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Edited Transcript of OHAI earnings conference call or presentation 13-Aug-19 2:00pm GMT

Q2 2019 OHA Investment Corp Earnings Call

Houston Sep 7, 2019 (Thomson StreetEvents) -- Edited Transcript of OHA Investment Corp earnings conference call or presentation Tuesday, August 13, 2019 at 2:00:00pm 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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Good day, ladies and gentlemen, and welcome to the OHA Investment Corporation second quarter report.

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, today's conference call is being recorded.

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

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

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Thank you, Sidney. Good morning. I'd like welcome all of you to our company's second 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 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 OHAI will merge with and into Portman Ridge Finance Corp. The transaction is subject to OHAI's shareholder vote and, to the extent shareholder vote is received and other customary conditions are met, is expected to close in the fourth quarter of this year. For more details about the merger, please refer to the press release issued on August 1, which is available on the OHAI website and the replay of the joint conference call hosted on the same day. 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 second quarter of 2019. OHAI's NAV decreased $0.01 per share or 1% to $1.83 at June 30, 2019, from $1.84 at March 31, 2019. The slight decrease stems from a net investment loss of $0.02 per share and the $0.02 per share distribution declared during the quarter, partially offset by a $0.04 increase from net realized and unrealized gains on our investment portfolio.

This quarter, we invested a total of $5.4 million in an average price to par of 97.25%, and we had $3.1 million in net realizations. Most significantly, we sold the remaining $2.1 million of our senior unsecured notes of TIBCO at a price of 106.375%, resulting in a realized capital gain of $231,000 or $0.01 per share. This $10 million investment was initiated in July of 2015 and generated a gross unlevered internal rate of return of 18.6%.

During the quarter, we received $695,000 of production payments related to our investment in ATP royalty interest. Payments continued to be applied to our cost basis, and this investment remains on nonaccrual status. Subsequent to quarter end, we exercised our option to extend the maturity date of our credit agreement with MidCap Financial to March 9, 2020.

Now turning to the levered credit markets. M&A activity, which generally drives new money financing opportunities in the below-investment-grade credit markets, slowed its pace in the second quarter of 2019. M&A activity in North America decreased year-over-year in the second quarter of 2019 by 36% on both a deal-count basis and a deal-value basis. The strength we saw in the capital markets during the first quarter of 2019 continued into the second quarter of the year with a leveraged loan market returning 1.6% in the quarter, bringing the gain for the first half of 2019 to 5.4%. The high-yield market returned 2.6% in the second quarter of 2019 and was up 10% for the first half of 2019.

On the equity front, the S&P 500 posted returns of 4.3% in the second quarter of 2019 and 18.5% through June 30.

In recent weeks, we have seen a marked increase in volatility throughout the credit and equity markets.

Issuance in the loan -- leveraged loan market continues to be down significantly in 2019. New issue volume was down 50% year-over-year in the second quarter and 9% quarter-over-quarter. However, syndicated transaction activity in the middle market did bounce back from the light start to the year. New issuance by companies with EBITDA of $50 million or less was up 140% quarter-over-quarter but still down 14% year-over-year. New-issued first lien yields by companies with EBITDA of $50 million or less decreased 28 basis points quarter-over-quarter to 8.2%, which is still 100 basis points higher than the 7.2% we saw in the second quarter of 2018.

I'll now turn the call over to Cory to discuss the financial results for the second 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 second quarter can be found on Page 5. Our investment income for the quarter totaled $1.5 million or $0.08 per share. Base management fees were $304,000, and there was a capital gains incentive fee of $78,000 accrued in the second quarter. We finished the quarter with a net investment loss of $501,000 or $0.02 loss per share. We recorded net realized and unrealized gains totaling $858,000 or $0.04 per share. Altogether, we reported a net increase and net assets from operations of $0.02 per share. After a $0.02 per share distribution declared in May and paid in early July, our net asset value decreased $0.01 per share to $1.83 per share, a 1% decrease from the first quarter of this year. This quarter, we sought and received third-party positive assurance on 81% of our Level 3 assets with any fair value.

Page 6 shows the net investment income section of our income statement for the second quarter of 2019 compared to our results for the first quarter of 2019 and for the second quarter of the prior year. Investment income decreased by approximately $9,000 from the first quarter of 2019. Investment income decreased $1.1 million or 42% 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 second quarter of last year, our investment in OCI contributed $1.2 million of investment income.

Interest expense for the quarter was $611,000 or $0.03 per share compared to $629,000 or $0.03 per share in the first quarter of 2019 and $801,000 or $0.04 per share in the same quarter of the prior year. Compared to the same quarter prior year, interest expense was lower due to lower amount outstanding on our credit facility as well as lower amortization of debt issuance cost.

Management and incentive fees to our adviser were $66,000 higher in the second quarter of 2019 compared to the first quarter this year primarily due to the $78,000 capital gains incentive fee accrued during the second quarter of 2019. Compared to the same quarter prior year, management and incentive fees were $1,000 lower.

During the second quarter of 2019, we reported $282,000 or $0.01 per share of costs associated with our strategic alternative review process.

Other G&A expenses for the quarter were $731,000 or $0.04 per share compared to $702,000 or $0.03 per share in the first quarter of 2019 and $743,000 or $0.04 per share in the same quarter prior year. G&A expenses were $29,000 higher compared to the first quarter of 2019 primarily due to higher regulatory expenses related to our Annual Shareholders' Meeting held on June 4 of this year. Compared to the same quarter prior year, G&A expenses were lower by $12,000.

As a result, we incurred a net investment loss for the second quarter of 2019 of $501,000 or a loss of $0.02 per share compared to a net investment loss of $145,000 or a loss of $0.01 per share in the first quarter of 2019. In comparison, our net investment income for the second quarter of 2018 totaled $667,000 or $0.03 per share.

Turning to Page 7. You can see a summary of the realized and unrealized gains and losses in the portfolio for the relevant quarters. As Steven mentioned earlier in the presentation, we sold $2.1 million on the senior unsecured notes of TIBCO during the second quarter of 2019, resulting in a realized capital gain of $231,000 or $0.01 per share.

Now let's look at the net unrealized gains and losses on the lower portion of the page. For the second quarter of 2019, the total net unrealized gain was $449,000. The other valuation change in the quarter of note was related to a $201,000 write-up of our investment in OCI-subordinated note. An additional $194,000 of net unrealized gains were from the mark-to-market increases in the OHA investment 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 $1.84 per share. NAV was reduced by the net investment loss of $0.02 per share and the second quarter distribution of $0.02 per share. These reductions to NAV were partially offset by the net positive adjustments in the value of our investment portfolio totaling $0.04 per share. These all combined to decrease our net asset value per share to $1.83 for a quarter-over-quarter decrease of $0.01 per share or 1%.

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 under $179 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've realized $175.5 million of investments, including $122.7 million through the full or partial realization of OHA investments. $115.9 million of these have come from the full realization of 12 investments.

At the end of the second quarter of 2019, the fair value of our portfolio investments totaled $66.4 million, excluding the $2.8 million of cash on our balance sheet. Our investment portfolio, excluding nonyielding assets, is split 94%-6% between floating-rate and fixed-rate investments. Also, 72% of our portfolio investments based on fair value were classified as Level 2 at June 30, 2019.

Moving to Page 12. This page presents the realized and unrealized returns for the portfolio company investments OHA has made through June 30, 2019, since becoming OHAI's investment adviser. The 12 fully realized investments generated a dollar-weighted average gross IRR of 13.8% on an unlevered basis. The remaining unrealized investments based on prices as presented in our June 30, 2019, financial statements have a dollar-weighted average gross IRR of 11.8% 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 and expenses. Please note that the explanatory footnotes related to this chart are found on the following page.

Turning to Page 14. Despite investing $180.5 million over the past almost 5 years, which includes $1.7 million of additional investments in legacy portfolio companies, the size of our portfolio by fair value has decreased 61% since September 2014 driven by $125.7 million in net negative valuation changes and $175.5 million of realizations.

Let's now go to Page 15. 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 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 $54.93 after hitting as high as $76 in October of 2018. This commodity price movement took its toll on these legacy energy assets.

Over the past almost 5 years, we've had a write-down or markdown approximately $112.3 million of the original $171 million of investment assets or approximately 2/3 of their failure value. Most of that $112.3 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 marked down 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 6% at June 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 into a wide range of industries.

Let's move on to Page 17 and discuss our investment activity in the quarter. In April 2019, we purchased $1.4 million of second lien term loan in Aptean, a global leader in enterprise business software. The Aptean second lien term loan was purchased at a 2% discount to par, included a 1% commitment fee, earns interest payable in cash at a rate of LIBOR plus 8.50% and matures in April 2027.

Also in April 2019, we purchased $1.5 million of second lien term loan in Blackboard Transact, an educational technology company. The Blackboard Transact second lien term loan was purchased at a 2% discount to par, included a 1.5% commitment fee, earns interest payable in cash at a rate of LIBOR plus 8.50% and matures in April 2027.

In May 2019, we purchased $600,000 of second lien term loan in Allied Universal, adding to our $1.25 million position, which was previously acquired in March 2018. This term loan was purchased at a 0.75% discount to par, earns interest payable in cash at a rate of LIBOR plus 8.50% with a 1% LIBOR floor and matures in July 2023.

In June 2019, we purchased $800,000 of second lien term loan and $200,000 of delayed draw second lien term loan in Imperial Dade, a leading independently owned distributor of food service packaging, facilities maintenance supplies and equipment. The Imperial Dade second lien term loan was purchased at a 1% discount to par, included a 1.5% commitment fee, earns interest payable in cash at a rate of LIBOR plus 8% and matures in June 2027.

Also, in June 2019, we purchased $1.2 million of unitranche term loan, $400,000 of delayed draw unitranche term loan and $100,000 of revolving loan facility in JS Held, a global consulting firm with expertise in construction, environmental health and safety equipment, forensic architecture and engineering services. The JS Held first lien term loan was purchased at a 1% discount to par, included a 1.5% commitment fee, earns interest payable in cash at a rate of LIBOR plus 6% and matures in July of 2025.

So let's move on 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 10.3% and 10.4% based on weighted average fair value and cost, respectively, at June 30, 2019. This compares to 10.5% and 10.6%, respectively, at March 30 -- March 31, 2019.

As shown on Page 19, we have 30 active portfolio companies as of June 30, 2019, as compared to 10 at September 30, 2014. 28 of these are investments made by OHA, and they now constitute 89% 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.

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Operator [5]

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(Operator Instructions) And I'm showing no questions at this time. I would now like to turn the call back to Steven Wayne for closing remarks.

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

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Thank you very much, operator. We want to appreciate your attendance today, and thank you for your time, and look forward to speaking with you again next quarter. Thank you.

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Operator [7]

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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.