Q2 2021 TCG BDC Inc Earnings Call
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Thank you for standing by and welcome to T. C. G. BDC second quarter 2021 earnings 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 <unk>.
The session you will need to press star 1 on your Touchtone telephone. Please be advised that today's conference maybe recorded should you require any further assistance. Please press star zero I would now like to hand, the conference over to your host head of Investor Relations Alison Route Aerie.
Good morning, and about going to TCG BDC second quarter 2021 earnings.
Last night, we issued an earnings press release and detailed earnings presentation with our quarterly results a copy of which is available on TCG 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 a 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. These statements are based on current management expectations and they involve inherent risks and uncertainties, including those identified in the risk factors section of our annual report on form 10-K.
Could cause actual results to differ materially from those indicated TCG BDC assumes no obligation to update forward looking statements at any time and with that I'll turn the call over to our Chief Executive Officer Linda pace.
Thank you Allison.
Everyone and thank you for joining us on our call. This morning to discuss our second quarter 2021 results.
Joining me on the call today is our Chief investment Officer, Taylor, Boswell, and our Chief Financial Officer, Tom Hennigan.
I wanted to focus my remarks on 3 areas first I'll touch on a few portfolio highlights.
Second I'll provide a review of our second quarter results and third I'll share some thoughts on the current market environment.
Let me start by highlighting our portfolio activity and current credit position for the quarter.
As we previewed last quarter our deal activity in the second quarter was extremely robust outpacing even the volume of the fourth quarter.
We originated over $213 million of loans across a diverse array of new borrowers and add ons for existing portfolio companies.
Overall, the portfolio is sitting at just under $1.9 billion and we continue to find ample attractive new deployment opportunities in todays market.
We're pleased to report that credit performance continues to strengthen alongside the macroeconomic recovery.
Over the past several quarters, we've seen tangible evidence of a cyclical recovery across the portfolio, including those names most impacted by Covid.
Fundamental performance is solid.
Our watch list continues to trend down as a percentage of the portfolio and our portfolio internal risk ratings continue to improve.
Importantly, we have seen no new non accruals in the last year and we are confident in the trajectory and progress we are making in each of our 4 non accrual names.
We're proud of the performance of the portfolio through Covid and most importantly, we see the current trajectory of improving performance and solid credit continuing on its current upward path.
I'd like to turn now to the financial highlights of the quarter.
We generated net investment income of 38 cents per common share and declared a total dividends of 38 cents.
This includes a base dividend of <unk> 32, and our 6 supplemental dividend in line with our policy of regularly distributing substantially all of the excess income earned over our base dividend.
As Tom will detail later, we see earnings continuing in the context of 36 to 37 cents as we've reported over the last several quarters, which remains comfortably in excess of our 32 base dividend.
Net asset value per share increased 2.8% or 44 cents from $15.75 to $16.14.
While improving market yields drove some of this increase.
With substantially bolstered by stronger overall credit performance, particularly in those names impacted by Covid.
We've taken an appropriately conservative approach to valuation through this cycle and we expect continued underlying fundamental improvement to drive positive migration in the coming quarters.
Additionally, we repurchased $8 million of our common stock, resulting in 2 tenths of accretion to net asset value.
Care deeply about our shareholders total return experience.
And at our Stock's current valuation, we will continue to be consistent active re purchasers of our shares.
Turning to the investment environment.
Investment activity across our business footprint in the second quarter was amongst the highest on record reflective of the active transaction environment and consistent with the trends in private equity and broadly syndicated loan markets.
View, the investment opportunity set and our market is highly attractive, especially on a relative risk reward basis and on.
We're actively deploying capital into those transactions, we regard as most compelling at.
At the same time as you would expect we remain highly selective investors vigilant on risk and thoughtful in portfolio construction.
With this backdrop, we are confident in our ability to continue to generate and sustain attractive and stable income for our shareholders.
Finally, I'd like to take a moment to welcome Aaron Lee Collins, who joined our board of directors in June as an independent director.
Aaron brings a great deal of expertise in both the leveraged finance and middle market private equity to our board.
We're pleased to have the benefit of counsel and experience.
I'd like to now hand, the call over to our Chief investment Officer Taylor Boswell.
Yeah.
Thanks Linda.
As usual I'll begin with carlyle's macroeconomic perspective, and then I'll share our thoughts on our investment approach to todays highly active and competitive market.
Global growth accelerated in the second quarter.
<unk> distribution progressed health restrictions ease and economies reopened.
U S. GDP growth grew at an annualized 6.5% from the first quarter, while the eurozone and Chinese economies expanded at 8% and 5% respectively.
Most strikingly households in the U S continued to spend freely.
And we've seen a 20% year to date increase on our discretionary spending index relative to 2019.
This year's acceleration in economic activity.
Third with the pandemic related disruptions over the last year.
Headline Q2 inflation to reach levels not seen in over a decade.
Recently realized inflation remains concentrated in certain supply constraints sectors, such as autos materials and energy.
We expect many of these pressures to ease in coming quarters as capacity expands and consumer spending patterns.
1 place we are keeping a close eye on is the labor market, where we see more risk as the year progresses, given continued tight labor availability.
Despite these pressures corporate profits are expanding across many sectors. Thanks to significant productivity improvements, including a broad based increase in the adoption of technology.
In total we judge the macro backdrop to be highly supportive of continued credit performance, both generally and in <unk> portfolio.
The velocity with which our markets have recovered after 2000 twenty's severe shock it's remarkable.
Like 2019, we are again in a very robust transaction environment.
And the key metrics in our industry spreads fees leveraging alike are now broadly in line with the pre Covid period.
We've come full circle and the operative question for today's market.
The same 1 as 2019.
How will you drive outperformance in a competitive environment.
Across our platform, we are windows into the vast majority of credit risk markets and we can report with high confidence that there is no avoiding competition.
Non sponsor finance non technology lending not an ABL not in liquid markets not in any investment market of reasonable depth or scale.
Yes, there are.
Our varying degrees of competition for any given deal, but as it relates to building diversified credit portfolios.
The last decade Central Bank policies have made obsolete. The question of how do you avoid competition.
Rather the right question is how do you win in the face of competition.
Here's how we do it at Carlisle.
First.
We leverage our leadership position in middle market sponsor finance to win the deals we want to win.
And in so doing avoid adverse credit selection.
We accomplish this by maintaining a heavy investment in direct origination.
Offering a complete leveraged finance product set at scale does that.
<unk> underwriting and execute execution expertise to move with speed and conviction.
And delivering value to borrowers beyond our capital in as many ways as possible.
In short.
We used carlyle's platform to create an extremely broad investment funnel.
And we pair it with a highly relevant solution.
Set for potential borrowers.
Allowing us to be both highly credit selective and trusted partners from financial sponsors.
It's critical to remember we're operating in a market where demand for capital is growing at least as strongly as the supply of capital.
On a market with an extremely fragmented competitive set.
Our platform's competitive advantages are real and sustainable.
And stand in Stark contrast to the average player in the market.
We're deal sourcing and relevance of offering may be more constrained.
We're comfortably on the right side of the competitive landscape.
And fortunate to operate in the market, which offers extremely strong relative investment value.
Second.
We complement our $1st sponsor finance business with additive private credit assets, where carlyle possesses similarly deep expertise.
Such as asset backed non sponsor and recurring revenue London.
The value in this exercise is not that these markets are categorically better or worse than our core market.
Rather the value is that they are fundamentally different than our core assets.
Allowing us to diversify risk factors in our book.
Actively assess relative value deal by deal and be even more credit selective.
We are confident that complementing our core with these other safe and defensive private credit profiles will result in better portfolio construction and investment results on a through cycle basis.
Finally.
We are intensely focused on deploying the advantages of the Carlyle platform against every investment opportunity in every aspect of our operations.
From origination to diligence to execution to portfolio management, we understand our edge apply it with rigor and seek to extend it in all possible ways.
At Carlisle, we sit alongside hundreds of talented investment professionals with specific expertise across sectors geographies and asset classes from which we can derive investment insights to both capture opportunities and avoid mistakes.
In addition, we leverage fully staffed and highly capable teams and capital markets workout liability management and ESG to name just a few.
When properly applied it's hard to overstate, the extent to which these capabilities create and sustain edge for CG BD.
In summary.
Our market offers a highly attractive investment opportunity.
Characterized by growing demand for capital high current income and significant downside protection.
It makes all the sense from the world that people want exposure to it and that there would be ample competition.
At Carlisle, our platform equips us to win the business, we want to win.
In competitive markets and across cycles.
Harnessing these competitive advantages has been exactly what Linda Tom and I have been focused on these past 2 years and we are confident that it will continue to produce strong investment results.
As always thank you for your continuing support.
I'll now hand, the call over to our CFO Tom Hennigan.
Thank you Taylor.
Today I'll begin with a review of our second quarter earnings then I'll provide further detail on the portfolio and our balance sheet positioning.
As Linda previewed we had another very solid quarter on the earnings front.
Total investment income for the second quarter was $43 million, that's up from $41 million in the prior quarter, primarily due to 2 main factors.
Higher core interest income on our investment book and second higher amendment and underwriting fees.
Both OID accretion from repayments and income from the 2 jv's were flat versus prior quarter.
Total expenses were $21 million in the quarter.
Modestly from $20 million last quarter.
The result was net investment income for the quarter of $21 million or <unk> 38 per common share.
Exceeding the general guidance, we've been providing during recent earnings calls.
On August 2nd our board of directors declared the dividends for the third quarter of 2021 at a total level of <unk> 38 per share that comprises the 32 base dividend plus a <unk> supplemental which is payable to shareholders of record as of the close of business on September 30.
Similar to prior quarters as we look forward to the rest of 2021 and beyond we remain very confident in our ability to comfortably deliver the 32 base dividend plus continue the sizeable supplemental dividends in line with the 4 to 5 we've been paying in the last few quarters.
Moving on to the performance of our 2 Jv's total dividend income was $7.5 million in line with last quarter.
On a combined basis, our dividend yield from the JV has inched up from 10% closer to 11%.
We were able to make return of capital with Mcf 1 following a recent favorable amendment under our primary credit facility.
Total assets at the JV has increased from 1.2 to 1.3 billion reversing the recent trend of declines that had been driven by repayment headwinds.
Linda noted the robust new originations across our direct lending platform. This was particularly evident in the <unk> portfolio with fair value increasing by over 10% in the second quarter.
Going forward, we continue to expect stable dividend generation from the <unk>. So much of this quarter's results.
On devaluations, our total aggregate realized and unrealized net gain was $21 million for the quarter.
<unk> fifth consecutive quarter of positive performance following the drop in March 2020.
Using the same buckets have outlined in prior quarters, we again saw improvement across the board.
First performing lower Covid impacted names plus our equity investments from the Jv's, which accounts for a combined 70% of the portfolio increased in value about $8 million compared to $3.31.
Second the assets that have been underperforming pre pandemic. So much have COVID-19 exposure were up $4 million, marking the fifth consecutive quarter of stability or improvement there.
This included an exit at par of our investment in Plano molding.
The final category is the moderate to heavier COVID-19 impacted names.
We continue to see improvement in fundamentals and recovery prospects for these investments.
Collectively they experienced a net $9 million increase in value.
I'll turn next to the portfolio and related activity, we continue to see overall stability and improvement across the book.
Non accruals were flat at 3.3% based on fair value.
And this was the fourth consecutive quarter with no new additional non accruals.
Similar to last quarter, we don't see any additional loans at risk of non accrual.
As Linda noted, we also see potential for improvement from the level of non accruals over the next 12 months.
The total fair value of transactions risk rated 3 to 5 indicating some level of downgrade since we made the investment improved again this quarter by $14 million on the aggregate while over $50 million on transactions experienced some level of upgrade.
While there remains some unfinished work, we're very pleased with the continued positive momentum in the performance of the overall portfolio.
I'll finish with a review of our financing facilities on leverage.
To be very well positioned with the right side of our balance sheet.
Statutory leverage was again stable at about 1.2 times, while net financial leverage which assumes the preferred is converted in the risk metric we use to manage the business was again right around 1 turn of leverage.
So we're sitting close to the lower end of our target range of 101, 4 times, giving us flexibility to invest prudently in the current robust deal environment.
And regarding the preferred equity issuance from May 2020, I'll reiterate reiterate again. This instrument was a strong sign of support by Carlyle during the darkest days of the global pandemic and it continues to be a long term investment by Carlyle in our BDC. So currently there is no intention to convert.
With that back over to Linda for some closing remarks.
Thanks, Tom.
Before turning to your questions I'd like to conclude by noting that we are very pleased with the current momentum abetted embedded in our business.
Engines, we have in place, namely the talent and hard work of our team here and throughout Carlisle are driving attractive and sustainable returns for our shareholders.
And ladies enjoy the remaining weeks of summer and with that I'd like to now turn the call back over to the operator to take your questions.
Thank you as a reminder to ask a question you will need to press star 1 on your telephone again Thats Star 1 on your touch.
Touchtone telephone to ask a question to withdraw your question press the pound key.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Ryan Lynch of <unk> Your.
Your line is open.
Hey, good morning, Thanks for taking my questions.
The first 1 you were talking about the competitive environment.
That's out there today on the direct lending market, which.
It's been very clear to us.
And you talked about how you guys are coming to the market and how you guys can help you win deals.
And I was hoping to get his day.
Net.
A little more background on where you guys stand as a direct lending platform.
I would love to hear what sort of you.
You guys concurrently come to the market.
That's currently.
Dedicated to the direct lending space across the Carlyle platform that.
But obviously <unk> can participate with and what sort of.
Commitment size as you all can make across the platform because that's obviously 1 way to help win deals is to be able to commit to larger hold sizes to be able to offer Fuller solutions announced we've seen the direct lending market growth would grow we've seen larger solutions, becoming a competitive advantage. So I was just.
Love to hear an update on where you guys stand there from a platform standpoint.
Yes, sure sure things sort of share.
Ryan It's Taylor.
And happy to happy to pick up that question. So just to provide a couple of points of context around that carlyle's overall global credit business is about $60 billion of AUM and so well see JBT is a really important vehicle on flagship vehicle for us at $1.9 billion of AUM. It does represent a small portion of our total <unk>.
Capital base aligned against these markets and what I would say also about that $60 billion of Emmett Carlisle as we really have built a credit business that focuses down on core corporate leverage finance markets. So the vast majority of that AUM is targeted right and the places where you think carlyle would be good.
But levered credit private transactional levered credit and the like and so collectively that does give us a very full product suite to deliver to the marketplace.
Which really enhances our relevance in the marketplace as well as our hold sizes to get specifically into illiquid credit, which you can kind of shorthand as the direct lending business or the relevant private corporate credit markets, we manage about $15 billion on capital across the platform.
In those strategies.
And so we have a very material footprint.
Specifically around hold sizes, we've done transactions on our platform as large as $750 million on total commitment size, obviously individual positions that flow into <unk> end up being smaller but it is.
Material market presence, 1 thing I will call out for you though.
Is unlike.
Some players in the market, we really remain focused on the core middle market.
$20 million to $75 million EBITDA business and a lot of the very large transactions that are printing in the unit tranche market and appropriately getting significant headlines those are far larger borrowers where the competitive set is competing with traditional leveraged finance markets broadly syndicated loans on high yield markets on the like so.
Our capital base is very relevant very scaled, but you're less likely to see us.
Competing head to head in large cap markets against broadly syndicated and high yield on more likely to see us kind of sticking to that middle market Knitting, where you don't have to go head to head with both private credit and traditional liquid market financing sources.
Sorry for the long answer I hope that I hope that's broadly responsive to the question.
Nope.
That's very helpful very good context and color on your overall platform.
Good day here.
The other question that I had.
Which you guys have kind of talked about in the past and I would reiterate again, but you talked about the convertible preferred.
Doc being kind of a long term financing solution.
Do you guys intend to hold.
And I think you said you view that as an attractive source.
I mean, you guys have been able to issue.
Liabilities unsecured notes recently at Ash.
4.5% and I wouldn't be surprised if you could do something less than that in today's market. So why why is paying 7% cash on our convertible preferred.
An attractive source of financing when you are able to tap.
Unsecured notes at 4.5% and then.
Depending on your answer that we can get into.
Converting that what does that look like how does that look like from come from a manager converting.
At a sizable discount the external manager converting in.
And making a sizable profit from from supporting the BDC I don't know if thats a great look either but I just don't understand I comment on why.
Wi <unk>, 7%.
It's attractive source when you guys are issuing debt significantly below that.
Yeah.
Yeah, Hi, Ryan its Linda.
I'll start and then maybe maybe turn it over to Tom.
So just just to kind of reiterate.
If you recall when we put the convert in place.
Life was pretty dire right.
Our stock price was half of what it is today, we're in the middle of the pandemic.
Or we're looking at really how to make sure our balance sheet was strong and defensible. During a time that was had just an enormous amount of uncertainty.
And Carlisle coming in and doing the preferred.
Really great.
Testament, not only to their support of our business.
But also to just really help us achieve the goals that we wanted to achieve at that point in time.
So.
I'd like I'd like really people to kind of just put all of this in context.
For Carlisle.
Great sales support, but let's not forget it is $50 million for for Carlyle on its $50 million for our balance sheet. So it's.
Relatively small.
<unk>. This is strategic right there, they're not looking to convert this anytime soon it's there to support the business and we really look at this as equity.
No.
Compared to our dividend yield on our common stock. This is paying 7%, which is we think actually a pretty attractive piece of equity for our balance sheet.
And.
Converting it.
It's just not not really in the cards. So I would I would just encourage people to think of this really as.
Permanent equity, which which you may view as extensive but we actually view as pretty pretty cheap and.
I know that this is not something that is going to.
Dilute our current shareholders.
Any in the foreseeable future that we can tell so and we're pretty conscious of that.
When back when we issued this.
On.
We didn't want to dilute shareholders, especially especially back in the spring of 2020, and that's still our view now there's no reason to dilute current shareholders.
Not 1 Carlyle is standing behind the business like it is.
On.
Tom maybe you could kind of talk about.
Our unsecured and kind of just the rest of the balance sheet and how we're thinking about that.
Yes, I'd just add is I think we have the best both awards, we have the financial flexibility to effectively equity we manage the business as if it's equity we get credit under our leverage facilities as if it's equity.
So certainly from a financial flexibility perspective, we think it's well priced equity sort of managing the business would be we're very happy to have this on the capital structure.
You look on a broader capital structure, we've got diversified funding sources from our traditional corporate Rover with very attractive.
Hello vehicle.
That's got north of 2 years left to under 3 investment period and obstacle suited for are primarily first lien book and then of course, we have our 2 tranches of unsecured notes and we don't know to those unsecured notes price a little bit high compared to current market standards, but it's a couple of tranches there they mature in a few years, it's actually very favorable call features.
Well, so we look down the road in terms of a traditional from deal that has effectively before.
We will make hole, we've got some flexibility on the capital structure with those bonds dependent.
Well the only thing that I would just add though is 1 of the issues with looking at the preferred.
Is that accurate figures sits here today from a regulatory standpoint accounts on flat rates.
Counting towards <unk>.
Our leverage calculation as it sits here today.
Yeah.
Tranche and so that's 1 of the issues from from a GAAP asking your point I would just say if it does convert.
At its current price I mean, 1 of the things that that.
CVD.
He is known for having a large successful big platform.
Carlyle reviewed the external manager and so I don't know if its a great work when it does convert to <unk>.
The manager.
We are making.
Large profit problem.
From the BDC shareholders from making an investment into it.
Add on.
At a rough cut in the market on that Dan I don't think necessarily having a 7% cost of.
Capital out there, which right now count as leverage.
Great options out there.
Yes, Ryan I think we'll be we'll be conscious of that.
How that that could look and would look.
But what I would tell you now is 2 things.
Tom Correct me, if I'm wrong on that.
But just also keep in mind that our financing facilities do not look at this as leverage right.
It's not it's not restraining our flexibility vis vis the rest of the liabilities on the balance sheet.
And.
Yes.
I know.
You are keeping it in the back of your mind at Ash.
What happens when and if this converts but.
Again, I would just reiterate there is no plan to convert it.
And.
Sometimes I think the focus on this $50 million preferred gets lost.
And overshadows I think what we would like people to really feel like what is the focus of our story.
Over the over the past 2 years.
The management team, particularly Taylor and Tom and the rest of the team have just really been working.
Super hard to get us through Covid.
Get us out of the Cup program.
Put in place processes and procedures that that strengthen that strengthen the balance sheet that strength in the portfolio.
And we've made such great progress.
Over the past couple of years.
On that.
I cringe, a little bit that the $50 million preferred that is support from our parents kind of overshadows that message. So.
Maybe a little bit of advertisement here from me, but I guess I see.
That is part of my job.
But.
No listen we're happy to keep talking about it each quarter.
But I've just asked.
Let's not let's not lose sight of also I think kind of a bigger picture of that.
That we're trying to.
To show to you and to our investors.
Keep in mind that Carlyle has I think.
Carlisle and <unk>, we pride ourselves on having a really strong reputation.
Our reputation for taking care of our shareholders and.
It's not our intent to change that way of operating.
Excellent.
Fair point and I do want to say that this was a really nice nice quarter.
On all around so keep up the good work on that front. That's all from me I appreciate the discussion today.
Thanks, Brian.
Okay.
Thank you again to ask a question. Please press star 1 on you touched on telephone again Thats star 1 on your touched on telephone to ask a question.
Our next question comes from Finian O'shea of Wells Fargo. Please go ahead.
Hi, everyone just a follow up on Brian's question, sorry to do that.
I was listening to some of your comments Linda agree that.
Life was pretty dire.
When the parent stepped up.
And during Covid, but.
It was also rather bright and sunny in say 2018.
The BDC lost a lot of money and was paying the parent a full incentive fee.
So I guess the question is.
Against your opening remarks about caring deeply about the shareholders total return.
Do you, perhaps care more deeply about the advisor.
Or should something give like should there be sort of pick.
Pick 1 between the convert and not having a credit look back.
Thanks, Thanks, Ben for that for that question.
I think I think I've kind of address the convert issue and.
Talking and talking about our look back on and our management fee.
We do believe that.
Carlisle.
Carlyle has a very fair and balanced management fee structure.
We think that the shareholders are getting a lot of value for that.
Keep in mind that.
We do manage the the JV.
And don't take a fee for that so.
Sometimes I think that gets a little bit lost when people.
Look at our overall fee structure.
You are kind of getting the management of the JV jv's at a very nice discount on on the management fee.
And.
1 of the other kind of topics I think Taylor really discussed on the call in and 1 that we'd like to.
Further emphasize is.
All of the resources that Carlyle brings to the table.
Just away from just that the cash.
Core team, that's supporting the <unk> and the rest of the direct lending.
Is is therefore investors as well so.
Our management fee and not having a look back I'm not really sure that that is what is going to be driving our stock price higher.
Really we've got to continue on this straightforward consistent performance.
Get get our non accruals GAAP.
Down, which is which is looking better and better.
And really keep.
Keep our shareholders.
Satisfied by knowing that we can generate generate our dividend performed well on credit.
And.
Ultimately, we think that will get our stock price up I'm not sure.
Our management fee is really the issue.
Okay. It makes sense that's all from me. Thank you.
Yeah.
Thank you and there appear to be no further questions in queue on the phone lines at this time.
At this time I'd like to turn it back over to FERC closing remarks.
This is Linda I wanted to thank everybody for joining us on our call today.
This concludes today's conference call. Thank you for participating you may now disconnect.
Yes.
Okay.
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