Q1 2022 First Eagle Alternative Capital BDC Inc Earnings Call
Good morning, and welcome to first go alternative capital BDC incorporated earnings Conference call for its first fiscal quarter ended March 31st 2020.
It is my pleasure to turn the call over to Sabrina Rusnak Carlson.
You go I'm, sorry, Nippy capital BDC incorporated Ms. Rusnak Carlson you may begin.
Thank you operator, good morning, and thank you for joining US joining me on today's call are Chris Cline President of first Eagle alternative credit John Wilson, Our Chief Accounting Officer, Jim Fellows, our Chief investment Officer.
And 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.
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.
The uncertainties and other factors are in some ways beyond management's control and include the factors included in the section entitled Risk factors in our most recent annual report on Form 10-K as updated by our quarterly report on Form 10-Q, and our periodic and other filings with the securities and exchange commit.
Yeah.
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, the forward looking statements based on those assumptions also could be incorrect.
You should not place undue reliance on these forward looking statements first Eagle 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-K were released yesterday afternoon copies of which can be found on our website along with our Q1 earnings presentation that we may refer to during this call.
A webcast replay of this call will be available until may 14th 2022, starting approximately two hours. After we conclude this morning to access the replay. Please visit our website at Www Dot F. D. A C. B D C dot com with that I'll turn the call over to Chris.
Thanks, Brian Good morning, and thank you for joining us on our earnings call on today's call I want to discuss the recent actions we've taken to drive strategic initiatives as well as review, our first quarter results and share some portfolio highlights.
From there I'll hand, the call over to Jim to discuss our portfolio and financial results in more detail.
We had a busy quarter working toward our three strategic initiatives, one reducing our cost of debt to increase in our portfolio yield and three increasing our portfolio diversification.
We've made progress in these three goals. This year first we have effectively reduced our debt financing as announced in Q1 through our 8-K, we amended our credit facility to reduce the weighted average borrowing costs by 26 basis points.
Further since December 31, 2020, we have reduced our weighted average borrowing costs by 148 basis points.
Second we refinanced the Logan JV into a middle market CLO structure, which we expect to increase the dividend to F. CRD as a result of this incremental leverage we're very.
Pleased that we were able to close the Logan JV CLO transaction on April 19th despite.
Despite a challenging market steaming from the war on Ukraine inflationary pressures.
Competition for AAA buyers, we were able to secure a deal that we believe is favorable to our shareholders and that speaks to the overall strength of our platform.
The Logan JV CLO supports our strategic initiatives by increasing portfolio diversification through a reduction in F. <unk> exposure to Logan to a 15% to 16% and increasing our portfolio yield. Moreover, we expect the Logan JV return on equity to increase from around 10% historically to approximately 14% going forward with this new structure.
Sure.
At the same time, the middle market CLO like mini refinance even tells them upfront one time cost to achieve longer term benefits show our alignment with shareholders. We agreed to wave $400000 of our management fee in Q1.
And part of the management fee waiver in Q2 in order to maintain the 10 cent dividend.
We noted during our last call in connection with increasing portfolio yield we aim.
Aimed to increase our leverage range and increase our allocation to higher yielding asset based loans in connection with the amendment to the credit facility. We have increased the credit facility size to $175 million and pushed out our maturity date, which allowed us to further increase leverage at $3 31, our consolidated leverage was one six times up from one eight at the end of Q4.
Sure.
This brings me to the results of <unk> first quarter net income was in line with expectations at 10 cents per share.
We anticipate the reduction in financing costs more flexible capital and increase utilization of leverage to drive a more investment activity, which will help further stabilize NAV and drive NII.
We ended the quarter with a net asset value of $6 12 per share down three 5% on a quarter over quarter basis. The decrease and that was primarily driven by the change in unrealized depreciation.
Our non income producing second lien position and loadmaster and a first lien position in Matilda Jane were written down <unk> <unk> per share. The remaining write downs were not material on an individual investment basis and spread across a handful of names in the portfolio.
In line with our goal to reduce or eliminate exposure to non income producing physicians as noted in our recent update section in 10-Q in early April Aerotech LLC entered into a purchase agreement to sell its common shares the proceeds of the sale, which includes cash and amounts placed in escrow were used to pay off and terminate the outstanding credit agreement.
The company realized the loss of $1 8 million as a result of this transaction.
This amount will be offset by a reversal in the unrealized loss on the investment the remaining value on non accrual and the portfolio represents about one 8% of the total portfolio based on fair market value at March 31.
We announced last quarter Aerotech defaulted since we monitored re underwrote the company and the prospects and ultimately believe that exit was in the best interest with shareholders. Therefore thought the extra position as quickly as possible.
Overall, the core portfolio continues to perform well in line with expectations. We believe our portfolio of companies continue to maintain good liquidity profiles and the support from private equity sponsors there were no significant amendments to existing loans in Q1, and no new loans placed on non accrual.
Similar to the broader market trends, we have seen a few of our portfolio companies facing supply changes supply chain challenges labor shortages as well as inflationary pressures, including increased wages and material cost Matilda Jane in particular was impacted by supply chain issues and labor shortages.
To keep a close eye on and packet companies in the economy for signs of further weakness.
As we've noted before portfolio diversification and stabilization of our investment portfolio has been Paramount focus.
Our ability to increase leverage across more flexible capital terms will further.
These goals over time, as we and breast capital and add new investments.
From an origination perspective, the private debt market cap up its typical trend of a slower Q1 relative to the rest of the year. We saw our private equity partners focused on clothing and settling into new deals from our record year of deployment in 2021.
First eagle direct lending origination activity in the first quarter was mainly focused on portfolio add ons plus one new investment.
Total deployment was $114 million versus $69 million in Q1 of 2021.
In line with that trend the CRD portfolio invested $2 3 million in the new portfolio investment in Q1 with an additional $17 5 million invested in follow on investments, including revolvers and delayed draw fundings.
There were no significant repayments during the quarter, which resulted in an atypical quarter with no prepayment premiums received or accelerated amortization of OID or this quarter.
Looking forward, our direct lending pipeline remains strong including agency cash flow and asset based deals. The BDC continues to benefit from 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 positions up from 45 in Q1 of 2018 to 77 this quarter.
While also allowing for a single to provide more capital to middle market businesses.
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 capital and are mindful of the macro environment and our investment committee discussions with that I'll turn the call over to Jim.
Thanks, Chris and good morning, everyone.
First I'll start off with some investment and portfolio highlights as Chris mentioned Q1 was well was a relatively muted quarter for new activity with one new and several follow on investments totaling $9 $8 million at a blended yield of six 5%. We had no notable realizations during the quarter.
As of March 31, our portfolio was valued at $407 million.
Up slightly from $392 1 million at the end of Q4. It was invested 78% in first lien senior secured debt and 18% in the Logan JV as a reminder, Logan JV is 99% invested in first lien assets the.
The remaining 4% of the Bdc's portfolio was held in second lien 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 5% in Q1, which was flat with Q4.
As Chris noted, we did not place any new investments on non accrual during Q1 total non accruals as a percentage of our portfolio at fair value and it costs were 2% and four 5% respectively.
Now I'd like to address the financials for the first quarter.
During Q1, we recognized $7 4 million of investment income primarily from interest and dividends interest income decreased approximately 548000 from Q4 to $5 5 million for Q1. The decrease was primarily driven by the decline in accelerated amortization of OID from 367.
In Q4 to 17000 in Q1.
The decline resulted from the decrease in repayments and refinancings during the current quarter.
Dividend income from Logan JV was relatively flat quarter over quarter at $1 7 million in other income of 230000 with approximately half of Q4.
Total expenses net of management fee waivers for the quarter or $4 5 million down from $5 3 million in Q4. The biggest driver of the decrease were were a 379000 decrease in interest and fees on borrowings during the quarter due to our 2023 notes being fully redeem prior to year end.
As well as a $433000 decrease in management fees due to a decrease in our net asset value and a $400000 laser during Q1 for.
From a leverage perspective, we ended Q4 with the debt. We ended Q1 with a debt to equity ratio of 126 times, we have ample borrowing capacity on our credit facility to continue to grow and increase leverage towards our increased target of one three to one four times with that I'll turn the call back over to Chris.
Thanks Jen.
Before I turn the call over to Q&A I wanted to take a moment to assure our shareholders that we're committed to doing what's right here.
We have the benefit of a $20 billion platform and direct in tradable credit assets, where we successfully managed private funds CLO separately managed accounts levered and unlevered for institutional investors.
We after the benefit of our shareholders shifted our strategy and rotated out of legacy assets.
Outlines a specific process for driving higher NII, we brought an ABL assets to provide higher yielding loans, we have restructured logan to create a more accretive structure for the BDC.
Along this process, we have waived management fees repeatedly determined to serve to demonstrate to our shareholders that we are committed and invested in the success of the BDC.
Notwithstanding the foregoing with our stock price would be higher recognizing these events.
This transition of the balance sheet has taken longer than expected and is designed had little room for error in terms of execution I've asked the shareholders to be patient as it goes to this process and the shareholders have been compensated for said patients with management fee waiver supporting the dividend.
As noted in previous releases now that Logan is closed later than budgeted we should be in a position to see NII growth, which should result in a dividend increase starting in Q3, if the dividend is not able to be increased or stock continues to trade at significant discount to our peer group, we recognize the status quo isn't acceptable to our shareholders and to be clear, it's not acceptable to <unk>.
The management team.
While our track record on executing this plan has been far from perfect, but our track record of supporting the shareholders and doing what's right for the shareholders has been invaluable I would ask the shareholders to look at the latter track record and take comfort that we as the largest shareholder are aligned with you.
Operator, you can open the line for questions now.
Thank you Ann participants as a reminder to ask a question you will need to press star one on your telephone keypad again Thats Star then the number one on your telephone keypad to withdraw your question press the pound.
Yeah.
Your first question comes from the line of Lee Cooperman from Omega family Office. Your line is now open.
Thank you very much Chris good morning to you and everybody else.
I really could replay conference call about a year ago.
It turns 79 last Monday, but I think I asked the same questions.
78, and I made the same comment then I'll make now that you have done a great job in trying to support the shareholders, but basically.
I really question, whether we're at a size, which makes sense for us to be publicly owned.
And so I'm going to ask you five or six questions get them out in the table and they like to get your response, some of which you've already.
Anticipated what is that question of public ownership number one number two what are you willing to explore sale of the company, we have a market cap of $115 million were irrelevant.
You know you've done a great job in time to support the shareholders. We've done a poor job of executing up until now okay.
What are the intentions regarding your continued waiver of fees.
4000 is about a penny and a fraction so when the dividend is in excess is fully weighed.
Fully accrued fee income.
Your expectations for dividend you mentioned that you expected to be increased in the third quarter order of magnitude that you're thinking.
And another question I'd ask is excess capital.
If you have any to buy back equity would you rather buy back equity at a discount to NAV would you rather than make a new loan and take the risk of what's going on in the economy.
Those would be my question again, I compliment you on your support the shareholders, but I think what we hope to accomplish when we went public cannot be accomplished that cost of cap was too high.
And you know Wall Street has created a lot of companies in the BDC MLP.
Space only work if they were able to sell stock at a premium to NAV.
So stock you bought assets raise the dividend.
Stock what assets raise the dividend and so on and so forth, but we're on a vicious cycle the wrong way the stock is at a low.
We went public I think its 13 or thereabouts that you had an offering of 14 or no idea that the work of $14 62, you can't sell stock and you know you know.
The story and so the question is whether you're gonna become proactive where you want to continue to stay public and what is the cost of you being a public company that's it.
Thanks, I appreciate the questions.
Going to take them probably.
In a random order if thats, okay sure it.
It works for you, yes, yes, the cost of being public is high I can come back and give you. The exact numbers just as a rule of thumb as you look at the market today, I think being a public company at less than $1 billion of equity is probably generative. So.
I don't disagree with your statement were too small.
And that puts us at somewhat of a disadvantage.
As it relates to waivers we've said publicly.
That will support the dividend through Q2 on that on the <unk>. We did that in Q1, we expect to have a waiver of some sort in Q2 to maintain the 10, primarily related to the expenses associated with putting these financing packages in place.
As it relates to the dividend I think we said in the press release that based on our expectations of the new financing that you could see the dividend go up by anywhere from 2020% from where we are so call. It 11 to 12.
Excess capital we have more capital now that we were able to have more flexibility of capital that we were able to upsize the IMG facility.
We do have a program in place, where we are buying shares, albeit at modest amounts just given the way the program works and the fact that our stock doesn't trade that much.
Your second question, which was related to the sale of the business.
I'm not in a position to comment on that today, what I tried to address in my closing remarks was.
We call the play I paid for a paid for the Optionality associated with the play in the play results in our stock price sitting where it is today, obviously it didn't work and we've we've always gone back and said that we'll do what's right for the shareholders. So.
I'm going to wait and see mode, but the period of time that we're going to wait and see is probably much shorter than it was historically.
Got you I wish you luck and I again.
Complement you on standing behind your shareholders I'm not happy with the results and the environment has become more hostile and I guess I'd like to drill a little bit on the question.
Given your excess capital would you rather make a new loan.
Or would you rather buy stock back at four we have a book value of 618, yes, mathematically, it's easy we'd rather buy back stock obviously the return on that is higher if you look at what we did in the portfolio, we primarily to support our existing portfolio companies, which is that's part of doing this business. So.
The issue, though is were at odds right I, just said being small is a competitive disadvantage in buying back the stock only makes us smaller so we're trying to.
Our balance between the two but we have been actively buying stock in the in the market and we'll continue to do so under the program that we have in place that was approved by the board, but unless you're buying it very carefully because it keeps going down okay, but thank you very much I appreciate your answer and I wish you well in your good Guy.
Thanks Lee.
Again for participants if you would like to ask a question you May Press Star then the number one on your telephone keypad. Your next question comes from the line of Ryan Lynch of BBW. Your line is now open.
Hey, good morning, Chris.
I wanted to follow up a little bit on on <unk> question I know, we have a few.
And I kind of wanted to take it just from a little bit of a different approach.
If I look at your slide deck slide.
Slide number 11 in slide 29 that really shows kind of the growth of your overall direct lending platform at first Eagle and it shows that STR D. It's really just a small component of the overall direct lending platform as far as the deals you participate in and then slide 20.
Nine shows that.
You all have deployed $2 4 billion of capital across the platform and obviously <unk> was a really small percentage of that so.
It just seems that ex CRD is such a small little component of the overall direct lending platform, obviously STR D. It's not been a good run for shareholders.
You know for the last five or six years as there's been the notable issues that you all have been trying to work through I.
I can't imagine as <unk> been very shareholder friendly I can't imagine this is really <unk> been a super profitable.
NPD for the overall first Eagle manager given all the fee waivers and the low speed that generates it's a big time commitment to run a public company Chris.
Chris Your times, obviously very valuable it's a lot harder to run a public company that can be private funds and so I'm just wondering.
I'm not sure really you know what what.
Why this and to be like what are the reasons that it makes sense for this entity participate public I'm not really sure what parties are really benefiting from STR D.
Being a public company and is there any point, where you think that that would it not make sense.
No Ryan I appreciate the appreciate the question into perspective.
Youre right. Its interesting if you think about the beginning of I guess it was legacy THL now.
First eagle.
Lending platform the BDC used to be the only vehicle that we at one point I think there's like a $750 million vehicle.
Unfortunately, due to lots of things that we've talked about in the past.
Some portfolio issues that vehicle has shrunk from $750 million down to call. It 400 <unk>.
Outside of that we basically have grown our private markets business from zero to over 5 billion. So the team is very good at what we do and we know how to build portfolios, we know how to execute.
And therefore, we are bringing in a significant amount of capital.
Alongside the BDC.
If you look at the publicly traded vehicle and the way we look at it we knew the vehicle was under pressure.
We knew there was a thought there would be a path I hope there was a path forward to reposition the portfolio to stabilize it and start seeing some growth. We're in the late stages of this it has taken time.
And like I said in my prepared remarks.
Works and the dividends able to be increased and we narrow the gap in book that's great.
If we don't listen we're 100% aligned with the shareholders. Because we are you are the singles were still the largest shareholder in the platform. So.
There is a lot of value to a permanent capital vehicle when it's run well and when it's trading as leaves Ed when Theyre above book you can you can add.
We can generate a lot of value that this one has obviously been more difficult. So we asked ourselves the same questions. All the time, that's why I think there's a good alignment of interest between us and the manager.
We appreciate the patience of the shareholders as I've tried to execute this turnaround and as I said, we'll know here in short order how the market is going to react and we will plan accordingly.
Your next question comes from the line from the line of Matt Tjaden from Raymond James Your line is now open.
Hey, all morning, and appreciate you taking my questions, Chris wanted to pivot a little and maybe maybe go a little more high level.
I was wondering what your outlook is for the private credit default environment at year end 'twenty, two and how that's changed versus maybe six months ago.
That's a good question.
I don't know if I weren't going to put a specific number on it.
But I will tell you as we sit back and we are underwriting new business and we're looking at our portfolio companies listen we're credit people. So it's always raining outside for US, let's say, maybe the intensity of the rain has increased as you just look at the different trends that are flowing through.
The good news from our position across the entire platform as we.
We're not sitting here on sponsored Mezz.
And portfolios are going to see a lot of volatility we control.
Senior secured top of the capital structure control the liquidity so to the extent there was something that there was a shock to the system, where we're able to navigate that if you go back and look at the Covid shock I think our BDC and all of our private funds and I think the private market in general.
<unk> very very well on those in those circumstances.
Right now I think it's hard to it's hard to come back and put a number on it but I would just say to your point.
Yes, we're probably more bearish and bullish as it relates to.
Our underwriting credit now we're trying to reposition the portfolio. Hence the reason why we're not chasing yield right now we're not going deeper in the capital structure. When we are deploying we're going to do it on a control basis at the top of the capital structure to minimize any loss given default.
Step back in the economy.
Got it that's helpful last one for me as most have been asked and answered.
When youre talking about potentially taking the dividend higher are you embedding any benefit from rotation of either loadmaster OEM the remaining fair value in those assets.
We are not.
Got it Thats it from me I appreciate the time this morning.
Thanks, Matt.
And again participants if you would like to ask a question.
Then the number one on your telephone keypad, we have a follow up question coming from the line of Ryan Lynch from BBW. Your line is now open.
Hey, Chris Sorry, my phone got dropped.
I was I was like that was that was an easy one.
But adding back in the queue.
The other question that I had was.
You talked to yet obviously, you've already started working on you outlined some initiatives some of them have already been executed like refinancing and.
And restructuring Logan to increase that would be our.
ROE for that entity I'm just curious.
In your slide deck. These these initiatives you guys have any sort of target Roe.
You guys are hoping ex CRD will generate and obviously I know, there's a lot of uncertainties out there one of the you know sort of a positive uncertainties that rising rates, we're going to benefit your entities. So that will obviously play into what sort of ROE. You think you can generate insights on where the risk free rate ends up but.
Any.
Excuse me any sort of guidance that you have kind of where we sit here today.
If you can execute on these strategies, what sort of operating ROE you think ex CRD you can generate.
Yes.
Critical component.
The asset side of the equation is basically the market.
We've got some differentiated strategies with like ABL lending, where I think you can pick up some incremental yield but.
Being in a position now with a much more diversified portfolio to lower the liability side is what is what's driving what we believed to be going forward a more stable ROE. If you look at the balance sheet about CRD on a standalone basis.
That should be in the call. It eight to eight 5% range in this market when you add in Logan because were using more synthetic leverage there. We've already quoted that that's around a 14% ROE. So if you blend those out you've got 15% of the portfolio out of 2014, you got the balance at an eight or nine and I am not going to do that math in my head because I'll get it wrong, but that's.
Where.
Where things stand.
Lowering that cost of debt was was mission critical because we never want to be in a position.
Even though our cost of debt was was higher than it than it should've been where we're taking excessive risk and chasing yield. So you can see the discipline on the ROA side now we've got the balance sheet right now we can lower our cost of debt to drive a much more stable Roe.
On a combined basis, but thats, how I look at it inside those two pockets Logan Logan Standalone is around 2014 F. CRD on its own is probably eight to eight five.
Okay, and then as far as the ABL lending.
I know that's kind of a newer initiative.
Can you give us a staggered maybe just the broader direct lending platform what percentage of the deals that you guys have closed have been in that.
That ABL space and do you see that changing going forward.
Do you expect that to grow that going forward or is that going to be kind of consistent from what we've seen over the last couple.
A couple of quarters.
Yes, if you look at ABL across the entire platform.
Call It a.
10% to 15% allocation, there could be SMA or asset specific funds, where that's 100% allocation to ABL for institutions and went direct access but.
They think of that's about 10% to 15% of the book across the entire 5 billion.
Okay.
Got you I appreciate the time today, that's all for me.
Perfect. Thanks, Brian .
And again participants if you would like to ask a question you May Press Star then the number one on your telephone keypad, we have a follow up question coming from Mr. Lee Cooperman from Omega family Office. Your line is now open.
Getting some rough approximations, but.
If you were able to raise your dividend by <unk> that.
That would be a 48% annual dividend.
Divide that by six 8% return on your book.
Okay.
Not adequate to justify being a public company.
And I would just say that very strongly.
Listen everything you say you seem to be very objective.
I think your conclusion is obvious.
We have to bulk up and eat.
First eagle could bias, where somebody else could bias that is my conclusion would be my conclusion for well over a year and the <unk>.
Facts of supported that conclusion, I think your own comments as well. So I wish you luck, but I would say an 8% return on equity in this environment.
Not adequate and that.
The way you want to run the company and I appreciate that given the risks out there.
That's it over and out.
Thankfully.
And we don't have any questions over the phone.
Please go ahead.
And we don't have any questions over the phone.
Now Kris please.
Thank you operator, we appreciate the support of our shareholders and we look forward to providing you an update of our Q2 results. This summer if you have any questions feel free to reach out to myself or Gen. Wilson.
And ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect.
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Okay.
Sure.
Okay.
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