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

Q3 2019 OHA Investment Corp Earnings Call

Houston Nov 29, 2019 (Thomson StreetEvents) -- Edited Transcript of OHA Investment Corp earnings conference call or presentation Wednesday, November 13, 2019 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Cory Elvan Gilbert

OHA Investment Corporation - CFO & Treasurer

* Steven T. Wayne

OHA Investment Corporation - President & CEO

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to the OHA Investment Corporation Third Quarter Report, September 30, 2019 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 will now turn the call over to Steven Wayne, the company's President and CEO. Please go ahead, sir

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

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Thank you, operator. Good afternoon. I'd like to welcome all of you to our company's third quarter 2019 earnings call. I'm joined on the call today by Cory Gilbert, our Chief Financial Officer. The presentation we're about to review was posted to our website last night under the Events & 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, as you may know, on August 1, we announced that OHA Investment Corporation has entered into a definitive agreement under which OHA Investment Corporation will merge with and into Portman Ridge Finance Corporation. The transaction is subject to OHAI's stockholder vote and to the extent approved is expected to close by the end of the year.

On November 5, we filed our definitive proxy statement with the SEC, and our Board of Directors have set a special stockholder meeting date for December 12 to approve the merger.

For more details about the merger, please refer to the press release and investor presentation issued on August 1 in our proxy, which are all available in the OHA Investment Corporation's website. We believe this transaction, which is the culmination of a thorough strategic process that OHAI's Board of Directors initiated to enhance stockholder value will provide an attractive outcome for and is in the best interest of OHAI stockholders while providing continued value creation opportunity for Portman Ridge stockholders.

I'll now turn to Page 4 and provide a summary of the developments for OHAI for the third quarter of 2019. OHAI's NAV decreased $0.07 per share or 4% to $1.76 at September 30, 2019. And from -- from $1.83 at June 30, 2019. The decrease stems through a net investment loss of $0.03 per share.

Net unrealized portfolio depreciation of $0.03 per share and the $0.02 per share distribution declared during the quarter. This quarter, we invested a total of $4.3 million at an average price to par of 99.134, and we had $7.8 million of net realizations. We had full pay-downs of our $5 million second lien term loan in MyEyeDr and $1.9 million second lien term loan in Allied Universal.

The $5 million MyEyeDr term loan was initially purchased in February 2018 and generated a gross unlevered internal rate of return of 10.6%. The $1.9 million Allied Universal term loan was initially purchased in March 2018 and generated a gross unlevered internal rate of return of 12.0%.

During the quarter, we received $583,000 of production payments related to the investment in our ATP royalty interest. Payments continue to be applied to our cost basis, and this investment remains on nonaccrual status.

During the quarter, we exercised our option to extend the maturity date of our credit agreement with MidCap to March 9, 2020.

At September 30, 2019, we had $30 million outstanding on this facility, which will be repaid as part of the Portman Ridge merger transaction.

Now turning to the levered credit markets. M&A activity, which generally drives new money financing opportunities in the below-investment grade credit markets, increased on a deal value basis in the third quarter of 2019 by 28% year-over-year, skewed by an unusually large number of $10-plus billion deals.

On a deal count basis, M&A activity actually declined 13% year-over-year. The strength in the U.S. capital markets witnessed in the first and second quarters of 2019 slowed in the third quarter of the year.

The leveraged loan market returned 0.92% in the third quarter of 2019, below its coupon, implying about 0.5 point of average price decline in the loan market.

This weakness has continued in recent weeks with negative returns of 26 basis points from quarter end through yesterday and has been highlighted by a bifurcation of returns with lower quality credit underperforming.

The high-yield market returned 1.22% in the third quarter of 2019 and 43 basis points so far this quarter.

On the equity front, the S&P 500 posted total returns of 1.7% in the third quarter of 2019 and is up 4.1% from quarter end through yesterday.

Issuance in the leveraged loan market increased since third quarter of 2019. New issued volume was up 2% year-over-year and up 29% sequentially.

However, syndicated transaction activity in the middle market was down significantly, as private unitranche solutions continue to take market share.

New issuance by companies with EBITDA of $50 million or less was down 30% year-over-year and down 5% sequentially.

New issued first lien yields for companies with EBITDA of $50 million or less decreased 71 basis points quarter-over-quarter to 7.5%, which is 16 basis points higher than the 7.3% in the third quarter of 2018.

I'll now turn the call over to Cory to discuss the financial results for the third quarter.

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Cory Elvan Gilbert, OHA Investment Corporation - CFO & Treasurer [3]

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Thank you, Steven. The financial headlines for the third quarter can be found on Page 5. Our investment income for the quarter totaled $1.5 million or $0.08 per share. Cost incurred related to our strategic alternative review was $754,000 or $0.04 per share. Base management fees was $305,000 or $0.02 per share.

We finished the quarter with a net investment loss of $560,000 or a $0.03 loss per share. We recorded net unrealized losses totaling $539,000 or a $0.03 loss per share and had no realized gains or losses in the quarter.

Altogether, we reported a net decrease in net assets from operations of $0.05 per share. After our $0.02 per share distribution declared in September and paid in early October, our net asset value decreased $0.07 per share to $1.76 per share, 4% decrease from the second quarter of this year.

This quarter, we sought and received third-party positive assurance on 80% of our Level 3 assets with any fair value.

Page 6 shows the net investment income section of our income statement for the third quarter of 2019 compared to our results for the second quarter of 2019 and for the third quarter of the prior year.

Investment income decreased by $2,000 from the second quarter of 2019. Investment income decreased $368,000 or 20% from the same quarter last year, predominantly due to placing our investment in OCI-subordinated notes on nonaccrual status in October of 2018.

In the third quarter of 2018, our investment in OCI contributed $459,000 of investment income. Interest expense for the quarter was $620,000 or $0.03 per share compared to $611,000 or $0.03 per share in the same quarter of 2019, $767,000 or $0.04 per share in the same quarter of the prior year. Compared to the same quarter prior year, interest expense is lower due to lower amounts outstanding on our credit facility as well as lower amortization of our debt issuance cost.

Management fees were $1,000 lower in the third quarter of 2019 compared to the second quarter of this year and $92,000 lower compared to the same quarter prior year.

During the third quarter of 2019, we've reversed $32,000 of capital gains incentive fees, bringing the incentive fee accrual balance at September 30, 2019, to $46,000. In the second quarter of 2019, we accrued $78,000 of capital gains incentive fees. And in the same quarter prior year, we accrued $6,000 of capital gains incentive fees.

During the third quarter of 2019, we reported $754,000 or $0.04 per share of costs associated with our strategic alternatives review process.

Other G&A expenses for the quarter were $431,000 or $0.02 per share compared to $731,000 or $0.04 per share in the second quarter of 2019 and $658,000 or $0.03 per share in the same quarter prior year.

G&A expenses were $300,000 lower compared to the second quarter of 2019, primarily due to lower audit-related expenses and lower regulatory expenses related to our Annual Shareholders Meeting, which was held in the second quarter. Compared to the same quarter prior year, G&A expenses were lower by $227,000.

As a result, we incurred a net investment loss for the third quarter of 2019 of $560,000 or a loss of $0.03 per share compared to a net investment loss of $501,000 or a loss of $0.02 per share in the second quarter of 2019.

In comparison, our net investment income for the third quarter of 2018 was $57,000 or less than $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. There were no realized gains or losses recorded in the third quarter of 2019.

Now let's look at the net unrealized gains and losses on the lower portion of the page. For the third quarter of 2019, the total net unrealized loss was $539,000. Approximately half of the unrealized losses reported in the third quarter of 2019 related to the 2 remaining legacy investments, ATP and OCI.

The other half of the unrealized loss related to mark-to-market adjustments in the OHA portfolio. 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 $1.83 per share. NAV was reduced by the net investment loss of $0.03 per share, the second quarter distribution of $0.02 per share and the net negative adjustments in the value of our investment portfolio totaling $0.03 per share.

These all combined to decrease our net asset value per share to $1.76 for a quarter-over-quarter decrease of $0.07 per share or 4%.

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

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

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Thanks, Cory. Let's go to Page 10. As shown here, OHA has been able to invest just over $183 million in 41 new portfolio companies since September 30, 2014, which we believe demonstrates OHA's origination capability for OHAI.

Turning to Page 11. During the same period, we have also realized $183.2 million of investments, including $129.9 million through the full or partial realization of OHA investments.

$124.8 million of this has come from the full realization of 14 investments. At the end of the third quarter of 2019, the fair value of our portfolio investments totaled $62.4 million, excluding the $4.4 -- $5 million of cash on our balance sheet. Our investment portfolio, excluding nonyielding assets is split 93%, 7% between floating rate and fixed rate investments. Also, 72% of our portfolio investments based on fair value were classified as Level 2 at September 30, 2019.

Moving to Page 12. This page presents the realized and unrealized returns for the portfolio company investments OHA has made through September 30, 2019, since becoming OHAI's investment adviser.

The 14 fully realized investments generated a dollar-weighted average gross IRR of 13.6% on an unlevered basis. The remaining unrealized investments based on prices as presented in our September 30, 2019, financial statements have a dollar-weighted average gross IRR of 11.6% on an unlevered basis.

The returns shown in this presentation and discussed today are unaudited and provided for informational purposes, and these gross IRRs are presented before any fees or expenses.

Please note that the explanatory footnotes related to this chart are found on the following page.

Turning to Page 14. Despite investing $184.8 million over the past 5 years, which includes $1.7 million of additional investments in legacy portfolio companies, the size of our portfolio by fair value has decreased 64% since September 2014, driven by $126.2 million in net negative valuation changes and $183.3 million of realizations.

Let's now go to Page 15. The page better illustrates and explains the significant decline in NAV that OHAI has experienced since September 30, 2014, when OHAI became the investment manager of OHAI.

As shown here on that date the portfolio consisted of $171 million of investment assets in only 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 closed yesterday at $56.80 after hitting a high as high as $76 in October of 2018. This commodity price movement took its toll on these legacy energy assets.

Over the past 5 years, we've had a write-down or markdown approximately $112.6 million of the original $171 million of investment assets or almost 2/3 of the fair value. Most of that $112.6 million of net write-downs and markdowns, $97 million of it 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 markdown shown here do not take into account any additional investment paid-in-kind interest or dividends or discount accretion subsequent to September 30, 2014.

Let's now go to Page 16. 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 was down to 5% at September 30, 2019, 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 across a wide range of industries.

Let's move on to Page 17 and discuss our investment activity in the quarter. In September, we purchased $4.3 million of second lien term loan in NAVEX, adding to our $400,000 position, which was previously acquired in August of 2018. The $4.3 million of NAVEX term loan add-on was purchased at a 0.875% discount to par, earns interest payable and cash at a rate of LIBOR plus 7% and matures in September 2026.

As I mentioned earlier, $5 million of MyEyeDr second lien term loan and $1.9 million of Allied Universal second lien term loan were fully realized during the quarter due to pay-downs.

So let's move to another snapshot of our investment portfolio, the yield comparison on Page 18. This table focuses on the yield of our portfolio, both as it relates to fair value and cost. Based on our current yielding investments, which includes any PIK component from performing investments, our portfolio yields 10.1% based on both weighted average fair value and cost, respectively, at September 30, 2019.

This compares to 10.3% and 10.4%, respectively, at June 30, 2019. This decline resulted largely from the declines in LIBOR rates in the third quarter.

As shown on Page '19, we now have 28 active portfolio companies at September 30, 2019, as compared to 10 at September 30, 2014. 26 of these are investments made by OHA, and they now constitute 90% of the investment portfolio on a fair value basis.

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

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Operator [5]

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(Operator Instructions) Speakers, I'm showing no questions in the queue at this time.

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Steven T. Wayne, OHA Investment Corporation - President & CEO [6]

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Thanks, operator. I want to thank, everyone, for their time today. Also, as this is likely our last call, pending the completion of the Portman Ridge merger, I do want to thank you all for your ownership and interest in OHAI. And as a final reminder, please vote your proxies at OHAI Special Stockholder Meeting to approve the merger, which is scheduled for December 12. Thank you very much.

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Operator [7]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.