Barings BDC Inc (BBDC) 2014 Q2 法說會逐字稿

At this time, I would like to welcome everyone to Triangle Capital Corporation's conference call for the quarter ended June 30, 2014. (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 website at www.tcap.com under the investor relations section.

Your hosts for today's conference are Triangle Capital Corporation's Chief Executive Officer, Garland Tucker; President and COO Ashton Poole; Chief Financial Officer Steven Lilly; and Chief Investment Officer Brent Burgess.

I would now like to turn the call over to Sheri Colquitt, Vice President of Investor Relations, for the necessary Safe Harbor.

(technical difficulty) with details of the Company's quarterly financial and operating results. A copy of the press release is available on our website.

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 and forward-looking statements in our annual report on Form 10-K for the fiscal year ended December 31, 2013, and quarterly report on Form 10-Q for the quarter ended June 30, 2014, each as filed with the Securities and Exchange Commission. TCAP undertakes no obligation to update or revise any forward-looking statements.

And at this time, I would like to turn the call over to Garland Tucker.

Thanks, Sheri. I would like to thank everyone for joining us today.

In keeping with our traditional format, I will provide a brief overview of some of our highlights for the quarter, Steven will provide more detailed information about our financial results and liquidity, Ashton will discuss the overall investment market, and Brent will provide an update on our investment portfolio.

The first item I would like to discuss is the meaningful increase to our annual cash payout to shareholders. Our current annualized base dividend of $2.16 per share continues to lead the BDC industry as the highest annual dividend on a per-share basis. In addition to the strength of our base dividend, we are very pleased that our investment portfolio continues to generate such a meaningful amount of realized capital gains.

As a result, after paying shareholders $0.30 per share in special distributions during the first six months of 2014, we intend to begin making additional distributions to shareholders totaling $0.20 per share annually. These annual distributions will be paid quarterly beginning with the third quarter of this year and are expected to continue for at least the next three years. So starting immediately, Triangle shareholders can expect to receive an annualized dividend of $2.36 per share.

Before I move on, I would like to pause and say thank you to the entire Triangle Capital team for its focus, its hard work, and these accomplishments. It is our full team's efforts that have made this significant multiyear shareholder distribution possible, and on behalf of the entire TCAP Board of Directors and our shareholders, our team is certainly to be congratulated.

Now before I hand the call off to Steven, just a few high-level specifics for the quarter. The second quarter of 2014 was another very active quarter for TCAP. We grew our investment portfolio and maintained our above-average credit quality. Our second-quarter NII per share of $0.53 increased 6% over our first-quarter 2014 NII per share of $0.50, and our June 30, 2014, portfolio value of $736 million increased 7% over March 31, 2014.

In addition, in July we exited our investment in Snacks Holding Corporation, which generated a realized gain of approximately $8.9 million, bringing our year-to-date 2014 net realized gains to a total of $20.7 million.

And finally, during the second half of 2014, we expect to overearn our base quarterly dividend of $0.54 per share.

With that introduction, I will turn the call over to Steven.

Thanks, Garland.

During the second quarter of 2014, we generated total investment income of approximately $24.9 million, representing a sequential increase of 4% from our first-quarter 2014 total investment income of $24 million. The increase in investment income was primarily attributed to an increase in the size of our investment portfolio.

Our total operating expenses during the second quarter of 2014 were $10.3 million, as compared to $10.2 million during the first quarter of 2014. Our operating expenses consist of interest and other financing fees and general and administrative expenses. During the second quarter, interest expense and other financing fees totaled $5.2 million, as compared to $5.1 million during the first quarter, and our general and administrative expenses for both the second quarter of 2014 and the first quarter of 2014 totaled $5.1 million.

From an efficiency ratio standpoint, with efficiency ratio being defined as our total G&A, or general and administrative, expenses divided by total revenues, our second-quarter 2014 efficiency ratio was 20.5%, and for the first six months of 2014, our efficiency ratio was 20.8%.

Net investment income for the second quarter was $14.7 million, or $0.53 per share, as compared to $13.8 million, or $0.50 per share, during the first quarter of this year, equating to a sequential growth rate of 6%.

Our net increase in net assets resulting from operations during the second quarter of 2014 totaled $24.2 million, as compared to $12.5 million during the first quarter of this year. On a per-share basis, our net increase in net assets resulting from operations during the second quarter of 2014 was $0.87, as compared to $0.45 during the first quarter of this year.

Our net asset value on a per-share basis as of June 30, 2014, was $15.95 versus $15.72 at March 31, 2014, which is an increase of $0.23 per share. The primary components of the increase in our net asset value during the second quarter were the net realized gains, which totaled approximately $11.7 million, or $0.42 per share, partially offset by the impact of the special cash distribution during the second quarter of $0.15 per share; the $0.01 per share by which our second-quarter based dividend exceeded our second-quarter net investment income; and then, finally, net unrealized depreciation, which totaled approximately $0.06 per share.

As many of you know, during much of 2013 Triangle maintained a fairly conservative approach in terms of the growth of our investment portfolio. As the broader market focused on aggressively-priced refinancings and recapitalizations, we purposefully chose not to participate.

The two primary consequences of our decisions were, one, our investment portfolio decreased in size last year as our attractively-priced mezzanine structures were refinanced with senior debt. And two, our investment portfolio generated the realized gains that Garland has previously mentioned on this call.

During 2014, as the market has naturally shifted back to a healthy amount of M&A activity, we have found that our patience has been rewarded and we have taken advantage of what we perceive to be high-quality investment opportunities at attractive price points. As a result, as we enter the second half of the year, we are becoming increasingly convinced that 2014 could end up being one of TCAP's most active years in terms of new investments.

As we have discussed on our last few conference calls, our investment portfolio has been going through a natural recycling process. We previously have provided the view that we expect to underearn the base dividend during the first half of 2014 and that we hope to overearn the base dividend during the second half of the year.

In conjunction with Garland's comments, I am pleased to report that our view is still very much intact. As we look forward to the second half of the year, we believe that our investment portfolio will continue to expand and that our net investment income on a per-share basis will equal or exceed our base dividend of $0.54 per share.

Before I touch on liquidity and capital resources, I would like to provide some color around our announced annualized $2.36 per-share distribution to shareholders. First, it has always been our strategy to earn our base dividend, and since our IPO, we have done just that, as our cumulative net investment income on a per-share basis is greater than our cumulative base dividends per share.

The second key component of our strategy has been for realized equity gains to exceed principal or credit losses. Since IPO, we have generated over $50 million of realized gains over and above our principal or credit losses, including $18.3 million of net realized gains in 2013 and $20.7 million of net realized gains thus far in 2014.

If our investment portfolio continues to perform well into the future, we would expect these additional distributions would continue beyond the initial three-year period.

Turning to liquidity and capital resources, we continue to find ourselves in the fortunate position of enjoying the many benefits of a conservatively structured balance sheet. From a liquidity standpoint as of June 30, we had approximately $80 million in cash on hand, $31 million of undrawn SBA debentures, and $134 million available under our senior credit facility.

Subsequent to quarter-end, we borrowed the remaining $31 million of SBA debentures, enabling us to fund certain SBA-eligible investments. After taking into account our July investment activity, which has continued to be robust, we have over $200 million to support future investment opportunities.

And with that, I will turn the call over to Ashton to talk a little bit about the general investing market.

Thanks, Steven.

The second quarter of 2014, and indeed the early part of the third quarter, has continued to be very active for Triangle. During the second quarter, we originated $87.3 million in total investments, of which $61.3 million were new investments and $26 million were follow-on investments in existing portfolio companies.

We have also originated over $58 million in new investments so far in the third quarter.

From an investment volume perspective, the second quarter of 2014 represented our third most active quarter since our IPO, and taken as a whole, the first half of 2014 represented our most active six-month period since our IPO.

During the quarter, we closed five new investments with an average size of $12.3 million. The weighted average interest rate associated with all debt investments made during the quarter, including follow-on investments in existing portfolio companies, was 13.1%, and the weighted average interest rate associated with new debt investments was also 13.1%, solidly in the long-term range of sub debt pricing of 11% to 14%.

On our first-quarter conference call, I mentioned that bankers, advisers, and sell-side M&A boutiques were all reporting record activity in backlogs and that we were optimistic that those backlogs would result in meaningful new M&A transaction activity for the remainder of 2014 and 2015. In our checks with the banking community this quarter, the response has been consistent with the message delivered in Q1, and in many cases more bullish. Q2 activity was greater than Q1 activity. Q3 and Q4 outlooks suggest a record year for transactions, both in the number of deals and volume of deals. And finally, backlogs are beginning to build for 2015.

Just to add a few data points to illustrate how active our market has become, consider that for the first two months of this year, the sub $100 million enterprise value segment of the M&A market got off to a very slow start and was actually down more than 50% year over year. However, during the next four months as pipelines materialized, this same segment of the market is up by over 27% year over year.

And if you include the next segment of the market, including those transactions greater than $100 million, but less than $500 million in enterprise value, the market is up almost 43% during the last four months.

Another interesting and positive fact is that transaction multiples in the sub $100 million market, where TCAP principally plays, has averaged 7.2 times EBITDA on a latest 12-month basis, almost exactly in line with average multiples for the last five years.

We should caution, however, that enterprise values are admittedly being valued off of higher levels of EBITDA, and as a general statement, capital structures do contain more leverage than they did 12 to 24 months ago.

Overall, we believe it is a great time to be focused on the lower middle market. It is a segment of the market that we know very well and one which has allowed us to deliver consistent and attractive returns for our shareholders. We look forward to continuing to build the Triangle Capital franchise in the lower middle market for many years to come.

And with that, I will turn the call over to Brent to discuss some additional details associated with TCAP's investment portfolio.

Thanks, Ashton.

From an investment perspective, 2014 continues to be a very strong period of performance for us. Our investment portfolio currently consists of 86 companies and we remain pleased with the operating and financial metrics of those investments.

Once again, we generated net realized gains during the second quarter. These gains totaled $11.7 million. I would like to point out that this is the ninth consecutive quarter that we have generated positive net capital gains.

As Garland mentioned in his earlier comments, after quarter-end we experienced a realized gain of approximately $8.9 million from our investment in Snacks Holding Corporation.

During the second quarter, we received five full loan repayments totaling $30.3 million, partial loan repayments of $8.8 million, and proceeds relating to equity securities of $14.1 million. The weighted average IRR on our exited investments during the quarter was 25.1% and the weighted average life of those investments was 2.5 years. As of June 30, 2014, the weighted average debt yield on our investment portfolio was 13.8%, as compared to 13.9% at the end of the first quarter.

From a credit quality standpoint, FSI, an $11.7 million investment, was restored from PIK nonaccrual to full accrual, and one account, Minco Technology, a $5.5 million investment, was moved from PIK nonaccrual to full nonaccrual. As you may recall, Minco was on full nonaccrual during the fourth quarter of last year and was moved to PIK nonaccrual in the first quarter of 2014 as the company made its first quarter cash interest payment. However, during the second quarter Minco again missed its cash interest payment, so we moved the account back to full nonaccrual.

As a result of these portfolio movements, our nonaccrual assets as of June 30 totaled 2.8% of our portfolio on a cost basis and 0.6% on a fair value basis.

In conclusion, as we continue into the second half of 2014, we remain very pleased with the performance of our investment portfolio.

And with that, Operator, I would like to open the call for questions.

(Operator Instructions). Mickey Schleien, Ladenburg.

Thanks for taking my call. I was trying to write as quickly as possible, but I just wanted to confirm that you said that multiples and terms in the lower middle market where you are operating are steady versus the previous couple of quarters?

Mickey, hi, it's Ashton. Good morning to you. What I mentioned to you was that multiples in the sub $100 million market, which is principally where we play, has averaged 7.2 times EBITDA on a latest 12-month basis.

That was on M&A transactions. How about debt to EBITDA in the portfolio, is it relatively steady?

I would say it is very consistent with historical parameters that we have experienced.

Okay, and covenant light is not an issue?

Not for our market.

Okay, thanks for your time.

Bryce Rowe, Robert W. Baird.

Just a couple questions. Wanted to, Brent, ask you about the investment subsequent here to quarter-end in DLC. It looked like there was a floating rate associated with that DLC investment of LIBOR plus 800 basis points. It seems to be a little lower than we would expect from you all. Maybe you could just give us some color around that investment, if you don't mind.

Sure. It does have a LIBOR floor that brings it up to 10%, but it's a sponsor with whom we have a very strong relationship. We have done multiple deals with this sponsor and have a very good track record with them.

And we certainly are looking -- senior debt has always been a small percentage of our portfolio, so there are situations where, particularly when we have a good relationship with a sponsor, where we will look at doing senior or unitranche type loans, and that's the case in this one, which is why it is a little bit of a lower yield.

Okay, that's helpful. And then, Steven, a question for you on the capital structure. You have got your 7% senior notes coming up to be called potentially in March of next year, and just wondering how you and the Board are thinking about the cost of those senior notes and maybe the ability to reduce the cost by calling them and using -- potentially using the credit facility more heavily than you are right now? Thanks.

Bryce, thanks. I think as we move from this quarter through the end of this year and early next year, we will certainly begin analyzing that.

I think when you look at where those bonds are trading, it's certainly a fair statement. If we were to issue bonds today, they would be at a tighter coupon than that issue, which I think was the first non-rated baby bond done in the industry. And when you look at the availability we have under the credit facility, it certainly is an option for us.

Probably, I think you could respect, we would prefer not to commit one way or the other to it today, but as we have tried to do in the past, we will certainly try to keep our weighted average cost of capital as low as possible for the benefit of shareholders.

Great, thank you.

Greg Mason, KBW.

Thanks for the guidance on the pipeline being one of TCAP's most active years. What about on the repayment side and what should we be thinking about in terms of net growth for the back half of the year?

It's Lilly. I will give just a quick overview, and Ashton and Brent may give you more detail. I would say like a lot of BDCs, we are still experiencing a little heavier than average payment -- repayments across the portfolio.

It is obviously incredibly difficult, if not impossible, to predict quarter to quarter what those will be, so you guys' crystal balls are probably better at that than ours are even as operators.

But I think the whole industry that is focused on more the junior side of the capital structure continues to experience a little bit elevated levels of repayments. Ashton and Brent, would you guys add anything to that, or is that --

I would just add, I think, given that the higher yields in our portfolio, we were probably earlier than others in the cycle in terms of the really, really heavy repayments. We saw those last year in the second and third quarter.

And so, we're going to continue to have certainly relative to historical, if you look at the total history of TCAP, I think shorter average durations right now and slightly higher elevated levels of repayment, but I think that our really heavy cycle, we experienced last year.

Great, and then as the portfolio is moving back into growth, I think one of the key questions is available capital. You mentioned $200 million, but can you just give us a little more information on where you are comfortable running your debt, both on a total basis and a regulatory basis?

Sure, it's Steven.

I think we -- I would echo the comments I made in the prepared remarks about our capital structure and it tilting fairly conservatively there. We do enjoy, thankfully, still meaningful liquidity, certainly as a percentage of the portfolio. I think it's probably around 30% of the portfolio, which is a pretty healthy rate to show for any BDC.

On a total basis right now, I guess, we're about 0.8 times leverage, if you just look at the raw statistics. On more, call it, a 40 Act covenant standpoint, we're about 0.35, so we have additional capacity at the holding company, which is great. I think at that entity, we're operating today around -- right at 0.55 or 0.6, a little bit of rounding.

So there is good capacity for us there with the credit facility, which is -- it looks out that we were maybe a little early putting that in place, echoing some of Brent's comments a second ago of our elevated repayments last year, but now as we slip more into an expansion mode, we are very thankful that we have a such a large facility to take advantage of. So, does that help?

Absolutely. And then one final question, you talked about you are the first non-rated to issue debt. Is there any prospects of potentially getting a rating, an investment-grade rating?

Thank you for the question. We certainly look at those types of things. We have enjoyed nice dialogue with the rating agencies for now measured in years.

It is one of those questions that I think any operator is wise to ask at a time when they feel pretty confident what the answer will be, and so as our Company continues to expand a little bit, it is something that is a natural conversation at a point in the future. But in terms of pinpointing a time either for us or the rating agencies, I obviously would be very hesitant to do that.

Have they expressed any guidelines of what they need to see out of you guys? Obviously, your performance has been top notch. Is there some type of size or some type of issue that they have outlined to you that they want to see?

If you figure out the black box that the agencies use, please share it with us. (laughter). A little tongue in cheek there, obviously, but they have their own internal metrics. They are really loathe to share that for their proprietary reasons.

I would simply say that we have enjoyed a very, very nice dialogue with two of the rating agencies, and would hope at the natural time that we would take those steps that certainly some other folks in our industry have taken, and I think if you look at some of the larger folks in our space, they have probably appealed to the rating agencies from a size standpoint first. Triangle's appeal, I think we do have an element of size to leverage off of, but we hope to leverage off of quality as well, to your point earlier. So hopefully, we will hit on multiple data points when we get to that precise conversation.

Great. Thanks, guys.

Robert Dodd, Raymond James.

Congratulations. Just one housekeeping one first. Do you have the spillover income at the end of the second quarter?

We do. It is still -- I guess I would say it would be basically plus or minus about half a quarter's worth of dividends for us on a per-share basis, which is kind of where we would like to keep it historically.

And then on the question of the market, obviously very -- as of Brent's comments, very high levels of deployments early in the third quarter. Can you give us any -- and the backlog sounds like it is building, but -- and again, I know this question is going to be really hard to answer, but is there -- were some of those deals early in the third actually delayed from the second? And you are back to rebuilding your short-term backlog, if I can, your backlog for closing during the third quarter, and there can be a gap because, obviously, a very good start to the third. And I don't want to flatline that, obviously. For three straight months, that would be a little crazy.

But can you give us any color on whether there is a lag in terms of rebuilding after a really good Q2, beginning of Q3, and the rest of Q3 might be a little soft, we see a rebound in Q4? Any kind of additional color about where you stand in the near-term cycle would be really helpful.

Robert, good morning, it's Ashton. Thanks for your message or, sorry, your question. It is a consistent one because you asked the same thing last call. So, I will respond.

I try to be consistent. (laughter). I'm predictable.

It's a good question, and look, honestly, it's one that is hard for us to answer because, as you know, we partner so much with our financial sponsor partners in these deals. We don't drive the bus on the closing dates. We obviously drive the bus on the part of the capital structure that we are involved with, but overall timing is usually not at our control.

What I would say is that the market and the pipeline that we are seeing continues to be full, continues to be consistent, and continues to be one where fortunately with our platform, which is national in nature, as you know, continues to provide ample opportunities for us to consider.

So, I would say that it is hard to say whether or not the deals that we've closed in Q3 to date were on the borderline of closing in Q2. I just think they preceded along their normal path, and for the rest of the quarter, I would say that we are in a very normal mode of looking at deals and exploring opportunities and acting on them as appropriate.

So, we would consider the pipeline to be consistent, I guess is what I would say, but the timing of any deals that we ultimately act on can be lumpy and that's just an unfortunate part of the way this business is.

Robert, this is Brent. I will just add. As you will likely recall, 2012 was a very active year for us and that accelerated through the end of the year because of the tax law changes.

I would say what we are seeing now in the market is a long-awaited, really, recovery of a healthy and robust M&A market that bankers have been telling us about for the last nine months and we are now really seeing that.

And so, what we are seeing is not unexpected. Frankly, it took us a little longer than we thought because the pull in -- out of 2013 into 2012 due to the tax law changes just ended up being, I think, more severe than really anybody expected. And 2013 was a slower year than probably everybody expected. So, I think we are now getting back to normal and healthy levels, similar to what we saw in 2012.

Perfect. Thanks a lot, guys.

Chris York, JMP Securities.

Thanks for taking my question. My question on the investment-grade rating was asked, but I would like to get a clarification on the new investment activity for the total year. Is it safe to presume those comments were about an all-time high on a gross level, as opposed to a function of the beginning portfolio?

In terms of -- Chris, this is Steven -- in terms of the year-to-date investing activity, our comments earlier of it being the third most active quarter, and then the most active six-month period that we have had since IPO, that is on a gross basis, which is how we have consistently measured it.

Got it. And then, I suppose I will ask about staff. Do you continue to expect leverage or leveraging the current level of investment professionals with the pipeline or are you guys considering adding some additional staff?

Chris, hi, this is Garland. We will continue to manage the staffing levels just as we have since the IPO.

We have consistently said -- in fact, said at the IPO -- that we are committed to staying in the lower middle market. We saw a lot of growth opportunity in that market, and in order to achieve that growth, if we were successful as investors, that we would have to add to the staff as we grew, and that's certainly what we have done.

We don't see anything unusual or different as we look out into the future. We still see plenty of growth opportunities. If we are able to fulfill those, then we will be adding to the staff, but I don't think it will be anything in any way unusual or I don't think there will be any disconnect with what we have done over the last seven years.

Great, that's good color. That's it for me. Good quarter. Thank you.

Thank you, and I am showing no further questions at this time and I would like to turn the call back to Mr. Tucker for any further remarks.

Operator, thank you. I would only say to everyone thank you for joining us. I think we got some good questions, and we look forward to visiting with you next quarter and hope the results will be similar. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.