Alcentra Capital Corporation (NASDAQ:ABDC)
Q2 2016 Results Earnings Conference Call
August 5, 2016, 10:00 AM ET
Paul Echausse - Chief Executive Officer and President
Ellida McMillan - Chief Accounting Officer
Robert Dodd - Raymond James
Bryce Rowe - Robert W. Baird
Good day, ladies and gentlemen, and welcome to the Alcentra Capital Q2 2016 earnings conference call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]
I would now like to introduce your host for today's conference, Ms. Ellida McMillan. Ms. McMillan, you may begin.
Thank you, Danielle. Good morning, everyone, and welcome to Alcentra Capital Corporation second quarter 2016 earnings call. I’m joined by Paul Echausse, our President and Chief Executive Officer.
Before we begin, I would like you to know that this call is being recorded. Replay information is included in our August 1, 2016 press release and will be posted on the Investor Relations section of Alcentra Capital Corporation's website, which can be found at www.alcentracapital.com.
Please note that this call is the property of Alcentra Capital Corporation. Any unauthorized rebroadcast of this call in any form is strictly prohibited.
Today's call may include forward-looking statements and projections. We ask that you refer to our filings with the SEC for important factors that may cause actual results to differ materially from those anticipated in any forward-looking statements and projections. We do not undertake to update our forward-looking statements unless required by law.
To obtain copies of our SEC filings, please visit our website or call Investor Relations at 212-922-8240.
The format for today’s call is as follows. Paul will provide an overview of our results and outlook and I will summarize the financials and provide an update on our portfolio liquidity. And then we’ll open the line to our Q&A.
I will now turn the call over to our Chief Executive Officer, Paul Echausse.
Thank you, Ellida. And welcome everyone to Alcentra Capital Corporation’s second quarter earnings conference call. We're pleased to report quarterly results for the June 2016 period of $5.9 million of net investment income or $0.44 per share.
Net investment income was up $0.03 per share from the March 2016 period and represents $0.85 per share for the first six months of this year. This compares favorably to $0.71 per share for the same period last year.
The company paid a dividend for the June quarter of $0.34 per share. The company paid this dividend on July 7 to shareholders of record on June 30. And the dividend yield was approximately 11% based on our share price at the time.
With regards to dividend, I will note that our Board has authorized the payment of a third quarter dividend of $0.34 per share to be paid October 6, 2016 to shareholders of record on September 30, 2016.
For the June quarter-end, the weighted average yield on our debt portfolio was 11.7% and the weighted average leverage in the debt portfolio is 3.88 times EBITDA. The yield on the portfolio has come down slightly, approximately 30 basis points, and the weighted average leverage has increased slightly, approximately .16 times EBITDA.
Both statistics continue to demonstrate our ability to deploy capital at good risk-adjusted returns relative to our peer group. With weighted average portfolio at 3.8 times EBITDA, we have seen a moderate shift in our first dollar of attachment analysis. While 80% of the portfolio was at or below three times EBITDA for the March period, 76% of the portfolio was at this same threshold for the June period.
Most of the shift occurred within the three to four times EBITDA range and a slight shift resulted as a result of lower leverage companies being repaid in the quarter. We had one new investment at the higher leverage level and there was a slight shift with one or two existing portfolio companies from the 1 to 3 basket to 3 to 4 basket.
Despite these dynamics, these statistics continue to demonstrate our ability to deploy capital at good risk-adjusted returns relative to our peer group and we expect the portfolio to continue to operate within the historical norm.
Our portfolio company investment at cost was approximately $9 million and there were no non-performing loans in the portfolio. Our average portfolio company investment has continued to decline moderately, while the number of portfolio companies has increased. We would expect this trend to continue as some of our larger legacy investments benefit from the M&A market. We will look to redeploy this capital in new opportunities, mindful of maintaining this smaller average investment in a larger universal portfolio companies.
The most significant change in the portfolio occurred within the past few weeks. City Carting was merged into Tunnel Hill Partners in a stock-for-stock transaction, thus positioning our investment within a larger waste management platform with a deeper management team and a broader geographic focus. The transaction reduces the level of PIK income in the portfolio as well.
And then on June 1, 2016, our notes and warrants in DBi Holdings were repaid, including our holding company PIK note. We realized a gain on our warrant of $9.7 million. The merger of City Carting and the repayment of DBi has thus eliminated the two largest components of PIK income in our portfolio, reduce the equity component of our portfolio, and positions us favorably to redeploy that capital into new debt investments. We would expect this portfolio dynamic to continue over the next few quarters, which should allow us to grow net investment income.
I will now turn the call over to our Chief Accounting Officer, Ellida McMillan, to discuss our financials in more detail.
Just on that one note, it was August 1, the repayment of DBi, not June, so just to clarify.
Our total investment income for the quarter was $10.6 million, which would largely compromise of interest and PIK income. The other income included $2.5 million of prepayment fee income – I’m sorry, other income of $2.5 million, prepayment income of that was $2.1 million and approximately $300,000 was an amendment fee.
Operating expenses totaled $900,000 for the quarter. Base management fees were $1.3 million and incentive fees were approximately $930,000. The expenses related to our credit facility and InterNotes were $1.6 million.
The net change in unrealized appreciation of the portfolio investment before the provision for taxes was $5.8 million. Accruals to-date for the income incentive and capital gains incentives for accruals is based on the value of the portfolio at quarter-end. The actual payment of both of these incentive fees is based on cash proceeds received. And thus, the timing of the cash distributions associated with these accruals may differ from the timing of the accrual.
We invested $39.3 million in debt, in equity securities, including investments in four new portfolio companies and add-on financing and we received proceeds from repayments and amortizations of $26.5 million.
With regards to liquidity at the end of the June quarter, we had cash available on hand of $5 million, with $51.6 million drawn under $135 million revolving credit facility. Net asset value per share was $14.16 at quarter-end.
And now, I will turn it back to Paul.
Thank you, Ellida. The investment portfolio continues to be very well diversified by industry, sponsor and individual company. Our largest single industry exposure remains healthcare and pharmaceutical services at 16% of the portfolio. That has been coming down as the portfolio has been growing and more diversified. And the credit profile of the investment portfolio continues to be in relatively good shape.
During the quarter ended June 30, we had no investments on non-accrual, although we did add a new investment XGS to our watchlist, which also includes Black Diamond.
Let me address a few strategic issues with regards to the portfolio and our balance sheet. With regard to the portfolio specifically, our unrealized appreciation, while oil and gas is a small fraction of our portfolio at 3.4%, I want to stress that the business is profitable and well-positioned currently and in the future as most of its business is focused in the Permian basin. The business has an excellent management team and a strong supportive ownership group and we believe that patience will see us through the current cycle.
While there will be some continued variability in our unrealized appreciation, we believe that there is an opportunity for approximately $0.65 to a dollar per share in unrealized appreciation within this portfolio over the next 9 to 15 months based on current and projected performance of these companies in the current M&A market.
With regards to our balance sheet, we took the opportunity to close on $5 million of additional unsecured notes over and above the $10 million that we initially planned for. Similar to last year's note offering, we raised capital at favorable fixed rate pricing, particularly when one compares our note pricing to our peer group.
As I stated in our last earnings call, we have raised this capital to maximize our liquidity and flexibility within our balance sheet. The opportunity cost of this offering is approximately $450,000 per year relative to borrowings under our revolving credit facility. We view this expense as a small price to pay for balance sheet liquidity and flexibility.
With regard to strategic initiatives, we continue to be in an active dialogue with the US Small Business Administration and our large equity base and strong balance sheet is a point of distinction. We want to make sure we have the liquidity to fund any capital commitment we have to make to the extent our dialogue with SBA progresses accordingly.
We always have the flexibility to reduce our unsecured notes by $8 million, given the fact that the one-year note call on last year's note offering has expired.
Danielle, if we could take the questions now? Thank you.
Thank you. [Operator Instructions] And our first question comes from Robert Dodd from Raymond James. Your line is open.
Hi. One quick clarification. City Carting paid off [indiscernible] during the second quarter, like not after the quarter-end?
It was during the quarter, Robert. We issued a press release with regards to that because it is a large investment in our portfolio and a focus of these calls, including the extension of the preferred from time to time.
Yeah, yeah, yeah. Understood. It’s just that the last four weeks comment threw me because, obviously, it’s been more than four weeks since the end of the quarter. And just kind of the outlook that you’re seeing, we’re hearing various commentary about activity picking up. Obviously, you had a pretty solid second quarter. But what color can you give us about the level of activity you’re seeing, the valuations as well? Because, obviously, in some situations, the M&A market is still pretty hot in the lower end of the middle market with multiples pretty high. And give us any color on activity, appetite for your type of somewhat growth companies and how the valuations are playing out there and your willingness to back some of those deals?
So, obviously, we feel good about the pipeline. I do think that what makes us a little bit different is that we have the flexibility to do what, I would call, growth as well as not-sponsored. So as I look at our pipeline, I think there’s a fair balance between the two. And then, I think we will, in some cases, see maybe a little more senior secured or second-lien that may have a slightly lower return threshold. But we’re all about point of attachment than risk-adjusted returns.
What’s interesting is, if you looked at the first quarter of the year, the weighted average yield on repayments was roughly 11.7% and the weighted average yield on capital deployed was roughly 9.8%. In the second quarter, by happenstance, we deployed more capital, but the weighted average yield of repayments as well as capital deployed was in the 11.6% range, kind of with a perfect match.
I think you're going to see coupons that are closer in that 11% to 12% range or 10.5% to 12% in terms of weighted average. And I think the point of attachment is going to be similar.
Right. Thank you for that color. And then on the XGS, I may have missed it, but you gave some color on your comfort with Black Diamond, et cetera. But what was the trigger, if you will, for putting that on the watchlist?
I don’t want to get into specifics, per se, there has been a large level of investment made. It’s a transportation company. And so, there's been an upgrade to the fleet. And so, when you make a large capital investment to drive efficiency, sometimes it will show up in the short-term numbers. We have seen that from time to time. We just had a great result in the refinancing of DBi. But you may recall that, at one point, we had written that investment down for maybe a quarter or two as they similarly were making a large investment in the growth of the business, and then we subsequently wrote it up almost consistently for about four quarters. So you’re going to see that. Implicit in my statement, Robert, about some of the unrealized appreciation that we see improving by $0.65 to a dollar a share is a similar dynamic.
Okay, got it. I appreciate that. Thank you.
Thank you. And our next question comes from Bryce Rowe from Baird. Your line is open.
Thank you. Good morning, Paul and Ellida.
Paul, I just wanted to ask about, specifically, on City Carting or Tunnel Hill. I am assuming that Tunnel Hill is now just common equity and there is no PIK associated with it.
That’s correct, although the business is owned by a private equity firm that believes in maintaining a relatively low leverage, so that they can not only fund growth, but historically have paid some type of a dividend. So that dividend varies based on the performance and it would be our expectation that there would be some dividend yield on that. But that’s a variable yield and we will recognize that on an as-received cash basis.
That’s helpful. Just to clarify, the $0.65 to a dollar of, you said, potential appreciation – or potential unrealized appreciation within the portfolio over the next 9 to 15 months, did I hear that correctly?
That is correct.
Okay. And I guess that kind of goes hand-in-hand with your comment about some of the larger investments in the portfolio, potentially participating in an active M&A environment.
I would say it kind of comes in spurts. So the amount of repayments that we see over the next six months may slow down a bit relative to what we saw in the first six months. Okay? And some of it isn’t only M&A driven. It's probably balance sheet and growth. I think Robert at one point said, we have a relatively under-leveraged portfolio in terms of the underlying portfolio companies. So there should be greater velocity in the portfolio. And I think we saw that in the first quarter, right? D4C paid us back a little bit earlier than we have expected. I think the same was true of ACT, the same was true of Radiant. Okay? While that can be difficult to – I don’t want to use the word manage, okay, because we don't really manage the repayments.
What’s good about that is we typically have either some form of no call or prepayment premium that gives us a window to continue to manage and grow the portfolio from a lost income opportunity perspective. Based on what we know about portfolio today, my general sense is that may slow down a little bit as we head into the third and fourth quarter. And so, new investments are going to drive the growth.
And then, look, in the case of the refinancing of DBi, that was $28 million, $10 million of which – close to $10 million was equity. That was non-income bearing. So our ability to take that $9.7 million and redeploy it in debt at a 50% leverage level is certainly going to help us drive NII and we expect that dynamic to continue as some of the equity in the portfolio comes back as well.
Right, okay. And then just on DBi, Paul and Ellida, I assume based on the numbers you give in the subsequent event section of the press release, you book some level of fee income associated with that refinance too?
Correct. Not substantive. I think it was 101 on the premium, 102 in that range.
101 I think. Yeah.
Okay. On both components of the debt?
I don’t think it was just the – not the PIK note. It’s the sub note.
Okay. I think that’s it for me.
Thank you. [Operator Instructions]
Okay. If there are no other calls, I want to thank everybody for attending our second quarter earnings conference call. And again, thank you for your continued support. Thank you.
Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. And you may all disconnect. Everyone, have a great day.
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