Q3 2022 First Eagle Alternative Capital BDC Inc Earnings Call
Okay.
Good morning, and welcome to first Eagle alternative capital P. D. C. Inc's earnings conference call for its third fiscal quarter ended September 30th 'twenty 'twenty. Two it is my pleasure to turn the call over to Sabrina Rusnak Carlson of first Eagle alternative capital BDC, Inc. Misread that 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 seek alternative credit and John Wilson, Our Chief Accounting Officer and Treasurer.
Before we begin please note that the statements made on this call may constitute forward looking statements within the meaning of the Securities Act of 1933 as amended.
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 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 <unk>.
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 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-Q were released yesterday afternoon copies of which can be found on our website along with our Q3 earnings presentation that we may refer to during this call.
A webcast replay of this call will be available until November 9th 2023, starting approximately two hours. After we conclude this morning to access the replay. Please visit our website at Www Dot F E AC BDC 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 to review, our third quarter results and share some portfolio highlights.
Jim Volker will discuss our portfolio on our financial results in more detail.
We know folks are interested in hearing our view on the transaction analysis I'll address that at the end of the call FERC, let's cover the quarter.
The results of the quarter were as expected we saw some softness in the overall portfolio continued.
Given continued softness in the market, but nothing outside of expectations.
The positive news is this quarter really showed the earnings power of the portfolio once all the work.
Implemented.
Lower cost of debt financing and the Logan joint venture coupled with rising rates on our floating rate book.
<unk> 13 per share NII.
A dividend of 11.
We ended the quarter with net asset value of $5 14 per share down 3% on a quarter over quarter basis, then that'd be great was driven primarily by three positions the Logan joint venture.
Loadmaster seven <unk>.
Matilda Jane too soon.
As at September 30.
<unk> exposure to Logan joint venture was 12, 5% of our total investments during.
During the quarter, the Logan JV and returned approximately $12 8 million of capital as a result of refinanced via the issuance of a middle market CLO.
Interest income was about $200000 higher than last quarter.
Result of a combination of new investments in Q2, and Q3, but increased yield due to rising benchmark rates.
Yes.
The Logan JV dividend was $2 $1 million in the third quarter, representing a 24% increase from the Q1 dividend, which is the last dividend paid before the JV Logan JV when you finance we've done.
The increase in the dividend income to directly correlated with the refinancing of the Logan joint venture facility until the middle market CLO, coupled with increases in LIBOR and silver.
As discussed in prior calls one of the expected outcomes of the middle market CLO with higher low higher Logan JV at dividend income to the BDC.
As a reminder, the Logan JV is primarily comprised of first lien broadly syndicated CLO loans.
From an origination perspective, the overall first eagle direct lending platform remains robust deploying over $490 million in first lien capital to middle market sponsor backed companies.
Given the continued economic and geopolitical landscape Q3 volume was driven by a mix of new investments and add on activity.
We maintain a cautious view on putting money to work and where our new cash flow and asset based lending deals arise. We're looking for recession resistant businesses across our maintenance through verticals, which include health care financial services information technology and consumer services.
In the third quarter, our CRT investments totaled $24 7 million was 12 point.
1 million wasn't three new portfolio investments with the remainder in follow on investments, including revolver and later all funded.
We had one repayment of a tradable credit assets during the quarter with total proceeds of $3 9 million.
Mentioned earlier, the Logan JV returned approximately $12 8 million of capital for the quarter as well.
Yesterday position portfolio ended the quarter with 73 investments.
With that I'll turn the call over to Jim.
Great. Thank you, Chris and good morning, everyone.
Ill start off with a few investment and portfolio highlights.
Chris previously mentioned, we did have three new investments added to the portfolio at $12 1 million par. However.
However in addition to that we also have several follow on investments and funding commitments totaling $12 6 million for total deployment of $24 $7 million Park.
The blended yield of new investments was nine 1% based on underlying benchmark rates and spreads as of September 30th.
Additionally, we did have one repayment during the quarter, receiving total proceeds of $3 $9 million in that rate payment was made at par.
During the quarter as a result of its financing of its capital structure through the issuance of a middle market CLO. The Logan JV also returned $12 $8 million to F. CRD.
As of September 30, our portfolio was valued at $363 2 million down from $3 to $366 8 million at the end of Q2.
It wasn't invested 84, 4% in first lien senior secured debt and 12, 5% in the Logan JV.
As a reminder, the Logan JV is approximately 99% invested in first lien assets.
The remaining three 1% 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 JV was eight 2% at the end of Q3, which is up from six 8% at the end of.
Q2, the increase was attributable to both the ryzen benchmark reference rates as well as the increase in the Logan JV dividend during the quarter.
During Q3, there were no new assets placed on non accrual total non accruals as a percentage of our portfolio at fair value at cost or one, 9% and seven 5% respectively.
Now I'd like to address the results of operations for the third quarter.
During Q3, we recognized $8 9 million of investment income primarily from interest and dividends.
Interest income increased approximately.
<unk> 2 million from Q2 to $6 5 million for Q3 the.
The increase was primarily driven by an increase in cash interest of <unk> 9 million due to capital deployment in Q2, and Q3, coupled with increasing benchmark reference rate. This was offset by a decrease of approximately 700000 and prepayment premiums and accelerated amortization as there were no.
Significant pre.
Prepayment realizations during the period.
As expected the dividend income from Logan JV increased significantly to $2 1 million in Q3 the.
Our Q2 dividend was lower than normal due to certain onetime charges and write offs associated with the termination of the Logan JV credit facility in connection with the issuance and refinancing of the Logan JV middle market CLO Q.
Q3 dividend of $2 1 million represents the return to a normalized quarterly dividend from the Logan JV.
Hence by the more efficient financing structure of the middle market, CLO and rising with benchmark reference rates.
Tom was flat at $300000.
Total expenses net of management fee waivers for the quarter were $5 million up from $4 million in Q2. The biggest driver of the increase was the $1 million increase in management fee gateway for waiver of our Q2 management fees and no waver in Q3.
From a leverage perspective, the Q3 debt to equity ratio was up marginally to 144 times due to the decrease of net asset value at the end of the quarter.
We continue to have ample borrowing capacity under our credit facility to manage our portfolio and phone calls on our unfunded commitments.
With that I will turn the call back over to Chris.
Thanks, John I'd like to take a moment to address the announcement of our entry into a merger agreement with Crescent capital BDC on October four.
We're pleased with this outcome as we believe it is in the best interest of the <unk> stockholder since 2015 as the adviser we executed on a variety of initiatives to close the valuation gap between the <unk> NAV and our stock price.
These initiatives and cyclical portfolio development did not translate into a narrowing of the trading discount. Unfortunately.
That's unfortunate all the efforts improving the book enabled the board to run a very efficient process, which resulted in what we believe to be an extremely compelling offer from <unk> capital.
In both the advisor and the largest shareholder our interests are aligned with our stockholders and we alongside with the board fully support the proposed combination with growth in capital BDC.
Furthermore, first Eagle investment management assigned to support agreement to vote in favor of the transaction.
The details around the board process can be found in the in 2014 filing was made public on November 4th.
On November four 2022.
And we look forward to working with <unk> to both close the transaction and assist with the transition of portfolio management.
We have spent extensive time with crescent and believe they're the right partner to manage the BDC going forward. As a reminder, we will not be answering any questions about the transaction do you have any questions about portfolio results, we will be happy to take them now.
Later, please open up the line for questions.
As a reminder to ask a question you will need to press star one one on your telephone please standby, while we compile the Q&A roster.
And our first question comes from Lee Cooperman with Omega family Office. Your line is open I feel like George Washington in the first time I've ever been first anyway I want to congratulate you on the transaction I know that this was an outcome that you did not want initially when you win.
Public, but I think all along the way you have represented the best interest of shareholders and I congratulate you.
My question is when do you expect the transaction to close.
Perfect. Thanks for that and I'll defer to Sabrina, It's Brent do you have any timeline that we are able to speak to publicly.
Yes, I mean, I think we've publicly stated that.
We endeavored by end of year, but likelihood split probably into Q1 2023 got you. Thank you good luck and thanks again.
Thank you.
Thank you one moment for our next question.
And our next question comes from Robert Dodd with Raymond James Your line is open.
Hi, guys just to accurately congratulations on the transaction.
Thats all my questions.
On the portfolio.
All the markdowns in particular for loadmaster, and childrens chain, which were some of the larger contributors.
Is that the result of.
Of spread widening being greater.
Got it so to speak or actual to credit right.
Right Okay.
Any.
Okay.
Are you getting any feel for like how close that is to the bottom or is it still subject to how the economy develops over the next 12 months.
Obviously as the market portfolio, we feel that the number that we put in the queue is an accurate reflection of what we think the recovery is on on any position. So this is our best estimate based on the information that we have in hand.
Understood with the caveat that is based on the information you have but as the information to say the most recent data is that has that deteriorated from.
Now to your new hit.
No.
I understand your question all right no changes from from from my opinion on performance from.
When we snapped the tape at 930 versus where we are today on those students.
Got it thank you.
Thank you and as a reminder to ask a question. Please press star one one on your phone.
And I'm showing no further questions at this time I would now like to turn the conference back to Chris Flynn for his closing remarks.
Thank you operator, we appreciate the support of our stockholders and look forward to providing you with an update on the <unk> transaction when appropriate feel free to reach out to Jim Wilson or myself. If you have any questions before them. Thank you.
And this concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Good morning, and welcome to first Eagle alternative capital BDC Inc's earnings Conference call for its third fiscal quarter ended September 30th 2022. It is my pleasure to turn the call over to Sabrina Rusnak Carlson of first Eagle alternative capital BDC, Inc. Mistrusted 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 first seek alternative credit and John Wilson, Our Chief Accounting Officer and Treasurer.
Before we begin please note that the 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 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 use.
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-Q were released yesterday afternoon copies of which can be found on our website along with our Q3 earnings presentation that we may refer to during this call.
A webcast replay of this call will be available until November 9th 2023, starting approximately two hours. After we conclude this morning to access the replay. Please visit our website at www Dot FTE AC BDC dot com with that I will.
Turn the call over to Chris.
Thanks, Brian .
Good morning, and thank you for joining us on our earnings call on today's call to review, our third quarter results and share some portfolio highlights.
And then Jim will discuss our portfolio on our financial results in more detail.
Folks are interested in hearing our view on the transaction announcement I'll address that at the end of the call the FERC, let's cover the quarter.
The results of the quarter, where as expected we saw some softness in the overall portfolio continued.
Given continued softness in the market, but nothing outside of expectations.
The positive news is this quarter really showed the earnings power of the portfolio once all of our guys were implemented.
Lower cost of debt more efficient financing in the Logan joint venture coupled with rising rates on our floating rate book.
Interpreted into 13 cents per share the NII versus our dividend of 11.
We ended the quarter with net asset value of $5 14 per share down 3% on a quarter over quarter basis, then that'd be great and was driven primarily by three positions the Logan joint venture.
Loadmaster seven.
<unk> two <unk>.
As of September 30.
<unk> exposure to Logan joint venture was 12, 5% of our total investments.
During the quarter, the Logan JV and returned approximately $12 8 million of capital as a result of refinance.
Issuance of a middle market CLO.
Interest income was about $200000 higher than last quarter. This is the result of a combination of new investments in Q2, and Q3 plus increased yield due to rising benchmark rate.
The Logan JV dividend was $2 $1 million in the third quarter, representing a 24% increase from the Q1 dividend, which is the last dividend paid before the JV Logan JV refinanced we've done.
The increase in the dividend income to directly correlated with the refinancing of the Logan joint venture facility until the middle market CLO, coupled with increases in LIBOR and silver.
As discussed in prior calls one of the expected outcomes of the middle market CLO with higher low higher Logan JV at dividend income to the BDC.
As a reminder, the Logan JV is primarily comprised of first lien broadly syndicated CLO loans.
From an origination perspective, the overall first eagle direct lending platform remained robust deploying over $490 million in first lien capital to middle market sponsor backed companies.
Given the continued economic and geopolitical landscape Q3 volume was driven by a mix of new investments and add on activity.
We maintain a cautious view on putting money to work and where our new cash flow and asset based lending deals arise. We're looking for a recession resistant businesses across our maintenance through verticals, which include healthcare and financial services information technology and consumer services.
In the third quarter as CRD invested a total of $24 7 million of which 12 point.
1 million wasn't three new portfolio investments with the remainder can follow on investments, including revolver and later all funded.
We had one repayment of a tradable credit asset during the quarter with total proceeds of $3 9 million.
Mentioned earlier, the Logan JV returned approximately $12 8 million of capital this quarter as well.
Yesterday position portfolio ended the quarter with 73 investments.
With that I'll turn the call over to Jim.
Great. Thank you, Chris and good morning, everyone.
Ill start off with a few investment and portfolio highlights.
Chris previously mentioned, we did have three new investments added to the portfolio at $12 1 million par. However.
However in addition to that we also had several follow on investments and funding commitments totaling $12 6 million for total deployment of $24 $7 million Park.
The blended yield of new investments was nine 1% based on underlying benchmark rates and spreads as of September 30th.
Additionally, we did have one repayment during the quarter, receiving total proceeds of $3 $9 million in that rate payment was made at par.
During the quarter as a result of its financing of its capital structure through the issuance of a middle market CLO. The Logan JV also returned $12 $8 million to S. CRD.
As of September 30, our portfolio was valued at $363 2 million down from $3 to $366 8 million at the end of Q2.
It wasn't invested 84, 4% in first lien senior secured debt and 12, 5% in the Logan JV.
As a reminder, the Logan JV is approximately 99% invested in first lien assets.
The remaining three 1% 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 JV was eight 2% at the end of Q3, which is up from six 8% at the end of Q2. The increase was attributable to both the ryzen benchmark reference rate as well as the increase in the Logan JV dividend during the.
Quarter.
During Q3, there were no new assets placed on non accrual total non accruals as a percentage of our portfolio at fair value and at cost or one, 9% and seven 5% respectively.
Now I'd like to address the results of operations for the third quarter.
During Q3, we recognized $8 9 million of investment income primarily from interest and dividends.
Interest income increased approximately.
<unk> 2 million from Q2 to $6 5 million for Q3 the.
The increase was primarily driven by an increase in cash interest.
<unk> 9 million due to capital deployment in Q2, and Q3, coupled with increasing benchmark reference rate. This was offset by a decrease of approximately 700000 and prepayment premiums and accelerated amortization as there were no significant.
Prepayment realizations during the period.
As expected the dividend income from Logan JV increased significantly to $2 1 million in Q3 the.
Our Q2 dividend was lower than normal due to certain onetime charges and write offs associated with the termination of the Logan JV credit facility in connection with the issuance and refinancing of the Logan JV middle market CLO Q.
Q3 dividend of $2 1 million represents the return to a normalized quarterly dividend from the Logan JV.
Enhanced by the more efficient financing structure of the middle market, CLO and rising with benchmark reference rates.
Tom was flat at $300000.
Total expenses net of management fee waivers for the quarter were $5 million up from $4 million in Q2. The biggest driver of the increase was the $1 million increase in management fees due to a full waiver of our Q2 management fee and no waver in Q3.
From a leverage perspective, the Q3 debt to equity ratio was up marginally to 144 times due to the decrease of net asset value at the end of the quarter.
We continue to have ample borrowing capacity under our credit facility to manage our portfolio and phone calls on our unfunded commitments.
With that I will turn the call back over to Chris.
Thanks, Ken I'd like to take a moment to address the announcement of our entry into a merger agreement with crossing capital BDC on October four.
We're pleased with this outcome as we believe it's in the best interest of the <unk> stockholder since 2015 as the adviser we executed on a variety of initiatives to close the valuation gap between the <unk> NAV and our stock price.
The initiatives and subsequent portfolio development did not translate into a narrowing of the trading discount. Unfortunately.
Well that's unfortunate all the effort that's improving the book enabled the board to run a very efficient process, which resulted in what we believe to be an extremely compelling offer from <unk> capital.
And both the advisor and the largest shareholder our interests are aligned with our stockholders and we alongside with the board fully support the proposed combination with Crescent capital BDC.
Furthermore, for Eagle investment management assigned to support agreement to vote in favor of the transaction.
The details around the board process can be found in the in 2014 filing was made public on November 4th of.
November four 2022.
And we look forward to working with Crescent to both close the transaction and assist with the transition of portfolio management.
We have spent time with crescent and believe they're the right partner to manage the BDC going forward. As a reminder, we will not be answering any questions about the transaction do you have any questions about portfolio results, we will be happy to take them now.
Later, please open up the line for questions.
As a reminder to ask a question you will need to press star one one on your telephone please standby, while we compile the Q&A roster.
And our first question comes from Lee Cooperman with Omega family Office. Your line is open I feel like George Washington, The first time I've ever been first anyway I want to congratulate you on the transaction I know that this was an outcome that you did not one initially when you went.
Public, but I think all along the way you have represented the best interest of shareholders and I congratulate you. My only question is when do you expect the transaction to close.
Perfect. Thanks for that and I'll defer to Brendan Brennan, you have any timeline that we're able to speak to publicly.
Yeah, I mean, I think we've publicly stated that.
We endeavored by end of year, but.
Likelihood split probably into Q1 2023 got you. Thank you good luck and thanks again.
Thank you.
Thank you one moment for our next question.
And our next question comes from Robert Dodd with Raymond James Your line is open.
Hi, guys, Yeah, just to echo the congratulations on the transaction.
Thats all my questions.
On the portfolio.
All the markdowns in particular for Loadmaster, and Matilda, Jane which were some of the larger contributors I mean is that the result of.
Of spread widening being greater.
Got it so to speak or actual competitor.
Credit credit deficient okay.
Any.
Color you can give any feel for like how close that is to the bottom or is it still subject to how the.
The economy develops over the next 12 months.
Obviously, the market portfolio, we feel that the number that we put in the queue is an accurate reflection of what we think the recovery is on on any position. So this is our best estimate based on the information that we have in hand.
Understood with the caveat that is based on the information you have but has the information to say the most recent data is that has that deteriorated from no 10 unit. So.
So.
I understand your question all right no changes from from from my opinion on performance from when we snapped the tape at 930 versus where we are today on those units.
Got it thank you.
Thank you and as a reminder to ask a question. Please press star one one on your phone.
And I am showing no further questions at this time I would now like to turn the conference back to Chris Flynn for his closing remarks.
Thank you operator, we appreciate the support of our stockholders and look forward to providing you with an update on the <unk> transaction when appropriate feel free to reach out to Jim Wilson or myself. If you have any questions before them. Thank you.
And this concludes today's conference call. Thank you for participating you may now disconnect.