KCAP Financial's (KCAP) CEO Dayl Pearson on Q3 2016 Results - Earnings Call Transcript

|
About: KCAP Financial (KCAP)
by: SA Transcripts

KCAP Financial (NASDAQ:KCAP) Q3 2016 Earnings Conference Call November 3, 2016 9:00 AM ET

Executives

Dayl Pearson - Chief Executive Officer

Ted Gilpin - Chief Financial Officer

Analysts

Operator

Good morning, ladies and gentlemen, and welcome to the KCAP Financial Inc. Conference Call. An earnings press release was distributed yesterday. If you did not receive a copy, the release is available on the Company’s website at www.kcapfinancial.com in the Investor Relations section. As a reminder, this conference call is being recorded today, Thursday, November 03, 2016.

This call is also being hosted on a live webcast which can be accessed at our Company’s website at www.kcapfinancial.com, in the Investor Relations section under Events.

Today’s conference call includes forward-looking statements and projections and we ask that you refer to KCAP Financial’s most recent filings with the SEC for important factors that would cause actual results to differ materially from those projections. KCAP Financial does not undertake to update its forward-looking statements unless required by law.

I would now like to introduce your host for today’s conference, Mr. Dayl Pearson, President and Chief Executive Officer of KCAP Financial. Mr. Pearson, you may begin.

Dayl Pearson

Thank you. Good morning and thank you for joining KCAP Financial for a review of our third quarter 2016 results. Today, I will review some of the important highlights and activities from the third quarter as well as provide some context for our direct lending business and the performance of our Asset Manager Affiliates.

I will then turn the call over to our Chief Financial Officer, Ted Gilpin, who will provide a brief recap of our third quarter operating results and our financial condition at the end of the quarter. We will then open the line for your questions at the end of the call.

A presentation outlining a few of our key accomplishments during the quarter can be found on the IR section of our website.

To start let me provide a brief recap of some of the important highlights from the third quarter which are summarized on slide three of our earnings presentation. For the third quarter of 2016, our NII was $0.12 per share. Our third quarter shareholder distribution was $0.15 per share consistent with the $0.15 paid in the first and second quarter of 2016. This does not include approximately $0.02 per share in cash distributions from Asset Management Affiliates [Indiscernible].

I would now like to discuss the performance of our loan and securities business and Asset Management Affiliates in more detail.

Turning to Slide 4, during the quarter we invested approximately $17 million in new originations. This is primarily funded by repayments and sales and placeholder assets. These new loans had a yield slightly less than the assets they replaced. We have also experienced an increase in repayments and repricings as a result in increased strength in the credit market, although the middle market [Indiscernible]

Credit quality over the portfolio continues to be strong with only one nonaccrual loans representing less than 1% of the company’s total investments as of September 30, 2016. We continue to monitor our portfolio closely especially those in [Indiscernible].

KCAP originations have slowed during Q3, Q3 is generally a slow quarter for originations as [Indiscernible] aggressive pricing structures. KCAP continues to be judicious and focused on credit underwriting and has a growing pipeline of new deals.

During the third quarter, KCAP monetized its investment in DVI, which included realized gains and warrants of approximately $4.5 million. In terms of the market for new CLO phones, the environment has improved in Q3 and continues positive momentum into Q4. We continue to warehouse for an ex- CLO phone and the warehouse provider has increased warehouse capacity in the third quarter due to favorable market conditions.

Projected CLO issuance although lower than 2015 prices increased recently indicated resiliency and appeal of the CLO product. We continue to be positive regarding our ability issuing new CLO phones in the future.

As of September 30, 2016 our weighted average mark-to-market value to par on our debt securities portfolio was 95, consistent with the same market in the second quarter of 2016. As far as the CLO portfolio, our weighted average mark-to-market value to – was 50 at September 30, a decrease from the weighted average mark-to-market, higher 51 for the second quarter of 2016.

Our 100% ownership with our Asset Management Affiliates was valued at approximately $43 million based upon assets under management and positive and perspective cash flows at September 30, 2016. Our investment portfolio at the end of the quarter totaled approximately $372 million.

At the end of the third quarter, debt securities totaled approximately $264 million and represented about 71% of the investment portfolio. First lien loans represent 76% of debt securities and junior loans 15%.

All CLOs managed by KDA and Trimaran continue to be current on equity distributions and management fees. The stable income stream from our Asset Manager Affiliates allows them to make periodic distributions to us. During the third quarter, they made a distribution of $750,000 to the company.

Additionally as of September 30, our Asset Manager Affiliates had approximately $2.6 billion of par value assets under management. As always, we continue to evaluate our equity and debt financing options, which will allow us to focus on continued balance sheet growth, increasing net investment income, and dividend distributions.

And now, I’ll ask Ted Gilpin, to walk through the details of our financials.

Ted Gilpin

Thank you, Dayl. Good morning, everyone. As of September 30, 2016, our net asset value stood at $5.38, which is down from $5.45 at the end of the second quarter of 2016 and down from $5.82 as of December 31, 2015.

As Dayl mentioned, the company declared a $0.15 distribution in the third quarter of 2016 consistent with the second quarter as well as the fourth quarter of 2015. Net investment income was $4.5 million or $0.12 per basic share for the third quarter of 2016 down from $5.1 million or $0.14 per basic share for the second quarter of 2016 and down from $6.5 million or $0.18 per basic share for the third quarter of 2015.

At this point, I’d like to discuss the details of our third quarter results. Interest income on our debt securities for the quarter ended September 30, 2016, was $5.2 million essentially flat compared to the second quarter of 2016 and down from $6.3 million for the third quarter of 2015.

Our debt securities portfolio contribution to total investment income for the third quarter of 2016 was 58%. Debt securities portfolio contributed total investment income from the nine months ended September 30, 2016 57% compared to 52% for the corresponding period of 2015.

Investment income from the CLO fund securities was $3.5 million in the third quarter 2016 compared with $3.4 million in the second quarter of 2016 and $3.9 million in the third quarter of 2015. The Asset Manager made a distribution of 750,000 or 40.02 per share compared to 850,000 or $0.02 per share in the second quarter of 2016.

None of the third quarter 2016 distribution in the asset manager affiliates is estimated to be a taxable dividend. The company recorded net realized and unrealized appreciation of investments of approximately 1.7 million or $0.05 per share during the second quarter, during the quarter ended September 30, 2016 primarily attributable to our investment our asset manager affiliates and CLO Fund Securities as compared to net realized and unrealized appreciation of approximately 2 million of $0.05 per share in the second quarter of 2016. And net realized and unrealized appreciation of approximately $22.4 million or $0.61 per share in the third quarter of 2015.

On the liability side of our balance sheet, as of September 30, 2016, the par value of our debt outstanding was $181.4 million consisting of $34 million of senior notes due in October of 2019, with a fixed rate of 7.375% and $147.4 million of our on balance sheet debt securitization, financing transactions which has a stated interest rate that resets quarterly.

In the previous quarter, we had convertible notes matured which were repaid on March 15, 2016. Our asset coverage ratio at quarter-end was 207%, above the minimum required of 200% for BDCs.

For additional information, regarding the above metrics for the third quarter of 2016 result please refer to our earnings release and our recently filed 10-Q. All of our filings are available online with the SEC at sec.gov or on our website at kcapfinancial.com.

I now like to turn it over to you for your questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question is from [Angelo Garena]. Your line is now open.

Unidentified Analyst

Good morning, thanks for taking my question. So I was going back through your CAD reconciliations just for the -- for this year. And I just want to make sure I understand, how your reporting this?

If you go back to your Q1, you show that you had 17 available distributed 15, and then you show the difference as a minus 2. And now you're what you've distributed is greater than available and you're still showing as a negative quantity. Can you, can you let me know it was that just a typo or are you trying to say something in Q1 that was different than the current quarter?

Dayl Pearson

So I guess, I can give you, is do you have an investor presentation of [Indiscernible].

Unidentified Analyst

I do, the slides.

Dayl Pearson

Yes. So on page five is the is the nine-month ended for the third quarter, which is just the sum of the first three quarters.

Unidentified Analyst

Right. But if you look at Q1, if you – you have to take a moment to pull that up off your website. It shows we have 17 available and 15 out, and then it shows the difference is negative. And I'm assuming that that's just the type of that I'm not missing something that you're trying to say.

Dayl Pearson

Yes, I mean if we have 70 available, it should have been 15, it should have been a—that would have been a positive to that we under distributed in the first quarter.

Unidentified Analyst

Okay, so that you just have a typo on that.

Dayl Pearson

Well we are just double checking that while you ask us your next question.

Unidentified Analyst

Okay great. So the other question I had was now that you're over your leverage ratio, so you're tapped out your restricted from taking any more loans. Are there any other impacts on your current operations until you get back under the minimum world?

Dayl Pearson

We're actually not over, we are 207, we have to be yet at 200.

Unidentified Analyst

Oh, I’m sorry, I misheard you then.

Dayl Pearson

Yes, no we still have a little bit of room obviously we are not in a position where we want to add more debt at this point, but where we’re within the bounds of the asset coverage test.

Ted Gilpin

And we do have, because of repayments we do have a know higher than usual amount of cash which we are looking to obviously reinvest in...

Unidentified Analyst

Right. In the CLO we are expecting that risk this year?

Dayl Pearson

Well, CLOs are raised to a private placement process, which really restricts us from making any commentary. I just point to the fact that during the quarter, the warehouse provider did increase the amount they were allowed to warehouse without having us to increase our first loss, and so you can read into that whatever you want, but unfortunately we're in a in a quiet period on that moment.

Unidentified Analyst

Okay. Will that be something that you will since it is done through party, will that be a press release through KCAP or do we monitor its...

Dayl Pearson

Now KCAP will issues a press release when we probably when we price the deal.

Unidentified Analyst

Okay.

Dayl Pearson

So yes that will that will show up as it has in the past on our --sec announcements.

Unidentified Analyst

And just I guess one follow up question, why you're looking that up is has it -- over the last I have been a investor for a few years now, so from your perspective, have you -- are you thinking about where you are going, differently then you did two years ago. How do you see next year, and how would how does that compare to where you might have seen next year two years ago? As far as compared to what -- how you see your own company where it's going?

Dayl Pearson

Yes, I think that's a great question. I think the board is constantly looking at different strategic alternatives for the company and we are working on a number of different potential projects to be able to enhance shareholder value. I can't really go into the details of that, but I people should take away from this is the board's just not sitting there waiting for something to happen. They have task management with looking for alternative ways of growing the company in the NNI, without issuing shares and there are some opportunities to do that.

Unidentified Analyst

But, but with that change, things that would change the nature and character of KCAP fundamentally I mean or just putting the focus on the things that you already doing.

Dayl Pearson

Yes I think that's fundamentally in terms of our core competencies, our core competencies are not investment-grade corporate credit both on the probably syndicated side of the middle market side and the idea is how do you leverage that core competence -- core competencies and growing an environment where issuing new stock is really not a alternative at the moment, and we assume...

Unidentified Analyst

So you're not necessarily creating new businesses or new markets, but rather expanding your current businesses into...

Dayl Pearson

Expanding our current business through alternative means to get leverage what we have is I think of when you look at the track record both the CLO manager and KCAP in terms of credit performance, I think you argue as we can leverage that in otherwise.

Unidentified Analyst

Okay, thank you.

Dayl Pearson

Thank you for your questions. Do we have...

A – Unidentified Company Representative

The first question I had at the back is around the $0.02 of deposit of $0.02.

Unidentified Analyst

So it’s just typo.

Dayl Pearson

Yes.

Unidentified Analyst

Okay. Thank you for taking my questions.

Dayl Pearson

Thank you.

Operator

[Operator Instructions]

At this time I am showing no further questions.

Dayl Pearson

Okay, well thank you very much for taking the time to listen. We know it's very busy with lots of people reporting over the last few and next few days. So thank you all for listening and we will be talking to you again soon. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today conference. This concludes the program. You may now disconnect. Everyone have a great day.