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Capitala Finance Corp. Reports Fourth Quarter and Full Year 2019 Results

CHARLOTTE, N.C., March 02, 2020 (GLOBE NEWSWIRE) -- Capitala Finance Corp. (CPTA) ("Capitala", the “Company”, “we”, “us”, or “our”) today announced its financial results for the fourth quarter and full year ended December 31, 2019. 

Fourth Quarter Highlights 

  • Invested $29.0 million during the quarter, consisting of $27.4 million of first lien debt with a weighted average yield of 9.0%, and $1.6 million in equity investments
  • Reduced equity concentration by partial exit of Nth Degree, Inc., generating a realized capital gain of $25.9 million, above the previous period valuation
  • Ended 2019 with no non-accrual investments
  • Net asset value per share of $9.14 at December 31, 2019, compared to $9.40 at September 30, 2019
  • Amended our senior secured revolving credit facility as the Company is now subject to a 150% asset coverage test
  • Class action lawsuit dismissed effective October 25, 2019 with no settlement
  • Announced Mitsui USA minority investment in the Company’s investment adviser

Full Year Highlights

  • Rebalanced the investment portfolio, as first lien debt investments represent 81% of the debt portfolio at December 31, 2019, compared to 51% at December 31, 2016, on a fair value basis
  • Invested $77.8 million during 2019 consisting of $70.2 million in first lien debt, $4.5 million in second lien debt, and $3.1 million in equity
  • Closed credit facility for Capitala Senior Loan Fund II, LLC, enhancing its ability to hold first out positions in certain unitranche debt investments

Management Commentary

In describing the Company’s fourth quarter and full year activities, Joseph B. Alala, III, Chairman and Chief Executive Officer, stated, “During 2019, management focused on positioning the Company for improved financial performance.  Notably, our investment adviser announced a minority investment from and a strategic partnership with Mitsui USA; we enter 2020 with no non-accrual investments; we have reduced our equity concentration by partially exiting our largest holding; we continue to focus on first lien debt investments rather than riskier mezzanine investments; we enter 2020 with substantial liquidity to allow us to be active investors in the lower middle market; and our investment adviser continues to hire talented professionals across the platform.” 

Fourth Quarter 2019 Financial Results
During the fourth quarter of 2019, the Company originated $29.0 million of new investments, and received $36.8 million of repayments.  Debt investments, all first lien structures, totaled $27.4 million, with a weighted average yield of 9.0%.  In addition, we invested $1.6 million in equity securities.     

Total investment income was $9.6 million for the fourth quarter of 2019, compared to $11.3 million in the fourth quarter of 2018.  The decline was attributable to lower interest and fee income, resulting primarily from a decrease in our debt portfolio and a decline in the weighted average yield on our portfolio from the continued shift to a first lien debt investment strategy.    

Net investment income for the fourth quarter of 2019 was $1.9 million, or $0.12 per share, compared to $3.5 million, or $0.22 per share, for the same period in 2018. 

Net realized gains totaled $1.2 million, or $0.07 per share, for the fourth quarter of 2019, compared to net realized losses of $14.6 million, or $0.91 per share, for the same period in 2018.  During the fourth quarter of 2019, the Company realized a $25.9 million gain on a partial exit of Nth Degree, Inc., partially offset by realized losses on Vology, Inc. of $3.7 million, Portrait Studio, LLC of $6.2 million, CableOrganizer Acquisition, LLC of $12.8 million, and American Clinical Solutions, LLC of $1.9 million.  Net realized gains during the fourth quarter of 2019 did not have a material impact on our net asset value per share, as the realized amounts were in line with our previously reported fair values. 

Net unrealized depreciation totaled $3.1 million, or $0.19 per share, for the fourth quarter of 2019, compared to appreciation of $1.2 million for the fourth quarter of 2018.        

The net decrease in net assets resulting from operations was $0.1 million for the fourth quarter of 2019, or $0.00 per share, compared to a net decrease of $9.2 million, or $0.57 per share, for the same period in 2018.     

Full Year 2019 Financial Results

During 2019, the Company originated $77.8 million of new investments and received $128.1 million of repayments.  New investments consisted of $70.2 million in first lien debt, $4.5 million in second lien debt, and $3.1 million in equity investments.     

Total investment income was $44.0 million for the year ended December 31, 2019, compared to $47.3 million for the same period in 2018.  Interest and fee income collectively declined $4.8 million, driven by a decrease in debt balances outstanding during the year, coupled with a decrease in the weighted average yield on the debt portfolio from the continued shift to a first lien debt investment strategy.  Dividend income increased $2.9 million, partially offset by a $1.4 million decrease in PIK income.     

Total expenses for the year ended December 31, 2019 were $31.0 million, a decrease of $0.3 million from the comparable period in 2018.  Significant variances included (1) $1.1 million decrease in base management fees, (2) a $1.0 million increase in incentives fees, net of the waiver, and (3) a $0.2 million decrease in interest and financing expenses.       

Net investment income for the year ended December 31, 2019 was $13.0 million, or $0.81 per share, compared to $16.0 million, or $1.00 per share, for the same period in 2018.

Net realized losses totaled $19.8 million, or $1.23 per share, for the year ended December 31, 2019, compared to losses of $34.8 million, or $2.18 per share, for the same period in 2018. 

Net unrealized depreciation totaled $20.3 million, or $1.26 per share, for the year ended December 31, 2019, compared to net unrealized appreciation of $0.8 million, or $0.05 per share, for the same period in 2018. 

During 2019, the Company recorded a tax provision of $0.6 million, compared to a tax benefit of $1.9 million in 2018.   

The net decrease in net assets resulting from operations was $27.6 million, or $1.72 per share, for the year ended December 31, 2019, compared to a net decrease in net assets resulting from operations of $16.0 million, or $1.00 per share, for the same period in 2018.    

Net assets at December 31, 2019 were $148.1 million, or $9.14 per share, compared to $190.6 million, or $11.88 per share, at December 31, 2018. 

Investment Portfolio

As of December 31, 2019, our portfolio consisted of 43 companies with a fair market value of $362.5 million and a cost basis of $353.9 million. First lien debt investments represented 63.8% of the portfolio, second lien and subordinated debt investments collectively represented 14.8% of the portfolio, equity/warrant investments represented 17.6% of the portfolio, and our investment in CSLF II represented 3.8% of the portfolio, based on fair values at December 31, 2019.  The weighted average yield on our debt portfolio was 11.5% at December 31, 2019.    

At December 31, 2019, the Company had no non-accrual balances, compared to 2.1% and 4.9%, on a fair value and cost basis, respectively, at December 31, 2018.      

Liquidity and Capital Resources

At December 31, 2019, the Company had $62.3 million in cash and cash equivalents.  In addition, the Company had SBA debentures outstanding totaling $150.0 million with an annual weighted average interest rate of 3.16%, $75.0 million of fixed rate notes bearing an interest rate of 6.00%, and $52.1 million of convertible notes bearing an interest rate of 5.75%.  At December 31, 2019, the Company had $0 drawn and $60.0 million available under its senior secured revolving credit facility, which is priced at LIBOR plus 3.0%.   

Fourth Quarter 2019 Financial Results Conference Call

Management will host a conference call to discuss the operating and financial results at 8:30 a.m. on Tuesday, March 3, 2020.  To participate in the conference call, please dial 1-877-312-5507 approximately 10 minutes prior to the call.  A live webcast of the conference will be available at http://investor.CapitalaGroup.com

About Capitala Finance Corp.

Capitala Finance Corp. is a business development company that invests primarily in first and second lien loans, subordinated debt and, to a lesser extent, equity securities issued by lower and traditional middle market companies.  The Company is managed by Capitala Investment Advisors, LLC.  For more information on Capitala, or to automatically receive email notifications of Company financial information, press releases, stock alerts, or other corporate filings, please visit the Investor Relations section of our website.

About Capitala Group

Capitala Group is a $3.0 billion asset management firm that has been providing capital to lower middle market companies through its credit, growth, and equity investment strategies throughout North America for twenty years. Since its inception in 1998, Capitala Group has invested in over 160 companies and seeks to partner with strong management teams to create value and generate superior risk-adjusted returns for its individual and institutional investors. For more information, definition and details visit Capitala Group’s website at www.capitalagroup.com.

Forward-Looking Statements

This press release contains certain forward-looking statements. Words such as “believes,” “intends,” “expects,” “projects,” “anticipates,” and “future” or similar expressions are intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance, condition or results and involve a number of risks and uncertainties.  Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in the Company’s filings with the Securities and Exchange Commission.  The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law.

SOURCE: Capitala Finance Corp.

Capitala Finance Corp.
Stephen Arnall
CFO|COO
sarnall@capitalagroup.com

 
Capitala Finance Corp.
 
Consolidated Statements of Assets and Liabilities
(in thousands, except share and per share data)
           
  As of
  December 31, 2019   December 31, 2018
           
ASSETS        
Investments at fair value        
  Non-control/non-affiliate investments (amortized cost of $250,433 and $280,114, respectively)   $ 241,046     $ 286,843  
  Affiliate investments (amortized cost of $80,756 and $72,300, respectively)     98,763       92,939  
  Control investments (amortized cost of $22,692 and $67,556, respectively)     22,723       69,145  
  Total investments at fair value (amortized cost of $353,881 and $419,970, respectively)     362,532       448,927  
Cash and cash equivalents     62,321       39,295  
Interest and dividend receivable     1,745       3,778  
Prepaid expenses     624       454  
Deferred tax asset, net     -       628  
Other assets     115       83  
  Total assets   $ 427,337     $ 493,165  
           
LIABILITIES        
SBA Debentures (net of deferred financing costs of $1,006 and $1,688, respectively)   $ 148,994     $ 164,012  
2022 Notes (net of deferred financing costs of $1,447 and $1,987, respectively)     73,553       73,013  
2022 Convertible Notes (net of deferred financing costs of $916 and $1,259, respectively)     51,172       50,829  
Credit Facility (net of deferred financing costs of $1,165 and $983, respectively)     (1,165 )     9,017  
Management and incentive fees payable     3,713       2,487  
Interest and financing fees payable     2,439       3,063  
Accounts payable and accrued expenses     518       100  
  Total liabilities   $ 279,224     $ 302,521  
           
           
           
NET ASSETS        
Common stock, par value $0.01, 100,000,000 common shares authorized, 16,203,769 and 16,051,547 common shares    
  issued and outstanding, respectively   $ 162     $ 161  
Additional paid in capital     237,886       241,757  
Total distributable loss     (89,935 )     (51,274 )
  Total net assets   $ 148,113     $ 190,644  
Total liabilities and net assets   $ 427,337     $ 493,165  
           
Net asset value per share   $ 9.14     $ 11.88  
           


 
Capitala Finance Corp.
 
Consolidated Statements of Operations
(in thousands, except share and per share data)
                   
      For the Three Months Ended December 31,   For the Years Ended December 31,
        2019       2018       2019       2018  
INVESTMENT INCOME   (unaudited)   (unaudited)        
Interest and fee income:                
  Non-control/non-affiliate investments   $ 6,563     $ 6,839     $ 27,659     $ 27,754  
  Affiliate investments     1,773       2,074       8,351       7,945  
  Control investments     145       1,117       1,566       6,702  
  Total interest and fee income     8,481       10,030       37,576       42,401  
Payment-in-kind interest and dividend income:                
  Non-control/non-affiliate investments     438       766       1,721       2,248  
  Affiliate investments     258       133       869       1,251  
  Control investments     -       134       372       849  
  Total payment-in-kind interest and dividend income     696       1,033       2,962       4,348  
Dividend income:                
  Non-control/non-affiliate investments     64       -       1,345       59  
  Affiliate investments     25       151       50       238  
  Control investments     320       25       1,904       100  
  Total dividend income     409       176       3,299       397  
Interest income from cash and cash equivalents     48       69       198       147  
  Total investment income     9,634       11,308       44,035       47,293  
                   
EXPENSES                
Interest and financing expenses     4,371       4,269       17,121       17,283  
Base management fee     1,904       2,178       7,967       9,049  
Incentive fees     -       -       1,497       244  
General and administrative expenses     1,457       1,360       4,695       4,695  
  Expenses before incentive fee waiver     7,732       7,807       31,280       31,271  
  Incentive fee waiver     -       -       (288 )     -  
  Total expenses, net of incentive fee waiver     7,732       7,807       30,992       31,271  
                   
  NET INVESTMENT INCOME     1,902       3,501       13,043       16,022  
                   
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND WRITTEN CALL OPTION:                
Net realized gain (loss) on investments:                
  Non-control/non-affiliate investments     20,073       106       16,529       (15,714 )
  Affiliate investments     -       1,964       2,288       2,920  
  Control investments     (18,917 )     (16,696 )     (38,573 )     (22,010 )
  Net realized gain (loss) on investments     1,156       (14,626 )     (19,756 )     (34,804 )
Net unrealized appreciation (depreciation) on investments:                
  Non-control/non-affiliate investments     (20,655 )     (2,360 )     (16,116 )     16,487  
  Affiliate investments     1,087       (11,709 )     (2,632 )     (5,982 )
  Control investments     16,441       15,262       (1,558 )     (16,460 )
  Net unrealized appreciation (depreciation) on investments     (3,127 )     1,193       (20,306 )     (5,955 )
Net unrealized appreciation (depreciation) on written call option     -       -       -       6,795  
  Net realized and unrealized loss on investments and written call option     (1,971 )     (13,433 )     (40,062 )     (33,964 )
Tax benefit (provision)     -       731       (628 )     1,916  
  Total net realized and unrealized loss on investments and written call option, net of taxes     (1,971 )     (12,702 )     (40,690 )     (32,048 )
                   
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS   $ (69 )   $ (9,201 )   $ (27,647 )   $ (16,026 )
                   
NET DECREASE IN NET ASSETS PER SHARE RESULTING FROM OPERATIONS – BASIC AND DILUTED   $ (0.00 )   $ (0.57 )   $ (1.72 )   $ (1.00 )
                   
WEIGHTED AVERAGE COMMON STOCK OUTSTANDING - BASIC AND DILUTED     16,176,507       16,029,884       16,117,719       15,993,436  
                   
DISTRIBUTIONS PAID PER SHARE   $ 0.25     $ 0.25     $ 1.00     $ 1.00