Q4 2020 First Eagle Alternative Capital BDC Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the first Eagle Alternative capital BDC, Inc. Q4, 'twenty 'twenty earnings Conference call. At this time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
It's a good question day in this session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you have.
Why any further assistance please press star zero.
I'd now like to hand, the conference your speaker today there'd be no restaurant Carlson General Counsel of first Eagle Ultra net of capital V. D. C. Please go ahead ma'am.
Thank you operator, good morning, and thank you for joining US joining me on today's call are Crisp Flynn, Chief Executive Officer, and Terry Olson, our chief operating and Chief Financial Officer before we begin. Please note that the statements made on this call may constitute forward looking statements within the meaning of the Securities Act of 19.
Three as amended.
Such statements reflect various assumptions by first Eagle alternative capital P. D. C concerning anticipated results that are not guarantees of future performance and are subject to known and unknown uncertainties and other factors that could cause actual results to differ materially from such statements.
The uncertainties and other factors are in some ways beyond management's control and include the factors included in the section entitled Risk factors in our most recent annual report on form 10-K filed yesterday and other filings within the Securities and Exchange Commission.
Although we believe that the assumptions on which any forward looking statements are based on are reasonable any of those assumptions could prove to be inaccurate and as a result, the forward looking statements based on those assumptions also could be incorrect you should not place undue reliance on these forward looking statements first eagle on.
Turning to capital undertakes no duty to update any forward looking statements made herein and all forward looking statements speak only as of the date of this call our earnings announcements and 10-K were released yesterday afternoon copies of which can be found on our website along with our Q4 earnings presentation that we may refer to during.
This call.
A webcast replay of this call will be made available until March 15th 2021, starting approximately two hours. After we conclude this morning to access the replay. Please visit our website at Www Dot F E. H E. B D C dot com with that I'll turn the.
Call over to Chris.
Yeah.
Thanks, Brian.
Good morning, and thank you for joining us on our earnings call on.
Today's call will provide an overview of our fourth quarter results. Some portfolio highlights and then Terry will discuss our portfolio on financial results in more detail.
Let's begin with our results for the quarter net investment income for the quarter was <unk> 11 per share compared to a <unk> 10 dividend at <unk> per share from Janssen.
And then as Q.
Q3.
NII continues to benefit from the management fee waiver that will continue through Q1 of 2021.
As a reminder, the management fee waiver adds <unk> <unk> per share on NII per quarter. It was intended to reduce the impact to shareholders as we exited and derisked, our remaining concentrated noncore positions.
This management fee waiver has supported NII over the past year, we've made considerable progress on our portfolio transition on overall, we're very pleased with how the portfolio has performed through the pandemic.
We are currently Levered 0.093 times.
And a target long term leverage level above one two times by the end of Q2 2021, we expect this increase on leverage to be accretive to NII at this level and we will believe will be in line with or exceeded our 10% dividend while paying on the management fee.
In Q4, our book value decreased approximately one 6% from $6 25 per share net Q3 to $6.15 per share at the end of Q4. It is important to put this modest change in Q4 and context of three other developments.
First as you may have seen in our 8-K filing from late December we were successful in completing the sale of two principal businesses of OEM.
The de risking of disposition resulted in a significant decline in the value of our equity like second lien position compared to our holdings at the end of Q3 does that a 41 cents per share impact on our book value.
I'll provide some additional color on this later on the call.
Second the improvement in broadly syndicated loans lifted the value of our holdings in the Logan joint venture specifically on <unk>.
<unk> per share positive impact on the Logan joint venture this quarter, we remain pleased with the overall credit quality across the 92 names in Logan is $254 million of assets.
Non accruals represented less than 1% of the portfolio in Q4.
Lastly, the overall improvement in portfolio performance I mentioned earlier together with further spread tightening in the market resulted in appreciation on the rest of our portfolio of <unk> 12 per share excluding OEM, 90% of our portfolio companies reported either the same or increase value in Q4.
Now, let's dive deeper into the portfolio.
As noted earlier the portfolio continues to perform well amid the continued impact of the pandemic.
Revenue on EBITDA levels for Covid impacted businesses continue to improve and in many instances have returned to or exceeded pre COVID-19 levels.
The company does not companies that have not yet rebounded continue to maintain good liquidity profiles.
The draws remained muted this quarter and median leverage through our securities from the portfolio decreased from $4 eight turns to four three turns quarter over quarter.
We did not add any new non accruals during the quarter loadmaster as the only portfolio company on non accrual.
Smart towards a business centered on sponsoring on organizing high on travel and vacation tours was significantly impacted by Covid.
Restructuring in Q4, and subsequently removed from non accrual.
The company has emerged from chapter 11 in December after we reached an agreement with our sponsor on a balance sheet restructuring that included approximately $10 million of capital support.
Evenly among the lenders on the sponsor.
Our short term loan <unk> and other modifications smart towards is performing as expected and is beginning to see some earlier than expected traction with booking activities for the second half of 2021 and 2022.
We also continued to make progress on our goal of exiting our derisking the remaining concentrated positions.
The sale of the two principal businesses of OEM allowed us to meaningfully reduce our exposure to this credit which previously represented at our single largest position.
This has been a priority and will contribute importantly to the ongoing efforts to diversify our portfolio on the first lien positions in sponsor backed companies.
Consistent with our strategy since the end of 2014 as we've mentioned on our last call. We had completed a restructuring of our holdings in OEM at the end of Q3.
This resulted in returning a portion of our holdings to income producing status beginning in Q4.
We upsized, our $7 $5 million first lien term loan slightly at the end of 2020 to $8 $5 million to provide short term transitional capital in connection with the sale process.
The 8-K that was filed provides additional details on this transaction, but in short the consideration for the sale of one of the business. The plasma therapy was in the form of deferred payments that will take place over seven year on several years contingent on certain milestones, including minimal annual payments for the first four years. These payments will be used to service our debt and cover.
Certain operating costs.
The sale of the other business, which was based in Pennsylvania from a minority investor will not result in any cash consideration.
Our first and second lien term loans remain in place after completing the sale.
We retained all of the equity of the remaining business and we'll be the beneficiary of the aforementioned book.
Deferred payments.
After investing an oem's technology for several years, we are pleased to have found the right partner in plasma from them to commercialize and distribute this through the market.
So U K market at 5% position, which had been on the portfolio. Since 2010 was sold in December to a lease up trust.
We received $10 $7 million of cash at closing plus a $5 $8 million subordinated seller note with an 11% yield comprised of 8% cash pay and 3% Pik.
And warrants on the business with nominal value our sub debt position represents one 8% of the portfolio at fair value.
<unk> continues to be one of our top performing credits during the pandemic.
Glue the largest single holding at year end represents six 4% of the portfolio the cash.
But it continues to perform very well our position is marked at par up from 95% of par in Q3, reflecting improved performance and the overall effect of spread tightening.
After the TNK transaction only two of the 14 concentrated positions. We held early 2018 remained on the portfolio.
I am an igloo.
And during 2020, we added 15, new direct lending investments to the portfolio with an average hold size of approximately $4 million.
We also increased our first lien exposure, which includes the company's investment in the Logan JV to approximately 90%.
Our direct lending platform in the market in general has seen a pickup in both new business as well as M&A activity and our existing portfolio companies during the quarter.
The BDC continues to benefit from the deal flow generated by first Eagle is $5 billion direct lending platform and this provides more opportunities for diversification.
We added eight new investments in Q4 totaling $23 million.
Since the beginning of the pandemic first eagle as direct lending platform has remained robust and we continue to provide us with investment opportunities.
We continue to be very selective about where we deploy capital in a very disciplined about sticking to our strategy of investing in first lien highly diversified positions in select industries, where we have the expertise and the sponsor to be supportive partners. Our goal is to continue to diversify as we grow the BDC portfolio in 2021 with that I will turn the call over to Terry.
Thanks, Chris and good morning, everyone.
First from investment portfolio highlights Chris Chris.
As mentioned, we had an active quarter with eight new investments and several follow ons totaling $31 million for a blended yield of seven 9%. We also had four notable realizations, Chris mentioned generating $34 million of cash proceeds that included the exit from <unk>.
First lien positions sooner act simplicity financial.
NCP investors on our equity holdings and see okay.
As of December 31st our portfolio of $338 million was invested 69%.
First lien senior secured debt, 20% Logan JV as a reminder, the Logan JV is 97% invested in first lien assets.
The remaining 11% of the portfolio was held in the second lien second lien sub debt on the other income producing and equity holdings.
Weighted average yield on the debt and income producing portfolio based on cost, including Logan was seven 1% a modest increase over prior quarter Chris.
Chris mentioned.
No no no.
<unk> added to non accrual in Q4, and the non accruals as a percentage of our portfolio at fair value and cost.
Two 2% from three 9% respectively.
Moving on to the financials for the fourth quarter I'll highlight some of the components of our $7 $5 million on investment income this quarter.
These include interest income of $5 1 million, which was up.
Half of million dollars quarter over quarter as we added several names to the portfolio are all experiencing some back ended repayments.
Included in the 5.1 of interest income of $100000 related to prepayment premiums and approximately $300000 related to accelerated amortization of OID.
Dividend income decreased this quarter to $2 $2 million due to a smaller dividend from <unk> that was paid in connection with the closing on the sale.
Logan dividend contributed $1 $6 million to the dividend income in Q4.
Total expenses for the quarter were $4 2 million, which were flat versus Q3.
Slightly higher borrowing costs, which were associated with the write off from certain deferred financing costs related to our credit facility Amendment. This quarter were offset by lower professional fees.
With respect to other items below the net investment income line on net realized gains of $1 6 million in Q4 was largely related to the gain on the <unk> transaction.
On a realized loss from the smart towards restructuring, which was for accounting purposes only.
Each of these were already reflected in our Q3 now and as a result, they had a limited impact on the NAV change in Q4.
From a leverage perspective, we ended the quarter with a debt to equity ratio of <unk> 93.
Additionally, we have ample borrowing capacity on our credit facility to continue to grow and increase leverage towards our target Chris mentioned through the first half of the year.
Where we are given the risk given where we are with the portfolio risk overall.
As a reminder, we mentioned on our last call that we completed an amendment and extension of our senior credit facility.
In October which included a commitment of $100 million of the option to increase the facility up to $200 million. We're currently on the process of increasing our commitments to $125 million.
Notable changes associated with this amendment included the extension on the revolving period to October 2023, a reduction on the asset coverage test from 165% to 150% a modest price increase to LIBOR plus 300.
So from an unsecured debt standpoint, we continue to evaluate the market potential to refinance our our $60 million of currently callable bonds in light of our current unexpected investment rating.
We believe the diversity and flexibility of our capital structure structure continues to be a strength of the challenges presented to all in 2020 remain but to a much lesser extent, we have ample capacity to borrow to fund new investments.
Provide follow on to our existing portfolio of companies.
With that I'll turn the call back over to gross.
Thanks, Darren overall this was a good quarter for CRD, we continue to see positive trends on our portfolio companies as the economy has begun to open up over the last several months we.
We have derisked the portfolio with changes to the outsides legacy positions.
We have seen an uptick in deal activity that will help drive additional growth in the coming months. We believe this has put us on a positive position to cover the dividend without a management fee waiver beginning in Q2.
We remain focused on the last two remaining concentrated names and on competent in our underlying portfolio and our go forward strategy.
With that I'll turn the call over to the operator for questions.
Thank you as a reminder to ask a question you're on mute the press star one on your telephone to withdraw your question Pester Pankey. Please standby, while we compile the Q&A roster.
Our first question comes from Paul Johnson with <unk>. Your line is now open.
Good morning, guys. Thanks for thanks for taking my questions. This morning.
Sure.
The on the Logan JV.
Just.
It was kind of going back and looking at some of the numbers I believe in the first quarter of last year. When it took a fairly sizable write down I believe the assets were like roughly 86% of cost.
Fair value or cost.
This quarter, it's about around 96% or so I think if I'm looking at that right.
And obviously the equity investment took a little bit more of a write down.
Well on is still at it held at a discount.
Point.
How do you guys feel about further potential recovery in the in the <unk>.
As to the Logan JV.
Paul This is Terry thanks for the question.
You've got the numbers are directionally right unrealized.
On the unrealized loss within Logan at 12, 31 was about $9 6 billion. So <unk> portion of that would be just under $8 million.
Low market continued to be strong in.
In Q1 so.
To date, we've seen.
We've seen the price was run a little further from 12 31. So we were at this point in time, we would expect to see a little bit of uplift on the NAV within the Logan portfolio.
No no credit concerns at this point that would.
Give us any pause.
Could drive any material change in NAV, there is still obviously.
Three or four weeks left in the month here and provided the markets change I would say that the direction has been positive. So we should continue to close some of that GAAP.
Okay, great great.
Great and then.
On the on the yield of the JV.
If I look back.
Roughly a year ago, maybe a little bit more I mean, it was basically low double digit yield coming from the JV Covid happened and obviously had.
<unk> had its issues for everyone and help to reduce.
Reduced the yield on that portfolio, it's at seven 6% today.
I'm just curious what do you think that that the JV can generate I guess long term.
What type of yield and maybe how long do you think it would take to get to get you there.
Sure I think the way to look at Logan, maybe just trend yields on cost maybe just translated to now to make it a little simpler so $68 million a day.
<unk> NAV and about one six to $1 7 million a quarter of dividend income.
That's about a 10% yield on NAV, we've held steady for the past couple of quarters I would anticipate the portfolio to be able to generate 106 to one eight per quarter of dividend income for TCR D, which would equate to a 10% yield on the NAV and similar level.
You mentioned, the 76 related to cost.
We will probably grow the portfolio modestly again, it represents 20% of the overall book.
I still think there's room to deploy.
Some capital so I would anticipate over the next few quarters to two expected on that $1 six to one eight range from income producing standpoint.
Okay.
Thanks for that and then.
My My last question was just around leverage at the BDC.
Obviously as we're moving past the credit issues and you guys feel good about.
The performing portfolio.
On the economy recovering and as he said you know you're seeing good activity.
Pick up for your pipeline this year.
Do you still look at the leverage target leverage range of about 1.1 on 1.2 is what youre comfortable with today or do you think that could potentially move higher.
Do you look at that.
Hey, Paul its Chris I appreciate the question.
Yeah, we're still comfortable at net call at one one to one two range.
Again, as we said upfront.
We've been comfortable with that number.
Earlier, its just the fact that the underlying.
Portfolio.
Opinion didn't didn't support that now that we've transitioned out of these names to the portfolio substantially more diversified.
Much more comfort in moving those levels up to the appropriate to.
To that range and as we said on our call moving to leverage that that level will enable us to still cover our dividend and.
Pay the management fee going forward.
Okay, Great. That's all from me thanks.
Thanks, Paul.
Thank you.
To ask a question you will need to press star one on your telephone our net.
Question comes from Robert Dodd with Raymond James Your line is now open.
Hi, guys.
First of all thanks for the presentation by the way I've got a question about price sort.
Slide 18.
That's basically five assets that from 2015 or earlier that is still remaining hasnt been on their lives, obviously, OEM loadmaster and spot towards the three of those equally you mentioned as much capital as well I mean, if we look at exiting merchant capital they seem to be performing pretty.
Pretty well, but there are six or eight years old now, 11% I mean, what's the probability that those get refinanced.
Above average yields.
On the impact on earnings obviously.
Those who did get refinanced symptoms or sales big position, obviously, so what's the outlook for those two assets from lack of a better term, leaving the portfolio.
Yes, nothing we can comment right now as it relates to specific actions being taken we'll just say both credits are performing we recognize igloo as a concentrated position. It's also high yielding.
From my perspective I'd rather.
Exit the facility continued to diversify the program and potentially then address the question that Paul had earlier do you want to take leverage up slightly higher so.
To the extent it does get re slide are repaid.
We feel we'll be able to offset any any contraction in yield.
Either through adding more names on the existing portfolio or are taking the fact that the concentration has been reduced and move leverage more.
Higher if needed.
Got it got it.
What are your equity successes like wheels up.
<unk> got an unrealized gain and that looks like that getting taken out by its back right now.
Is that all in the process.
Mark at 12, 31 does that take any of that into accounts or is that just.
That was I think creek.
<unk> announcement right actually.
How should we you are right. There is some upside associated with that name to the extent that moving forward, obviously that transaction hasn't closed yet so we haven't taken that number up to two what the math would be but it's.
We've read that read the news, saying that you have had those discussions. So if that continues to move forward. Obviously that would result in some upside here for Q1 on Q2 whenever that transaction closes.
Got it got it and then flip.
Flipping to the liability side I mean have you mentioned the $60 million callable.
The <unk> the other one is until the end of this year.
But right now at 675 on the $60 million.
On the way from expires and you're paying the base management fee on assets associated with that.
Seven and three quarter kind of cost, which is higher than your portfolio you'd be on the water if that stays out on the other.
One as well.
What's the vs.
Why wouldn't you.
Cool.
And if you don't call it.
What.
Would it be appropriate maybe to ways to continue to waive the.
The management fee on assets funded with that given its cost is higher than your portfolio yield right now.
Yes, maybe I'll, let me take the first part of that as I mentioned in the remarks, we're I mean, we're we're kind of continuously looking at opportunities too.
Refinance that expensive debt and certainly the market conditions.
Our favorable, albeit a bit more favorable with the investment creating.
Label So.
We are we are looking at the announcement of these earnings and moving forward hopefully with a path to restore.
On our rating to investment grade, which will allow us the opportunity we think.
In light of the existing market conditions to reduce.
That cost significantly so we're balancing where we are today versus where we expect to be in the coming months, but we are active we would fully expect to.
Refinance both of them. This year I think 'twenty three bonds are callable at the end of October if my Memory's correct. Yes. The end of this year for sure Yeah, I would say listen it's front of mind from me, we're certainly as Chris talks about the math on the increasing leverage we certainly think one of the other levers to pull as addressing the cost to fill.
So I would say it's ongoing as it always is.
In this business.
Got it got it thank you and on the on the concept of a wave I realize that's a broad question.
You guys, but right now its shareholders. Obviously I think you probably will get it refinanced that hypothetically if it goes later in the year.
Has there been any discussion on why you think that because because frankly right now shareholders on losing money on those bonds.
The only person.
Entity, making money on that capital outstanding right now lets the advisor.
And the advisor has waste piece and it's done.
Right.
Shareholders' favorable steps, but would that be something that would be considered.
Yes, Robert this is Chris I appreciate the question.
We said upfront as we we were willing to waive the management fee is we wanted to work through and transitioned the portfolio. We believe that as you know.
Close to being done if you will or it's far far enough along where we're comfortable.
Moving on our leverage up we'll take that same analysis.
Terry said and have these conversations with the rating agencies to the extent.
We're able to obtain that investment grade rating I think youll see a substantial reduction in the costs of those bonds to the extent that doesn't come to fruition youll still see a reduction on the price of those bonds.
Plenty of bonds printed that you can see there well inside of this so for US. It's just a matter of time, it's not a question of assets.
It's just a question of when and I'd much rather do it and see a substantial step down with that investment grade rating, but if for some reason the investment grade rating doesn't take place.
We can still bring these bonds in at a much lower lower yield today than then.
But where they are just based on the current market data.
Got it thank you.
Thank you. This concludes the question and answer session I would now like to turn the call back over to Chris Flynn for closing remarks.
Thank you operator, we appreciate the support of our shareholders and look forward to providing you with an update in early may with our first quarter results.
Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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