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Edited Transcript of HCAP earnings conference call or presentation 9-Aug-19 3:00pm GMT

Q2 2019 Harvest Capital Credit Corp Earnings Call

NEW YORK Aug 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Harvest Capital Credit Corp earnings conference call or presentation Friday, August 9, 2019 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 - MD, Head of Business Development & Director

* William E. Alvarez

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

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Presentation

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Operator [1]

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Good morning. My name is Heidi, and I will be your conference operator today. At this time, I would like to welcome everyone to the Harvest Capital Credit Corporation Second Quarter 2019 Earnings Call. (Operator Instructions)

William Alvarez, Chief Financial Officer, Harvest Capital Credit Corporation, you may begin your conference.

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

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Thank you. Good morning, everyone, and thank you for participating in this conference call to discuss our financial results for the second quarter ended June 30, 2019. I'm joined today by our Chairman and Chief Executive Officer, Joseph Jolson; and by Richard Buckanavage, our Managing Director and Head of Business Development.

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.

Harvest Capital Credit undertakes no duty to update any forward-looking statements made herein. 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. Our second quarter results were a little better than we expected, excluding the $0.04 per share of historical accrued interest for one portfolio company that was reversed in the period after their circumstances changed, indicating it may not be collectible.

We made progress in growing our investment portfolio, which increased 9% and 17% from March 2019 and December 2018 levels, respectively.

We still have substantial room to grow our portfolio through leverage as our targeted debt-to-equity ratio of 1.3:1 if achieved, with our existing equity capital base, could support total assets of roughly $160 million.

We also continue to repurchase our shares in open market transactions at current price levels, which is immediately accretive to net investment income and book value per share.

As of Wednesday's close, we had approximately 140,000 shares remaining on our existing stock repurchase program.

Now Bill will take everyone through some details on the financials from the quarter, and Rich will take a few moments to discuss new investment activity in our pipeline. Bill?

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

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Thanks, Joe. Net investment income for the quarter was $0.8 million or $0.14 per share compared to $1.6 million or $0.25 per share in the second quarter of 2018.

Net investment income decreased by $0.8 million in 2019 as compared to 2018 as a result of a decrease in investment income of $1.1 million as a result of a smaller portfolio at June 30, 2019, compared to June 30, 2018, which also included a write-off of $0.3 million of previously accrued interest, offset by a decrease of $300,000 in expenses in the 2019 period as compared to 2018.

Net income for the quarter was $0.1 million or $0.01 per share compared to $0.8 million or $0.13 per share in the second quarter of 2018. Net income decreased by $0.7 million for the quarter ended June 30, 2019, primarily attributable to a decrease in investment income, offset by a decrease in expenses as previously mentioned.

Reflecting on the 6 months ended June 30, 2019, net investment income was $1.6 million or $0.26 per share compared to $2.8 million or $0.44 per share in the 6 months ended June 30, 2018.

The $1.2 million decrease in the 6 months of 2019, primarily related to the company recording $1.8 million of lower investment income offset by lower expenses of $0.5 million for the 6 months ended June 30, 2019.

Net income for the 6 months ended June 30, 2019 was $147,000 or $0.02 per share compared to $2.9 million or $0.45 per share in the 6 months ended June 30, 2018.

The $2.7 million decrease was primarily attributable to a $1.8 million decrease in investment income, $2.8 million increase and a change in unrealized depreciation, offset by a $0.8 million positive change in net realized gains, a decrease in expenses of $0.5 million and $0.5 million reduction in deferred taxes on unrealized gains.

We recognized fee amortization income of $235,000 and $484,000 in the 3 and 6 months ended June 30, 2019, as compared to $459,000 and $666,000 in a comparable 2018 3- and 6-month periods.

The higher fee amortization in 2018 resulted from several balloon payment exits where greater fees were earned in 2018 compared to 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.

In addition, we also recognized other income of $103,000 and $242,000 in the 3 and 6 months ended June 30, 2019, compared to $23,000 and $77,000 in the comparable 2018 3- and 6-month periods.

As a result, our fees and other income will fluctuate quarter-to-quarter depending on portfolio activity. As of June 30, 2019, the fair value of our portfolio was $110.7 million with a cost basis of $116.2 million, reflecting $5.5 million of net unrealized depreciation in the portfolio at the end of the quarter.

As of June 30, 2019, we had a debt balance of $55.8 million consisting of $27.8 million of bank debt and $28.8 million in 2022 notes for a debt-to-equity ratio of approximately 77% compared to approximately 58% at December 31, 2018.

At quarter end, we had $17.3 million of cash and approximately $7.5 million of undrawn capacity on our $55 million credit facility. Our cash and borrowing capacity provides us with sufficient liquidity in order for us to execute our business plans for 2019.

As of quarter end, our net asset value was $11.89 per share, down $0.41 per share from December 31, 2018, principally as a result of paying $0.50 per share in distributions for the 6 months ended June 30, 2019, compared to a $0.02 increase in net assets from our 6 months of 2019 operations and enhanced by $0.07 of accretion due to shares repurchased during 2019. On May 3, 2019, the Board of Directors authorized an open market stock repurchase program to repurchase up to 250,000 shares in the aggregate of the company's common stock in the open market.

At June 30, 2019, the company purchased 50,972 shares under the May 2019 repurchase program and through August 7, 2019, purchased a total of a 110,398 shares.

Effective on May 4, 2019, the asset coverage ratio applicable to Harvest Capital decreased from 200% to 150% pursuant to provisions under the Small Business Credit Availability Act.

Now I'll turn the call to Rich for some further discussion on our investing activity and pipeline.

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Richard P. Buckanavage, Harvest Capital Credit Corporation - MD, Head of Business Development & Director [5]

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Thank you, Bill. The current state of the market in which we compete continue to be competitive, although it appears to have stabilized. Credit spreads, which have been fairly static since the start of the year are enabling Harvest to compete for most of the opportunities we choose to pursue.

The access to additional leverage, which went into effect in May, is providing us with an enhanced competitive position in order to compete for a larger percentage of the opportunities we identify.

We are encouraged by our ability to continue to identify attractive investment opportunities.

During the second quarter, our investment activities involved both new investments as well as additional capital deployment and existing portfolio companies. In the aggregate, we closed approximately $17.3 million of debt commitments across 2 new and 3 portfolio companies bringing our portfolio to 26 investments.

Subsequent to quarter end, we closed another investment totaling $5.5 million in debt commitments in our core lower middle-market strategy.

As we look forward to the remainder of the third quarter, we are optimistic regarding our capital deployment activities. We currently have 5 mandated transactions totaling approximately $25 million. Many of these financings are expected to close by September 30.

While not likely to contribute meaningfully to this quarter's income, these investments will provide solid earnings momentum to the fourth quarter and should move us closer to meeting our objective of earning our dividend during this time frame.

I'll turn the call back over to Joe with some final thoughts.

Joe, are you there 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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You know what, I apologize. I started, but I was on mute. Thanks for the heads-up there. The -- I wanted to provide a progress report on our plan to return our historical -- back to our historical financial performance within the next 12 months.

We've been focused on a 3-pronged approach of increasing our investment portfolio to a leverage ratio of roughly 1.3:1 at attractive risk-adjusted yields, repurchasing shares at current price levels and resolving our nearly $11 million of nonearning assets.

For the second consecutive quarter, we were able to grow our investment portfolio, now up 17% to $110 million from year-end 2018 levels.

As Rich discussed, our pipeline of opportunities is solid, and we're optimistic that we can continue to grow our current portfolio at the existing trajectory going forward.

The levered return on investments on these opportunities is more than 10% currently. We have continued to actively repurchase our shares in open market transactions and according to the corporate buyback rules, which limit the number of shares, we can buy materially.

As Bill went through, as of Wednesday's close, we had more than 110,000 shares under the current -- we had bought a 110,000 under the current repurchase program at an average price of $10.42, which is immediately accretive to net asset value and net investment income per share.

We have been carrying 3 nonearning assets totaling roughly $11 million or 10% of our investment portfolio this year.

We've been working hard to resolve these situations, but the progress has been frustratingly slow. Our risk rating increased to 2.44 in the quarter as 2 credits were downgraded due to deteriorating financial performance, both occurring on interest and principal.

While it's unrealistic to assume we'll have no problem assets given our focus on the lower-middle market and noninvestment-grade credit area, carrying a more normalized 5% of nonearning investments would improve our current net investment income by roughly $0.07 to $0.08 per share annually.

So in closing, I want to thank our employees and our Board for their continued efforts hard work in executing on this plan and our shareholders for their continued support.

With that, Heidi, happy to take any questions.

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Operator [7]

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(Operator Instructions) And it appears there are no questions in the queue. I'll turn the call back over to presenters.

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Joseph Andrew Jolson, Harvest Capital Credit Corporation - Chairman of the Board & CEO [8]

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Okay. Well, we're hopeful that we provided information people needed. But if not, you can reach out to myself directly or to Bill Alvarez, our CFO. And we look forward to updating everyone next quarter. Thank you.

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Operator [9]

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And this concludes today's conference call. You may now disconnect.