Q1 2022 OFS Capital Corp Earnings Call

Okay.

We will now begin the excuse me good morning, and welcome to the <unk> Capital Corporation first quarter 2022 earnings call.

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After todays presentation, there will be an opportunity to ask questions.

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I would now like to turn the conference over to Steve Ultra Brando, Vice President of capital markets. Please go ahead.

Good morning, everyone and thank you for joining US also on the call today is Bilal Rashid Chairman and Chief Executive Officer of all of that capital and Jeff Cerny, The company's Chief Financial Officer and Treasurer.

Please note that we issued a press release this morning announcing our first quarter results and filed our Form 10-Q.

Each of the documents can be obtained under the Investor Relations section of our website a lot less capital dotcom.

Before we begin please note that the statements made on this call and webcast may constitute forward looking statements as defined under applicable securities laws.

Such statements reflect various assumptions expectations and opinions by LFS management concerning anticipated results are not guarantees of future performance and are subject to known and unknown risks uncertainties and other factors that could cause actual results to differ materially from such statements.

Certainties and other factors are in some way beyond management's control, including the risk factors described from time to time in our filings with the SEC.

Although we believe these assumptions are reasonable any of those assumptions could prove 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.

Best capital undertakes no duty to update any forward looking statements herein and all forward looking statements speak only as of the date of this call.

During this call, we will be referring to non-GAAP financial measures.

These non-GAAP measures are not prepared in accordance with generally accepted accounting principles a reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in the Investor Relations section of our website under the heading tax and non-GAAP information.

With that I'll turn the call over to chairman and Chief Executive Officer Bilal Rashid.

Thank you Steve good morning.

I'm pleased to report another strong quarter.

Some key takeaways.

Net asset value per share increased to $15.52. Another historical high for the company.

We have increased our quarterly distribution 39 cents per share for the second quarter.

On the 28 cents per share we paid for the first quarter.

I think the seventh consecutive increase in our quarterly distribution.

Net investment income was 22 cents per share it.

Adjusted net investment income was 30 cents per share, which excludes the accrual well the depth of gains incentive fee.

We had no new loans on non accrual in the quarter.

In fact, we have not placed any loans on non accrual for seven consecutive quarters.

We deployed $55 million in new investments.

$51 million in add on investments with existing portfolio companies.

What is that capital is approaching its 10th anniversary as a public company.

Since our IPO.

This has paid out $11.77 per share in distributions.

And our net asset value per share exceeds our IPO price of $15 per ship.

We believe this performance puts us in select company among peers.

We believe that we are well positioned to benefit from higher interest rates.

As our loans are largely floating rate.

Financing is fixed.

Fixed rate.

Financing continues to provide us operational flexibility.

As of the quarters.

More than 67% or five debt matures in 2025, or later and more than half of our bed.

Is unsecured.

In addition, our <unk>.

Senior loan facility matures in 'twenty 'twenty, four and is non recourse to the BDC.

Our corporate line of credit is flexibility with no mark to market provisions.

In terms of our investment activity, we are cognizant of macroeconomic and geopolitical uncertainties.

Continue to remain cautious.

We believe that our disciplined approach along with the strength of our balance sheet.

But that's to deliver solid performance.

We have relied on our long standing investment process and the dedicated and experienced team of our adviser.

Even with several unprecedented events impacting the economy.

We continue to believe that we will benefit from this experience, which spans multiple asset classes and industries.

Today, our adviser manages $3 $1 billion across the north and structured credit markets and has gone through multiple credit cycles and global economic disruptions what would the bulk 95 plus years.

In this uncertain economic environment, which has been significantly impacted by inflation rising interest rates and geopolitical conflict. We believe that we continue to be well positioned both in terms of our portfolio as well as our liabilities.

We believe that our portfolio remains defensively positioned both in terms of seniority and looked at some stuff too.

And industry selection.

As a percentage of fair value approximately 97% of our loan portfolio was senior secured at the end of the first quarter.

And as one diversified across multiple industries.

Our largest exposures are in healthcare technology business services and manufacturing and we continue to avoid highly cyclical industries.

Such as oil and gas.

Metals and mining.

At this point.

I'll turn the call over to Jeff Cerny, Our Chief Financial Officer, who can give you more details.

Color for the quarter.

Thanks, Paul Good morning, everyone.

Continue to be encouraged by our overall performance last quarter, we generated an increase of more than 2% on that asset.

Prior quarter too.

$15.52, which is once again historical hard.

It is also a 24% above our pre pandemic level at the end of fiscal year 2019.

As Paul said, our net asset value per share this quarter since our IPO price of $15 per share since our IPO, we've made cumulative distributions of $11.77 per share.

This quarter, we increased our distribution to <unk> 29 per share seventh consecutive quarterly increase.

Posted net income of 22 cents per share.

The accrual for the capital gains incentive fee. Our adjusted net investment income of 40 cents per share it was strong and <unk> <unk> above last quarter's distribution.

To get into more specifics the increase in our net asset value was primarily driven by higher fair value marks on select equity investments as was the case with our equity investment in foreign steel as well as our equity investment in Frankfurt data Center.

Valuation marks on the ultimate portfolio were partially offset by lower marks on our structured finance notes.

More liquid senior debt in Boston that students worldwide.

Got it.

Since our IPO.

Invested $45 million in the equity.

Once we have more than 40 portfolio.

To date, we have not realized gains of approximately $23 million, which equates to a one eight times multiple on invested capital.

As of March 31st on the unrealized gain is just over $70 million on remaining invested capital of $17 $7 million, which equates to approximately five times.

We believe that these metrics demonstrate the strength of our investment process and are one of the reasons for our record net asset value.

Once again, we had no new non accruals this quarter.

<unk> had a maybe not accruals since the second quarter of 2020.

Fair value for what we hope to four 1% of the loan portfolio.

Yeah.

Turning to the income statement total investment income was $10 $9 million for the quarter.

So $15 $3 million in the prior quarter.

This was primarily due to a decrease in dividend and fee income including syndication fees.

At very high levels in the prior quarter won't can fluctuate from quarter to quarter, depending on portfolio and investment activity.

Also contributing to the decline in investment income was portfolio a little attention.

Certain higher yielding assets and lower amortization of the Florida origination fees due to lower portfolio tool.

Total expenses of $7 $9 million were down $2 $1 million from the.

Part of the quarter.

Primarily due to lower income and capital gains incentive fees.

We also benefited from lower interest expense due to the full quarterly benefit of a lower weighted average pricing unsecured notes.

Nothing from the November of issuances and redemptions.

As I just mentioned net investment income was 22 cents per share for the first quarter.

On adjusted basis. It was 30 cents per share after adding back a capital gains can be cool.

That's the law discussed earlier this morning, we announced a distribution of 29 cents per share a three 6% increase in the quarterly rate and the seventh consecutive increase.

We believe the strength of our platform and investment portfolio will continue to help drive healthier returns.

Bond offerings last year helped to improve our capital structure.

We remain focused on our liquidity and maintaining a healthy balance sheet.

In the first quarter, we realized the full benefit of our new lower priced $55 million of unsecured debt issued in the fourth quarter.

It is worth noting that 67% of our debt matures in 2025 or later.

2% of all the quarters unused unsecured.

Excluding the <unk> debt, our debt to equity ratio was stable quarter over quarter at approximately one four times.

Turning to our investments we are pleased by the continued strong performance of our portfolio companies.

George you have been posting positive revenue and EBITDA gains.

We continue to have confidence that our underwriting selectivity increases the likelihood that the portfolio performs positively in the future.

Several of our portfolio of companies continue to identify opportunities for growth.

We are evaluating incremental funding.

These opportunities give us relationship and informational advantages in making investment decisions in terms of originations, we deployed $15 $1 million in add on investments to existing portfolio companies.

$5 million in new investments in the first quarter, while remaining cautious given the macroeconomic and geopolitical environment.

The majority of our investments are on loans.

As of March 31st 97% of the loan portfolio was senior secured.

In addition over 90% of the loan portfolio is floating rate with variable rates that are subject to a LIBOR floor.

As of March 31st the weighted average LIBOR floor was 85 basis points.

With three month, LIBOR, now well above 1% and statements by the fed and other central banks that rates will continue to rise.

Dissipate a positive impact on our net investment income over the coming quarters as we have over 90% of our loan portfolio of floating rate loans and then the majority of our debt is fixed rate.

As a percentage of cost our overall in vascular portfolio includes approximately 74% senior secured loans.

Percent subordinated debt.

19% structured finance notes and 4% equity securities.

Our portfolio remains diversified at the end of the quarter, we had 95 portfolio investments totaling approximately $557 million on a fair value basis.

Average investment size of $5 $9 million.

Approximately 1% of the portfolios total fair value.

For the quarter ended March 31st an income yield on the investment portfolio, which includes all interest and amortization of deferred loan fees was 9%.

With that I'll turn the call back over to Paul.

Thank you Jim.

In closing we are pleased with our first quarter performance.

Our net asset value has continued to grow driven by the performance of both our debt and equity investments.

We increased our distribution for the seventh straight quarter.

Reflecting our view of our improved performance and unexpected outlook for the quarters ahead.

Even in light of the uncertain economic environment.

Since the beginning of 2011, what that has invested more than one 7 billion with accumulative net realized loss of <unk>.

Just 2% over the last 11 years.

While generating attractive yields on our portfolio.

Our loan portfolio is almost completely comprised of senior secured loans standing at 97%.

Financing is primarily long term with 67% of our debt maturity in that it can be five and beyond.

In addition, more than half of our outstanding debt was unsecured.

We believe that this gives us operational flexibility to execute on our business plan.

Lastly, we believe the size experience and reputation on quite adviser.

Does the new to benefit our business.

With a $3 1 billion corporate credit platform within a more than 30 billion bottle asset management group, our advisor has broad resources, including long standing banking and capital markets relationships.

It has gone through multiple credit cycles.

25 years.

<unk> has a strong alignment of interest.

The 22% ownership of the BDC.

With that operator.

You can open up the call for questions.

We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.

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At this time, we will pause momentarily to assemble our roster.

Our first question comes from Mickey Schlein with Ladenburg. Please go ahead.

Yes, good morning, everyone hope you're all well.

Below are with all of this volatility in the private markets for much of this year are you seeing more deal flow migrating to direct lenders like well, what FES and what kind of quality are you seeing in the pipeline.

Yes, so vicki I think that.

We're not seeing yet.

You know because of the volatility in the public markets.

Not seeing.

A lot of deal flow.

You know coming in.

From that market to the private market certainly in the normal market, where we play.

But you know I think that.

It's still early as it relates to the volatility.

And the public market so.

That may happen over time.

And with respect to the quantity of the deal I think the quantity.

Still remains.

Fairly good.

We're not seeing any major changes in the quantity.

Off the deal flow.

<unk> two.

Before this.

This one volatility began so again I think it's.

Still early.

In a high volatility environment, but.

So far we are seeing.

The relative stability in the private lending market.

Below that that volatility in the public markets is obviously, reflecting all of these headwinds.

Whether it's inflation or the political.

Colon unrest in Europe , or the fed tightening and you know.

Are you and the rest of your team of a lot of experience in the credit markets. So.

You know we have defaults are at record lows and all of this volatility.

What's your view on the trajectory for default over the next couple of years.

Yeah, No I think that's a that's a very good question and read Mickey you would think about that all the time I.

I think that.

As you just pointed out I think.

Sure.

Two big risks and you have the inflation risk and you have a potential recession risk and most of them happening at the same time.

Obviously causes some challenges.

To the economy and the way we have dealt with it in the past I think.

Our plan is to deal with it in the same way one.

Saying staying senior secured in the capital structure. So as you see you know a vast majority of our loan portfolio is senior secured.

So I think that helps mitigate.

Some of that risk and I.

I think that.

Clearly if you have an environment where.

Do you have any.

Inflation and you have potential for a recession in the next couple of years.

You would.

Likely see.

Default rates across the across the industry creeping up.

But what I would say Dan is that.

Thanks.

And the capital structure.

Italy, mitigates that risk and then clearly the underwriting.

Our experienced team has.

Really through multiple credit cycles at this point.

We expect that that will certainly help us as we navigate through.

Through this uncertain environment.

Thanks for that explanation bill all of that that's helpful. But.

If I can ask in terms of the senior secured portion of the portfolio.

How does that breakdown between first lien unitranche and second lien.

Yes.

Thanks for the question this is Jeff.

So about 16%, 15% to 16% in second lien and.

The remainder is is first lien.

No I don't have a split out at my fingertips.

Considered unit tranche, but I would say that most of our unit tranche loans are still.

You know at relatively low leverage points.

And I would say that our second lien book tends to be a little larger a little more liquid type names and it's a pretty granular portfolio. So most of the names there tend to be smaller than the average size. So we feel really good about the quality of our of our book.

And a quarter over quarter, we've continued to see revenue and EBITDA growth.

With the vast majority of the businesses so yes.

Very limited companies on the watch list.

So we feel very very good about the about the portfolio.

Thanks, Thanks, Jeff that's helpful. My last question. So obviously the forward LIBOR and so for curves are steep and nominal rates on your debt investments could go up fairly sharply over the near term and I think you've talked about that in your prepared remarks.

But you know that's going to make is that a lot more expensive for borrowers overtime.

How much of that.

Increase in nominal rates, you think the private lenders like office will keep versus maybe seeing some spread compression due to competition or just to help support your portfolio companies.

No because the rely more on shelf for tend to be.

A relatively small portion of the overall coupon.

You know I think that we will.

We've seen this before.

A lot more has spiked up.

I think it was maybe in 2019.

You know the portfolio performed well three month LIBOR I think went from 30 basis points to well over 2% and it did not have a meaningful impact on the portfolio. So when you look at.

You know the coupons on our book I think that we feel that you know as floating rates continue to increase.

The.

You know that the companies will see some some strain, but you know we've modeled that and as Bilal said into our downsides for these investments.

You always include a sensitivity of interest rates to ensure there is adequate cushion and we don't.

Don't expect.

That to be a major issue in our book.

That's interesting and helpful. Thanks, Geoff those are all my questions. This morning.

Thanks, Nick.

This concludes our question and answer session and todays Olaf Best Capital Corporation first quarter 2022 earnings call. Thank you for attending today's presentation. You may now disconnect.

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