Q4 2021 TCG BDC Inc Earnings Call
Good day, and thank you for standing by and welcome to the TCG BDC, Inc. Fourth quarter 2021 earnings call. At this time, all participants are in a listen only mode.
And speakers presentation there'll be a question and answer session.
I asked a question. During this session you will need to press star one on your telephone. Please be advised that this call is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your host today head of Investor Relations Alison Gary. Please go ahead.
Yeah.
Good morning, and welcome to TCG Bdc's fourth quarter 2021 earnings call 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's 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 involve inherent risks and uncertainties, including those identified in the risk factors section of our annual report on Form 10-K that could cause actual results to differ materially from those indicated.
G BDC assumes no obligation to update forward looking statements at any time.
With that I'll turn the call over to our Chief Executive Officer, Linda pace.
Thank you Allison and good morning, everyone and thank you all for joining us on our call. This morning to discuss our fourth quarter and full year 2021 results.
Joining me on today's call is our Chief investment Officer, Taylor, Boswell, and our Chief Financial Officer, Tom Hennigan.
Going to focus my remarks today on three topics.
First I want to touch on this quarter's results.
Second I'll highlight some of the momentum of the last year and finally, I'll conclude with some thoughts on our positioning for 2022.
Let me begin with this quarter's financial results, which demonstrated continued strength across the board.
We again generated solid earnings with net investment income of <unk> 40 per common share while declaring 40 in total dividends, which represents an annualized yield on our stock of over 11% net.
Net asset value per share of $16 91.
So a positive progression for the seventh consecutive quarter up one 6% from Q3 21.
As we will detail later strengthening credit performance, especially in our non accrual and watch list names drove most of this increase.
Salerno of nonaccrual name, we have been invested in for seven years and been working out for three provided the largest impact in the first quarter, we exited the position and expect another meaningful boat boost to Q1, 'twenty two performance and a reduction in our non accrual rates as a result.
As we have said before the recovery of our watch list and non accrual names remains a significant tailwind for performance.
During the fourth quarter, given the continued attractive returns available repurchased seven $8 million of our common stock, resulting in three cents of accretion to net asset value. Since we launched our program in late 2018, we have repurchased over $125 million of stock, which represents nearly 15% of the total <unk>.
Shares outstanding demonstrating our ongoing commitment to shareholder returns.
On the investment front, we funded $236 million in the fourth quarter, reflecting the robust deal environment in and the deeper origination capabilities of carlyle's platform.
We had repayments and strategic sales of $272 million and ended the year with just over $1 $9 billion of investments.
This is a very comfortable funding position, allowing us to be highly selective and defensively oriented on new investments.
Next I'd like to reflect for a moment on 2021 full year results.
Simply put it was a great year for our business with strong income delivery substantial NAV growth and outstanding stock performance.
We posted full year net investment income of $1 53 considerably out, earning our base dividend each quarter, we paid $1.50 in dividends, representing a nine 7% yield on NAV and a 14.6% yield on the stock price as measured from the beginning of 2021 week.
We grew our NAV almost 10% in 2020 , one and two 2% since the since year end 2019, reflecting excellent results through the Covid cycle and.
And our shareholders have January one 2021 received a full year return of almost 50% inclusive of reinvested dividends.
We're proud of this performance, which we view is amongst the best in the industry for Conservative lending focused bdcs were confident it reflects not only the strong macroeconomic backdrop of 2020 , one but also the resilience of our investing approach the benefits offered by carlyle's platform and the hard work of a large and talented team we.
Thank each of them for their efforts.
As we begin another year, our investment objective the delivery of sustainable income to our shareholders hasn't changed but the investment environment is both changing and getting more complicated with.
We've been investing in leverage credit for over two decades here at Carlyle and our approach has been tested through many cycles. Our focus on senior secured debt the extraction of illiquidity premium from the true middle market harnessing our platform to drive competitive advantages at all stages of our process and finally safe and defensive portfolio construction.
All of these position us well to deliver again in 2022 for our shareholders. Thanks.
Thanks for joining us this morning, I'd like to now hand, the call over to Taylor Boswell.
Thanks, Linda as usual I'll begin today by sharing some macroeconomic perspective derived from our global investment footprint.
And after that I'd like to spend a few moments detailing the investment setup as we see it for <unk> in 2022.
Inflation is understandably are focused on today and short it remains high and our portfolio data provide little reason to expect price pressures to abate meaningfully anytime soon.
Capacity constraints continue to buy from inventories to shipping to labor. The good news is that we are seeing cost increases largely being passed on to end customers. While this is positive for the portfolios gross margins near term financials and credit performance. It further complicates the inflation outlook and suggests more cumulative fed tightened.
<unk> may be necessary.
In markets, we are of course, seeing a meaningful shift in forward rate expectations. Thus.
Thus far floating rate credit, which comprises the vast majority of our portfolio has been largely unaffected while the sell off in high yield bonds can be almost entirely explained by rate risk rather than credit spreads.
Equity market volatility on the other hand, that's risen with treasury market volatility.
Returns in the most rate sensitive equity categories, Lossmaking and long duration growth stories are down significantly.
Conversely, the equity assets, both sensitized to the near term economic outlook companies with more traditional cash flow base valuations and shorter investment horizon have actually held up quite well.
So despite this volatility equity markets seem to be telling us the same thing as credit markets liquidity conditions in the valuation environment, our shifting fears of recession are not yet driving markets.
Shifting back to <unk>.
As Linda noted 2021 was undeniably a great year for the company with strong income delivery, good NAV growth and outstanding stock performance, but of course, what's next should always be our focus our investment objective remains the delivery of sustainable income and looking forward. We are equally optimistic about our prospects for both fundamental.
And stock performance in 2022.
Allow me to peal under the building blocks.
<unk> fundamental corporate performance and credit.
2021 was a year of strong cyclical recovery for corporates and tremendous liquidity tailwind across markets, which buoyed performance across nearly all investment strategies.
2022 promises to be more complicated and is likely to demonstrate slower, but still positive cyclical earnings growth prospects with inflationary pressures across sectors as well as rising rates and the more balanced liquidity conditions. They engender.
At Carlisle, we welcome this environment as it offers substantial opportunity for discerning investors to differentiate their performance, we're confident the sourcing and credit engine of our competitively advantaged platform will continue to deliver through cycles.
Second yielded income we continue to find attractive absolute yields and strong investment relative value in our core strategy true middle market senior lending.
The source of that return is the structural illiquidity premium we access we're not forced to compete with traditional broadly syndicated loan and high yield markets.
Alongside that core are complimentary and opportunistic efforts in junior investing ABL recurring revenue finance non sponsor lending and other areas offer both a yield enhancement and risk diversification benefits.
Of course, with 98% of our loans invested in floating rate instruments, we are significantly insulated from the risk of rising rates are.
Our borrowers typically have meaningful cash flow to absorb increased financing costs limiting credit impacts while all else equal returns on our assets will increase.
As Tom will detail later, the current path of the forward LIBOR curve implies that we will quickly pass through any headwind from LIBOR floors sometime in the third quarter after which we would see increasing returns on the portfolio.
We're pleased to have this benefit but that said, it's an important time to reiterate the following.
We are conservative investors here at Carlisle, our shareholders hire us to generate sustainable income, which we do principally by extracting structural illiquidity premium and tightly managing credit performance, we do not view it as our mandate at <unk> to make macro bets on the interest rate curve.
As we have always done we will continue to appropriately match and balance our funding profile to our assets to ensure overall stability of income through the cycles.
Third our watch list and non accruals.
As we stated last year, we've been working these assets for a long time years in most cases and we are very comfortable they now rests on a strong footing.
In fact as you see in our results today and are likely to see again in the coming quarters. These investments are proving to be net assets not liabilities for <unk> performance.
In this quarter I'll I'll highlight solera alone made in 2014 that has been on non accrual since the end of the second quarter of 2018.
To be sure this investment did not perform as expected.
But due to the strong capabilities and persistent efforts of our workout team, we've been able to manage this underperforming investments through a solid outcome.
In Q4, 'twenty, one Salerno accounted for 14% of our non accrual investments at fair value after a $6 million markup.
In Q1, 'twenty two having now sold the business disposition, who will deliver an incremental $9 million of gains behind solera. We continue to work dermatology associates and direct travel both of which have incredible past outperformance in 2022.
Offering further potential NAV and earnings upside all else equal.
Finally, a comment on our stock.
We are approaching three years since Lyndon I joined Tom believes <unk> investment effort.
Since that time, <unk> fundamental return or change in NAV, plus our dividends paid has been solid comfortably in the top half of the industry and top quartile in more recent periods, while we have been delivering against our primary investment objective of generating sustainable income.
Despite this our stock can still be acquired with over 2% incremental dividend yield or an approximate 15% discount on price the nab that the industry.
We believe this provides a compelling margin of safety for investors, who want attractive sustainable income.
We're confident that over time investors will see the same strong fundamental performance. We do an evaluation of our version will offer further upside to current shareholders. In the meantime, we expect to continue to be active repurchases of our shares with that I would like to turn it over to Tom.
Thank you Taylor.
Today I'll begin with a review of our fourth quarter earnings.
Further detail on our balance sheet positioning and conclude with a discussion of our portfolio performance, including some very positive developments in some of our historically underperforming assets.
As Linda previewed we had another strong quarter on the earnings firms.
Total investment income for the fourth quarter was $44 million up modestly from prior quarter.
The primary driver was an increase in prepayment fees and OID accretion from a higher level of repayment activity.
Core interest income on our investment book was down modestly due to a lower average investment balance.
Income from the two JV is again remained stable versus prior quarter levels.
Total expenses were flat at $22 million in the quarter.
The result was net investment income for the fourth quarter of $22 million or <unk> 40 per common share.
That's our highest level since March 2020.
On February 18, our board of directors declared the dividends for the first quarter of 2022.
Total level of <unk> 40 per share.
That comprises about 32 base dividend plus an eight supplemental.
Which is payable to shareholders of record as of the close of business on March 31.
That may sound like a broken record with us as we look forward into 2022, we remain highly confident in our ability to comfortably deliver that 32% base dividend plus continued a sizeable supplemental dividends.
Kevin noted the impact of rising rates.
Given most of our loans have LIBOR floors, while our floating rate debt is now.
Based on the most recent curves ryzen rates will result in mild earnings headwinds in the near term.
However, the current curves also with the benchmark rates will quickly become a positive earnings driver.
By the end of 2022, we'll begin to see a net positive impact.
Every 33 basis points.
<unk> increase in LIBOR will experience a one penny increase in NII each quarter.
In addition, we also expect a positive earnings impact from the improvement in our level of non accruals.
I'll touch on that point in more detail later.
Moving on to the performance of our two Jv's total dividend income was against $7 $5 million in the quarter in line with the last few quarters.
On a combined basis, our dividend yield from the JV was again about 11% so continued stability.
Onto evaluations, our total aggregate realized and unrealized net gain was $12 million for the quarter.
The seventh consecutive quarter of positive performance following the drop in the first quarter of 2020.
First performing lower Covid impacted names plus our equity investments in the JV, increasing value of about $2 million compared to 930.
The largest component was 8 million and gains from our equity book.
Offset by a 5 million decline in the value of our investment in Mcf one JV.
I will note the decline in the Jv's value was driven by lower leverage at the vehicle not underlying credit.
Next is the moderate to have your COVID-19 impacted names.
Valuations for this category were flat for the quarter.
We saw overall stability in the underlying fundamentals in this group.
The final category.
Assets that have been underperforming pre pandemic were up $9 million, marking the seventh consecutive quarter of stability or improvement.
This was driven primarily by Salerno.
And continued continued positive my grade migration in dermatology assumptions.
Next I'll touch briefly on our financing facilities and leverage.
We continue to be very well positioned with the right side of our balance sheet.
Statutory leverage was about one two times, while net financial leverage was about one point out so.
So we're still sitting close to the lower end of our target range, giving us flexibility to invest in attractive new investment opportunities.
I'll finish with a review of the portfolio and related activity.
We continue to see overall stability unapproved mint in credit quality across the book specifically in some of the positions with more severe historical credit issues.
Total fair value of transactions risk rated three to five indicating some level of downgrade since we made the investment improved again this quarter by $15 million in the aggregate.
Total non accruals increased to 4% based on fair value, but that's actually a good thing because our valuations for these assets improved during the quarter.
Last quarter, we said, we saw a path to both NII expansion and increased recovery from our non accruals.
In the fourth quarter, we had an increase in fair value of our investments and solera from a mark of 38 to 90 accounting for $6 million unrealized gain.
That was based on a potential sale of the business.
And we're very pleased to say that sale was consummated earlier this quarter.
With the incremental gain on our debt and equity above our 12, 31 valuation totaling almost $9 million or <unk> 18 per share.
You'll see that benefit in our results for the first quarter of 2022.
Including a reduction in non accruals of about 60 basis points above our cost and fair value basis.
And as Taylor noted, we continue to work hard on their other watch list names and see a path for further reduction in non accrual levels later in the year as these processes play out.
With that back to Linda for some closing remarks.
Thanks, Tom.
Before I turn the call over to the operator, I'd like to reiterate that delivering a sustainable and attractive dividend to our shareholders alongside a stable or growing NAV remains our top priority.
Since we changed our dividend policy in the third quarter of 2020 to include a base dividend of 32, plus a supplemental dividend. We've earned undistributed between 36, and 40 cents a share per quarter.
Our shareholders should have a high degree of confidence that future quarterly payments will continue in this range and that we will continue to pay out the excess earnings over and above our 32 base dividend.
For joining us today I'd like to now hand, the call over to the operator to take your questions.
And thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press. The pound key please standby will compile the Q&A roster and our next question. Our first question comes from Lisa Wardell from J P. Morgan.
Your line is now open.
Good morning, Thanks, so much for taking my questions today.
A lot to digest in this quarter and with the update you provided this morning.
But I think given the conversation.
Had about the interest rate outlook and given the magnitude of NII performance above the base dividend.
I thought it would be helpful to kind of explore your thinking around at what point you might revisit.
The discussion around the level of the base dividend.
Potentially increasing that over time.
Okay.
Yes.
Tom and again, thanks for the question.
We feel very comfortable with that 32 dividend and we expect to continue to exceed that as we've noted continue to note.
There certainly are some.
Near term headwinds from the interest from the interest rate curve, we think will be quickly through that.
And the next couple of quarters.
You look at the curve and really be the fourth quarter. When we start to see a positive impact on earnings all else equal from the interest rate curve.
We also see upside from our two remaining large non accrual names. So overall very positive signs, we feel very comfortable with those levels.
Certainly as the year plays out it's something we look at but as of right. Now there is no intention to increase that base dividends, we sit here today.
Yes, Melissa Linda let me just just chime in because your question is one that obviously, we ask ourselves every every quarter.
And we're never going to have perfect visibility, but I think as you know as Tom said and as Taylor pointed out in his discussion, we think theres going to be a lot going on this year.
Some of it is really really good in terms of.
Fundamentals in our portfolio and some of it is is unknown vis vis the macro environment and the interest rate environment.
And really we think the best thing for shareholders right now.
Just give them a high degree of predictability in a very unpredictable world that we think is where we are in 2022. So we're going to we're going to stay with our current dividend policy today.
But.
Feel free to keep asking that question is as time goes on.
[laughter] noted thank you.
One follow up on the repurchase activity as we look at it over the last few quarters, it's been pretty consistently in the $7 million to $8 million range.
For the last three quarters, certainly sounds like Youre, well aware of the value there.
Given trading levels currently.
Given where portfolio leverage and given the opportunity set right now.
Is your thinking evolving at all on the level or pace of deployment on repurchases over the next few quarters.
Given the remaining capacity on the existing authorization.
Hey, Melissa it's Tom again, I think that based on that we've been trading in we'll call. It the mid <unk> range.
Stuck there for the last couple of quarters, and we think that at that level. We are comfortable at the current levels, we don't see any change to the level of repurchases.
So I think that.
We certainly would.
I hope that based on looking at the deposits in this quarter is as our price creeps up towards the 90% of NAV range Thats, where I think that you may see a decline in those open repurchase but right now we're comfortable with that modest level, we'll put that modest level, we want to be in the market consistent purchases that we've been in the last the last number of quarters as we've been in the mid eighties trading range.
And Melissa it's Taylor I mean, you'll hear a common thread through the answers to both of your last questions, which is we are just super focused on stability and consistency.
Those are the things that we think investors want to see out of us and we think that there is ample room for us to perform both fundamentally and for our staff to perform if we just keep delivering solid consistent performance.
And.
And that's driving a lot of the philosophy and the response to both of those questions there's more opportunity on both.
Likely but with where we sit today, we think investors just want to see us deliver deliver deliver a quarter in quarter out.
That's really helpful context. Thank you so much.
And thank you.
And if you have a question that is star one and our next question comes from Ryan Lynch from K B W.
Your line is now open.
Hey, good morning, Thanks for taking my questions this quarter.
The first one I wanted to touch on was can you maybe speak.
What what was the biggest difference and you're successful.
So where are you.
Guys accomplished in Q1 of 2022 and kind of a long progress you guys made.
Working through that investment and turning that around versus maybe some of the indexes that are you guys.
Haven't had.
Such a positive outcome.
Several of those were in that.
The unit tranche program so.
Maybe it's just where how you structure those investments, but I would love to get here.
What you guys are large and where you guys thought.
This investment was why that was a successful exit turnaround versus maybe some of them at.
So much.
Yes, Ryan I think.
Youre referencing the sort of 2018 period, when we had some underperformance that was very localized on credit in our program and we took a couple of high severity losses.
And that really goes back to sort of a strategic decision around that program, which was very focused on small borrowers and junior debt.
And when you look at our current non accrual portfolio, it's mostly first lien assets.
More scaled businesses at this point and you've heard us say previously.
That we have the capabilities to work those assets over long periods of time to drive maximum value creation, we don't need to pump them or manage around them.
A shorter timeframe and so in the first case.
Three years ago over many years that was.
As were losses that run a web of unavoidable given the strategic choice around them.
In this case this is more sort of the natural outcome with solid first lien investing in good workout capabilities.
Tom.
Don't know if you want to pick up any details around collateral from there what I would add is.
The similarity solar on our other two watch list non accrual names is where first lien.
So the lenders effectively control of our destiny.
Second is we believe and support these businesses and we've done so with capital.
And third is the patient's point is we're not in a rush will maximizing.
Value over time by doing the right thing getting the right management team and the right board of directors using that Carlyle resources simulators with the various credits we used all of those for the missile lateral investment. We're the largest lender who we are the largest equity holder ultimately and we helped drive a turnaround in that business I think patients providing capital.
Some other lenders, maybe we're not willing to provide capital and with patients and then getting and then exiting we think is the right time.
And Ryan even even when we're not the biggest we tend to have a have a lead role in these workouts.
Largely because of the resources that Carlyle brings to the table.
Obviously.
Given our private equity background, we're good at determining value.
And we have resources to source the board members and management teams and.
A plethora of other kind of things that we can bring to the table. So.
Given that we have that capability in.
And the names that in <unk> and in the other two names we see value.
Over and above where where things are things are trading if you will.
So we're happy to be patient and work them out.
Okay. That's helpful commentary on that.
Switching gears a little bit.
Taylor.
In the prepared remarks, you talked about.
No surprise, you know labor excuse me equation, whether it's input cost or labor inflation sort of been.
Probably the biggest headwind that businesses are managing through today and trying to pass along long those costs.
When I look at your current too.
Large non accruals in your portfolio derm growth direct travel I Wouldnt think that those would inflationary pressures would be huge headwinds in that business, but I'd love to hear your comments online. How do you think those two businesses are in particularly position for kind of rising inflation.
And then also maybe broadly are there any particular companies or industries or hours and just generally and about.
CGP these portfolios ability.
Underlying portfolio companies to 10 managed through kind of a.
Inflationary environment.
So so on the first question first.
Those two names just to give you a sense of them one of them has a diversified set of.
Scaled dermatology practices. The other is a corporate services provider and neither of them are having.
Notable inflationary impacts.
On their on their performance both of them frankly have far more opportunity from the combination of inherent operational improvement and macroeconomic recovery to overwhelm any marginal impacts they may feel from inflation. So I think that those two businesses are really kind of right in the curve to recovery pretty comfortable.
At this point, Ryan and Thats why.
We are stepping forward and saying that we think we have plenty of opportunity for continued positive performance out of those names as 2022 rolls forward.
In the end.
The larger conversation about credit.
Listen.
We've got <unk>.
Really diversified book and to suggest that we arent seeing the impacts of inflation would be completely disingenuous.
And then we always try to be very direct with people here inflation is real and it's in the portfolios, but we see.
We're not seeing any.
Evolving risk to our former credit performance from inflation, because it pass through Israel and generally speaking borrowers are achieving pass through of their increased costs. The problem with that for all of US of course is that's that's.
That's a loop right.
Fact that rising costs are being pass through is what's creating inflation.
And so I think that a lot of those pressures are flowing into the macro and liquidity environment more than they're flowing into fundamental corporate credit performance right now Ryan.
That's what we're seeing.
Across our portfolios not just in <unk>, but but carlyle generally.
Great Thats helpful details on specific combination also brought on your portfolio towards definitely understand that we're going to be execution issues.
All businesses today.
That's all for me I appreciate the time today and again, congrats on a nice quarter and more importantly.
On that really the nice 2021.
Thanks, Brian .
And thank you and I'm showing no further questions I would now like to turn the call.
Actually pardon me, we have a question from Derek Hewett from Bank of America.
Good morning, everyone.
Congrats on the good quarter could you comment on.
Any updated thoughts on the preferreds.
I mean should we expect any sort of.
Oh.
Is there an announcement or.
And any sort of movement on it.
On that.
Preferred issuance to give the market a little bit more certainty.
Sure Derek high is it.
Linda Thanks for your question and.
Short answer is is not yet.
Just to maybe reiterate and a little bit of background on the preferred.
You recall that was put in at a very.
Yeah.
Volatility in the market.
And it was really a nice show of support from from the Carlyle Group.
As we sit here today with the market having recovered as much as it has.
We're still pretty comfortable having it in our capital structure.
To remind you to 7% cash pay and when you compare that to the yield on our common stock.
It's pretty attractive for us and really really accretive we think.
To the overall to the overall balance sheet.
And it's $50 million.
So it is not not something that is kind of moving the needle for us.
And as we sit here today, we sort of like where it fits.
And the capital structure so.
Obviously, there are some call dates and whatever that'll that'll come up eventually.
Well, we'll address that but.
But at this point in time, you should think that it is.
Just going to be as Taylor said using is worth of stability and consistency that applies to the press too.
So it's.
It's in our balance sheet and you should expect it to be there for a bit.
Okay. Thank you.
And thank you and I'm showing no further questions I would now like to turn the call back over to Linda pace for closing remarks.
Thank you everyone for joining us today I appreciate your time and your questions and we look forward to talking to you in the spring have a good day.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
Thank you.
Okay.
Okay.
[music].
Sure.
Okay.
Okay.
Yes.