Logan Ridge Finance Corp (LRFC) 2013 Q4 法說會逐字稿

At this time, I would like to welcome everyone to the Capitala Finance Corporation conference call for the quarter ended December 31, 2013.

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 the 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 Capital Financial Corp Chairman and Chief Executive Officer, Joe Alala. Chief Operating Officer, Treasurer and Secretary, Jack McGlinn. And Chief Financial Officer, Steve Arnall.

Capitala Finance Corporation issued a press release on March 11, 2014 which details the Company's quarterly financial and operating results. A copy of the press release is available on the Company's Website.

Please note, this call contains forward-looking statements that provide information 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 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 our Registration Statement on Form N-2, and any report on Form 10-K filed on March 11, 2014.

Capital undertakes no obligation to update or revise any forward-looking statement.

At this time, I would like to turn the meeting over to Joe Alala. You may begin, sir.

Thank you, operator. Good morning, everyone. Thanks for joining us.

This is only our second public earnings call, but we just want to reiterate our desire to have a great dialogue with the public investors and analysts, and have full transparency in our operations. Our phone is always open and welcome. And, apparently, Steve gets a lot of phone calls. And that will continue to be our priority here.

We had the IPO on September 30, 2013. And as part of that IPO, we agreed to significant fee waivers. But even with those fee waivers, with the external managers invested in significant research resources and additional very senior professionals, we have hired a business development professional for Atlanta, Georgia. Opened that office. We've hired a business development professional for Washington D.C. Staffed that office. And we hired a very senior professional to bring to portfolio management to start enhancing portfolio management as we grow.

We're also continuing to seek to enhance professionals for the underwriting and have several offers outstanding. And we'll beef that up over the next quarter.

We're happy to announce our net investment income of $6.1 million, or $0.47 per share for the fourth quarter. Our net asset value of $268.7 million, which is basically $20.71 per share end of the fourth quarter. The Board did declare a second dividend of $0.47 per share with the record date of 3/14/14 and a payable date of 3/26/14. We are very excited that we covered our dividend out of the gate. And that we covered this dividend out of the gate. We covered our fourth quarter dividend from net investment income. And that is after incentive fees at $0.47 per share.

A reminder, as part of going public, we did a few things to better align our interest for the shareholders. We lowered our management fee to 1.75%. We waived management fees on IPO proceeds that were held in cash until deployed at the parent. And the management team also paid the underwriting fee by reducing our rollover shares in the BDC at IPO.

Notwithstanding the significant fee waiver, we are prudently increasing the size of the fund to best serve our investors and continuing to build our direct origination platform and firm operations to take advantage of the current market conditions where we are finding significant demands for our capital. And we're still able to obtain very attractive risk adjust in pricing.

We've excited to have generated two very solid quarters out of the gate from our IPO. And we expect to continue to build on our 15-year history of generating side risk adjusted returns.

Moreover, we continue to review a robust tight plan of investment opportunities. And, to date, have not seen significant contraction to yields of our existing pipeline of deals.

At this point, I would like to the meeting over to Steve Arnall for some additional comments on our operating and financial performance.

Thanks, Joe. Good morning, everyone.

As mentioned, yesterday, we filed an 8K with our quarterly and annual earnings for 2013. I'd like to take a few moments to highlight a few items within that release, which can be found in the Investor Relations section of our Website.

During the fourth quarter of 2013 total investment income was $12.1 million, a 73% increase over the same period in 2012. The increase was attributable to higher interest and dividend income resulting from a larger investment base. Jack will talk more about investments in a moment.

During the quarter, we realized a $3.4 million dividend from a control investment, which happens to be one of our larger higher performing investments.

New investment income totaled $6.1 million for the quarter ended December 31, 2013 compared to $3.9 million for the same period last year. Net investment income per share was $0.47 for the fourth quarter of 2013 with no comparable number in 2012.

As Joe mentioned, we're very pleased to report dividend coverage from our net investment income. This is a metric we hope continues in future quarters as available cash continues to be deployed, and as the portfolio concentration continues to transition from equity to debt - 65% debt and 35% equity, based on December 31, 2013 fair market values.

Total expenses for the quarter ended December 31, 2013 were $6.0 million, compared to $3.1 million in 2012. The increase of $2.9 million is attributed to one, our fourth quarter incentive fees of $1.5 million. Two, other expenses of $.9 million, as this is the first full quarter of direct and allocated expenses for the Company. And three, an increase in management fees, net of a waiver of $.7 million. These expenses are in line with our internal models.

Net realized losses were immaterial at $48,000 for the quarter ended December 31, 2013 compared to a $1.1 million gain for the same period last year.

The net change in unrealized depreciation was $.7 million for the quarter ended December 31, 2013 compared to $13.7 million for the same period last year. The 2012 amount consisted mostly of significant equity appreciation in two investments.

Our net increase in net assets resulting from operations during the fourth quarter of 2013 totaled $6.8 million, down from $18.7 million the same period last year. Again, 2012 included significant unrealized appreciation related to two equity investments.

Our per share basis, the net increase and net assets resulting from operations was $.52 per share for the quarter ending December 31, 2013. And, again, is not comparable to a period in 2012.

Total net assets of $268.7 million at December 31, 2013 equates to $20.71 per share, compared to $20.79 per share at September 30, 2013. Again, no comparison to the prior year.

From the liquidity standpoint, we had cash and cash equivalents of $101.6 million at December 31, 2013 compared to $30.5 million at December 31, 2012. The increase is the result of our IPO back in September, netting $74.2 million in limited partner contributions of $25 million prior to the formation transaction.

At this point, I'd like to turn the call over to Jack for a few comments on our investment portfolio and trends we're seeing in the overall investing market.

Thanks, Steve.

During the fourth quarter, we originated $35.1 million in new investments. We had two new company investments totaling $21 million. One of these was an equity-sponsored deal where Capitala co-invested $15 million in a senior debt facility. We note that this was an investment with a new sponsor relationship from our business development efforts. The other was a $6 million preferred equity investment that provides for a current return and has certain protective debt-like rights.

We also completed four add-on investments totaling $14.1 million, $11.1 million related to a significant add-on acquisition by an existing portfolio company in a sponsor-backed deal.

On the exit side, there minimal activity as we received in $2 million from the repayment of debt and equity from an exited investment. So net new investments was over $30 million in Q4.

Capitala also realized $3.4 million of dividend income related to a dividend recapitalization at one of its portfolio companies. While such an event is not necessary recurring on an individual portfolio company basis, we do feel that such events are recurring portfolio-wide. And we do expect to continue to see this activity from our significant equity holdings.

In total, our portfolio consists of 41 companies with a fair market value of $364.7 million on a cost basis of $301.3 million. Senior debt investments represent 28% of the portfolio. Senior subordinated debt, 36.7% and equity/warrant value of 35.3%. On a cost basis, equity investments comprised 20% of the portfolio.

Capitala continued to recognize significant appreciation on its equity and warrant positions during the quarter. The weighted average effective yield in our debt portfolio was 13.7%. And our internal weighted average rating is 1.65. All of these figures were in line with the prior quarter.

We currently have four companies on non-accrual status. The combined fair market value of these companies at December 31, 2013 is $6.5 million, or 1.7% of the portfolio. This percentage is an improvement from the prior quarter as we had a successful long-term forbearance agreement reached on one of the previously impaired companies. We continue to remain very active in supporting the non-accrual companies where we are seeing some operating improvements. And non-accrual assets are being reported at just over 50% of original costs.

In regards to market conditions, after a slow January, we are seeing a significant pick up in deal floor activity and our pipeline is strong. We previously announced that we had expanded our team and added investment professionals in both the Atlanta and D.C. markets. These new markets complement our existing offices in Raleigh, Louisville and Fort Lauderdale. And as Joe mentioned, we continue to build out the underwriting and portfolio teams in Charlotte.

We are very pleased to see our increase in deal flow coming from all of our offices, especially some immediate results from our new offices.

With that, I will turn it back over to Joe.

Thank you, Jack. And thanks, Steve. And I think now, just open it up for questions.

(Operator Instructions). Our first question comes from [Terry Mell], [Barclays].

Question, can you just give us some color on the split between debt and equity investments in your pipeline going forward?

Yes. I mean, I think the pipeline right now is mostly debt. And when we were on the road show, we had mentioned that we were going to focus on having our equity investments be less than 20% going forward. And I think that's consistent with the pipeline right now.

Okay. And just given equity evaluations are currently so high, how do you think about monetization events in your portfolio going forward? And maybe you can just remind us exactly what triggers an event?

Yes. As we've mentioned in the past, the equity portion of our portfolio we don't necessarily have control over. And a lot of those were debt investment where we had an equity portion, co-invest ones or it was a preferred structure so that it's reported as equity. We don't necessarily control the exits of those. It is a good market for exits and I think companies are exploring that option. But I don't think we have any great foresight right now as to exits in those. But we do expect some coming up.

Okay. Great. And how should we think about the dividend income going forward, given that it just a one-off dividend this quarter?

Well, we had a dividend in the fourth quarter, as well, of about $1.8 million. And another dividend in the third quarter - excuse me. The third quarter had $1.8 million and the fourth quarter we had what we reported. And we expect to see another on potentially in the first quarter. So, as Jack had mentioned, while they're not recurring, per se, the nature of our holdings is that we were seeing activities each quarter.

(Multiple speakers).

Go ahead.

No. I'm sorry. Go ahead.

That's the nature of our portfolio. And in terms of going forward, undetermined how to model that out. We can just kind of report what we've seen so far, which is three quarters in a row.

And, Terry, this goes to your question, as we rotate the portfolio more from the equity down to what in line where we think it'll be, which was 36 to 20 and under over time, we will just add recurring/non-recurring events as that happens. And we're confident we'll cover the dividend in the first quarter.

Thanks very much. That's it for me. Thank you.

Our next question comes from the Kyle Joseph with Stephens.

Good morning, guys. Thanks for taking my questions.

I notice that you paid down some SBA debt. I was wondering if there's some higher coupon SBA debt you're looking to refinance or if there's any potential to drive the top funds down there?

No. This was related some SBA debt in our Fund II subsidiary where we had some cash sitting up there that wasn't being utilized. So we just decided to pay off $10 million. 3 [million dollars] of it actually matured, $8 million was going to mature later this year - excuse me - $2 million matured in March and $8 million was maturing in September. So just an early repayment of $8 million.

Got it. Thanks. And then do you guys have a goal of how much -- on your balance sheet going forward once you - over time, once you've deployed the IPO proceeds and what not?

You broke up. Are you saying how much cash?

Yes. Your targeted cash balance.

Yes. I think that's going to change over time. Until we can get a revolver in place, we're trying to keep between a half a year and a year's worth of dividends kind of set aside on the balance sheet from a liquidity standpoint. Once we're able to get a revolver in place, I think that strategy changes and we're going to be, hopefully, holding less cash. But in the short term, we're just being conservative in that regard.

Got it. And then can you give us - for your portfolio companies, what were your revenue and EBITDA growth trends in the portfolio?

For the fourth quarter they were positive. And revenue's hard to track as we added a lot of new investments and there were some that had very large revenue base. And the same is true going forward. We have some very large portfolio companies now that kind of skew some of the numbers. But overall, it was a positive trend in the fourth quarter.

All right. And then, lastly, can you describe a little bit about what's going on with the leverage in your portfolio or debt coverage trends?

From the leverage standpoint, a couple of comments. To the extent we get relief from the SEC, as previously filed, regulatory leverage will drop to zero. Over time, we would expect that leverage to be in the 0.5% to 0.7% range. And that would surely depend on the mix of our investments, higher equity our position, the lower the leverage. Along those lines, we would expect actual leverage to be over 1% longer term. But, again, that's going to depend on the mix of our balance sheet.

And, Kyle, I think maybe you were asking more specifically for our portfolio companies.

Yes. I'm sorry for the confusion there. That really was the question.

There was really no change in leverage ratio in the portfolio from Q3 to Q4. That's pretty steady. I would say, pipeline-wise, we've been seeing some higher debt multiples in the market. So I would think that we'd have to follow the market in the future and that'll rise a little it. But, overall, our portfolio is in very good shape leverage-wise, which kind of goes back to a prior question of a lot of our companies in good position to do dividend recaps, which leads to us receiving dividends on those. So I think we're very comfortable with our portfolio leverage at this point.

Great. Thanks so much for answering my questions. And congratulations on a great quarter.

Thank you.

Our next question comes from [Allison Terrell] with Oppenheimer.

Hey. Good morning, guys. Thanks for taking my questions.

So, just two things. I think I noticed there was one new debt investment on non-accrual quarter-over-quarter. And I was wondering if you could maybe talk about that a little bit. And then whether or not you're seeing any industry or geographic trends in your potential distress of non-performing assets over time?

I'll answer the second part. No. From an industry and geographic standpoint, there's really no correlation to anything. We did have - we had one non-accrual investment that rolled into an accrual standpoint. So we started receiving interest again on that based on a long-term forbearance agreement. It was really a multi-party accommodation agreement for this company that we all worked very hard on. So that rolled back into kind of the good assets.

And then we had two that rolled into non-accrual. One is a another long-term legacy investment that we've been in for a while, had been very active in that. And made a management change and working hard at keeping it - we do have a new investment in that one in a senior facility, which is most of the fair market value of that company at this point. So that one's marked down pretty low.

And then another new one that just had a combination of some operating issues and just some contract sales that were pushed out of the fourth quarter. And we're optimist that, during 2014, they will make up some of that ground and will be performing again. But at this point, we're not receiving interest on it, and report it as not accrual.

Okay. Great. Thanks. And then my final question. You report about $35 million in new investments. And usually the fourth quarter is pretty active. And I was wondering if you could maybe give us an idea of what you think a normal pace of deployment is going to be going forward? And what we can kind of look for in the first and second quarters?

Yes. We were actually - with just going public, basically, the last day of the third quarter and having a good quarter of investments, and the fourth quarter, obviously, coming off a very busy time with the IPO, we were pretty happy to hit our $30 million at a modeled new investments.

So that is kind of our benchmark level going forward is to achieve that $30 million of new investments. I think as the year progresses and as the pipeline improves and our new business development efforts kick in, that we should be able to exceed that.

Okay. Great. Thanks very much.

And I'm not showing any further questions at this time.

All right. I would like to thank everybody for joining the call. And we look forward to reporting back next quarter. Everyone have a great day.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect. And have a wonderful day.