Transcript provided to Seeking Alpha by the company.
Garrison Capital Inc. (NASDAQ:GARS)
Q3 2019 Earnings Conference Call
November 14, 2019, 03:00 PM ET
Joseph Tansey - CEO
Brian Chase - Chief Operating Officer
Mitch Drucker - Chief Investment Officer
Daniel Hahn - Chief Financial Officer
Welcome to today's Garrison Capital Inc., Third Quarter Ended September 30, 2019 Earnings call. For the third quarter ended September 30, 2019 earnings presentation that we intend to refer to in the earnings call, please visit the Investor Relations link on the homepage of our Website www.garrisoncapitalbdc.com, and click on the third quarter ended September 30, 2019 earnings presentation under Upcoming Events.
As more fully described in that presentation, words such as anticipates, believes, expects, intends, and similar expressions identify forward-looking statements. Actual results could differ materially from those implied or expressed in our forward-looking statements for any reason, and future results could differ materially from historic performance. You should not rely solely on the matters discussed in today's call as the basis of an investment in Garrison Capital. Please review our publicly available disclosure documents for further information on the risk of an investment in our company. Questions will be taken via the phone during the Q&A session at the end.
It is now my pleasure to turn the Webcast over to Mr. Joseph Tansey, CEO. You may begin.
Good morning everybody and thank you for joining the call. I'm joined by Brian Chase, our Chief Operating Officer, Mitch Drucker, our Chief Investment Officer and Daniel Hahn, our Chief Financial Officer.
On Tuesday afternoon, we filed our Form 10-Q with the SEC along with our earnings presentation that include the financial results for the third quarter ended September 30, 2019. We have also posted the Q3 earnings presentation to our website and will be referring to it throughout today's call.
I'll begin today's call with an update on current market conditions and a high-level overview of the third quarter results. Following my broader comments, Mitch will highlight the investment activity during the quarter and discuss the current portfolio in greater detail. Brian will then summarize the quarter's financial performance and provide some additional color on the direction of the company before opening up the lines for Q&A.
The overall credit market during 2019 has been quite challenging. Some factors contributing to these market conditions included significant volatility in Q4 2018 that resulted in soft M&A volume during the year, as well as lower yields driven by a decrease in LIBOR while spreads remained largely flat. In addition, financing solutions to borrowers that would have historically been syndicated to a wider group of club or syndication partners are now being executed as large, one stop unitranche financings by platform with significant scale. Finally, in the BSL market, we saw a flight to quality that resulted in a wider dispersion in the credit performance of those assets. The pricing on larger deals with higher credit ratings have remained largely stable where higher yielding investments with lower ratings have experienced significant spread widening and underperformance due to the risk of further downgrades resulting in forced sellers in the CLO market.
Turning now to our performance for the quarter. We've reported third quarter net investment income of $0.21 per share, which was slightly lower than our third quarter dividend of $0.23 per share. Unfortunately, our NII was offset, again, by losses of $1.24 per share during the quarter, resulting in a drop in net asset value to $9.04 per share. The decline in our NAV was driven by credit losses as well as negative fair value adjustments, driven by spread widening on certain syndicated investments. Based on the current state of the company, we are considering our potential options going forward to deliver the best possible outcome for our shareholders, which Brian will discuss in greater detail. In the meantime, we will continue to work diligently on managing our existing investments and client relationships, and we'll seek to deploy capital into lower risk assets, which are less volatile and have significant downside protection.
With that, I'll turn it over to Mitch who will provide additional color on the loan market and our activity during the quarter.
Thanks, Joe. As noted on Page 4 of our presentation, new par additions during the quarter totaled $28.3 million across ten new portfolio companies at a weighted average yield of 8.2%. The new business mix included one club deal for $6.9 million and nine purchased credits totaling $18.5 million, all of which were backed by sponsors. The remaining $3 million of portfolio additions for the quarter were add-on investments to existing clients. Our investment portfolio is now up to 104 distinct portfolio companies, diversified across approximately 30 industries. Our portfolio additions for the quarter were offset by aggregate repayments and sales of $34.7 million at a weighted average yield of 8.2%.
We received full repayment from four borrowers and sold two investments. The balance of the repayments came from ordinary course amortization, partial repayments from excess cash flow and refinancings. As a result of the repayments outpacing additions and the net losses, our total portfolio at fair value decreased quarter-over-quarter to $460 million from $487 million.
The average yield for the debt portfolio at cost decreased slightly quarter over quarter to 8.5% from 8.9%. The decrease was due to a combination of a decrease in LIBOR and the placement of higher yielding credits on non-accrual during the quarter.
As Joe mentioned, we incurred net realized and unrealized losses of approximately $20 million or $1.24 a share for the quarter. These losses were driven by $15.1 million of negative credit losses across three investments and $3.8 million of negative markdowns primarily on four syndicated investments. The majority of the credit losses resulted from writing our investment in Confluence Outdoors down to zero.
The other two meaningful credit write downs were on our investments in Gold Coast Bakeries and HRI Holding Corp., both of which were placed on non-accrual during the quarter. We also placed our investment in Fusion Connect on non-accrual, bringing our total non-accruals to 6.5% and 4.9% of the debt portfolio based on amortized cost and fair value respectively.
As of September 30, 2019, all four non-accrual investments were currently being restructured either through bankruptcy or a sales process.
Now I'd like to pass the discussion to our COO, Brian Chase.
Thanks, Mitch. Our net investment income remained relatively stable at $3.4 million or $0.21 per share for the third quarter ending September 30, 2019, as compared to $3.5 million or $0.22 per share in the prior quarter. Our third quarter NII of $0.21 per share was just shy of our Q3 dividend of $0.23 per share, driven by reduction in LIBOR and new non-accrual assets.
As I mentioned on last quarter's call, we’d be reassessing our -- we were likely to be realign our dividend based on the expectation of lower LIBOR rates. Given the decreases we've seen since then and the increase in non-accruals, management and the board have decided that a reduction in our dividend is warranted. We have declared a fourth quarter dividend of $0.15 per share as payable on December 20th to shareholders of record as of December 6th.
As Joe mentioned, we have spent a considerable amount of time discussing the company's future with our board of directors. We're fully aware that based on the current size of the company and its performance, the current operating model is not sustainable. The company's board of directors has decided to retain KBW as its financial advisor and investment banker to explore a variety of strategic options in order to maximize shareholder value. While we're actively working with KBW to explore all options and are committed to taking actions that will maximize shareholder value, we cannot make any assurances that the company will be able to execute on any of them.
In addition, there is no specific time table or formal process as of yet, and we will not comment further or provide periodic updates to the market unless, and until, the company's board of directors have approved a specific transaction or otherwise deemed such a disclosure would be appropriate or necessary.
In the meantime, we will continue to work diligently to maximize shareholder value through the realization of our existing club and originated investments. Any new investments will target companies with a lower risk profile, less volatility and significant downside protection. We have set our dividend with these priorities in mind.
That concludes the prepared remarks for today's call. And with that, I'd open it up for questions.
[Operator Instructions]. Please standby while we compile the Q&A roster. And once again, to ask a question at this time, please pres star and the number one. And I'm not showing any questions at this time.
Thanks, everybody, for dialing in. And this concludes the call.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.