First Eagle Alternative Capital BDC, Inc.
Q1 2021 Earnings Call Transcript

Published: 7 May 2021

[Operator:]

Good morning, and welcome to the First Eagle Alternative Capital BDC, Incorporated’s Earnings Conference Call for its First Fiscal Quarter Ended in March 31, 2021. It is my pleasure to turn the call over to Ms. Sabrina Rusnak-Carlson of First Eagle Alternative Capital BDC, Incorporated. Ms. Rusnak-Carlson, you may begin.

[Sabrina Rusnak-Carlson:]

Thank you, operator. Good morning, and thank you for joining us. Joining me on today’s call are Chris Flynn, President of First Eagle Alternative Credit; Terry Olson, Chief Operating and Chief Financial Officer of First Eagle Alternative Credit; and Jen Wilson, Chief Accounting Officer.

[Chris Flynn:]

Thanks, Sabrina. Good morning, and thank you for joining us on our earnings call. On today’s call, I’ll provide an overview of our first quarter results, some portfolio highlights, and then Terry will discuss our portfolio and financial results in more detail. Let’s begin with our results for the quarter. Net investment income for the quarter was $0.11 per share compared with $0.10 dividend and $0.11 per share in Q4. NII continued to benefit from the management fee waiver that ended in March 31. As a reminder, the management fee waiver constituted a $0.03 per share impact NII per quarter. It was intended to reduce the impact to shareholders as we exited and de-risked our remaining concentrated non-core positions. We’ve made considerable progress on our portfolio transition and overall, we’re very pleased with how the portfolio has performed through the pandemic.

[Terry Olson:]

Thanks, Chris, and good morning, everyone. First, some investment portfolio highlights. As Chris mentioned, we had an active quarter with six new several follow on investments totaling $25 million at a blended yield of 6.6%. Excluding the four broadly syndicated loans, the blended yield on the new investments of 7.8%, we had two notable realizations through the exit of our first lien positions in Neiman Marcus in app buyer technologies in Q1 generating $3.2 million of cash proceeds, which included prepayment premiums.

[Chris Flynn:]

Thanks, Terry. Overall, this is another solid quarter for FCRD with steady NAV and credit improvement. We again recorded positive results that most of our portfolio companies the economy has begun to open up over the last several months. We made progress of derisking the portfolio attributed to outsize legacy positions. Originations remain strong and remain confident in our ability to prudently increase our leverage profile to put us in a position to cover our dividend going forward without management fee waivers. I would now like to turn the call over to the operator for Q&A. operator?

[Operator:]

Thank you, sir. Your first question is from the line of Lee Cooperman from Omega Family Office. Your line is now open.

[Lee Cooperman:]

Thank you. Good morning. How you’re doing? Well, Chris, hope that all is well.

[Chris Flynn:]

Well. Thanks, Lee.

[Lee Cooperman:]

I think you’ve addressed it, but I just want to make sure I hear right. You feel the dividend is sustainable after returning to a full fee, correct? Is that what you said?

[Chris Flynn:]

That’s correct.

[Lee Cooperman:]

Okay. How do you given things as they exist today? Not tomorrow, but today? How do you view making additional loans versus stock repurchase, given the big discount to book value? The discount seems to be justified by we’re earning on our book. But how do you view the relative merits of repurchase versus growing the business?

[Chris Flynn:]

Yes, it’s a complicated. Go ahead, Lee, if you had a second question, interrupt.

[Lee Cooperman:]

No. On the repurchase, what is the actual order of magnitude that you would have available if you decide to do repurchase?

[Chris Flynn:]

Perfect, I think the second question first, under the current borrowing base that we have with ING, I don’t believe there be any restrictions that we’d have full access to the full $10 million to the extent we elected to do that. It will take time for us, $10 million as the size of the program, obviously would take time for us to do that. Just given out thinly traded the stock is. So there shouldn’t be any restrictions to limit that. With that said, as you said, how do you balance it? It is a balance because obviously the BDC has strong, tremendously, we’re trying to turn that around and actually see growth. But we’re trying to manage both shareholder expectations and making sure we’re being good fiduciaries of capital in making capital available to make new investments and new loans, but also recognize that we still do trade at a discount to book.

[Lee Cooperman:]

So the answer to the question is you haven’t decided.

[Chris Flynn:]

We haven’t decided, and that’s correct. We were looking at them on a case by case basis, but again, my focus right now is trying to fix the liability side of the equation coupled with maintaining some growth in the existing investments. But I also do recognize that we’re still trading at a significant discount, and that’s a good prudent use of capital as well. So I would anticipate all three.

[Lee Cooperman:]

Actually two last ask questions, given a full fee schedule for your compensation scheme. And the way you want to run the business in terms of the quality of credits you’re investing in. What is a reasonable return on equity is a target, which are that $6 and some change in book value yield in the way of earnings.

[Chris Flynn:]

Yes. Once we get the liability side, corrected – right now, the cost of the debt stack is absolutely too high, I wasn’t saying it was unjustified before the balance sheet was fixed. But now that it’s fixed, we need to bring that down. But we’re still targeting 9% to 10% ROE. I don’t think that’s substantially different than any other BDC.

[Lee Cooperman:]

Got you. Okay. Thank you very much. I’ll yield the call to somebody else.

[Chris Flynn:]

Thanks, Lee.

[Lee Cooperman:]

Thank you.

[Operator:]

Your next question is from the line of Matthew Tjaden of Raymond James. Your line is now open.

[Matthew Tjaden:]

Hey, all good morning and appreciate the time and apologies by assuming that’s been covered as I had to join late. First question, I guess, kind of for me, any high level commentary you can give on spreads and structures versus kind of pre-COVID levels? And what you’re seeing in the pipeline?

[Chris Flynn:]

Yes. Sure, Matt. Appreciate the question. We didn’t cover that in our script. When COVID hits, spreads probably gapped out 200 to 300 basis points. The market has become more competitive or a stabilized, those spreads have come down. I’d say now, you’re probably still maybe 50 basis points wide from where your pre-COVID levels, but I’d call the market right now on a high quality senior secured deal LIBOR 550. On our traditional transactions were probably LIBOR 600 to 650 our ABL transactions.

[Matthew Tjaden:]

Okay. I guess, on a more unrelated note, just kind of looking at the fair value to cost marks in the broad portfolio. So on my calculations, I’ve got about, call it, $1.70 and just embedded depreciation on the book. Any commentary you can give on how much of that, I know that obviously embeds like loadmaster and OEM. But how much of that is from what I might call the non-accrual book and any further NAV upside from that?

[Terry Olson:]

Yes, this is Terry, I’d have to get back to you with the math, I had bifurcated the answer to that question ahead of this call. So if maybe I can circle back with you. There is a decent – the only other name I would say where there’s you’re probably seeing that gap is with Matilda Jane. And you can see that gap has closed over the last few quarters based on his performance. So that would be the only other larger area where there’s related to a specific name that I’d point out. But I don’t think that exact split.

[Matthew Tjaden:]

Okay. Fair enough. That is it for me. I appreciate the time.

[Chris Flynn:]

Thanks, Matt.

[Operator:]

Your next question is from the line of Robert Dodd of Raymond James. Your line is now open.

[Robert Dodd:]

Good morning, guys. Yes, this is a weird morning. So I joined from a different call. Lee actually asked the question, but I’m going to follow-up. On the target ROE, a 9% ROE seems realistic for your strategy, et cetera. What do you think you’re obviously well below that today? What do you think is a realistic timeframe to actually get to that level of ROE, if you can hit 9% the valuation can potentially move? So what’s the timeframe where you think that’s realistic?

[Chris Flynn:]

Yes. Robert, it’s a great question. I wish, I could give that to you. But unfortunately, we don’t control all aspects of the business per se, what we did control was the asset side of the equation. We’ve worked tremendously hard to reposition the portfolio, exit these facilities that didn’t make sense, massively reduce our concentrated positions. So now we feel like we’ve got an asset balance sheet that can be financed substantially cheaper. What do I need to make the other part of the equation work? We need an upgrade, we need to be investment grade. And if we hit an investment grade status in the near-term or in the future that’ll enable us to substantially reduce the cost of our financings, which will be extremely accretive to the dividend, which will make that ROE calculation that much easier. But, unfortunately, I don’t have a crystal ball on when that upgrades coming. We’re obviously having conversations with the rating agencies, as Terry alluded in his prepared remarks. So we have – as I said before, bonds that are callable now, we have another set that are callable in October, I’m hopeful that we can get all this stuff wrapped up by the end of the year. But of course, again, that’s still subject to the rating agencies. As we sit here today is currently rated, we can refinance the bonds that have savings, but I think from my perspective, like we’ve done enough to get that investment grade rating, and we want to hold for that to take a bigger step down in the cost of debt. Once the cost of debt comes down, obviously, the ROE equation becomes substantially easier.

[Robert Dodd:]

Understood. Thank you.

[Terry Olson:]

Robert, maybe just to put some numbers around it just order of magnitude, 50 basis point savings on the bonds themselves, just on a rate perspective drives about $0.02 of annualized NII just on 50 basis points. So, you could potentially multiply that by three, and that could come up to $0.05 or $0.06 per share on an annualized basis, if you can get the bonds down 150 basis points. So I’m sure you’ve done that math, but I just wanted to highlight that for to tie the two points together.

[Robert Dodd:]

Thank you. Yes, I’ve done that. But I appreciate it.

[Terry Olson:]

Absolutely. Thanks for the question, Robert.

[Operator:]

I’m sorry. Presenters, there are no further questions. Please continue.

[Chris Flynn:]

Operator, is it no more questions?

[Operator:]

Yes, sir.

[Chris Flynn:]

Robert, that was it. Okay. Perfect. All right. Well, thank you. Thanks, operator. Before I make my final remarks, I’d be remiss if I didn’t highlight the fact that this was Terry’s last earnings call with us. I believe this is 44 in a row for him. Well, I didn’t do all 44 with Terry, I can tell you I am pleased that he did all align with me. I couldn’t think of a better partner to help navigate the last few years. So on behalf of First Eagle, I just wanted to say thank you. We wish you all the best. We also appreciate the support of our shareholders and we look forward to providing you with an update in early August on our future results. I hope everyone has a good day. As usual, feel free to reach out to Sabrina or myself if you have any questions before then.

[Operator:]

And with that, this concludes today’s conference call. Thank you for attending. You may now disconnect.