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Edited Transcript of GARS earnings conference call or presentation 13-Aug-19 6:00pm GMT

Q2 2019 Garrison Capital Inc Earnings Call

New York Aug 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Garrison Capital Inc earnings conference call or presentation Tuesday, August 13, 2019 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian Steven Chase

Garrison Capital Inc. - COO & Director

* Joseph B. Tansey

Garrison Capital Inc. - Chairman & CEO

* Mitchell E. Drucker

Garrison Investment Group LP. - MD and Head of Corporate Finance

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Presentation

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Operator [1]

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Welcome to today's Garrison Capital Inc. second quarter ended June 30, 2019, earnings call. For the second quarter ended June 30, 2019, earnings presentation that we intend to refer to on the earnings call, please visit the Investor Relations link on the home page of our website, www.garrisoncapitalbdc.com, and click on the second quarter ended June 30, 2019, earnings presentation under Upcoming Events.

As more fully described in that presentation, words such as anticipate, believe, expects, intends and similar expressions identify forward-looking statements. Actual results could differ materially from those implied or expressed in our forward-looking statements for any reason, and future results could differ materially from historic performance. You should not rely solely on the matters discussed in today's call as the basis of an investment in Garrison Capital. Please review our publicly available disclosure documents for further information on the risk of an investment in our company. (Operator Instructions)

It is now my pleasure to turn the webcast over to Mr. Joseph Tansey, CEO. You may begin.

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Joseph B. Tansey, Garrison Capital Inc. - Chairman & CEO [2]

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Good morning, everybody, and thank you for joining the call. I'm joined by Brian Chase, our Chief Operating Officer; Mitch Drucker, our Chief Investment Officer; and Dan Hahn, our Chief Financial Officer.

On Monday morning, we issued our earnings report and press release for the second quarter ended June 30, 2019. We also posted the supplemental earnings presentation to our website, which is available for reference throughout today's call.

Following my broader comments, Mitch will highlight our investment activity during the quarter and discuss the portfolio in greater detail. Brian will then discuss our financial performance before opening up the lines for Q&A.

While the overall credit market has largely rebounded from the significant fourth quarter 2018 volatility, we're still feeling the impact of head-on M&A activity, with slower deal flow during the first half of 2019.

We continue to find the market challenging as supply for direct lending continues to outpace demand. As a result, new opportunities are generally being executed at higher leverage levels with looser credit structures. In light of the current environment, we remain focused only on executing investments to strong credit-worthy companies.

Turning now to our second quarter results. We've reported net investment income of $0.22 per share as compared to our second quarter dividend of $0.23 per share. Our second quarter NAV was $10.30 per share, down slightly from $10.44 per share in the first quarter. The decrease on average was driven by unrealized losses on a few of our investments, will Mitch -- which Mitch will discuss in further detail.

Overall, we continue to believe the company is well-positioned to deliver strong, stable returns on a go-forward basis, and we hope this will result in closing the wide gap between where our stock currently trades and the net asset value of our portfolio.

With that, I'll turn it over to Mitch, who will provide additional color on the loan market and our activity during the quarter.

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Mitchell E. Drucker, Garrison Investment Group LP. - MD and Head of Corporate Finance [3]

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Thanks, Joe.

Competitive conditions continue to permeate the middle market. As the current credit cycle persists, our objective is to be selective, defensive and focus on downside protection.

In seeking out the best quality, we continue to source a wide funnel of deals across the various size segments of the middle market. We characterize our deal flow in 3 buckets: originated business in the lower middle market; club business, which includes deals less than the -- than $250 million in size or unrated deals closed by nonbank direct lenders; and purchased credits in the broadly syndicated market.

Our originated business, as a percentage of our overall business, has declined, as the quality of deal flow and aggressive debt structures have led to a decrease in actionable transactions. On the other hand, while our overall selectivity ratios diminished due to market conditions, we continue to source attractive opportunities in the upper middle market for club deals and broadly syndicated transactions. These larger companies tend to be more durable and resilient in the events of economic volatility.

We also continue to service our existing sponsor clients who are seeking acquisition financings, recapitalizations and charity extensions. New par additions during the quarter totaled $24.6 million across 2 new portfolio companies at a weighted average yield of 8.5%. Lower volume in the quarter is consistent with reduced market volumes resulting from late 2018 volatility. The mix of new business included $4 million in a club deal, $3 million in a purchased credit and $18 million of portfolio add-on investments.

The club and purchased credits were sponsored financings for Surgical Specialties and Wheel Pros, respectively. Surgical Specialties specializes in the design and manufacturing of high-performance wound closure and ophthalmic products, while Wheel Pros distributes proprietary-branded aftermarket custom wheels and performance tires.

In addition to the deals discussed above, we generated new volumes from our existing customer base. We now have 100 companies in our portfolio, of which a good portion seek incremental capital for strategic and/or acquisition purposes.

In addition to adding quality assets to our portfolio, these add-ons assist with the retention of customers that exhibit solid business models and financial performance.

Additions to the quarter were offset by repayments totaling $19.3 million with a weighted average yield of 7.5%. We received full repayment from 1 borrower, AOC Aliancys. The balance of the repayments came from ordinary course amortization and excess cash flow.

As a result of the modest repayments, total portfolio at fair value increased quarter-over-quarter to $487 million from $481 million. The average yield to the debt portfolio at cost remained constant quarter-over-quarter at 8.9%.

With respect to portfolio performance, net realized and unrealized losses totaled $2.1 million or $0.13 a share for the quarter. This was primarily driven by negative market-related adjustments across various purchased syndicated investments.

Nonaccruals decreased during the quarter to 0.7% of the portfolio based on market value, down from 2.9% in the previous quarter. The reduction in nonaccruals was due to the restructuring of the confluence investment into an equity position as discussed in a previous quarter's call.

The overall credit quality of our portfolio has remained stable and consistent throughout 2019. Our post-2016 vintage now comprises 96% of our debt portfolio, and we now have investments in 100 borrowers diversified across 30 industries.

Our largest industry concentrations are in solid defensive sectors with recession-resilient attributes, such as business services, software and health care. Other significant attributes include lower average hold size per investment, higher concentrations of sponsor deals and larger, better capitalized companies. This is clearly reflected in the average revenue and EBITDA levels of the companies in our portfolio, which continues to grow quarter-over-quarter.

In addition, the overall weighted average leverage, loan to enterprise value through our positions and risk ratings, have remained mostly consistent at 3.9x, 48% LTV and 2.3, respectively.

With respect to the pipeline, third quarter activity to date has been modest due to market and competitive factors. Conversely, our second quarter repayment activity was also moderate, which we believe to be a more normalized level given our portfolio is relatively young with pricing generally in line with current market conditions.

We will continue to source a wide funnel of deals across the various-sized segments of the middle market. Post quarter end, we made progress on deploying the remaining idle cash within our SBIC by committing to 2 deals totaling $14 million in fundings.

We expect the club market to continue to benefit as sponsors look for certainty of execution. Additionally, spreads on broadly syndicated purchases provides attractive opportunities on a selective basis. In the meantime, we'll continue to service and retain our valued existing clients, which often provide us the most attractive risk-adjusted returns.

Now I'd like to pass the discussion to our COO, Brian Chase.

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Brian Steven Chase, Garrison Capital Inc. - COO & Director [4]

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Thanks, Mitch.

As Joe noted, our net investment income for the first quarter ending June 30, 2019, is $3.5 million or $0.22 per share, just shy of our $0.23 dividend. The dividend is payable on September 20 to shareholders of record as of September 6.

As mentioned in the earnings presentation, earnings grew by $0.02 per share from the previous quarter mostly due to the utilization of liquidity in our SBIC and CLO. As of quarter end, our portfolio is pretty close to being fully ramped with about $35 million of remaining liquidity in our CLO and SBIC.

In addition to our remaining liquidity, a substantial portion of the portfolio is held in relatively liquid, properly syndicated credits that can be opportunistically swapped with better priced club or directly originated assets.

Since the portfolio is largely ramped, earnings over the next several quarters will mostly be driven by the overall spend environment and LIBOR rather than the utilization of our remaining liquidity. It is worth taking note that over the last 2 quarters, yields on new investments have been higher than investments that have been repaid or sold.

For the 10 preceding quarters, the dynamic was the opposite where new investment yields were significantly tighter than the yields on investments that were repaid, which contributed to shrinking that investment income. The stability of asset spreads in the portfolio, along with the fact that the portfolio is largely ramped, should make that investment income a lot more predictable going forward, that is assuming LIBOR remains stable.

At current levels of LIBOR, we are comfortable that net investment income, over the course of a 1 year period, should largely cover our current dividend payout, assuming there are no major shifts on asset yields and nonaccruals remain low. However, our net investment income is very sensitive to moves in LIBOR. Each 25 basis point move in LIBOR can either increase or decrease our earnings per share by $0.01 per share. If LIBOR significantly decreases from its current level, without an earnings pick up elsewhere in the portfolio, we will likely need to reassess our dividend.

In closing, we feel that our goal of ramping the portfolio is largely complete. We will continue to focus on what remains of the ramp and picking up some yield through portfolio rotation.

With that said, capital preservation and NAV stabilization remain our highest priority, and we'll continue to be disciplined and selective with our go-forward deployment of this remaining capacity.

This concludes our prepared remarks for today's call. And now I'd like to open up the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We are currently showing no audio questions.

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Joseph B. Tansey, Garrison Capital Inc. - Chairman & CEO [2]

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All right. I'll -- I guess we'll catch you next time. Have a good rest of the summer.

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Operator [3]

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This does conclude today's conference call. We thank you for your participation and ask that you please disconnect your line.