Barings BDC Inc (BBDC) 2015 Q3 法說會逐字稿

Welcome to Triangle Corporation's conference call for the quarter ended September 30, 2015. All participants are in 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 two hours after the conclusion of the call on the Company's website at www.tcap.com under the Investor Relations section. The hosts for today's call 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 will now turn the call over to Sheri Colquitt, Vice President of Investor Relations for the necessary Safe Harbor disclosures.

Thank you, operator, and good morning, everyone. Triangle Capital Corporation issued a press release yesterday 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, 2014, and Quarterly Report on Form 10-Q for the quarter ended September 30, 2015. Each is 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 start this quarter's call where we left off last quarter cup quarter's call. As Triangle moves towards our previously announced succession plan, whereby I will be moving to the role of Executive Chairman next year and Ashton will be moving up to CEO, I would like to make a few comments and then turn the call over to Ashton.

During the third quarter, our investment team originated a record level of new investments and we generated $0.56 of net investment income. From a portfolio perspective, we wrote off certain underperforming investments and our net asset value per share was essentially flat, increasing $0.01 to $15.48 per share. I am proud of our team efforts during the quarter and I believe we are well-positioned as we finish 2015 and begin to look forward to 2016.

And, with that, I would like to turn the call over to Ashton.

Thanks, Garland. The third quarter really was an extremely active quarter for Triangle. We originated approximately $189 million of total investments during the quarter, which was a record for us. During the quarter, we closed 11 new investments, totaling approximately $158 million and, on top of those investments, we made an opportunistic $26 million investment in a well performing existing portfolio company.

In keeping with our strategy of coinvesting equity alongside our financial sponsor partners, we invested more than $12 million in equity in six of our new investments. Our perception is that the competitive dynamics of the lower middle market have begun to shift in our favor during the last several months.

As a result, we are pleased to have been cautious during the first half of the year and that we held onto our liquidity to be able to put us in a position to achieve what we believe is a very opportunistic time in the market. Fortunately for us, the lower middle market continues to be active and we are pleased with the opportunities that our relationship-oriented style of investing producers. It is precisely this style of investing that could promote meaningful quarterly fluctuations in the amount of new investments that we make.

By focusing on our key sponsor relationships, we believe we can better target long-term returns for shareholders by operating within our credit discipline and maintaining our focus. And while that strategy naturally produces certain quarters where we make a significant amount of new investments, and certain quarters where our origination volume is very modest, we believe on a long-term basis it allows us to take advantage of attractive market conditions.

So as we move into the fourth quarter, I would say we continue to be active in the market, but it would be unlikely that a record quarter of origination volume, like the one we just experienced, would be followed closely by another record or near record quarter. And, with that, I will turn the call over to Steven.

Thanks, Ashton. Much of our straightforward financial discussion is contained in our quarterly podcast, which is made available yesterday at the time of our earnings release. So my comments will be focused on providing you with additional color behind our numbers.

Our third quarter of total revenue of $30.8 million represents a single quarter record for us as we recognized solid amounts of recurring revenues from our portfolio companies, coupled with strong dividend and fee income which we believe is enhanced by our investor strategy of having equity upside from such a high percentage of our investments. Our interest expense was slightly lower on a sequential basis due to the fact that we redeemed our 2019 votes in June of this year.

The lower interest expense and debt financing fees were partially offset by interest and fees on our large senior credit facility. From an efficiency ratio standpoint, for the first nine months of 2015, our efficiency ratio was 18.6%. Depending on various assumptions, we would expect our efficiency ratio to be between 19% and 20% of revenue for the full year 2015.

As Garland mentioned in his opening comments, our net investment income for the third quarter was $18.5 million or $0.56 per share as compared to $16.2 million or $0.49 per share during the second quarter of this year. As we look forward to the fourth quarter, we believe the trends we see (technical difficulty)

our investment portfolio will continue to lead to an above average amount of dividend and fee income, which hopefully will position us well as we turn the corner from 2015 to 2016.

Our net asset value per share was $15.48 as of September 30, as compared to $15.47 at the end of the second quarter and $13.07 at the time of our IPO back in 2007. I mention our IPO back in 2007 because we believe it is noteworthy that, over the last nine years, we have created a track record whereby we have grown from approximately $100 million in assets under management to approximately $1 billion of assets under management. We have cumulatively earned our dividend over the same time. But we have increased our NAV per share $2.41.

Finally, from a liquidity perspective, we have total liquidity in excess of $230 million which equates to approximately 25% of the value of our investment portfolio.

And, with that, I will turn the call over to Brett for a few portfolio-related comments.

Thanks, Steven. With regard to our investment portfolio, during the fourth quarter, our third quarter, pardon me, we recognized a realized loss of $18.3 million related to the write off of our investment in parts now. This loss was partially offset by $2.[3] million of realized gains in the quarter.

With this realized loss, we have now moved beyond three of our four troubled accounts from a year ago. Also during the third quarter, we experienced net equity write-ups totaling $11.2 million. As these investments continue to season, we expect that they will become the cornerstone of our next series of future equity gains.

Our unrealized equity appreciation during the quarter was balanced by certain debt investments which were written down during the quarter. In one of these investments, BFN Operations, or Berry, in conjunction with a balance sheet restructuring we amended the terms of our first-out subordinated note from 13% cash and 4% PIK to 3% cash and 14% PIK.

In addition, we amended the terms of our last subordinated note from 13% cash and 4% PIK to zero cash and 17% PIK. In connection with the changes we placed our last subordinated debt investment in Berry on nonaccrual and placed our first out subordinated debt investment in Berry on PIK, not nonaccrual status. Our total investment in Berry has a cost basis of approximately $16.1 million and a fair value of $6.5 million. In addition, during the quarter we moved one account from PIK nonaccrual status to full nonaccrual status. (technical difficulty) account is DCWB Acquisition Corporation, which has a cost basis of approximately $8.2 million and a fair value of approximately $3.4 million. In terms of debt write-ups during the quarter, the operating and financial performance of Eckler's Holdings has continued to improve and we are happy to announce beginning of the third quarter of this year the investment was back to full accrual. Also, Frozen Specialties was written up during the quarter from 84% of cost to 96% of cost as the Company's operations in near-term outlook continue to improve.

So in summary, we are pleased with the new investments we have added to our portfolio during the quarter and we are also pleased with the diversification and associated yield of the overall portfolio which as of September 30, 2015 totaled approximately $1 billion.

And, with that, I will turn the call back to Garland for a few concluding comments before we take questions.

Okay. Thanks, Brent. Since our IPO in 2007, we have maintained a singular focus in terms of our approach to the business producing above average returns for our shareholders. After a five-year period from 2010 to 2014, during which we generated over $44 million of net realized gains, we have experienced over the last nine months one of our more difficult periods during which we experienced approximately $30 million of net realized losses.

As we move to the end of 2015, and begin to look forward to 2016, I believe Triangle has successfully navigated this rough patch with the same measure of discipline and focus that our team employed to navigate the success-filled days and quarters before. So as we ready ourselves for 2016, I am confident that the Triangle Capital management team will maintain it's a discipline and focus and continuing to produce above-average returns for our shareholders.

With that, operator, we would like to open the call for questions.

(Operator Instructions) Ryan Lynch, KBW.

You obviously had a record quarter as far as originations this quarter and, Ashton, I think you spoke about favorable market conditions in the third quarter. What is really driving that shift in market conditions as well as you guys being able to put out -- have a record quarter as far as originations go?

Thanks for your question. I think it is important to step back and remember sequentially how the quarters have progressed from a market perspective. So I am going to start by answering your question that way first and then I will get more specific. Bet you may recall the first quarter of this year was a slow quarter in terms of flow. And that was not only a Triangle specific phenomenon. I think that was an overall industry phenomenon.

In Q2, you may recall we mentioned on our call that it was one of the more active flow quarters of the year and, importantly, the quality of that flow had increased as well. And, as you know, there is a lag time that occurs between flow and ultimate realization of the investments. And so the flow that started in Q2 and continued in Q3 all manifested itself in the origination performance that you see here. In respect to the actual market condition, I would say there are three or four things that continue to work in our favor.

Number one is just from a big picture perspective that commercial banks continue to retreat from the middle and lower middle markets, is providing a tailwind for non-bank lenders including TCAP.

Number two is the M&A market is still active. And there is a need for capital.

I regularly check in with our M&A boutique friends and they report that the market is still very active, especially in the middle and lower middle markets. Pitch activity is high. Some firms are saying pitch activity is higher than it was. Last year. I would say that overlaying that, there is also an increased degree of caution about the quality of the product that is coming to market.

But the fact remains that the flow is steady. So theme number one, commercial banks continue to retreat. Theme number two, M&A market is still active and there is a need for capital.

The third theme I would say that is providing some tailwinds for us is, while the market -- the financing market remains open, there are certain aspects to it that are helping us. Liquidity, the pricing has steadily tightened, spreads have widened, leverage multiples have narrowed. And when you combine those factors with TCAP's specific competitive positioning, which is the fact that we have a strong balance sheet, we have good liquidity, and we have a relatively strong currency, vis-a-vis the rest of the competition, it positions us very well to capitalize on our relationship style of investing.

Great. That actually is a good segue into my next question which is capital management. If I look at your balance sheet, you have $50 million of cash. You are also levered basically at 1 to 1 times debt to equity. But well under that level from a regulatory standpoint. You have plenty of capacity on your revolver if you chose to draw more on that. You have that opportunity.

And then, if I look at your stock price, you are above book value, but at a stock price much lower than you were six months or a year ago.

So how are you guys thinking about funding growth over the next six to 12 months assuming that you can deploy that $50 million of cash on your balance sheet?

Ryan, it is Steven. Thanks for your question. First of all, your observation is accurate in terms of total leverage. However, I think it is important to point out that, from an SEC perspective, and a [40 act] perspective, where actually levered about .56 to 1, 0.56 to be clear, and I think that compares to the basically the full BDC industry of being in the high, .67 to .7 times leverage. So I think from a 40 act perspective, we are actually below our peers in the industry and so that gives us flexibility, obviously, either within our bank facility or in, call it, the bond market.

It also -- I think it would be natural to think that for some time period between now and, call it, year end next year depending on the amount of investing activity that we see, all BDCs at some point need to think about raising stair stepping in terms of debt and equity and those types of things. And we would want to be as prudent with that, certainly from an equity standpoint, as we have tried to be and believe we have been in the past. So based on what we see right now, we think we are in a healthy position so I am not sure I think that we are about to do anything near-term, based on what we see in the market and in terms of our -- the flexibility we have in our balance sheet.

But if you draw the line out far enough next year, I think it is certainly reasonable to think that we, like any BDC, what think about permanent capital at some point. Does that help?

Yes. That's helpful. One other question on that. Have you guys started any dialogue with the rating agencies to potentially get an investment grade rating?

There's a question. Let me think of the appropriate way to answer you in a public forum. We are actively looking at the possibility of that.

Okay, understand. And then just one more on a portfolio company. Looks like United Biologics had a pretty big write-down on the current quarter. Can you just provide any color or update on what is going on with that investment?

Sure, Ryan. This is Brent. As you know, we are very limited in what we can say about a particular portfolio company. The Company is experiencing some near-term challenges. We are certainly very hopeful that those were get reserved resolved in the not-too-distant future, but we felt it best, given some certain near-term uncertainty there and weaker performance than we had anticipated that the prudent thing to do is to take it down. We are relatively optimistic that those things will get resolved and -- but, time will tell on that, for sure. So we will certainly look to revisit that the next reporting period.

Bryce Rowe, Robert W. Baird.

Wanted to ask about repayment activity and then kind of coinciding with some of the unrealized appreciation you had third quarter from second quarter. So obviously, kind of a record pace of repayments as well in the third quarter.

What is the outlook here coming out toward the end of the year and then wanted to just get a feel for whether you had some strategic processes started with some of your portfolio companies, given the equity appreciation and a handful of companies this past quarter. Thanks.

It is Ashton. Thanks for your message. As you know, it is always hard to predict repayments. That has been a frustrating part of this business. Especially when we have such a great quarter of originations. All I would say is that we would expect repayments to continue. We obviously have a very well attractively priced portfolio and sponsors are being opportunistic. There is still a market out there so it is hard to predict the quantity and the amount of repayments, but we would expect the trend to continue.

And just one more general comment, Bryce. On valuations. Again, in terms of what to expect, I think we will have to wait for the K to come out. Not as -- potentially your question implied, obviously had some meaningful equity write-ups. Those are not all necessarily tied to expected repayments.

As you know, we do have a history of being a little bit conservative in our marks before exits -- or the exit typically is north of where our market is. But some of the write-ups are in light of potential M&A activity with those companies, but others are just strong Company performance.

Robert Dodd, Raymond James.

Just kind of staying on the equity theme, one of the themes over the last couple of years, how it was harder to get equity in new investments. And then this quarter obviously a record amount deployed and then six of the 11 you managed to get equity in.

So, can you give us a little bit more color on -- do you think that is easing the ability to get equity, which obviously has been a core part of your strategy in the long run? And then also, tying that in kind of with Bryce's question, if equity multiples are high you are getting equity now, are you paying up a lot to get high valuations to get that equity and how will that affect potentially the ability to generate gains on that equity in the future?

Look, I would say on the equity, the ability to get equity, it is still as a macro theme hard to do in today's market. Having said that, the Triangle playbook is well known and well accepted and has been very consistent since our IPO in 2007. And our sponsor partners know and understand it and appreciate it and embrace it.

And so back to my comments earlier, we have a very relationship style of investing and so our partners, there is very rarely any sparring that goes on between us and our partners about equity because when they choose to go with us, they know that it is a standard part of our playbook. And, if they were not willing to consider it, they wouldn't have conversations with us in the first place.

So I would say that, yes, to answer your question, from a macro perspective, it is difficult to get equity in today's market. Having said that, we have the very strong core relationships that we have and with whom we regularly transact. It is a well-known component of our investing strategy and by definition of choosing to engage with us, they are affording us the opportunity to have equity in the majority of our investments.

Let me add one thing to that Ashton was saying. More in terms of the more recent investments that we have made where we have had equity positions and your comment of later in the cycle and what that might mean for future gains. I think what we have experienced over, certainly, in our lifecycle including the private years of, call it, the 12 years or more of invested -- our returns on equity investments have, frankly, not been correlated to what you would think of as a good vintage year or a bad vintage year in terms of overall investing.

I think the reality is in the lower middle market and especially with our portfolio, these are very specific positions. They are individual companies. We are not a cycle dependent investor, I guess I would say. And as you have heard many times on these calls before, what we look for the best risk-adjusted returns we can find and to Garland's point earlier, more times than not thankfully that has worked in our favor. And we think it has been one of the reasons over the full body of work for Triangle, we have enjoyed such a nice track record. And, obviously, we hope that will continue but time will be the best arbiter of it, I guess I would say.

Okay. Thank you. Very helpful color. On Eckler's if I can, last quarter you basically said that they could be coming back on accrual at some point in the not-too-distant future. You delivered that this quarter so -- congratulations on that. What is the confidence level that investment is going to continue to basically remain on accrual and perform at a high level? I mean, what is the margin in a sense -- the margin of error by which they came back onto accrual?

Yes. I guess the best indicator is where we are carrying it at. Which is very close to par. And so, we are using our best judgment, obviously, based on the results that we are seeing from the Company. And if we did not expect those results to continue to be positive, then I think you would have seen a different market.

Got it. Thank you. Then, one last one, if I can. A little bit of a fishing expedition, put you on the spot a little bit, Steven. Dividend and nonrecurring fee income was high, as you said, and then in your comment you said it you expected it to remain high. Optimistic that it could.

Q4 is typically a high quarter anyway because of year-end tax distributions, the S-1s, and things like that. So where dividends occur it can be high in Q4.

So from a color perspective, are you indicating Q4 could be abnormally high at 4 AQ 4 or just abnormally high compared to Q3, which was abnormally high as well?

Professor Dodd, that is a good question as always. I guess the observation I would give you without trying to be too technical about it is, if you were to look back over the last four years of the Company, then I think the fourth quarter would have been the highest quarter on record in two of those four years. And it would have been pretty materially lower than average than the other two. So we were not trying to say that it would be high for the fourth quarter based on historical observations. But I do think what the trends we are seeing in the portfolio, which really echo back to what Ashton was saying in terms of the overall M&A market, that sponsors are being active with companies. And frequently, they will run a parallel process of looking at (technical difficulty) selling a company or doing a dividend recap of those types of things.

And so, I think from our standpoint, repayments have continued to be elevated. That has been a little bit of the downside of the cycle that we are in. But nonrecurring fees and dividends have been, I guess we would call it, above average, which is a little bit offset.

So I think in the fourth quarter, we feel good about things, where we sit today. So I think if you were to look at your model and whatever your average number is, if you were a little bit above that, that is probably not the inappropriate place to start, I guess I would say. Does that (multiple speakers)?

Okay. Yes. Helps a lot. Thank you.

Chris York, JMP Securities.

Just one modeling question this morning. So given that you have now resolved most issues, with your troubled credit from last year, should we expect a reduction in expenses associated with those credits in the G&A line item in 2016?

We, historically, have not engaged third-party consultants and things of that nature that we would pay ourselves to help us in restructurings and workouts and those types of things. So our SG&A burden was not artificially increased during the last, call it, 12 months since the third quarter of last year where we were surprised by these accounts that as you point out, we have pretty much worked through now, thankfully. So I don't think you will see any real change depending upon that within the SG&A line.

Ben O'Shea, Wells Fargo Securities.

Looks like he dropped out of queue, sir. Next question is from Bruce Roberts, Interest Brokerage.

I had a question about obviously the record amount of originations. Congratulations on that. I just want to look at that through two prisms, if I could. Also, the efficiency ratio is a little bit higher this quarter, I think, if I am not mistaken. Doing that kind of enlarged amount of originations, is that -- does that require you to sort of temporarily hire additional underwriting personnel? Does that have anything to do with the higher efficiency ratio?

And then, also, you mentioned earlier that you have gone through this rough patch of bad debt with that earlier vintage. And I was just wondering, how do you anecdotally feel about this new origination -- bunch of originations that you did from a credit standpoint versus when you did the originations for that vintage that created the rough patch? So I wanted to sort of get a sense of the credit quality of the new originations, how you feel about that and how you accomplished that in terms of just sort of like nuts and bolts getting the personnel to do that through the quarter. Thank you.

Bruce, it is Steven, I will start and then let a combination of Brent and Ashton, maybe, to take the last part of what you asked. From an origination standpoint it certainly was active for us as we indicated in our prepared remarks. We do not hire short-term staffing with that type of thing to help or augment our SG&A position doing these periods. We have got a full-time team Triangle Capital, sole focus of everybody here. And so we think it has produced better results to have it be structured that way.

And in terms of your comment on the efficiency ratio, I think if you go back and look at us over a long, long period of time, what we have always talked about is an efficiency ratio of somewhere on the low-end of probably 18% and on the high end, probably 22% of revenue. And we certainly bump around on different quarters, but I think in this quarter we were 18.6% for the quarter, which is certainly on the low end. Year to date this year we are 18.7%, I think.

So from that perspective, I think, again, we are kind of in the low part of where we would expect to be. And that echoes to my comment earlier that we would expect to end the year between 19% and 20%, based on various assumptions.

So if you take the bracket of 18% to 22% and we are going to end the year 19% to 20%, we are on kind of the lower half of the growth there. So I think we feel very comfortable with that and hope you would take that as well that we are being good stewards of shareholder capital.

In terms of how we feel about the current originations, the de facto answer is, we feel very good about them or we would not have made the investments to begin with. We look at a lot of opportunities. As you have heard Ashton say on these calls before, it is not unusual for us to have $2 billion of total flow in a single quarter that we are filtering through in terms of the total consideration.

So, there is a lot of filtering that goes on. We tend to close somewhere between 3% and 5% of what we look at. We are very much aligned with that this quarter and I think feel really good about those.

In terms of the investments that we were surprised by last year, the four nonaccruals that we have thankfully worked through now, I will let Brent make any comments that he might -- I think just to summarize before I hand it to Brent, I think, in general, there were, as we specified on prior earnings calls, there were fairly specific circumstances related to each of those accounts that were unforeseen items. But, again, Brent, you may have some additional color on that.

Yes. A couple of additional comments. To the deployment question, we do not have deployment targets, either quarterly or annually. And so, if you look at our first and second quarter, first quarter we deployed just under $80 million. Second quarter we deployed just under $50 million and we had a repayment almost equal to that so we had no asset growth. We obviously had stronger payments in Q3. We could have had negative asset growth. We certainly have had that in the past.

So there was no attempt to hit a certain number. We originate the best investment opportunities that we can and we select the best opportunities we can to go after and some of them we win and some of them we don't. This quarter, to comments that Ashton alluded to earlier, I think the competitive landscape has changed a little bit. Most of the BDCs are more liquidity constrained than we are.

So I think that helped us. It helped us get a little bit better risk-adjusted returns in the market and gave us a little bit more, both at apps and a little bit higher batting average, probably.

In terms of nonaccruals, we look over our history, we are generally taking more risk in the market than most of our peers and we have been amply rewarded for that in the past with our market-leading returns that we historically enjoyed. Generally speaking, if you look out over a long period of time, we have about a 200 basis point premium on our loans to the market. Yet, our nonaccrual assets have been more or less in line and, of course, we realized net gains over and above our losses.

And what we had happened last year -- a year ago, was unusual, something fairly unprecedented in our experience. We always have, obviously, accounts that have challenges and we have had deeply troubled account in the past. We have had meaningful losses in the past, again, those have been more than offset by gains and that has been sort of a normal part of our business. As it is with every (technical difficulty) that is doing what we do.

So the unusual nature of Q3 last year was very episodic and it just happened to be from a timing standpoint that we had four accounts with some negative surprises all at once. Two of those accounts have been pretty much fully written off. One continues to pay down debt and had some potential positive catalyst there. The other is a business that we own 100% of. Or almost 100% of. And we're seeing some very positive developments there that could result in some meaningful upside for us, but, again, it is too early to say. It is marked where it is for a reason. So yes, those are -- that would be my summation of responses to your question.

At this time, I don't see any other questions in queue. I would like to turn it back to Mr. Tucker for any closing comments.

Okay, operator. I would like to, as always, thank you for being on the call. We appreciate your interest and we look forward to staying in touch. Thanks, again.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your program. You may now disconnect. Everyone, have a great day.