Q1 2021 OFS Capital Corp Earnings Call

Earnings Conference call all.

All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation there'll be an opportunity to ask questions. Please note. This event is being recorded and I'd like to turn the conference over to Steve.

Ultra Marando. Please go ahead.

Good morning, everyone and thank you for joining US also on the call today is Bilal Rashid Chairman and Chief Executive Officer of <unk> capital and Jeff Cerny, The company's Chief Financial Officer and Treasurer. Please note that we issued a press release. This morning announcing our first quarter of 2021 results. This press release with subs.

When we filed on form 8-K with the SEC. Both documents can be obtained under the Investor Relations section of our website at Opus capital Dot Com.

Before we begin please note that statements made on this call and webcast may constitute forward looking statements as defined under applicable securities laws.

Such statements reflect various assumptions expectations and opinions by oil price capital management concerning anticipated results are not guarantees of future performance and are subject to known and unknown risks uncertainties and other factors that could cause actual results to differ materially from such statements.

Certainties and other factors are in some way beyond management's control, including the risk factors described from time to time in our filings with the SEC.

Although we believe these assumptions are reasonable any of those assumptions could prove 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 below first 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.

During this call we will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in the Investor Relations section of our website.

I'll, let these capital dot com under the heading tax and non-GAAP information.

With that I'll turn the call over to chairman and Chief Executive Officer Bilal Rashid.

Thank you, Steve Good morning, everyone and welcome.

I hope that you and your families continue to be safe and healthy.

I would like to thank everyone for joining us today.

Discuss Oss capital performance in the first quarter of 'twenty, 'twenty, one during which well F S capital performed well.

The other key takeaways from the quarter.

Adjusted net investment income of 23 cents per share up 5% from the last quarter.

An increase of approximately 1% and a N a.

But it stood at $11.96 per share as of March 31.

This number includes 21 cents per share and write off of costs and.

And expenses tied to the refinancing of our bonds.

And meaningful reduction in our weighted average cost of debt from.

<unk>, 5.49% to 5.16% as a result of our capital raising activities in the quarter.

We had no new loans on non accrual.

We believe demonstrates the resilience of our portfolio companies.

Lastly, we increased our quarterly distribution by 10% compared to last quarter.

From 20 cents per share from 'twenty, two cents per share, marking our third straight quarterly distribution increase.

Our new priorities have always been to preserve capital while thoughtfully growing our earnings.

These two long standing principles positioning us well as the broader economic outlook continues to improve for middle market companies.

We remain focused on increasing our earnings by growing our origination activities and reducing our cost of debt.

We continue to originate loans to new companies.

Well as increasing our loans to existing portfolio companies as they grow organically or through acquisitions.

As you know conditions in the debt capital markets have been strong over the last several months.

We were able to capitalize on these conditions and issued $125 million of unsecured bonds at attractive costs.

The majority of the proceeds from these offerings were used to repay higher cost existing debt.

This resulted in a projected annual interest expense savings on the repaid debt of approximately one $4 million.

Our portfolio remains defensively positioned.

Both in terms of seniority in the capital structure and industry selection.

As a percentage of fair value approximately 96% of our loan portfolio was senior secured at the end of the first quarter.

Our portfolio is diversified across multiple industries, such as healthcare technology business services and manufacturing.

However, we continue to avoid highly cyclical industries.

It says oil and gas and metals and mining.

Looking forward, we expect that the economy will continue to improve due to favorable fiscal and monetary policies.

Although interest rates remain historically low we believe that we are well positioned to benefit from an eventual increase in interest rates since our assets largely floating and financing is primarily fixed rate.

These factors provide a solid backdrop for increasing the pace of our originations.

Which we believe could lead to an increase in net investment income overtime.

In this regard we are encouraged by our increased pipeline activity through new borrowers and existing borrowers as we help them with their growth plans.

Be assured we.

We are committed to consistently adhering to our long standing underwriting standards, which have been in place since the inception of our adviser in 1994.

Our financing provides us operational flexibility.

As of the quarters and more than 90 per cent of our debt matures in 2024.

Later.

And nearly two thirds of our debt is unsecured.

In addition, our senior loan facility matures in 'twenty 'twenty, four and is non recourse to the BDC.

And our corporate line of credit is flexible as well with no mark to market provisions.

Well if S capital continues to benefit from the expertise and skill Opex adviser.

With more than $2 $5 billion in assets under management. The BDC adviser has experience investing across the loan and structured credit markets were.

We believe gives us the ability to identify relative value credit opportunities across multiple asset classes.

Our team of investment professionals have extensive experience in credit underwriting and restructuring across industry verticals.

In addition, we also believe that shareholders benefit from our alignment of interests with the advisor owning 22 per cent of the outstanding shares of the BDC.

You can be assured that we are working hard every day to protect our investments and drive the business forward for the benefit of all of our shareholders.

At this point I'll turn the call over to Jeff Cerny, Our Chief Financial Officer, who will give you more details and color for the quarter.

Thanks, Paul Good morning, everyone as Bilal just discussed we continue to be encouraged by the performance of our portfolio companies as well as the add on investment activity and the increase in our deal pipeline.

We're optimistic about the future of both the economy and the pickup in investing activity. However, we remain cautious moving forward.

Turning to our financial results.

Starting with our balance sheet, we had approximately $41 $6 million of cash at the end of the quarter only $4 $5 million of that cash was in our SP I see as the BDC received a $19 $1 million return of capital distribution from our SB IC.

In addition.

We repaid $9 $8 million of SBA debentures during the quarter.

At quarter's end, we had only $95 $5 million left in outstanding SBA debentures.

As Bilal mentioned 90 per cent of our debt matures in 2024, or later and 64 per cent of our outstanding debt at quarter end was unsecured.

Therefore, when you feel good about the composition of our liabilities.

Our debt to equity ratio of approximately one four times at the end of the quarter. Excluding RSP has seen that compares to one three times at year end.

Our net asset value per share at the end of the quarter was $11.96 up 11 from the prior quarter.

The increase was primarily driven by higher fair value marks on our investments.

This was offset by a noncash loss on extinguishment of debt primarily related to our successful refinancing of approximately $99 million in higher priced unsecured notes.

And to a lesser extent, the prepayment of $9 $8 million in SBA debentures that I mentioned earlier.

In addition, we had higher than normal interest expense due to this unsecured note refinancing because of the timing difference between when we issued the new unsecured notes and the repayment of certain of our existing notes.

Our NAV per share increased quarter over quarter and has made a strong recovery since the onset of the pandemic.

This quarter's increase includes a 21 cent per share offset for losses and expenses tied to the refinancing I just mentioned.

As Bilal mentioned, we had no new non accruals. This quarter, we have not had a new non accruals since the second quarter of 2020. We currently have two three per cent of the loan portfolio on non accrual at fair value.

Turning to the income statement total investment income for the quarter decreased approximately $600000 to $10 $5 million. This decrease was primarily due to a decline in prepayment and other fees and lower common equity dividends.

Total expenses of $7 $9 million were down approximately $200000. This decrease was due to lower incentive fees, partly offset by increases in interest expense.

As Bilal discussed earlier. This morning, we declared a distribution for the second quarter of 'twenty, two cents and approximately 10% increase in the quarterly rate.

The board approved this higher distribution based on our increased earnings on an adjusted basis for the unsecured bond refinancing as well as lower interest cost of approximately $1.4 million annually. We believe that this bond offering improves our overall capital structure as always we remain focused on our liquidity and maintaining a healthy.

<unk> balance sheet.

Turning to the portfolio. We are pleased that our portfolio companies have continued to perform and believe that our underwriting selectivity will continue to positively impact how the portfolio performs in the future.

Several of our portfolio companies identified opportunities for growth for which we are evaluating incremental funding.

At the end of the quarter the portfolio had 87 companies totaling approximately $466 million on a fair value basis.

The overwhelming majority of our investments are in loans 96 per cent of a fair value of our loan investments were in senior secured loans.

Up 1% from the prior quarter, 93% of our loan investments were floating rate.

We had LIBOR floors on approximately 88 per cent of our floating rate loan portfolio with a weighted average LIBOR floor of 117 per cent.

In the current interest rate environment. This LIBOR floor is a strong contributor as it favorably compares to the three month LIBOR of just 19 basis points at March 31.

Our overall investment portfolio as a percentage of cost includes approximately 71% senior secured loans, 10% subordinated debt, 12% structured finance notes and 7% equity.

Of which approximately 55 per cent of our equity was in preferred equity securities.

Our portfolio remains diversified with an average investment in each portfolio company of approximately $6 million or approximately $1 four per cent of the portfolio's total fair value the.

The overall weighted average yield to cost on our performing debt and structured finance note investments remains above 10%.

Low down by 23 basis points quarter over quarter, primarily as a result of overall tightening of the credit markets with that I'll turn the call back over to Bilal.

Thank you Jim in closing we are pleased with our performance in the first quarter <unk>.

Additionally, once again, we increased our distribution in the second quarter of 2021, reflecting both the improved performance and our outlook for the quarters ahead.

We believe that our solid liquidity position will help us in the current economic environment as we seek to take advantage of potential new investment opportunities and support our existing portfolio companies.

Since the beginning of 2011 <unk> has invested approximately one $5 billion per the accumulative net realized loss of principal of only $13.8 million or an annualized loss percentage of approximately 1%.

While generating attractive yields on our portfolio.

We have been steadily increasing our allocation to senior secured loans and our loan portfolio consists primarily of such loans.

<unk> also been increasing that exposure to larger borrowers.

Our financing is primarily long term.

As of March 31, 90.

90% of our debt matures in 2024 and beyond.

We believe that this gives us operational flexibility to execute on our business plan.

Lastly, we benefit from the experience of our adviser.

<unk> manages a $2 5 billion corporate credit platform.

Our advisor as a part of an asset management group with over $30 billion in assets with broad resources, including long standing banking relationships.

Our adviser has gone through multiple credit cycles.

For the past 25 years.

And we believe it has a strong alignment of interest with all shareholders.

22% interest in the BDC.

I want to acknowledge the continued dedication and hard work of our employees.

<unk> continues to work diligently to adapt to the evolving impact of the pandemic.

Especially by supporting our portfolio companies employees and other stakeholders.

With that operator, please open up the call for questions.

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To turn the conference back over to the loan for sheet for any closing remarks.

Yeah.

Thank you all for joining our call today, and we look forward to speaking with everyone again next quarter.

Operator, you May now end the call. Thank you.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

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