Logan Ridge Finance Corp (LRFC) 2017 Q4 法說會逐字稿

At this time, I would like to welcome everyone to Capitala Finance Corp.'s conference call for the quarter ended December 31, 2017. (Operator Instructions) Today's call is being recorded and a replay will be available approximately 3 hours after the conclusion of the call on the company's website at www.capitalagroup.com under the Investor Relations section.

The host for today's call are Capitala Finance Corp.'s Chairman and Chief Executive Officer, Joe Alala; Chief Operating Officer, Treasurer and Secretary, Jack McGlinn; and Chief Financial Officer, Steve Arnall. Capitala Finance Corp. issued a press release on February 27, 2018, with details of the company's quarterly financial and operating results. A copy of the press release is available on the company's website. In addition, the company posted a prerecorded podcast of its quarterly results February 27, 2018, on its website. Please note that this call contains forward-looking statements that provide information other than historical information, including statements regarding the company's goals, beliefs, strategies, future operating results and cash flows.

Although the company believes these statements are reasonable, actual results could differ materially from those projected in the forward-looking statements. These statements are based on various underlying assumptions and are subject to numerous uncertainties and risks, including those disclosed under the section titled Risk Factors and Forward-Looking Statements in the company's annual report on Form 10-K. Capitala undertakes no obligation to update or revise any forward-looking statements.

At this time, I would like to turn the call over to Mr. Joe Alala.

Thank you, operator. Good morning, everyone. Thank you for joining us. I'm dialing in from a nice cold Berlin, Germany. But we have Steve and Jack in the conference room in Charlotte, North Carolina.

Yesterday, we released our results for the fourth quarter and the full year of 2017. Net investment income was $0.26 per share, covering our fourth quarter distributions. Net asset value per share was $13.91 at year-end. We originated $43.1 million of investments during the quarter, $40 million of debt, $3.1 million of equity, 96% of debt investments were first-lien structures for the quarter. For the year, 91% of all debt investments were first lien. Moreover, 82% of all debt investments made since the second quarter of 2016 were first-lien structures with a weighted average yield of 11.8%. This is in line with what we have been telling you for the past 6 to 8 quarters and reflects our investment shift to senior structure deals.

We reduced nonaccrual loans slightly during the period and remain committed to working through underperforming credits. Two recent underperforming first-lien energy credits, US Well Services and Sierra Hamilton, were successfully restructured during the year and have generated approximately $13 million in net asset value growth since restructuring.

Along those lines, we recently announced the addition of Peter Sherman to our team as Chief Risk Officer, with oversight of both underwriting and portfolio monitoring. We have significantly enhanced our underwriting process in an effort to ensure that we invest -- we are investing our capital in the best risk-adjusted return opportunities.

During the quarter, we received $6.2 million for our equity investment in Brunswick Bowling Products, Inc. generating a gain of $2.5 million. We anticipate additional equity exit from the normal course of business and continue to explore other opportunities to allow us to reduce equity as a percentage of our investment portfolio. We continue to have significant liquidity to allow us to be active in the lower middle-market focusing on first-lien investments. Our pipeline remains robust. However, we are being cautious from an underwriting standpoint, as we may be approaching the later stages of the credit cycle.

At this point, operator, we will open the line for questions.

(Operator Instructions) And our first question will come from the line of Christopher Nolan from Ladenburg.

The addition of Velum Global Credit to nonaccruals, that credit matured at 12/31/17. Is this still on the book in the first quarter?

Yes. It is. We're in ongoing discussions with them. So we'll have one more news on that when there's news on it.

Great. And then the equity appreciation during the quarter relative to the third quarter, any particular driver for that?

Any particularly name or just in general?

Just in general. I'm trying to think about given the tax laws changes, I would think that for the type of companies you invest in, equity might be an -- equity value could be a beneficiary of that, I just want to see whether or not that was a factor?

No, I don't think that was a big part. But again, as someone mentioned, US Wells and Sierra Hamilton were a nice piece of that as the restructured energy investments that, again, was conversion to equity and the equity is appreciated as those companies have rebounded with the higher and more stable (inaudible) prices, and then some other appreciation continuing in the portfolio. And I would say, those are either EBITDA improvements or acquisitions within those companies that continue to help them grow, but we are definitely happy with that appreciation.

Yes. And Jack, my final question is, are there any other changes to the underwriting processes that you guys are implementing aside from the one that Joe referred to?

Yes. I mean, we continue to, and we will always continue to improve the underwriting process. So again, some of that would be shifting to doing more first lien and that was 6, 8 quarters ago. So that was a kind of a material change as we looked at risk-adjusted return. But just from a process standpoint, we continue to improve. And again, we're adding new resources and new ways of thinking about things too. So we're -- that's always an area that we want to keep focusing on. As far as other dramatic changes or different things we're doing? No. I mean, it's gradual improvement and doing a better job of it and more accountability at all levels of the underwriting team.

And our next question comes from the line of [Ross Rubin.]

Could you give me an update on Cedar Electronics and how their recent quarter was?

The recent quarter was about on par with budget. So there was no real surprises either positive or negative there. There is a new management team in place, and they are optimistic of where the company is going to go, and we have been working with them in this quarter and trying to nail down a restructuring of that investment.

Okay. And then I'm hearing a lot of good news in the truck industry. Is that flow through Kelle's? There you're having better results?

Yes. Certainly, better than it was last year at this time. So yes, rates are up and still across the industry hard to find drivers, so that's still an issue. But yes, definitely the rate increases helped, and they have seen better performance.

Okay. Are there any like new additions to your watch list that you could share with us?

The 3s and 4s, how we look at it have been pretty stable. And looking at a deeper end of that list, the most recent investment and that's the reason for category base back to mid-2015. So we are seeing some kind of stabilization there and kind of a more manageable list. So there's nothing that was kind of added into the 3s category that we're -- that's new so.

Okay. And then the favorable adjustment from income taxes, I assume that doesn't impact NII, that's below the line?

That's correct.

(Operator Instructions) Our next question comes from the line of Chris Kotowski from Oppenheimer.

Yes, I was wondering about the equity positions you've been working to monetize them I know -- and I -- that you're mainly dependent on the controlling sponsors. But I was just wondering with all the kinds of new pools of capital and secondary market in private equity investments has developed in recent years. Can you give us, I guess, the pros and cons of monetizing some of that -- some of your equity investments in the secondary market?

Yes. Chris, this is Joe. It's a great question. We spend a lot of time on this issue. We actually do and often are approached by larger secondary groups. I think that's what you're referring to. It can take a secondary transaction. As you recall, we did one of these secondary transactions in the summer of 2016, where we sold a strip of debt and equity in the BDC at fair value. And so we have done this before and we continue to look at that. I think when you start looking at fair value of debt and equity with a lot of debt, it's a much easier process for these secondary groups than when you're looking at a dozen or 2 dozen minority equity positions. With minority equity positions, you typically -- those are a much different dynamic on fair value and when you monetized the fair value, especially when you don't control those positions. So we do have an infrastructure in place that we could do a secondary sale. We've proved that infrastructure out back in the summer of '16. We do receive interest in offers on that minority book. We're still evaluating them. We do think in the normal course of business, some of these should monetize in the next quarter or 2. And that's really the balance that you've got to look as you got a secondary offer that you know they're going to have a structure in there that's not going to give you 100% fair value day 1 in the couple of dozen minority positions. However, there is probably a way to get to a fair value or plus depending on earn-out type performance. But if we monetize them like we have in the past like we just did in Brunswick, we typically monetize them right at our fair value, maybe slightly above, maybe slightly below, but typically our fair value has been right on point. And if we can monetize those naturally in the next quarter or 2, that really makes a difference. And I think if you look, there's really several names in there probably 4 to 5 that are the bulk of that equity appreciation. And those ones if you can monetize the larger ones or few of the larger ones, that really can make a difference. We could take that rotate in the first-lien yield and really grow our earnings, but we spend a tremendous amount of time. One of the reasons I'm over here in Berlin, Germany talking with other groups, secondary groups, these big master funds, looking at secondary opportunities for this bucket of equity.

And I'm showing no further questions at this time. I would now like to turn the call back to Mr. Joe Alala for closing remarks.

Thank you, operator. We thank you for your time today. We are focused. I just want to reiterate on first-lien securities and also the focus on our underperforming credits. And lastly, we are focusing on the rotation of our equity investments in the yield to grow our earnings. Steve and Jack around all day. If you have follow-up questions, please call. I'll be back later this week, and we thank you for your time. Thanks, everyone.

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