First Eagle Alternative Capital BDC, Inc.
Q4 2020 Earnings Call Transcript

Published: 5 Mar 2021

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the First Eagle Alternative Capital BDC, Inc. Q4 2020 Earnings Conference Call . I would now like to hand the conference to your speaker today, Sabrina Rusnak-Carlson, General Counsel, First Eagle Alternative Capital BDC. Please go ahead, ma'am.

[Sabrina Rusnak-Carlson:]

Thank you, operator. Good morning, and thank you for joining us. Joining me on today's call are Chris Flynn, Chief Executive Officer; and Terry Olson, Chief Operating and Chief Financial Officer. 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. 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 filed yesterday and other filings within the Securities and Exchange Commission.

[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 fourth 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 to our $0.10 dividend and $0.01 per share NII of Q3. NII continues to benefit from the management fee waiver that will continue through Q1 of 2021. As a reminder, the management fee waiver adds $0.03 per share in NII per quarter. It was intended to reduce the impact to shareholders as we exited and derisked our remaining concentrated noncore positions. This management fee waiver has supported NII over the past year. We’ve made considerable progress on our portfolio transition and overall, we’re very pleased with how the portfolio has performed through the pandemic. We are currently levered 0.093 times and a target long term leverage level of up to 1.2 times by the end of Q2 2021. We expect this increase in leverage to be accretive to NII at this level, and we believe will be inline with or exceed our $0.10 dividend while paying the management fee. In Q4, our book value decreased approximately 1.6% from $6.25 per share in Q3 to $6.15 per share at the end of Q4. It is important to put this modest change in Q4 in context of three other developments. First, as you may have seen in our 8-K filing from late December, we were successful in completing the sale of two principal businesses of OEM. The derisking of deposition resulted in a significant decline in the value of our equity life second lien position compared to our holdings at the end of Q3, it’s had $0.41 per share impact on our book value. I'll provide some additional color on this later in the call.

[Terry Olson:]

Thanks, Chris, and good morning, everyone. First, some investment and portfolio highlights. As Chris mentioned, we had an active quarter with eight new investments and several follow ons, totaling $31 million for a blended yield of 7.9%. And we also had four notable realizations. Chris mentioned, generating $34 million of cash proceeds that included the exit. Our first lien positions, Synteract, Simplicity financial, NCP Investor and our equity holdings in C&K. As of December 31st, our portfolio of $338 million was invested 69% and first lien senior secured debt, 20% Logan JV. As a reminder, the Logan JV is 97% invested in first lien assets. The remaining 11% of the portfolio was held in the second lien, sub debt and income producing and equity holdings. Weighted average yield on the debt and income producing portfolio based on cost, including Logan, was 7.1%, a modest increase over prior quarter. As Chris mentioned, there's no new investments added to nonaccrual in Q4 and the nonaccruals as a percentage of our portfolio at fair value and cost were 2.2% and 3.9% respectively. Moving on to the financials for the fourth quarter, I'll highlight some of the components of our $7.5 million of investment income this quarter. These include interest income of $5.1 million, which was up $0.5 million quarter-over-quarter as we added several leans to the portfolio while experiencing some back ended repayments. Included in the $5.1 million of interest income is $100,000 related to prepayment premiums and approximately $300,000 related to accelerated amortization of OID. Dividend income decreased this quarter to $2.2 million due to a smaller dividend from C&K that was paid in connection with the closing of the sale. Logan’s dividend contributed $1.6 million to the dividend income in Q4. Total expenses for the quarter were $4.2 million, which were flat versus Q3, slightly higher borrowing costs, which were associated with the write-off of certain deferred financing costs related to our credit facility amendment this quarter, were offset by lower professional fees. With respect to other items below the net investment income line, net realized gains of $1.6 million in Q4 was largely related to the gain on the C&K transaction and a realized loss from the smarTours restructuring, which was for accounting purposes only. Each of these were already reflected in our Q3 NAV and as a result, they had a limited impact on the NAV change in Q4. From a leverage perspective, we ended the quarter with a debt to equity ratio of 0.93. Additionally, we have an ample borrowing capacity on our credit facility to continue to grow and increase leverage towards our target Chris mentioned through the first half of the year, where we are, given the risks -- given where we are at the portfolio risk overall. As a reminder, we mentioned on our last call that we completed an amendment and extension of our senior credit facility in October, which included a commitment of $100 million with the option to increase the facility of $200 million.

[Chris Flynn:]

Thanks Terry. Overall, this is a good quarter for FCRD. We continue to see positive trends at our portfolio companies as the economies began to open up over the last several months. We have de-risked the portfolio with changes to the outside legacy positions. We have seen an uptick in deal activity that will help drive additional growth in the coming months. We believe this will put us in a positive position to cover the dividend without a management fee waiver beginning in Q2. We remain focused on the last two remaining concentrated names and I'm confident in our underlying portfolio and our go forward strategy. With that, I'll turn the call over to the operator for questions.

[Operator:]

Thank you . Our first question comes from Paul Johnson from KBW.

[PaulJohnson:]

On the Logan JV, I was kind of going back and looking at some of the numbers, I believe, in the first quarter of last year when it took a fairly sizable write down, I believe, the assets were like roughly 86% of cost, fair value of cost. This quarter, it's about around 96% or so, I think if I'm looking at that right. And obviously, the equity investment took a little bit more of a write-down as well and is still held at a discount of point. How do you guys feel about further potential recovery as to the Logan JV?

[TerryOlson:]

You're right. You've got the numbers directly right, unrealized unrealized loss within Logan at 12/31 was about $9.6 billion, so FCRD's portion of that would be just under $8 million. The loan market continued to be strong in Q1. So to date, we've seen the prices run a little further from 12/31. So at this point in time, we'd expect to see a little bit of uplift on the NAV within the Logan portfolio. No credit concerns at this point that would give us any pause that could drive any material change in NAV. There's still obviously three or four weeks left in the month here and provided the markets change, I would say that the direction has been positive. So we should continue to close some of that gap.

[PaulJohnson:]

And then on the yield of the JV, if I look back roughly a year ago, maybe a little bit more, I mean, it was basically low double digit yield coming from the JV. COVID happened and obviously, had its issues for everyone and helps, I guess, reduce the yield of that portfolio. It's at 7.6% today. I'm just curious, what do you think that the JV can generate, I guess, long term, what type of yield and maybe how long do you think it would take to get there?

[TerryOlson:]

I think the way to look at Logan, maybe just that yields on cost, maybe just translate it to NAV to make it a little simpler. So $68 million-ish of NAV and about $1.6 million to $1.7 million a quarter of dividend income. So that's about a 10% yield on NAV. We've held that steady for the past couple of quarters. I would anticipate that the portfolio to be able to generate $1.6 million to $1.8 million per quarter of dividend income for TCRD, which would equate to 10% yield on the NAV and similar level as you mentioned the 7.6% related to cost. We'll probably grow the portfolio modestly. Again, it represents 20% of the overall book. I still think there's room to deploy some capital. So I would anticipate over the next few quarters to expect it in that $1.6 million to $1.8 million range from an income producing standpoint.

[PaulJohnson:]

And then my last question was just around leverage at the BDC. Obviously, as we're moving past the credit issues and you guys feel good about the performing portfolio and the economy recovering, and as you said, you've seen good activity pick up for your pipeline this year. Do you still look at the target leverage range of about 1.1 to 1.2 which you're comfortable with today or do you think that could potentially move higher, or how do you look at that?

[ChrisFlynn:]

Yes, we're still comfortable in that, call it, 1.1 to 1.2 range. Again, as we said upfront, we've been comfortable with that number earlier. It's just the fact that the underlying portfolio in our opinion didn't support that. Now that we've transitioned out of these names, the portfolio is substantially more diversified much more comfort in moving those levels up to that range. And as we said on the call, moving to leverage to that level will enable us to still cover our dividends and pay the management fee going forward.

[Operator:]

Our next question comes from Robert Dodd with Raymond James.

[RobertDodd:]

First of all, a question about Slide 18. There's basically five assets that from 2015 or earlier that are still remaining, haven't been realized, obviously, OEM, Loadmaster and smartTours are three of those. Igloo, you mentioned as Merchants Capital as well. I mean if we look at Igloo and Merchants Capital, they seem to be performing pretty well. But they're six, seven years old now at 11.5%. I mean, what's the probability that those get refinanced? I mean above average yields would have an impact on earnings, obviously, if those who did get refinanced, Synteract is also a big position, obviously. So what's the outlook for those two assets for lack of a better term, leaving the portfolio?

[ChrisFlynn:]

Yes, nothing we can comment now as it relates to specific actions being taken. Although, I’ll say both credits are performing. We recognize Igloo is a concentrated position, it’s not so high yielding. From my perspective, I'd rather exit the facility, continue to diversify the program and potentially then address the question that Paul had earlier, do you want to take leverage up slightly higher. So to the extent it does get refied or repaid, we feel we'll be able to offset any contraction in yield either through adding more names in the existing portfolio or taking the fact that the concentration has been reduced and move leverage more higher if needed.

[RobertDodd:]

On your equity successes, right, you've got an unrealized gain in that. It looks like they're getting taken out by a SPAC right now -- in the profit the mark at 12/31, does that take any of that into account or is that just -- that was, I think, pre SPAC announcement, right?

[TerryOlson:]

You're right. There's some upside associated with that name to the extent that moves forward. Obviously, that transaction hasn’t closed yet so we haven't taken the number up to what the math would be. But we've read the news saying that you have had those discussions. So if that continues to move forward, obviously, that would result in some upside here in Q1 and Q2 whenever that transaction closes.

[RobertDodd:]

And then flipping to the liability side. I mean, Terry mentioned, the $60 million is callable. The $50 million -- the other one isn't until the end of this year. But, right now, at 67.5 on the $60 million, once the waiver expires and you're paying a base management fee on assets associated with that, that's a seven and three quarter kind of cost, which is higher than your portfolio yield, you'd be underwater if that stays out and you get the underwater on the other one as well. What's the -- why wouldn't you call that and/or if you don't call it, wouldn't it be appropriate maybe to waive, to continue to waive the management be on assets funded with that given its cost is higher than your portfolio yield right now?

[TerryOlson:]

As I mentioned in the remarks, Robert, we're kind of continuously looking at opportunities to refinance that expense of debt and certainly, the market conditions are favorable, albeit a bit more favorable with the investment in creating label. So we are looking at the announcement of these earnings and moving forward, hopefully, with a path to restore our rating to investment grade, which will allow us the opportunity, we think in light of the existing market conditions to reduce that cost significantly. So we're balancing where we are today versus where we expect to be in the coming months, but we are active, and we would fully expect to refinance both of them this year. I think the 23 bonds are callable at the end of October, if my memory is correct.

[RobertDodd:]

Yes, at the end of this year, for sure.

[Terry Olson:]

I would say, it's front of mind for me. We're certainly, as Chris talks about the math and increasing leverage, we certainly think one of the other levers to pull is addressing the cost of financing. So I would say it's ongoing as it always is in this business.

[RobertDodd:]

And on the concept of a waiver, I realized it's a broad question not typical for you guys. But right now, shareholders, obviously -- I think you you probably will get it refinanced. But hypothetically, if it goes later in the year, has there been any discussion on waving that? Because frankly, right now, shareholders are losing money on those bonds the only person, entity making money on that capital outstanding right now is the adviser, and the adviser has waste piece, and it made shareholder favorable steps. But would that be something that would be considered?

[ChrisFlynn:]

We said upfront as we are willing to waive the management fee as we want to work through and transition the portfolio, we believe that is close to being done, if you will, or it's far enough along where we're comfortable moving our leverage up. We'll take that same analysis, as Terry said and have these conversations with the rating agencies, to the extent we're able to obtain that investment-grade rating. I think we'll see a substantial reduction in the cost of those bonds to the extent that doesn't come to fruition, you'll still see a reduction in the price of those bonds. There's been plenty of bonds printed that you can see they're well inside of this. So for us, it's just a matter of time. It's not a question of if, it's just a question of when. And I'd much rather do it and see a substantial step down with that investment grade rating. But for some reason, the investment grade rating doesn't take place. We can still bring these bonds in at a much lower yield today than where they are just based on the current market data.

[Operator:]

Thank you. This concludes the question-and-answer session. I would now like to turn the call back over to Chris Flynn for closing remarks.

[Chris Flynn:]

Thank you, operator. We appreciate the support of our shareholders and look forward to providing you with an update in early May with our first quarter results. Thank you.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.