Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

TICC Capital Corporation (NASDAQ:TICC)

Q3 2012 Earnings Call

November 7, 2012 10:00 AM ET

Executives

Jonathan Cohen – CEO

Bruce Rubin – SVP, Treasurer and Controller

Patrick Conroy – CFO

Saul Rosenthal – President and COO

Analysts

John Stilmar – JMP Securities

John Hecht – Stephens

Greg Mason – Stifel Nicolaus

Mickey Schleien – Ladenburg

Boris Pialloux – National Securities

Operator

Good morning, and welcome to the TICC Capital Corp. Third Quarter 2012 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Mr. Jonathan Cohen, CEO. Please go ahead.

Jonathan Cohen

Thanks very much. Good morning, and welcome everyone to the TICC Capital Corp. third quarter 2012 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 the 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 a property of TICC Capital Corp. Any unauthorized rebroadcast of this call, in any form, is strictly prohibited. I’d also like to call to your attention 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 at 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 call back over to Jonathan.

Jonathan Cohen

Thanks, Bruce. For the third quarter, TICC reported core net investment income of approximately $0.24 per share and a core net increase in net assets resulting from operations of $0.83 per share. At September 30, net asset value per share stood at $9.85, compared with the net asset value at the end of the second quarter of $9.47.

We reported total investment income of approximately $15.6 million for the third quarter of 2012, representing a decrease of approximately $4.9 million from the second quarter. That decrease was due largely to the non-recurrence of a one-time fee of $3.4 million earned during the second quarter of 2012, as well as from lower interest income in the third quarter.

We also recorded net unrealized depreciation of approximately $21.5 million and a net realized capital gain of approximately $1.8 million for the quarter. As a result of those realized and unrealized gains, we had a core net increase in net assets resulting from operations of approximately $32.5 million, for approximately $0.83 per share.

Our third quarter GAAP net investment income was approximately $4.6 million or $0.12 per share, which includes the impact of a capital gains incentive fee accrual of approximately $4.6 million. Excluding the impact of that accrual, our core net investment income was approximately $9.3 million or $0.24 per share. On a GAAP basis, our net increase in net assets resulting from operations was $0.71 per share. The decrease in net investment income for the third quarter compared with – to the second quarter was due in part to our substantial capital raising activity, the very great majority of which is now been invested.

Our weighted average credit rating on a fair value basis was 2.2 at the end of the third quarter of 2012, compared with 2.1 at the end of the second quarter. During the third quarter, we announced that we closed a $160 million debt securitization transaction, consisting of $120 million of secured notes and $40 million in subordinated notes. The secured notes were issued in four classes. TICC has regained all of the subordinated notes and $3 million worth of the class D-1 secured notes. The secured notes have a stated maturity date of August 25, 2023 and are subject to a two-year non-call provision. The CLO has a four-year reinvestment period. This financing structure provides TICC with long-term financing and what we believe is an attractive cost of capital.

As we also announced during the third quarter, we closed a private placement of five-year unsecured 7.5% Senior Convertible Notes Due 2017. A total of $105 million of aggregate principal amount of the Notes were issued at closing. Additionally, on October 22, we announced that we issued an additional $10 million aggregate principal of the Notes.

The Notes bear interest at an annual rate of 7.5%, they mature on November 1, 2017 unless previously converted in accordance with their terms. Consistent with obtaining this financing during the third quarter, we deployed approximately $128 million in additional investments, the significant majority of which were made within the 2012 securitization vehicle. As of today, the capital is essentially fully committed in the 2012 security – securitization vehicle, pending commitments in outstanding trades yet to settle.

Our Board of Directors has declared a $0.29 per share distribution for the fourth quarter of this year payable on December 31, 2012, to stockholders of record as of December 17. During the third quarter, we raised in excess of $255 million of new capital, and we deployed in excess of $128 million. We continue to deploy this capital in fourth quarter, and we expect to be substantially invested prior to the end of this year.

With that, I’d like to turn the call over to Patrick who can describe our third quarter investment activities and go through some financial highlights from the third quarter.

Patrick Conroy

Thanks, Jonathan. As mentioned at September 30, net asset value per share was $9.85 compared with the NAV at the end of the second quarter of $9.47, as a result of broad-based increases in the fair values of our portfolio holdings. As mentioned previously during the third quarter, we deployed approximately $128 million in additional investments. Also during the third quarter, we announced that we completed a public offering of 3.5 million shares of our common stock, including 450,000 shares that were issued to cover over-allotments at a public offering price of $9.65 per share for total net proceeds of approximately $32.4 million.

For the quarter ended September 30, TICC recorded earned income from our investment portfolio as follows: approximately $6 million from our CLO equity investments, and approximately $1.3 million from our CLO debt investments. At September 30, the weighted average yield of our debt investment portfolio was approximately 10.3% compared to 11.2% at June 30. And I would note that we currently have one investor on non-accrual status that is a fair value of about $1.1 million.

And as Jonathan mentioned, the Board of Directors declared a distribution of $0.29 per share for the fourth quarter of this year, which will be payable on December 31 to stockholders of record as of December 17.

Now, let me turn it back to Jonathan for Q&A.

Jonathan Cohen

Thank you, Patrick, very much. With that, operator, we’re very happy to open the call for any questions.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions) And our first question comes from John Stilmar of JMP Securities.

John Stilmar – JMP Securities

Good morning, gentlemen.

Jonathan Cohen

Good morning, John.

Saul Rosenthal

Good morning.

John Stilmar – JMP Securities

Good morning. Just starting with a macro question, by virtue of the fact that you guys pivot across several different classic types of asset classes and investment strategies and you’ve proven good capital allocators in the past.

Where do we kind of sit today between your three principal strategies, obviously, you closed your CLO, but as we start thinking forward, where should we start thinking about marginal capital allocation and how should we start thinking about how – your perspectives at least in terms of the current pricing environment in terms – for the structured credit trade, are we kind of in the latter innings of that, and I mean, you certainly have the opportunity to be nimble, but just curious, how – what are your views of the of kind different parts of the market that you look at, and then maybe opportunities as we think about the balance sheet going forward?

Jonathan Cohen

Sure, John. Thanks very much for the question. I think at this moment, we’re particularly focused on our cost of capital with respect to each of our three lines of business. So as we think about the structured credit trade that you mentioned, as we think about the prospective revival of our bilateral lending practice, as we think about the middle market syndicated corporate loan business that we’ve been particularly active in over the last several years, each of those sectors carries different risks for us. They carry different return structures for us.

How we finance or fund those investments is – are critically important element right now, because we raise different types of capital and you saw we’ve raised different types of capital during the prior quarter. And each of those different capital streams can be allocated with greater or lesser degrees of flexibility in terms of where we put the money. I would say right now to answer your question very directly, we’re looking across all three parts of our business, and we’re seeing opportunities or the prospect for opportunities in each of them.

So, I wouldn’t say, we’re going to be necessarily rotating out of structured credit over the next several years and rotating into bilateral lending opportunities. We are going to remain highly opportunistic. We’re going to remain flexible with respect to our capital deployment. And we’ll see which way that these markets go, because I don’t think from a macro perspective, there’s a great deal of certainty right now, and I think one of our competitive advantages historically, has been our ability to be somewhat more nimble than others.

John Stilmar – JMP Securities

Great. And then, can you talk about the CLO II that you recently closed, just by looking at the service report, it looks like the yield is about 7 in three quarters, which is much higher than the LCD acts are or some of the liquid loan marks, is that reflective of the asset strategy you have, and is this a fair kind of coupon that we should be thinking about as the rest of the capital in that CLO is deployed? And maybe you just spend a little bit of time also talking about why your CLO structure is different than maybe a broader syndicate, just so we can get a flavor for both, the funding mix and how the assets perform and look? Thank you very much.

Jonathan Cohen

Sure, John. Thank you. We have always tended to focus on the middle market. We’ve made four A’s in other parts of the corporate lending markets, but we tend to revert back more often than not to our middle market practice. Middle market spreads, as you know, are generally wider right now than broadly syndicated corporate loan spreads, and we think on a risk return basis, they offer, generally speaking, a more compelling opportunity at this moment. So that I think is our thinking on that topic.

Operator

And our next question comes from John Hecht of Stephens.

John Hecht – Stephens

Good morning, guys. Thanks for taking my questions.

Jonathan Cohen

Good morning, John.

John Hecht – Stephens

Hi. One question, first question is that what were the effective yields on the CLOs during the quarter, the CLO equity investments and subordinate investments and is there – was there a timing issue with maybe some of the cash proceeds from that pool of capital?

Jonathan Cohen

The answer to the second part of your question is yes. There are usually timing issues with CLO equities because they don’t necessarily – those timing – the timing of those payment streams don’t fall neatly within particular quarters necessarily, additionally, to the extent that we purchase or will purchase primary CLO equity tranches. There are frequently delays built into the first payment. And as you know, on an accounting basis, we only recognize CLO equity income on an as received basis, we don’t accrue for it.

Saul Rosenthal

But to be clear we incorporate the timing of those cash flows into our analysis of the return of that investment.

Jonathan Cohen

Right. For internal planning purposes.

John Hecht – Stephens

Yeah, of course.

Jonathan Cohen

With respect to the first part of your question, John, the cash that we received from our CLO equity tranches, these are our third party portfolio – the third party portfolio that we hold was for the third quarter – for the second quarter was essentially flat because one diversion or partial diversion of those numbers are in excess of probably about $6 million quarter-over-quarter with one exception rate.

John Hecht – Stephens

Okay. And the – and can you – you’ve deployed a lot of capital during the quarter. Was it weighted toward the back end or was it somewhat smooth throughout the quarter just in terms – and you’re trying to...

Saul Rosenthal

We raised – a big chunk of the money that we raised was in the – literally in the last few days of the quarter. So that’s why you see a fair amount of cash both restricted cash and non-restricted cash on balance sheet at September 30. As Jonathan mentioned during the call, the vast majority of that is now been invested, wasn’t as of September 30. So the capital that we’ve been invested over the course of the quarter was the capital primarily raised from the 2012 securitization vehicle, which have been raised a little bit earlier in the quarter. The convert that we closed was I think literally like around approximately September 20, literally few days before the end of the quarter.

John Hecht – Stephens

Okay.

Jonathan Cohen

It was pretty lumpy, John.

John Hecht – Stephens

Okay. Lumpy but generally spread out over the quarter or back weighted or any kind of weight characterizing that?

Jonathan Cohen

More back weight – more back-end loaded.

John Hecht – Stephens

Okay. And then, can you talk about the – just briefly describe the non-accrual loan, I mean, it’s your first one you had in several years if I recall, and is it just a one-off in your mind or is there the credit watch list you’re starting to put together at this point in the cycle?

Jonathan Cohen

Well, there is always a credit watch list that we are maintaining as a function of our one through five risk rating structure that we applied in all of the loans in the portfolio. There wasn’t any dramatic shift during the quarter. As you noted, we have one small position currently on non-accrual. It’s just a position that’s not performing particularly well, but it’s a very, very small (inaudible).

Saul Rosenthal

I would not look at that as the beginning of a trend to answer your question.

Jonathan Cohen

Right. Although, just to be clear as a matter of policy, we don’t make projections, either with respect to our earnings numbers or any of our other operating metrics, including our risk metrics. That said I think, Saul’s statement is a fair one. This is a small position that we’ve held for a very long time where we already have a positive rate of return on the position.

John Hecht – Stephens

Great. Thanks very much. And the final question is, you do have a lot of cash liquidity on the balance sheet now and you mentioned you’re going to deploy most of that by the end of this year. I’m wondering that from just a capital management policy, how much cash should we take about you retaining just in order to manage your expenses, dividends and take advantage of other opportunities you might come across them in the market.

Jonathan Cohen

You know, John, I think we can manage well with as little as $10 million of cash in our balance sheet. So that’s probably a reasonable target for us to manage too. This was an unusual quarter and we’re sort of looking to have deployed that capital again prior to the end of the year, if not sooner than that.

John Hecht – Stephens

Great. Thanks very much for the color, guys.

Jonathan Cohen

Thank you, John, very much.

Operator

And our next question comes from Greg Mason of Stifel Nicolaus.

Greg Mason – Stifel Nicolaus

Hey. Good morning, guys.

Jonathan Cohen

Good morning, Greg.

Greg Mason – Stifel Nicolaus

Can you talk about, you mentioned that if you do a primary CLO investment, it takes – there is a bit of a lag before the cash flows kick in. How much either a percentage or a dollar basis of your new CLO investments would you characterize as primary versus secondary?

Jonathan Cohen

There were two CLOs that we purchased, Greg, during the quarter that were primary transactions, were new transactions.

Saul Rosenthal

And incidentally, the typical – I mean, when there is a delay, it’s usually just a one quarter delay, because sometimes these new primary CLOs are in – still in the process of ramping up. And so they don’t make their first payment for six months rather than three months. But that’s about it. It’s not like it’s going to be delayed beyond that.

Jonathan Cohen

Right. The dollar value, Greg, was approximately $17.2 million of face value CLO equity between those two positions.

Greg Mason – Stifel Nicolaus

Approximately $17.2 million. Got it. And as we think about your historical mix of about close to 30% and CLOs, as we look to deploy the pre-robust amount of capital in the fourth quarter, are you looking to primary markets or the secondary markets in the CLO investments. What’s the most attractive area today for that segment?

Jonathan Cohen

You know, we’re looking at both. I wouldn’t say that one is necessarily more attractive than the other. I think, if you can afford to put smaller amounts of capital to work in smaller increments, there tend to be greater opportunities for locating marketing efficiencies in the secondary market. But if you wanted to deploy greater amount of capital in a shorter period of time, you would have a harder time doing that in the secondary market, you’d be better served to focus on the primary market. But there are opportunities in both.

Greg Mason – Stifel Nicolaus

Great. And then, you mentioned revival of doing bilateral loans. Can you talk about that market, how – have you done any of those yet and what are you seeing in that market in terms of yield and opportunity?

Jonathan Cohen

Yield and opportunity tends to be all over the map in the bilateral lending practice. These are smaller companies, they have smaller deals, they have much larger gestation periods. We have looked at deals recently some deals, it wouldn’t surprise me if we were to do some activities, we’re engaged in some activity in that segment in the not too distant future. But it’s a much larger spread environment and much sort of wider opportunity set than you’d see in even the middle market corporate syndicated loan sector, by virtue these basically being one-off bespoke transactions. So it’s an as negotiated market with equity participations with water spreads, with more customized bespoke indenture structures, all of those things are more in evidence.

Saul Rosenthal

But I think the important point is that we’re an opportunistic investor, and we are not so big that we have to buy the market and as Jonathan mentioned earlier, we’ve pivoted when appropriate and we’ll invest in the best deals that are available to us at any time. We don’t – we’re not sort of biased towards one section of the market or another. And at the moment, our portfolio reflects what we do as the best risk adjusted returns that are available.

Greg Mason – Stifel Nicolaus

And you guys are intensively focused on funding those new investments with the appropriate capital, would these bilateral loans, any part of them, be available to go inside a CLO structure, or those going to be funded more by the convert debt in the equity you’ve raised?

Jonathan Cohen

The latter, Greg. It’s more of the convert debt in the equity, would be very difficult to put bilateral loans inside of the securitization vehicle. They just don’t – they’re not really architected for that.

Greg Mason – Stifel Nicolaus

Great. And then, one final question. Kind of John Hecht’s question of weighted to the front end or the back end, as we look to the fourth quarter, you’ve got about $200 million of cash to deploy. How much of that have you done today – to-date, just so we can get a feel for front to back end weighted for deployment of capital in the fourth quarter?

Jonathan Cohen

Sure. I would say most of it between commitments in allocated capital and closed deals, even the substantial majority of it.

Greg Mason – Stifel Nicolaus

Great. Thank you, guys.

Jonathan Cohen

Pleasure. Thanks.

Operator

And your next question comes from Mickey Schleien of Ladenburg.

Mickey Schleien – Ladenburg

Hello. Good morning.

Saul Rosenthal

Good morning, Mickey.

Jonathan Cohen

Good morning, Mickey.

Mickey Schleien – Ladenburg

Just want to make sure I understand the allocation of capital. I know everybody has sort of asked the same question over and over. But you had about $97 million of restricted cash. I’m assuming that’s mostly in the new CLO, is that correct?

Saul Rosenthal

Yes.

Jonathan Cohen

Yes.

Mickey Schleien – Ladenburg

Okay. And the $35 million of securities purchased not settled, that’s also in the new CLO?

Jonathan Cohen

Generally, although, not necessarily, I mean, from an accounting perspective anything that’s traded but not settled is going to show up in that line item. So it’s not necessarily the case that it’s all inside of the 2012, but most of it would be.

Mickey Schleien – Ladenburg

I mean, the figure was a lot lower than the previous quarter. So, we know where that cash is going to be directed of the $123 million of non-restricted cash, some of it’s for working capital. Let’s say $100 million, $110 million, it sounds like that’s what you have on a go-forward basis to target more of the lower-middle market syndicated loans that wouldn’t fit in the CLO and perhaps some more CLO equity and debt subject to the 30% cap, is that right?

Jonathan Cohen

That is precisely correct, Mickey. Yes.

Mickey Schleien – Ladenburg

Okay. Just a few housekeeping questions, can you tell us what the new non-accrual loan is at cost?

Jonathan Cohen

At cost, hold on one second, I’ll get you that number.

Mickey Schleien – Ladenburg

Okay. And while you’re looking for that, how much pick did you accrue in the third quarter?

Jonathan Cohen

Yeah. The pick the recorded – the minimums, I’m being told Mickey that it’s about $10,000. So it’s not a meaningful number.

Mickey Schleien – Ladenburg

Okay.

Jonathan Cohen

In terms of our cost basis on the loan, on non-accrual, its approximately $1.8 million.

Mickey Schleien – Ladenburg

Okay. And lastly, can we expect the Q sort of by the end of this week or what’s the timing?

Jonathan Cohen

Yeah (inaudible).

Saul Rosenthal

It’s a little down time with the storm as you can imagine and we’re caught up – we can call out late tomorrow or Friday.

Mickey Schleien – Ladenburg

Late tomorrow or Friday. Okay. Thanks for your time.

Jonathan Cohen

Thank you, Mickey.

Saul Rosenthal

Thanks, Mickey.

Operator

And our next question comes from Boris Pialloux of National Securities.

Boris Pialloux – National Securities

Hi. Thanks for taking my question. I just want to have a general question about like the – this convert. I mean, your cost of the convert is about 7.5% and if I look at your G&As and relative to the asset side, you’re roughly at 2.5%. So the earning cost should be 10%, so with this convert founding, are you targeting higher coupons, are you targeting – I mean what type of instruments would you be targeting?

Jonathan Cohen

Absolutely, Boris. Good question. We are obviously with that unrestricted capital, focusing on our higher spread opportunities, meaning that we are out of that capital based looking at CLO double D paper, we’re looking at some CLO equity tranches. We’re looking at perhaps second lean broadly syndicated and middle market syndicated corporate loans. We’d be looking at bilateral opportunities prospectively. So that category in – with respect to that capital base.

Boris Pialloux – National Securities

Okay. Thanks.

Jonathan Cohen

All rights, Boris. Thank you very much.

Operator

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

Jonathan Cohen

Thanks very much. The only closing remark I have is that I’d like to thank everyone for participating, and we look forward to speaking to you either individually or on the next conference call. Thanks very much again.

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!

Source: TICC Capital's CEO Discusses Q3 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts