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Edited Transcript of CRN.TO earnings conference call or presentation 7-Nov-19 1:30pm GMT

Q3 2019 Crown Capital Partners Inc Earnings Call

TORONTO Nov 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Crown Capital Partners Inc earnings conference call or presentation Thursday, November 7, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher Allen Johnson

Crown Capital Partners Inc. - CEO, President & Director

* Michael John Overvelde

Crown Capital Partners Inc. - Senior VP & CFO

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Conference Call Participants

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* Christopher Allan Murray

AltaCorp Capital Inc., Research Division - MD of Institutional Equity Research for Diversified Industries & Senior Analyst

* Jaeme Gloyn

National Bank Financial, Inc., Research Division - Analyst

* Nikolaus Priebe

BMO Capital Markets Equity Research - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Crown Capital's Q3 2019 Results Conference Call.

Please note that today's call contains forward-looking statements within the meaning of the applicable Canadian securities legislation. Forward-looking statements involve known and unknown risks and uncertainties and other factors that may cause actual financial results, performance or achievements to be materially different from estimated future results, performance or achievements expressed or implied by those forward-looking statements.

For a description of the risks associated with Crown's business, please refer to the company's filings for Q3 2019 as well as at AIS at sedar.com.

Chris Johnson, Chief Executive Officer, you may begin your conference.

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Christopher Allen Johnson, Crown Capital Partners Inc. - CEO, President & Director [2]

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Thank you, operator, and good morning, and welcome to today's conference call.

I'm joined as usual by Michael Overvelde, our Chief Financial Officer.

I'll start today's call with a few comments and the key highlights of the quarter and then Mike will review the financials.

It's been an active few months across the business as we made steady progress building our lending and power platforms as well as acquiring WireIE, which represent the starting of what we hope will be a third growth platform. The activity is mostly visible on the special situation side where we've had an opportunity to increase our investment in several of the quality companies in the portfolio. Since the end of the second quarter, we've invested more than $50 million in 4 companies bringing this portfolio back up to roughly $207 million across 10 companies.

In the third quarter, we advanced additional $7 million to data communications, bringing this loan $19 million, and we increased our investment in Rokstad to $35 million through 2 separate transactions. Rokstad continues to experience very strong growth, driven by a need to improve and repair the power grids across North America, and importantly, in California.

Towards that end, yesterday, we announced additional advance of $15 million, bringing our total investment to $50 million.

As you've seen with a few other transactions, we have brought in 2 limited partners on this transaction for additional $5 million. This is proprietary deal flow that our limited partners are generally very receptive seeing from us.

Subsequent to the quarter end, we advanced an additional $12 million to 2 other portfolio companies. $5 million to Touchstone, bringing its total loan to $20 million; and $7 million to Triple Five, increasing their net facility to $27 million. While the challenges in the oil and gas sector has been well documented, both these companies performed well, and will now have additional capital to grow their businesses.

While the lending environment remains competitive, there are deals to be done in our pipeline. This fund remains reasonably strong with a number of interesting investment opportunities.

One of the other key highlights in the third quarter was an agreement with Concentra Bank to provide investment management services for their $20 million investment in the senior facility for Canadian Helicopters. This represented the first of what we hope to be a growing set of opportunities to act as similar role for senior transactions that don't fit the parameters of the Crown Partners Fund.

Based upon our well-established presence in the Canadian market, we intend to use our origination and underwriting capacity to generate a new fee stream for shareholders.

With regards to Crown Power Fund, during the quarter, we made significant progress on a number of fronts. The issue we had in the first quarter, one of our original partners did set us back, but we recovered a portion of the bad debts from this partner, assumed control of the affected projects and brought them closer to completion. We also advanced on multiple other projects in the third quarter, and we expect to be operational in the coming 2 quarters. Currently, we have 8 projects under development with 3 operating partners.

We've also been working on adding new partners that we believe will bring additional capabilities and scale to the fund. Consistent with our strategy to steadily develop new financing platforms that are both highly profitable and scalable, we acquired WireIE, which develops carrier-grade data networks to underserved communities. We believe this industry is providing attractive new avenues for growth, and this is the first step in developing a platform via a capital provider to independent telecom utility operators.

As with the power infrastructure fund, we see an opportunity to apply our core capabilities in sourcing and structuring transactions that generate strong risk-adjusted recurring cash flows. WireIE's core business is joining recurring cash flows with high-quality counterparties.

Clearly, it's early days, our immediate focus is to support the growth of WireIE, while we finalize our plan to bring additional partners and third-party capital together to go after this market. We expect more to have -- to report on this as we get into 2020.

With that, I'll turn the call over to Mike who will review the financial results.

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Michael John Overvelde, Crown Capital Partners Inc. - Senior VP & CFO [3]

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Thanks, Greg, and good morning, everyone on the line.

I'll quickly cover the financial highlights for the quarter. I'll try to comment on a few items that are new or exceptional as there is some new complexity to the financial results this quarter.

Starting with the interest revenue, it increased versus the prior year to $7.5 million compared to $7.2 million last year, the increase due primarily to revenue of $1.3 million that came from the repayment of the Canadian Helicopters, Limited loan, and that offset the impact of a lower average level of interest-yielding investments at Crown Partners Fund.

As Chris highlighted, we've increased the capital deployed in that fund by about $50 million since the end of the second quarter.

On a year-to-date basis, interest revenue is up by about 12% over 2018 driven mainly by some repayments in 2019. Fees and other income also increased from $0.2 million a year ago to $0.5 million this quarter. And on a year-to-date basis, fees and other income increased by over 42% over the prior year, again mainly reflecting early repayment fees.

Total revenues of $8 million were similar to $7.9 million in Q3 of last year. Compared with last year, there was a net loss on investments in Q3 2019, that was offset by both $1.9 million of revenue from WireIE and increases in both interest and fee income.

I'll highlight that the net loss on investments in Q3 did include a $1.3 million unrealized loss item in relation to the Canadian Helicopters loan, which is really just a reversal of the unrealized gain we've been carrying on that loan prior to its repayment. As mentioned earlier, that $1.3 million was received in Q3 and was included in interest income this quarter. So it doesn't that truly reflect an investment loss per se.

An important change to our reporting this quarter is that with the acquisition of WireIE in July, we're now consolidating its financial results, and no longer accounts for this as a loan in our investment portfolio. Recall that this loan had been carried at amortized cost, so it was deemed to have been repaid at the time of the acquisition. It resulted in a reversal of 2 things.

One, the expected credit loss allowance we've been carrying for that loan of roughly $90,000 as well as the reversal of the discount we previously been carrying the loan at under amortized costs, resulting in a gain of $0.3 million is included in the realized -- the net realized loss number this quarter.

These transaction-related gains were largely offset by a separate loss on acquisition of $0.2 million that's detailed in the purchase price adjustment breakdown in the notes to the financials.

In terms of operating revenues and costs from WireIE, we report virtually all of its revenues and the network services revenue line, and its costs are including various expense categories. For the period between acquiring the company in July to the end of Q3, WireIE's operations generated a net loss of $0.6 million.

But again, I just want to highlight, this operating loss includes about $1.2 million of depreciation, including depreciation of transaction-related intangibles such that WireIE did make a positive contribution to operating cash flow in the period.

Total expenses were $4.8 million in the third quarter, that's up from $2.3 million last year. The change relates to increases in several expense categories, resulting largely from the acquisition of WireIE, including the salaries, G&A, depreciation categories as well as the new cost of network services category. And finance costs were also higher year-on-year. The impact of these were partially offset by recoveries in relation to each of the provision for performance bonus and the provision for bad debt.

Excluding WireIE, total expenses were similar to the same levels last year.

G&A were $0.9 million. That compares with $0.5 million last year. That includes $0.2 million from WireIE plus additional legal costs that we wouldn't expect to recur beyond this quarter. Salary expense also increased over last year primarily due to the addition of WireIE and an increase in headcount.

Finance costs of $1.1 million were higher than $0.8 million a year ago. It's explained mainly by higher average level of debt outstanding. And in addition, the results this quarter, included interest in relation to network colocation, network services, equipment lease arrangements, WireIE in addition to interest on the office leases both Crown and WireIE, and so -- I guess under IFRS accounting, the new lease accounting standards have brought that into effect.

Adjusted EBITDA was $3.1 million in the quarter, similar to last year. And adjusted funds from operations were negative $0.5 million in the quarter compared with $3.2 million last year. I do want to highlight that the AFFO methodology that we've been using, doesn't adjust for realized gains and losses, only for unrealized items, such that the AFFO this quarter reflects the realized loss on Solo and full. That's effectively the same item, keep in mind that impacted our Q1 earnings when that loss was initially taken as an unrealized amount. So it's not just to point out, that's not a new item it's just reflected in a different manner with this AFFO.

Net income, net of noncontrolling interest, decreased over the prior year period to $0.5 million or $0.05 per share from $1.8 million or $0.19 per basic share last year. Net income for Q3 this year was impacted obviously by net investment losses and a net loss from the operations of WireIE.

Now looking at the balance sheet. Total assets at quarter end were $277 million, and that's consistent with year-end balance of $276 million. There are quite a few changes, both positive and negative here. I'll simply highlight that we added about $19 million in assets with the WireIE, comprised mainly of property and equipment and associated intangibles. And again, just to highlight, we have removed WireIE loan from the investment category.

Cash and equivalents increased from $11.3 million in the year and to $13.9 million. Equity decreased to $98 million or $10.38 per basic share compared with $10.91 per basic share at the end of last year. The change primarily reflects the net loss reported in Q1, in addition to dividend payments and share repurchases year-to-date, under the current MCIB, which commenced in April. We've now purchased just over 150,000 shares.

In addition to the dividend we paid in Q3, we declared another $0.15 per share dividend yesterday. That'll be paid at the end of November. And I'd also note that we continue to have substantial capital available to fund opportunities as they arise. Quarter end, we had access to approximately $150 million for additional investments, including our working capital. Over $98 million of committed capital available to both Crown Partners Fund and the Power Fund from third-parties, plus undrawn amounts available under each of our credit facilities.

So with that run down, I'm going to turn it back to Chris for some closing remarks.

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Christopher Allen Johnson, Crown Capital Partners Inc. - CEO, President & Director [4]

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All right. Well, thanks, Mike.

So we're nearly through the challenges we encountered in the first quarter this year, and the core operating performance of the business remains solid. We have multiple important milestones and catalysts over the next coming quarters as we build out each of the financing platforms.

On the special situation side, our portfolio is expanding, and we're focused on originating new transactions. As part of our normal transaction flow, we also expect to source several new agency opportunities for the senior debt transactions.

On the Power Fund, we expect to onboard new partners and prove new projects and build the assets and infrastructure in this new fund. There are multiple projects going live in the next couple of quarters, which will serve as great reference projects for our operators. And with the foothold in the data network industry, we'll work to advance the development of this market.

We look forward to updating you with the release of our year-end results in 2020.

With that, we'll open the call to questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Your first question comes from Nik Priebe at BMO.

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Nikolaus Priebe, BMO Capital Markets Equity Research - Analyst [2]

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Okay. I just wanted to start with a few questions on the Power Fund this morning. I think, Chris, in your prepared remarks, you had kind of alluded to the fact that you're still looking at onboarding a few new partners in that fund. Just wondering if you could give us a little bit of color on how efforts are progressing on that front? Are you still sort of prospecting new partners there? Or do you feel that you're close to adding a few new ones?

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Christopher Allen Johnson, Crown Capital Partners Inc. - CEO, President & Director [3]

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Yes, we're very close, like we feel the Ontario market is well represented by the groups we have, and we've been really late-stage and working on some partners in Alberta, where we see a lot of opportunity for this distributed generation. I think you'll see some announcement out very soon.

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Nikolaus Priebe, BMO Capital Markets Equity Research - Analyst [4]

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Okay. Okay, that's good. And then also, I just wanted to ask about the status of fundraising efforts for that fund as well. Is that something that you would look to be active on perhaps early in the New Year? Or do you have a sense of timing when the next phase of fundraising efforts could occur?

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Christopher Allen Johnson, Crown Capital Partners Inc. - CEO, President & Director [5]

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Right, yes. So as you remember, we closed the fund in February, and then in early March, we ran into an issue with that partner of ours. So that set us back, say, 6 months maybe a bit more in managing terms of just getting money deployed and getting another projects up to speed. So at the moment, we're adequately capitalized for the pipeline we're working on.

Now that said, as we onboard new partners and our partners continue to scale, that all changes somewhat exponentially. And so it very much depends on the timing of both closing the Alberta leads we're working on. And just to the extent that because you get the partners and then you get the projects, and then you got to start building them, and that's when the capital's required. And so I would expect a lot of that to happen through this final quarter of the year. And then with that, we've already started just doing the fundraising without necessarily taking any orders.

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Nikolaus Priebe, BMO Capital Markets Equity Research - Analyst [6]

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Got it. Okay. Okay. And then I think you had also pointed out the first few projects that are expected to become operational in the next few months. Is that when you'd expect to start drawing management fees from that fund as well?

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Christopher Allen Johnson, Crown Capital Partners Inc. - CEO, President & Director [7]

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Yes, yes. So what we did, just given the operational issues that we had with one partner, we decided to waive management fees until the fund was cash flowing. So in the next -- it's not huge numbers either right now, like this scale is really through 2020. But the -- yes, the goal is probably by Q1 when we have most of the [8] projects running, then we'll be turning management fees on.

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Nikolaus Priebe, BMO Capital Markets Equity Research - Analyst [8]

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Okay. Okay, understood. And then one last question, just for Michael. I just want to make sure I caught this correctly in your comments. I think you had pointed out that the earnings -- when you were discussing the earnings contribution of WireIE in the quarter. I think you'd pointed out the operating income contribution was about negative $0.6 million, but that included $1.2 million of depreciation. And there were some component of that, that would have been acquisition -- the amortization of acquisition-related intangibles. Just wondering if you could quantify how much that would have been.

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Michael John Overvelde, Crown Capital Partners Inc. - Senior VP & CFO [9]

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Yes. And I apologize, I didn't bring the breakdown into the room. It's approximately $300,000 in the quarter. And that's an item -- it's a network services item that -- network contract intangible. You'll see a note in the financial statements that references that, just over $3 million, and that's going to be amortized roughly over the 3-year period on average that represents the average contract term underlying those amounts. So that is -- that will be a recurring amount.

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Operator [10]

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Your next question comes from Chris Murray with AltaCorp Capital.

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Christopher Allan Murray, AltaCorp Capital Inc., Research Division - MD of Institutional Equity Research for Diversified Industries & Senior Analyst [11]

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Maybe just following up on that, Mike. Just looking at your segment note, the -- and looking at the revenues and the operating costs. How should we think about this on a run rate basis now kind of going forward? Because -- I mean essentially you've got a construction company in the middle of your financial statements. So I'm just trying to understand how we think about this segment and how it affects earnings on a go-forward basis.

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Michael John Overvelde, Crown Capital Partners Inc. - Senior VP & CFO [12]

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I think, Chris, it's pretty -- it's -- given that we've just got this under our belt, and to be quite honest, we're still working through some operational, I guess, changes under the new ownership system, it's a little bit too early to provide specific guidance. Again, what you're seeing revenue was probably representative of run rate because these are contractual revenues. This is an investment. To date, we've made, in aggregate, about $8.5 million and it's generating, we think, like still a sufficient mid-teens-ish return from a cash flow point of view.

So again -- I want to stop short of providing specific guidance, frankly, in part because the numbers are shifting and partly because we haven't necessarily come to the point where we're ready to give that kind of guidance yet.

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Christopher Allan Murray, AltaCorp Capital Inc., Research Division - MD of Institutional Equity Research for Diversified Industries & Senior Analyst [13]

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Okay. I guess maybe just thinking about this, is there any sort of seasonality that we should be thinking about with this thing? Or is it basically -- it should be kind of flattish with the growth built into it? Is that a better way to think about it?

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Michael John Overvelde, Crown Capital Partners Inc. - Senior VP & CFO [14]

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Correct. Yes. There shouldn't be seasonality to these revenues. The revenues come on -- just for reference, these are -- these revenues come on initially under contract for periods of 3 to 5 years. And when they come on, it's just a steady, steady contractual monthly revenues that upfront, there are certain portion of the revenues that are received in relation to the setup and installation. Those are deferred and amortized over the terms of those contracts, so those will be steady as well. So there shouldn't really be a whole lot of variation related to seasonality or other factors other than, call it, the change in average pricing or level of contracts outstanding.

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Christopher Allan Murray, AltaCorp Capital Inc., Research Division - MD of Institutional Equity Research for Diversified Industries & Senior Analyst [15]

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Okay. Fair enough. And then, Chris, I don't know if you -- I mean in your prepared commentary, it felt maybe a little more positive than maybe the written outlook. Where you're talking about the ability to deploy new capital in investments. Can you kind of give us a flavor of what you're seeing in terms of the possible deployments, and then where you're seeing industries that could be interesting to be pursuing?

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Christopher Allen Johnson, Crown Capital Partners Inc. - CEO, President & Director [16]

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Yes. How do I say this? Like it's -- I guess you're talking just generally across all funds or specifically?

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Christopher Allan Murray, AltaCorp Capital Inc., Research Division - MD of Institutional Equity Research for Diversified Industries & Senior Analyst [17]

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Well, mainly the special situations fund.

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Christopher Allen Johnson, Crown Capital Partners Inc. - CEO, President & Director [18]

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Okay. Well, the special situations, obviously, like -- it's -- there's a lumpy type of pipeline we work on. We actually had some really interesting things that required close, and a variety of reasons they didn't close in the third quarter. There's just a number of great opportunities out there we continue to work towards, and we have term sheets out on.

It's still generally -- like you can see, in terms of net new relationships and just timing. Like our focus when we have clients that precedes the new activity, new client activity. So we did a lot of work in the third quarter just supporting our existing portfolio of companies. And as you saw this morning's announcement the Rokstad, we're very involved in that one, as that business -- it's almost doubling every 6 months in terms of the work that's required there.

So you're seeing just some positivity in terms of that. But no, there's still a lot of interesting companies out there that are looking to finance. So I -- we remain reasonably positive the portfolio is back growing again and it's going to continue to grow.

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Christopher Allan Murray, AltaCorp Capital Inc., Research Division - MD of Institutional Equity Research for Diversified Industries & Senior Analyst [19]

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Okay. And then my last question, just looking at sort of these ratings as you go through it, some of the energy-related companies. I know you alluded to the fact that some of them are doing okay, but that risk profile continues to kind of increase. Any thoughts around exposures, concerns, particularly if energy kind of stays where it's at right now?

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Christopher Allen Johnson, Crown Capital Partners Inc. - CEO, President & Director [20]

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Yes. I think just to be clear, like the -- so we've both service companies and a few producers. And the producers actually, risk ratings actually went down this quarter. Like the forward curves and what our price curves and what our groups have been able to do on the hedging markets is really significantly improving cash flow now and into next year.

So we were working those numbers up as prices were deteriorating. Now that prices are strengthening, we're bringing those numbers back down again.

The service side is a different game. They -- like we have the 2 Source and Ferus, which are both tied to completion activity. And it's just -- it's a pretty difficult market still for them. They -- I think they're both making reasonably good progress with their businesses. It's just the spending in the energy patch is very unpredictable. And so it's -- I think we just are expecting continued headwinds in that industry until the capital markets really open up.

And that's a big thing in terms of just -- probably -- I know from Chris, your group's perspective at AltaCorp, that a lot of investment dollars have left Western Canada, and that's affecting the ability to put money into the ground. And that just goes right into companies like Source and Ferus. So those are headwinds we think are big, long-term things. So that -- again, we're just increasing our risk ratings because of that.

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Christopher Allan Murray, AltaCorp Capital Inc., Research Division - MD of Institutional Equity Research for Diversified Industries & Senior Analyst [21]

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Okay. I mean, I guess, what I'm trying to get at is or make sure of is, you still feel comfortable, though, with the performance on those loans?

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Christopher Allen Johnson, Crown Capital Partners Inc. - CEO, President & Director [22]

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Yes. So there's -- I don't want to get too much particular with Source because it is a public company, and we really get information that most people get as a public company. So you can reach your own conclusions.

And I just -- I think there is -- there is a -- there is this is a tale of 2 cities, really. Like there's sort of what's going on in the capital markets, which is really, really bad. And there's what's going on actually in the industry, which there's some -- there are some really more positive things happening in the industry. So we remain focused on these companies, but I think they're both good loans.

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Operator [23]

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Your next question comes from Jaeme Gloyn at National Bank Financial.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [24]

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Just real quick on the Rokstad follow-on investment. Is there any change in terms or conditions around that and thinking about rate as well, especially given the size of this investment?

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Christopher Allen Johnson, Crown Capital Partners Inc. - CEO, President & Director [25]

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Yes, so as we upsized the loan, the rate -- the interest rate was -- remained the same. We think that's a reasonable rate. We don't disclose a private company. It's sensitive to their business, but it's in our range. So it's a good rate.

We did -- with the upsizing, we have a bonus participation, and we've increased that. And it's -- the fund will get significantly rewarded if they execute their business plans what they're expecting. So this is less going to be the highest -- just given the size, while that's the way equity is structured, the highest impact in investment on the portfolio.

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Operator [26]

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(Operator Instructions)

There are no further questions at this time. Please proceed.

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Christopher Allen Johnson, Crown Capital Partners Inc. - CEO, President & Director [27]

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All right. Well, thank you, operator, and thank you, everybody, for joining us this morning.

And as always, if you'd like to reach out, just let us know. Thank you.

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Michael John Overvelde, Crown Capital Partners Inc. - Senior VP & CFO [28]

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Thank you, all.

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Operator [29]

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Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and ask that you please disconnect your lines.