Barings BDC Inc (BBDC) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. At this time, I'd like to welcome everyone to the Triangle Capital Corporation's conference call for the quarter and year ended December 31, 2015. All participants are in a listen-only mode. A question-and-answer session will follow the Company's formal remarks. (Operator instructions)

Today's call is being recorded, and a replay will be available approximately two hours at the conclusion of the Company's call, and also will be located 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 President and Chief Executive Officer, 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 and full-year 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 a 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, 2015, as filed with the Securities and Exchange Commission. TCAP undertakes no obligation to update or revise any forward-looking statements.

At this time, I would like to turn the call over to Ashton Poole.

Thanks, Sheri. 2015 was a turbulent year in the debt and equity markets. While the S&P 500 generated a positive 1.4% total return, the three primary forms of debt securities -- investment-grade, high-yield, and syndicated loans -- all experienced negative total returns. Indeed, during 2015, the BDC industry experienced a negative 4% total return, and 2016 is clearly off to a difficult start.

It is against this backdrop that we are pleased to be able to report a positive 5.8% total return for our shareholders in 2015, in addition to strong operational and financial results for both the fourth quarter and the full year.

2015 for Triangle was marked by several notable items. First, we excelled in originating high-quality, new investments in the lower middle market, as 2015 represented our second-most active investing year on record, with over $450 million in total capital deployed.

Second, we successfully reduced our cost of capital and meaningfully expanded our balance sheet, as we called our 7% bonds in June; issued new, lower-cost bonds; and expanded our senior credit facility to $300 million.

Third, the additional revenue generated from our investing activities, combined with the interest savings from our balance-sheet management, as well as strong dividend and fee income from our portfolio companies, enabled us to generate net investment income of $0.58 per share for the fourth quarter and $2.16 per share for the year, an amount which equals our base quarterly dividend.

And fourth, from a portfolio-management standpoint, we recognized realized losses on certain underperforming assets. It is because of these net realized losses, as compared to net realized gains during 2014, 2013, 2012, and 2011, that our Board decided to discontinue the quarterly supplemental dividends that we have been paying for the last eight quarters.

As we said in our August 2015 conference call, when we have cumulative realized capital gains, we have the opportunity to pay supplemental dividends to shareholders. But in periods when we do not have realized gains, it is not prudent for us to pay supplemental dividends that we have not earned.

As we move into 2016, we see the overall market and our specific opportunity somewhat differently. First, the overall market is experiencing dislocation, primarily due to macro concerns, including commodity price declines, a slow-down in China, fear of a US recession, rising interest rates, and rising default rates, among others.

Second, this macro-economic vortex has unfortunately enveloped the BDC industry, which is grappling for its rightful place in the public markets. Indeed, some operators are wondering if they will ever be afforded the opportunity to grow again.

Despite a difficult overall market and a challenging time for BDCs in general, the outlook for our principal investing market, the lower middle market, remains bright. It is a fertile market, which has only become better and stronger since the Great Recession.

We find lower middle market management teams are very adept, their businesses are well run, and they have become more attuned to the nuances of customer relationships and what it takes to preserve and enhance them.

Against the backdrop of declining deal flow in the larger middle market, deal flow in the sub-$500 million enterprise-value segment increased by almost 10% during 2015; and transactions with an enterprise value below $100 million increased by 15.5%. These data points are important to us, given that approximately 95% of our existing portfolio companies have enterprise values below $500 million.

Thus, the lower middle market continues to stand out in an otherwise difficult environment. It is a market with which we are intimately familiar, and it continues to present TCAP with many attractive investment opportunities, as illustrated by the fourth quarter of 2015, where we originated $101.5 million of investments across both new and existing portfolio companies.

These investments were made at a total rated average debt yield of 11.8%, which equals the weighted-average debt yield of our investments originated for the full year of 2015.

As we have moved into 2016, there is an increasing degree of separation between what are considered to be A-quality companies and B- and C-quality companies. And while we have always tried to focus on quality over quantity in our investing strategy, we are clearly seeing the market become more stratified in terms of total leverage, pricing, and [covenants]. Transaction multiples also have declined recently, as buyers have become increasingly focused on not overpaying for cash flow streams that have experienced meaningful levels of growth in recent years.

In the sub-$100 million enterprise-value segment of the market, average EBITDA valuation multiples were 6.9 times during 2015, as compared to 8.1 times during 2014, with much of the downward moves centered on the last half of the year.

So in short, the lower middle market continues to offer attractive investing opportunities, albeit with a [credit lens] more sharply focused on structure, pricing, and (inaudible) company-specific competitive advantages. And with that, I'll turn the call over to Steven.

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

Our fourth-quarter total revenue of $31.8 million represents another single-quarter record for us, as we recognized solid amounts of recurring revenue from our portfolio companies, coupled with strong dividend and fee income, which we continue to believe is enhanced by our strategy of having equity upside in such a high percentage of our investments.

Our interest expense was slightly lower on a sequential basis, due to lower average borrowings on our senior credit facility; and our G&A was slightly higher quarter over quarter, due to increased incentive compensation expenses.

From an efficiency-ratio standpoint for the fourth quarter of the year, our efficiency ratio was 19.6%, and for the full year, our efficiency ratio was 18.9%. Going forward, we still consider an appropriate efficiency-ratio target range to be plus or minus 20% of revenues.

As Ashton mentioned, our net-investment income for the fourth quarter was $0.58 per share, or $19.2 million. This compares to NII of $18.5 million, or $0.56 per share during the third quarter. Our NAV per share was $15.23 at December 31, as compared to $15.48 at the end of the third quarter, and $13.07 at the time of our IPO in February 2007.

From a liquidity perspective, we have total liquidity in excess of $220 million, which equates to over 20% of the value of our investment portfolio.

Now in terms of outlook for 2016, a few of the key drivers are as follows. First, our yielding debt portfolio totals approximately $850 million and has a weighted-average debt yield of 12.2%.

Second, our annual recurring-fee income -- that is, fee income which happens every quarter contractually -- is approximately $3 million per year; and our non-recurring fee and dividend income from portfolio companies tends to approximate $8 million to $10 million per year. These items yield total annualized revenue of approximately $115 million to $117 million per year, before allowing for any investment-portfolio growth.

Our total interest expense should approximate $27 million during 2016, and our total G&A should approximate $23 million. These expense items total approximately $50 million, which results in a baseline net-investment-income range of $65 million to $67 million, again before allowing for any investment-portfolio growth.

We should remind you that as overall interest rates remain quite low on an absolute basis and compressed on a relative basis despite the recent widening in credit spreads, our ability to earn our dividend on a quarter-to-quarter basis continues to be driven to some extent by one-time fee and dividend income generated during a specific quarter.

Consequently, should the economy continue to remain relatively stable, should spreads continue to widen, and should our investment portfolio continue to generate one-time fees and dividends, we would expect to be in a position to generate net-investment income on a per-share basis that would be in the range of 2014 and 2015 results.

However, should any of the above items change, including our outlook for fees and dividends with respect to our investment portfolio, or should lower middle market M&A activities slow materially, then we would expect to revise our guidance accordingly.

Finally, as we have previously announced, the one-time items associated with the retirement of our former CEO, Garland Tucker, total approximately $5.5 million. These items will be recognized as nonrecurring operating expenses during the first quarter of 2016, so I highlight them for you so you can begin taking them into account as nonrecurring items in your models for 2016.

And with that, I'll turn the call over to Brent for a few portfolio-related comments.

Thanks, Steven.

With regard to our investment portfolio, during the fourth quarter we originated $101.5 million in investments across both new and existing portfolio companies; and we received full and partial portfolio-company repayments, totaling approximately $75.3 million.

For the full year of 2015, we originated $453.9 million in investments across both new and existing portfolio companies, and we received approximately $321.8 million in full and partial repayments.

During the fourth quarter, we recognized realized gains totaling $2.8 million, and we recorded pretax, unrealized depreciation on our current portfolio of $10.4 million.

Across the equity component of our investment portfolio, we experienced [26] write-ups in the quarter and 27 write-downs, resulting in unrealized depreciation of approximately $3.5 million.

Across the debt portion of our investment portfolio, we experienced $6.9 million of unrealized depreciation, the largest component of which was a further write-down of our investment in BFN Operations.

We did not have any new nonaccruals during the fourth quarter. And as of December 31, 2015, our nonaccruals [on a cost basis] (inaudible) 2% of the cost basis of our investment portfolio.

In the first quarter of 2016, in conjunction with a further restructuring of BFN Operations, we stopped recognizing the 3% [cash interest] on our $14.2 million first-out subordinated note.

As a result, BFN Operations, which was previously a PIK nonaccrual asset, is now a full nonaccrual asset. However, I should note that the loss of additional interest income [for us] at this stage is less than $0.5 million [this year].

For the full year 2015, we recorded $27.5 million of net realized losses. As a result, 2015 represented the first year during the last five-year period when our investment portfolio generated net realized losses, as opposed to net realized gains. And over that five-year time period, our net gains outpaced our net losses by approximately $22.2 million.

We continue to believe that our ability to protect shareholder capital is meaningfully enhanced by having equity [upside] in a high percentage of our portfolio companies.

Our long-term investment performance, when combined with one of the highest weighted-average yields in the industry, is testament to the skill of our investment professionals, as well as our strategy of investing in the lower middle market.

In addition, the historical stability of our net-asset value on a per-share basis is due to our history of equity gains exceeding loan losses since inception, as well as our decision to avoid over-concentrating our investment portfolio in certain sectors, such as the energy-related exposure that many BDCs took on during the last few years.

And with that, I'll turn the call back to Ashton.

Thanks, Brent.

In our opinion, 2016 could be a very important year for the BDC industry and its investors. Management teams who are operationally and financially focused and who have a long-term perspective will increasingly become distinguished in terms of market perception and value from those focused on the short term.

Since going public in 2007, one of the hallmarks of TCAP has been the Company's commitment and ability to communicate clearly and transparently with investors. My personal commitment is to not only continue the clarity and transparency with which we have communicated in the past, but also to enhance it.

The decisions we make during the balance of 2016 will be focused on how to best position TCAP for future stability and growth so that shareholders a decade from now will be as pleased as shareholders have been for the last decade.

And with that, operator, we'd like to open the call for questions.

Thank you, Mr. Poole. (Operator instructions) John Hecht, Jefferies.

Actually, this is Mike Del Grosso calling. Quick question for you guys on -- what was total fee income in the quarter, and how does that compare to typical base levels of fee income?

Total fee income in the fourth quarter of 2015 was approximately $4.5 million. And as we said in our guidance, that's -- we would tend to average between $2 million and $2.5 million.

Okay, great.

So again, a very strong quarter in terms of fee income.

Got it. And as far as revenue and EBITDA of the portfolio companies, anything we can discern on geographic or industry macro trends, aside from the energy and cyclical exposure you guys called out?

I'll let -- this is Steven -- I'll let Brent handle that one.

We're -- no major change in trend, Mike. We continue to see generally over the portfolio modest revenue and EBITDA growth.

I will point out, actually -- in our energy portfolio, we have three companies. Those companies are all performing very well. One of them -- the debt was refinanced in 2015. We now have equity only. All three of those companies actually grew their earnings year over year in 2015.

That's great. Final one -- have you applied for your third [SBA] license yet, given the legislative changes, and how should we think about the funding there?

This is Steven. We are in process with the SBA in terms of what would ultimately be the third license, but I would not expect that we would be at a point from a true licensing standpoint with the SBA in the next 60 to 90 days, just because those things do take time. But we are beneficiaries, I guess I would say, of the new legislation, and we're delighted that it has finally passed.

Great. I'm going to hop back into the queue and give some other people a chance to ask questions. Thank you for the time.

Ryan Lynch, KBW.

Good morning, and thank you for taking my questions. First off, Ashton, congratulations on formally taking over the CEO role. And on that note, Ashton, are there any changes, either strategically or operationally, that you plan on making over the next coming quarters or even years to TCAP?

Ryan, good morning. Thanks for your message, and thanks for the congratulatory note.

In terms of planned strategic changes, I'd say that -- as you know, I've been at TCAP now for two and a half years, so I've been able to get into the flow of the business, understand our strengths and the markets in which we target. And I would say that I would anticipate no major strategic changes for us.

We continue to see a lot of opportunity in the lower middle market. We fortunately have a leading platform in that market, and we will continue to pursue transactions as we have historically done that balance the best risk-adjusted return for our shareholders. So nothing on the horizon that I would see that would be a major departure.

Okay. And then I want to circle back to the SBIC program. So obviously, the legislation passed, as we just talked about. So does that mean that you guys have access to the additional $75 million with your current two licenses, and then you could eventually get the full $125 [million] if you get a third license -- but you guys have access to that additional $75 million today -- number one. And also, assuming that you guys do have access to the SBIC debt in the near term or in the future, how should we think about your total debt to equity that you guys run on your balance sheet, as well as the regulatory debt to equity with these additional SBIC debentures?

Ryan, it's Steven. There's a lot in your question, there. The first thing I would say is, out of deference to our partners at the SBA, I think we would not ever want to say anything in a public forum that would commit them or that they would perceive that we were saying to try to get them to be committed to something that they internally would make their own decision about.

Certainly the SBA is working with each of its licensees, in terms of the age of their fund, in terms of how much capital has been drawn on that fund. And we have been delighted to engage with the SBA with numerous conversations since the legislation passed, and even before the legislation passed.

I'm not going to be able to get as specific as you might like in terms of [grist-ful] information in terms of timing and leverage draws and things like that. But it's a wonderful thing for us as well as some other [SBIA] licensees that this legislation has passed. And I think over time, we, and other folks too, will take advantage of it. So it's a really good thing. So I'll leave it at that point in terms of SBA things, if I may.

And then in terms of your question on leverage and -- both from a regulatory standpoint and total standpoint -- the Company's right at about 1 to 1 on a total standpoint. But given that we have the exemptive relief that we do, we're slightly north of 0.5 [and I think it's] 0.56, 0.58 on a regulatory basis.

And so we have capacity there. I think from a regulatory standpoint -- you know, you don't want to get too close to 1 to 1 from a regulatory basis because you always want to leave a little bit of fluctuation in terms of portfolio value and things like that.

So there is capacity there, and we're grateful that we have it, and we will utilize an appropriate amount of it. So I hope that helps give you a little bit of color.

Yes, that's great. That's actually all the questions from me. Thanks, guys.

Bryce Rowe, Baird.

Good morning. Just some questions around the prepared remarks, relative to your overall macro comments versus the lower middle market. We've heard from you all over the years, as well as other BDC management teams, that perhaps the middle market and the lower middle market will react more slowly to market changes. I'm just curious what you're seeing in terms of deal terms and deal pricing now and if you think we're going to see some better movement in terms of pricing, given that spreads have widened in the overall market.

Bryce, good morning. It's Ashton. Thanks for your question.

I'd say, high level, from where we sit, and as I've said before on our calls in the past, we have very close relationships with many of the financial institutions who are involved on the M&A side of the business with the middle market and the lower middle market.

And what we've heard very consistently from all of them has been that overall PE activity simply -- I think the word would be crested in 2015, and certainly started a decline in Q4. So that's an overall comment.

Specifically, you start to peel back the onion -- the middle market, itself, would follow that trend. That's the broader middle market. So cresting would be consistent with that market, as well.

Having said, that when you peel the onion back further and go to the lower middle market, you actually saw deal counts stable to slightly up in 2015. So you did see a difference between the overall market and the middle market versus the lower middle market.

And so far, we're not seeing any different trends from -- if you were to ask our deal teams, they're very busy and running around, as they usually do. So it's hard for us to predict how things will happen.

As you know, it's a very -- gotten to be a very seasonal business over the last several years. And certainly in the fourth quarter and first quarter when folks are working on their audits and preparing companies to go out, you might see a slight dip in activity. But where we sit right now, we're very, very happy with the flow that we're seeing in the lower middle market.

That's great, Ashton. And just to follow up -- from a pricing perspective, you guys have talked about the historic range in the lower middle market in terms of yields on investments. Do you see the yields that you [might had] or that you're seeing now, do you see the potential for those starting to move up relative to moving down, as we've seen the last couple years?

The answer is yes. And I think we started to see some firming of pricing occur -- really if you go back to Q3 of last year, that's when you started to see selective firming. And I would say that across the board now we're seeing a firming virtually in every deal that certainly we're contemplating.

As you know, the range of pricing that we have communicated before is 11% to 14%. That's the historical range that you would see for mezzanine debt, or subordinated debt. And I would say that from where we sit today, new deals are certainly above 11% and probably -- the average deal is above 11% and a little south of 14%. So I'd say that -- you know, kind of 12% to 13% is more of the norm that we're seeing today.

As I did highlight there are companies -- there's a big differentiation in A-quality companies versus B- and C-quality companies. And I will tell you that the A-quality companies that are in the market do continue to receive the best terms on overall leverage, pricing, structure, etc.

So that is not changing. And so -- but overall I'd say that, kind of 12% to 13% is a general range that we're very comfortable with and we're seeing quite frequently in the market.

That's great. Appreciate the comments.

Robert Dodd, Raymond James.

Hi, guys. First, a kind of market-structure question, going back to Ashton's comments at the beginning -- and congratulations, as well. Back in 2009, a very different situation, but volumes dried up for the overall market because buyers and sellers had a big difference of opinion between what the multiples should be. And [by this hand] we're seeing some of those signs again. And that can take a little while to play out before everybody kind of has a meeting of the minds and deals start getting done again. So is that the potential risk in 2016, the discrepancies between the bid and ask, so to speak, on these middle -- the quality middle market businesses is so large that, just, there's a stalemate for a while?

Robert, this is Brent. Always good to hear your voice.

I think the comparison to 2008 here, at least at this point, does not make sense. I mean, 2008 was an absolute [cliff] with a marked collapse. And I think our market adjusted pretty rapidly to that.

I think that -- you know, multiples are still quite high. It's still a very good time to be a seller. I think there's always tension between seller expectations and buyer expectations. We're actually hoping that the market adjusts a little bit here, in terms of purchase-price multiples, because we do think they've been getting a little elevated.

So I think the adjustments we're seeing in the market and the little bit of volatility and the macroeconomics challenges that Ashton mentioned could very well be a real positive for our market, in terms of bringing expectations down a little bit and bringing purchase-price multiples down a little bit, as well.

Obviously, if the macro adjustments go too far, then I think you'll begin to see some of the mismatch in expectations that you're talking about. But for right now, I think we're seeing a market that we believe is becoming a little bit more balanced and we hope will continue to become a little more balanced as the year goes on.

Okay, great. Thank you. On the SBA, following up Ryan's question, one of the -- the obvious question -- I don't want to get too technical -- one of your SBICs has 150 [drawn], the other one 75. The one that has 75 drawn, is it still in its reinvestment period, or out of the investment period, which triggers either the need for a request for debentures or request for license?

Robert, it's Steven. We believe we would have availability to draw additional debentures on what is known as [fund 2] for us.

Okay, perfect. Thank you. And then last one -- trying to put you on the spot here, Steven, like I like to -- this year looks like fee and dividend income was around $15 million, last year a little north of $11 million, if I'm doing my math right. But you're indicating larger portfolio [of] $8 million to $10 million. Is that more an artifact of, for lack of a better term, [be] conservative and give something that's got a very high confidence level, or -- it seems a little lower than we've seen the last couple years.

Robert, thank you for the precision of your analysis (laughter). We did have about $15 million, or so, of nonrecurring fees in 2015. That was a record year for us. And the last two years were -- 2014 and 2013 -- were about $12 million. So your observations are spot-on.

In terms of our guidance of $8 million to $10 million, we do strongly prefer to under-promise and over-deliver. That's certainly in our DNA. But I think it is fair to acknowledge, as we are in a later stage of an economic cycle, that we would think that nonrecurring fees and dividends should begin tapering off as people do -- companies have fewer, perhaps, dividend recaps, given the widening of some spreads in the market that we talked about earlier on this call. And again, as spreads are widening, then you might have fewer repayments and refinancings, as well.

So it would seem to us that statistically 2016 should be a lower year, certainly than 2015 was, being a record. And we felt that $8 million to $10 million was a good starting point for our guidance. Does that help?

That helps a lot. Thank you.

Thank you. Gentleman, at this time, I show no further questions in the queue. I'd like to turn the call back over to Ashton Poole for any additional or closing remarks.

Great. Thank you, operator, and thanks to everyone for joining us today on our call to review Q4 and fiscal year 2015 results. We appreciate your interest in TCAP, and we look forward to further conversations with you at 2016 progresses.

Thank you. Again, ladies and gentlemen, this does conclude today's conference. Thank you for your participation, and have a wonderful day.