Q2 2021 First Eagle Alternative Capital BDC Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the first Eagle alternative capital B D. C. Inc. Q2, 2021earnings conference call.
At this time all participants are in a listen only mode.
After the speaker presentation, there will be a question and answer session to ask a question. During the session you will need to press star 1 on your telephone keypad. Please.
Please be advised that today's conference is being recorded if you require any further assistance. Please press star then zero.
I would now like to hand, the conference over to your speaker today, Sabrina Rusnak Carlson. Thank you. Please go ahead.
Thank you operator, good morning, and thank you for joining us.
On today's call are Chris Flynn President of first seek alternative credit and Dan Wilson, our Chief Accounting Officer and Treasurer.
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 1933 as amended such.
Such statements reflect various assumptions by first Eagle alternative capital BDC concerning anticipated results that are not guarantees of future performance and.
And are subject to known and unknown uncertainties and other factors that could cause actual results to differ materially from such statements and then.
Certainties 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 as updated by our quarterly report on form 10-Q, and our periodic and other filings with the Securities and Exchange Commission.
Although we believe that the assumptions on which any forward looking statements are based on are reasonable and.
And of those assumptions could prove to be inaccurate and as a result, the forward looking statements based on those assumptions also could be incorrect.
And should not place undue reliance on these forward statements first Eagle alternative capital BDC undertakes no duty to update any forward looking statements made herein.
All forward looking statements speak only as of the date of this call. Our earnings announcement and 10-Q were released yesterday afternoon copies of which can be found on our website along with the Q2 earnings presentation that we may refer to during this call.
Webcast replay of this call will be available until August 16, 2021.
Approximately 2 hours. After we conclude this morning to access the replay. Please visit our website at www Dot and E. C. B D C dot com with that I'll turn the call over to Chris.
Thanks Sabrina.
Morning, and thank you for joining us on our earnings call on today's call I'll provide an overview of our second quarter results and some highlights from the portfolio and Jim will discuss our portfolio and our financial results in more detail.
Let's begin with our results for the quarter net investment income for the quarter was 9 cents per share compared with a 10% dividend and 11 cents per share of NII in Q1.
As a reminder, the management fee waiver, which contributed <unk> <unk> per share and NII ended in Q1. The waiver went into effect in Q3 of 2020 and was provided by the advisor to reduce the impact for shareholders as.
As we continue to complete the repositioning of our portfolio by exiting and Derisking. The remaining concentrated non core positions. This portfolio repositioning now substantially complete.
And literally improvement and stabilization and stabilization of the portfolio, we increased our leveraged and 1.1 times up from <unk> 96 times at the end of Q1.
We have previously communicated our plan to move closer to our long term leverage target of 1.2 turns based on the deal pipeline and the lending environment. Today. We believe we have the ability to hit our target leverage ratio by the end of the year at that level, assuming all conditions remain the same we are and targeting and inquiries to our earnings.
<unk> per share and next quarter.
During the quarter book value increased by approximately 2% from $6.37 per share at the end of Q1 to $6.52 per share at the end of Q2.
We think this is important to highlight the key contributors to the book value increase.
First continued improvement and the broadly syndicated loan market lifted the value of our holdings and the Logan joint venture does that a <unk> <unk> per share positive impact on NAV this quarter.
And very pleased with the overall credit quality across the 92 names and the Logan and $241 million portfolio.
Non accruals or less and 1% and Logan as of Q2.
Second other parts of the portfolio experienced increases in value as well.
The IPO and wheels up and which the BDC holds an equity position and continued performance improvements at Matilda Jane together contributed <unk> <unk> a share.
Lastly, the overall improvement and the portfolio performance I mentioned earlier together with further spread tightening and the market resulted in a net appreciation for the rest of the portfolio equaled <unk> <unk> per share.
Now lets delve deeper into the portfolio.
Overall, the portfolio companies continue to perform well amid the continuing impact of the pandemic.
Revenue and EBITDA levels and liquidity for most COVID-19 impacted businesses and the portfolio continue to improve and in many instances of return or exceeded pre COVID-19 levels.
Companies that have not yet fully rebounded continued to maintain good liquidity profiles.
Perfect and amendments were required to the existing loan portfolio and Q2.
Consistent with Q1, we did not add any non new non new accruals for the quarter loadmaster as the only portfolio company on non accrual.
OEM and <unk>, our 2 remaining concentrated positions both continue to perform in line with expectations.
At OEM, the plasma from transaction that we consummated and Q4 to commercialize and distribute the technology into the market is proceeding well.
As a reminder, the principal consideration was in the form of deferred payments over several years. These payments are contingent upon certain milestones, including minimal annual payments for the first 4 years that will be used to service our debt and cover certain operating costs.
<unk> retained all the equity and the remaining business.
And Q2, we Upsized, our first loan position by $300000 as planned to provide short term transitional capital and connection with the sale transaction.
Igloo represents a 6% position and the portfolio and is the largest holding that we have as of June 30.
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 and continued impact and spread tightening.
These 2 positions represent the last of the 14 concentrated positions, we held and the portfolio and early 2018, we are pleased with our progress and exiting these legacy investments and this gives us comfort with proceeding with our plans to increase leverage we.
We're very active and the quarter, making new portfolio investments across the direct lending platform totaling $350 million of which $46 million and 12, new investment companies was allocated to <unk> and CRD made an additional $4 million of follow on investments during this quarter separately and there were 2 debt prepayments at par plus a prepayment premium during the quarter.
Our direct lending pipeline remains strong and the BDC continues to benefit from the overall deal flow generated by first Eagle 5 billion and direct lending platform.
The growth of the platform allows the BDC to hold and more diversified portfolio with a number of physicians up from 45, and Q1 and 2018 to 64 this quarter.
Since the beginning of the pandemic first eagle as direct lending platform has remained robust and we expect it to continue to provide us with attractive investment opportunities. We continue to do to be very selective on where we deploy our capital and we are mindful of the macroeconomics.
Environment, and all of our investment and committee decisions.
Our goal is to continue to diversify our investment approach as we grow the bdc's portfolio into 2021 and beyond with that I will turn the call over to Jim.
Great. Thank you, Chris and good morning, everyone.
Turn it off with some investment and portfolio highlights.
Chris mentioned, we had an active quarter with 12, new and several follow on investments totaling $50 million at a blended yield of 6.6%.
And we also had 2 notable realizations through the repayment of our first lien positions and communication and technology intermediate and Whitney Bradley and Brown, Inc. Generating $17.3 million of cash proceeds including prepayment premiums.
As of June 30, our portfolio was valued at 395 million up from $363 million at the end of Q1. It was invested 73% and first lien senior secured debt and 19% and the Logan JV as a quick reminder, the Logan JV is 98% invested and first lien.
Assets.
And the remaining 8% of the Bdc's portfolio withheld and second lien sub debt and other non income producing and equity holdings, including our restructured equity like second lien investment and OEM.
The weighted average yield on the debt and income producing portfolio based on cost and including Logan was 6.9% from Q2. This is in line with the prior quarter.
And as Chris mentioned, we didn't place any additional investments on non accrual during Q2 total non accruals as a percentage of our portfolio at fair value and net cost or 2.1% and 3.6% respectively.
Now I'd like to address the financials for the second quarter.
During the second quarter, we recognized $7.8 million of investment income primarily from interest and dividends.
Interest income increased by approximately half a million dollars from Q1 to $5.9 million for Q2 coupon interest increased approximately 300000 as we added new names to the portfolio and we also benefited from some back and repayments with call protection included and the $5.9 million is 245000 related to <unk>.
Prepayment premiums and approximately 236000 and related to accelerated amortization of OID.
Dividend income from the Logan JV was relatively flat quarter over quarter at $1.6 million.
Total expenses for the quarter were $5.1 million up $1.2 million from the prior quarter, primarily due to the payment of the management fee and Q2 totaling $963000.
The remainder of the increase was due to the incremental fees on our credit facility and notes.
With respect to other items below the net investment income line. The net realized losses for Q2 were approximately $1 million. This included 447000 and related to the adjustment to certain escrowed and 543000 related to the extinguishment of debt and connection with the redemption of our 2020.
To note.
From a leverage perspective, we ended Q2 with a debt to equity ratio of 1.1 times with ample borrowing capacity on our credit facility to continue to grow and increase leverage towards our target of 1.2 times.
With respect to unsecured debt, we were pleased to refinance our callable bonds and Q2, lowering our overall cost of capital.
Close on the $69 million public debt offering and made of 2021, the new bonds, which mature in 2026 are priced at 5% and are not callable for 3 years.
Proceeds from the issuance were used to redeem our 6 and 3 quarter percent and 2022 bonds at par as well as to partially pay down our revolving credit facility. The refinancing resulted and the loss on the extinguishment of debt equal to the difference between the amount we paid to redeem the bonds and the carrying value of the bonds.
Which reflects the impact of unamortized deferred financing costs.
With the refinancing of the 2022 bonds, we were able to reduce our weighted average cost of debt by 84 basis points from 545% as of March 31 to $4.6 1% as of June 30th.
We continue to evaluate opportunities to further reduce our cost of capital, especially as our 2023 bonds become callable.
With that I will turn the call back over to Chris.
Thanks, Jen overall this was another solid quarter for <unk>, we delivered steady improvements and lab and credit quality. We again recorded positive results at most of the operating portfolio companies.
We also made additional progress and Derisking the portfolio with respect to sell our remaining legacy positions and <unk>.
<unk> activity remains strong and we are confident and our ability to prudently increase our leverage profile and to put us and are positioned to meet or exceed our dividend level.
I'll now turn the call back over to the operator for any questions.
At this time, if you would like to ask a question. Please press Star then the number 1 on your telephone keypad again and that is star then the number 1 we'll pause for just a moment to compile the Q&A roster.
Your first question comes from the line of Lee Cooperman with Omega family Office.
Good morning, Thanks, Hope everybody is safe and healthy.
Hi, Lee.
I guess you've answered 1 of my question, which is you feel comfortable at the dividend and to secure at 40.
Correct.
Hey.
I'm trying to figure out you know.
And that is deploying capital at 6.6%.
Repurchasing stock and a 30% discount.
And.
And I assume you feel comfortable that the NPV of 650 to Israel and.
And that are secure.
We do yes.
Okay. So.
Wouldn't your best alternative be to buy back stock rather than making new loans.
Yes, Lee, it's a balancing and had to obviously I'm trying to.
Maintain some stability and the portfolio and again the ultimate goal here is for us to increase the size of the BDC not decrease it but we do have a program in place I think it's a $10 million program that we can buy and we will book.
We will consider that as we as we weigh those but again mathematically you're correct.
And the creative and buy back stock and Thats, why we layered and the the option of doing that.
But it's currently not used it right.
Didn't use it last quarter Thats correct right. Okay. Let me ask you. This question and I don't want to put you out of business, but we have $140 million equity market cap.
We're really insignificant.
Aleksey I think with the way spend time line and other than I own a lot of stock.
Basically.
Yeah.
And I was very instrumental and MVC another BDC merging with a b B D C bearings and.
And we have a stock price for it and extra so what we would have gotten if they stayed independent.
What is the.
And your attitude towards seeking a merger partner, where we gains you're trying to gain size you can gain side, where 2 ways you can try to and totally grow we could basically merge with a larger.
And we're successful lower cost of capital BDC, what's your attitude towards that.
And so literally 1 of the reasons why we ended up joining first Eagle was.
And it was the gain access to a bigger balance sheet and a larger asset manager and it put us in a position where we can be more proactive strategically and pursuing those types of opportunities.
The fact is until we were able to clean up our balance sheet, we weren't that attractive of a partner and now that our balance sheet is clean.
We feel like we have the ability to come back and start having those types of discussions to the extent they make sense. If they don't make sense, we'll continue to do and control what we can which is to manage the portfolio continued to try to find good relative value and investments and right now focus on.
Lowering the cost of capital and the debt side, which will and if that drive a higher ROE and again continue to support growth through the dividend.
We're looking at all options in front of US we recognize the bdcs too small.
That's not it's not been something that we've ever disagreed with its just a matter of trying to find the right avenues for growth and they can take a lot of different.
Options and then again, we're considering all of them I.
I know, it's complex, but I was sick shrinking the share cap and a big discount to NAV.
We'd get us a better price and the and if that transaction was to ever occur, but that can be as obvious and I am sure. It's obvious to you as well.
Yes.
And where large shareholder day Lee.
Yeah.
That is largest me probably but whenever anyway. Good luck to close thank you very much and stay safe stay healthy.
Thanks, Larry appreciate the call.
And again to ask a question. Please press Star then the number 1 on your telephone keypad. Your next question comes from the line of Robert Dodd with Raymond James.
Hi, guys, sorry, I missed the prepared remarks, because there's so many things this morning.
And did it.
You mentioned, obviously focusing on and <unk>.
<unk>.
The capital assumption how are you.
And you started that can you give us any color on on next steps I mean, obviously, there's still some expensive debt on the balance sheet debt debt could be refinanced debt at <unk>.
Some point, what do you think.
I mean, we know the pricing of.
The debt you have done do you think that the likely pricing.
And for future debt refinancings, or where do you think that could go because obviously the lower the cost of debt capital is the better for the obvious reasons.
And any color on what the plans all of that and not just the <unk>.
And the potential imminent refinancing, but longer term what would you like to debt debt stack and particularly if you have a target cost of debt and long term what would that be.
Yeah no. Thanks, Robert appreciate the question obviously.
Obviously getting the investment grade status at the beginning of the year was was was a big win.
And immediately took action and called the bonds and substantially lowered our cost of debt.
As you can see and our filings we've got another set of bonds that are callable in October.
And it's probably not the right position for me to predict what I think future rates are going to be out to October but based on current market conditions today, the bond market for Bdcs and those types of financing has continued to be very very strong. So my expectation as I sit here today would be to execute at a very similar levels.
Another comment that you made real guard and the cost of debt is just you're right. It's not just the unsecured bonds and it's also the debt facility and how we finance the BDC and how we finance Logan.
As we continue to grow and more diversified senior secured portfolio. If you remember in the prepared remarks, I guess, you said you missed those but I think we've gone from 44 low 40 names up to 64, our target would be and you get to said and to the end of the low 7 days. That's a highly diversified first lien portfolio that we feel will have significant optionality and how we.
To finance that both inside the BDC and and inside the Logan structure, which to your point as we bring those cost down that will drive a higher ROE and hopefully create a situation where you have some upside to continued dividend coverage.
Got it but again, thank you and if I could put it the debt side, we've got and fix the debt side of the equation until the asset side of the equation was stable now that thats stable, we can come back and significantly reduce the debt going forward.
Understood I mean, 1 of the question the obvious question and as well.
With the investment grade rating I mean rating agencies out generally.
Bdcs and at least generally fans of stock buybacks.
Was.
Was there any.
Rating agencies don't apply pressure per se, but is there any dynamic between the buyback and the rating and the plans on refinancing I mean basically are you.
Conceptually blocked from buying back stock.
Block does not the right word it's about just describe it as a balancing act as.
As we looked at Q1 getting the investment grade rating and reducing our cost of debt and our opinion was was an extremely valuable.
Get if you will for us and for the shareholder and that was our priority now that we've received that and we've refinanced a significant portion of our bonds at a lower cost of capital we will.
And hopefully be able to do the same in October but we are you are right trying to balance the.
Goal of buying back stock and maintaining the investment grade and reducing our cost of debt. It's not just 1 item that you have taken into account and you got to take multiple items into account as you sit back and do they do these calculations if you will.
Got it thank you.
Thanks Robert.
Okay.
And there are no further questions at this time I will now turn the call back over to the speakers for any closing remarks.
Thank you operator, we appreciate the support of our shareholders and we look forward to providing you with an update in early November and on our third quarter results feel free to reach out to me or Jen if you have any questions before them. Thank you.
Yes.
This concludes today's conference call. Thank you for your participation and you may now disconnect.
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