TICC Capital Corp (NASDAQ:TICC)
Q2 2016 Earnings Conference Call
August 04, 2016, 08:30 ET
Jonathan Cohen - CEO
Bruce Rubin - CFO
Jonathan Bock - Wells Fargo
Mickey Schleien - Ladenburg
Christopher Testa - National Securities Corp
Welcome to the TICC Capital Corp. Second Quarter 2016 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Mr. Jonathan Cohen, Chief Executive Officer. Please go ahead.
Thanks very much. Good morning and welcome, everyone to the TICC Capital Corp. Second Quarter 2016 Earnings Conference Call. I'm joined today by Saul Rosenthal, our President and Chief Operating Officer; and Bruce Rubin, our Chief Financial Officer. Bruce, could you open the call today with a discussion regarding forward-looking statements?
Of course, Jonathan. Today's call is being recorded. An audio replay of the conference call 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 a property of TICC Capital Corp., any unauthorized rebroadcast of this call in any form is strictly prohibited.
And also I'd call your attention to the customary disclosure in our press release this morning regarding forward-looking information. Today's conference call includes forward-looking statements and projections and we ask that you refer to our most recent filings with the SEC for important factors that can 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 over to Jonathan.
Thanks very much, Bruce. We're pleased to report that we had a very strong second quarter. Our book value per share rose from $5.89 at the end of the March 2016 quarter to $6.54 at June 30. We note that our book value is higher now than it was at the end of 2015 and that we've paid distributions to our shareholders during the first half of 2015 of $0.58 per share. For the quarter ended June 30, 2016, we recorded net investment income of approximately $6.8 million or approximately $0.13 per share.
In the second quarter, we also recorded net unrealized depreciation of $48.8 million and net realized capital losses of $7.3 million. Our collateralized loan obligation or CLO positions experienced significant market value appreciation during the quarter with $37.3 million of that net unrealized depreciation associated with those investments. In total, we had a net increase in net assets from operations of approximately $48.3 million or $0.94 per share for the quarter. Our core net investment income for the quarter ended June 30, 2016 was approximately $0.32 per share. We believe that the various initiatives, including the large share repurchase program we completed earlier this year and the portfolio rotation strategy we're implementing, clearly contributed to our strong results in the second quarter.
I note that at June 30, we had one investment on non-accrual status with a fair value of approximately $11.4 million. That investment was purchased for a total of approximately $10.7 million in separate purchases in 2011 and 2013. This was the same investment that was also on non-accrual status in the prior quarter. On the corporate loan side of the business, we're very pleased to announce the successful strategic sale of Ai Squared in a transaction that we believe highlights the ability of our investment staff to add value to our corporate loan investments. In the case of Ai Squared, two senior members of our investment staff have served on Ai Squared's Board of Directors since we made that investment.
We provided assistance for the company in ways that included the hiring of their Chief Executive Officer, introducing the company to business development opportunities and ultimately helping to identify and execute the strategic sale of the company. In addition to the profit we generated through our investment and leadership of Ai Squared, it is also worth talking about another aspect of that investment. Ai Squared is an assistive technology company and a preeminent developer of software-based solutions for blind and partially sighted computer users. The difference that these products have made for thousands of people who suffer from visual impairments has been truly profound. And while we believe that every investment we make is compelling from an expected return perspective, we're especially proud of our investment in Ai Squared.
Continuing on with the corporate loan portfolio, several weeks ago we announced that during the quarter ended June 30, 2016, we exited through sales, repayments, excluding amortization payments, $59.1 million of first and second lien syndicated corporate loans at an average price of 100.2% and an estimated weighted average yield at exit price of approximately 6.89%. That rotation was very much consistent with our ongoing strategy of rotating our corporate loan portfolio into higher yielding, less liquid loans that we intend to hold on a less levered basis. Also during the second quarter and consistent with that strategy, TICC purchased $36 million of first and second lien corporate loans in a mix of both primary and secondary market transactions, at an average price of 92.6% and an estimated weighted average yield at purchase price of approximately 11.6%.
That corporate loan portfolio origination during the second quarter resulted in a weighted average yield increase of approximately 4.7%, 470 basis points on the reinvested capital. Since the end of the second quarter, we have deployed additional capital and we continue to believe that our rotation strategy provides us with an attractive risk-adjusted opportunity in the current market environment. While we're pleased with the process we made during the second quarter, I emphasize that that work is ongoing and that we look forward to providing an update when we report our September quarter financial results. Lastly and building on several years of portfolio construction history, we have continued to avoid companies operating in markets characterized by high levels of commodity price exposure.
Specifically, we ended the second quarter with no non-CLO investments in the energy sector, a position we have maintained over the past several years. Addressing the CLO part of our portfolio, we note that the market saw very substantial increases in market prices for CLO equity in junior debt tranches as both technical and fundamental factors came into play. Our CLO portfolio produced a total return for the second quarter greater than 20%. At the same time, the strong gains within the CLO market during the second quarter were not uniformly distributed. CLO structures with the longest reinvestment durations, the most opportunistically positioned portfolios in the lowest cost of capital tended to outperform during the second quarter.
And while our current investment strategy continues to contemplate the longer term the emphasis of CLO equity as a proportion of our overall returns, that asset class has continued to provide us with compelling risk adjusted return opportunities. The fact that we've never experienced an event of default at any of our CLOs, even during the credit crisis and the fact that none of our CLOs experienced any diversion of cash from their equity tranches during the second quarter or indeed for the past several years, is we believe, evidence of the significant resilience of this asset class. In summary, the changes we've made over the past year, including the repayment of $150 million of our corporate debt in December of 2015, the 25% reduction in base management fees payable to our investment advisor through its ongoing fee waiver, the repurchase of just over $49 million of our common stock in the open market and the rotation of the portfolio into higher yielding corporate loans, have strongly positioned us, we believe, for a continuation of the success we saw during the second quarter.
I note that additional information about TICC's second quarter performance has been posted to our website at www.ticc.com.
And with that, operator we're happy to open the line-up for questions.
[Operator Instructions]. And the first question comes from Mr. Jonathan Bock from Wells Fargo. Please go ahead.
One quick question, because we don't yet have the SOI, but I know given this is a public call, it'd probably be very helpful for us to understand a bit more about the types of assets that you're originating, may be perhaps where the proprietariness of those types of transactions and so if you're able to give us a few examples in terms of how you work with the underlying sponsor originated the investment or had the relationship that allowed that investment to occur, that'd be helpful for us as we look for the model change into more proprietary bilateral loans.
So as you noted, our SOI should be posted when we file our Q, probably tomorrow, we're expecting to file that Friday. So I can't speak to any specific transactions we conducted during the quarter. What I would note is that the new transactions that we bought on during the second quarter and the transactions we continue to look at the moment are a mix of secondary and increasingly a number of primary transactions.
Those transactions, we would characterize as substantially more proprietary than the syndicated corporate loan market portion that we participated in over the course of the last several years. So if we look down the list which again, we'll be providing tomorrow. These are names where, in many cases, we've got longstanding relationships with the relevant sponsors, where we've been involved in some cases with the company or with the sponsor over a long period of time, where we think that we have a proprietary component to the deal flow that we're executing against currently and that we believe is a significant portion of the reason why we're able to capture higher spreads in this market.
And then so as part of the diligence on those processes, I mean you kind of get the opportunity to be invited into the origination part where you get to sit in front of management and do the same type of proprietary analysis you've always done previously with these same types of loans, now maybe moving into the next phase, given that this market is presenting that opportunity?
Absolutely, Jon. And that's true for both the first lien and the second lien portions of these various transactions. So the second lien, specifically, before the syndication being able to get in and take a look at the company, have a discussion or a series of discussions with management and participate, again both in the first lien and the second lien side is, we believe are very valuable. There are also a series of transactions, a series of deals that are neither purely bilateral, nor purely syndicated, these are deals that sometimes have CU.S.IPs associated with them and sometimes don't have CU.S.IPs associated with them, but which as an asset class, we believe may offer some interesting opportunities at this point in the cycle.
The next question comes from Mr. Mickey Schleien from Ladenburg. Please go ahead.
Jonathan, last quarter you mentioned that it was not an opportune time to exit CLOs which as you stated is your longer-term objective for TICC and you're obviously correct in hindsight, since we've seen a strong rally in the middle market and therefore in middle market CLOs. So I'm curious how you feel about that opportunity now, particularly since it seems you've surpassed the 30% non-qualified asset limit.
I think Mickey, that the market has become, for CLO equity and CLO junior debt, more specialized. So what we're seeing in the market now is a greater delta between primary or new issuance pricing and secondary market pricing for CLO equity specifically. So we continue to believe that there are opportunities within the CLO market, in some cases, very strong opportunities and what you'll see in our schedule of investments within the next 24 hours presumably is some meaningful level of rotation of the CLO portfolio during the quarter.
So this quarter was not a case where we said we've got positions that we think will rise in value substantially on a static pool basis, instead we've taken a very active management approach to our CLO equity portfolio and I believe that paid significant dividends in the second quarter. So to answer your question, I think we're at the point in the cycle right now where CLO debt and junior debt and equity continue to provide us with interesting opportunities. We're not rushing to exit this asset class, especially as we're able to generate strong returns. We believe over the near to intermediate term, but again I think an active portfolio management approach is needed.
And Jonathan, could you just remind us what the 1940 Act requires you to do to cure the 30% test, is it grandfather, do you have to immediately settle down, what are the limitations?
Sure, Mickey, thank you. The 1940 Act requirement with respect to the 30% limitation is actually a BDC, not specifically a 1940 Act requirement, is maintain or improve requirement. In other words, we're not permitted to buy additional non-qualified assets of any description, whether they're large-cap public company investments which we typically don't do, foreign corporation investments which would similarly be non-qualified or any of the variety of other types of investments that don't need the BDC definition of a qualified asset. So we're not permitted to buy assets of that description while we're exceeding the 30% limitation. We're not required to sell assets or liquidate or take any other steps other than simply not purchasing new assets that would make that test beyond 30%.
The next question comes from Mr. Christopher Testa. Please go ahead.
Just on the selling down of syndicated paper and the rotation and club deals, just wondering if you could quantify how quickly you're able to sell down those syndicated loans and whether you're looking to do it sooner rather than later you’ve a more of a market?
Sure, Chris, it's an excellent question. Part of that really relates to our 2012-1 TICC CLO structure. So we, as you know, have an on balance sheet CLO that has historically provided us with a low-cost source of leverage against which we purchased principally more broadly syndicated loans. So there is a natural connection between the life cycle of that vehicle which will be coming out of its reinvestment period shortly and essentially go into basically a self-liquidating mode and the liquidation of the more broadly syndicated corporate loan assets.
So the short answer to your question is that some of these can be sold quickly at or above par, we've done some of that, we may be doing more of that in the near future and some of these assets are still pulling to par, in other words, increasing the value over time from a below par position to a par position, obviously, we need to balance that dynamic against the rotation strategy that we're in the midst of.
And could you provide us with an update on the infrastructure of these club deals and proprietary originations in terms of hiring certain personnel et cetera, anything that you've added to within the company to build out capacity to do the those deals?
Sure. We have made a recent additional hire, but I think more importantly, the investments that here is very much the same investment staff that we've had for most of the last 10 years. We've got people on staff and we'll be bringing on probably additional people who have long histories originating loans, structuring loans, negotiating indentures, monitoring transactions, post-closing, negotiating amendments as necessary, doing all of that work.
So the fact that we started as a Company and as a business back in 2003 as a pure self-originating bilateral loan shop, much of that infrastructure certainly is still very much in place and assist us as we both rotate our portfolio into less liquid higher yielding assets and also with respect to the existing portfolios as we certainly saw this quarter with the strategic sale of Ai Squared.
The next question comes from Mr. Jonathan Bock from Wells Fargo. Please go ahead.
So I also know that dividend policy is very important and while we see what is an effective return of capital for the moment, because of the CLO securities you own, you really have a choice to where NAV can actually be distributed to investors later or you could return some of that capital that will effectively build on balance sheet to investors today. And so if it's possible, would you give us a quick tutorial on the dividend policy in terms of the decisions that you're making to distribute dividends in excess of NOI, because there are really two paths one can take and both can be right.
As you note, we have essentially two different line items. We have our GAAP net investment income which for this prior quarter was $0.13 and we separately report our non-GAAP financial measure called Core NII and that number was $0.32. The core NII essentially consists of the GAAP number with the cash that we received from our CLO equity investments in excess of the GAAP recognition added back in. And that number has historically approximated our distributable taxable income which is the number that we're required to distribute through to our shareholders under The Investment Company Act of 1940 in order to not pay corporate taxes.
So as you correctly note, we have essentially the option to retain, for a limited period of time, for some number of quarters, maybe 1 year or 1.5 year, but a limited period of time, some additional capital that we otherwise are required to distribute through to our shareholders on our balance sheet and potentially endure the effect of some compounding. For the moment, the Board has made the decision, we put a press release out about this recently, that our policy will be to distribute our -- essentially our estimated taxable or core net investment income through to our shareholders. It is certainly a difference in approach, but our view is that given that we're required to distribute this capital through to our shareholders in any case, that our shareholders would generally prefer to receive the benefit of the cash distributions during or around the period where their capital has earned that money.
The next question comes from Mickey Schieien from Ladenburg. Please go ahead.
I just wanted to follow up on the question I had about the waiting in CLO. You indicated you couldn't buy more while you're above the 30% limit which it appears that you are, but you also mentioned that we will see some rotation when the Q is released. So does that imply that you will have made some new investments that reduced it below 30%?
No, Mickey, the schedule investments will relate to the June 30 period. So that will relate to the activity that we undertook with respect to the second quarter, we were not as of the March quarter, in excess of the test and therefore we were able to both buy and sell assets during the second quarter.
The next call comes from Mr. Christopher Testa. Please go ahead.
Just had a question on the weighted average cash yield on the CLO, it was up roughly 110 bps quarter-over quarter even as the reinvestment opportunities within CLOs have become less attractive. Can you give some color on how the cash-on-cash yield went up quarter-over quarter?
Sure, Chris. It was essentially, mostly I think a timing issue, where weighted average spreads from the prior two quarters which were typically higher, as the vehicles we're reinvesting their pools of collateral capital flow through into our second quarter results. But again, I think your question really underscores the importance of portfolio rotation and active management within the CLO equity asset class which we certainly undertook meaningfully in the second quarter.
And the effective GAAP yields also being up pretty significantly, was that more a line for the same reason?
Yes, that was primarily the result of the portfolio rotation we undertook in the CLO equity book during the second quarter.
And last one from me just on the debt funding side of the CLO equity. What have you seen in terms of pricing become more favorable along the AAA and AA tranches within the CLO?
We have certainly seen the benefit of tighter AAA spreads on the liability side of new issue CLO structures. That's part of -- maybe a meaningful part of the reason for the dynamic I referenced earlier in the call which is this increasingly wide delta in terms of pricing and yields between the CLO new issue market and the secondary market.
This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Jonathan Cohen for any closing remarks.
Thank you very much. I'd like to thank everybody who participated in the call. We appreciate your interest in TICC and we look forward to speaking to you again soon. Thanks very much.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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