TICC Capital's (TICC) CEO Jonathan Cohen on Q1 2014 Results - Earnings Call Transcript

May.12.14 | About: TICC Capital (TICC)

TICC Capital Corp. (NASDAQ:TICC)

Q1 2014 Earnings Conference Call

May 12, 2014 10:00 am ET

Executives

Jonathan Cohen – Chief Executive Officer

Saul Rosenthal – President & Chief Operating Officer

Patrick Conroy – Chief Financial Officer

Bruce Rubin – Controller & Treasurer

Analysts

Mickey Schleien – Ladenburg Thalmann

John Hecht – Stephens, Inc.

Ryan Lynch – KBW

Chris York – JMP Securities

Jonathan Bock – Wells Fargo

Operator

Good morning and welcome to the TICC Capital Q1 2014 Earnings Conference Call. (Operator instructions.) Please note this event is being recorded. I would now like to turn the conference over to Jonathan Cohen, CEO. Please go ahead.

Jonathan Cohen

Thank you. Good morning, everyone, and welcome to the TICC Capital Corp’s Q1 2014 Earnings Conference Call. I’m joined today by Saul Rosenthal our President and Chief Operating Officer; Patrick Conroy, our Chief Financial Officer; and Bruce Rubin, our Controller and Treasurer. Bruce, could you open the call today with a discussion regarding forward-looking statements?

Bruce Rubin

Sure, Jonathan. Today’s call is being recorded. An audio replay of the conference call will be available for 30 days. Replay information is included in our press release that was released earlier this morning.

Please note that this call is the property of TICC Capital Corp. Any unauthorized rebroadcast of this call in any form is strictly prohibited.

I’d also like to call your attention to the customary disclosure in our press release this morning regarding forward-looking information. Today’s conference call contains forward-looking statements and projections and 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 projections. We do not undertake to update our forward-looking statements unless required to do so by law. To obtain copies of our latest SEC filings please visit our website at www.ticc.com.

With that I’ll turn the presentation back to Jonathan.

Jonathan Cohen

Thanks, Bruce. As we noted in our press release this morning, TICC reported core net investment income of approximately $0.29 per share for Q1 2014. We reported total investment income of approximately $28.7 million for the quarter, representing a decrease of approximately $1.8 million from Q4. That decrease was largely due to lower interest income and some larger inaugural payments from our CLO Equity Investments during Q4.

Our Q1 GAAP net investment income was approximately $17.8 million or $0.33 per share which includes the impact of the capital gains incentive fee accrual reversal of approximately $2.2 million. Excluding the impact of that fee accrual reversal our core net investment income was approximately $15.6 million or $0.29 per share.

We also reported net unrealized depreciation of approximately $3.6 million and net realized capital losses of approximately $900,000 for the quarter. As a result of those unrealized and realized gains and losses we had a net increase in net assets resulting from operation of approximately $13.3 million for the quarter or approximately $0.24 per share.

At the same time we believe that the credit quality of our portfolio remains stable. Our weighted average credit rating on a fair value basis (inaudible) at 2.2 at the end of Q1 2014 compared to 2.1 at the end of Q4 2013.

At March 31, 2014, our net asset value per share stood at $9.78 compared with a net asset value at the end of Q4 of $9.85. During Q1 2014 we made additional investments totaling approximately $87.0 million. The additional investments consisted of approximately $58.6 million in corporate securities and $28.4 million in CLO equity.

For Q1 we received proceeds of approximately $55.4 million from repayments, sales, and amortization payments on our debt investments. For the quarter ending March 31, 2014, TICC recorded income from our investment portfolio as follows: approximately $12.5 million from our syndicated and bilateral investments; approximately $15.1 million from our CLO equity investments; approximately $500,000 from our CLO debt investments; and approximately $600,000 from all other income.

At March 31, 2014, the weighted average yield of our investment-producing investments on a cost basis was approximately 12.9% compared with 13.2% at December 31, 2013. I’d note that on March 31 we had one investment on nonaccrual status with a fair value of $3.5 million.

The company’s Board of Directors has declared a distribution of $0.29 per share for Q2 this year, payable on June 30, 2014, to stockholders of record as of June 16th. Additional information about TICC’s Q1 performance will be posted to our website at www.ticc.com.

And with that, Operator, we’re happy to now poll for questions.

Question-and-Answer Session

Operator

At this time we will begin the question-and-answer session. (Operator instructions.) And our first question today comes from Mickey Schleien of Ladenburg.

Mickey Schleien – Ladenburg Thalmann

Good morning, Jonathan and Saul. Just a couple of questions. Previously as the CLO 1.0 positions were approaching the end of their reinvestment period you rotated into CLO 2.0. So now we’re not there yet but we’re getting closer to the day when CLO 2.0 will end its reinvestment period, so I was curious what your thoughts are as to what you’ll do with those positions as you get closer.

Saul Rosenthal

Sure. Our general view at this moment is we are focusing on rotating out of older vintage CLO equity. Now the 1.0, 2.0 line of demarcation was a clear and easy one because the credit crisis essentially afforded us a clear distinction between pre- and post-credit crisis transactions. There isn’t quite such a clear line of distinction or demarcation in the context of 2.0 CLO transactions; however that aging of these transactions and our view as to when might be an appropriate moment to rotate out of certain 2.0 positions is consistent with that theme – that we have historically looked as you said to take advantage of market opportunities to rotate out of older vintage paper in the CLO market and into new primary transactions. And that has continued.

Jonathan Cohen

Mickey, there may or may not be such a thing as CLO 3.0. Nobody uses that terminology yet. It may come online at some future point but whether they are officially called 3.0 or not they’re obviously hundreds of millions and millions of dollars of new CLO issuance this year and for the foreseeable future. And we’ll continue to [staff out] of the market.

Mickey Schleien – Ladenburg Thalmann

Okay, I understand. And my next question’s more straightforward – I’m assuming the nonaccrual is [NextTag], am I correct?

Saul Rosenthal

Correct, Mickey, yes.

Mickey Schleien – Ladenburg Thalmann

And can you give us any update on its outlook?

Saul Rosenthal

We can’t, Mickey, no.

Mickey Schleien – Ladenburg Thalmann

Okay, thanks for your time this morning.

Jonathan Cohen

Alright, Mickey, thanks very much.

Operator

And the next question comes from John Hecht of Stephens.

John Hecht – Stephens, Inc.

Good morning, thanks for taking my questions. Just within the CLO structures, can you remind us what the composition of investments you’re making or excuse me, that are in those structures? Are these floating rate or fixed rate investments?

Jonathan Cohen

They are floating rate investments, John.

John Hecht – Stephens, Inc.

Floating rate investments. And then also remind me are these fully distributing to equity in all of the vehicles right now?

Jonathan Cohen

They are, yes.

John Hecht – Stephens, Inc.

Great, thanks very much guys.

Jonathan Cohen

Sure, our pleasure. And just by way, I’m sorry, Operator – just by way of clarification, Mr. Hecht’s question referred to the lack of, the absence of any blockage in the operations of the CLO structure by virtue of having failed some indenture tests that would result in the diversion of interest away from the equity tranche to repay the debt from the top of the equity stack down. We are not experiencing any such diversion or blockage at this moment. So just by way of expansion, clarification to Mr. Hecht’s question.

Operator

And our next question will come from Ryan Lynch of KBW.

Ryan Lynch – KBW

Thanks for taking my questions, guys. First one: I think you guys probably had about a $2.0 million to $2.5 million write down of [Next Tag] this quarter but you guys had about $4.5 million of total portfolio depreciation. Were there any other large write downs in other portfolio companies or was it kind of spread across the entire portfolio of just kind of small markdowns?

Jonathan Cohen

I wouldn’t characterize anything within the remainder of that basket you referenced as being of an unusual magnitude or something that’s the subject of particular focus by us at the moment.

Ryan Lynch – KBW

Okay. And then over the last years we’ve seen a lot of [BDCs] start getting into the CLO equity market, purchasing a lot of investments. Has that affected, that increased competition, has that affected the pricing you guys are seeing on any CLO equity investments or is the market just big enough where other BDC competitors aren’t really affecting the pricing or anything?

Saul Rosenthal

It’s not just BDCs. I mean there’s a market of buyers and sellers.

Jonathan Cohen

Right. The answer to your specific question is yes. The incursion of additional BDC and non-BDC participants into the CLO equity market has resulted in increased competition; and all else held equal higher prices. The corollary of that though is that we believe the market is large enough that we are still being provided with interesting and appropriate opportunities.

Ryan Lynch – KBW

What kinds of yields are you guys hoping to get on the CLO equities?

Jonathan Cohen

It really varies widely as a function of the structure of that particular transaction, the nature of the indenture, the nature of the underlying collateral; the assumptions that we and the market are making about the forward three-month LIBOR curve, the assumptions that we and the market are making about default rates and recovery rates. We have historically generated what we consider to be very good returns in the CLO strategy. We hope and expect that strong returns will continue for us in this strategy but we haven’t enumerated a specific yield target for the strategy broadly because each deal is different and because we negotiate price based on a wide array of factors – most of which, or many of which put back to the quantum of risk we perceive that we’re taking in any particular deal.

Ryan Lynch – KBW

So I understand each deal’s different but in general are we thinking about 10% yields, 13% yields, 15% yields in that kind of area?

Jonathan Cohen

Each of those would be acceptable depending on the level of risk that we perceive that we’re taking.

Ryan Lynch – KBW

Okay, and then one more: you guys have about $75 million of cash on your balance sheet. What do you think is the timeline before you guys will be able to deploy substantially all that in investments?

Jonathan Cohen

Right. That was the cash position as of March 31. It would certainly be reasonable to expect that we’re putting cash to work on a weekly basis, on a real time basis essentially and that is a higher level of cash than we’d look to maintain on a run rate basis. So it would be reasonable to assume that we’re working to put cash to work and that that was the number as of March 31st.

Ryan Lynch – KBW

Okay, thanks.

Jonathan Cohen

Thank you very much.

Operator

And the next question comes from Chris York of JMP Securities.

Chris York – JMP Securities

Good morning, guys, thanks for taking my questions. Did your internal expectations about the credit quality of an investment change in Q1? It appears that the weighted average internal credit rating of grade three investments increased during the quarter.

Jonathan Cohen

The answer to your question is yes. There were I believe two changes, both of which went from 2 to 3 – nothing went to a 4 or a 5. And the magnitude of the overall change is not something we would consider to be particularly material.

Chris York – JMP Securities

Got it, that’s helpful. And then lastly from me, do any of your CLO 1.0 equity investments possess collateral exposure to energy future holdings?

Jonathan Cohen

The answer is yes, they do.

Chris York – JMP Securities

And then is there, how should we think about the effect or the expectation of changes in distribution for any of your CLO equity investments there?

Jonathan Cohen

The position that we were just referencing has already been priced into our models and into the fair value calculations that are evidenced on our March 31st disclosures.

Chris York – JMP Securities

Got it, okay. That’s it for me, thanks.

Jonathan Cohen

Thanks, Chris, very much.

Operator

And this concludes our question-and-answer session. I would like to turn the conference back over to Mr. Cohen for any closing remarks.

Jonathan Cohen

Sorry, I think there might be one more question, Operator.

Operator

Yes, he just queued up while I was giving the closing, but that is Jonathan Bock from Wells Fargo.

Jonathan Bock – Wells Fargo

Good morning, I apologize and thank you for taking my question at the last minute. So just getting back, I was interested in Chris’ question as it relates to TXU. You mentioned it’s reflected in the fair value – does that default in any way, shape or form reflect the cash flow that will come off your CLO 1.0 investments where that credit is in that portfolio?

Jonathan Cohen

Well, the answer is that it’s already been incorporated into our expectation for forward cash flows and into the fair value assessment that we’ve done at March 31st. So we don’t see any material change relative to those two elements.

Saul Rosenthal

And don’t forget that it’s a typical, without commenting on just one CLO in particular but the typical one has a hundred plus to maybe two hundred different positions. So even as it’s contained in there it’s just going to be a very small position and at least thus far has not materially affected anything we’ve seen.

Jonathan Bock – Wells Fargo

That’s fair. Maybe diving into the CLO specifics a little bit, Jonathan, Saul, give us a sense in the roughly $285 million, just looking here at your CLO portfolio, something that you own – of the collateral, how much of that collateral contains a LIBOR floor?

Jonathan Cohen

The substantial majority, Jonathan – somewhere in the range of maybe 80% or 90% order of magnitude.

Jonathan Bock – Wells Fargo

Got it. So let’s walk through a situation where LIBOR goes to 100 basis points and stays there. What does that look like for both your equity value and the cash flow distributions off the CLO equity securities that you own?

Jonathan Cohen

Both would diminish. I think we’ve attempted to quantify the magnitude of that diminishment in our public disclosure documents we’ve included historically and will continue to include calculations around increases in LIBOR and how those increases would affect our cash flows.

Jonathan Bock – Wells Fargo

Makes sense, but I’m also, Jonathan, understanding that if you were buying something at a set IRR of 13% etc. and that IRR goes to 9% people will no longer be willing to pay par for the asset. So if a third of the book has more mark-to-market risk, and if you’re running at 0.80 or 0.85 times leverage how should people typically think about that? Now granted you’ve been very conservative in your funding and I’m not trying to answer my own question – I’m just trying to understand what happens in the event of the CLO securities end up going down substantially in the event of a LIBOR rise?

Jonathan Cohen

It’s a very good question, Jonathan, and the answer I think is that we would suffer a dminishment in the values of those equity positions commensurate or at least related to the diminishments in the cash flows that those investments were producing – exactly as you suggest.

Jonathan Bock – Wells Fargo

But we haven’t quantified the [mass hit] because we don’t know?

Jonathan Cohen

I think that’s a calculation that’s very difficult to do. We have not undertaken to try to estimate how the market would value a series of cash flows in an environment that was very different than the environment we’re operating in today – meaning a much higher LIBOR rate context.

Jonathan Bock – Wells Fargo

Got it. And then now with the stock trading where it is in line with of course the group which has seen some substantial outflows in the last two weeks, walk us through the investment – I’d say your leverage level of comfort in the current environment in light of the fact that the stock is below booked value and how one should look at forward CLO equity investment in the future considering your nonqualified asset bucket is substantially utilized?

Jonathan Cohen

I’m sorry, Jonathan, can you just rephrase the question?

Jonathan Bock – Wells Fargo

Will you plan on investing in CLO equity securities today in light of the fact that the stock’s below booked value?

Saul Rosenthal

We don’t have much room to anyway.

Jonathan Cohen

Right. As you say, the 30% basket is essentially full so at the margin we don’t have much ability to increase our exposure to the asset class.

Jonathan Bock – Wells Fargo

And so the only CLO trades that we’ll see will be moving from 1.0 to 2.0 securities?

Jonathan Cohen

Or from more mature vintage 2.0 into more recently issued or primary 2.0 transactions.

Jonathan Bock – Wells Fargo

I guess the one thing that we’re trying to understand is that with recently issued CLOs we’re looking at low LIBOR, historic lows in credit quality and maybe what some people believe to be a relatively frothy time in credit. Can you walk us through the relative value proposition of an 8x or 10x leveraged security in this environment that’s exposed to interest rate risk in the event LIBOR rises?

Jonathan Cohen

Well, I think that the deals and the structures that we’re investing in right now, by virtue of their diversifications, by virtue of the cost of capital that they enjoy the benefit of, by virtue of a very low default and high recovery rate environment that we’re operating in currently, and by the optionality afforded these vehicles in the event of a less benign credit environment – meaning a credit environment where we see a widening in corporate spreads – all of those things together combine to make us believe that this remains an attractive risk-adjusted opportunity for us.

Jonathan Bock – Wells Fargo

Fair enough, thank you so much.

Jonathan Cohen

Thank you, Jonathan, very much for the questions. Operator?

Operator

Yes, that will conclude the question-and-answer session. Please go ahead with any closing remarks.

Jonathan Cohen

I’d like to thank everyone for their interest and for their participation. We look forward to speaking with everybody during the quarter and at the next call. Thank you all very much.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!