Q3 2021 First Eagle Alternative Capital BDC Inc Earnings Call
Good morning, and welcome to first Eagle alternative capital BDC incorporated.
Earnings Conference call for its third fiscal quarter ended September 30th 'twenty 'twenty. One it is my pleasure to turn the call all participating a reason at Carson I first Eagle I've tried to capital BDC incorporated Ms. Teresa Carlson you may begin.
Thank you operator, good morning, and thank you for joining US joining me on today's call are Chris Flynn President of first Eagle alternative credit and young Wilson, our Chief Accounting Officer and Treasurer.
Before we begin please note that statements made on this call may constitute forward looking statements within the meaning of the Securities Act of 1933 as amended and such.
Such statements reflect various assumptions by first Eagle alternative capital BDC concerning anticipated results that are not guarantees of future performance and are subject to known and unknown uncertainties and other factors that could cause actual results to differ materially from such statements.
Uncertainties and other factors are in some way beyond management's control and include factors, including 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 our reasonable any of those assumptions could prove to be inaccurate and as a result of foreign looking statements based on those assumptions also could be incorrect you should not place undue reliance on these forward looking statements.
Firstly of alternative capital BDC undertakes no duty to update any forward looking statements made herein unless required by law.
All forward looking statements speak only as of the date of this call.
Our earnings announcements and 10-Q were released yesterday afternoon copies of which can be found on our website along with the Q3 earnings presentation that we may refer to during this call.
A webcast replay of this call will be available until November 15, 2021, starting approximately two hours. After we conclude this morning to access the replay. Please visit our website at www Dot F. The AC BDC dot com with that I'll turn the call over to Chris.
Thank you Brandon good morning, and thank you for joining us on our earnings call today I'll provide an overview of our third quarter results. Some portfolio highlights and then Jim will discuss our portfolio and financial results in more detail.
Let's begin with the quarter net investment income for the third quarter was <unk> 11 per share compared with our 10 five per share dividend this quarter and <unk> <unk> per share of NII in Q2.
We continue to increase leverage in Q3 up to $1. One three times up from $1. One at the end of Q2, we have previously communicated our plan to move closer to our long term leverage target of one two times.
As we've continued to diversify the portfolio and the portfolio stabilized we are increasing our target leverage ratio from one two to one three.
Based on our deal pipeline and lending environment. Today, we continue to believe we have the ability to hit our target leverage ratio of one two times by the end of the quarter.
During this quarter book value was essentially flat at $6 50 per share.
During the quarter, we saw a change in unrealized depreciation net of tax of $700000 or <unk> <unk> per share our equity position and will that was the primary contributor to this decrease this quarter with the change in unrealized depreciation of <unk> <unk> per share at the public share price of the stock declined approximately 33% from the end of Q2 to the end of Q2.
Alright.
Subsequent to quarter end, we have seen the share price improve approximately 15% through the market closed last night.
Additionally, <unk> America, all contributed <unk> <unk> per share change in unrealized depreciation during this quarter. These decreases were offset by a change in net unrealized depreciation across the broader portfolio of <unk> per share due to continued performance of the portfolio companies tightening spreads and the benefit for taxes on unrealized depreciation of one <unk>.
Primarily attributed to the value of wheels up.
As we delve deeper into the portfolio. We believe there have been a great deal of progress made and we continue to be optimistic about the portfolio repositioning.
Overall, the portfolio continues to perform well and that they continue.
Continuing impact of the COVID-19 pandemic.
Revenue and EBITDA levels and liquidity for most COVID-19 impacted businesses and the portfolio continued to improve and in many instances have returned to or exceeded pre COVID-19 levels.
Companies that are not yet fully rebounded continue to maintain good liquidity profiles their notes that I have to get amendments to existing loans in Q3.
Consistent with Q2, we did not add any new non accruals during the quarter loadmaster, They only portfolio company on non accrual.
At OEM, the plasma thermal transaction, we consummated in Q4 to commercialize a distributed technology to the market is performing in line with expectations.
As a reminder, the principal consideration was in the form of deferred payments for several years. These payments are contingent upon certain milestones, including menu with minimum annual payments for the $4 four years that will be used to service our debt.
Cover certain operating costs the.
The BDC retained all of the equity in these remaining businesses.
Igloo or other concentrated position, which represented five 5% of the portfolio and was the largest holding at September 30th.
Was repaid at the end of October.
Our equity position all accrue to us.
Plus a one year earn out.
With the repayment of the Igloo OEM is the last remaining credits of the 14 concentrated positions held in our portfolio. In early 2018, we are pleased with our progress on exiting these legacy investments and this gives us confidence to proceed with a plan to increase leverage.
We are very active in the quarter, making 33, new investments across the entire direct lending program platform totaling over $615 million of which $34 million or eight new portfolio investments companies were allocated at CRD.
This pace of deployment not only speaks to the overall level of deal activity in the market, but also the power of being part of the first Eagle direct lending platform.
<unk> also made an additional $8 5 million add on investments during the quarter during the quarter. There were four debt repayments at par of which two included prepayment penalties.
Our direct lending pipeline remains strong and the BDC continues to benefit from the deal flow generated by first eagle's approximately $5 billion direct lending platform.
The growth of the platform allows the BDC to hold a more diversified portfolio with a number of physicians up from 45 in Q1 of 2018 to 68 this quarter.
Allowing first eagle to provide more capital to middle market companies.
Since the beginning of the pandemic first eagle's direct lending platform has remained robust and we expect it to continue to provide us with attractive investment opportunities. We continue to be very selective about where we deploy our capital.
And are mindful of the macro environment and our investment committee decisions. Our goal is to continue to diversify our investment approach is the BDC continues to grow in 2001 and beyond with that I'll turn the call over to Jim Great. Thanks, Chris and good morning, everyone first I'll start off with some investment and portfolio highlights as Chris mentioned, we had an active quarter with eight new <unk>.
I will follow on investments totaling $43 million at a blended yield of seven 5%. Additionally, we had four new notable realizations the repayments of our first lien position in women's health USA PDF Tron system's ABC legal services and since there are intermediate generating $29 $3 million of cash.
Proceeds including prepayment premiums.
As of September 30, our portfolio was valued at $418 million up from $395 million at the end of Q2. It was invested 74% in first lien senior secured debt and 18% in the Logan JV as a reminder, the Logan JV is 98% invested in first lien assets.
The remaining 8% of the Bdc's portfolio with <unk> second lien sub.
Debt and other non income producing and equity holdings, including our restructured equity like second lien investment in OEM.
The weighted average yield on the debt and income producing portfolio based on cost and including Logan was six 9% in Q3. This was in line with prior quarter.
We did not place any additional investments on non accrual during Q3 total non accruals as a percentage of our portfolio at fair value and it costs, four 2% and 3.5% percent respectively.
Now I'd like to address the financials for the third quarter. During Q3, we recognized $8 4 million of investment income primarily from interest and dividends interest income increase for approximately 400000 from Q2 to $6 3 million for Q3, the increase was driven by an improvement in coupon interests as we can.
We need to add new names to the portfolio included in the $6 3 million as 156000 related to prepayment premiums and 214000 related to the accelerated amortization of OID.
Dividend income from the Logan JV was relatively flat quarter over quarter at $1 7 million and other income increased 131000.
Primarily related to an increase in one time fees such as the amendment in a range of fees.
Total expenses for the quarter.
5 million down slightly from Q2.
With respect to other items below the net investment income line. The company had a small net realized gains for Q3 of.
Approximately $100000 from.
From a leverage perspective, we ended Q3 with a debt to equity ratio of one three times, we have ample borrowing capacity on our credit facility to continue to grow and increase leverage towards our target of one two times by the year end.
With that I'll turn the call back over to Chris.
Overall this was another stable quarter for CRD, we continued to deliver steady improvements the credit quality and enhance our ability to utilize leverage.
Our record of positive results in most portfolio companies. We also made additional progress in Derisking the portfolio with respect to several remaining legacy positions.
Origination activity remains strong and we are confident in our ability to prudently increase our leverage profile put us in a position to meet or exceed our current dividend level I would now like to turn the call over to the operator for Q&A.
As a reminder to ask a question. Please press star one on your telephone keypad Android John a question. Please press the pound key.
Again to ask a question. Please press star one is telephone keypad, Andrew a question. Please press the pound key.
Lisa and I will be compiled the Q&A roster.
Yeah.
Okay.
Our first question comes from the line of Matt Tjaden from Raymond James.
Hey, all good morning, I. Appreciate you taking my questions first one for me maybe on the on the capital structure. So it looks like the 2023 notes are now redeemable.
At a higher cost in the 'twenty six notes any any high level color you can give on kind of plans for that issuance and maybe revisiting the unsecured market.
Yeah. Thanks, Matt This is Chris we appreciate it obviously as we've improved the balance sheet obtaining the investment grade rating, we were able to refinance the four.
That's one of the bonds early this year.
We continue to look at the market based.
Based on our current read of the market remains strong. So we will we'll take that into consideration. Obviously is as we finish up the quarter in our 10-Q and 10-K.
Got it maybe second one for me on OEM, so it sounds like it's going to be.
Somewhat of a process.
In terms of when we could see OEM fully roll off the books is that a 2023 or maybe beyond kind of process just to complete the the legacy rotation.
Yes, that's a great question, Matt and I wish I had a better answer for you probably too early to tell as structured it's a longer dated investment.
I would like to see where we stand at the end of the year and had some discussions based on the performance to see if theres a way too.
Convert that to cash sooner, but we're not in a position to do that right now but to the extent, we can we would and we will.
But it's a bit too early.
Got it.
Last one for me just more so a housekeeping one it looks like yields in the Logan JV were down 30 bps quarter over quarter any noise, but can matter or is that just a function of kind of deployment and repayment yields.
It's just more of a function of where the market is right now.
You step back for a bit pre COVID-19 market was pretty aggressive when COVID-19 first hit the market gapped out.
As I sit here today, we're probably back at pre Covid levels are slightly tighter in other in other areas. So it just a function of the overall competitiveness of the market.
Got it that's it for me I appreciate the time.
We appreciate it thank you.
Okay.
Our next question comes from the line of Paul Johnson from CBW.
Hey, Paul.
Hey, good morning, guys. Thanks for taking my questions Hey.
On the JV.
As that has stabilized.
Just wondering are you guys I think with some skills, let's he remaining commitments inside of the JV is that something that you're still looking to grow at this point or kind of just maintain.
Where it's at currently.
Listen we think it's an attractive return for the shareholder we have thoughts to manage it as it relates to our 30% bucket.
As the portfolio has started to grow again, it's created some incremental capacity.
I think you could see some incremental capital contributed to the Logan to the extent the.
Return on equity makes sense.
I'd say, we're also trying to figure out more efficient ways to not only finance the BDC balance sheet, but also the Logan balance sheet to drive a higher Roe.
So.
Not only growth.
But also again, a consistent theme you're going to hear US now that we've got a consistent stable balance sheet, we should be able to drive a higher ROE based on that lower cost of financing.
Not only for the BDC, what we've done with the bonds, but also what we could potentially do with Logan.
Got it.
And then on the.
The igloo repayments.
Forgive me if I didn't catch this in your remarks, but were there any exit fees or OID associated with repayment.
Fourth quarter.
They were not it was a long dated investment we're well beyond the call protection.
Got it and I'm guessing that investment that was probably refinance there.
Probably.
But it will be built out of the portfolio.
The business, Okay got it.
Okay.
Okay.
Those are all my questions. Thanks.
Paul Thank you I appreciate it.
Again to ask a question. Please press star one on your telephone keypad.
At this time I would like to hand, the conference back to Chris Flynn.
Thank you operator, we appreciate the support of our shareholders and look forward to providing you with an update in late February early March in our full year results feel free to reach out to me or Jen. If you have any questions before then.
Yeah.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
Okay.
Yeah.
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Good morning, and welcome to first Eagle alternative capital BDC incorporated.
Earnings Conference call for its third fiscal quarter ended September 30th 'twenty 'twenty. One it is my pleasure to turn.
Turning the call over to Sabrina Roosen at Carson, our first Eagle I've tried to capital BDC incorporated Ms. Teresa Carlson you may begin.
Thank you operator, good morning, and thank you for joining US joining me on today's call are Chris Flynn President of first Eagle alternative credit and John Wilson, Our Chief Accounting Officer, and Treasurer before we begin. Please note that statements made on this call may constitute forward looking statements within the meaning of the Securities Act of 1933.
Such statements reflect various assumptions by first Eagle alternative capital D. C concerning anticipated results that are not guarantees of future performance and are subject to known and unknown uncertainties and other factors that could cause actual results to differ materially from such statements.
The uncertainties and other factors are in some way beyond management's control and include factors, including 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 any of those assumptions could prove to be 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.
Firstly of alternative capital BDC undertakes no duty to update any forward looking statements made herein unless required by law. All forward looking statements speak only as of the date of this call.
Our earnings announcements and 10-Q were released yesterday afternoon copies of which can be found on our website along with the Q3 earnings presentation that we may refer to during this call.
A webcast replay of this call will be available until November 15, 2021, starting approximately two hours. After we conclude this morning to access the replay. Please visit our website at www Dot F. The AC BDC dot com with that I'll turn the call over to Chris.
Thank you Brandon good morning, and thank you for joining us on our earnings call today I'll provide an overview of our third quarter results. Some portfolio highlights and then Jim will discuss our portfolio and financial results in more detail.
Let's begin with the quarter net investment income for the third quarter was <unk> 11 per share compared with our $10 per share dividend this quarter and <unk> <unk> per share of NII in Q2.
We continue to increase leverage in Q3 up to $1. One three times up from $1. One at the end of Q2, we have previously communicated our plan to move closer to our long term leverage target of one two times.
As we've continued to diversify the portfolio and the portfolio stabilized we are increasing our target leverage ratio from one two to one three.
Based on our deal pipeline and lending environment. Today, we continue to believe we have the ability to hit our target leverage ratio of one two times by the end of the quarter.
During this quarter book value was essentially flat at $6 50 per share.
During the quarter, we saw a change in unrealized depreciation net of tax of $700000 or <unk> <unk> per share our equity position in <unk> was the primary contributor to this decrease this quarter with the change in unrealized depreciation of <unk> <unk> per share at the public share price of the stock declined approximately 33% from the end of Q2 to the end of Q2.
Alright.
Subsequent to quarter end, we have seen the share price improved approximately 15% through the market closed last night.
Additionally, <unk> America contributed <unk> <unk> per share change in unrealized depreciation during this quarter. These decreases were offset by a change in net unrealized depreciation across the broader portfolio of <unk> <unk> per share due to continued performance of the portfolio companies tightening spreads and the benefit for taxes on unrealized depreciation of one <unk>.
Primarily attributed to the value of wheels up.
As we delve deeper into the portfolio. We believe there have been a great deal of progress made and we continue to be optimistic about the portfolio repositioning.
Overall, the portfolio continues to perform well and that the continuing impact of the COVID-19, pandemic revenue and EBITDA levels and liquidity for most COVID-19 impacted businesses and the portfolio continued to improve and in many instances have returned to or exceeded pre COVID-19 levels.
<unk> that are not yet fully rebounded continue to maintain good liquidity profiles their notes that I have to get amendments to existing loans in Q3.
Consistent with Q2, we did not add any new non accruals during the quarter loadmaster, They only portfolio company on non accrual.
At OEM, the plasma thermal transaction, we consummated in Q4 commercialize and distribute this technology to the market is performing in line with expectations.
As a reminder, the principal consideration was in the form of deferred payments for several years. These payments are contingent upon certain milestones, including menu with minimum annual payments for the $4 four years that will be used to service our debt and cover certain operating costs.
The BDC retained all of the equity in these remaining businesses.
Igloo or other concentrated position with represented five 5% of the portfolio and was the largest holding at September 30th.
Was repaid at the end of October.
Our equity position at all.
Cash plus a one year earn out.
With the repayment of the Igloo OEM is the last remaining credit of the 14 concentrated positions held in our portfolio. In early 2018, we are pleased with our progress on exiting these legacy investments and this gives us confidence to proceed with a plan to increase leverage.
We are very active in the quarter, making 33, new investments across the entire direct lending program platform totaling over $615 million of which $34 million or eight new portfolio investments companies were allocated at CRD.
As a deployment not only speaks to the overall level of deal activity in the market, but also the power of being part of the first Eagle direct lending platform.
First <unk> also made an additional $8 5 million add on investments during the quarter during the quarter. There were four debt repayments at par was two included prepayment penalties.
Our direct lending pipeline remains strong and the BDC continues to benefit from the deal flow generated by first eagle's approximately $5 billion direct lending platform.
The growth of the platform allows the BDC to hold a more diversified portfolio with a number of physicians up from 45 in Q1 of 2018 to 58 this quarter.
Allowing first eagle to provide more capital to middle market companies.
Since the beginning of the pandemic first Eagle direct lending platform has remained robust and we expect it to continue to provide us with attractive investment opportunities. We continue to be very selective about where we deploy our capital.
And are mindful of the macro environment and our investment committee decisions. Our goal is to continue to diversify our investment approach as a BDC continues to grow in 2001 would be on with that I will turn the call over to Dan great.
Great. Thanks, Chris and good morning, everyone first of all start off with some investment and portfolio highlights as Chris mentioned, we had an active quarter with eight new and several follow on investments totaling $43 million at a blended yield of seven 5%. Additionally, we had four notable realizations through the repayment of our first lien positions.
In women's health USA, PDF Tron system's ABC legal services and to Zara intermediate generating $29 3 million of cash proceeds including prepayment premiums.
As of September 30, our portfolio was valued at $402 million up from $395 million at the end of Q2. It was invested 74% in first lien senior secured debt and 18% in the Logan JV as a reminder, the Logan JV is 98% invested in first lien assets.
The remaining 8% of the Bdc's portfolio with <unk> second lien sub debt and other non income producing and equity holdings, including our restructured equity like second lien investment in OEM.
The weighted average yield on the debt and income producing portfolio based on cost and including Logan was six 9% in Q3. This was in line with prior quarter.
We did not place any additional investments on non accrual during Q3 total non accruals as a percentage of our portfolio at fair value and cost for a 2% and three 5% percent respectively.
Now I'd like to address the financials for the third quarter.
During Q3, we recognized $8 4 million of investment income primarily from interest and dividends interest income increase for approximately 400000 from Q2 to $6 3 million for Q3. The increase was driven by an improvement in coupon interest as we continue to add new names to the portfolio.
Included in the $6 $3 million is 156000 related to prepayment premiums and 214000 related to the accelerated amortization of OID.
Dividend income from the Logan JV was relatively flat quarter over quarter at $1 7 million and other income increased 131000.
Primarily related to an increase in one time fees, such as amendment and a range of fields.
Total expenses for the quarter were $5 million down slightly from Q2.
With respect to other items below the net investment income line. The company had a small net realized gains for Q3 of.
Approximately $100000 from.
From a leverage perspective, we ended Q3 with a debt to equity ratio of 113 times, we have ample borrowing capacity on our credit facility to continue to grow and increase leverage towards our target of one two times by the year end.
With that I'll turn the call back over to Chris.
Thanks, Jim overall this was another stable quarter for CRD, we continued to deliver steady improvement in credit quality and enhance our ability to utilize leverage.
Our record of positive results in most portfolio companies. We also made additional progress in Derisking the portfolio with respect to several remaining legacy positions.
Origination activity remains strong and we are confident in our ability to prudently increase our leverage profile and put us in a position to meet or exceed our current dividend level I would now like to turn the call over to the operator for Q&A.
As a reminder to ask a question. Please press star one on your telephone keypad and withdraw your question. Please press the pound key.
Again to ask a question. Please press star one is telephone keypad, Andrew a question. Please press the pound key.
And while we compile the Q&A roster.
Okay.
Okay.
Our first question comes from the line of Matt Tjaden from Raymond James.
Hey, al Good morning, I. Appreciate you taking my questions first one for me maybe on the on the capital structure. So it looks like both the 2023 notes are now redeemable.
At a higher cost in the 'twenty six notes any any high level color you can give on kind of plans for that issuance and maybe revisiting the unsecured market.
Yeah. Thanks, Matt This is Chris we appreciate it obviously as we've improved the balance sheet obtaining the investment grade rating, we were able to refinance the.
A portion of the bonds early this year.
We continue to look at the market.
Based on our current rate of the market remains strong so we will we.
We'll take that into consideration obviously is as we finish up the quarter in our 10-Q and 10-Q.
Got it maybe second one for me on OEM, so it sounds like it's going to be.
Somewhat of a process.
In terms of when we could see OEM fully roll off the books is that a 2023 or maybe beyond kind of process just to complete the the legacy rotation.
Yes, that's a great question, Matt and I wish I had a better answer for you probably too early to tell as structured as a longer dated investment.
I would like to see where we stand at the end of the year and have some discussions based on the performance to see if theres a way too.
Convert that to cash sooner, but we're not in a position to do that right now but to the extent, we can we would and we will.
But it's a bit too early.
Got it.
Last one for me just more so a housekeeping one it looks like yields in the Logan JV were down 30 bps quarter over quarter any noise within matter was that just a function of kind of deployment and repayment yields.
I guess just more of a function of where the market is right now.
You step back for a bit pre COVID-19 the market was pretty aggressive when COVID-19 first hit the market gapped out.
As I sit here today, we're probably back at pre Covid levels are slightly tighter in other in other areas. So that's just a function of the overall competitiveness of the market.
Got it Thats it from me I appreciate the time.
We appreciate it thank you.
Okay.
Our next question comes from the line of Paul Johnson from TB W.
Hey, Paul.
Hey, good morning, guys. Thanks for taking my questions Hey.
On the JV.
As that has stabilized.
Just wondering are you guys I think were some skill sets you remaining commitments inside of the JV is that something that you're still looking to grow at this point or kind of just maintain.
Where it's at currently.
Listen we think it's an attractive return for the shareholder we have to us to manage it as it relates to our 30% bucket.
As the portfolio has started to grow again, it's created some incremental capacity.
I think you could see some incremental capital contributed to to Logan to the extent.
Return on equity makes sense.
I'd say, we're also trying to figure out more efficient ways to not only finance the <unk>.
BDC balance sheet, but also the Logan balance sheet to drive a higher Roe.
So.
Not only growth that we're focused on.
But also again, a consistent theme you're going to hear US now that we've got a consistent stable balance sheet, we should be able to drive a higher ROE based on that lower cost of financing.
Not only through the BDC, what we've done with the bonds, but also what we could potentially do with Logan.
Got it.
And then on the.
On the igloo repayments.
Forgive me if I didn't catch this in your remarks, but were there any exit fees or OID associated with repayment in the fourth quarter.
There were not it was a long dated investment we're well beyond the call protection.
Got it and I'm guessing that investment that was probably refinance.
Yes, probably.
Our business in the portfolio.
Okay got it.
Okay.
Okay.
Those are all my questions. Thanks.
Paul Thank you I appreciate it.
Again to ask a question. Please press star one on your telephone keypad.
At this time I would like to hand, the conference back to Chris Flynn.
Thank you operator, we appreciate the support of our shareholders and look forward to providing you with an update in late February early March in our full year results feel free to reach out to me or Jen. If you have any questions before then.
This concludes today's conference call. Thank you for participating you may now disconnect.