Harvest Capital Credit Corporation
Q2 2020 Earnings Call Transcript

Published: 7 Aug 2020

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Harvest Capital Credit Corporation Second Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Mr. William Alvarez, Chief Financial Officer. Sir, Please go ahead.

[William Alvarez:]

Hey, thank you, operator. Good morning, everyone, and thank you for participating in this conference call to discuss our financial results for the quarter ended June 30, 2020. I'm joined today by our Chairman and Chief Executive Officer, Joseph Jolson; and by Richard Buckanavage, our President. Before we start, I'll provide a disclaimer regarding any forward-looking statements that we make during this presentation. This presentation contains forward-looking statements, which relate to future events or Harvest Capital Credit's future performance or financial condition. These statements are not guarantees of future performance, condition or results and involve a number of risks and uncertainties. Actual results may differ materially from those in these forward-looking statements as a result of a number of factors, including those described from time to time in our filings with the Securities and Exchange Commission including in our most recently filed annual report on Form 10-K and quarterly report on Form 10-Q. Harvest Capital Credit undertakes no duty to update any forward-looking statements made herein unless required to do so by law. Now I will turn the call over to Joe. Joe?

[Joseph Jolson:]

Okay. Sorry. I got cut off there for a second. I'm the one with power out here too, unlike the two of you in Connecticut, the third world country of Connecticut. Thanks Bill. Our second quarter results reflect a negative impact on certain of our portfolio companies that resulted from the sharp economic recession since February 2020 due to forced business closures in the U.S. caused by the COVID-19 global pandemic, as well as the high cost associated with the recent short-term extension of our revolving line of credit. We continue to work with our portfolio companies that have been hurt by the economic environment, with a focus on minimizing the negative impact wherever possible to net asset value included by lowering cash interest rates to affordable levels. We are also focused on maintaining high levels of liquidity, given the uncertainty about replacing the agent bank and our credit line in the context of this difficult environment. While these tactics will continue to have a negative short-term effect on our net investment income, we are optimistic that they will support shareholders' value until business conditions normalize over time. I'm going to turn it over to Bill to go over some of the financial results of the quarter, and then Rich will provide some color on our portfolio before I make some concluding remarks. Bill?

[William Alvarez:]

Okay. Thanks, Joe. Net investment income for the quarter was $0.2 million or $0.03 per share compared to $0.8 million or $0.14 per share in the second quarter of 2019. Net investment income decreased by $0.6 million in 2020 as compared to 2019 primarily as a result of a decrease in investment income of $0.4 million and an increase in expenses, principally interest, of $0.2 million. The increase in interest expense results from executing an amendment to our credit facility, which extended the revolving termination date to July 31st, 2020, and increased our interest rate from LIBOR plus 3.25% to LIBOR plus 4.5%. Net operating loss for the quarter was $0.8 million or $0.13 per share compared to operating income of $0.1 million or $0.01 per share in the second quarter of 2019. The decrease in net operating income of $0.9 million between periods principally resulted from the company recording lower investment income as a result of a lower weighted average effective yield on the company's income earning portfolio. And the addition of two portfolio companies to non-accrual status, an increase in interest expense and an increase in realized losses offset by an increase in unrealized appreciation on investments. Reflecting on the six months ended June 30th, 2020, net investment income was $1.2 million or $0.20 per share compared to $1.6 million or $0.26 per share for the six months ended June 30th, 2019. The $0.4 million decrease in the first six months of 2020, as compared to 2019, primarily resulted from a decrease of $0.2 million in investment income as a result of a lower income earning portfolio and an increase in expenses of $0.2 million. Net loss for the six months ended June 30th, 2020 was $4.4 million or $0.75 per share compared to net income of $0.2 million or $0.2 per share for the six months ended June 30th, 2019. The $4.6 million decrease was primarily attributable to a $0.2 million decrease in investment income, a $1.9 million increase in net unrealized depreciation, a $2.3 million increase in net realized loss and a $0.2 million increase in expenses, principally interest. The increase in unrealized depreciation during the six months ended June 30th, 2020 is primarily the result of the immediate adverse economic effects of the COVID-19 pandemic and the continuing uncertainty surrounding its long-term impact. During the quarter ended June 30th, 2020, we placed two additional loans on non-accrual bringing the total to four non-accrual loans representing approximately $17.8 million of our portfolio at fair value as of June 30th, 2020. Also as of June 30, 2020, the fair value of our portfolio was $104.3 million with a cost base of $114.3 million reflecting a $10 million of cumulative net unrealized depreciation in the portfolio as of the end of the quarter. As of June 30th, 2020, we had a debt balance of $73.8 million, consisting $45 million of bank debt and $28.8 million in 2022 notes, for an asset coverage ratio of approximately 183%, compared to approximately 192% at December 31st, 2019. At quarter end, we had $30.2 million of cash and restricted cash. In addition, the revolving period under the credit facility was scheduled to end on July 31st, 2020. However, on August 6th, 2020, the company amended the credit facility to extend the revolving period to October 31st, 2020, until which date the company may receive additional advances at the discretion of the lenders. As of June 30th, 2020, our net asset value was $10.24 per share, down $0.99 per share from December 31st, 2019, principally as a result of paying $0.24 per share in distributions for the first quarter ended March 31st, 2020, and recording $0.75 of net losses from operation during the 6 months ended June 30th, 2020. Now I'll turn the call over to Rich who will provide an update on our portfolio.

[Richard Buckanavage:]

Thank you, Bill. Since mid-March, we have focused all of our resources on dealing with portfolio issues emitting from the coronavirus pandemic. We have been and continue to be actively engaged with all of our portfolio companies on a regular basis, since that time. During our earnings call last quarter, we reported that 14 of the 15 directly-originated financings in which we have a debt investment had been approved for loans under the Paycheck Protection Program totaling over $30 million in the aggregate, providing valuable liquidity during this very difficult period. We are monitoring these companies closely to ensure compliance with the program requirements, so as to maximize the amount of the loans that are eventually determined to be forgivable. At this juncture, we are confident that a material portion and in some cases 100% of the loan proceeds received by these 14 companies will be deemed forgivable. Should a second amount of financing become available under the PPP program that is currently being discussed in Washington, we are confident that many of these 14 companies will be eligible for additional forgivable loans. We're also considering the benefits of the Main Street Loan Program for our portfolio companies. While the program guidelines will limit its impact to only a few situations, we do believe there will be opportunities to reduce our exposure to those companies meeting the criteria. The magnitude of the existing PPP loans is material relative to enterprise value of each of these businesses. These infusions, along with the tightening of credit spreads during the second quarter, have helped Harvest mitigate and recapture some of the unrealized depreciation incurred in the first quarter, and would have been present in the second quarter. In addition to the liquidity provided by the PPP program, we're also continuing to benefit from several equity infusions at private equity owners of our portfolio companies. It is also worth noting that as at quarter end June 30th, we received approximately 88.4% of total interest payments due from borrowers, not on non-accrual status, and that percentage remained at above 86% as of July 31st. While we did remove one of our non-accrual investments during the quarter, Choice Pet, we are forced to place two syndicated debt investments on non-accrual status, GNC and GK Holdings, given negative events at these companies, bringing our total non-accrual investments to four at quarter end. In terms of our core lower middle market portfolio, we are pleased with the resiliency demonstrated by these companies, despite the strong headwinds from the pandemic. We are working collaboratively with the owners and management teams of these companies and making prudent accommodations on a case-by-case basis. The goal of our work with these businesses is to provide adequate flexibility to weather this storm, while reducing our credit risk where possible, and positioning our capital for the best outcome when the economy returns to something closer to normal. We believe we have made and will continue to make progress towards this goal. Progress achieved thus far we attribute in part to the fact that nearly three-quarters of our portfolio is in the senior secured asset class. In many cases, we are the sole debt provider to the company. This dynamic enables us to control our own destiny and manage to quicker and more favorable results than club or syndicated financings. As we look forward to the remainder of Q3 in terms of deployment, our activities will be limited to advances under committed revolving lines of credit, for which borrowers remain eligible for further draws, as well as protective advances and a few select cases where doing so improves our chances for a full recovery of interest and principal. I'd like to turn the call back over to Joe for some final thoughts.

[Joseph Jolson:]

Thanks, Rich. In closing, we were hopeful that preserving our borrowing capacity in the last few years to a way better risk-adjusted investment returns would have positioned our company well to take advantage of the current or attractive lending environment and grow our portfolio up to our targeted 1.3 to 1.4 times leverage. However, bad lock-in receded in the form of an April, 2020 anniversary to renew our revolving line of credit. And as a result, we find ourselves forced to preserve liquidity and de-lever until we can replace the facility in a difficult environment. We're working hard to do just that and to preserve shareholders’ value as we navigate our path forward. I want to thank our team of hardworking professionals, all of whom have been working remotely for the past six months now and our shareholders for their patients and support. With that operator we'd be happy to answer any questions.

[Operator:]

[Operator Instructions]. Your first question comes from the line of Paul Johnson from KBW. Your line is open.

[Paul Johnson:]

I just want to make sure I'm clear on the credit facility because there's been a couple of amendments in the past few month. So the reinvestment period or the amortization period or date, is that the October date that you referenced in your call?

[William Alvarez:]

No, this is the amortization period. The principal amortization will begin this month in August.

[Paul Johnson:]

Okay. So currently the facility is actually in the amortization period?

[William Alvarez:]

That's correct.

[Paul Johnson:]

Okay. And then what is the actual maturity date for the facility?

[William Alvarez:]

The maturity date for the facility, I believe it's 18 months from now. I don't know. Brandon, do you have that exact date in front of you?

[Brandon Campbell:]

Yes, it's October, 2021.

[Paul Johnson:]

So then I would ask, I guess, what is the plan going forward if you are not able to get that amended by -- in the next couple of months?

[Joseph Jolson:]

Well, we’re working hard to be able to replace it, but we see a path to liquidity through maybe the end of the year to just potentially pay off the facility through repayments. Now it would be well before it matures. So we don't view that as a significant risk right now with the caveat that the economy is still relatively uncertain with the pandemic.

[Paul Johnson:]

Sure. Understood. And then I would just ask on the portfolio, I'm sure you've had conversations with the majority of your borrowers. I'm just curious, as far as amendments or waivers and that sort of thing with your portfolio companies, have you provided a lot of those? Do you still see a demand -- a high demand for such waivers? And I'd also ask, when you do provide any kind of relief, are you guys receiving any sort of compensation such as fees or higher interest for doing so?

[Joseph Jolson:]

I'll let Rich handle that. I might have some other comments. Rich?

[Richard Buckanavage:]

Yes. In my prepared remarks, as I mentioned, we're making certain accommodations on a case by case basis. So no two situations are identical. And we are making accommodations in terms of -- in some cases waivers, in some cases as we mentioned in our prepared remarks, lowering the cash interest rate temporarily during this difficult period. In terms of receiving compensation, the answer is, it depends. And typically what we're trying to do right now is focus on liquidity. And if an owner or a private equity group is supporting the business with additional equity, in some cases we might forego some upside in return for providing that valuable liquidity. In some cases, we are getting additional compensation in the form of, primarily back-ended exit fees, given the liquidity issues piling on more cash. Current demand is probably not the best move, but it really is on a case-by-case basis.

[Paul Johnson:]

Thanks for that. And my last question is just on the dividend. Just seeing you guys have not declared a dividend for the year yet, is the plan to kind of just probably, basically retain capital, preserve liquidity, maybe no intention to declare dividend in the near-term or do you guys have any other plans for that?

[Joseph Jolson:]

Well, we have declared $0.32 year-to-date in dividends, $0.24 in Q1 and $0.08 for the month of April. There’s no payment record date set yet for that last dividend payment, I think. From the standpoint of going forward, we'll comply with whatever the RIC rules are. And depending on what the next two quarters look like, we may have to declare a dividend, prior to the end of the year. And the way that the rules work, Bill, correct me if I'm wrong, the way I understand them though, it's tied to our tax return that doesn't need to be filed till September, October of 2021. So, it might be possible to delay any cash payment till then, or potentially pay 80% or 90% of it in stock. But, Bill, did I answer that or was there something else you wanted to add?

[William Alvarez:]

Yes. That's great, Joe. We have to look at what are our tax requirements are under RIC rules and any additional distributions we have until September of 2021 to true it up. So, that's the case. There actually were two dividends that we -- actually the Board had approved, but we basically have not paid them and they will be paid at some point in time in the future.

[Operator:]

[Operator Instructions]. Excuse me, presenters, there are no more phone questions. You may continue.

[Joseph Jolson:]

Yes. I appreciate everyone's continued interest in our company and we look forward to giving you an update in three months with our progress. Thank you.

[Operator:]

This concludes today's conference call. You may now disconnect.