First Eagle Alternative Capital BDC Q3 2021 Earnings Call Transcript

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Provided by Quartr
November 4, 2021

There are 6 speakers on the call.

Operator

Good morning, and welcome to First Eagle Alternative Capital BDC Incorporated Earnings Conference Call for its 3rd fiscal quarter ended September 30, 2021. It is my pleasure to turn the call over to Sabrina Rusnak Carlson, of First Eagle Alternative Capital BDC Incorporated. Ms. Rusna Carlson, you may begin.

Speaker 1

Thank you, operator. Good morning and thank you for joining us. Joining me on today's call are Chris Flynn, President of First Eagle Alternative Credit and Jen Wilson, our Chief Accounting Officer and Treasurer. Before we begin, please note that statements made on this call may constitute forward looking statements within the meaning of the Securities Act of 1933 as amended. Such statements reflect various assumptions by First Eagle Alternative Capital BDC concerning anticipated results that are not guarantees of future performance and are subject to known and unknown uncertainties and other factors that could cause actual results to differ materially from such statements.

Speaker 1

The uncertainties and other factors are in some way beyond management's Control and include factors, including the section entitled Risk Factors in our most recent Annual Report on Form 10 ks as updated by our quarterly report on Form 10Q and our periodic and other filings with the Securities and Exchange Commission. Although we believe that the assumptions on which any forward looking statements are based on are reasonable, any of those assumptions could prove to be 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. First Eagle Alternative Capital BDC undertakes no duty to update any forward looking statements made herein unless required by law. All forward looking statements speak only as of the date of this call.

Speaker 1

Our earnings announcements and 10 Q were released yesterday afternoon, copies of which can be found on our website along with the Q3 earnings presentation that we may refer to during this call. A webcast replay of this call will be available until November 15, 2021, starting approximately 2 hours after we conclude this morning. To access the replay, please visit our website at www.feacbdc.com. With that, I'll turn the call over to Chris.

Speaker 2

Thanks, Sabrina. Good morning and thank you for joining on our earnings call today. I'll provide an overview of our Q3 results, some portfolio highlights, and then Jim will discuss our portfolio and financial results in more detail. Let's begin with the quarter. Net investment income for the Q3 was $0.11 per share compared with our $0.10 per share dividend this quarter and $0.09 per share of NII in Q2.

Speaker 2

We continue to increase leverage in Q3 up to 1.13 times, up from 1.1 at the end of Q2. We have previously communicated our plan As we continue to diversify the portfolio and the portfolio stabilized, We are increasing our target leverage ratio from 1.2 to 1.3. Based on our deal pipeline and lending environment today, we continue to believe we have the ability to hit our target During the quarter, we saw a change in unrealized depreciation, net of tax, of $700,000 or $0.03 per share. Our equity position in Wheels Up was the primary contributor to this decrease this quarter with a change in unrealized depreciation of $0.05 per share as the public share price of the stock declined 33% from the end of Q2 to the end of Q3. Subsequent to quarter end, we have seen the share price improve approximately 15% through the market close Additionally, Rotech and Maricel contributed $0.02 per share change in unrealized depreciation during this quarter.

Speaker 2

These decreases were offset by a change in net unrealized depreciation across the broader portfolio of $0.05 per share due to continued performance of the portfolio companies, Typing spreads and the benefit for taxes on unrealized depreciation of $0.01 primarily attributed to the value of wheels up. As we delve deeper into the portfolio, we believe there have been a great deal of progress made and we continue to be optimistic about the portfolio repositioning. Overall, the portfolio continues to perform well under the continuing impact of the COVID-nineteen pandemic. Revenue and EBITDA levels Liquidity for most COVID impacted businesses in the portfolio continue to improve and in many instances have returned to or exceeded pre COVID levels. Companies that have not yet fully rebounded continue to maintain good liquidity profiles.

Speaker 2

There are no significant amendments to existing loans in Q3. Consistent with Q2, we did not add any new non accruals during the quarter. Loadmaster is the only portfolio company on non accrual. At OEM, the plasma therm transaction we consummated in Q4 to commercialize and distribute its technology to the market is performing in line with expectations. As a reminder, the principal consideration was in the form of deferred payments for several years.

Speaker 2

These payments are contingent upon certain milestones, including minimum annual payments For the 1st 4 years, it will be used to service our debt and cover certain operating costs. The BDC retained all the equity in these remaining businesses. Igloo, our other concentrated position, which represented 5.5% of the portfolio and was the largest holding at September 30th was repaid at the end of October. Our equity position in it all through cash plus a 1 year earn out. With the repayment of Igloo, OEM is the last remaining credit of the 14 concentrated positions held in our portfolio in early 2018.

Speaker 2

We are pleased with our progress on exiting these legacy investments and this gives us confidence to proceed with a plan to increase leverage. We are very active in the quarter making 33 new investments across entire direct lending platform totaling over $615,000,000 of which $34,000,000 are 8 new portfolio investments Companies were allocated to FCRD. This pace of deployment not only speaks to the overall level of deal activity in the market, but also the power of being part of the First Eagle direct lending platform. First, FCRD also made an additional $8,500,000 add on investment during the quarter. During the quarter, there were 4 debt repayments at par, of which 2 included prepayment penalties.

Speaker 2

Our direct lending pipeline remains strong and the BDC continues to benefit from the deal flow generated by First Eagle's approximately $5,000,000,000 Direct lending platform. The growth of the platform allows the BDC to hold a more diversified portfolio with a number of positions up from 45 in Q1 of 2018 to 68 this quarter, while allowing First Eagle to provide more capital to middle market companies. Since the beginning of the pandemic, First Eagle's direct lending platform has remained robust and we expect it to continue to provide us with attractive investment opportunities. We continue to be very selective about where we deploy our capital and are mindful of the macro environment in our investment committee decisions. Our goal is to continue to diversify our investment approach as the BDC continues to grow in 2,001 and beyond.

Speaker 2

With that, I'll turn the call over to Jen.

Speaker 3

Great. Thanks, Chris, and good morning, everyone. First, we'll start off with some investment and portfolio highlights. As Chris mentioned, we had an active quarter with 8 new and several follow on investments totaling $43,000,000 at a blended yield of 7.5%. Additionally, we had 4 notable realizations through the repayments of our 1st lien positions in Women's Health USA, PDF Tron Systems, ABC Legal Services and Senzara Intermediate, generating $29,300,000 of cash proceeds including prepayment premiums.

Speaker 3

As of September 30, our portfolio was valued at $402,000,000 up from $395,000,000 at the end of Q2. It was invested 74% in 1st lien senior secured debt and 18% in the Logan JV. As a reminder, the Logan JV is 98 1st Lien Assets. The remaining 8% of the BDC's portfolio was held in 2nd lien, sub debt and other non income producing and equity holdings, including our restructured equity like second lien investment in OEM. The weighted average yield on the debt and income producing portfolio based on costs and including Logan was 6.9% in Q3.

Speaker 3

This was in line with prior quarter. We didn't place any additional investments on non accrual during Q3. Total non accruals as a percentage of our portfolio at fair value and at cost were 2% and 3.5% respectively. Now I'd like to address the financials for the Q3. During Q3, we recognized $8,400,000 of investment income, primarily from interest and dividends.

Speaker 3

Interest income increased approximately $400,000 from Q2 to $6,300,000 for Q3. The increase was driven by an improvement in coupon interest as we continue to add new names to the portfolio. Included in the 6 $3,000,000 is $156,000 related to prepayment premiums and $214,000 related to accelerated amortization of OID. Dividend income from the Logan JV was relatively flat quarter over quarter at $1,700,000 and other income increased $131,000 primarily related to an increase in one time fees such as amendment and arranger fees. Total expenses for the quarter were $5,000,000 down slightly from Q2.

Speaker 3

With respect to other items below the net investment income line, the company had a small net realized gain We have ample borrowing capacity on our credit facility to continue to grow and increase leverage towards our target of 1.2 times by the year end. With that, I'll turn the call back over to Chris.

Speaker 2

Thanks, Jim. Overall, this is another stable quarter for FCRD. We continue to deliver steady improvements to credit, Quality and enhance our ability to utilize leverage. We recorded positive results at most portfolio companies. We also made additional progress in de risking the portfolio with respect to several remaining legacy Origination activity remains strong and we are confident in our ability to prudently increase our leverage profile to put us in a position to meet or exceed our current dividend levels.

Speaker 2

I I'd now like to turn the call over to the operator for Q and A.

Operator

Please standby while we compile the Q and A roster. Our first question comes from the line of Matt Jaden from Raymond James.

Speaker 4

Hey, all. Good morning. I appreciate you taking my questions. First one for me, maybe on the capital structure. So it looks like the 2023 notes are now redeemable at a higher cost than the 2026 notes.

Speaker 4

Any high level color you can give on kind of plans for that issuance and maybe revisiting the unsecured market?

Speaker 2

Yes. Thanks, Matt. This is Chris. We appreciate it. Obviously, as we've improved the balance sheet, obtained the investment grade rating, we were able to refinance the A portion of the bonds early this year, we continue to look at the market.

Speaker 2

Based on our current rate, the market remains strong. So We'll take that into consideration obviously as we finish up the quarter and get our 10Q in and get our 10Q out.

Speaker 4

Got it. Maybe second one for me on OEM. So it sounds like it's going to be somewhat of a process. In terms of when we could see OEM fully roll off the books, is that a 2023 or maybe beyond kind of process just to complete The legacy rotation.

Speaker 2

Yes, it's a great question, Matt. I wish I had a better answer for you. Probably too early to tell. As structured, it's a longer dated investment. I'd like to see where we stand at the end of the year and have some discussions based on the performance to see if there's a way to convert that to cash sooner.

Speaker 2

But we're not in a position to do that right now, but to the extent we can, we would and we will. But it's a bit too early right now.

Speaker 4

Got it. Last one for me, just more so a housekeeping one. It looks like yields in the Logan JV were down 30 bps Quarter over quarter, any noise within that or is that just a function of kind of deployment and repayment yields?

Speaker 2

I think it's just more of a function of where the market is right now. Yes, you step back for a bit. Pre COVID, the market was pretty aggressive. When COVID first hit, the market gapped out. As we sit here today, we're probably back at Pre COVID levels are slightly tighter in other areas, so just a function of the overall competitiveness of the market.

Speaker 4

Got it. That's it for me. I appreciate the time.

Speaker 2

We appreciate it. Thank you.

Operator

Our next question comes from the line of Paul Johnson from KBW.

Speaker 4

Hey, Paul.

Speaker 5

Hey, good morning guys. Thanks for taking my questions. Hey, on the JV, as that has stabilized, I'm just wondering, are you guys I think there's some still a few remaining commitments inside of the JV. Is that something that you are still looking to grow At this point or kind of just maintain where it's at currently?

Speaker 2

Listen, we think it's an attractive return for the shareholder. We have to manage it as it relates to our 30% bucket. As the portfolio started to grow again, it's created some incremental capacity. So I think you could see some incremental capital contributed to Logan to the extent that return on equity makes sense. I'd say we're also trying to figure out more efficient ways to not only finance the BDC balance sheet, but also the Logan balance sheet to drive a higher ROE.

Speaker 2

So, not only growth that we're focused on, but also, again, a consistent thing we're going to hear is now that we've got a consistent stable balance sheet, we should Be able to drive a higher ROE based on that lower cost of financing, not only for the BDC, what we've done with the bonds, but also what we could potentially do with Logan.

Speaker 5

Got it. And then on the Igloo repayment, Forgive me if I didn't catch this in your remarks, but were there any exit fees or OIDs associated with repayment in the 4th quarter?

Speaker 2

No, we're not. It was a long dated investment. We are well beyond the call protection.

Speaker 5

Got it. And I'm guessing, was that an investment that was probably refinanced or you allowed to probably

Speaker 2

get the business out of the portfolio? Okay, got it. Okay.

Speaker 5

Those are all my questions. Thanks.

Speaker 2

Thank you. Appreciate it.

Operator

At this time, I would like to hand the conference back to Chris Flynn.

Speaker 2

Thank you, operator. We appreciate the support of our shareholders and look forward to providing you with an update in late February, early March on our full year results. Feel free to reach out to me or Jen If you have any questions before then.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

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Key Takeaways

  • Net investment income was $0.11 per share in Q3, up from $0.09 in Q2, as the BDC increased leverage to 1.13× and raised its target leverage ratio to 1.2–1.3× given a strong deal pipeline.
  • No new non-accruals were added during the quarter, leaving Loadmaster as the sole non-accrual, while most COVID-impacted portfolio companies saw revenue and liquidity recover to or exceed pre-pandemic levels.
  • Net unrealized depreciation was $0.03 per share, driven primarily by a 33% decline in Wheels Up’s share price and smaller markdowns in Rotech and Maricel, partially offset by broader portfolio gains and tax benefits.
  • Progress in de-risking legacy positions continued with the October repayment of Igloo (5.5% of the portfolio) and the OEM Plasma-Therm transaction performing as expected, leaving OEM as the last remaining legacy credit from early 2018.
  • Origination remained robust with 33 new First Eagle platform investments totaling $615 million (including 8 new BDC commitments at a 7.5% blended yield), while portfolio diversification grew to 68 positions and maintained a 6.9% weighted average debt yield.
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Earnings Conference Call
First Eagle Alternative Capital BDC Q3 2021
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