Triangle Capital's (TCAP) CEO Ashton Poole on Q4 2017 Results - Earnings Call Transcript
Triangle Capital Corporation (NYSE:TCAP-OLD) Q4 2017 Earnings Conference Call March 1, 2018 9:00 AM ET
Executives
Ashton Poole - Chairman and Chief Executive Officer
Steven Lilly - Chief Financial Officer
Tommy Moses - Vice President and Treasurer
Analysts
Ryan Lynch - KBW
Chris York - JMP Securities
Robert Dodd - Raymond James
Joe Mazzoli - Wells Fargo
Christopher Testa - National Securities
Mark Drucker - Jefferies
Operator
At this time, I would now like to welcome everyone to the Triangle Capital Corporation’s Conference Call for the Quarter and Year Ended December 31, 2017. All participants are in a listen only mode. A question-and-answer session will follow after the Company’s formal remark [Operator Instructions]. Today’s call is being recorded and a replay will be available approximately two hours after the conclusion of the call on the Company’s Web site at www.tcap.com, under the Investor Relations section.
The hosts for today’s call are Triangle Capital Corporation’s Chairman and Chief Executive Officer, Ashton Poole, and Chief Financial Officer, Steven Lilly. I will now turn the call over to Tommy Moses, Vice President and Treasurer, for the necessary safe harbor disclosures.
Tommy Moses
Thank you, Briged and good morning, everyone. Triangle Capital Corporation issued a press release yesterday with details of the Company’s fourth quarter and full year 2017 financial and operating results. A copy of the press release is available on our Web site.
Please note that this call contains forward-looking statements that provide other than historical information, including statements regarding our goals, beliefs, strategies, future operating results, and cash flows. Although, we believe these statements are reasonable, actual results could differ materially from those projected in forward-looking statements.
These statements are based on various underlying assumptions and are subject to numerous uncertainties and risks, including those disclosed under the sections titled Risk Factors in Forward-Looking Statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 as filed with the Securities and Exchange Commission. TCAP undertakes no obligation to update or revise any forward-looking statements.
At this time, I’d like to turn the call over to Ashton.
Ashton Poole
Thanks, Tommy. Good morning everyone. Thank you for joining us on today’s earnings call. Before Steve and I provides you with some color regarding our financial and operating results, let me first say that the evaluation of certain strategic alternatives that our Board is considering is still ongoing. As a result, while we look forward to sharing with you the result of the process once it is concluded, for obvious reasons relating both to preserving the integrity and confidentiality of the process, we will not be making any comments nor answering any questions regarding the strategic process on this earnings call.
With that introduction, let me turn to a few high level comments regarding our fourth quarter and full year 2017 results. After which, I will provide some color on our investment portfolio. During the fourth quarter of 2017, we generated total investment income of $31.7 million, which was comprised of $27 million of revenue associated with recurring portfolio company interest and fee income and $4.7 million of revenue associated with non-recurring fees and dividends. The majority of our non-recurring fee income during the quarter was associated with the prepayment of loans across our investment portfolio, which totaled $3.5 million.
Our NAV on a per share basis increased by $0.23 from $13.20 to $13.43, relating primarily to unrealized depreciation on our current portfolio of $0.11 per share and over earning our dividend by $0.08 per share. From an investment standpoint, during the fourth quarter, we originated $92.2 million of total investments of which $74.2 million were new investments and $18 million were follow on investments. Consistent with our TCAP 2.0 investment strategy, our new investments were comprised of $42.5 million in unitranche investments, $29 million in second lien investments, $500,000 in mezzanine investments and $2.2 million in equity investments. During the fourth quarter, we experienced $171.9 million in repayments and sales proceeds, resulting in a net portfolio decline of $79.7 million.
For the full year 2017, we originated $483.7 million in total investments. Of which, $408.9 million were new investments. The weighted average interest rate associated with all our new debt investments was 9.9%. We experienced $403.7 million in repayments and sales proceeds, resulting in net portfolio growth of $80 million.
Turning to our investment portfolio. As of December 31, 2017, we had investments in 89 portfolio companies with an aggregate cost of $1.12 billion and total fair value of $1.02 billion. The weighted average yield on our outstanding debt investments was approximately 11% compared to 11.7% as of December 31, 2016. The weighted average yield on all our outstanding investments and excluding non-accrual debt investments was approximately 9.6% compared to 10.2% as of December 31, 2016.
During 2017, we had 21 portfolio company loans repaid at par totaling $332.5 million and we received normal principal repayments, partial loan prepayments and PIK interest repayments totaling $54.5 million. We received proceeds related to the sales of certain equity securities, totaling $29.6 million and recognized net realized gains on such sales totaling $20.9 million. We recognized $72.3 million of realized losses related to the restructuring, write-off or sale of our investments in certain portfolio companies, including CRS Reprocessing, Capital Contractors, DCWV Acquisition Corporation, Dialog Direct and Waste Recyclers Holdings.
As of December 31, 2017, the cost basis of our non-accrual assets was $120.1 million and totaled 10.7% of our investment portfolio. And the fair value of our non-accrual assets was $15.8 million and totaled 1.6% of our portfolio on a fair value basis. From a credit quality standpoint, we did not place any additional accounts or non-accrual status during the fourth quarter of 2017. During the fourth quarter, we exited our Investments in Dialog Direct and DPII Holdings, and we also restructured our investment and CRS Reprocessing. Of the eight remaining non-accruals, four are currently valued at zero and one investment, GST AutoLeather Inc, has a nominal value based on recovery expectations.
Four of these accounts experienced meaningful depreciation during the fourth quarter from a valuation standpoint. In each case the client related specifically to company performance. Finally, as we take steps to reinvest the $171.9 million in portfolio company repayments and sale proceeds, we experienced during the fourth quarter, we expect our first quarter 2018 NII per share will be slightly below our $0.30 per share dividend.
And with that, I’ll turn the call over to Steven.
Steven Lilly
Thanks, Ashton. As Ashton previously mentioned, during the fourth quarter, we generated total investment income of $31.7 million. This level of investment income compares to total investment income of $29.9 million during the third quarter. The increase in our quarter-over-quarter total investment income resulted primarily from $4.7 million of non-recurring dividend and fee income during the fourth quarter as compared to non-recurring dividend and fee income during the third quarter of 2017 of $2.1 million, representing an increase of $2.6 million during the quarter. This increase was offset by a decrease in portfolio debt investments from the third quarter to the fourth quarter.
During the fourth quarter, interest expense and other financing fees totaled $7.8 million as compared to $7.4 million during the third quarter. Our compensation expenses totaled $4 million during the fourth quarter as compared to $4.3 million during the third quarter of 2017. The quarter-to-quarter decrease in compensation expenses primarily related to a decrease in discretionary compensation expenses.
G&A expenses totaled $2 million during the fourth quarter of 2017 as compared to $1 million during the third quarter of 2017. The increase primarily related to increased legal and other professional service fees, including public company expenses. From an efficiency ratio standpoint with efficiency ratio being defined as total compensation and G&A expenses divided by total investment income, our fourth quarter efficiency ratio was 18.8% compared to 17.9% during the third quarter.
Net investment income during the fourth quarter was $17.9 million or $0.38 per share as compared to $17.2 million or $0.36 per share during the third quarter. During the fourth quarter, we recognized net realized losses totaling $34.6 million relating primarily to $25.3 million of losses on the restructuring of our investments in CRS Reprocessing LLC and $10.9 million of losses on the sales for our investments in Dialog Direct Inc and DPII Holdings LLC.
From valuation perspective, we recorded net pre tax unrealized appreciation on our current investment portfolio totaling $5.3 million for the quarter, largely driven by $21.5 million or right offs in 11 strong performing equity investments, including right offs in MD Products Inc for a total of consultancy, Pay Low Branded Solutions Inc, United Biologics LLC and Nomacorc, LLC. In addition, we had debt write offs of $5.1 million associated with the 2018 repayments of all Metals Holdings LLC, Nomacorc, LLC and United Biologics LLC. These write offs were partially offset by $15.6 million in write downs associated with our non-accrual debt investments and $5.7 million in write downs associated with certain debt investments, including PCX Aerostructures LLC, Passport Food Group, Technology Crops LLC, HTC Borrower, LLC and Lakeview Health Holdings Inc.
As a result of these events, our net increase and net assets resulting from operations during the fourth quarter totaled $23.7 million. And on a per share basis, our net increase in net assets resulting from operations during the fourth quarter was $0.50 per share. Our total net assets were $641.3 million as of December 31, 2017 and our net asset value per share at December 31, 2017 was $13.43 as compared to $13.20 as of September 30, 2017, and $15.13 as of December 31, 2016.
For the full year ended December 31, 2017, total investment income was $123 million as compared to $113.7 million of federal investment income for the year ended December 31, 2016. The change in investment incomes primarily attributed to an increase in our overall investment portfolio and $2.8 million increase in non-recurring fee and dividend income. These events were partially offset by a decrease in the weighted average yield on our debt investments from 2016 to 2017 and the decrease in investment income relating to non-accrual assets.
During 2017, interest expense and other debt financing fees totaled $29.3 million as compared to $26.7 million for 2016 with the increase relating to the additional borrowings under our senior secured credit facility. A higher overall interest rate associated with the increase in LIBOR during the year and an amendment to our senior secured Brent facility, which extended the maturity to April 31, 2022. For the year ended December 31, 2017, compensation expenses totaled $16.1 million as compared to $23.7 million for the year ended December 31, 2016.
Compensation expenses for the year ended December 31, 2016 include previously announced one-time item, totaling $7 million relating to the requirement of the Company’s former CEO and the resignation of the Company’s former CIO. In addition to the impact in 2016 of the one-time charges noted above, 2017 compensation expenses were $600,000 lower -- 2017 compensation expenses were $600,000 lower than 2016 primarily related to lower discretionary compensation.
For the year ended December 31, 2017, general and administrative expenses totaled $5.4 million as compared to $4.4 million for the year ended December 31, 2016. For the year ended December 31, 2017, our efficiency ratio was 17.5%, which we believe continues to be one of the lowest efficiency ratios in the BDC industry.
Our 2017 net investment income was $72.2 million or $1.55 per share as compared to $58.9 million or $1.62 per share during the year ended December 31 2016. Net investment income for 2016 included the $7 million of one-time compensation expenses that I just mentioned, which had an impact of $0.19 per share. During the year 2017, we recognized net investment losses totaling $51.6 million. Also during 2017, we recorded net unrealized depreciation totaling $48.4 million. As a result of these events, our net decrease in net asset resulting from operations during the year ended December 31, 2017 totaled $28.7 million. On a per share basis, our net decrease in net assets resulting from operations during 2017 was $0.62 per share.
Finally, from a liquidity and capital resources perspective, as December 31, 2017, our current liquidity totaled approximately $545 million, consisting of combination of cash on hand, available bank borrowings and SBA debentures.
And with that, operator, we will open the call for questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from the line of Ryan Lynch with KBW. Your line is open.
Ryan Lynch
I was just curious have you guys been seen any push back from potential borrowers are looking for capital from TCAP dividend, just the uncertainty surrounding the company’s future given the strategic review.
Ashton Poole
We have been and continue to be active in the market, thanks for our long standing history of the company and the longevity of our senior coverage officers where we have extremely good relationships in the financial sponsor community, and those relationships continue and our dialogue and our flow continue.
Ryan Lynch
And then from the G&A side, and obviously G&A bumped up this quarter given the things that are going on in the company, as that process continues in the first quarter. Should we expect G&A to stay at this 2 million-ish type level versus the1.1 million your guys experienced in Q1 through Q3 of ’17?
Steven Lilly
My personal opinion would be it’s probably not as high as the $2 million or the full $1 million difference, but it’s probably not equal to where we were last year. We will have certain other expenses. I would imagine it will flow through. But I think in the fourth quarter, you saw more of those as we were gearing up for things so to speak.
Ryan Lynch
And then, I believe you guys mentioned in prepared remarks $21.5 million of appreciation due to 11 stronger performing equity investments. I was just curious of the $21.5 million of write-offs in these equity investments, was any of that driven by favorable changes due to tax reform getting in place or are these just companies that are just have been stronger underlying fundamental trends?
Ashton Poole
Ryan, in the equity write-off this quarter, there was a significant grouping that accounted for equity changes over a million dollars in terms of write-offs, and that total of about $0.45 per share. That was about 11 companies, and seven out of those 11 companies are in active M&A processes. So to answer your question, the write-offs were primarily driven more by M&A related processes as opposed to tax changes.
Operator
Our next question comes from the line of Chris York with JMP Securities. Your line is open.
Chris York
So Ryan touched on three of them, so I’ll switch to couple others. I believe your senior loan investment in the Passport originated about a year ago under the Triangle 2.0 strategy, and the valuation of the mark has declined over the last two quarters. So could you help me understand or describe some of the inputs driving the deterioration and what was not anticipated at underwriting?
Ashton Poole
Just to recount for everyone, Passport is manufacturer agent and other ethnic food products, and they saw primarily through the food service and retail club channels. This quarter, the senior debt investment is valued at 85% of costs versus 90% of costs last quarter. The primary driver of the decline in performance was the unexpected loss in Q3 of the Company’s key product line. And that loss resulted in lower sales and contributed to the performance decline. Since that time, they have revamped their business plan. They have a pipeline that’s robust for new customers and products. But that shift is going to take a little bit of time in order to rebuild the lost sales related to the key product line was lost. So we still believe in the company long-term. We believe operational performance will improve. But write-down this quarter was based on the slight delay in the expected improved performance.
Chris York
Over the last couple of years, you have received management and other fees from SRC. Do you expect to receive these fees going forward as a result of STV with CRS?
Steven Lilly
At this point, there is not anything that we see with the company that would change that view. Obviously, your question is future looking. But you will forgive us if we -- so we can’t foretell what may happen in ultimate quarters. But right now, that’s our consistency.
Operator
Our next question is from the line of Robert Dodd with Raymond James. Your line is now open.
Robert Dodd
The first one you probably not going to answer, or don’t want to answer about the process. I mean, you did declare or scheduled your Annual General Meeting for 2nd of May. Is that -- do you have any reasonable expectations that you’re going to be able give shareholders a more seller update on the strategic review process by that date?
Steven Lilly
As I’m sure you know and appreciate, 48 companies have to declare their Annual Meeting within the certain number of days from year-end. And so that’s the time we’ve always had our meeting and so we in the normal course, which is how the company provide some comments earlier as operated had scheduled that meeting and we’ll look forward to posting that meeting. And as we said in prepared remarks, we can’t make any comment on the strategic process. But when there is something to announce at the conclusion of it, we will announce what we can.
Robert Dodd
It was worth of short. On the portfolio, obviously, so markdowns on the non-accruals, I don’t think any great shocks there. True that you mentioned on markdowns on other non-accrual assets of that 5.7, some of that was PCX, some of that was technology comps and a couple of others, those two were already what I would lump in -- I mean they were marked below 80% of cost last quarter. Obviously, they come down a little bit more this quarter. When you talked about the non-accruals, obviously the marks for the non-accrual were company specific issues, the PCX Technology comps they were already having issues. Have those issues deteriorated even further? And any visibility on a probability that those issues could continue to accelerate and potentially become an incremental non-accrual?
Ashton Poole
Let me start with PCX quickly. Just as a quick reminder, they manufacturer close tolerance aerospace components that are used in military and civilian aircraft. This is 2014 investment for us. It’s valued at 72% this quarter versus 79% last quarter. The one thing of note here is that the company completed a debt recap in the first quarter of 2018. And fundamentals behind the company are actually much improved. The primary driver of the write downs this quarter was an adjustment of our interest rate as part of an all encompassing recap of the company.
And so it was a reduction in our interest rate from 10.5 down to 6 that was the primary driver of the write down this quarter. So I think from where we sit, we feel very encouraged by the progress of the company and the backlog of the company and the overall environment for defense spending. So I think again the key driver of the write down was the interest rate reduction.
Steven Lilly
Rob just to say on technology cost that you mentioned as well, as you know, that was a 2009 investment for us. It’s, last quarter I think was valued at 77% of cost this quarter 70% of cost, so it’s a write down of about $800,000. Based on restructuring at the company, we amended our sub-debt terms and we have reduced our -- I think our rate was 12% and 5%, 12% cash so just simply 12% cash. So here again there is normal change in the operations of the company, because it’s similar to PCX given the lower economics we are receiving that mathematically produce the write down.
Robert Dodd
Obviously, action you addressed in response to earlier question that you’ve relationships with the private equity community continue. But when we look at how much if any -- how much of the lower level of origination in the fourth quarter could you allocate, but obviously it’s a competitive market and quarters are choppy. But is there any allocation of that that could be pointed to serve as a result of, for lack of a better term, management distraction you’ve had another large project with the view for everybody on ongoing during that process, has that reduced the amount of time available for management and originators to get out and make calls threshold to speak and originate deals?
Ashton Poole
With respect to -- I think you said a lower level of originations in Q4 2017. I would just point out if you did say that I guess I would respectfully disagree with that characterization, at $92 million that’s very consistent with previous quarters in which the typical level of origination that’s very much in line with how we’ve originated in the past. So I’d say we’re very proud of the level of originations that we had in the quarter and it’s again a reflection of our relationships.
Certainly, the strategic process has taken management time, but we’ve been very disciplined and focused on our outreach in our origination efforts. And again, I would just say that our touch points our flow and our level of dialogue with our financial sponsor community has never been stronger. As you can imagine we’re being very proactive in reaching out to our sponsor network and ensuring that we stay in their flow and we stay top of line.
Operator
Our next question comes from the line of Jonathan Bock with Wells Fargo Securities. Your line is open.
Joe Mazzoli
So the first question is a two part question. So we see about $191 million of cash on the balance sheet as of 12/31. So is this -- do you leverage in part of the strategic review in terms of just increasing optionality. And then also I guess we would assume that you would use this cash to pay down the credit facility?
Steven Lilly
The amount of cash we have on the balance sheet at the year end is in no way related to anything particular to the board’s reviewed of strategic alternatives. It’s just the timing difference it’s sometimes associated when you have more repayments than investments. And to the part of your question why the senior credit facility hasn’t been paid down with that cash. As I’m sure you can appreciate with your knowledge of the company majority of this cash is held at our SBIC funds. And so lots of it is held at the, what we would call, holding company where the credit facility legally is.
And the credit facility would be unused that as I’m sure you’re aware the credit facility has. And even if we were to pay down, we pay down effectively the mathematical breakeven. So we technically could pay it down a little more but it wouldn’t necessary be to our benefit given the terms of it. So the holding company does have little bit more cash but it’s not considerably more, most of the cash is held as funds. I hope that helps.
Joe Mazzoli
That does, it totally makes sense. Thank you, Steven. And the next question is, so the stock is trading at about 0.8 times price to net asset value. And Triangle Capital has historically certainly managed the balance sheet in ways that have been very accretive for shareholders by issuing above net asset value. And stock repurchases at these levels would of course also be highly accretive to net asset value. Now we understand that the effective shareholder owned management contract becomes less valuable if there were less assets. But for more traditional M&A higher NAV per share through repurchases that would be a higher purchase price. So what are your thoughts on stock repurchases at this point? And of course is -- there is number of different scenarios under the strategic review where stock repurchases could add value?
Ashton Poole
While not deferring of anything from a mathematical computation standpoint that you might have raised, it’s a fairly simple matter from a legal standpoint and we discussed this a bit on the third quarter call that our Board is involved with and therefore the company with review of strategic alternatives for the company to be in the market buying its own stock. While at the same time, it is perhaps aware of material non-public information. I’m sure, you can understand the conflict that that would create. And that’s not something that we as a management team, nor our board would be comfortable with. And so any of this -- everything you alluded to frankly just not possible right now from our standpoint. And so any of that type of activity would not occur until after we -- the board has included in its review of strategic alternatives.
Joe Mazzoli
The combined fair value of CRS increased from about $8 million to $20 million and it look s like this investment was restructured. I’m just curious what led to the fair value improvement?
Ashton Poole
It’s really two things. Number one, during the fourth quarter, there were incremental investments made. So that accounts for a portion of the change. Number two, when the company -- when CRS emerged from bankruptcy then we had a third-party valuation firm to a fresh start accounting analysis, which was helpful to our board in establishing valuation of that single asset. And then during the fourth quarter, CRS Reprocessing LLC was merged with SRC, they know their portfolio company. And so what you’re seeing in the fourth quarter is the combination of both those values.
Operator
And our next question comes from the line of Christopher Testa with National Securities. Your line is open.
Christopher Testa
Just curious how much of the problem assets, meaning anything that’s been written off as well as accrual and non-accruals are within the SBIC?
Steven Lilly
I don’t have that breakdown in front of me. So we can follow up after the call with you if you look like.
Christopher Testa
And just touching on Joe’s question about your leverage position a little bit. I’m just curious obviously with you guys below book and not able to really issue equity. How comfortable you would be in the current environment taking up total debt to equity?
Steven Lilly
Well, given the amount of cash we’re sitting on right now, I don’t think we’re in the market to do anything from a leverage standpoint. We also obviously as you know have from the prepared remarks well north of $500 million of liquidity. So liquidity is not really an issue. We’ve got committed debt facility, a senior credit facility we have of the third SBIC license and good partnership with the SBA. So we’re really in good step there right now.
Christopher Testa
And can you quantify how much the TCAP 1.0 cost is remaining and of this how much has already been written off?
Ashton Poole
We don’t have that page in front of us. But we, again like your other question, we can follow up with you offline. I think a little more than 50% of portfolio has been -- has shifted if you will into what we refer to is TCAP 2.0. But again, to give you the exact breakdown, we’ll follow up offline.
Christopher Testa
And last one for me. Just given you guys obviously have a lot of subordinating second lien on the book. With tax reform how much of your portfolio is leveraged enough that the loss of interest deductibility will offset any decrease in rates where we could see cash tax as actually increase?
Ashton Poole
Chris, given the recent passage of the tax law and with our individual portfolio of companies, that analysis has not been completed. But from a total standpoint of the portfolio, we don’t believe there is -- based on where our leverage point is regardless of whether we’re unitranched or second lien or a mezzanine position. We don’t foresee that to be really much of a change when you net it all out.
Operator
And our next question comes from Mark Drucker with Jefferies. Your line is open.
Mark Drucker
Any additional color you can share on new issued bond yields by category?
Ashton Poole
Mark, your question broke up on the line there…
Mark Drucker
So you shared 9.9% on new debt investments the average yield. I was wondering can you share anything in addition to that in terms of yields by category?
Ashton Poole
Well, investments made during the quarter, you’re just asking are they worth to what did they range between or are you asking what type of securities were invested in if they’re first lien or second lien?
Mark Drucker
No, the yield specifically. So by category, what were the yields in relation to where the portfolio stands today during the quarter?
Ashton Poole
I think they’re consistent with the overall portfolio. One in first quarter -- I mean fourth quarter. Just typical I mean in general Mark to answer your question for the Q4 investments, the unitranche investments would have been made around the call it 7.5% to 8.5% debt way, if you will. The second liens would have been in the call it 8% to 10% range for those investments. Does that help?
Mark Drucker
Last question from me. Any ends to that you can share on prepayment and repayment trends over the next couple of quarters. I know it’s difficult to predict.
Ashton Poole
It’s really impossible to pretend unfortunately. We had elevated repayments in the fourth quarter. But if you were to go back and look at the company on a quarter-to-quarter basis then you would see that it really does jumps around. We had -- the last two quarters of 2017, we were in the third quarter $131 million or so in repayments and closer to about $143 million or so including equity realizations. Then in the second quarter, we were at $35 million in the first quarter, we were between $53 million and $54 million. And as you know, we announced where we said in the prepared remarks we’re $171.9 million in the fourth quarter. So it really does go in ways and you just can’t really predict one way or the other unfortunately.
Ashton Poole
Well, we’re showing no further questions. So Briged, thank you for call and we will conclude at this time.
Operator
Ladies and gentlemen, this does conclude the program and you may now disconnect. Everyone have a wonderful day.
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