OFS Capital Corp (OFS) 2019 Q1 法說會逐字稿

Good day and welcome to the OFS Capital Corporation's First Quarter 2019 Earnings Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Mr. Steve Altebrando, Vice President of Equity Capital Markets. Please go ahead.

Good morning, everyone, and thank you for joining us. With me today is Bilal Rashid, Chairman and Chief Executive Officer of OFS Capital; and Jeff Cerny, the company's Chief Financial Officer and Treasurer.

Please note that we issued a press release this morning announcing our first quarter results. This press release was subsequently filed on Form 8-K with the SEC. Both documents can be obtained under the Investor Relations section of our website at ofscapital.com.

Before we begin, please note that the statements made on this call and webcast may constitute forward-looking statements as defined under applicable securities laws. Such statements reflect various assumptions, expectations and opinions by OFS Capital's management concerning anticipated results, are not guarantees of future performance and are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from such statements. The uncertainties and other factors are in some way beyond management's control, including the risk factors described from time to time in our filings with the SEC.

Although, we believe, these assumptions are reasonable, any of those assumptions could prove inaccurate and, as a result, the forward-looking statements based on those assumptions also could be incorrect. You should not place undue reliance on these forward-looking statements.

OFS Capital undertakes no duty to update any forward-looking statements made herein, and all forward-looking statements speak only as of the date of this call.

With that, I'll turn the call over to Chairman and Chief Executive Officer, Bilal Rashid.

Thank you, Steve. Good morning and welcome. We reported today that our net investment income per share was $0.36 for the first quarter. This was a more than 24% increase from last year and again above our $0.34 quarterly distribution.

These continued strong results were driven by a disciplined deployment of capital, largely financed with fixed-rate, long-term unsecured debt we raised in 2018.

We have now declared 26 straight quarterly distributions of $0.34 per share since our IPO in late 2012. In total, we have declared over $9 per share in distributions over this time, including special distributions.

Additionally, our net investment income has exceeded our regular distribution in each of the last 4 quarters. And over the last 4-plus years, our total net investment income has exceeded our total regular distribution. We believe that maintaining our distribution and outearning it over this period of time puts us in select company within the BDC sector.

Our net asset value per share at the end of the quarter was $13.04 compared to $13.10 in the prior quarter. The benefit of narrower credit spreads was offset by unrealized depreciation in a small number of debt and equity positions. We had no new non-accruals in the quarter.

In terms of originations, we deployed approximately $63.6 million in the quarter. As discussed on prior calls, we remain committed to being highly selective even with a relatively healthy pace of deployment. We continue to concentrate on industries and management teams, that, we believe, are well positioned to navigate the next downturn. As always, we remain focused on capital preservation.

With that high-level recap of the quarter, I wanted to provide an update on our business plan now that we have permitted to increase our leverage. As you know, our Board approved a reduction in our asset coverage ratio last May. As of today, our BDC is allowed to operate at higher regulatory leverage.

As we have mentioned in the past, we intend to use this additional leverage to invest in lower-yielding senior secured debt of larger companies. We believe that this will improve the risk profile of our portfolio, while improving our earnings.

We anticipate establishing a senior secured credit facility and will make an announcement when an agreement is executed. We have been gravitating toward more senior loans and we expect that this facility will accelerate that trend. We believe that we are well positioned to benefit from this opportunity given the breadth and skill set of our adviser's $2.3 billion platform, which invests across the corporate loan market. The goal of the facility would be to improve upon our historical ROE, which over the last 5 years, has been approximately 8%.

Turning to the current lending environment. We are continuing to be vigilant and cautious about our portfolio construction. As you know, 88% of our loan portfolio is senior secured as a percentage of fair value. This compares to 67% 2 years ago.

We expect to continue to concentrate on senior secured loans and avoid highly cyclical industries. While we still believe that we are in the late stages of the current credit cycle, the U.S. economy remains in good shape with solid GDP growth. In terms of deal flow, we continue to see attractive opportunities across the middle market.

At this point, I'll turn the call over to Jeff Cerny, our Chief Financial Officer, to give you more color and details for the quarter.

Thanks and good morning, everyone. As Bilal mentioned, this was a strong quarter from a net investment income perspective, and our NAV was stable. We continue to see the benefits of our increased scale and asset base.

Starting with the income statement. We derived approximately $12.3 million in total investment income in the quarter, a $300,000 decrease over the fourth quarter. Total expenses of $7.5 million increased $200,000 compared to the prior quarter. This increase was driven by higher interest expense due to a full quarter related to our October 2018 bond offering and higher outstanding line of credit balances used to fund additional investment activity.

Resulting net investment income per share of $0.36, compared to $0.40 in the prior quarter. The decrease was driven by lower fee income and fewer accelerations of original issue discounts this quarter partly offset by a full quarter of income related to the deployment of last October's bond proceeds. It is worth noting that recurring earnings, earnings excluding fee income and original issue discount acceleration are up.

Turning to balance sheet. We had approximately $15 million of uninvested cash at the end of the quarter. $13 million of that cash was in our SBIC. We had considerable deployment of cash during the quarter at the SBIC.

To allow for continued growth and improved earnings, we recently renegotiated our $50 million PacWest line of credit, and we're successful at upsizing the facility to $100 million. We also achieved more favorable pricing, which decreased by 50 basis points. In addition, we were able to negotiate more flexible leverage covenants to align the financing with the change to 150% statutory asset coverage. As a result of this facility upsize, we currently have approximately $61.5 million of undrawn availability on our line of credit.

Our debt-to-equity ratio at the end of the quarter was about 1.64x, including our SBIC debt. As you know, this is well below our regulatory leverage requirements as the SBIC debt does not count towards the leverage test. We would be comfortable increasing our leverage further in order to invest in senior secured loans of larger companies.

Our net asset value was pretty stable at the end of the quarter at $13.04 per share compared to $13.10 in the prior quarter. As far as our investments, at the end of the quarter, we had investments in 51 companies, totaling $438 million on a fair value basis. As a percentage of cost, our investments were approximately 77% senior secured loans; 12% subordinated debt; 3% structured finance notes and 8% equity, approximately 2/3 of which is in preferred equity securities.

Our portfolio remains diversified with an average investment in each portfolio company of $8.6 million or 2% of the portfolio's total fair value. At fair value, we currently have 0.2% of the portfolio on non-accrual, the same as last quarter.

The overall weighted average yield to cost on our performing debt investments was 11.8% at March 31. This compares to our weighted average cost on our borrowings of just under 5% at quarter's end.

We deployed approximately $63.6 million in the first quarter across 9 investments. This consisted of $12.7 million to several existing portfolio companies, and we also invested $50.9 million in 5 new companies. The new names consisted mostly of floating rate and senior secured loans along with some structured finance notes. The weighted average yield to cost on the new investments during the quarter was 13.4%.

One of the new investments I would like to highlight is our investment in Chemres, which we closed during the first quarter. We made a $15 million investment in a floating-rate, senior secured loan facility and a $2 million common equity investment to help finance the acquisition of the company.

Chemres has been in business for nearly 25 years and is a formulator, a manufacturer and supply chain manager of high-performance polymers and plastics. The OFS team directly sourced and underwrote the deal. The 5-year facility has a full covenant package and we secured board observation rights.

The last dollar of debt leverage at closing was just under 4x and the pricing stands today at about 11%. We believe this is a strong investment for us as Chemres counts several Fortune 500 companies as its customers and a majority of its top customers have been customers for more than 10 years. The company serves several end markets, including medical, wire insulation, chemicals and consumer packaging among others. Chemres has economically resilient characteristics and saw just a minimal decline in gross profit during the last downturn.

The management team has been together for 8 years and will continue to have significant ownership in the company. As such, we are happy to have Chemres among our group of portfolio investments.

With that, I will turn the call back over to Bilal.

Thank you, Jeff. In closing, we are pleased with our net investment income this quarter. We believe that our strong performance is driven by the strength of our origination platform as well as our underwriting and portfolio management process.

We are proud that since the beginning of 2011, OFS has invested approximately $1.2 billion with a cumulative net realized loss of principal of only 0.05%, while generating attractive yields on our portfolio.

Looking ahead, we remain confident in our earnings power. We have a senior secured, floating rate-focused portfolio and have locked in attractive fixed-rate long-term financing. By taking advantage of our higher leverage allowance, we believe that we can increase the ROE of the BDC, while investing in senior secured loans of larger companies.

We continue to benefit from our adviser's $2.3 billion platform and its broad capabilities within the corporate credit sector. Its long-standing investment platform has been in existence since 1994 and has gone through multiple credit cycles. We believe that this experience will help us navigate changing market conditions, considering where we are in the current credit cycle.

Our focus remains on capital preservation, as highlighted by our low loss experience. In addition, we believe that our performance is further aided by the adviser having considerable skin in the game since it is the largest shareholder in the BDC.

With that, operator, please open up the call for questions.

(Operator Instructions) As we have no questions at this time, I would like to turn the conference back over to Bilal Rashid for any closing remarks.

Thank you all for joining our call today, and we look forward to speaking with everyone again next quarter. Operator, you may now end the call. Thank you.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.