Q1 2021 First Eagle Alternative Capital BDC Inc Earnings Call
Good morning, and welcome to the first Eagle alternative capital of BBC Incorporated's, earning.
Earnings Conference call.
First the scope what the ended in March 31st 2021.
It is my pleasure to turn the call over to MS. Sabrina Rusnak Carlson of first Eagle alternative capital of BDC incorporated.
It wasn't the Carson you may begin.
Thank you operator, good morning, and thank you for joining US joining me on today's call are Chris Flynn President of the first seek alternative credit Terry Olson, Chief operating Officer, and Chief Financial Officer, first Eagle alternative credit and general, saying Chief Accounting Officer.
Before we begin please note the statements made on this call may constitute forward looking statements within the meaning of the Securities Act of 1933 as amended.
Such statements reflect various assumptions by first Eagle alternative capital of BDC 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 factors included in the section entitled Risk factors in our most recent annual report on form 10-K filed yesterday and the.
The other filings with the Securities and Exchange Commission, although we believe that the assumptions on which any forward looking statement are based on are reasonable any of the 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 on <unk>.
Do your reliance on these forward looking statements first Eagle alternative 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-Q were released yesterday afternoon copies of which can be found on our website along with the Q1 earnings presentation that we may refer to during this call.
A webcast replay of this call will be available until may 17th 2021, starting approximately two hours. After we conclude this morning to access the replay. Please visit our website at Www Dot S. E. A C. D D C dot com with that I'll turn the call over to Chris.
Thanks for bringing on good morning, and thank you for joining us on our earnings call on today's call I'll provide an overview of our first quarter results from portfolio highlights and then Terry will discuss our portfolio on the financial results in more detail.
Let's begin with our results for the quarter.
Net investment income for the quarter was the 11 cents per share compared with 10 cent dividend and 11.
Per share in Q4, NII continued to benefit from the management fee waiver that ended on March 31 as.
As a reminder, the management fee waiver constituted of <unk> <unk> per share impact to NII per quarter. It was intended to reduce the impact of shareholders as we exited and derisk. The remaining concentrated noncore positions. We've made considerable progress on our portfolio of transition on overall, we're very pleased with how the the portfolio has performed through the pandemic.
And a lot of the improvement and stability of our portfolio as <unk> communicated we have began to increase our leverage.
We were Levered at 0.0, 93 times at the end of the quarter.
96 times, if you take into account our unsettled trades at quarter end and we are targeting long term leverage levels of up to one two times by the end of 2021, we.
We expect this increase in leverage to be accretive to NII at the dividend at a level that what you believe will be in line with or exceed our current dividend.
Thank you one of our book value increased approximately three six per cent from $6.15 per share at the end of Q4, the $6 37 per share at the end of Q1.
Similar to Q4, we think it is important to highlight the contributors to the increase in our book value.
First the continued improvement in the broadly syndicated market similar to what you saw on Q4 lifted the value of our holdings on the Logan joint venture specifically on 11 cent per share positive impact of NAV this quarter.
We remain pleased with the overall credit quality across the 92 names and logan's $241 million of assets.
Non accruals within the Logan represent less than one percentage of the portfolio in Q1.
Second we saw overall increases in the portfolio related to certain equity positions in the wheels up TNK market America L and igloo.
Performance in all four investments remains strong and the increase in book value reflects the improved credit metrics the market multiples and aggregate the increase in these values of the equity represent a 7% increase of NAV.
Lastly, the overall improvement in our portfolio performance I mentioned earlier together with future further spread tightening in the market resulted in net appreciation on the rest of the portfolio of <unk> <unk> per share.
The 95% of our debt investments reported either the same or increase values in Q1 versus Q4.
Now lets delve deeper into the portfolio overall.
Overall of the portfolio continues to perform well amid the continuing impact of the pandemic.
Revenue and EBITDA levels and liquidity for most of COVID-19 impacted businesses continue to improved and in many instances have returned to or exceed pre COVID-19 levels.
Companies that are not fully rebounded continued to maintain good liquidity profiles, no significant amendments where necessary in Q1 related to COVID-19.
We did not add any new non accruals during the coder loadmaster was the only portfolio of company on non accrual.
While we did not exit any of our two remaining legacy of concentrated positions OEM on a glue each continued to perform in line with expectations.
Specifically with respect to OEM as the plasma from transaction consummated in Q4 to commercialize and distribute its technology to the market is proceeding well.
As a reminder of the principal consideration was on the form of deferred payments for several years contingent on certain milestones, including minimum annual payments for the first four years that will be use the service or debt and cover certain operating costs. The BDC retained all of the equity on the remaining business in Q1, we upsize the eight and a half million dollars first lien term loans slightly as planned to.
Provide short term transitional capital in connection with the sale transaction.
Second Eagle.
Eagle the largest single holding at the year end represented six per cent of our portfolio.
The company continues to form well the debt investment is marked at par and the equity position was written up this quarter, reflecting strong performance in the yen and the continued impact of spread tightening.
These two positions represent the last remaining of the 14 concentrated positions we held in our portfolio starting in early 2018.
As I noted earlier, we were pleased with our progress on exit any of these legacy investments and hence our comfort with proceeding with our plans to increase leverage.
Additionally, our directly on your pipeline remains strong the <unk>.
D. C continues to benefit from deal flow generated by first Eagle $5 billion direct lending platform.
Our growing platform benefits, the BDC by allowing the BDC to be more diversified positions, while also allowing the first eagle to ride more capital of the middle market companies the.
The first quarter of the year tends to be slower compared to year end, but nonetheless, the BDC may two new directly originated investments totaled eight 6 million of this quarter.
Further the BDC made $15 million of broadly syndicated investments and for companies that are not necessarily intended to be long term positions in the portfolio, but rather replace of the directly originated positions over time.
Separately, the where to direct to debt repayments at par plus of prepayment premium during the quarter.
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 our capital.
Our goal is to continue to diversify our investment approach as we grow the BDC portfolio in 2021.
Lastly, you may have seen it.
Okay.
Okay.
The meeting earlier this week the plan gives us discretion to buy back stock on open window should we feel it makes sense with that I will turn the call over to Terry.
Thanks, Chris and good morning, everyone.
First the some investment portfolio of highlights as Chris mentioned, we had an active quarter with six new several follow on investments totaling $25 million at a blended yield of six 6%.
Excluding the for broadly syndicated loans the blended yield on the new investment.
Seven 8% we had two notable realizations through the exit of our first lien positions at Neiman, Marcus and outlier technologies in Q1 of generating $62 million of cash proceeds.
Which included prepayment premiums.
On the March 31st our portfolio of $363 million up from $338 million at the end of the Q4 was above the 70% first lien senior secured debt 20 per cent Logan JV.
As a reminder of the Logan JV of 98% investing in first lien assets.
The remaining 10 per cent of the BDC portfolio was held in second lien subordinated debt and other non income producing of the equity holdings, including our restructured equity like second lien investment in the OEM.
The weighted average yield on our debt and income producing portfolio based on cost, including Logan was 7%, which was in line with the prior quarter Chris.
As Chris mentioned, we added no new investments to the non accruals.
In Q1 in total non accruals of the percentage of the portfolio at fair value and cost were $2 one per cent and three 7% respectively.
Moving to the financials for the quarter I'll highlight some of the components of our of $7 $2 million of investment income this quarter.
These include interest income of five 4 million, which rose slightly quarter over quarter as we go out of new names to the portfolio will experience them back experiencing some back ended the repayments would call protection.
Included in the $5 4 million as of $100000 related the prepayment premiums and $300000 related to accelerated the amortization of the OID.
Dividend income decreased this quarter to $1 6 million from two point was we are no longer receiving the dividend from our holdings you can see okay.
I'll get the net income in Q1 was related to the Logan.
Total expenses of the quarter were $3 9 million, which were down about $300000 largely due to higher costs in Q4 of associated with the write off of certain.
The financing costs related to our credit facility Amendment.
Yeah.
With respect to other items below the net investment income line.
The net realized losses for Q1 were the $3 1 million of one 9 million of these were related to the recognition of the full reserve on our equity holdings on Alex brands. So no now of the impact in Q1.
At $1.1 million related to adjustments to certain of our outgrows.
From a leverage perspective, we ended the quarter with the debt to equity ratio of point of nine three times.
We settled several trades post quarter end and made at nine point of made one of $9 1 million of new and follow on investment since March 31st.
We have ample borrowing capacity on our credit facility of an increased our 100 million dollar.
The facility to $125 million at the end of the quarter, we continued to grow and increase leverage towards our target.
From a from an unsecured debt standpoint, we're continuing to evaluate alternatives to refinance our $60 million of currently callable 2022 bonds.
Both of our current unexpected investment rating and overall lowering our cost of capital.
With that I'll turn the call back over to Chris.
Thanks, Terry overall this was another solid quarter for S CRD with steady NAV on credit improvement.
We again recorded positive results at most of our portfolio of companies. The economy has begun to open up over the last several months.
We made progress of Derisking the portfolio of attributed to outside of legacy positions originations remained strong.
<unk> confident in our ability to prudently increase our leverage profile to put us on a position to cover our dividend going forward without management fee waivers.
I would now like to turn the call over to the operator for Q&A.
Operator.
Thank you Sir and as a reminder, if you wish to ask the question simply press Star then the number one on your telephone keypad. If you wish to withdraw your question press the balance sheet.
Once again, if you wish to ask a question in the press Star then the number one on your telephone keypad.
The first question is from the lineup Lee Cooperman from Omega family Office. Your line is now open.
Thank you.
Good morning, how are you doing with Chris hope it will as well.
I think you've addressed.
First it but I just wanted to make sure I hear it right you feel of the dividend is sustainable.
After returning to a full C. Correct is that what you said that's.
That's correct.
Okay how.
How do you give.
Given the things as they exist today.
Tomorrow, but today.
How do you view, making additional loans versus stock repurchase.
You know given the the big discount the book value that the <unk>.
Discount seems to be justified by what we were earning on our book, but how do you view the rare.
Relative merits of repurchase versus growing the business.
Yeah. It's a complicated go go ahead Lee if you had a second question I didn't mean, it or I'm doing all of a.
And then on.
The repurchase of what is the actual order of magnitude that you would have available if you decided to do repurchase.
Okay perfect I think the second question first.
Under the current borrowing base that we have with I N. G. I don't believe there'd be any restrictions of the way that full access to the full $10 million to the extent, we elected to do that.
But the type of thing time for a $10 million is the size of the program.
Obviously would take time for us to do that.
Given our thinly traded the stock is so.
There shouldn't be any restrictions to the to limit debt with that said as you said, how do you balance of it as the balance because obviously the BDC has shrunk tremendously we're trying to turn that around and actually see growth, but we're trying to manage both shareholder expectations.
Making sure we're being good fiduciaries of capital and making capital available to make new investments of new loans, but also recognize that we still do trade at a discount to book.
One of the points, we tried to make the last quarter and I want to emphasize the here. There are other levers that we can pull here to continue to fix the equation, we had of fix the asset side of the equation first that's done for the most part we're debt players. So we never declare victory, but we feel very comfortable with the balance sheet the increase the leverage to cover the dividend.
Step two is moving forward.
Improving our improving of our rating and therefore lowering our cost of of.
Financing you know we have a set of bonds that are callable now way of another set that are callable on October.
As the asset side of the balance sheet continues to improve we continue to push for a for an upgrade which would substantially reduce our costs, which would be further accretive to the dividend and therefore shrink that gap between book and the Cat book and the NAV.
Net of stock price.
So the answer to the question is you haven't decided.
We haven't decided let's correct when we were looking at them.
You know on a case by case basis, but again my focus right now is trying to fix the liability side of the equation coupled with maintaining some growth in the existing investment, but I also do recognize that we're still trading at a significant discount and that's a good prudent use of capital.
As well.
The day to all three.
Actually two last questions given a full fee schedule.
For your compensation scheme, and the way you want to run the business in terms of the quality of credits you're investing in what is a reasonable return on equity is the target the words, which of the $6 and from change in book value.
On the way of the earnings.
Yeah, once we get the liability side corrected because right now of the cost of the debt stack is absolutely too high I wasn't saying it was on justified before the balance sheet was fixed but now that it steps we need to bring that down but we're still targeting the 90, 10% ROA I don't think that's substantially different than other bdcs than any other BDC.
Got you okay.
Very much.
I'll yield of the cole to somebody else.
Thanks Lee.
Thank you.
Your next question is from the.
Your next question is from the line of Matt Tjaden, hopefully when the James Your line is now open.
Hey, all good morning, and appreciate the time and apologies if I ask something that's been covered as I had the joined late first question I guess kind of per B any any high level commentary you can give on spreads in the structures versus kind of pre COVID-19 levels and what youre seeing in the pipeline.
Yeah sure Matt I appreciate the question, we didn't cover that in the script.
COVID-19 hits spreads probably gapped out two to 300 basis point the market is it.
You know become more competitive or of stabilize those spreads have come down.
I'd say now you'll probably still maybe 50 basis points of light from where you were pre COVID-19 levels, but I'd call. The market right now and of high quality senior secured deal you know LIBOR of $5 50 on our traditional transactions were probably LIBOR 600 of success on on our ABL transactions.
Okay.
I guess on.
On a more unrelated note just kind of look at the fair value to cost marks of the broad portfolio. So by my calculations I've got about.
Call It a buck 70 and just embedded.
Depreciation on the books any any commentary you can give on how much of that I know that obviously embeds like loadmaster and OEM, but how much of that is from what I might call. The the non non accrual book and any further NAV upside from that.
Yes can you take now does the yeah. This is Terry I'd have to get back to you with the math I had I had the bifurcated. The the answer to that question. You know ahead of this call. So maybe I can circle back with you on it goes.
There is a decent you know the only other name I would say where there is you're probably seeing that GAAP is with Matilda Jane.
And you can see that gap has closed over the last few quarters.
Based on its performance so that would be the only other larger area, where there is related to a specific name that I just thought I'd point out.
But I don't know the kind of ex split.
Okay Fair enough that's it from me I appreciate the time.
Thanks, Matt.
Yeah.
Once again, if you wish to ask the question simply press Star then the number one on your telephone keypad. The next question is from the line of Robert Dodd.
Cleveland James Your line is now open.
Morning, guys and the yeah. This is a weird morning, so I joined from a difficult from that side.
Lee actually asked the question, but on follow up on the on the target on the Wii.
I think of 9%, although we seem to be holistic per your strategy.
Cetera.
What do you think you're obviously well below that today.
What do you think is a realistic timeframe to actually get to that.
On the level of all of that we can hit 9%.
The valuation could potentially so what's the timeframe, where you think that's realistic.
Yeah, Robert it's of Great question, I wish I could give that to you, but unfortunately, we don't control all aspects of of the business per se. What we did control was the asset side of the equation.
We've worked tremendously hard to reposition the portfolio exit these facilities that didn't make sense.
The <unk> reduce our our concentrated positions. So now we feel like we've got an assets balance sheet that.
It can be financed substantially cheaper.
What do I need to make the the other part of the equation work, we need an upgrade you know where we need we need to be investment grade and definitely when you hit an investment grade status in the near term on the future.
That will enable us to substantially reduce the cost of our financings, which will be extremely accretive to our.
So the dividend.
To make that our ROE calculation.
That much easier but.
Unfortunately, I don't have a crystal ball on when that upgrades coming we're obviously, having conversations with the rating agencies as Terry alluded in his prepared remarks so.
We have as I said before bonds that are callable now way of another set that are callable on October I'm hopeful that we can get all the stuff wrapped up by the end of the year, but of course again, that's still subject to the.
On to the rating agencies as we sit here today is currently rated we could refinance the bonds of the savings, but I think from my perspective of like we've done enough to get that investment grade rating and we went on hold for that to take a bigger step down in the in the cost of debt once the cost of debt comes down obviously, the ROE of your equation of become substantially easier.
Uh-huh, maybe Robert Thank you, Okay. Robert Yeah, maybe just to put some numbers around of just order of magnitude.
The 50 basis points savings on the bonds themselves just on the rate perspective drives about.
The <unk> of annualized NII, just on 50 basis points. So.
You know you could you could potentially multiply that by three and that could come up to five or six cents per share on an annualized basis. If you can get the bonds down 150 basis points. So I'm sure you've done that math, but I just wanted to highlight that.
The type of two point, Thank you, yeah, I absolutely love.
Yeah.
Absolutely.
Yeah.
During the thanks for the question Robert.
I'm, sorry present best day no further questions. Please continue.
Oh, operator of that no more questions.
Yes, thanks, Robert but that was just okay perfect alright, well. Thank you. Thanks operator.
Before I make my final remarks, I'd be remiss, if I didn't highlight the fact that this was Terry's last earnings call with US I believe this is 44 in a row for him.
Well I didn't do all of 44 with Terry I can I can tell you I'm pleased that the heated all of line width with me.
I think of a of a better partner to help navigate the last few years. So on behalf of first Eagle I just wanted to say. Thank you. We wish you all the best we also appreciate the support of our shareholders and we look forward to providing you with an update in early August on our future results of hope everyone has a good day.
Feel free to reach out to Sabrina on myself, if you of any questions before them.
And with that this concludes today's conference call. Thank you for attending you may now disconnect presenters. Please standby.
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