Q1 2021 TCG BDC Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to D. C. G. BDC first quarter 2021 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 to ask a question. During this session you will need to press the start and the one key on you touched on the telephone.
And.
If he would go on operating assistance, Please press star and Zelle.
I would now like to hand, the conference over to your Speaker host Allison who Woodbury. Please go ahead.
Good morning, and welcome to TCG BDC first quarter 2020 on earnings call last night, we issued an earnings press release and detailed earnings presentation with our quarterly results a copy of which is available on D. C.
G BDC Investor Relations website.
Following our remarks today, we will hold a question and answer session for analysts and institutional investors. This call is being webcast and replay will be available on our website.
Any forward looking statements made today do not guarantee future performance and undue reliance should not be placed on them D.
These statements are based on current management expectations and involve inherent risks and uncertainties, including those identified and the risk factors section of our annual report on form 10-K that could cause actual results to differ materially from those indicated TCG BDC assumes no obligation to update forward looking statements and anytime.
With that I'll turn the call over to our Chief Executive Officer, Linda pace.
Thank you Alison good morning, everyone and thank you for joining us on our call. This morning to discuss our first quarter 2021 results. Joining me on the call today is our Chief investment Officer, Taylor, Boswell, and our Chief Financial Officer, Tom Hennigan.
I'd like to start by highlighting the continued strong momentum, we've established and our business or financial.
Results for the quarter, which Tom and I will detail later were solid and importantly, our portfolio's credit profile continues to improve.
Going forward, we expect that credit will continue to strength in alongside the macroeconomic recovery as we move further away from the depths of the health crisis and the U S.
Overall, we are pleased with our current positioning and are confident and our ability to generate and sustain attractive income from our shareholders.
I'd like to net I'd like to turn now to the financial highlights of the quarter.
We generated net investment income of 36 cents per common share and declared a total dividend of 36 cents.
This includes a base dividend of 32 cents and a force supplemental dividend.
And as we've noted before we expect earnings to continue to be well in excess of our 32 cent base dividend.
We ended the quarter with net asset value per share of $15 70 up 31 cents from last quarter for an increase of 2%.
Driving this increase was a combination of improving market yields and more importantly, stronger overall credit performance.
This marks our fourth consecutive quarter.
And then EV growth since the first quarter of 2020, and since then and net asset value has increased 11%.
Additionally, we repurchased almost $6 million of our common stock at an average discount of 22% of our net asset value.
This resulted in three tenths of accretion to net asset value.
We continue to be consistent active re purchasers of our shares.
Turning to the investment environment as we look forward the markets and which we operate continue to be very active and broadly speaking the economic environment is recovering rapidly from last year, a sharp contraction.
As Taylor will detail later broadly syndicated markets experienced an exceptionally strong quarter.
But our focus area and the middle market still provide compelling relative value and we continue to close on attractive investment opportunities.
Despite a competitive landscape our deal pipeline is robust both on our core markets and those adjacent areas of the credit markets, where we have deep expertise.
We remain focused on leveraging the competitive advantages that accrue to us from the breadth of the Carlyle platform to originate differentiated new business.
Our broad sourcing funnel allows us to be highly selective.
And as always we construct our portfolio to be defensive high quality and diverse the aim of wages predictable stable income generation throughout all market cycles.
I'd also like to take a moment to welcome Billy Wright, who joined our board of directors last quarter as an independent director.
Billy brings a great deal of experience and credit to our board and we're glad to have the benefit of his expertise as we continue to deliver on our key objectives for our shareholders.
I'll now hand, it over to our Chief investment Officer Taylor Boswell. Thank.
Thank you Linda.
And as usual I'll begin with some quick comments on carlyle's current macroeconomic perspectives, which we develop based on inputs from across our global footprint.
Keeping with the themes of the last year, our proprietary data again show sharp divergence across economies.
<unk>, which grew 3% and 2020 is evidenced sides and decelerating, but still solidly positive growth.
As its post pandemic catch up phase outs.
Conversely, European Lockdowns and generated a second quarter of economic contraction.
And the U S. As we expected the economy is accelerating significantly on the back of improved confidence and vaccine distribution reopening and massive fiscal stimulus and the latter of which is expected to boost household income by 5% of GDP. This year.
Our data suggest significant growth.
Versus both 2020, and 2019 and the most income sensitive spending categories.
Of course, with a 91% U S based investment portfolio.
Establishes a strong fundamental operating backdrop for the vast majority of our borrowers.
As the year has progressed we.
We have seen increased incidences of inflation globally after and the result of understandable, but ultimately overly conservative management decisions to take capacity offline in 2020.
These capacity constraints are combining with pent up demand to generate pockets of price spikes and shortages, especially and the industrial sector.
However at this time like policymakers. We also view most of these increases this transitory with a low likelihood of long term runaway inflation.
And the portfolio, we are monitoring for the effectiveness of price pass through mechanisms and put substitution and other management actions, which we expect will support continued strong credit performance.
Liquid leveraged finance markets have remained extremely active year to date with both the broadly syndicated loans and high yield markets posting their busiest new issue quarters on record and astonishing fact.
The reason is obvious to all here in today's low interest rate environment. The execution offered by these asset classes is extremely attractive to both borrowers and investors alike.
While we do not see and near term catalyst for these market conditions change, we are not concerned about operating effectively and they prove persistence.
In fact, we are pleased that our business is demonstrating sustainable performance through this period.
And this environment repayments across credit markets have picked up and will continue to occur as transaction velocity increases.
And this has been especially true on our M. C. F. One JV because larger EBITDA borrowers are more susceptible to rotation into liquid markets. However, our core middle market borrower base has seen a slower pace of repayment activity year to date.
Many of these assets were price and higher LIBOR environments, and do not offer significant spread savings as well as often possessing strong fundamental reasons to remain and private credit markets.
Meanwhile, we are as a business finding ample attractive new opportunities to deploy capital.
After the remarkable return of deal activity and the fourth quarter were pent up transaction demand from COVID-19 matched with owners desires to sell ahead of potential tax and regulatory changes one might have expected a material slowdown in Q1.
And in fact, we were extremely active on the originations front and the first quarter.
And $151 million across 10 borrowers at an eight 4% average yield.
This activity again comfortably outpaced 73 million and repayments and the period.
The remainder of our portfolio exits where tactical sales taking advantage of robust secondary market prices as part of our active portfolio management strategy.
All in the yield on our sales and repayments was approximately seven 8%.
The core secular drivers of our asset class remain intact, while the breadth and quality of origination available to us from the Carlyle platform allow us to maintain and grow our portfolio as may be required across the investment cycle.
At the same time, you will see we posted another solid quarter of credit improvement and earnings generation.
From an asset base income or credit perspective, we feel our business is on sound footing to deliver for shareholders and 2021.
As always thank you for your time and support.
Thank you Taylor.
Today I'll begin with a review of our first quarter earnings and I'll provide further detail on the portfolio and our balance sheet position.
And Linda previewed we had another stable quarter on the earnings from <unk>.
Total investment income for the first quarter was $41 million debt.
Down from 44 million and the prior quarter, primarily due to two main factors first a full quarter impact of lower average loan balance following the closing of our second JV in November.
And second and why.
The accretion and prepayment fees due to lower loan repayments and the first quarter.
This was partially offset by an increase in total dividend income from the <unk>, which increased due to a full quarter impact from Mcf too.
Total expenses were $20 million and the quarter down from $22 million last quarter from.
A largest component of the decrease was lower credit facility fees.
The result was net investment income for the quarter of 36 per common share or $20 million right in line with guidance. We provided during last quarter's earnings call.
On May <unk>, our board of directors declared the dividends for the second quarter of 2021, and total level of 36 per share that.
That comprises the 30 to regular dividend plus the <unk> supplemental.
Which is payable to shareholders of record as of the close of business on June 30.
Similar to last quarter as we look forward to the rest of 2021, we remain very confident and our ability to comfortably deliver the 30 <unk> regular dividend plus continue the sizeable supplemental dividends in line with the 4% to <unk>, we've been paying in the last few quarters.
Moving on to the performance of our two JV.
Total dividend income was $7 5 million.
Up from $6 five last quarter.
The increase was due to a full quarter impact of an mcf too.
On a combined basis, our dividend yield and the JV was about 10%.
And in line with the prior quarter.
Total assets at the Jv's were down from one three to $1 2 billion due to another wave of repayments that occurred in Mcf. One later in the quarter.
However, we've had positive momentum with new originations for that vehicle early and the second quarter.
Going forward, we expect stable aggregate assets yield and dividend generation from the two jv's similar to the first quarter's results.
On devaluations, our total aggregate realized and unrealized net gain was $15 million per the quarter. The fourth consecutive quarter of positive performance. Following the drop in March of 2020.
Similar to the last three quarters, we still valuations increase based on the continued rebound and market yields plus improving fundamental credits.
Using the same buckets have outlined in prior quarters, we again saw improvement across the board.
First performing lower COVID-19 impacted borrowers plus our equity investments and the Jv's, which accounts for a combined 70 per cent of the portfolio increased in value about $4 million compared to 12 31.
Second the assets that have been underperforming pre pandemic and which have.
COVID-19 exposure.
$5 million, marking the fourth consecutive quarter of stability or improvement for this group.
And final category is the moderate to heavier COVID-19 impacted loans.
We continue to see a rebound and actual results and improvement and recovery prospects for these investments.
Secondly, they also experienced a net $5 million increase and value.
Given we're still on the early days of a sustained recovery for some of these borrowers we continue to be appropriately conservative and our assessment of these credits.
I'll turn next to the portfolio and related activity.
We continue to see overall stability and improvement across the book.
Total non accruals were flat at $3 three based on fair value.
And as we sit here today, we don't see any additional loans at risk of non accrual.
The total fair value of physicians risk rated three to five indicating some level of downgrade since we made the original investment Inc.
Down again.
And this quarter by about 33 million and the aggregate.
Total amendment activity slow down meaningfully and the first quarter as we expected.
We had two material amendments that closed for borrowers specifically impacted by COVID-19.
The important point to note is that and exchange for Covenant relief.
<unk> adjusted significant incremental dollars to support the liquidity needs of each business.
I'll finish with a review of our financing facilities and liquidity.
We continue to be very well positioned with the right side of our balance sheet.
That said, we're always exploring various alternatives and both the private and public markets, particularly given the current issuer friendly financing environment.
Regarding $3 31 results.
Statutory leverage was stable at about one two times, while net financial leverage which assumes the preferred is converted and the risk metric we use to manage the business was again right around one turn of leverage.
So we're sitting close to the lower end of our target range of one <unk> and one four times.
Giving us flexibility to invest prudently and new attractive opportunities.
And regarding the preferred equity issuance from May 2020.
Our stock continues to trade well above the conversion price.
And as we previously noted this instrument remains a long term investment by Carlyle and our BDC.
So they're currently has no intention to convert.
With that back over to Linda for some closing remarks.
Thank you Tom.
I'll finish where I started and note the strong momentum and performance and our company that will continue to drive attractive and sustainable income generation for our shareholders.
We appreciate your support and thank you for your time. This morning, I'd like to now turn the call over to the operator to take your questions.
Thank you, ladies and gentlemen to ask a question you will need to press. The Star then the one key on your Touchtone telephone.
To withdraw your question press the pound key please standby, while we compile the Q&A roster.
And our first question coming from the line.
Melissa Wedel with Jpmorgan Your line is open.
Good morning, everyone. Thanks for taking my questions today.
And couple of interesting things this quarter and first of all was noticing that there are some second lien issuance and.
And that was a little bit elevated compared to prior quarters. I was just wondering if you could elaborate on sort of the relative value that youre seeing.
And on the capital structure. Thank you.
Hey, Thank you so much Melissa it's Taylor picking that went up.
I think that.
That doesn't represent any significant change in terms of our approach to originations and balance of the portfolio over time and maybe its just more reflective of.
The opportunities that we saw and liked and this particular period.
But what I would say to you is.
And our business, whether it's a.
Yes, it was sub asset class or product category or a sector.
Even when portions of the market and might comprehensively offer better or worse rail Val we're always really kind of looking for the individual credit investment and tender tend to find those that we like even those vertical so interestingly, while we have a little more second lien and origination.
And we really like those credits that we book I think the second lien market right now is probably comprehensively not as much of a source of relative value of other aspects of the market and so yes, I wouldn't I wouldn't read into that that we're doing deals we don't like rather we're finding investment conviction and end up.
And credits we know.
And like very much within those markets, even if the whole market has less of a relative value construct right now for large second lien borrowers at the same time I think the core middle market senior product continues to offer.
Great relative value across that entire asset base. So again.
We like out of a very big origination funnel not necessarily a reflection of our view that thats, where the best relative value and comprehensively and the market today is that responsive.
And that's really helpful. Thank you.
Follow up question on the repurchase activity.
We did continue in the March quarter, but it was a bit lower.
From <unk>.
Levels of repurchase and I'm, just wondering if you could help us understand the framework that you used to think about the sizing and pace of repurchase.
From quarter to quarter. Thanks, so much.
Sure and Melissa Hi, it's Linda Thanks for the question.
And I think the first thing to state and excuse me allergies are kicking in here.
Is that we are we do think there is a lot of value and our stock and.
And.
We continue to be consistent repurchase shares of it.
But we will obviously scale those repurchases based on how accretive they are.
On.
Overall and that will that will fluctuate as our as our stock price fluctuate. So it shouldn't be a surprise that we purchased a bit less this quarter.
On.
Repurchasing our shares was a bit less accretive this quarter than it had been in prior quarters, but nevertheless, again, we continue to see great value and our share. So you should continue to see repurchases.
At least in the near future and.
And we have just as a side note, we have plenty of room and plenty of time left on our.
Repurchase authorization that the board gives us each year.
Thank you Linda.
And welcome.
And our next question coming from the line of Paul Johnson with <unk>. Your line is open.
Yes, good morning, everybody. Thanks for taking my questions.
Realize you mentioned this at the end of your prepared remarks, and this has also been asked on previous calls as well, but I'm just wondering on the preferred equity piece and your capital structure.
Have you have you guys assessed any of the dilutive impact from a potential conversion or even just the pay off of that investment.
And then also on that investment I'm. Just also curious is this.
Is the preferred equity.
And essentially controlled by.
The adviser itself.
Discretion over.
The prepayment of that investment or is this something that's in a fund thats maybe outside of the control of the adviser.
Hey, good morning, Paul It's Tom here.
To hit the <unk>.
Second point and the last part in terms of.
The actual investment who holds it is held by Carlyle and the advisors. Some of it is it is obviously part of Carlyle.
We look at it is.
Clearly friendly money and.
And any decisions will certainly be made.
With our management team as well as broader Carlyle, noting that whenever the.
Sometime down the road.
And realization of that product there is certain.
Requirements for board approval as well in terms of the.
St where the liquidity will come from so we think it certainly is.
Much friendly paper and it's going to be long term carlyle's investment and so.
A portion of this business and.
When the time is right sometime down the road.
Active decision across both the BDC, the BDC board and.
And Carlyle the manager.
In terms of Decretive in fact, you could see we can report to fully diluted shares is subject to the tune of 5 million shares if and when converted and that would have.
The commensurate impact on earnings obviously, we would not be paying the prep dividend, which is roughly 900000 and the cash rate per quarter, which is 7% rate, but then we'd be paying the common dividend.
The net impact would be.
<unk> per share per quarter.
Okay.
Okay, Thanks for that and not to prolong that topic anymore, I guess, but.
As you say, it's a part of your long term.
Financing plan for the BDC I'm, just curious how you balance that out and context of.
Todays capital markets, where obviously BDC, we've seen bdcs issue on.
And secured debt.
Much lower rates, three 4% handle some even lower than that.
How how do you balance that out in terms of viewing a.
7% piece of financing.
When you can issue potentially lower and the unsecured market.
Sure Ed.
From a broader capital structure perspective, we're very comfortable with our current balance sheet, well positioned with our flexible corporate revolver, we have and attractive long term CLO, that's well suited for our heavy first lien.
Folio and of course, the unsecured debt that we raised in the last two years, so very well positioned we're certainly looking at the current hot market, whether it be for unsecured whether it be the CLO market.
Obviously, a lot of moving pieces and we'd certainly be factoring and the impact of a.
And bond offering at a lower interest rate, but then offsetting what would certainly be the dilutive impact on let's say a conversion or repayment of depressed. So I think but I think that our analysis would suggest that certainly carlyle as a long term holder with that perhaps is debt that will remain on long term part of the capital structure no intention.
And right now to convert no intention to repay it.
Okay and Paul.
I do think it's important and the context of the convert.
Go back to the circumstances in which it was put in the capital structure, which was sort of and the depths of.
And the Corona virus crisis last year and so the.
And the firm really thought that that was a strong statements of support for the company at the time.
And with that execution was done on terms that probably wouldn't have been available and.
The market at those times and then and then if you flash forward to today I do think it's also important to call out that many of the attributes of that security or are not replicable.
In other respects for the company, meaning it's perpetual duration, it's pik toggle option and Theres a bunch of attractive features of that security still today.
For that for that instrument and so we don't have any intention to convert and the near term as Tom said.
But yes, we don't feel like it like it is and inappropriate portion of our overall capital structure at $50 million and size.
Yes.
Okay, yeah, thanks for that.
And then my last question.
Just on the JV.
And the I know you've been deleveraging slightly over quite a bit over the last couple of years and the middle market credit fund number one.
Yield has been declining obviously is kind of a result of that.
I calculate roughly like a 9.3% yield or so annualized yield for that JV this quarter.
Curious is that kind of the yield that we should expect.
Forward, just given all the deleveraging that's taken place there or.
Could we expect maybe potentially higher return if you are going to be placing more investments into the fund.
And yet it's Tom again, when I think when you compare the current status of that JV lower leverage and.
And.
Certainly as we look at new investments now, perhaps slightly higher yield from a spread perspective relative to historically, you had higher leverage and the vehicle, but perhaps much lower yielding assets more broadly syndicated assets and let's say had a L. L plus 400 handle and you'll see some of those legacy investments too on the portfolio. So as we look going forward.
The leverage will certainly be thinking and the ballpark, where it is now perhaps a little bit higher, but we'll be looking for higher yielding assets relative to where the portfolio is right. Now so I think that right now I'd say that that 9% is.
And a range of let's say, 9% to 10 or 11 is at the bottom end of our range.
I think will net comfortably in that and that range based on some recent.
Enhancements to our main credit facility.
<unk>.
And potentially have an ability to.
[noise] achieve some higher yields and I think we feel really comfortable with the 9% and based on both on the asset side and the liability side, a little bit of movement per inch potentially move that up and I think we're comfortable with kind of a 9% to 10% target and against some potential upside based on our current assets targets and also are some recent.
And from the amendment and closed on our main credit facility.
Thanks for that and that's very helpful and.
And those are all my questions. Thanks, a lot.
And ladies and gentlemen to ask a question. Please press star one.
And I'm showing no further questions at this time I would now like to turn the call back over to the speakers for closing remarks.
This is Linda and wanted to thank everyone for joining us on our call today and please follow up with Alison If you have any other further questions have a great day. Thanks.
Ladies and gentlemen, and that does conclude our conference for today. Thank you for your participation you may now disconnect.
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