Capitala Finance Corp. (CPTA) Q4 2020 Earnings Conference Call March 9, 2021 8:30 AM ET
Joe Alala – Chairman and Chief Executive Officer
Steve Arnall – Chief Financial Officer and Chief Operating Officer
Conference Call Participants
Christopher Nolan – Ladenburg Thalmann
Kyle Joseph – Jefferies
At this time, I would like to welcome everyone to Capitala Finance Corp.'s Conference Call for the Quarter Ended December 31, 2020. All participants are in a listen-only mode. A question-and-answer session will follow the company’s formal remarks. Today's call is being recorded, and a replay will be available approximately three hours after the conclusion of the call on the company's website at www.capitalagroup.com under the Investor Relations section.
The host for today's call are Capitala Finance Corp.'s Chairman and Chief Executive Officer, Joe Alala and Chief Financial Officer and Chief Operating Officer, Steve Arnall. Capitala Finance Corp. issued a press release on March 8, 2021, with details of the company's quarterly financial and operating results. A copy of the press release is available on the company's website.
Please note that this call contains forward-looking statements that provide information other than historical information, including statements regarding the company's goals, beliefs, strategies, future operating results and cash flows. Although the company believes that these statements are reasonable, actual results could differ materially from those projected in the forward-looking statements. These statements are based on various underlying assumptions and are subject to numerous uncertainties and risks, including those disclosed under the section titled Risk Factors and Forward-looking Statements in the company's annual report on Form 10-K. Capitala undertakes no obligation to update or revise any forward-looking statements.
At this time, I would like to turn the meeting over to Joe Alala.
Thank you, operator. Good morning, everyone. Thank you for joining our call today. We ended 2019 with a portfolio without any nonaccrual loans and a robust pipeline of investments expected to support our earnings and allow us to sustain the payments of distributions. Fast forward to March 2020, and all that changed. The global pandemic negatively impacted our portfolio of investments in small businesses, especially consumer-facing businesses.
The pandemic forced us to place eight investments on nonaccrual status as of March 31, 2020. In the spring of 2020, Capitala began focusing on portfolio liquidity, reducing portfolio leverage and supporting the many small businesses in our portfolio that were impacted by the pandemic with ultimate goal to stabilize the company's NAV. The company's NAV has stabilized since the onset of the pandemic, and we are encouraged to report our third consecutive quarter of NAV stability and appreciation.
During the second quarter of 2020, we generated $51 million of liquidity through repayments and the wind down of Capitala Senior Loan Fund II, LLC, stabilized NAV and reduced the balances on nonaccrual status.
During the third quarter of 2020, we substantially reduced our GAAP debt-to-equity ratio to 1.9 from 2.7 at March 31, 2020. We accomplished this through the repayments of $59 million of SBA debt debentures and the repurchase of $2.2 million of our 6% retail bond notes. At year-end 2020, NAV remains stabilized, up approximately 7% since the low at March 31, 2020. GAAP leverage was at 1.98 at year-end, but will decline as a result of the $20 million repayment to SBA during the first quarter of 2021.
We are currently sitting on over $50 million of cash of an undrawn senior secured credit facility and expect to monetize several of our larger investments over the next several quarters. The company continues to have a green light from the SBA for the submission of an additional SBIC license to replace the existing license. At this point, I'd like to ask Steve to provide more color on the financial results.
Thanks, Joe. Good morning, everyone. Total investment income was $5.7 million during the fourth quarter of 2020 compared to $9.6 million for the fourth quarter 2019. Interest and fee income declined by $3.2 million for the comparable periods, resulting from a decrease in debt investments outstanding. Dividend income decreased by $0.4 million for the comparable periods, noting that the company's investment in Capitala Senior Loan Fund II was wound down during the second quarter of 2020.
Total expenses for the fourth quarter of 2020 were $5.7 million, a decrease of $2.0 million from the fourth quarter of 2019. Interest and financing expenses declined by $1.4 million, resulting from the $59 million repayment of SBA guaranteed debentures and $2.2 million of repurchases of our 2020 notes during the third quarter of 2020.
Net realized gains totaled $0.6 million or $0.23 per share for the fourth quarter 2020 compared to net realized gains of $1.2 million for the same period in 2019. Net unrealized depreciation totaled $12,000 for the fourth quarter of 2020 compared to net unrealized depreciation of $3.1 million for the fourth quarter of 2019. The net increase in net assets resulting from operations totaled $0.5 million or $0.20 per share for the fourth quarter 2020 compared to a net decrease of $0.1 million for the fourth quarter of 2019.
Net assets at December 31, 2020, totaled $108.9 million or $40.19 per share compared to $39.99 per share at September 30, 2020. At year-end, we had $49.9 million in cash and cash equivalents. In addition, we had zero drawn and $25 million available on our senior secured credit facility with KeyBank, N.A. Also, the company had SBA debentures outstanding totaling $91.0 million with an annual weighted average interest rate of 2.74%, $72.8 million of fixed rate notes bearing an interest rate of 6% and $52.1 million of convertible notes bearing an interest rate of 5.75%.
The company's total debt-to-equity ratio at December 31, 2020, was 1.98:1 compared to 2.72:1 at March 31, 2020. Subsequent to year-end, the company repaid $20 million of SBA guaranteed debentures, of which $6 million was due to mature on March 1, 2021 and of which $14 million were scheduled to mature on March 1, 2022.
At December 31, 2020, our investment portfolio included 36 investments with a fair value of $274.7 million, a cost basis of $277.7 million. First lien debt investments on a fair value basis at year-end comprised 60.9% of the portfolio; second lien debt investments represent 14.3% and equity warrant investments represented 24.8%.
Please refer to our fourth quarter investor update on our website for additional information regarding the trends in our portfolio. At year-end, we have four debt investments on nonaccrual status with a cost basis and fair market value of $37.5 million and $20.8 million, respectively.
At this point, operator, we would open the line for questions.
[Operator Instructions] Our first question will come from the line of Christopher Nolan from Ladenburg Thalmann. You may begin.
Hey guys. Joe, in your comments in terms of monetizing investments in coming quarters. How much of that do you think is going to be your equity investments?
Hey Chris, good morning. Yes, that's a great question. We do have several of our larger investments in the BDC are engaged or engaging investment banks to sell or refinance, and we do believe some of those will be our larger equity positions that we'll monetize in this market because it's – if you have a strong small business, it's a good time to monetize, and a lot of these management teams and sponsors are pursuing those exit options, and we do expect to monetize substantial portion of our equity in 2021.
Great. In terms of debt paydowns, is the priority to pay down the SBA debt or would potentially, if you had a cash balance, redeeming the 2022 notes being an option as well?
That's – this is Joe. Steve is going to have an answer, too. My – all debt is a priority. So we're going to – we're focused on the repayment of all debt. We do have a green light outstanding with SBA. I'm of the opinion that the more debt we repay to SBA, the closer we are to obtaining a subsequent SBIC license there, but all debt is a priority for us. And as you can see, we're monetizing a lot of assets and addressing debt repay down in a very successful manner.
Yes Chris, this is Steve. Specifically, I think we've still got capacity under our repurchase program that we put in place last year to buy back the notes and the convertibles. So we will still consider doing that. In addition, we are evaluating alternatives for the partial or full call of the 6% notes, which are callable. So we are in hand with some options to consider there, and we're actively reviewing those and considering the best way to push some of those maturities out to a later date.
Great. Final question. Is monetizing the investment portfolio more of a priority than reinstating the dividend?
This is Joe. Dividends are always important. We do need to address these maturities that we were just discussing. We're sitting on a lot of cash. We've delevered nicely on a GAAP debt-to-equity ratio since the pandemic. We believe the best way to grow earnings is really to reestablish a subsequent SBIC license in the BDC, leverage that up with SBA, low-cost, long-term capital to grow our earnings, but no, we're very mindful that distributions are important, and we're just trying to repurpose and rebalance the balance sheet to get a subsequent SBIC license and – what would you add to that, Steve?
I think that's good. Yes. Nothing.
Okay. Thanks guys.
[Operator Instructions] Our next question will come from the line of Kyle Joseph from Jefferies. You may begin.
Hey, good morning; Joe and Steve. Hope you guys are doing well. Just two follow-ups from me. One, on the credit side, it does look like nonaccruals ticked up, but can you give us a sense for broader portfolio performance in terms of revenue and EBITDA growth, and how that compares to earlier in the year?
This is Joe, Kyle. A lot of our portfolio companies are in market and pursuing exit opportunities. As you know, we saw Burgaflex. That was a nice monetization that a company that really started to perform post-pandemic and sort of reshuffle their operations of their business and really began to improve earnings. So the portfolio companies are improving, a lot of them are seeking transactions to monetize, and we do believe that we sell a big portion of our portfolio, especially our larger positions in the BDC over the next couple of quarters.
Got it. Helpful. And then I know debt pay down remains a key focus for you guys, but I'd be curious to get your thoughts on the new issue deal environment right now.
Yes, this is Joe again. We had hoped to receive an SBIC license in the BDC to replace the existing license in the fall of 2020, that did not happen. However, the fall of 2020 in our private funds, we have probably one of the most active deployment quarters we've ever had. We did seven deals, over $200 million of deployments, very diverse deals, mainly first lien, had some warrants – first lien of warrants, had some – in our equity practice, we had some equity only buyout deals. So we – it's a very robust market for small businesses. The pandemic has created a big dislocation for these small businesses, and we are hopeful to get a subsequent SBIC license in the BDC to really begin investing again with the rest of the platform into these small businesses, but it's a very robust environment and our private funds have really taken advantage of it.
Got it. Thanks for having me on, and answering my questions.
[Operator Instructions] And I’m not showing any further questions at this time.
Well that, thank you, everyone, for participating today. Steve and I are around all day, just e-mail us or contact us, and we look forward to answering any of your questions. Everyone, have a great day. Thank you.
Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.