THL Credit, Inc. (NASDAQ:TCRD) Q4 2018 Earnings Conference Call March 7, 2019 10:30 AM ET
Sabrina Rusnak-Carlson - General Counsel and Chief Compliance Officer
Christopher Flynn - Chief Executive Officer
James Fellows - Chief Investment Officer, THL Credit Advisors
Terrence Olson - Chief Financial Officer and Chief Operating Officer
Conference Call Participants
Leon Cooperman - Omega Advisors, Inc.
Kyle Joseph - Jefferies LLC
Leslie Vandegrift - Raymond James & Associates
Christopher Testa - National Securities Corporation
David Miyazaki - Confluence Investment Management LLC
Thomas Wenk - JMP Securities LLC
Ryan Lynch - Keefe, Bruyette & Woods, Inc.
Good morning, and welcome to THL Credit's Earnings Conference Call for its Fourth Fiscal Quarter ended December 31, 2018.
It's my pleasure to turn the call over to Ms. Sabrina Rusnak-Carlson, General Counsel and Chief Compliance Officer of THL Credit. Ms. Rusnak-Carlson, you may begin.
Thank you, operator. Good morning, and thank you for joining us. With me today are: Chris Flynn, our Chief Executive Officer; Jim Fellows, our Advisers Chief Investment Officer; and Terry Olson, our Chief Operating and Chief Financial Officer.
Before we begin, please note that the statements made on this call may constitute forward-looking statements within the meaning of the Securities Act of 1933 as amended. Such statements reflect various assumptions by THL Credit concerning anticipated results that are not guarantees of future performance and are subject to known and unknown uncertainties and other factors that could cause the actual results to differ materially from such statements. The uncertainties and other factors are in some ways beyond management's control and include the factors included in the section entitled Risk Factors in our most recent Annual Report on Form 10-K as updated by our periodic filings with the Securities and Exchange Commission.
Although we believe that the assumptions on which any forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate and as a result, the forward-looking statements based on those assumptions also could be incorrect. You should not place undue reliance on these forward-looking statements. THL Credit undertakes no duty to update any forward-looking statements made herein. All forward-looking statements speak only as the date of this call.
Our earnings announcement and 10-K were released yesterday afternoon, copies of which can be found on our website, along with the Q4 Earnings Presentation that we may refer to during this call. A webcast replay of this call will be available until March 17, 2019 starting approximately two hours after we conclude this morning. To access the replay, please visit our website at www.thlcreditbdc.com.
With that, I'll turn over the call to Chris.
Thanks, Sabrina, and good morning, everyone. On our earnings call last March, we announced a specific plan for 2018, intended to reduce the risk in our portfolio and provide better alignment with our shareholders. We are very pleased with our execution thus far.
But that being said, however, we recognize that our stock price have declined during this period and based on feedback from our shareholders, we understand there are two main areas of uncertainty driving this.
First, NAV stability and second, the dividend. We are in a better position today, given the execution of our plans to address both of these topics. On today's call, in addition to talking about the progress made in 2018, I'll provide more detail on the concentrated credits in our portfolio and our outlook and address the future earnings power of our portfolio.
Before I do that, let me briefly cover the financial highlights for the quarter. First, our net investment income of $0.23 per share for the quarter, after adjusting for one-time costs associated with our bond refinancing, was $0.26 per share, which is basically in line with our Q4 dividend of $0.27.
Secondly, the NAV for the quarter declined by 9.4% to $9.15 per share, largely due to outsized positions Charming Charlie and LAI. Marks related to the Logan joint venture and other certain credits, which were largely related to market volatility in the Q4 contributed to the decline as well.
Last March, we highlighted four specific action items for 2018 that covered the monetization of non-income producing holdings, the core growth of our assets in first lien and Logan joint venture, improve diversification and our continued commitment to remain aligned with our shareholders.
The goal to reduce the risk in the portfolio ultimately narrowed the gap between our stock price and book value. We've made considerable progress on these objectives in 2018 and expect to do so further in 2019.
First, we achieved our goal and monetized over 50% of our non-income equity-producing investments, with the realization of Tri Starr in October and by moving Copperweld to income producing earlier this year. Second, we continued to grow Logan and our first lien assets, which now together represent 84% of the portfolio, up from 78% as of 12/31/17.
Third, we improved the diversification by adding smaller positions and exiting more concentrated positions. The average investment size of the new nine investments made by TCRD in 2018 was only 1.5% based on the fair value, and we reduced the number of positions that are greater than 2.5% of our portfolio from 14 to 11. I'd like to pause here and walk you through the remaining 11 credits that are concentrated.
Slide 16 in our earnings presentation shows our investments by size. While we are proactively monitoring all of the concentrated positions, we are specially focused on four key names, OEM, Charming Charlie, LAI and Holland, which together represent approximately 19% of the portfolio at 12/31. The other seven credits are generally performing in line with our expectations and several are in either active sale or refinancing processes.
First, I'll address the OEM. It's our largest position. As a reminder, there is no other third-party debt in the capital stack, and as the majority owner of the business, we've taken a number of steps to stabilize it.
We provided additional capital in 2018, and have been actively working with the management team and its advisers on several product development, operational, sales initiatives in the past year. We expect to continue this into 2019 to drive better performance and position the company for a sale in late 2019 or early 2020.
Next, let me address Charming Charlie and LAI, which combined contributed over 60% of the decline in our NAV this quarter. Charming Charlie actually had a very strong quarter with increased traffic levels and double-digit positive comp store sales across its store footprint.
We have actively led efforts with other constituents in the early part of 2019 to review the capital structure, refinancing an existing asset-based lender. The company completed this refinancing last week and looks well positioned ahead of its important spring selling season with adequate inventory levels.
The notable markdown of the investment in Q4 reflects lower multiples in the retail sector that continue to face headwinds, lower growth expectations for the company in 2019 and the uncertainty regarding liquidity at the end of the year 12/31/18. As we said before, we addressed this refinancing – we addressed this liquidity risk last week with the refinancing.
And as I noted before, we've provided an extended runway for the management team to continue to execute. Our term loans, however, will move to non-accrual status in the fourth quarter when we move the Charlie credit to a five score.
Moving on to LAI, which was marked down for the quarter, is a provider of comprehensive engineering, manufacturing and quality control solutions and components. Persistent delays in certifying certain new manufacturing lines and certain contract constraints created a notable impact on performance and liquidity, which is reflected in our markdown in Q4. The company has an active sale process, and we expect that to be completed in the next 45 days to 60 days.
Holland, a first lien investment, is one of our three remaining energy credits. The company has done well there in a projected downturn and has seen improvements on a number of fronts. The sponsor continues to support the business and liquidity remains strong. We will continue to provide as much detail as we can on these positions on our quarterly earnings calls going forward.
Now, moving on to the dividend. As I've stated on previous calls, we have not previously been comfortable providing guidance on a new dividend level, given the amount of work we had to do on the portfolio. Despite the remaining concentrations that I just mentioned, we believe that the portfolio today has less risk than it did a year ago and we are now in a much better position provide clarity on our dividend. This is based on what we know today and our look forward into 2019 and at the 2020, once the portfolio rotation is complete.
Our efforts over the past several years to shift our portfolio into a predominantly first lien floating rate asset base has resulted in a portfolio mix of lower-yielding assets. Accordingly, our Board of Directors approved the reduction of our dividend to $0.21 per share for Q1 of '19. We believe this dividend level appropriately reflects the current and sustainable earnings power of our portfolio going forward, while providing additional cushion versus our current earnings expectations.
As a result of the execution of our plan in 2018, we now have better visibility on our liquidity and early exits of certain concentrated equity positions, but the BDC now plans to use proceeds to make accretive stock repurchases under new $15 million 10b5-1 plan that we intend to put in place prior to March 15th. I want to point out historically that while the BDC did not have liquidity to buy back shares, the Advisor stepped in and provided support, purchasing over $10 million of stock under its own 10b5-1 program last year.
We have and intend to continue to ensure shareholder alignment, while we finish the execution of our plan and acknowledge the transition of our portfolio has taken longer than anticipated. As a reminder, our Advisor agreed to waive incentive fees in 2018 through the first half of '19.
We're doing more on this front in 2019, as our Advisor has agreed to additional incentive fee waivers to the extent earned through the end of the year. In anticipation of where we are heading through the rest of 2019 and to 2020, we are taking proactive steps today to position our BDC accordingly.
Our Advisor has agreed to implement changes to our fee structure that are intended to better align with what we expect will be a more diversified senior secured floating rate portfolio in the future.
Effective April 1, 2019, our Advisor has agreed to lower our base management fee from 1.5% to 1% on gross assets and lower our incentive fee from 20% to 17.5%. Our hurdle will remain unchanged at 8%. The reduction in our incentive fee is subject to a shareholder approval at our June 2019 Annual Meeting.
Once we have achieved our diversification objectives, we believe it will be accretive to our shareholders to operate with additional leverage in the 1.05 times to 1.15 times range. Our Board of Directors has approved, putting the reduced asset coverage requirement to a shareholder vote on our Annual Meeting in June. If approved and subject to further progress in diversifying our portfolio and successfully amending our credit facility, we intend to introduce additional leverage commencing sometime in 2020.
We believe the actions we've taken in 2018 and 2019 are the right ones. They will ensure a more stable and predictable return base for our BDC and our shareholders, and will position the company for continued progress in 2020 and beyond.
With that, I'll turn the call over to Jim Fellows, our CIO, who will provide a quick update on our portfolio and investment activities this quarter.
Thank you, Chris. Let me first touch upon the market environment, which continues to be competitive with tighter spreads and more aggressive structure and covenants. Amidst the market volatility in Q4, we saw little impact on spreads in the core middle-market businesses with EBITDA in the range of $10 million to $25 million.
We continue to maintain a strong credit discipline, first-sponsored lead transactions in an industry where we have a favorable outlook. We closed on $67 million of investments in Q4. This included $55 million in seven new first-lien investments, including three refinancings of existing positions. We had $12 million in follow-on transactions during the quarter as well.
We closed on three new investments totaling $12 million, subsequent to quarter end, all first lien sponsored transactions. As Chris mentioned, our co-investment capabilities across our private funds and middle-market CLOs have allowed us to take smaller hold sizes within the BDC and achieve our diversification goals. I would also point out that the increased deal flow in the second half of the year is attributable to the organizational enhancements we made in the beginning of 2018.
During the quarter, we also recognized proceeds from realizations totaling $74 million, which included the sale of our first lien and control position in Tri Starr, the repayment of our first lien loan and sale of the common equity in Constructive Media and the sale of the Duff & Phelps TRA position. Subsequent to quarter end, we also exited our remaining positions in Alex Toys and Home Partners of America.
Lastly, I would like to touch upon Logan JV, which continue to perform well and grew to 17% of the portfolio at December 31st. The $330 million portfolio, consisting of 130 issuers generated a yield of 12% for TCRD in Q4. There are no loans on non-accrual as of 12/31. The dividend yield reflects stable spread levels, a slower deployment of equity in the second half of 2018 and more selectivity on credits during Q4.
With that, I will turn the call over to Terry to give you more detail on the Q4 financial performance. Thank you.
Thanks, Jim. Good morning, everyone. First, a few portfolio highlights. At the end of 2018, our portfolio of $494 million was invested 67% in first lien senior secured debt, 17% the Logan JV as Jim mentioned. As a reminder, the Logan JV is 95% invested in first lien assets. The remaining 16% of TCRD's portfolio was held in second lien, subordinated debt and other income-producing and equity holdings.
Copperweld and C&K together represent over half of the 16% I just mentioned. You can refer to slides 13 and 14 in our earnings presentation, which highlights these trends over the last two years.
Total non-accruals as a percentage of the portfolio at fair value and costs increased to 3.7% and 7%, respectively, as Charming Charlie was moved to non-accrual in Q4 as Chris mentioned. Charming and Loadmaster are the only loans on non-accrual status at December 31st.
The weighted average yield of the debt and income-producing portfolio, including Logan, was 10.7%, down from 11.6% in Q3, reflecting the new non-accrual. Portfolio remains well positioned from an interest rate perspective with 96% of the portfolio in floating-rate loans.
Moving on to the financials for the fourth quarter. Net investment income was $0.23 per share relative to our dividend of $0.27, which included a one-time expense of $0.03 related to the write-off of deferred financing costs associated with our 2021 notes that were redeemed in November. Excluding this expense, our core earnings per share were $0.26.
Looking at some of the components of our $15.8 million of investment income this quarter. Interest income decreased from $12.2 million in Q3 to $12 million in Q4 due to the additional non-accrual. This was offset partially by increased prepayment penalties and an increased level of accelerated amortization of upfront costs in Q4 associated with exits.
Dividend income was basically flat quarter-over-quarter at $3.4 million, which was comprised of $2.6 million from Logan and the remainder largely from C&K and Copperweld.
On the expense side, total expenses for the quarter were $8.5 million compared to $7.5 million in Q3. The increase was primarily due to the acceleration of the deferred financing costs of about $920,000 associated with the redemption of the notes I mentioned earlier.
Additionally, we continue to see a reduction in other G&A and administrative cost as our direct lending platform continues to scale. The net realized gain of $6.2 million in Q4 was related primarily to our sale of Tri Starr and our investment in Duff & Phelps. These gains were already embedded in the Q3 NAV.
From a leverage and liquidity perspective, leverage levels increased to 0.74 times at 12/31, as proceeds from repayments in Q3 were reinvested in Q4, and our NAV decline from the unrealized depreciation in the portfolio Chris mentioned earlier.
We continue to target a range of 0.6 to 0.8 and expect to operate closer to 0.75 times, as we continue to reposition the portfolio in 2019. In an effort to reduce our cost of capital and as we previously highlighted in our last call, we closed on a $51.6 million public debt offering in Q4. The new notes are priced at 6.125% and are due in 2023, and are not callable for three years. Proceeds were used to redeem our 2021 notes, which had an interest rate of 6.75%.
We also intend to reduce the size of our $275 million revolver this month to $190 million to better align with the size of the portfolio going forward. We anticipate this will save approximately $425,000 per year in unused fees.
We expect the reduction in commitments under our senior facility will result in approximately $0.02 per share, one-time charge in connection with the write-off of unamortized deferred financing costs in the first quarter.
With that, I'll turn the call back over to the operator to start the Q&A session.
[Operator Instructions] Our first question comes from the line of Lee Cooperman with Omega Advisors. Your line is open.
I feel like George Washington, first in the country. Anyway, someone reminded of the novel Charles Dickens, by Charles Dickens, A tale of Two Cities, to paraphrase the best of times to worst of times. And the analogy of the best of times, I can't think of a manager that has stood more behind their product than you guys. Deferring fees, buying back stock by the manager in the company, reduced the fees, et cetera. At the worst of times, you guys have done a terrible job. We went public in '13 and change. We have a book value NAV of 9.15. We have a low return on equity. The dividend has now been reduced twice. The market cap of the company is $215 million, which is almost in a relevancy.
So what I'm looking for is an agreement or pledge that you guys would be proactive. If we can fix the company in the next 12 months, then we're going to return the money to shareholders, as simple as that, if you could. Right now, you're saying that the $0.21 dividend is covered by earnings. It's actually covered, if you pay your full fee. So, you're not subsidizing the $0.21. But if we don't start to improve earnings and improve profitability, then you guys will basically go home, give the shareholders their money and go home peacefully rather than being forced into that position. So can I get your comment on that?
All right. Thanks, Lee. It's Chris. Appreciate your comments. I'd like to first comment more than the second, but unfortunately not in a position to disagree on the overriding performance of the stock. I think as we sit back and look at the position of the portfolio today, I'm trying to give you and other shareholders context.
As we sat here at this time last year and folks were asking us questions on, can you buy your stock back at a discount, can you tell me what your dividend was going to be, the portfolio itself was not in a position where the management team felt comfortable. Now, I know the stock has underperformed because we have answered those questions, but hopefully, the market draws the conclusion.
As we sit here today, we are answering those questions. We are giving better guidance on what we think the target areas of pressure are on the portfolio, and we have set a dividend, albeit lower than where it was historically, but it's one where we feel confident through 2019 and 2020 that we're going to be in the 105% to 110% coverage, with our incentive fee being waived once we've turned back on in 2020.
So, there have been mistakes that have been made and the existing team here is doing the best we can to reposition the portfolio and drive value. It's difficult for me to opine on a commitment that you want in the future until I see how the stock continues to perform. All I can tell you right now is we're doing everything in our power to turn this thing into what we think it should be, which is a senior secured, more diversified floating rate BDC, with a very attractive fee construct that generates a 10% ROE. That's our goal. And I think we'll be able to achieve that through 2020.
Obviously, which is a fact, I mean, there's no credibility. The average BDC on March 1st was yielding about 9.6%. Your $0.84 dividend, given in the last, so $664 is a 13% yield and you are covering your dividend. It's not like you're paying a dividend in excess of your earnings and the average BDC was selling at a book value I haven't figured out 6.64 divided by, was it 9.15, right?
So, divide that by 9.15, you're selling the 73% of book versus the industry average of selling 100% of book and you are yielding 13% versus 9.6%. So, I would say, if you believe your story, you should accelerate your repurchase, get it out of the way. $15 million is about 7% of the market cap and get that out of the way right away. And I will tell you that if you don't improve the performance, it's not going to be something that's going to be in your hands, you could be forced to do something. That's all I can tell you.
Yes. Thanks, Lee. We appreciate it. And we understand and again, hopefully, as we sit back and send signals to the market as we work through this transition, the fact that, for the first time, the BDC's balance sheet in our opinion is stable enough. We have sufficient liquidity, where we can start making these accretive stock buybacks and we are trading at a substantial discount $15 million at 7.5% of our stock. We think that makes sense based on where we sit today. And obviously, we can continue to evaluate that over time based on how the stock performs.
The other thing, just like, philosophically, that I want people to understand about the team that you have working for you on behalf of you today. You're right, Lee. We had a high dividend and we chased it. We chased $0.34 and we put on incremental risk. If you think about the business fundamentals of how you invest, the team that you have today, we look at the businesses, what? We find good businesses. We have good structure and then we price it.
Historically, we are doing that inverted. We were chasing price, then we figured out the structure and then we underwrite the business. That was a bad idea. And that's what created some of these portfolio issues that we're all trying to work through. So, I'm telling you and I'm telling the other shareholders, we're doing it the right way now. We are doing it the right way now, and we will have a portfolio that people will be proud of. It just takes time. I appreciate your patience, Lee, and I always appreciate your feedback. Thanks.
The only thing I would comment is you are learning on our nickel, not your nickel. We take $13, we made it $6.65. But we are wishing you well. Believe me, we are wishing you well.
Thank you. Our next question comes from the line of Kyle Joseph with Jefferies. Your line is open.
Hey, good morning, guys. Thanks for taking my question. Given the portfolio rotation we’ve seen in not just one of the expectations on yields. We have a more conservative portfolio. We have a higher LIBOR. Logan is now a bigger contributor. So just kind of give us your outlook for yields based on the new strategy from here.
Hey, thanks, Kyle. I appreciate the question. As that I think Jim Fellows said in his prepared remarks, the expected yield on our senior secure portfolio has been fairly stable. There was obviously some disruption in the broader market in Q4. We didn't experience that in the middle market.
So we're not anticipating substantial changes and a simple ROA calculation for our core business. Logan, obviously as a key component for us. We think it drives a lot of value to the shareholders. Our long-term expectation there is that still 11.5% to 12% ROE product for us.
Got it, that’s helpful. And then in terms of credit, obviously you guys gave us good color on the portfolio or on the concentrated positions in the portfolio, but stepping back and looking at the portfolio more broadly. Can you give us a sense for credit performance there or you know, more specifically revenue and EBITDA growth?
Yes. At a high level, the portfolio was performing fine. There's a handful of names that we highlight that are concentrated positions. As we said, 11 names, seven of the 11, we think are in line with our expectations. The four that we highlighted are a bigger focus for our.
But as we said in our prepared remarks, I want to highlight all and while it's an energy credit and it's the end of the first lien piece of paper. LAI, if we highlighted this for sale. Charming Charlie that's in a very tough industry, but it's marked down now. It's only $12.5 million of our portfolio. And then OEM, which is the largest position that we have, but we control it. We control the debt in the capital structure we're the only lender and we control it.
So we control the option if you will on one that gets monetized. So if you look at our gap between book value and the price of our stock that implies a substantial continued write-off on assets, and what we've tried to do here is highlight, this is roughly $90 million, $94 million. That $94 million is not worth zero. There's real value in these names. It just takes us time to move our way out of these positions.
So the broader portfolio we felt is fine. These four, even though we've highlighted them are still okay. We've gone through our process, we'd mark these credits, there's still execution risk as we turned them in from investments into cash. But from our perspective and where we sit here today, we think the gap between our book value and stock price is implied into [indiscernible] scenario that doesn’t make sense. That’s the reason why now we've got enough capital and liquidity. We're going to buy the stock and retire it.
Got it. That’s helpful. And then one last one for me. It does sound like some of these companies are still on the market. So in terms of your outlook for 2019 repayments, can we see a couple of quarters with elevator repayments in your opinion?
Hopefully on these concentrated positions, but the good news is, is the platform itself is performing very well. We put out over $400 million of credit and directly originated loans across the entire platform. The BDC participated when it had capital available, but on a substantially smaller size, running this portfolio and ability to lead directly originated high quality good risk adjusted return is what we want. But I want to do it in such a way where the BDC is taken 1% to 1.5% positions, not 5% positions or 6% positions just what we’re doing historically.
So even if we do get some repayments which we're hoping for, because we're pushing this on these bigger names, the origination machine working across the platform, be it our private funds or CLOs, or middle market CLOs is working very well, we'll be able to dovetail and put these assets right back to work and the stuff that we want.
Great. That’s very helpful. Thanks for answering my questions.
Thank you. Our next question comes from the line of Leslie Vandegrift, Raymond James. Your line is open.
Hi. Thank you. Good morning. I've just got a quick follow-up on Charming Charlie. You mentioned the refi occurred last week, given that change in the capital structure and you talked about 16 less liquidity issues there. Do you think that that going to be coming back to accrual status this quarter, maybe in the next few. What's the outlook there?
Yes, that's a great question. Leslie, appreciate it. As we sit back and we thought about the valuation of Charming Charlie at the end of the year, it was a tough situation because the industry itself is under such pressure and finding capital either from secured lenders or from the trade is extremely difficult. With that said, the management team has done an excellent job in a very difficult market. They’ve taken a business that was struggling and comping down negative and they turned it around. We had increased foot traffic and double-digit comp store sales positive in Q4. So the management team has done a fantastic job in the face of extremely difficult market conditions.
So as we sit here today and again, we're a debt holder and an equity holder and the company needs liquidity and we need to extend that runway, it just doesn't make sense for us to try to take more capital out of the businesses are still trying to stabilize that. We want to support the team and give them the capital if you will, either through with this amendment that we just did and the refinancing to continue to execute.
So difficult for us to come back and opine on the accrual status or the non-accrual status in the future quarters. I’d just say that from our perspective, we think that team has done a fantastic job. We want to continue to support them. At the end of the day, getting the deal done was very, very, very important. We'd be having a much different conversations today if that wasn't done. So again, kudos to that team and extended that runway we think is super important and we'll probably come back and evaluate with this in the coming quarters, but too difficult for us to opine right now.
Okay. Thank you for that. And then on the marks to NAV, obviously you went through this specific portfolio company marks that were intrinsic issues in those valuations, but on the whole portfolio, what impacted spreads in the fourth quarter have on that mark?
This is Terry. I'd say probably fairly not – probably close to around 10% to give a round number. Again, we didn't see this spread widening at the level of the size of business we've been financing of late quite frankly in Q4. We saw some of the transactions that come through our pipeline, moved away from us with spreads that were tightening, not widening.
Okay. And then of that 10% of the move that was due to spread, has that rebounded?
Yes. Again, some of that was related to Logan and, we've seen a decent amount of rebound in that in the early January, early February timeframe. I'd probably say a 40% to 50% of it as relates to Logan.
Okay. Thank you. Those are my questions.
Thank you. Our next question comes from the line of Christopher Testa with National Securities Corporation. Your line is open.
Hi, good morning, guys. Thanks for taking my questions. Just wondering, will the votes on reduced asset coverage and the lower fees be simultaneous?
They'll be simultaneous, but not conditioned on one another.
Got it. Yes, that I should have phrased it that way. Okay. So there is a potential that you get the lower fees, but the shareholders get the lower fees, but not reduce the asset coverage?
Okay. And sticking with the theme of reduced asset coverage, Logan's nearing 20% of the portfolio, just wondering your comfort on taking that up to maybe something larger 25% or so? Are you looking for at the top out around maybe 20% until you potentially free up the 30% basket with reduced asset coverage?
We think that makes sense Chris. We think it's a very, very attractive labor us to drive value, but you're plus or minus in the 20%.
Okay, yes. So you wouldn't be comfortable say taking it up to maybe 25% or so even if it's attractive, just for keeping the 30% basket, somewhat not hitting a red line?
Yes, Chris, this is Terry. We’ve got several other investments in the 30% basket as well. So I think some of the ability to move a little higher than that is not based on our ability to continue to move out of those assets, some will naturally recycle out over time. So it will ebb and flow. But I think 20% plus or minus is the right number to think about today.
Okay, got it. Thank you. I appreciate that. And I know you guys put in the deck that you have four non-sponsors investments remaining, I'm guessing Charming Charlie and LAI or two of them. What are the other two?
Actually LAI is sponsored, that's not the case, C&K, OEM and Copperweld.
Copperweld, okay, got it. And I know Copperweld is something you guys have previously turned around, just wondering, how that's been performing in your outlook on that company?
Excellent, above question.
Okay. And just more of a philosophical one, and I’ll hop back in the queue. You guys have had a lot of companies and you've invested a lot of additional capital in these companies over the past couple of years. Just wondering how you're thinking about this going forward and putting additional capital into troubled investments versus kind of just walking away from them?
Chris, that’s a great question. It’s something that we work on every single day. As you just step back and you have to come back and look at the fundamental business and make sure, you made there's a business plan that that warrants follow-on investments.
Obviously where we've written money in, it supported the businesses thus far. We’ve executed well, Tri Starr as an example. That was a business that I think when we took it over. I think our mark in the portfolio is around $0.15. And I think when we eventually exited this last quarter. I'll look at Terry to give us the number. What was the recovery on Tri Starr?
Sure, the original investment was [indiscernible].
Yes. So from a – when we've done it's worked well. Copperweld knock on wood. Hopefully it will be another example of that. You've seen the other portfolio companies that have – that we've taken losses on. We’ve exited through the sale of our positions in those circumstances where the drawn the conclusion from our perspective that didn't make sense to put a, to put more dollars.
And so it's probably the single biggest or the most difficult decision you have to make. You just sit back and evaluate these businesses. But the good news is we've got a good team in place and to the extent needed, we fail to bring in advisors, a restructure firms to help us evaluate those situations, but if it really is done on a case by case basis.
Got it. Okay, appreciate the detail on that guidance. Thanks for taking my questions today.
Thanks. A questions, one other thing I wanted to clarify, it was nuanced. Your first question on how we position be asked, right for increased leverage and the lower fee reduction, it's the beauty of a simple word and/or – and we could have tied those two together, but based on our performance and being consistent with these comments up front, we thought it was more shareholder friendly to separate the two. We're signaling to the market, we are going to be a senior secured floating rate, high-quality BDC and this is the right fee construct.
With that said, we think the appropriate leverage associated with that is in that 1.05 to 1.15. So while we could have tied the two together, we didn't feel like that, we feel like the shareholders will be supportive on both of those measures and will enable us to drive that ROE. So I didn't want you to think that not linking them wasn't – it wasn't a conscious decision, but we did it to show our support for shareholders hopefully agree with our strategy.
Yes. I could certainly appreciate that Chris, and appreciate the additional detail and more of a comment than a question. But yes, I think the shareholders would be – I don't think it would be a good idea, to put it that way, for them to not give the reduced asset coverage because it's going to enable you to drive a higher sharp ratio and we purchase more stock, and grow Logan, which is more senior secured. So I think it's unlikely you don't get it, but I appreciate your thoughts on that. Thank you.
Thank you. Our next question comes from the line of David Miyazaki with Confluence Investment Management. Your line is open.
Hi, good morning. I guess first just the comment, as a longtime shareholder, I would have to disagree with Mr. Cooperman that there really is only been one city, and it's the latter one that he referenced. And it's a frustration that you guys every quarter, every year, keep asking for more time. And capital markets don't afford managers that are underperforming endless amounts of time and I knew your stock costs. That's a lot of time too.
So your inability to commit to changes in recognizing managerial changes is a frustration if you're not able to deliver. That said, I'm glad to see that you are moving your fee in the right direction. I think that's a good thing. But one thing that is – a question for me is, if LIBOR were to declined by 150 basis points, would your dividend then be – still be sustainable at the new level that you place?
David, that's a tough question because you're in a static environment, right, where you're saying nothing else changes, but LIBOR drops 150 basis points. If you're going to tell me that LIBOR drops to 150 basis points driven by some market reaction and then the spread over LIBOR stays constant today, then yes, it would be tough. But the fact is when LIBOR has fallen or been reduced there's usually a market for us, it's driving that, and the repositioning of the portfolio and our L plus spreads usually increase to offset that. So hard question to ask – answer given that there's multiple variables that drive what we believe the overriding yield is.
Well, that actually gets exactly to my point is that you guys don't control the level of LIBOR nor do you control the level of spreads. And so if you're going to be a senior floating rate oriented BDC, I think it's absolutely the wrong message to send to shareholders that you have a sustainable dividend at the new level because that was what caused the problems that you recognized earlier, that you're reaching for yield in order to maintain a dividend that was not sustainable.
So my suggestion to you as if you're changing this and you're saying the dividend and we've all had to pay your tuition to learn these lessons, that maybe the message is saying that you have a new sustainable dividends is the wrong one. The message ought to be, we have positioned the dividend according to what is available in the market today, and going forward, we are floating rates senior oriented BDC.
I think that’s 1% David, I don’t think probably there is any…
I think what I heard from you is that you're setting a dividend that you think you can sustain, and I don't think that you can control LIBOR nor the level spread.
Okay. I mean…
It was not that different than any other – any other BDC where we're giving you the data and information based on the market information that we have today. Obviously if rates continue to contract or if LIBOR goes down or if – we'd run into – there's an endless supply of variables that will come into the calculation that drives our ability to generate this. And then I guess the thing I'd saying at clarify a comment, building up a high quality diversified portfolio is not what got us in trouble. It’s the exact opposite. It was taking on really high risk, 14%, 15% contractual yield chasing $0.34 dividend, when the market deals were contracting that causes problem.
And I understand that everybody is giving me the commentary on paying for my education here. That's fine. I'll take it, but OEM was done in 2010. It was eight years ago. We're still working it out. When we underwrote it was a 20% IRR. It didn't work out.
That's exactly my point. That's exactly the point I'm trying to make here. Is that…?
We’re not trying to generate 20% IRR on investment day. We’re trying to do senior secured – if people want to exposure to senior secured loans, floating rate that are directly originated with what we're doing. We believe we're going to build a portfolio that's diversified and give both set exposure.
You're right. I'm going to give you market exposure. If you thought I was implying, I’m going to give you market exposure plus 200 bass points and that’s where I set my dividend. That’s wrong. We did not – I didn't say that or mean to say it if that's how you took it, we're going to give you a market based exposure in a senior secured, highly diversified portfolio with a modest amount of leverage.
All right, well we can move on. The point that I'm trying to make is that, I don't like the word sustainable attached to a dividend when it's a floating rate portfolio. It ought to be a floating rate dividend, a floating dividend.
So moving on from that, there are other BDCs out there that are very senior oriented. They're senior secured. They never ran into the rocks or the credit problems that come from chasing the bad deals. There are ones that are flooding rate explicitly that way and they're already in the market that you are talking about sponsored bigger deals, bigger borrowers. What is it that you are going to be doing that is different from them? Because if I as an investor can go buy them today and not have to deal with the tuition expenses and investing in THL.
If I can buy them and not have to worry about the workouts from loans that were made eight years ago. Why would I buy THL? If you eventually get to the destination you're describing, what is it that's going to be different or better than what other alternatives are among senior oriented BDCs?
So two things, first, I appreciate the question. I think as you sit back and how we've positioned ourselves, it's not just, the BDC that's participating in our strategy is the other private funds that we've managed as well, the exposure that we're providing versus some of the others, you mentioned larger transaction that is not the case.
Our portfolio mix isn't going to change. It's still tend to $40 million in EBITDA with an average around 15% to 20%, some of the larger players that I believe you referenced are giving you exposure substantially higher than that. So I do think that…
Not all of them – many are in that wheelhouse that you’re describing.
Yes. Some, but that's the exposure that we're going to give, and the comment on why bias today versus others, fortunately, unfortunately you agree with our ability to execute. We're trading at a substantial discount the book. I wish we weren't at one point we won't be, but right now we've tried to tell the market exactly where we're going. We try to highlight where we think the risk is on the portfolio. We think the gap to book is to widen, the folks that believe us and we think we execute. We'll be rewarded for that.
Well the discounted price is certainly something to think about, but I'm not really hearing that what you're going to be originating is really going to be that different because there are some BDCs that are smaller that are in the 10 to 40 EBITDA range that our senior oriented and floating rate. So what you're telling me is that the reason to own your stock is because of the discount to NAV, but as that goes away, is there a reason to keep owning your stock?
If you want a high yield, high quality senior secured portfolio that generates a 10% ROE? I would say the answer to that is, yes. They listen, I appreciate your support and I understand your frustration, but you're questioning seem to need to push pushing me and the team and had been in the direction we're work.
We're not going, we've tried to differentiate ourselves so historically by saying, hey, we're going to do on sponsored and as we're going to do something that's different/ we're not going to be another me too BDC. And that's what's created the volatility from. My perspective was what the shareholder wants or what I hope the shareholder wants that we're going to try to deliver is access to a market that they can't get anywhere else, I mean other than other BDCs, I'm not suggesting we're the only player, we're not, but we're giving investors the opportunity to access, sponsor-backed senior secured high-quality risk adjusted return with a modest amount of leverage.
Why do I think I'm different than the other asset managers on the task to a $16 billion platform. I've got multiple private funds that are driving down my expense ratio. I've generated over $400 million or $500 million of unique directly in assets over the last 12 or 18 months in which the BDC is participating. Other competitors don’t have that same funnel or ability or attachment to a larger platform to participate in that, that are competing in the $10 million to $40 million range.
Most of the folks that have got a $16 billion business card or an upper market deals, we have a $16 billion business, but we're taking that size and scale and trying to execute that $10 million to $40 million range. But what I don't want to do, and I don't think you're asking me that, I'm not going to come back and say, hey, we've got proprietary deal flow that's going to price 100 basis points or 200 basis points wide as a market because when people tell you that they're wrong, they don't, the market's too competitive. It's very competitive and we're not going to go chase that again.
So I think based on the feedback I’ve got, you can tell me you disagree. If people are upset with us, it's not – our dividend is actually done, okay. We paid it out. I know it's been cut. It's really NAV, the lack of NAV stability. And the only way I can fix NAV stability is to a) run diversify and run more senior secured. It's all about portfolio construction. Our portfolio out of the box was built wrong. I said this on the call last year. We went public very small, no one could go public again today at $250 million, nor should they in my opinion. But we did it and that created this concentrated portfolio where we are stretching for yield and now we're paying the price for it.
Are we going to school for it and use the tuition example that you use? So I get that. But we've raised substantial amounts of capital outside of this. We're not bad at credit. I know it looks like, because we've got concentrated losses inside of the BDC, but we're not bad at credit. We've raised substantial capital associated with that. Our expense ratios have done nothing, but go down. We've allocated costs away. We subsidize and support the BDC in multiple ways until we get this fixed, but these things take time.
I know that people think capital markets are efficient and they are, but these are underperforming illiquid credit and those take time. If I own the business it's because the business has underperformed. We are going to stabilize it, get a new management team in, put an additional capital, and then hopefully show some form of growth, so I can drive some recovery on that and that maybe takes longer than people expect to trade stocks for living, but it takes time.
Well even from somebody who's been a longtime shareholder and afforded you a lot of time and paid for a lot of tuition, there's a limit at some point and I wish you the best and I hope you are able to execute this. But from my perspective, I'm just not sure about your destination. I'm not sure about how much time it's going to take to get there. But thank you for answering my questions.
Thanks Dave. We appreciate it.
Thank you. Our next question comes from the line of Chris York with JMP Securities. Your line is open.
Good morning, guys. Tom Wenk in for Chris York this morning. Thanks for take my questions. A quick one on staffing in the direct lending platform, how many investment professionals are responsible for the BDC at year end and how many are responsible for sourcing? I guess what I'm trying to get at is do you think this level of staff or the size of the staff is enough to really win deals and grow the portfolio in this really competitive lending environment? And what do you consider potentially adding to the team?
Yes, thanks. Tom, I appreciate the question. If you think – I'll step back, the overall firm itself was got almost 90 employees, 47 investment professionals across the entire platform, 20 of which are dedicated to the right blending. I don't know how much you fall in our story, but historically we ran a five office footprint with respect to the deal teams in each respective office. What we've done is we've consolidated credit, we've got better control and more efficiency with some consolidated credit in Chicago. We still maintain that flat office footprint, Boston, New York, Chicago, Dallas and Los Angeles from an origination standpoint.
So we've got originators, one or two originators in each one of those regional offices and we've got a full credit team sitting in Chicago that's doing all of our underwriting, the portfolio management. To the extent we've raised more capital private link because obviously we're not raising capital publicly right now. We've continued to add to the staff and we'll continue to do so. Adding to the staff has not been an issue for us.
Got it, got it. Understood. All right, thank you. In terms of Charming Charlie, you seem to have relatively high conviction on the name of the past few years. Has it's been a top five investment in terms of size? Is there anything specific you guys think you ultimately got wrong in terms of underwriting credit?
Yes. Listen, first, it was brick and mortar retail at a time when the market was moving away from brick and mortar retail. Second, we got it operational entrepreneur or CEO hadn't growth expansions well beyond the financial means of the balance sheet. And three, we took a massively concentrated position that wasn't because of the high conviction name is because we didn't have discipline upfront when we were building these portfolios historically.
Even if we liked the name, buying it at a full 5% or 6% position on a single name didn't make sense. We're buying 1% to 1.5% to positions today. So when it come back, you've got high conviction on the name, listen the name has been extremely tough, it's facing industry headwinds that are – have been insurmountable for some.
The good news for us as we sit here today is when we took over and restructures the balance sheet. We found a fantastic management team that has done nothing, but execute and face at least difficult situations to exactly how Charming Charlie is going to play out in the future? I don't, you saw market down based on the industry dynamics. But that's not a reflection on the management team. The management team has done a fantastic job there.
If you look at over any other brick and mortar retail, very few if any produced double digit comp store sales increases and these guys did. So like I said before, we're super happy that we were able to get through refinancing done this last week to extend the runway. I hope that the team containers to execute and we'll see how the industry plays, but it's a tough climb to given that the industry sector was wrong upfront.
Okay, understood. Well that's great. Thanks for the feedback guys at this moment.
Right. Thanks, Tom.
Thank you. Our next question comes from the line of Ryan Lynch with KBW. Your line is open.
Hey, good morning. Just wanting to talk about your guys kind of portfolio repositioning strategy. Part of your strategy, you consist of moving to the larger companies, sponsored back hiring the capital structure. And I would agree that that's certainly a safer route and investment strategy to go with.
But I would say we've seen other BDCs who are already doing that strategy, not have success in those same areas. And conversely, we've seen BDCs invest with smaller companies doing non-sponsored deals and junior debt have quite a bit of success. So you can have success really in either of those venues.
So well I would agree that moving to larger companies, sponsor back companies, hiring the capital structure is a less risky strategy. Have you or does this really fixed the credit underwriting process of identifying good credits from bad credits?
Thanks. I appreciate the question. And I had a few comments. I guess I made this reference earlier to one of the questions. I think as you sit back and I spend time with Jim Fellows and Jim’s invested in, and credit for a number of years through a number of cycles.
And the fundamental issue, historically was – as I said before was the sequencing of how decisions are made. The right way to build a portfolio to find a very good business, get a good structure, and in prices security. Our issues historically, regardless of whether it was senior secured, sponsored, unsponsored, we were price, structure, business and that's what caused the issue.
So I think fundamentally from the philosophical standpoint, from a process standpoint, from an underwriting standpoint, we've addressed those issues and we've done we've done a very good job of that.
So I don't anticipate seeing future mistakes if you will and that thing. On the other comment, on smaller BDCs and smaller deals are doing unsponsored, I've been down that road and everybody loves that portfolio until you don't. It sounds great on paper and listened, maybe these guys are fine.
I'm not saying that their book is positive or negative, but from my perspective as you build out a portfolio of loans, I strongly feel that there will be a massive differentiation between loss given default and a senior secure sponsor backed portfolio. Then there will be a much larger loss given default and unsecured or senior stretch or NAV, whatever you want to call it, in an unsponsored portfolio.
And if I go back to, stick with the theme of the education that we're all going through stability of NAV is mission critical to our shareholders. We believe that we can build the most stable book of business and the most stable NAV high in the capital structure with a sponsor and our businesses that will generate good returns. So the business isn't that complicated if you execute it and you’ve got the parameters upfront to do it the right way. And we believe that we've got that going right now. If you look across our entire portfolio, we've done a lot of investments outside of the BDC and there's a meaningful difference between where we've had issues and credit and losses in unsponsored, which is sponsored meaning secured to unsecured. Your loss given default in those portfolios in our opinion in the downturn, when the downturn happens, this is going to be substantially higher in our opinion.
Okay. Understood. And then I wanted to discuss your plans regarding leverage a little bit. You guys have talked about asking for shareholder vote and that increasing leverage level to 1.05 to 1.15, I mean, leverage really just magnifies results. If you have good results, more leverage would have made those results better, and if you had poor results, leverage would have just magnified them worse. And so, given the track record and given the portfolio reposition and the credit issues that you guys are still working through today, why does it make sense to ask shareholder for more leverage and why does adding on more leverage? It seemed like a good thing for shareholders today.
Well, thanks. I appreciate the question. It's a good one, and something that we spent a lot of time on. If you recall in previous calls, folks have asked us if we would consider putting leverage on the portfolio and to your point, that's the last thing our portfolio needed historically. It would only exaggerated the volatility of the NAV with the increased leverage. So I think we've been very prudent in our approach and had come back and been consistent to the market, and said, we won't ask nor what we consider higher leverage until we think the portfolio stabilized.
With that said, as we sit here today, as we're still continuing to work through this, we're not done. We do think it makes sense for us to have that option to increase the leverage started in 2020 as we finish up the repositioning. And I think as you sit back and you look at a portfolio of loans that are substantially more diversified, the added leverage is accretive to the shareholder and does make sense. Again, it's not a huge increase, I think we run at 0.7 to 0.8, moving to 0.105 to 0.115, I don't want to discount it. It is higher leverage, but given the new asset mix that we have and the increased diversification, we think it's prudent and accretive to the shareholder and that's why we're seeking it.
Okay. Understood. And then on the share repurchase program, from the press release you talk about repurchasing shares that are accretive to shareholders with proceeds from exits of additional control equity positions this year is what you guys stay. I just want to get the clarification, is the share repurchase is that contingent on exiting –contingent on using proceeds from executing control equity positions or the connect go into effect immediately once you guys get that in place?
It's going to go into effect. I think we’re trying to – in the back of our mind as we've managed the business with all this stuff, there was a correlation for us exiting these positions to getting a more diversified pool of assets. But as Terry said in his remarks or I said in my remarks, we plan on having the same implemented in the next by March 15, I believe was the actual date, and it'll be active.
Okay. And then just one last one, on the Logan JV, I know you said, I think some vote, the mark-to-market volatility was the reason for the decline in fair value. But I also noticed that the dividend return had dropped from Slide 17 to about 12%. You historically have been running on kind of the 13% to 14% range. So can you talk about why the dividend was a 12% yield this quarter and should we expect that lower yield going forward or what really drove that this quarter?
Jim, do you want to take that.
Yes, I'll take the question. In the fourth quarter of 2018, we had a slower level repayment activity in the broader low market, so that slowed the accretion of the OID that we had accreting earlier in the year when the market was much more active at repricing and repayment activity.
Okay. As we kind of look into Q1, are we still seeing that slower repayment activity? And so we should expect that kind of the dividend yield to stay around this level or are we seeing repayment activity pick back up to where it looks like you guys kind of ran in 2018 and corresponding a 13% plus dividend yield from the Logan?
Activity – repayment activity is continued to be a slower than what we've seen, call it a year ago, nine months ago, I wouldn't know 12% should stay fairly consistent with the last quarter for this quarter.
Okay. Okay, thanks for taking my questions. I appreciate the time today.
This is Terry. Just before we jumped to the next person in the queue, I just wanted to clarify a remark I made it earlier response to Leslie, about the percent of the portfolio markdowns related to credit versus market metric. I referred to 10% that 10% excluded Logan. Logan contributed to set 15% on its own. So I just wanted to make sure that the group had that clarification. Operator, you can go to the next person in a queue place.
We have a follow-up question from Leon Cooperman, your line is open.
Yes. Hi. Listening to all this conversation. I guess, the question I'd ask is, if I was on the Board or a member of management, is what can you do with your money that's better than buying something back at a 27% discount to book value that has a cash yield of 13%, the statue alternative?
No, I understand the negative of doing that. The negative of doing that is you continue to shrink yourself and you are already probably marginal in terms of your size. But what we have to step back and understand is, in the last decade, Wall Street has created a lot of companies in the BDC, MLP, REIT space that only made sense when they sold at a premium to NAV. The game was, do an offering, buy assets, raised the dividend, do an offering, buy assets, raised the dividend. And once you go to a discount to NAV, the game is over.
And what separates the men from the boys, if I could use the sexist analogy, is those that understand it and do right by their shareholders. In the extreme case, they say the game is no longer relevant when you liquidate, give all your money back or we're going to basically buyback dollar bills that are selling at a 25% discount because that's the best thing for the shareholders, make ourselves smaller and is that we make ourselves too small then we've got to take the final step.
Now, as that complemented – it complimented you guys at the beginning. You've done a lot of things to support the vehicle. But if we're not economic, don't torture us, just give us back our money. And I think the best way to take the first step in that regard is to accelerate your repurchase program. If you believe the 9.15 NAV is a low point and at a dividend of $0.21 times four $0.84 is sustainable, because the stock shouldn't be over 13% and buying a dollar book back for $0.75 is your best alternative and don't wait, do it now. But if you have doubts about the NAV at 9.15, don't leverage up and don't buy back stock. That's my recommendation and expect me to be vocal about your behavior.
Thanks, Lee. I'm not sure there was a question there. But I appreciate your statement and the comment. I think the only thing I'd highlight is, we understand the economics of the discount to book value. And as a management team, it's not that we didn't want to be buying the stock back at a discount. That was the balance sheet given where it was, was not in a position to do that. We thought that was putting you on too much risk.
And to your point, at too much uncertainty and some of these names as we sit here today, given that we've announced a sizable program that we intend to use, I hope the market looks at that as a step forward in the right direction. Is that a big enough step? We'll see how the stock performs and how the portfolio performs. But it is fully viewed as a good first step forward.
No, I would make one other recommendation. You guys should not make one new loan as long as your stock is 25% below NAV and yields 13%, and you have confidence in your cash flow and you have confidence in the stability of your book value. I would not make new loans because new loans cannot compete with your own stock. And understand the more stock you buy back, the more model you make yourself, the more less efficient you are as a vehicle, but so be it. The world has changed and we have to recognize that. But I wish you good luck.
Thanks, Lee. And again, just from a size perspective, we're not afraid to shrink the BDC to the extent it makes sense because we have other avenues of capital inside the platform, where we can still go out and execute our plan. I don't want people to draw an conclusion there that the BDC is getting smaller that we're still not executing it.
And as I said earlier to someone's question, I think we originated over $400 million that we think would be very nice senior secured assets in 2018 and the BDC just participated in some, albeit at a small size, which I think is appropriate. But we recognize the comment and don't disagree that buying dollar bills for $0.75 make sense even for a debt guy like me to follow.
I’m showing no further questions in the queue. I would now like to turn the call back over to Chris for closing remarks.
Thanks, everyone, for joining the call. Our goal today was to provide more clarity on what we believe to be the future earnings power of the portfolio based on what we know today and provide our vision of what we think the BDC will be for 2019 and into 2020, as we complete this portfolio rotation. We remain focused on the execution of our plan and look forward to updating you on our progress next quarter. Thank you.
Ladies and gentlemen, that concludes today's call. Thank you for participating. You may now disconnect. Everyone have a wonderful day.