Q2 2019 Earnings Call

Welcome to today's scarcity.

Capital incorporated second quarter ended June 30th 2019 earnings call.

For the second quarter ended June 30th 2019 earnings presentation that we intend to refer to on the earnings call. Please visit the Investor Relations link on the home page of our website.

W.W.W. dot gears in capitals BBC dot com.

Click on the second quarter ended June 30th 2019 earnings presentation under upcoming event.

As more fully describing that presentation parts touches anticipates. Please expects intends in similar expressions identified forward looking statement.

Actual results could differ materially from those implied or expressed in our forward looking statements for any reason and future results could differ materially from historic performance.

You should not rely solely on the matters discussed in today's call as the basis of an investment interesting capital.

Please review are publically available disclosure documents for further information on the risk of an investment in our company.

Questions will be taken via the phone during the Q. and a session at the end.

It is now my pleasure turned what <unk> you may begin.

Good morning, everybody and thank you for joining the call.

I'm joined by Brian Chase, our Chief operating Officer, Mitch Trucker, or Chief investment Officer, and Dan had our Chief Financial Officer, and Monday morning, We ask our earnings report your press release for the second quarter ended June 30th 2019. They also posted the supplemental earnings presentation to our website, which available for reference throughout today's call.

Following my broader comments, Mitch will highlight our investment activity during the quarter and discuss the portfolio in greater detail Bible, then discuss our financial performance before opening up the lights for Q. alive.

Oh, the overall credit market has largely rebounded from the significant fourth quarter 2018 volatility we're still feeling the impact it had an m. any activity were slower dealflow. During the first half of 2019, but continue to find the market challenging a supply for a direct lending continues to outpace demand.

As a result, new opportunities are generally being executed at higher leverage levels with looser credit structures in light of the current environment remain focused only I'd executing investments to strong credit worthy companies.

Turning now to our second quarter results, we reported that investment costs 22 cents per share as compared to our second quarter gave it at at 23 cents per share.

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Was $10.30 per share down slightly from $10 44 per share in the first quarter.

Increase turnout was given by unrealized losses on a few of our investments for Mitch, which Mitchell discussion for retail.

Overall, we continue to believe the company as well positioned to deliver a strong stable returned to go forward basis, and we hope. This will result in closing the wide gap between where our stock currently trades net asset value of our portfolio with that I'll turn it over to match will provide additional color alone market interactivity during the course.

Thanks, Joe competitive conditions continue to permeate the middle market.

As the current credit cycle persists objective is to be selective, but sensitive and focus on downside protection.

In seeking out the best quality.

We continue to sorts of wide final appeals across the various size segments of the middle market.

We characterized ideal so in three buckets.

Rejuvenated business in the lower Middle market club business, which includes deals less than the 200 and 250 million inside or on rated deals close by non bank direct landers.

And purchase credits and that broadly syndicated Marcus.

Originated business as a percentage of our overall business has declined at the quality of deal flow and aggressive that structures have led to a decrease in actionable transactions.

On the other hand, while our overall selectivity ratio is diminished due to market conditions, we continue to source attractive opportunities and the upper middle market for club deals and broadly syndicated transactions.

These larger companies tend to be more durable and resilient in the event of economic volatility.

We also continuous service or existing sponsor clients, who are seeking acquisition financings recapitalisations immaturity extension.

You partitions during the quarter totaled 24.6 million across to new portfolio companies at a weighted average yield of 8.5%.

Lower volume in the quarter is consistent with reduced market volumes, resulting from late 2018 volatility.

The mix of new business included 4 million and a club deal 3 million at a purchase credits and 18 million a portfolio add on investments.

The club and purchase credits were sponsored financings for surgical specialties and real pros respectively.

Surgical specialty specializes in the design and manufacturing of high performance closure and Sonic products, while wheel pros distribute proprietary branded after market custom wheels and performance tires.

In addition to the deals discussed above.

Degenerated, new volume for American existing customer base, we now have 100 companies in our portfolio of which a good portion seek incremental capital for strategic and or acquisition purposes.

In addition to adding quality assets cab portfolio.

These add ons assists with the retention of customers that existed solid business bottles and financial performance.

Additions for the quarter were upset by repayments totally 19.3 million within weighted average yields of 7.5%.

We receive full repayment from one bar or H.O.C. Alliance.

The balance of the repayments came from ordinary course amortization and excess cash flow.

As a result of the modest repayments total portfolio at fair value increase quarter over quarter to 487 million from 481 million.

The average yielded a debt portfolio a cost remained constant quarter after quarter at 8.9%.

With respect to portfolio performance net realized an unrealized losses total 2.1 billion or 13 cents a share for the quarter.

This was primarily driven by negative market related adjustments cause various purchased syndicated investments.

Nonaccruals decrease during the quarter, 2.7% of the portfolio based on market value.

Down from 22.9% in the previous quarter.

The reduction in honor cools was due to the restructuring of the confluence investment into an equity position as discussed in the previous quarters call.

The overall credit quality of help portfolio has remained stable and consistent throughout 2019.

Outpost 2016 vintage now comprises 96% of our debt portfolio and we now have investments in 100 bar, whereas diversified.

30 industries.

The largest industry concentrations are in solid defensive sectors with recession resilient attributes such as business services software and health care.

Other significant attributes include or average hope side per investments.

Higher concentrations sponsored deals and larger better capitalised comedies.

This is clearly riffraff reflected in the average revenue in either T.A. levels of the companies in their portfolio.

Which continues to grow quarter over quarter.

In addition, the overall weighted average leverage.

Loaned to enterprise value through our positions and risk ratings have remained mostly consistent at 3.9 times 48 per cent L.T.V. and 2.3, respectively.

With respect to the pipeline third quarter activities to date has been modest due to market and competitive factors. Conversely, a second quarter repayment activity was also moderate which we believe to be more than normalized level given her portfolio is relatively young.

Pricing generally in line with current market conditions.

We will continue to source a white funnel of deals across the various sides segments of the middle market.

Post quarter end, we made progress on deploying the remaining idle cash within R.S.B.I.C. like committing to two deals totalling 14 million and findings.

We expect the market to continue to benefit sponsors look for certainty of execution.

Additionally beds on Broadway syndicated purchases provide attractive opportunities on a selective basis.

In the meantime will continue to service on retainer evaluate existing cut clients, which often provide us the most attractive risk adjusted returns.

Now I'd like to pass the discussion tarsier, while Brian Chase.

Thanks match, it's Joe noted our net investment income for the first quarter ending June 30th 2019.

Three and a half million dollars or 22 cents per share.

Just shy of our 23 cent dividend the dividend is payable on September 20th to shareholders of record as of September 6th.

As mentioned in the earnings presentation.

Learning screwed by two cents per share from the previous quarter, mostly due to the utilization of liquidity and R.S.B.I.C. and C. Hello.

As as quarter end or portfolio is pretty close to being fully ramped there's about $35 million for meaning liquidity and R.C. 11 F.B.I.C.

In addition to our remaining liquidity a substantial portion of the portfolios held in relatively liquid probably syndicated credits that can be opportunistically swapped with better price club or directly originated assets.

Since the portfolios largely ramped earnings over the next several quarters will mostly be driven by the overall spread environment and live or rather than the utilization of our remaining liquidity.

It is worth taking note that over the last two quarters yields on new investments have been higher than investments that have been repaid or sold.

For the 10 proceeding quarters that dynamic was the opposite where new investment yields were significantly tighter send me Yeltsin investments that were repaid which contributed to shrinking net investment income.

The stability of asset spreads in the portfolio along with the fact that the portfolios largely ramped should make that investment income a lot more predictable going forward.

That is assuming life or remain stable at current levels of libel, where we're comfortable that that investment income over the course of a one year period should largely cover our current dividend payout assuming there are no major shifts and asset yields and nonaccruals remain low.

However.

I'm, an income is very sensitive to moves and <unk>.

Each 25 basis point move in life or can either increase or decrease our earnings per share by one cent per show.

If library significantly decreases from its current level without an earnings pick up elsewhere in the portfolio will likely need to reassess or dividend.

In closing, we feel that our goal of wrapping the portfolio is largely complete.

We will continue to focus on what remains of the ramps and picking up some yield portfolio rotation.

But that said capital preservation and anything stabilization remain our highest priority and we will continue to be disciplined and selective with our go forward deployment at this remaining capacity.

This concludes our prepared remarks for today's call and now I'd like to open up a line for questions.

At this time, if you would like to ask an audio question you may do so by pressing storing the number one on your telephone keypad I could not a star one we'll pause for just a moment.

[noise].

Again to ask an audio question. Please press star one.

Alright, So I guess, we'll catch you next time I have a good rest of the summer.

This does conclude today's conference call. We thank you for your participation in assets you. Please disconnect your line.

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