Q2 2021 OFS Capital Corp Earnings Call
[music].
Good day and welcome to the Ofa capital second quarter 2021 earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be and opportunity to ask questions to ask a question you May Press Star then 1 on your.
[noise] Touchtone phone and to withdraw your question. Please press Star then 2 please note. This event is being recorded I would now like to turn the conference over to Steve Ultra Brando, Vice President of capital markets. Please go ahead Sir.
Good morning, everyone and thank you for joining US also on the call today as Bilal Rashid Chairman and Chief Executive Officer, <unk> capital and Jeff Cerny, and the company's Chief Financial Officer and Treasurer. Please note that we issued a press release this morning announcing our second quarter 2021 results.
This press release and subsequently filed on form 8-K with the SEC documents.
Documents can be obtained under our Investor Relations section of our website at capital Dock.
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 all the best Capitals 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 and our filings with the SEC.
Although we believe these assumptions are reasonable and any of those assumptions could prove and accurate and as a result, the forward looking statements based on those assumptions also could be incorrect.
You should not place undue reliance on those on these forward looking statements all of US capital undertakes no duty to update any forward looking statements made herein and all forward looking statements speak only as of the day of this call with that I'll turn the call over to Chairman and Chief Executive Officer, Bill all of our sheet.
Thank you Steve.
Good morning, everyone and welcome.
I hope that everyone and their families remain healthy and safe.
We are pleased with the company's performance during the second quarter as we continue to grow on earnings.
On net asset value has improved to $13.42 per share, which is approximately 8% above pre pandemic levels at the end of 2019.
And on some key takeaways from the quarter.
Net investment income growth could be 4 cents per share up.
Approximately 26% compared to the first quarter's net investment income.
As a reminder, we had approximately $564000 on.
On <unk> per share of duplicate interest costs and.
And the first quarter related to our bond refinancing.
And the increase of approximately 12% and on MTV.
And <unk>, which was $13.42 per share as of June 30th.
We increased our quarterly distribution by 9% compared to last quarter.
From 'twenty 2 cents per share to 24 cents per share, marking our fourth consecutive quarterly distribution increase.
Lastly, we had no new loans on non accrual, which we believe demonstrates the continued improvement and the performance of our portfolio companies.
The increase and our net investment income was largely driven by additional fee income and lower borrowing costs, resulting from our bond offering and the first quarter.
We anticipate that day.
May be a future opportunity to further reduce the cost of borrowing on our existing debt, which in turn will help grow our earnings.
The increase in on net asset value was largely driven by improvements and the performance and our debt investments and strong growth and our equity investments.
1 of these equity investments Ventas team and a global manufacturer of high purity pharmaceutical ingredients has performed especially well.
While we primarily invest and senior secured loans on investment strategy allows us to selectively make equity investments when we identify a strong opportunity.
Since our IPO, we have invested approximately $39 million and the equity as well as received warrants and more than 35 portfolio companies.
To date, we have net realized gains of approximately $16 million on $14 million of invested capital.
As of June 30th the remaining $25 billion of capital still invested in our portfolio companies has a net unrealized gain of approximately $44 million.
We believe that our asset selection before and during the pandemic along with the strength of our balance sheet has enabled us once again to successfully weather and unprecedented prices.
And adviser has navigated through multiple credit cycles, and global economic disruptions over the past 25 years and we relied upon this experience to help us successfully navigate the COVID-19 crisis, thus far.
We also believe the resilience of our portfolio through the pandemic is a testament to our longstanding underwriting process.
Our fundamental priority is to remain focused on preserving capital.
While thoughtfully growing our earnings.
Continue to originate loans to new companies as well as increasing the size of our loans to existing portfolio companies as they grow organically or through acquisitions.
Our portfolio remains defensively positioned both in terms of seniority and the capital structure and industry selection.
As a percentage of fair value approximately 95% of our loan portfolio was senior secured and at the end of the second quarter.
Our portfolio is diversified across multiple industries, with our highest exposures and healthcare technology business services and manufacturing.
In addition, we continue to avoid highly cyclical industries, such as oil and gas metals and mining.
On loans are largely floating rate and our financing is primarily fixed rate.
And therefore, we view our portfolio as being well positioned to benefit from and eventual increase in interest rates.
Looking forward, we expect that the broader economy will continue to improve.
Over time.
Due to the fiscal and monetary policies enacted over the past 18 months.
This has incentivize overall M&A activity.
And the need for debt capital to finance this level of deal making activity.
We have been actively reviewing potential investments from new borrowers as well as existing borrowers for whom we are a trusted capital provider.
While always selective we see the current conditions and a solid backdrop to deploy capital.
Which we anticipate will lead to an increase and a net investment income in the long term.
Our financing continues to provide us operational flexibility.
As of the quarters and more than 90% of on debt matures in 2024 on later and nearly 2 thirds of on debt is unsecured.
In addition, our senior loan facility matures in 2020, 4 and is non recourse to the BDC.
Our corporate line of credit is flexible with no mark to market provisions.
Oss capital continues to benefit from the expertise and scale of its advisors.
With more than $2.5 billion and assets under management.
The BDC adviser has experience <unk>.
Investing across the loan and structured credit markets.
Which helps us to identify relative value credit opportunities.
<unk> multiple asset classes.
Our team of investment professionals has extensive experience and credit underwriting and restructuring across industry verticals.
In addition, we believe that shareholders benefit from our alignment of interest with the advisor owning 22% of the outstanding shares of the BDC.
You can be assured that we are working diligently every day to protect our investments and drive the business forward for the benefit of all shareholders.
At this point and turn the call over to Jeff Cerny, Our Chief Financial Officer to 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 overall performance of our portfolio companies and the increase and the fair value of our debt and equity investments driving a 12, 2% increase and our net asset value over the prior quarter.
Turning to our financial results, starting with our balance sheet, we had $35.2 million of cash at the end of the quarter of which $15.5 million of that cash was and our SPX.
At quarters, and we had $95.5 million left and outstanding SBA debentures, as Bilal mentioned, 90% of our debt matures in 2024, or later and 63% of our outstanding debt at quarter end was unsecured.
And we feel good about the composition of our liabilities. It should be noted that $78.4 million of the unsecured debt is callable later this year, adding to our flexibility to manage our liabilities and potentially reduce the cost of our borrowings.
Excluding our <unk> debt, our debt to equity ratio improved to approximately 1.3 times at the end of the quarter compared to 1.4 times at the end of last quarter.
Our net asset value continues to show a strong recovery since the onset of the pandemic.
Net asset value per share of $13.42 status at the end of the second quarter exceeds our premium pandemic net asset value per share of $12.46.
At fiscal year end 2019.
Also our net asset value per share at the end of the quarter was 12, 2% higher than the prior quarter.
This was primarily driven by higher fair value marks on our investments, especially as Bilal discussed the increase and our unrealized gain on our equity investment and fan steel.
Office capital has a long standing track record of making accretive equity investments since the Bdcs and inception, we have invested approximately $39 million and the equity and also received warrants and more than 35 portfolio companies.
Today, we have net realized gains of approximately $16 million $14 million on invested capital.
The remaining $25 million and <unk>.
<unk> invested and various portfolio companies has a net unrealized gain of approximately $44 million at June 30.
While we primarily invest in senior secured loans, our investment strategy allows us to make equity investments when we see a strong opportunity.
As Bilal mentioned, we had no new non accruals this quarter.
Not had a new non accrual since the second quarter of 2020.
And currently have 2.6% on our loan portfolio on non accrual on fair value.
Turning to the income statement total investment income for the quarter increased approximately $900000 to $11.4 million. This.
This was primarily due to an increase in interest income common dividends and other fees.
Total expenses of $8.2 million were marginally up over the prior quarter. This small increase was due to incentive and professional fees. This was largely offset by decreases in interest expense due to our bond refinancing and the first quarter and a reduction in net administrative fees.
Net investment income of 24 cents per share was up approximately 26 per cent compared to the first quarter's net investment income as.
As you May recall, we had approximately $564000 or <unk> <unk> per share of duplicate interest costs and the first quarter related to our bond refinancing.
As Bilal discussed earlier this morning, we announced the distribution for the third quarter of <unk> 24 cents and approximate 9% increase and the quarterly rate. The board approve this higher distribution and based on our increased earnings driven in part by our bond offering and the first quarter, which we believe will continue to improve our overall earnings and optimize our capital.
Structure as always we remain focused on our liquidity and maintaining a healthy balance sheet.
Turning to our investments we are pleased that our portfolio companies have continued to perform and believe that our underwriting so activity will continue to positively impact how the portfolio performs and the future set.
Several of our portfolio companies continue to identify opportunities for growth from which we are evaluating incremental funding.
The overwhelming majority of our investments on our loans, 95% on a fair value of our loans were senior secured 97% of which were floating rate.
We have LIBOR floors on approximately 89% of our floating rate loan portfolio with a weighted average LIBOR floor of 1.1% and and current interest rate environment. This LIBOR floor is a strong contributor to our earnings as it favorably compares to the 3 month LIBOR of just 15 basis points at June.
30th.
Our overall investment portfolio as a percentage of cost includes approximately <unk> 71 per cent senior secured loans, 8% subordinated debt, 15% structured finance notes and 6% equity of which approximately half of our equity was and preferred securities.
Our portfolio remains diversified at the end of the quarter the portfolio had investments and 91 companies totaling approximately $484 million on a fair value basis, with an average investment and each portfolio company of $5.3 million or 1.1 per cent of the portfolios total fair value.
The overall weighted average yield to cost on our performing debt and structured finance note investments is 9.7 and 7% down by 27 basis points quarter over quarter, primarily as a result of our continued focus on first lien debt to larger companies.
With that I will turn the call back over to Bilal.
Thank you Jeff.
In closing we are pleased with our performance and the second quarter.
Our net asset value has continued to improve.
Reaching above pre pandemic levels.
And driven by the performance of both on debt and equity investments.
Once again, we increased our distributions, reflecting both improved performance and our expected outlook for the quarters ahead.
We maintained a solid liquidity position, which we believe will help us in this current economic environment as we seek to take advantage of potential new investment opportunities and support our existing portfolio companies.
We continue to remain focused on capital preservation.
Since the beginning of 2011 were fast has invested approximately $1.6 billion with a cumulative net realized loss of principal of only $24.7 million.
And annualized loss percentage of approximately 0.15%.
While generating attractive yields on our portfolio.
Overtime, we have been steadily increasing our allocation to senior secured loans, which now constitute the majority of our loan portfolio as we continue to increase our exposure to larger borrowers.
On financing, it's primarily long term with 90% of on debt maturing in 2024 and beyond.
We believe that this gives us operational flexibility to execute on our business plan.
Lastly, we believe the size and experience and reputation of on adviser has continued to benefit our business.
With a $2.5 billion corporate credit platform within a $30 billion asset management group on.
Advisor has broad resources, including long standing banking and capital market relationships.
It has gone through multiple credit cycles over the past 25 years and.
And it has a strong alignment of interest with all shareholders with a 22% ownership interest in the BDC.
Finally, I want to thank our employees for their continued dedication.
While the impact of this pandemic continues to evolve.
We believe our hard work and diligence has helped us successfully navigate a challenging time, thus far.
With that operator.
Please open up the call for questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then 1 on your Touchtone phone if youre using a speakerphone. Please pick up your handset before before pressing on the keys.
And to withdraw your question. Please press Star then 2 and at this time on pause momentarily to assemble our roster.
And the first question will come from Mickey <unk> with Ladenburg. Please go ahead.
Yes, good morning, everyone hope everyone's well.
I'd like to ask about your outlook for the loan market.
Considering both the private debt and private equity markets have a lot of dry powder and spreads are tightening, which we all know can result in higher repayments, but.
And if the economy is growing sharply and M&A is very active and I'm getting the sense that borrowers seemed to be gravitating, more and more and more to private debt solutions. So I realized repayments can be a function of vintage and call protection, but broadly speaking how would you characterize the outlook for organic growth and.
The leveraged loan market versus refinancings, and what are your expectations for offices.
Originations versus repayments for the rest of the year.
Uh huh.
Thanks, Mickey that's a very good question so.
Thanks.
Youre right I think there is a decent amount of capital.
And the private debt markets right now and you know it.
Yes.
Lot of it actually has been raised.
Or.
The upper part of the middle market.
And in the sponsored space.
Part of the market that we play and the lower middle market is somewhat insulated.
And not completely insulated obviously.
So I think that.
As it relates to repayments I think that we will.
You know likely see.
Prepayment activity.
Does continue.
But then I think at the same time.
The low.
Lot of M&A activity and is also happening in this space, which will require a decent amount of capital.
To finance that M&A activity, I think and the past when you saw a lot of refinancing activity, maybe a couple of years ago.
You want and seeing a lot of new.
The new capital that was required.
M&A activity was not as strong I think.
And with a strong backdrop and the economy.
We are seeing.
The M&A activity picking up as well so although repayment activity I believe.
We will continue but at the same time the demand for capital will also continue.
And so we think that the.
Our origination book.
And the.
And.
Origination activities.
What.
And I believe.
Growth overtime.
And our expectation is that the new originations.
Outpace and my.
Opinion.
The prepayments.
I'd also mentioned that you know.
In addition to.
And.
Making new loans.
Excuse me.
<unk>.
And also Ken.
And look at other parts of the credit markets. So as you know we.
And have expertise and not just in the middle market.
Loan origination and we also have expertise and districts and credit market as well looking at CLO equity and CLO debt as well so given that we have a broad platform.
Market get 40, and 1 part of that market.
And certainly look at.
Other parts of that market.
So.
And as you've seen.
And really diversified portfolio across those.
Different asset classes within the credit and.
Structured credit.
Thank you for that explanation, but all I appreciate the your insight just 1 follow up sort of housekeeping question. Since we haven't seen the 10-Q could you just describe what drove the realized the net realized loss this quarter.
Yeah, So I think.
And as Jeff said at the time and I think that was a.
Those were loans that were already marked down.
Ooh and Ah.
I believe close to zero and it was just a reversal of them from going going from unrealized to realize is.
Is that correct.
Correct.
The predominant portion of it yes.
Alright, that's it from me. This morning I appreciate your time I hope everyone has a good weekend. Thank you.
Thanks Nicky.
The next question will come from David <unk> with Pat OCA. Please go ahead.
First gentlemen, I'm on.
And just want to congratulate you on a fantastic quarter and doing a fantastic job for the shareholders.
Through this crisis.
I just wanted to ask you about the equity investment and try and steel and what your thoughts are in terms of liquidity.
Yeah David.
Thank you very much first of all and this is Jeff.
We are primarily a platform that invest and senior secured loans, but we do make selective equity investments and we find it attractive.
Company and.
And sales are good example of that.
That was and investment that we that we made many years back it's about a $400000 basis and.
The fair value is around $49 million right now so.
And we continue to see a lot of growth trajectory for this company.
And.
While we think there is liquidity.
We think it's too early to sell we still think there's some strong appreciation here and we believe there's some some tailwind and this industry and show and the company's largely unlevered.
And so they have a lot of flexibility to work through any issues. So we feel we feel real good about that about that and Boston.
That's great. Thank you.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Mr. Bilal Rashid for any closing remarks. Please go ahead Sir.
Thank you all for joining our call today, and we look forward to speaking with everyone again exporters operator, you may now and Nicole.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
[music].
Hum.
[music].
Okay.
[music].
Hum.
[music].