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Edited Transcript of HCAP.OQ earnings conference call or presentation 13-May-20 3:00pm GMT

Q1 2020 Harvest Capital Credit Corp Earnings Call

NEW YORK Jul 7, 2020 (Thomson StreetEvents) -- Edited Transcript of Harvest Capital Credit Corp earnings conference call or presentation Wednesday, May 13, 2020 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Joseph Andrew Jolson

Harvest Capital Credit Corporation - Chairman of the Board & CEO

* Richard P. Buckanavage

Harvest Capital Credit Corporation - President & Director

* William E. Alvarez

Harvest Capital Credit Corporation - CFO, Chief Compliance Officer & Secretary

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Conference Call Participants

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* Ryan Patrick Lynch

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

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to Harvest Capital Credit Corporation Quarter 1 2020 Earnings Call. (Operator Instructions)

I would now like to turn the call over to William Alvarez, Chief Financial Officer of Harvest Credit Corporation. Sir, the floor is yours.

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William E. Alvarez, Harvest Capital Credit Corporation - CFO, Chief Compliance Officer & Secretary [2]

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Okay. Thank you, operator. Good morning, everyone, and thank you for participating in this conference call to discuss our financial results for the quarter ended March 31, 2020. I am joined today by our Chairman and Chief Executive Officer, Joseph Jolson; and by Richard Buckanavage, our President.

Before we start, I'll provide a disclaimer regarding any forward-looking statements that we make during this presentation. This presentation contains forward-looking statements, which relate to future events or Harvest Capital Credit's future performance or financial condition. These 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 our filings with the Securities and Exchange Commission, including in our most recently filed annual report on Form 10-K and quarterly report on Form 10-Q. Harvest Capital Credit undertakes no duty to update any forward-looking statements made herein unless required to do so by law.

Now I'll turn the call over to Joe.

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Joseph Andrew Jolson, Harvest Capital Credit Corporation - Chairman of the Board & CEO [3]

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Thanks, Bill. Given the severe negative impact on the U.S. economy from the COVID-19 pandemic since late February, we quickly shifted our strategy from growing our investment portfolio to increasing and preserving our capital, while actively managing our current investments to limit the negative impact from the downturn. We continue to negotiate with our lenders to extend our revolving line of credit, which -- until the end of July or at a later date. Otherwise, it will term out over the next 18-month period unless further extended or replaced with a new agreement. Because we will likely be in this mode for the next few quarters, our Board of Directors decided to preserve our cash and capital and defer the payment of our March and April cash dividends and suspend future dividends until we have better visibility to the depth and duration of this economic crisis.

Bill is going to take you through some of the financial results from the quarter, and then Rich will provide some color on our portfolio before I make some concluding remarks. Bill?

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William E. Alvarez, Harvest Capital Credit Corporation - CFO, Chief Compliance Officer & Secretary [4]

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Okay. Thanks, Joe. Net investment income for the quarter was $1 million or $0.17 per share compared to $0.8 million or $0.12 per share in the first quarter of 2019. Net investment income increased by $0.2 million in the 2020 period as compared to 2019, primarily as a result of an increase in investment income.

Net operating loss for the quarter was $3.7 million or $0.62 per share compared to net operating income of $61,000 or $0.01 per share in the first quarter of 2019. The decrease in net operating income of $3.8 million between periods was primarily attributable to an increase in net unrealized depreciation on our investment portfolio, primarily due to the effects of the economic impact of COVID-19 and continuing uncertainty regarding its long-term impact.

We recognized fee amortization income of $150,000 in the 3 months ended March 31, 2020, as compared to $250,000 in the comparable 2019 quarter. The higher fee amortization in 2019 resulted from higher prepayments in 2019. Our fees are deferred until they are either earned, amortized into income over the life of the investment using the effective yield method, or fully recognized when an investment payoff occurs. As a result, our fees and other income will fluctuate quarter-to-quarter depending on portfolio activity.

During the quarter ended March 31, 2020, we placed 1 additional loan on nonaccrual, bringing the total to 3 nonaccrual loans representing approximately $17.7 million of our portfolio at fair value at March 31, 2020. As of March 31, 2020, the fair value of our portfolio was $111.1 million, with a cost base of $122.3 million, reflecting $11.2 million of cumulative net unrealized depreciation in the portfolio as of the end of the quarter. As of March 31, 2020, we had a debt balance of $72.8 million, consisting of $44 million of bank debt and $28.8 million in 2022 notes, for an asset coverage ratio of approximately 185% compared to approximately 192% at December 31, 2019.

At quarter end, we had $20.8 million of cash and restricted cash. In addition, on April 30, 2020, the revolving period under our credit facility ended. And as a result, we are no longer able to borrow additional amounts under the credit facility. We are currently in negotiations with the lenders to extend the revolving period from April 30, 2020, to July 31, 2020 or some other date, but there is no assurance that the lenders will agree to do so or as to any timing.

As of March 31, 2020, our net asset value was $10.37 per share, down $0.86 per share from December 31, 2019, primarily as a result of paying $0.24 per share in distributions for the quarter ended March 31, 2020, recording $0.79 of realized and unrealized losses, offset by $0.17 of net investment income for the quarter.

Now I'll turn the call over to Rich, who will provide an update on our portfolio.

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Richard P. Buckanavage, Harvest Capital Credit Corporation - President & Director [5]

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Thanks, Bill. As you may recall from last quarter's earnings call, we had 3 mandated transactions in various stages of diligence. Given the early warning signs of the impact that the coronavirus was likely to have on the U.S. economy, we decided to place those transactions on hold to allow for additional time to pass in order to understand the order of magnitude this virus was going to have on the economy.

As of today, all of these transactions remain on hold, so that we can focus our efforts on portfolio management and maintain maximum liquidity for our business. Since mid-March, we have focused our resources on dealing with likely portfolio issues. We have been actively engaged with all of our portfolio companies on a regular basis since that time.

I'm pleased to report that 15 of the 16 directly originated financings in which we have a debt or equity investment have been approved for loans under the Paycheck Protection Program and in many cases have already received the proceeds from such loans. The single company that was ineligible for the PPP loan program was excluded by virtue of its ownership by a private equity sponsor and restrictions due to the affiliate rules governing the program.

The significance of this accomplishment should not be understated. The proceeds approved or received by these 15 companies range between approximately $500,000 and almost $6 million, providing critical liquidity during these challenging economic times. To put these loan amounts in perspective, the PPP proceeds represent between 4% and 28% of individual portfolio company enterprise values, providing Harvest with some mitigation against future unrealized depreciation. In addition to the liquidity provided by the PPP program, we have also benefited from equity infusions by private equity owners in 3 of our portfolio companies.

It is also worth noting that as of quarter end March 31, we received approximately 87% of total interest payments due from borrowers not on nonaccrual status, and that percentage remained above 84% as of April 30. While we did place one additional debt investment on nonaccrual status this quarter, our interest deferral was required by debt providers senior to us in the capital structure as part of a 45-day forbearance. All debt providers, along with the private equity owner are working toward a longer-term solution during the forbearance period. With ongoing financial support from this private equity sponsor and the subpar financial results coming almost exclusively from the impact of COVID-19, we remain optimistic long-term to ultimately receiving all past due interest along with our full principal repayment once the economy recovers from the coronavirus situation.

Overall, we are pleased with the performance of our portfolio during these unprecedented times. We attribute this outcome in part due to the fact that 74% of our portfolio is in the senior secured asset class. And in many cases, we are the sole debt provider to the company. This dynamic enables us to control our own destiny and manage to quicker and more favorable results than club or syndicated financings. As we look forward to the remainder of Q2 2020 in terms of deployment, our activities will be limited to advances under committed revolving lines of credit for which borrowers remain eligible for further draws.

With that, I'd like to turn the call back over to Joe for some final thoughts.

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Joseph Andrew Jolson, Harvest Capital Credit Corporation - Chairman of the Board & CEO [6]

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Thanks, Rich. In closing, we are working very hard to help successfully guide our portfolio companies through this difficult environment, while at the same time working with our lenders to extend the revolving period in our bank facility until economic conditions improve and we can attract alternative funding sources. Otherwise, the bank facility will term out, as Bill said, over the next 18 months.

Given our current cash position and some visibility to potential monetization events within our portfolio, we believe we can weather the current economic crisis and could be in a position to commit to new investments after the economy starts to improve, hopefully, by the end of fourth quarter at the latest. I want to thank our team of hard-working professionals all of whom have been working remotely for the past few months and our shareholders for their patience and support.

With that, operator, we'd be happy to try to answer any questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your question comes from the line of Mr. Ryan Lynch.

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Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [2]

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I hope you guys are all doing well and safe in these challenging times. I did have a couple of questions. The first one, why are you guys holding, I guess, $20 million of restricted cash in your credit facility on only $44 million drawn? Why not use that just to pay down those debentures right now?

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Joseph Andrew Jolson, Harvest Capital Credit Corporation - Chairman of the Board & CEO [3]

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Well, I think maybe Bill can answer that.

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William E. Alvarez, Harvest Capital Credit Corporation - CFO, Chief Compliance Officer & Secretary [4]

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Yes. Yes. That just happened to be a point in time. Our cash balance has been reduced. Our bank line is down to $27.5 million as of today, and our cash is about $6 million. So we've used that cash to pay down our bank line.

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Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [5]

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Okay. Given that you guys have paid down the bank line a little bit, I mean, what is the early dialogue that has been with your lenders on getting that extended? I mean, obviously, we're in kind of unprecedented times. Do you have any early feedback from those conversations of your ability to get that extended? And why -- at least in your prepared comments and in your 10-Q, you talked about getting that extended to really it seemed like a date with maybe July. Why not try to get that for a longer date, sometime through this downturn?

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Joseph Andrew Jolson, Harvest Capital Credit Corporation - Chairman of the Board & CEO [6]

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I think I'll start with that, Ryan, and then Bill might have some follow-up. You know, we had the unfortunate luck of having our normal credit line mature or at least the revolving period expire on April 30. So obviously, that was just unfortunate luck. We were already well along getting that renewed for at least another year or so going into March, when all this stuff occurred. So I think we've been working pretty well with our 2 bank lenders, and they've got obviously their own kind of things internally to deal with as it relates to just their overall loan portfolios and where we fit into that, and kind of their -- kind of strategy perhaps to manage their own businesses through this kind of uncertain time. But we've had an active dialogue. I think we're hopeful that we can get something accomplished in the near term.

But if -- we have to manage the business on the premise that we won't be able to do that in this environment, but maybe we can do that as the economy starts to reopen and people get more comfortable with the credit metrics out there. But -- so that's how we're managing the business. But -- and I think we're in good shape. As Bill mentioned, we have $6-plus million of cash, and we forecasted out all our cash needs and as well as potential draws on our committed lines. We don't have a lot of committed lines of credit, but the draws on that. So I think we're in pretty good shape to weather this storm. But essentially, I'm respectful of the fact that our lenders have their own internal issues with credits that have nothing to do with us and our unfortunate bad luck of just having our revolver happen to mature right in the middle of this. So Bill, do you have anything else to add to that?

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William E. Alvarez, Harvest Capital Credit Corporation - CFO, Chief Compliance Officer & Secretary [7]

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No, I think you've covered it all, Joe. We do have an active dialogue going on, and we're all hopeful we'll be able to extend it. But again, these are unprecedented times, and everybody is treading water very cautiously.

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Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [8]

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Okay. And then on that point, though, with your unfunded commitments, you had about $2.9 million or so listed as of March 31, are those all revolvers? Or are there any delayed-draw term loans or any other out of that $2.9 million or any of those loans have any sort of restrictions that would not make them eligible to be drawn down solely at the borrower's discretion?

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Joseph Andrew Jolson, Harvest Capital Credit Corporation - Chairman of the Board & CEO [9]

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Rich, you want to take that one?

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Richard P. Buckanavage, Harvest Capital Credit Corporation - President & Director [10]

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Sure. The majority of any unfunded commitments we have today are revolving lines of credit in nature. There's one small exposure to a delayed-draw term loan. But to your point about the gross unfunded commitments versus what might be available, the number that's actually available based on continued covenant compliance is $1.5 million. So it's not the full $2.9 million.

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William E. Alvarez, Harvest Capital Credit Corporation - CFO, Chief Compliance Officer & Secretary [11]

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And I also might want to add, too, that one of those revolving commitments actually expires in September. So just to give you some additional information on that.

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Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [12]

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Okay. That's helpful. And then regarding the dividend, obviously I saw you guys delayed the payment of 2 dividends and then right now it's kind of on pause. The Board of Directors is waiting to see the liquidity position, how that plays out. Have you guys considered with the dividend that was already declared, the 2 of them, the two $0.08 dividends that are already declared but haven't been paid, have you guys considered using some other BDCs do a combination of stock and a smaller percentage of cash dividend? Has that been on the table?

And then also, when do you think that you guys will have some more clarity around the dividend? Does it have to do with changes in the economic environment, which obviously is very fluid and uncertain? Or is it more have to do with your guys further clarity around getting your credit facility advance or extended? Just any comments on dividends in the future and when you guys are looking to make any further announcements of when those would be paid, how they will be paid and the ability to pay any future dividends?

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Joseph Andrew Jolson, Harvest Capital Credit Corporation - Chairman of the Board & CEO [13]

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Okay. The first part was changing what we already declared in a cash dividend to some combination of stock and cash. And once you declare the dividend in cash, legally you can't change it. So unless you're in such a distressed situation that you're not really worried about like the legality of it, right, in terms of being sued or something. So I think that in terms of -- we're going to comply with the RIC rules. We had NII of $0.17 this quarter. We've declared, I think, Bill, correct me if I'm wrong, $0.32 year-to-date, right? So we're going to comply...

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William E. Alvarez, Harvest Capital Credit Corporation - CFO, Chief Compliance Officer & Secretary [14]

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Yes, Joe. Correct.

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Joseph Andrew Jolson, Harvest Capital Credit Corporation - Chairman of the Board & CEO [15]

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Okay. So we're going to comply with the RIC rules, Ryan. So we'll see how we do in the next few quarters. And if we start to exceed by more than that 10% allowance for retaining NII, we'll then look to catch it up, okay? And unfortunately, it won't be kind of a consistent dividend. It will be more of a probably lumpy type of thing as a catch-up, right?

In terms of stock versus cash at that point in time, we would look at that. I think they recently amended the rules to say you could pay 90% of your dividend in stock, if you wanted to, just for this year, versus the 80% that they had on the books before for BDCs. But we'll see where we are in terms of the credit line, either -- if it just keeps getting renewed for a couple of more months at a time, we'll probably do what I said at first. But if we can negotiate a longer-term solution there, we'll probably revert back to our normal practice at that point.

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Operator [16]

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(Operator Instructions) There are no more questions from the queue. Presenters, you may continue.

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Joseph Andrew Jolson, Harvest Capital Credit Corporation - Chairman of the Board & CEO [17]

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Okay. Well, thank you for your interest. And we're around, if there's any follow-up questions. Let us know. And we're working hard for a very favorable result relative to where our current stock price has been trading. So I think stay tuned. And hopefully, we'll have updates in the not-too-distant future. Thank you very much. That's it, operator.

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Operator [18]

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This concludes today's conference call. Thank you, everyone, for joining. You may now disconnect. Have a great day.

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William E. Alvarez, Harvest Capital Credit Corporation - CFO, Chief Compliance Officer & Secretary [19]

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Thank you.