Oaktree Strategic Income Corporation
Q4 2016 Earnings Call Transcript

Published: 14 Dec 2016

[Operator:]

Good day, ladies and gentlemen and welcome to Fifth Street Senior Floating Rate Corporation’s Fourth Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions]. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, today’s conference call is being recorded. I’d now like to introduce your host for today’s conference Ms. Robyn Friedman. Ma’am, please go ahead.

[Robyn Friedman:]

Thank you, Liz. Good morning and welcome to Fifth Street Senior Floating Rate Corp’s Fourth Quarter 2016 earnings call. I am joined this morning by Bernard Berman, Chairman, Ivelin Dimitrov, Chief Executive Officer and Steve Noreika, Chief Financial Officer. Before we begin, I would like to note that this call is being recorded. Replay information is included in our December 14, 2016 press release and is posted on the Investor Relations section of Fifth Street Senior Floating Rate Corp’s website which can be found at fsfr.fifthstreetfinance.com. Please note that this call is the property of Fifth Street Senior Floating Rate Corp. Any unauthorized rebroadcast of this call in any form is strictly prohibited. Today’s conference call may include forward-looking statements and projections that reflect the company’s current views with respect to, among other things, future events and financial performance. Forward-looking statements may include statements as to the future operating results, dividends and business prospects of Fifth Street Senior Floating Rate Corp. Words such as believes, expects, seeks, plans, should, will, estimate, projects, anticipates, intend and future or similar expressions are intended to identify forward-looking statements, although not all forward-looking statements include these words. These forward-looking statements are subject to the inherent risks and uncertainties in predicting future results and conditions. Certain factors could cause actual results to differ materially from those projected or implied in these forward-looking statements. New risks and uncertainties arise over time and it is not possible for the Company to predict those events or how they may affect it. Therefore you should not place undue reliance on these forward-looking statements. We ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these forward-looking statements and projections. To obtain copies of our latest SEC filings, please visit our website or call Investor Relations at 203-681-3720. We undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise except as required by law. The format for today's call is as follows. Bernie will provide introductory remarks. Ivelin will provide an overview of our results. And Steve will summarize the financial results. Then we will open the line for Q&A. I will now turn the call over to our Chairman, Bernie Berman.

[Bernard Berman:]

Thank you, Robyn. Before turning to our results I would like to take a moment to discuss the recent management changes that were announced this morning. The FSFR Board of Directors has appointed Patrick Dalton as Chief Executive Officer and a member of the FSFR Board of Directors effective January 2, 2017. Patrick will succeed Ivelin who will continue serving as CEO and a member of the Board of Directors through the end of the year to ensure a smooth transition. Additionally, Todd will be stepping down as President and a member of the FSFR Board of Directors also effective January 2, 2017. We are grateful to have had Ivelin serve as CEO of FSFR and spearhead the formation of the senior loan business at Fifth Street. We are also grateful to have had Todd serve as President of FSFR and we would like to thank both of them for all of their hard work and the numerous contributions they made during their tenures. Looking ahead we are excited to have Patrick join FSFR. Patrick will assume responsibility for all aspects of FSFR's investment and operating strategies. We believe that the combination of his executive leadership experience and credit investment background make him an ideal choice to lead FSFR. Patrick is an industry veteran with significant middle-market lending experience. Most recently, from September 2012 until March 2016, including to its sale to Blackrock Capital Corporation, he worked at Gordon Brothers Finance Company where he served as President and CEO as well as chair of the investment committee. Gordon Brothers is a commercial finance company that provides cash flow, asset-backed and hybrid term loans to middle-market companies. Prior to Gordon Brothers, Patrick was President and Chief Operating Officer at Apollo Investment Corporation, a publicly-traded BDC, from 2008 to 2012, Chief Investment Officer and Portfolio Manager at Apollo Investment Management LP from 2007 to 2012, and was also a partner of Apollo Global Management from 2004 to 2012. With his 25 years of investment experience we are pleased that Patrick will take over responsibility for FSFR's investment strategy with the ultimate goal of enhancing returns for our shareholders and stabilizing NAV. We look forward to introducing Patrick to our investors and analysts in the coming months. Lastly, on our previous conference call we announced our decision to evaluate ways to enhance the alignments of interests between our external advisor and our shareholders. Patrick, the entire FSFR team and Board are all committed to that goal and plan to further discuss it with our external constituents in the New Year. I would now like to turn the call over to our CEO, Ivelin Dimitrov, to provide an overview of the quarter's results.

[Ivelin Dimitrov:]

Thank you, Bernie. I have enjoyed being part of the Fifth Street team for the past 11 years and leading FSFR over the past two years as we ramped its senior secured floating-rate loan portfolio. I am proud of our team and all the hard work we put into create our senior loan business three years ago and I believe that this will continue to be an attractive asset class for Fifth Street. I am confident that Patrick has the right experience and industry knowledge to lead FSFR. I look forward to working with him to ensure a seamless transition. Now turning to our September results, FSFR generated $0.22 of net investment income per share, slightly below our quarterly dividend of $0.225 per share. For the quarter ended September 30, 2016, FSFR's net asset value per share was $11.06, an increase of $0.07 per share from the June quarter. We ended the quarter with regulatory debt to equity ratio of 0.90, at the upper end of our targeted leverage range of 0.8 to 0.9 times. We felt comfortable ending the quarter at this level because we expect that originations net of repayments in the December quarter will bring leverage more squarely within our targeted range. Turning to the middle-market environment, the September quarter was marked by continued sluggishness mainly due to a lack of M&A deals by private equity firms coupled with global growth concerns. We believe that in this competitive environment Fifth Street's established relationships with private equity sponsors are increasingly important. As an incumbent lender the Fifth Street platform has the ability to screen a broad market opportunity set and is well-positioned to choose the right deals that we believe are mutually beneficial. In our view the overabundance of liquidity chasing too few deals remains an ongoing factor in our market as it has driven leverage levels higher and yields lower. In an environment such as this we believe it is important to be disciplined and employ a high degree of selectivity. As a result we have not seen many deals in our current pipeline that we believe provide adequate risk-adjusted returns to FSFR. We are content to sit on the sidelines for such deals as we do not believe that this is the environment for aggressive capital deployment. Turning to our portfolio, FSFR continues to maintain a diverse portfolio of senior secured floating-rate loans. As of September 30, 2016, our portfolio consisted of senior secured floating-rate loans spread across 63 companies in 29 industries with our largest non-controlling investment accounting for 4.8% of total assets. Only one investment answers that comp on non-accrual [ph] representing 1.3% of the portfolio at fair value. We continue to work diligently with the Company and our co-lenders team to improve the business and maximize recovery for our shareholders. Approximately 88% of the portfolio consists of senior secured floating-rate debt investments and approximately 11% of the portfolio consists of investments in the subordinated notes and LLC equity interest of the FSFR Glick JV which invests in senior secured floating-rate loans. At September 30, 100% of the debt portfolio consisted of floating-rate securities and 84% of the total debt portfolio had a LIBOR floor between 1% and 2% with a majority of those loans getting a LIBOR floor of 1%. The three-month LIBOR gradually rising through the year we have operated with increasing net interest margin pressure. When LIBOR exceeds 1% that trend will reverse and FSFR should experience improving net interest margins resulting in a benefit to earnings. This positive impact should increase as three-month LIBOR continues to rise. I would now like to turn the call over to our Chief Financial Officer, Steve Noreika, to discuss our financials in more details.

[Steve Noreika:]

Thank you, Ivelin. We ended the fourth quarter of 2016 with total assets of $624.9 million as compared to $697.7 million at September 30, 2015. Portfolio investments totaled $573.6 million at fair value and were spread across 63 companies at September 30, 2016. At the end of the September quarter we had $28.8 million of cash and cash equivalents, including restricted cash, on our balance sheet. Net asset value per share was $11.06 as compared to $10.99 at the end of the June quarter driven mainly by market-related write-ups. For the quarter ended September 30, 2016, we generated total investment income of $13.2 million, which was relatively flat compared to the prior quarter, and net investment income of $6.3 million or $0.22 per share. During the quarter ended September 30 we closed $28.2 million of investments in four new portfolio companies and funded $26.2 million across new and existing portfolio companies. We also received $25.6 million in connection with full repayments of four of our debt investments, all of which were exited at or above par, and an additional $28.2 million in connection with other pay downs, syndications and sales of debt investments. As of September 30, 2016, 87.6% of the portfolio consisted of senior secured floating-rate loans and 11% of the portfolio consisted of investments in the subordinated notes and equity interests in FSFR Glick JV. We continue to manage a well-diversified portfolio and have our largest exposures in the software and healthcare industries. At September 30, 2016, the average size of a portfolio debt investment was $8.9 million and average portfolio company EBITDA was $55.7 million. Only one portfolio company was on non-accrual status representing 1.3% of total investments at fair value. We remain excited about our joint venture with the Glick family and its ability to drive returns for FSFR shareholders. The yield on FSFR's investment in the joint venture has been instrumental in driving an increased yield on FSFR's overall portfolio. As of September 30 the joint venture had $201 million in assets, including senior secured loans across 36 portfolio companies. The joint venture generated $2.1 million of income for FSFR during the quarter representing an 11.7% weighted average annualized return on our investment. The weighted average yield on our debt investments, including the return on the JV, was 8.6% as of September 30, 2016, and included a cash component of 8.3% which were consistent with the June quarter. As Ivelin mentioned, we ended the September quarter at the upper end of our targeted range at 0.9 times debt to equity. As of September 30 we had $180 million of notes payable outstanding related to our securitization and $107.4 million drawn on our Citibank and East West Bank credit facilities. As a reminder, in October our Board of Directors declared monthly dividends of $0.075 per share for December, January and February. I will now turn it back over to Robyn.

[Robyn Friedman:]

Thank you for joining us on today’s call. Liz please open the line for questions.

[Ivelin Dimitrov:]

Thank you, everyone.

[Operator:]

Ladies and gentlemen, thank you for participation in today’s conference. This does conclude the program. You may now disconnect. Everyone have a great day.