominal basis it would have a lower than on higher EBITDA level, but we're still seeing the EBITDA levels in the Emirates.
Area that wed like to see them.
So anyway that natural flow is helpful and when you see a lot of opportunities and I would say if it's also how force.
If we're looking at something Thats, spic's qualifying or not.
The cost of capital for Spic's financings.
So it might be more geared for that.
But the <unk>.
Rob broad opportunity set and Fortunately, it's more skewed to that level of today one of the thing I'd say debt. We also looking for businesses as debt.
The real growth profile.
Which is true for like the lower middle market private equity generally.
And so these higher growth companies with low maintenance capital expenditures, if you will.
They perform in the third point.
They will of de Levered and both on absolute and relative way in a couple of years and won't be refinanced out. So that's another one of the the ingredients we look for in the financings that we do.
Okay, that's really helpful background.
Color on volume on that market.
Those are all my questions today, I really appreciate the time and nice quarter guys.
Yes, thank you very much.
Thank you and at this time, we have no further questions in our queue I'll turn the conference back over to our speakers for any additional or closing remarks.
Okay nothing more here, we very much appreciate everyone's support and we'll be back with you in early May to report on the first quarter. Thank you very much.
Thank you and this concludes today's call. We thank you for your participation you may now disconnect.
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