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Edited Transcript of OHAI earnings conference call or presentation 15-May-18 2:00pm GMT

Q1 2018 OHA Investment Corp Earnings Call

Houston Aug 28, 2018 (Thomson StreetEvents) -- Edited Transcript of OHA Investment Corp earnings conference call or presentation Tuesday, May 15, 2018 at 2:00:00pm GMT

TEXT version of Transcript


Corporate Participants


* Cory E. Gilbert

OHA Investment Corporation - CFO

* Steven T. Wayne

OHA Investment Corporation - CEO and President


Conference Call Participants


* Charles Von Kapff Carlson

Corbyn Investment Management, Inc. - President, Co-CIO, MD, and Portfolio Manager




Operator [1]


Good day, ladies and gentlemen, and welcome to the OHA Investment Corporation First Quarter 2018 Report Conference Call. (Operator Instructions)

Before we begin, I would like to remind everyone that today's remarks may include comments which could be considered forward-looking statements, and such statements are subject to many factors that can cause actual results to differ materially from our expectations as expressed in those forward-looking statements. Those factors are described in more detail in the company's SEC filings, and I refer you to the company's website or to the SEC's website to review those filings. The Company undertakes no obligation to publicly update or revise any forward-looking statements, which speak only as of today's date. As a reminder, this conference call is being recorded.

I would like to turn the call over to Steven Wayne, the company's President and CEO.


Steven T. Wayne, OHA Investment Corporation - CEO and President [2]


Thank you, Michelle. Good morning. I'd like to welcome all of you to our company's 1st Quarter 2018 earnings call. I am joined on the call today by Cory Gilbert, our Chief Financial Officer.

The presentation we are about to review was posted to our website earlier this morning under the Events and Presentations heading of the Investor Relations tab. We also refer you to our quarterly report on Form 10-Q that was filed yesterday.

Before I begin today, I want to remind you that on our last earnings call, we discussed the Strategic Review process that our Board of Directors initiated to provide more scale to OHAI. These options could include, among other things, raising additional capital, a merger or joint venture with another party, the acquisition of existing investment portfolios or other strategic transactions. We are actively working with our financial adviser, KBW, although there is no assurance that the Company will execute on any of these options. As we have said previously, we do not expect to comment further or periodically provide updates to the market with additional information unless and until the Company's Board of Directors has approved a specific transaction or otherwise deems disclosure appropriate or necessary, and I will not be commenting further or answering questions today regarding the strategic review process.

I will now turn to Page 4 and provide a summary of the developments for OHAI for the first quarter ended March 31, 2018.

OHAI's NAV increased for the 2nd consecutive quarter. At the end of the 1st quarter, NAV was $2.43, a $0.06 per share or 2.5% increase from December 31, 2017. The increase largely stems from the gain recognized in connection with the full redemption of our $11.5 million investment in Talos at par, partially off-set by write-downs on our investments in OCI. As you will see later on in the presentation, our investment in Talos was marked at 75% of par at December 31, 2017, and was subsequently redeemed at par in February, resulting in a $2.9 million or $0.14 per share gain. This gain was partially offset by $1 million or $0.05 per share of write-downs on our investments in OCI. I will cover the OCI write-downs and other portfolio investment developments later in the presentation.

For the quarter, we incurred a $0.01 per share net investment loss. During the quarter, excluding investments we purchased and sold during the quarter, we added six new portfolio investments, totaling $8.8 million of principal amount. Also during the quarter, we exercised our option to extend our credit facility with MidCap through September 9, 2018.

Now turning to the leveraged credit markets, private equity activity, which generally drives new money financing opportunities in the below investment grade credit markets, continued its recent decline in the first quarter of 2018, as private equity deal count declined 25% and capital invested declined 36% compared to levels in the first quarter of 2017. Private equity activity also declined compared to the fourth quarter of 2017.

After a strong first three quarters for the high-yield market, the fourth quarter of 2017 started to show some signs of slowing down. This softness continued into the first quarter of 2018, as the U.S. high-yield market was down 0.9% for the quarter, as the five-year treasury yield increased from 2.21% to 2.56%. However, April posted a modest recovery, with the index up 0.7%. High-yield spreads have continued to hover at levels near their post financial crisis tights.

In the leveraged loan market, the first quarter of 2018 was the busiest quarter since the first quarter of 2017. New issue volume was up 32% compared to the fourth quarter of 2017, but down 24% from the first quarter of 2017. Spreads remain under pressure against the backdrop of rising LIBOR. For example, average all-in spreads on first lien term loans for single B issuers hit a post-crisis low of 346 bps at the end of January.

As interest rates have increased over the past year, we have seen the loan market outperform the high-yield market. Through the first quarter of 2018, the loan index rose 1.4%, outpacing the 0.9% high-yield decline I mentioned earlier by 230 bps. LIBOR is up considerably and will have a significant impact on both the yields of our floating-rate assets and the cost of our borrowing, which is LIBOR based. Three-month LIBOR has gone from 1.33% at the end of the third quarter 2017 to 2.34% today.

Activity in the middle market slowed down both sequentially and year-over-year in the first quarter of 2018. Issuance by companies with EBITDA of $50 million or less decreased from $2.8 billion in the first quarter of 2017 and $2.2 billion in the fourth quarter of 2017 to $2.1 billion in the first quarter of 2018. However, syndicated credits of $350 million or less totaled $11.5 billion during the first three months of 2018, a 13% year-over-year increase and a 15% increase from the fourth quarter of 2017.

While first quarter volume was up, M&A activity, the traditional driver of middle-market loan issuance, was not responsible for this increase. Increased refinancings and repricings primarily drove the higher volume number, as the share of issuance, refis and repricings made up 41% of total middle-market volume in the quarter, significantly higher than recent past periods.

Similar to the overall leveraged loan market, spreads continue to tighten in the middle market. According to LCD, during the first quarter of 2018, the average syndicated middle-market first lien spread was 464 basis points, the tightest spreads we've seen since the financial crisis. Spreads in this market are down over 100 basis points over the last five quarters.

I will now turn the call over to Cory to discuss the financial results for the 1st Quarter.


Cory E. Gilbert, OHA Investment Corporation - CFO [3]


Thank you, Steven.

The financial summary for the first quarter can be found on page 5.

Our investment income for the 1st quarter totaled $2.3 million, or $0.11 per share, a 12% decrease from the fourth quarter prior year. Base management fees were $400,000, and there was a $100,000 capital gains incentive fee accrual recognized in the first quarter. We reported a net investment loss of $95,000 or $0.01 per share. We recorded net realized and unrealized gains totaling $1.8 million or $0.09 per share during the quarter.

All together, we reported a net increase in net assets from operations of $0.08 per share. After our $0.02 per share distribution declared in March and paid in early April, our net asset value increased to $2.43 per share, a 2.5% increase from the end of the fourth quarter prior year. We continued our practice to seek positive assurance from a third party valuation firm of all Level 3 assets with fair values in excess of $10 million on a quarterly basis. We will also seek positive assurance on other Level 3 assets with any meaningful fair value. This quarter, we sought and received third-party positive assurance on 94% of our Level 3 assets with any fair value.

Page 6 shows the net investment income and loss section of our income statement for the first quarter of 2018 compared to our results for the fourth quarter of 2017 and for the first quarter of the prior year. Investment income decreased by approximately $308,000 and $172,000 from the fourth quarter of 2017 and the first quarter of 2017, respectively, primarily due to a lower average earning portfolio balance. Interest expense for the quarter was $823,000 or $0.04 per share compared to $956,000 or $0.05 per share in the fourth quarter of 2017 and $974,000 or $0.05 per share in the same quarter of the prior year.

Quarter-over-quarter, the decrease in interest expense is due to a lower amount outstanding on our Credit Facility as a result of a $4.5 million pay-down in the 4th quarter. The lower average amount outstanding was partially offset by the increase in LIBOR. Management and incentive fees to our advisor were $10,000 lower in the first quarter of 2018 compared to the fourth quarter and $169,000 lower compared to the same quarter of prior year. Our base management fees continue to decrease as a result of the lower average asset balance subject to the base management fee calculation.

Other G&A expenses for the quarter were $1.1 million or $0.06 per share compared to $945,000 or $0.05 per share in the fourth quarter of 2017 and $714,000 or $0.04 per share in the same quarter prior year. Quarter-over-quarter, Other G&A expenses were $204,000 higher due to $75,000 in costs incurred in connection with the Strategic Review process, an increase in regulatory costs and employee-related expenses.

G&A expenses were $435,000 higher compared to the same quarter prior year, primarily due to higher legal costs and costs associated with the Strategic Review process. As a result, we recognized a net investment loss for the first quarter of 2018 of $95,000 or $0.01 per share, compared to net investment income of $367,000 or $0.02 per share, in the fourth quarter of 2017. In comparison, net investment income for the first quarter of 2017 totaled $193,000 or $0.01 per share.

Turning to page 7, you can see the summary of the realized and unrealized gains and losses in the portfolio for the relevant quarters. In the first quarter, we recorded a $41,000 adjustment to the AMT tax benefit previously recognized in the 4th quarter. This adjustment was based on recently published guidance from the IRS, which clarified that the AMT credit refund would be subject to sequestration. There were no other meaningful realized gains or losses recognized during the quarter.

Now, let's look at the net unrealized gains and losses on the lower half of the page. For the first quarter of 2018, as Steven mentioned earlier in the presentation, the total net unrealized gain was $1.9 million as a result of the redemption of our investment in Talos at par, partially offset by write-downs on our investments in OCI, a legacy non-energy portfolio company. Steven will provide more commentary on the portfolio valuation changes in a moment.

On Page 8, you'll find a graphical presentation of the components of the quarterly results and their respective impact on our Net Asset Value per share.

net asset value at the beginning of the quarter was $2.37 per share. Net investment loss was $0.01 per share. Net asset value was reduced by the 1st quarter of distribution of $0.02 per share, and the net positive adjustments in the value of our investment portfolio totaling $0.09 per share. These all combined to increase our net asset value per share to $2.43, for a quarter-over-quarter increase of $0.06 per share or 2.5%.

Now to discuss recent portfolio activity, let me hand the call back over to Steven.


Steven T. Wayne, OHA Investment Corporation - CEO and President [4]


Thanks, Cory. Let's go to Page 10.

As shown here, OHA has been able to invest $150.3 million in 25 new portfolio companies since September 30, 2014, which we believe demonstrates OHA's origination capability for OHAI.

Turning to Page 11. During that same period, we have realized $156.9 million of investments, including $106.9 million through the full or partial realization of OHA investments. $92.4 million of this has come from the full realization of nine investments. At the end of the first quarter, the fair value of our Portfolio Investments totaled $65.0 million, excluding the $22.2 million of cash on our balance sheet - and as noted at the bottom of the page, our investment portfolio is now split 88%/12% between floating rate and fixed rate investments. Also, 70% of our portfolio of investments based on fair value were classified as level 2.

Moving to Page 12, Which presents the realized and unrealized returns for the portfolio of company investments OHA has made through March 31st, 2018, since becoming OHAI's investment advisor. This page further underscores OHA's ability to originate investments for OHAI.

The nine fully realized investments generated a dollar weighted average gross IRR of 13.5% on an unlevered basis and when you include the $8.0 million of TIBCO that we sold in the 3rd quarter of 2017, this increases to 14.0%, as shown on this page.

The remaining unrealized investments, excluding the recently made investments this quarter, based on prices as presented in our March 31, 2018 financial statements have a dollar weighted average gross IRR of 12.5% on an unlevered basis.

I will note that even though these investments are still classified as unrealized, as shown on the prior slide, several of these investments relating to Equinox have had partial realizations to date. The returns shown on this presentation and discussed today are unaudited and provide informational purpose, and these gross IRRs are presented before any fees or expenses.

Turning to Page 13. Despite investing $152 million over the past 3.5 years (which includes $1.7 million of additional investments in legacy portfolio companies) the size of our portfolio by fair value has decreased 62% since September 2014, driven by $115.4 million in net negative valuation changes and $156.9 million of realizations.

Let's now go to Page 14. As shown in the past three quarters' presentations, this page better illustrates and explains the significant decline in NAV that OHAI has experienced since September 30, 2014, when OHA became the investment manager of OHAI. As shown here, on that date, the portfolio consisted of $171 million of investment assets in 10 portfolio companies, concentrated heavily in the energy industry. The price of West Texas Intermediate crude oil, or WTI, was over $90 a barrel, but almost immediately started dropping, falling to around $50 a barrel by the end of 2014.

In early 2016, WTI was under $30 a barrel, and today, it has recovered to the low $70s. This commodity price movement, in conjunction with the similar movement in the price of Natural Gas, which remains under $3, took its toll on these legacy energy assets. Over the past 14 quarters, we have had to write down or mark down approximately $108 million of the original $171 million of investment assets or approximately 63% of the fair value. Most of that $108 million of write-downs and mark-downs, $104 million, has come from the 7 legacy energy assets that totaled $127 million of the $171 million investment portfolio.

As noted below, the amounts written off and markdowns shown here do not take into account any additional investments, paid-in-kind interest dividends or discount accretions subsequent to September 30, 2014.

Let's now go to Page 15. While the portfolio may be smaller, this chart does show a material difference in the composition and diversification of today's portfolio. Although our energy exposure has now been reduced to 0% during the quarter, as I just discussed, too much of this reduction in energy exposure has come unfortunately from the losses in the legacy energy investments. Away from the energy positions, we have substantially diversified our portfolio into a wide range of industries. I will note that our legacy position in OCI, shown here as therapy services does constitute just over 20% of our investment portfolio plus cash today.

Let's move onto Page 16. I'll focus my comments on the meaningful changes in the portfolio during the quarter. On a positive note, our remaining legacy energy asset, the $11.5 million principal amount investment in Talos Production's senior unsecured notes, was redeemed at par on February 15, 2018, resulting in a $2.9 million write-up. This investment generated a gross unlevered internal rate of return of 9.95%.

Moving on to our largest decline in fair value for the quarter, OCI, our last non-energy legacy portfolio company investment. Although we kept the overall fair value of our investment in OCI's Subordinated Note flat quarter-over-quarter once again, OCI continues to pay us substantially in Payment-In-Kind or PIK, which resulted in a $1.0 million unrealized loss during the quarter.

OCI, a home health provider of pediatric therapy services to Medicaid patients in Texas, has been negatively impacted by Medicaid reimbursement rate reductions that were initially proposed in June of 2015 and were officially implemented by the state of Texas effective December 15, 2016. Even prior to the implementation of these rate reductions, OCI has experienced pressures on rates in certain parts of its business and a reduction in visit volumes. As a result, operating performance and cash flow have continued to suffer. In May of 2017, the Texas Legislature agreed to the 2018-2019 biennium budget. The new budget, which went into effect on September 1, 2017, restored approximately 25% of the rate cuts, subject to a number of specific provisions relating to pediatric therapy reimbursement. OCI has seen the benefit of the rate restoration, and management continues to address its cost base and reduced visit volumes, and is pursuing operating initiatives to best position itself for success in the new rate reimbursement environment.

As part of the effort to navigate the challenging rate environment, OCI announced on January 30th, 2018, that it had been selected as the preferred provider by Superior HealthPlan, covering approximately 167,000 member lives in the Texas Travis service delivery area and Central Medicaid Rural Service Area, covering 15% of all Texas counties.

This preferred provider arrangement commenced on March 1, 2018, and OCI now provides speech, physical and occupational therapy in all practice venues for these pediatric members aged three years and older, as well as adults. This value-based care program is the first of its kind in the Texas Medicaid pediatric therapy services market. Although the program is still in its infancy, we continue to believe this is a significant positive for the Company and will help mitigate the Medicaid rate reimbursement reduction and other industry issues OCI has faced over the past six quarters.

There were no other significant valuation changes during the quarter across the rest of the portfolio, but as you see on our schedule of investments, and as I mentioned earlier, we added $8.8 million par amount and in six new portfolio company investments during the quarter: SafeFleet, MedRisk, MyEyeDr, EaglePicher, ClearChoice and AlliedUniversal.

In January, OHAI purchased $700,000 of second lien term loan in Safe Fleet at 99.5% of par, which pays cash interest at a rate of LIBOR + 6.75%, with a 1% floor, and matures in February 2026. At quarter-end, this second lien term loan was marked at 101.75 Safe Fleet is a provider of safety products for fleet vehicles worldwide.

Also in January, we purchased $0.5 million of second lien term loan in MedRisk at 99.5% of par, which pays cash interest at a rate of Libor + 6.75% and matures in December 2025. At quarter end, this second lien term loan was marked at par. MedRisk is a leading provider of managed care services for the workers' compensation industry and related market sectors.

In February, we purchased $5.0 million of second lien term loan in CVS Holdings, I, LP., or MyEyeDr, at 99.5% of par, which pays cash interest at a rate of Libor+ 6.75% and matures in February 2026. At quarter end, this second lien term loan was marked at 100.125 . MyEyeDr is a provider of vision care services, prescription eyeglasses and sunglasses, and contact lenses.

Also in February, we purchased $300,000 of second lien term loan in EaglePicher Technologies at 99.25% of par, which pays cash interest at a rate of Libor+ 7.25% and matures in March 2026. At quarter end, this second lien term loan was marked at 101.0 EaglePicher is a leading provider of mission-critical power solutions for high-value applications within the defense, aerospace and medical end-markets.

In March, we purchased $1.6 million of first lien last out revolver and $0.5 million of first lien last out term loan in ClearChoice, both at 99% of par. Both the ClearChoice first lien last out term loan and revolver earn interest at a rate of Libor+ 6.5% and mature in January 2023. At March 31, 2018, the funded portion on the revolver was $563,000. Both the first lien last out revolver and term loan are entitled to skim interest on the first lien first out term loan. This skim interest will initially increase the interest rate spread by approximately 28 basis points.

At quarter-end, the ClearChoice investments were marked at 99, our original cost. ClearChoice is a provider of full mouth dental restoration and dental implant services throughout the United States.

Also in March, we purchased $1.25 million of second lien term loan in AlliedUniversal at par, which pays cash interest at a rate of Libor+ 8.50%, with a 1% floor and matures in July 2023. At quarter end, the second lien term loan was marked at 99.5. AlliedUniversal is a provider of contract security services.

Although there were no changes to the fair values of our $0 value legacy energy investments, I want to provide an update on our ATP Limited term royalty interests. As in prior quarters, this remains a complex situation, and my remarks here are qualified entirely by the detail in the December 31, 2017, 10K and our 10Q filed yesterday.

After Bennu and its platform subsidiary Bennu Titan filed for bankruptcy and production was halted in the 4th quarter of 2016, we wrote down the fair value of our investment to $0. We have maintained that valuation for this quarter. As we describe more fully in Note 6 of our financial statements in our 10Q, in August 2017, Statoil USA acquired the leases to certain wells on which we hold a royalty interest. On November 1, 2017, the Bankruptcy court approved the sale of the Titan Production facility to Statoil. Subsequent to this quarter end, we received confirmation from Statoil that production on these wells has re-commenced and production payments will be made, although we have not yet received any payments to date or know the amounts of expected payments.

As to the status of the ATP bankruptcy litigation, the bankruptcy court ruled in our favor regarding Phase 2 of the ATP litigation, and this favorable ruling was upheld by a District Court in 2017. On April 17, 2018, the U.S. Court of Appeals for the Fifth Circuit affirmed the District Court's opinion dismissing the claims of the Intervenors. On April 30, 2018, the Intervenors filed a petition with the courts for a En Banc rehearing by all of the Fifth Circuit judges. At this time, it is unknown whether a rehearing will be granted.

So, let's move on to another snapshot of our investment portfolio - the yield comparison, on Page 17. This table focuses on the yield of our portfolio, both as it relates to cost and fair value. Based on our current yielding investments, which includes any PIK component from performing investments, our portfolio yields is 13.6% and 14.1% based on weighted average cost and fair value respectively at March 31, 2018. This compares to 13.2% and 14.0%, respectively, at the end of 2017. Our portfolio yields at March 31, 2018, excluding our investment in OCI, were 9.9% and 9.6% based on weighted average cost and fair value, respectively.

As shown on Page 18, we now have 19 active investments as of March 31, 2018, including the $0 value investments in ATP and Castex and our minimal residual CLO investment, as compared to 10 investments at September 30, 2014. Sixteen of these are new investments made by OHA, and they now constitute 72% of the investment portfolio on a fair value basis.

This ends our formal presentation for today. I'll now turn it over to the operator to coordinate the Q&A process.


Questions and Answers


Operator [1]


(Operator Instructions) Our first question comes from the line of Chip Carlson, he is a private investor.


Charles Von Kapff Carlson, Corbyn Investment Management, Inc. - President, Co-CIO, MD, and Portfolio Manager [2]


A question about OCI. I see that the loan comes due in August. Have you started to make plans as to what you're going to -- how you are going to resolve that maturity?


Steven T. Wayne, OHA Investment Corporation - CEO and President [3]


Yes, we have, and we haven't reached any agreement yet, but the expectation is that we're going to extend the maturity, and we're working with the company and its financial sponsor on a solution and what the best thing is for us and the best thing is for the company going forward. But we have not finalized that agreement yet, but the intention is that we will extend the maturity.


Charles Von Kapff Carlson, Corbyn Investment Management, Inc. - President, Co-CIO, MD, and Portfolio Manager [4]


Okay. As far as the early reading on the success of the new agreement that they had down in Texas, is that -- everything going according to plan, or has it come with a positive reading so far?


Steven T. Wayne, OHA Investment Corporation - CEO and President [5]


So I think the answer is the results are -- that we've seen from the financial results that started March 1, so just given the timing of financial results, we've only seen 1 month of numbers. And to be honest, it's too early to tell one way or the other, but we'll continue to watch it very closely. But as far as the company feels, it's going well, and at least the feedback the Company has been getting from Superior as well is that it seems to be going well from their side as well. So we'll continue to monitor it very closely, obviously.


Charles Von Kapff Carlson, Corbyn Investment Management, Inc. - President, Co-CIO, MD, and Portfolio Manager [6]


Okay, great. And I know you guys came in, had some very unfortunate time, but you guys got involved and you've done a real good job kind of handling the cards that you were dealt. So keep up the good work.


Steven T. Wayne, OHA Investment Corporation - CEO and President [7]


I really appreciate that. Thank you.


Operator [8]


(Operator Instructions) And I'm showing no further questions at this time, and I would like to turn the conference back over to Mr. Steven Wayne for any closing remarks.


Steven T. Wayne, OHA Investment Corporation - CEO and President [9]


Thanks, operator. We want to thank everyone for their time today, and I look forward to speaking with you again next quarter.


Operator [10]


Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.