Oaktree Strategic Income Corporation
Q4 2014 Earnings Call Transcript

Published: 10 Dec 2014

[Operator:]

Good day, ladies and gentlemen and welcome to the Q4 2014 Fifth Street Senior Floating Rate Corp Earnings Conference Call. My name is Dave, I'll be your operator for today. [Operator Instructions]. I'd now like to turn the call over to Ms. Robyn Friedman, Vice President of Investor Relations. Please proceed, ma'am.

[Robyn Friedman:]

Thank you, Dave. Good morning and welcome to Fifth Street Senior Floating Rate Corp's fourth quarter and fiscal year-end 2014 earnings call. I'm joined this morning by Ivelin Dimitrov, Chief Executive Officer and Richard Petrocelli, Chief Financial Officer. Before we begin, I would like to note that this call is being recorded. Replay information is included in our November 5, 2014 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 his 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. 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. We do not undertake to update our forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our website or call Investor Relations at 203-681-3720. The format for today's call is as follows. Ivelin will provide introductory remarks and an overview of our results and Rich will summarize the financials. Then we will open the line for Q&A. I'll now turn the call over to our Chief Executive Officer, Ivelin Dimitrov.

[Ivelin Dimitrov:]

Thank you, Robyn. For the quarter ended September 30, 2014, FSFR generated $0.22 of net investment income per share. During the quarter, we deployed capital into loans with strong risk-adjusted returns, funding $140.1 million in originations across 12 new and pre-existing portfolio investments. With the enhanced scale and liquidity gains through FSFR's August 2014 follow-on equity offering, we are well-positioned to take advantage of the attractive opportunities available in the Senior Secured Loan market. During our last conference call, we discussed a timeline for deploying the equity capital raised and utilizing leverage. We’re pleased with the progress we have made and would like to provide visibility into the financial outlook for our December quarter. We’ve continued to invest capital into a diverse group of senior secured floating-rate loans. Utilizing all of the equity we raised and some of the leverage provided by our expanded credit facility with Natixis. Since the end of the September quarter, we have originated over $360 million in senior secured loans and currently have all of our $550 million invested in 58 portfolio companies. Based on our activity to-date and current pipeline, we’ve visibility into first quarter fiscal 2015 earnings and estimate that our net investment income per share for the December quarter will be in the range of $0.27 to $0.33. During the September quarter and through mid-December, there have been many positive developments at FSFR including the agency's approval of our affiliates exempted application to coinvest with other funds managed by our investment advisor, the closing of the Glick Family joint venture and upsizing our Natixis credit facility. Regarding the receipt of the SEC co-investment exemptive order, we believe sharing deal flow across the platform should allow us to deploy capital effectively and efficiently. While enhancing portfolio diversification and optimizing individual investment sizes. In the September quarter, Fifth Street closed our first co-investment transaction with other funds managed by our investment advisor, providing a $195 million one-stop financing facility and equity co-investment to support Veritas Capital's acquisitions of BeyondTrust, Inc. Initially, FSFR held $68 million in the BeyondTrust transaction and since the end of the quarter we have syndicated our position down to $39.3 million. An important benefit of co-investment approval is the ability to hold up the $250 million per transaction across the platform which is a key differentiating factor in the middle market. Delivering a one-stop financing solution provides multiple benefits for both FSFR and our private equity partners. This structure allows the Fifth Street platform and FSFR to capture a higher risk-adjusted return akin to participating in senior debt, while remaining in the first lien position and typically controlling the credit agreement. And for private equity sponsors, a one-stop financing solution often provides for a more seamless transaction and greater certainty of close. In November, we announced the formation of FSFR Glick JV LLC, a joint venture with an entity controlled by members of the Glick Family to invest primarily in senior secured loans. This partnership is structured similar to Senior Loan Fund JV1, a joint venture between Fifth Street Finance Corp and a subsidiary of Kemper Corporation. The JV expands FSFR's investment capacity to originate and underwrite senior secured middle-market loans and provides an efficient way to finance assets that enhance returns for our shareholders. We’ve partnered with the Glick Family many times during Fifth Street's history and we believe that we share a similar investment philosophy. We are excited to partner with them once again and expect to start allocating assets to the JV from our balance sheet in the coming months. We’re working on obtaining leverage for the joint venture and once fully ramped, we believe the partnership could generate an estimated mid-teens return on our invested equity. Going forward, we believe that funding this joint venture and out of the potential JV's should contribute to higher net investment income per share. In the December quarter, we began utilizing the leverage provided by our extended Natixis credit facility. The credit facility which provides us with a low-cost source of funding was upsized in October from $100 million to $200 million as Fifth Third Bank joined the facility as a syndicated partner. The facility now includes a $100 million term loan and $100 million revolving credit facility. In addition, we’re currently working on finalizing a second credit facility for FSFR to provide an additional $175 million of debt capital. Being part of a larger origination platform focused on the middle market provides FSFR with many benefits. Directly originating investments from private equity sponsors serves as a channel for new opportunities and may provide credit support in the event of a downturn. Additionally, as one of the leading middle-market lenders, the Fifth Street platform sees a tremendous amount of deal flow which provides FSFR with a wide funnel of investment opportunities. As a result of our disciplined underwriting process, FSFR selectively invests in transactions with strong risk-adjusted returns, closing about 5% of the opportunities on a dollar basis that we have seen over the last 12 months across the platform. As long-term investors, we work closely with our sponsors and portfolio companies from start to finish. We're focused on continuing to build the portfolio of senior secured floating-rate loans that fit the criteria on which we have based our underwriting culture. Strong credit protection, high documentation, an experienced management team and conducting business with the relationship oriented middle-market sponsors. In the event of an operational weakness, our dedicated portfolio management team can act quickly to assess the situation and recommend the course of action. As a result, we believe our portfolio should exhibit relatively strong performance through market cycles. The credit quality of the portfolio continues to be strong with no investments in non-accrual. We have focused on investing in defensive and high cash flow generating sectors while limiting our exposure to commodities risk. Additionally at FSFR we have minimal exposure to the energy sector. During periods of volatility, borrowers traditionally rely less on the syndicated market which is an opportunity for us to provide seniors stretch in uitranche products. We sold these during the periods of volatility in October and have seen the steam permeate in the fourth calendar quarter, with strong deal flow focused on a number of large one-stop transactions. Additionally, as a result of continuing bank regulation we believe certain competitors may be out of the market at this time. Due to leverage ratio constraints which in turn creates additional opportunities for us. We believe we're well-positioned for a strong December quarter and look forward to providing updates as we continue to execute on our multiple initiatives to enhance returns for FSFR shareholders. I would now like to turn the call over to our Chief Financial Officer, Rich Petrocelli to discuss our financials in more detail.

[Rich Petrocelli:]

Thank you, Ivelin. We ended the fourth quarter of fiscal 2014 with total assets of $412.5 million, an increase of $311.1 million from 2013 fiscal year-end. Net asset value per share was to $12.65 at fiscal year-end. For the three months ended September 30, 2014 we generated total investment income of $6.3 million and net investment income of $3.8 million or $0.22 per share. Net investment income increased 104.3% from $1.9 million in the prior quarter. We ended the fiscal year with portfolio investments of $300 million at fair value. During the quarter, we had gross originations of $145.9 million in 12 new and three existing portfolio companies and funded $140.1 million across new and existing portfolio companies. We also received $30.5 million in connection with repayments and open market sales of eight of our debt investments. As of September 30, 2014, 99.8% of the portfolio consisted of senior secured floating-rate loans. The weighted average cash yield on our debt investments has improved quarter-over-quarter from 7.0% to 7.2%. Our portfolio consisted of investments in 48 companies with our largest exposures in the healthcare and software industries. We continue to build a well-diversified portfolio and at September 30, 2014 the average size of a portfolio investment was $6.3 million and average portfolio company EBITDA was $56.7 million. Credit quality was strong once again, as 100% of the portfolio remained on accrual status as of September 30, 2014. Turning to our capital structure as of year-end we had invested a portion of the August 2014 follow-on proceeds, held $107.4 million of cash on our balance sheet and had no outstanding balance on our Natixis credit facility. Currently, we’ve invested all of the proceeds from the August 2014 follow-on equity offering and began utilizing leverage provided by our expanded Natixis credit facility. In November, our Board of Directors declared a quarterly dividend of $0.30 per share to stockholders of record on April 2, 2015. Our dividend represents $1.20 annualized run-rate and over an 11% yield on the current stock price. I will now turn it back over to Robyn.

[Robyn Friedman:]

Thank you for joining us on today's call. Dave, please open the line for questions.

[Operator:]

[Operator Instructions]. Please standby for your first question. This comes from the line of Christopher Nolan at MLV & Co. Go ahead please.

[Christopher Nolan:]

Any expectations to extend the waiving of the management fees in 2013?

[Ivelin Dimitrov:]

The waiving of the management fees had to do with a specific situation around our cash position at the end of September. So it was a one-time event, but we've done it before and we'll continue to evaluate it as we go forward.

[Christopher Nolan:]

Okay. And, Ivelin, what is the peak debt to equity ratio that you guys are looking at right now for managing the balance sheet?

[Ivelin Dimitrov:]

Just to clarify, you mean as far as our overall balance sheet or the deals we see in the market?

[Christopher Nolan:]

The overall FSFR balance sheet.

[Ivelin Dimitrov:]

The leverage ratio -- our target is in the 0.85% range and that's what we're working towards getting and if we're going to need to expand our leverage capacity and we're working with a lender now to document the credit facilities which will allow us to get there.

[Christopher Nolan:]

Okay and last question, any consideration of share repurchases?

[Richard Petrocelli:]

We do not have a share repurchase program at this time.

[Christopher Nolan:]

Yes, but what I'm asking is, is there any consideration of that? Even though if you don't have it, is that something you might seek to obtain?

[Ivelin Dimitrov:]

I think at this point, it's one of the things that's on the table for us. I can tell you we've talked about it a lot. We're very focused on executing our plan, deploying the proceeds from the offering, obtaining leverage and getting to our target range which we're doing, I think quite well. And see how the stock trades and that's something we're paying attention to and that's something our Board will have to consider at some point, but I don't think we're there yet.

[Operator:]

Thank you. Sir, you have no questions at this time. [Operator Instructions]. There are no further questions. So I would now like to turn the call back to Robyn Friedman.

[Robyn Friedman:]

Thank you so much for joining. Have a great day.

[Operator:]

Thank you, ladies and gentlemen for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.