Runway Growth Finance Corp. Q1 2023 Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the wrong way growth.
First quarter 20 twenty-two earnings conference call.
He used to be about today's conference call is being recorded I would not like to hand, the conference over to marry Thrill Assistant Vice President of business development and Investor Relations. Please go ahead.
Thank you operator.
Everyone and welcome to run My final conference call for the first order and then March 31st 2023.
Joining us on the call today from <unk> Finance, David Spring, Chairman and Chief Executive Officer, Chief Investment Officer.
And Tom Ratterman, Chief Financial Officer, and Chief operating Officer.
Runaway gross finances first quarter 2023 financial results were released just after today's market closed and can be accessed from one way gross finances Investor Relations website.
<unk> Dot <unk> dot com.
We've arrange for a replay of the call at runway girls finances web page.
During this call I want to remind you that we may make forward looking statements based.
Based on current expectations the.
Statements on this call that are not purely historical are forward looking statements.
These forward looking statements are not a guarantee of future performance and are subject to uncertainties and other factors that could cause actual results to differ materially from those expressed in the forward looking statements.
Including without limitation market conditions caused by uncertainty surrounding rising interest rates.
In fact of the COVID-19, pandemic changing economic conditions and other factors, we identified in our filings with the S E C.
Although we believe that via sanctions on which these forward looking statements are based on reasonable any of those assumptions can prove to be inaccurate and as a result of forward looking statements based on those assumptions can be incorrect.
You should not place undue reliance on these forward looking statements.
Forward looking statements contained on this call are made as of the date here out.
And runway refinance it seems no obligation to update the forward looking statements or subsequent events.
To obtain copies of S. C C related filings please visit our website.
That I'll turn the call over to David.
Thank you Mary and thank you all for joining US this evening to discuss our first quarter results I would like to start by providing first quarter 2023 highlights and I'll discuss broader market dynamics and are over.
In the first quarter runway demonstrated its ability to be a steady hand in the banking industry disruptions caused shockwaves throughout the market.
We attribute that to our weatherproof portfolio focused on recession resistant industries and our roster of season team members, who have experience traversing every economic cycle.
We want to take a moment to address the volatility we'd seen in the banking sector since our last call, which began with the closure of Silicon Valley Bank.
Estimated previously runway had no deposits or loans with SBB, nor did we participate in any credit facilities agent to buy or that included SBB as a lender.
S C DS lending portfolio was particularly concentrated in early stage companies.
Given our focus on the latest stage companies in the venture that goes systems. The recent banking disruptions did not financially impair runways portfolio.
We anticipate continued headwinds in the banking sector and will remain proactive in communicating with our portfolio companies and managing our capital structure.
Industrywide, we've seen public and private investors suggested approach to risk management for the expectations of a potential hard landing recession.
We believe this dynamic physicians runway as a preferred lender in the venture that space. Our priority has always been to deliver stable earnings well mitigating risks in any market environment.
Runway continued to execute its disciplined strategy and we delivered stable earnings as well as attractive risk adjusted returns.
Since inception, we believe our team is built the most stable portfolio in the venture that space. We did this by underwriting first name investments and the highest quality late stage companies that operate in the recession resistant industry sectors, we know best.
With looming macro concerns we remain confident in the durability of our strategy the experience of our team and the strength of our portfolio, which we believe positions. The company for continued success throughout 2023.
Turning to the first quarter operating results.
Runway completed seven investments any existing portfolio companies, representing $12.9 million and funded loans.
Originations and deployment activity reflects first quarter seasonality and the conviction with which we evaluate investments, which we mentioned in our last call.
That said, we continue to see healthy demand from quality companies with clear path to profitability seeking to use that as nondilutive growth capital runway.
Runways credit bar has never been higher and the team remains extremely selective in adding new companies to the runway portfolio.
We remained in our core leverage range of 0.8 to 1.1 times only slightly increasingly ratio from 0.97 to 1.04 times in the first quarter.
Runway has the lowest leverage ratio among the public venture that peers and ample dry powder to deploy however.
However, our approach to building a weatherproof platform has always been quality over quantity, we believe that selectivity in deploying capital will generate better terms and return on equity.
Runway delivered total investment income of $39.3 million and net investment income of $18.2 million in the quarter.
Represents an increase of approximately 104 per cent and 46% respectively from the prior year period.
Assets were $569.8 million at the end of the first quarter down 5% from $597.5 million in the prior year period and down 1% from $576.1 million at the end of 242022.
Tom will provide a deeper look at our strong credit quality, but are weighted average portfolio risk rating remained constant at two one and.
212023.
Turning now restructuring and underwriting.
As demonstrated by our weighted average active loan to value at origination of 17.4% across the portfolio underwriting is a key component of our credit first approach.
With a proven track record across multiple economic cycles.
Runway is built its underwriting process around the core principles of low loan to value a thorough understanding of our borrowers past profitability and value creation as well as the structural protections and covenants that enable effective monitoring and communication.
In an environment with higher base rates and.
And growing concern over potential economic weakness.
Importance of capital preservation, and providing a margin of safety for both our and our portfolio companies balance sheets cannot be overstated.
We continue to see the value in pursuing a growth mindset, well established and guard rails, such as thoughtful covenants and limitations on loan to value.
These measures limit downside risk for both us and our borrowers we believe our checks and balances are effective and allow us to work with borrowers to mitigate risk for us and them.
Management prides itself on being a good partner in helping borrowers work through problems when they arise while simultaneously preserving credit quality and safeguarding our shareholders.
In step with previous quarters, we calculated the loan to value for loans that were in our portfolio at the end of Q4, 2022, and Q1 2023 and found that our dollar weighted loan to value ratio increased modestly to 24% in Q1 from 23% in two four.
We continue to employ a conservative approach devaluation.
As you can see a primary focus heading into this year was to mitigate risks and support our existing portfolio companies runways focus on senior secured and almost exclusively first name loans is important for two reasons.
The first is because this focus empowers us to be a good partner to our borrowers and the second is that it gives us control and being a fiduciary for our investors capital.
Ultimately that means minimising losses.
Focus on first lien loans protects our investors from situations in which a second lien lender might find itself subordinated to any external party and precluded from taking action to preserve the value of alone.
We follow up our rigorous underwriting with proactive monitoring of our portfolio companies.
Our communication cadence with portfolio companies is built into the terms of each loan.
We do not take a one size fits all approach.
Portfolio monitoring is built on a core set of requirements for all portfolio companies and is customized to ensure we are positioned to protect our investors capital and avoid any potential losses in the portfolio.
Additionally, each position in our portfolio undergoes a comprehensive valuation process internally on a quarterly basis and periodically by a third party, which offers confidence in our markets.
Turning to the market outlook.
According to recent Pitchbook data U S late stage venture equity deal value slowed to $11.6 billion in Q1.
While this data provides a snapshot for BC equity market trends runway is not dependent on venture equity dynamics, we believe that our focus on late stage companies, including Nonsponsored borrowers with defined path to profitability Insulates us further from downstream financing risks.
Across the ecosystem the largest concern for companies is surrounding access to capital as they navigate through a slower growth environment.
That's where venture that can provide a very strong value proposition because relative to equity.
Which continues to be expensive and can come with onerous terms that remains an ideal option to fuel growth and minimize delusion.
Venture that is not however, rescue financing during does it replace equity when the capital structure and business operations require an equity solution.
We are mindful that existing portfolio companies me need additional support to navigate dynamic economic conditions. However, as a lender we're confident in our ability to provide that helping hand.
We can support our current portfolio companies and continued to prudently grow our lumber.
Our pipeline continues to expand as we see more quality companies come to runway to explore creative financing solutions, well, the assess future banking relationships and face fundraising challenges.
We will continue to be extremely thoughtful as we evaluate opportunities in the current market environment.
I will now turn it over to Tom.
Thanks, David and good evening everyone.
Runaway completed seven investments in the first quarter, representing $12 $9 million and funded loans.
Runways weighted average portfolio risk rating health cost us at 2.1 in the first quarter compared to the fourth quarter of 2022.
As a reminder, our rating system is based on a scale of one to five where one represents the most favorable credit rating.
At quarter, and we continue to have only one portfolio company right at five and on non accrual status.
During the quarter, we restructured our terms with guidance Sonics and split our investment between a senior secured firstling loan and preferred equity, which has priority over all other equity we.
We also received contributions from the restructuring.
The amended agreement attracted additional junior equity investments to support the company's growth and development.
We're pleased with this result, and that's our entire investment remains first out in the current capital stack.
Our total investment portfolio, excluding U S Treasury bills at a fair value of approximately 1.1 billion holding constant from the fourth quarter of 2022, and increasing 49% from $754 three man for the comparable prior year period.
As of March 31st 2023, Runaway had net assets of $569 aikman decreasing from $576. One man at the end of the fourth quarter of 2022.
Nerve for sure was $14.07 at the end of the first quarter compared to $14.22 at the end of the fourth quarter of 2022.
We're pleased with our stable NAV, which we feel reflects industry leading levels of scrutiny.
With respect to interest rates are long portfolio is comprised of 100% floating right assets, which will continue to benefit from higher rates.
All loans are currently earning interest at or above agreed upon interest rate floors, which generally reflect the base rate plus the credit spreads set at the time of closing or signing of the term sheet.
And the first quarter, we receive $10 2 million in principle repayments, a decrease from $16 million in the fourth quarter of 2022.
Runaway generate a total investment income of $39 three man and net investment income of $18 to Maine in the first quarter of 2023 compared to $19 to man and $12 five man in the first quarter of 2022, largely driven by the increase in the size of our portfolio.
Our debt portfolio generated eight dollar weighted average annualized yield of $15, 2% for the first quarter of 2023.
As compared to 12.2% for the first quarter of 2022.
Moving to our expenses so.
But first quarter total operating expenses were $21.1 million, increasing from $6 Aikman for the first quarter of 2022.
The majority of this increase was driven by higher interest expense and deputies with the balance made up of an increase in performance based incentives fees and management fees.
Runaway had a net realized loss of $1.2 million in the first quarter.
Compared to a net realized loss of zero point $4 million for the first quarter of 2022.
We recorded net unrealized depreciation of $5.1 million in the first quarter compared to net unrealized depreciation of 9.2 man in the first quarter of 2022.
Weighted average interest expense for seven 3% at the end of the first quarter, increasing from six 5% during the fourth quarter of 2022.
And a period leverage was 104% an asset coverage was 196% as compared to 97% in 203% respectively. At the end of the fourth quarter of 2022.
All investments in the first quarter were funded with leverage is part of our strategy to generate nondilutive portfolio growth.
Turning to our liquidity at.
At March 31, 2023 hour total available liquidity was $131 three man, including unrestricted cash and cash equivalents and borrowing capacity of 128 men as compared to 93.8 man and $88 million respectively. On December 31 2022.
We had unfunded loan commitments to portfolio companies of 302 man.
Surety of which were subject to specific performance milestones $63 million of those commitments are currently eligible to be funded.
During the quarter, we further enhance liquidity by increasing our credit facility pursuant to the accordion feature by $75 million to a total of 500 man subject to the terms and conditions as reflected in the credit facility agreement.
Subsequent to quarter, and we completed a $25 million private placement of three year unsecured notes.
We also receive full prepayment of our 30 million dollar loan to Mustang vital.
With ample dry powder that fortifies, our balance sheet runaway remains well positioned to selectively deploy capital at increasingly favorable terms for the remainder of the year.
Finally on May 2nd 2023 hour Board declared a regular distribution for the second quarter of 40 cents per share as well as a supplemental dividend five per share payable with a regular dividend.
S communicated last quarter runway intends to pay is similar supplemental dividend for each remaining quarter of 2023 subject to future approval from the board of directors.
This concludes our prepared remarks will now open the line for questions operator.
Thank you, ladies and gentlemen, if you'd like to ask a question. Please press star one one on your telephone again to ask a question. Please press star 111 moment. Please.
First question comes from the line of Air because Lick of hopefully group. Your line is okay.
Good afternoon, or good evening guys.
Hey, guys able to hear me, Okay Yep Yep.
Okay great.
I wanted to start may be first just on.
On leverage that you mentioned that the investments in the first quarter over refunded with leverage and you're going to get a little bit closer to your.
Preferred target range of 0.8 to one one although I know you've mentioned Jude in the right environment consider going higher so it just curious you know how how you frame your current leverage profile today.
Face to face with how you see the the environment for additional.
Beings and as well as kind of how the pipeline shapes up today.
Okay.
Sure I can take the leverage comment and as David said the pipeline is.
Certainly as strong and as high quality as it's ever been.
We don't feel an extraordinary amount of pressure.
To to grow the portfolio any way other than prudently and selectively as we have it really throughout our history. So as you look at our unfunded commitments that are available to be drawn which is about $63 million.
And our liquidity today, which is over $200 million given the.
Note offering prepayments.
We feel that we're in pretty good shape.
We will likely dripped up over or two or slightly over that one one I don't think we feel any pressure too.
Step outside of that range.
Outside of some very very attractive opportunities.
So I think we're comfortable with that.
Being at the upper end of the state at range going forward and expect that will be there bouncing around that one one for the remainder of the year.
That's helpful and just wanted to move on I was looking at a slide.
21 and the.
So actually I want to move on to 522, just just looking at the.
Potential impact that higher rates would have on on the portfolio and it seems that the fed is may be moving.
To a potential kind of pause and hold period.
Looking at the Sofa curve I would actually suggest that by July rates. The sofa car starts to come down at that point, which I guess is in a big disagreement with what the fed is saying at this point so curious I'm from your perspective.
What that potentially means for the the yield and the opportunity to to grow.
Net investment income just due to the higher rates of how.
How how you kind of face that that prospect today.
I think looking at our capital structure, you'll see that we're still primarily floating rate that.
Probably 60, 65% and and at least in the short term any financing that we would add would be under the revolving credit facility. So we would really have a perfect match there with assets because 100% of our loans are are floating right.
I think that.
In that circumstance as you see rates coming down that would likely be a signal that.
That.
We have a view towards where the economy is going to go now it may mean that the economy is is headed towards a hard landing, but then will be better able to judge the portfolio growth how much we want to add and if we want to step in to that expanded range at which would that impact return on equity.
Dudley.
I guess I would add Eric the other side of interest rates is if they do increase dramatically, which is not what you're seeing on that curve, but if they do there is a point at which it becomes.
Prohibitive for pre profit companies to service their debt or at least makes it a bit more of a hurdle we have not seen that yet and it's probably less of a factor with the latest stage companies, where where we play where our companies are much much closer to profitability they have a.
Clear plan and path to profitability and whether their interest rate is 11, 12, or 13% isn't really going to move the needle. So we're not seeing a lot of pushback, yet, but if rates were too for some reason go up dramatically there probably will be a point.
That we might have to look at slightly different structures, but again, we're not seem that as of yet.
Okay. That's helpful. I appreciate that the commentary right kind of it does seem as if that does go through a whole that I hire for longer level that that would be.
Beneficial or maybe a sweet spot here for you know as you mentioned, but the company is being able to withstand it higher interest burden, but go into much higher could could certainly change that I guess the last question for me and then I'll step aside just in terms of the.
The purchase of the Treasury bills and a quarter curious kind of what the maturities.
We're on those and if that was just a strategy to park some.
Cash short term after.
Prepayments or whether it's part of a longer term strategy to have those investments.
It's not a long term strategy to have treasuries on the on the balance sheet, we wanted to.
Frankly beef up our liquidity.
Given the noise and the disruption in the banking system at that point. So we wanted to have excess liquidity. If you will live in very short term treasuries. So those were.
Seven day treasuries.
Which subsequently liquidated those treasuries and <unk>.
Pay down our revolver.
Thanks for taking my questions today.
Thank you.
Thank you one moment please.
Our next question comes from the line of price Ro B Rally your line is open.
Thanks, Good good evening or good afternoon on the West coast.
Wanted to maybe ask about kind of the dividend policy and.
Any thoughts around maintaining the supplemental kind of given what happened late late in the first quarter any thought to.
Not paying a supplemental.
And retaining that capital as nap.
Great Great question price and thanks for joining today.
Something we certainly evaluate at.
Every quarter and as we move along.
Thank the view of the board right now is that.
And we made a commitment.
To pay that supplemental dividend out.
So that.
Unless there's a dramatic change I think it's our view to maintain that.
Supplemental dividend.
But the board will make that decision every quarter.
Okay. Thanks, Tom that's helpful and then.
I saw on the subsequent event.
They might've been an amendment that came in.
With with one of your portfolio companies.
Curious, what what you're hearing what you're saying with your portfolio companies in terms of trying to I'm trying to get her even need support.
Given given what's happened from a from a macro perspective.
Do you want to address the specific company and I can.
Speak to the general environment sure. So I think there were there were a couple of things one.
And you might be referring to.
Mustang bio, which was an early termination of public company that had.
Good liquidity and I think as we met with them and therefore it evaluated it.
They.
They decided to to prepay that loan that also happened before quarter and with the with the <unk>.
So it says or or is that the activity, we're referring to bryce.
Well that it was that as well as the negative smaller alone with Marley Marley spin.
And it just yet.
Yeah, so widely employing grace, yes Marley spin.
Well first off congratulations to the Marley spin team for successfully negotiating this back transaction and we all look forward as today and.
To joining the.
The Frankfurt exchanges as a public company and moving off the Australian exchange.
That's the <unk>.
Really good outcome as we sat down and we we had a seat at the table or loan agreements give us a seat at the table, There's 34 man U S coming in junior to us.
Right away and then there is the prospect of additional capital coming in a potentially reducing that loan amount.
But we thought it was appropriate to give them some relief in the form of a temporary pick adjustment in order to give them time to close that deal and make sure that the the spec investors were all lined up so we're pleased with it we did have a seat at the table and we think it provide.
Provides a lot of strength to that credit.
We look forward to the completion of that later in the year.
At AD from a general point of view, we have not seen any kind of an uptick in requests for amendments or relief.
The Q1 was very consistent with previous quarters and our sector.
Really really late stage is very much different from the world that.
Whereas VB operated in terms of their venture that book and as we said in our opening remarks, none of our company's head lending relationships with SBB. We had a number of companies that had depository relationships, but have since diversified those so basically no impact on our porch.
Polio from SDB.
That's great I appreciate it I'll step back in queue.
Thank you again, ladies and gentlemen, if you'd like to ask a question. Please press star one.
Hello.
<unk>.
Alright.
Okay.
Our next question comes from I spent a lot of Melissa J P. Morgan Your line is open.
Thanks for taking my questions today, I was hoping that you could walk through the restructuring that took place Q1Panasonic pay now that you touched on that earlier, but could we walk through at.
What triggered that and then anything else in the portfolio.
And what's been disclosed.
You feel like there might be some restructuring.
Activity sure. So <unk> has been a portfolio company for.
A reasonable period of time.
Got a sonics was through mid to late Fourthquarter had initiated a regular way cat.
Capital raised and they were making progress on that.
As we got deeper and two first quarter and there was more capital markets uncertainty Ah more.
Kind of locked up in the in the venture markets concern about the economy.
Their regular way capital raise.
Turned into an opportunity for existing a couple of the existing sponsors to really clean up the the deadwood and take a bit of a heavy hand on that that cap table and at the same time bring in new equity to support the company's growth and development.
In order to close that transaction will help facilitate it and give the company of room to to grow and execute their business plan. We still remain at the top of the capital stack the entire investment still remains senior to any other capital, including the new equity that came in junior your last.
We brought that into two pieces that senior secured.
<unk> and then a senior preferred equity piece, which was in effect.
To.
To reduce the cash interest burden there and it gave us substantial upside in the business and there was also some other upsize that we received so.
We think that's a good outcome for the company and the sponsors and.
We expect to see them to continue to execute on our business plan as to other names in the in the portfolio is David indicated we're not seeing any more or less active.
Activity, then and from an amendment standpoint than we would normally see in.
Confident in all of our processes.
And decision, making that led to that.
Restructuring I Gotta Sonics.
So with that said that we don't see anything specific.
I think we believe or anticipate that there will be more situations where.
There is a a fracturing of the equity syndicate.
Our average company is 14 years old. So you can imagine that the people that started 14 years ago or out of money and the people that did the most recent round have high expectations for for a return and so that can.
Lead to a fracturing of the syndicate and and can also have.
Wipe out round situations, which is essentially what you saw it again, the sonics, where the folks with dry powder say, we will go forward, but.
Folks without capital.
Without an ability to participate are gonna get wiped out and I would be shocked if we don't see more of that it's very typical at the end of the venture cycle and is to be expected and isn't necessarily a bad thing for us.
The strengthening of the syndicate, which would result from the strong investors going forward in the week investors being read it out it is actually a good thing and we've got to deal with it in terms of valuations and.
And requests for us to provide some accommodation, but it's it's it's part of the business. We don't see any specific situations now, but would not be surprised if we do see some pop up over the course of the year.
That's really helpful. I appreciate that just.
Just looking at the portfolio now obviously, there was a tech up I think because of that particular transaction and exposure or portfolio allocation preferred.
Frankly go through this cycle and you'll potentially see more things situations coming to pass.
How do you think about portfolio allocation.
Do you prefer dogs and common equity.
Is there some sort of cap that you think about it being reasonable for the portfolio.
Well, so that's a great question.
They could be extremely interesting investments, but that's not what you folks are paying us to do this is a credit first current return focused investment fund and that's where our commitment lies so we don't have any stated cap, but the preference would be zero.
This is not a.
Ah structured equity fund or anything like that it's focused on current return senior secured first lien loans and we prefer to keep it that way. So simple answers will try to avoid any of it but when it's required we'll try to make the most of it and I'd say, we're quite a depth and skill to add on.
Understanding what's the best way to structure something like that so that we maximize the return.
So a simple answer Melissa we're hoping not to have any more but.
But I don't think that's realistic.
Okay Fair enough one last follow up then on that I could and are there either vehicles at runway that could participate that perhaps more inclined to hold.
I prefer an equity position and or is that sort of standard approach across all of the product offerings.
Great Great. Yeah, Great question, we have one other phone, which is a private L. P. G. P fund, which has a strategy that's very similar to the BBC.
So we don't have any kind of a a structured equity restructured dead or preferred focused fund.
That would be a potential place for one of those it. So uhm dancer is unfortunately, no I I think the time for those is pretty interesting and you've seen a lot of them raised and we see a lot of those folks out in the market.
But they're not really competitive with us because they tend to focus on more troubled situations and we're really especially for new loans trying to make sure that we are lending to the very best companies weekend and make it clear that our type of capital is not rescue finance.
Really helpful. Thanks, So much yeah. Thank you most.
Thank you again, ladies and gentlemen, if you'd like to ask a question. Please press star one one on your phone again to ask a question. Please press star one one.
Our next question comes from the line of Mickey Salon.
Ah Ladenburg in line is open.
Yes. Good afternoon, everyone. Just a quick question on the investment Kneeled you show on page 16 of the presentation.
The weighted average declined 30 basis points that obviously reference rates have been climbing substantially I was hoping you could expand on what caused that I realized that were movements in the portfolio, but was there anything else, we should be aware of that caused that move directionally and.
That which could affect the the outlook for the balance of the year.
Yeah, a lot of it just has to do with the composition of the origination in the prior quarter Mickey and so our average so for spread probably came down a little bit in in fourth quarter, which then flowed through <unk>.
Into into first quarter, that's part of.
Our purpose for an intentional strategy of being very late stage and in an upmarket. So some of those transactions are gonna end up having a.
A little tighter yield visa fee, where we might've been.
24 months ago.
I understand that's it for me this afternoon. Thanks for your time.
Thanks for <unk>.
Yeah.
Definitely like question. Please press star one one on your telephone.
Thank you I'm showing no questions at this time I'd like to turn the call back over to Mr. Davis spring for any closing remarks.
Great. Thank you operator runways first quarter operating performance is indicative of the high quality durable portfolio, we have constructed to navigate the current environment or.
Our team remains confident in our disciplined approach of deploying leverage to dry prudent portfolio growth, while partnering with the latest stage companies in the venture market.
We believe that runway as well positioned to thoughtfully grow earnings and shareholder value in any market environment.
Thank you all for joining US today, we look forward to updating you on second quarter 2023 results in August .
Goodbye.
Ladies and gentlemen, this does conclude today's conference. Thank you all participating you may now disconnect have a great day.
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