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Edited Transcript of ABDC earnings conference call or presentation 8-Aug-19 1:30pm GMT

Q2 2019 Alcentra Capital Corp Earnings Call

NEW YORK Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Alcentra Capital Corp earnings conference call or presentation Thursday, August 8, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ellida McMillan

Alcentra Capital Corporation - CFO, COO, Treasurer & Secretary

* Suhail A. Shaikh

Alcentra Capital Corporation - CEO

* Vijay P. Rajguru

Alcentra NY LLC - Co­-CIO at Alcentra Limited

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Conference Call Participants

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* Paul Conrad Johnson

Keefe, Bruyette, & Woods, Inc., Research Division - Associate

* Robert James Dodd

Raymond James & Associates, Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning. My name is Shelan, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Alcentra Capital Corporation Second Quarter 2019 Earnings Call. (Operator Instructions) Thank you. Ms. Ellida McMillan, you may begin your conference.

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Ellida McMillan, Alcentra Capital Corporation - CFO, COO, Treasurer & Secretary [2]

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Thank you, Shelan. Good morning, and welcome, everyone, to Alcentra Capital Corporation's Second Quarter 2019 Earnings Call. I'm joined this morning by Vijay Rajguru, Chairman of the Board of Directors; Suhail Shaikh, our Chief Executive Officer; and Peter Glaser, the company's President.

Before we begin, please note that this call is being recorded. Replay information is included in our August 7 earnings release, will be posted on the Investor Relations section of Alcentra Capital Corporation's website, which can be found at www.alcentracapital.com.

Please note that this call is the property of Alcentra Capital Corporation. Any unauthorized rebroadcast of this call in any form is strictly prohibited. Today's call may include forward-looking statements and projections. We ask you refer to our filings with the SEC for important factors that may cause actual results to differ materially from those anticipated in any forward-looking statements and projections. We do not undertake to update our forward-looking statements unless required by law. To obtain copies of our SEC filings, please visit our website or call Investor Relations at (212) 922-8240.

The format for today's call is as follows: Vijay and Suhail will provide an overall business and portfolio summary, and I will then provide an overview of our results, similarly the financials, followed by a Q&A. I will now turn it over to Vijay.

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Vijay P. Rajguru, Alcentra NY LLC - Co­-CIO at Alcentra Limited [3]

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Thank you, Ellida. Good morning. Thank you for joining us to discuss our results for the second quarter of 2019. I'd like to congratulate the management team for their stellar performance in stabilizing net asset value per share in the 4 quarters since they joined the management, noting that we were paid a special dividend of $0.15 per share in addition to our second quarter regular distributions.

The second quarter was another solid quarter for the company, and we're pleased with the progress we've made to date in continuing to rotate our portfolio into our new strategy. I'll now turn it over to Suhail to provide you with the second quarter results. Suhail?

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Suhail A. Shaikh, Alcentra Capital Corporation - CEO [4]

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Thank you, Vijay. Good morning, everyone. We're pleased with our performance in the second quarter of 2019 as book value has remained stable, and we again overran the dividend. We ended the quarter with $219.2 million in fair value of our investment portfolio with 29 positions, including 28 companies and 1 rated debt security in a CLO. Our NAV per share was $11.02, after taking into account the $0.15 per share special dividend paid to record holders as of June 28, 2019 that Vijay mentioned earlier.

Net investment income per share of $0.20 was 1.1x greater than the $0.18 quarterly dividend. Our regulatory debt-to-equity ratio of 0.57x was consistent with the previous quarter. We made fair value adjustments in the first quarter to 7 names based on company-specific circumstances, resulting in a net increase in unrealized depreciation on investments during the quarter.

Breakdown in the quarter included Aegis Sciences Corporation's debt position by $0.1 million based on mark-to-market, Impact Group LLCs debt by $0.3 million due to the company's underperformance and Manna Pro Products LLCs debt position by $0.1 million due to the price of an add-on term loan funding at that price.

Writeups were as follows for the second quarter: GGC Aperio Holdings LPs value by $0.4 million due to an observable market trade, Cambium Learning Group Inc.'s first lien by $0.1 million due to a partial sale of our position and Conisus LLC's equity value by $0.4 million due to improving financial performance.

Goldentree Loan Management U.S. CLO2 Limited loan decision was marked up by $0.1 million based on mark-to-market. The average portfolio investment on a cost basis was $7.2 million and $7 million on a fair value basis. Measured on a fair value basis, first lien debt comprised 62% of the portfolio; second lien positions, 30%; and subordinated debt, 1%.

Equity positions comprise approximately 7%, a slight decrease versus 8% at the end of Q1 2019, measured by fair value. We received proceeds from repayments, loan dispositions and amortizations of approximately $22 million while new investments and add-on started approximately $29 million for the quarter. Our weighted average yield on debt investments of approximately 10.7% was slightly lower than the first quarter 2019 given the continued rotation of the portfolio to more senior secured debt.

Total capital transition since our announced strategy shift in the second half of 2017 has been approximately $217 million, including share repurchases. This is an increase of approximately $29 million from the first quarter of 2019.

I am very proud of our team's effort this quarter in continuing to rotate the portfolio and improve book value in light of the relatively slow deal origination.

I will turn briefly to address the trends we are observing in the market. In the second quarter, observed deal volumes for us were about the same as the previous quarter. However, we were more selective. We declined to participate in transactions due to leverage structure or both in many instances. Pricing has generally held up, although recent interest rate trends would suggest that the weighted average yield of our portfolio may be impacted. 3-month LIBOR tightened by approximately 30 basis points between the first and the second quarters, and the 3-month LIBOR has declined a further 12 basis points since the end of June.

Our credit selection process remains disciplined, and we remain focused on maintaining the quality of the book. As such, we may forgo some high-yielding transactions if leverage and structures don't meet our criteria.

We had only one investment on nonaccrual, Southern Technical Institute Inc., consistent with first quarter 2019. Our watchlist names of 9 -- our watchlist of 9 names has also remained steady. The underlying companies in this watchlist are generally performing in line with their expected results, and we continue to work actively with their management teams and sponsors to monitor the investments.

As I mentioned earlier, we have been able to deploy approximately $29 million across 6 positions this quarter. This included 3 new investments for 2 companies, Digital Room Holdings, Inc. and Perforce Software, Inc., which will directly source from sponsors. The remaining 3 investments were for existing portfolio companies, Manna Pro Products LLC, PharmaLogic Holdings Corp. and BayMark Health Services, Inc.

We exited $22 million across 4 portfolio companies: Impact Group LLC, Superior Controls, Inc., both of which we announced the subsequent events last quarter. Lugano Diamonds and Jewelry, Inc. and Cambium Learning Group. All the exits were at or above cost.

I will now turn it over to Ellida to provide financial highlights for the quarter. Ellida?

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Ellida McMillan, Alcentra Capital Corporation - CFO, COO, Treasurer & Secretary [5]

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Thank you, Suhail. For the 3 months ended June 30, 2019, total investment income was $6.1 million, a decrease of $1.1 million from the $7.3 million of total investment income for the 3 months ended June 30, 2018. This decrease was due to the continued portfolio rotation of legacy investments to investments more senior in the capital structure and the associated decrease in weighted average yield. Interest and PIK income comprised $5.9 million, and other nonrecurring income was $0.2 million. The 3 months ended June 30, 2019, total net expenses were $3.6 million after the waiver for management fees, a decrease of $0.2 million from the $3.8 million of the comparable period of 2018. The base net management fee was $0.8 million, a decrease of $0.2 million due to the lower amount of gross assets outstanding between comparable periods.

For the 3 months ended June 30, 2019, professional fees expenses totaled $1.5 million, an increase of $0.6 million from June 30, 2018. This increase was largely due to an increase in professional fees and director fees, and these were partially offset by a decrease in our excise tax payables, our consulting fees and a reversal of accrued incentive fees, which we reversed as a result of not being distributed.

Net investment income as of June 30, 2019, was $2.5 million or $0.20 per share as compared to $3.5 million or $0.25 per share for the period ended June 30, 2018. The net increase in net assets resulting from operations totaled $2.1 million or $0.17 per share for the 3 months ended June 30, 2019, as compared to a net decrease in net assets resulting from operations totaling $2.2 million or 16 -- negative $0.16 per common share for the 3 months ended June 30, 2018. These are based on weighted average shares outstanding of 12,875,566 and 13,725,423 for June 30, 2019, and 2018, respectively.

As of June 30, 2019, Alcentra had a balance of $7.8 million in cash, $26.6 million outstanding under our credit facility and $55 million outstanding in internotes.

I'd like now to turn the call back over to Suhail.

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Suhail A. Shaikh, Alcentra Capital Corporation - CEO [6]

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Thank you, Ellida. Shelan, we'd like to now open the lines up for Q&A, and we ask that the questions be limited to our quarterly results. For any questions regarding the previously announced review of strategic alternatives, we refer you to our prior public disclosure. Shelan, you may open the line up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from the line of Robert Dodd, Raymond James.

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Robert James Dodd, Raymond James & Associates, Inc., Research Division - Research Analyst [2]

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Congrats on the quarter. One, on the buyback front. Obviously, the review is ongoing. But I assume you didn't buy back any stock this quarter. I seem to recall you said last quarter that you could utilize the buyback even while the review was ongoing. So can you clarify whether it is available to be used? And if it is, why -- what the decision was this quarter not to utilize it?

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Suhail A. Shaikh, Alcentra Capital Corporation - CEO [3]

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So good question, Robert, and thank you for the question. So the -- so our program is in place, but the parameters of the program are such that unless they're met, the buyback shuts down as a 10b5 program. So that's still in place. We have not made any amendments to it. And as the parameters are met, the buyback will continue.

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Robert James Dodd, Raymond James & Associates, Inc., Research Division - Research Analyst [4]

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Got it. Got it. So I -- you might not want to answer this but I presume one of those parameters is how steep the discount is. And at this point, it's not in play.

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Suhail A. Shaikh, Alcentra Capital Corporation - CEO [5]

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Take the first part of your question was the answer to your question.

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Robert James Dodd, Raymond James & Associates, Inc., Research Division - Research Analyst [6]

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Fair enough. And then just on the -- I mean, obviously, you've cleaned a lot of the assets out, et cetera. I mean what would you expect or expect might be overemphasizing the predictability of this? But portfolio growth expectations or color that you can give us? I mean is it now -- I mean is it now down to market conditions given you have completed a lot of your rotation? Or any color you can give us on that front on which direction you expect the portfolio to grow, all other things being equal.

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Suhail A. Shaikh, Alcentra Capital Corporation - CEO [7]

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Yes. No, great question. I think our projection is, it is market conditions driven. Obviously, our projections are, as we think about the growth of the portfolio, the net phasing, we were, I'd say, slightly behind this quarter at net phasing of about $7 million of net add to the portfolio. We'd like that number to be higher. Obviously, on average, if you can do $10 million to $15 million of net phasing, that will maintain the book value and grow it and at a reasonable fashion. So that's how I would think about it. It is market-driven as you've probably been hearing from our peers and competitors in the marketplace. The back half of the quarter was a little better in terms of deals and volume. The front half of the -- I mean there usually is 3 to 6 months lag for (inaudible) So we're starting to see a healthy pipeline but your guess is as good as ours. What happens in the macro economy and trade, et cetera, that slows or speeds up M&A over the rest of the year.

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Robert James Dodd, Raymond James & Associates, Inc., Research Division - Research Analyst [8]

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Got it. Got it. Appreciate it. One more, if I can kind of ask you. What percentage of your portfolio would you classify as unit tranche or unit tranche like at this point in the rebuild?

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Suhail A. Shaikh, Alcentra Capital Corporation - CEO [9]

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Yes. I don't have a statistic off the top of my head I can give you. I think out of the 62% first lien, the bulk of them are either stretched first lien/unit tranche. What we've also done is when we're looking at the number of our privately placed second lien from sponsors, we are looking to strip those investments into a first and the second, so I wouldn't call that a unit tranche but we're being -- we're blending down the yield but we're also taking a cautious approach to the construction of the portfolio by putting in some more first lien risk on the same name, where we like the risk on both sides.

So a good example of that is Perforce Software, where we took a $5 million position in the first lien, approximately a $5 million position in the second lien, although we have shown the second lien originally as a privately placed second lien. So that's sort of what we're doing. So we can get back here with a precise number, but I'd say that's sort of the overall -- that's how we're approaching the construction.

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Operator [10]

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

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Paul Conrad Johnson, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [11]

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My first question was just on the portfolio yield. It looks like the yield declined 50 basis points or so quarter-over-quarter. I know a decent part of that was obviously due to LIBOR. Was there any other things driving that, especially since it looks like the amount of the second lien in the portfolio increased quarter-over-quarter as well? I was just curious if there was anything driving that?

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Suhail A. Shaikh, Alcentra Capital Corporation - CEO [12]

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Yes. No, good question. I think there's 2 or 3 things, and I'll address the second lien portion of the book as well. One is absolutely LIBOR and the base rate. Overall, pricing has held up, and we feel pretty good about where spreads have been and pricing have been in the quarter. But a large part of the base trade, obviously, is driving this lower yield. The other thing is that -- look on our superior to large divestments in the core and the quarter, but both much higher-yielding, low double-digit type of yield of investments. So as those legacy large high-yielding investments come off the portfolio that's going to bring your weighted average yield down because we're sort of going more to senior secured portfolio.

With respect to your question on the first and the second, so if you recall, we announced at the end of Q1 that we had sold a portion of our Carlton Group position. And the way that was structured was, it was effectively a unit tranche. It was a one tranche position that we had the ability, if we could carve out a tranche fee, we sold a strip of a tranche and a tranche fee in the sale. We sort of reclassified about the tranche fee essentially as the second lien. So you see the bulk go up and most of the strip that was sold was really in the tranches. So that shifted the mix a little bit from 70% of first lien down to about 62%.

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Paul Conrad Johnson, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [13]

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Okay. That's really good detail, appreciate that. Secondly, on G&A expenses. I know that they've been elevated, obviously, from the ongoing strategic review process last quarter. They're running about $1 million this quarter, about $800,000 or so. I mean can we expect -- I know this may be hard to pick, but can we expect that to remain sort of elevated in that $800,000 to $1 million per quarter level until that's, I guess, essentially completed? Or --

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Ellida McMillan, Alcentra Capital Corporation - CFO, COO, Treasurer & Secretary [14]

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Yes, I think that's a fair assessment, Paul.

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Paul Conrad Johnson, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [15]

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Okay. And then lastly, just kind of housekeeping. Did you guys provide estimate of your spillover income quarter?

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Suhail A. Shaikh, Alcentra Capital Corporation - CEO [16]

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For this quarter? No, we did not.

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Operator [17]

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(Operator Instructions) We have no further questions at this time.

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Suhail A. Shaikh, Alcentra Capital Corporation - CEO [18]

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Great. Well, thank you, everyone, for participating on the call and appreciate all the questions. And we will follow-up with one of the questions rather directly on the percentage of the portfolio. Thank you. Thank you.

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Ellida McMillan, Alcentra Capital Corporation - CFO, COO, Treasurer & Secretary [19]

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Thank you.

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Suhail A. Shaikh, Alcentra Capital Corporation - CEO [20]

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Thank you.

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Vijay P. Rajguru, Alcentra NY LLC - Co­-CIO at Alcentra Limited [21]

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Thank you.

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Operator [22]

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This concludes today's conference. You may now disconnect.