First Eagle Alternative Capital BDC, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the first EGLE Alternative Capital BDC, Inc. Q4 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference to our speaker today, Sabrina Resnick-Carlson, General Counsel, First Eagle Alternative Capital BDC. Please go ahead, ma'am.

Thank you, operator. Good morning, and thank you for joining us. Joining me on today's call are Chris Flynn, Chief Executive Officer, and Terry Olson, Chief Operating and Chief Financial Officer. Before we begin, please note that the statements made on this call may constitute forward-looking statements within the meeting of the Securities Act of 1933 as amended. Such statements reflect various assumptions by First Eagle Alternative Capital, BDC, concerning anticipated results that are not guarantees of future performance and are subject to known and unknown uncertainties and other factors that could cause actual results to differ materially from such statements. The uncertainties and other factors are in some ways beyond management's control and include the factors included in the section entitled Risk Factors in our most recent annual report on Form 10-K, filed yesterday, and other filings within the Securities and Exchange Commission. Although we believe that the assumptions on which any forward-looking statements are based on are reasonable, any of those assumptions could prove to be inaccurate and, as a result, The forward-looking statements based on those assumptions also could be incorrect. You should not place undue reliance on these forward-looking statements. First Eagle Alternative Capital undertakes no duty to update any forward-looking statements made herein. All forward-looking statements speak only as of the date of this call. Our earnings announcements in 10-K were released yesterday afternoon. copies of which can be found on our website along with our Q4 earnings presentation that we may refer to during this call. A webcast replay of this call will be made available until March 15, 2021, starting approximately two hours after we conclude this morning. To access the replay, please visit our website at www.feacbdc.com. With that, I'll turn the call over to Chris.

Thanks, Sabrina. Good morning, and thank you for joining us on our earnings call. On today's call, we'll provide an overview of our fourth quarter results, some portfolio highlights, and then Terry will discuss our portfolio and financial results in more detail. Let's begin with our results for the quarter. Net investment income for the quarter was $0.11 per share compared to our $0.10 dividend and $0.01 per share of NII of Q3. NII continues to benefit from the management fee waiver that will continue through Q1 of 2021. As a reminder, the management fee waiver adds $0.03 per share in NII per quarter. It was intended to reduce the impact to shareholders as we exited and de-risked our remaining concentrated non-core positions. This management fee waiver has supported NII over the past year. We've made considerable progress on our portfolio transition, and overall, we are very pleased with how the portfolio has performed through the pandemic. We are currently levered 0.093 times and a target long-term leverage level of up to 1.2 times by the end of Q2 2021. We expect this increase in leverage to be accretive to NII at this level and we believe we'll be in line with or exceed our 10-cent dividend while paying the management fee. In Q4, our book value decreased approximately 1.6 percent from $6.25 per share at Q3 to $6.15 per share at the end of Q4. It is important to put this modest change in Q4 in context of three other developments. First, as you may have seen in our 8K filing from late December, we were successful in completing the sale of two principal businesses of OEM. The de-risking of this position resulted in a significant decline in the value of our equity-like second lien position compared to our holdings at the end of Q3. This had a 41-cent per share impact on our book value. I'll provide some additional color on this later in the call. Second, the improvement in broadly syndicated loans lifted the value of our holdings in the Logan Joint Venture, specifically an 18-cent per share positive impact on the Logan Joint Venture this quarter. We remain pleased with the overall credit quality across the 92 names and Logan's $254 million of assets. Non-accruals represented less than 1% of the portfolio in Q4. Lastly, the overall improvement in portfolio performance I mentioned earlier, together with further spread tightening in the market, resulted in appreciation in the rest of our portfolio of $0.12 per share. Excluding OEM, 90% of our portfolio companies reported either the same or increased value in Q4. Now let's dive deeper into the portfolio. As noted earlier, the portfolio continues to perform well amid the continued impact of the pandemic. Revenue and EBITDA levels for COVID-impacted businesses continue to improve and, in many instances, have returned to or exceeded pre-COVID levels. Companies that have not yet rebounded continue to maintain good liquidity profiles. Revolver draws remain muted this quarter, and median leverage through our securities from the portfolio decreased from 4.8 turns to 4.3 turns quarter over quarter. We did not add any new non-accruals during the quarter. Loadmaster is the only portfolio company on non-accrual. Smart Tours, a business centered on sponsoring and organizing high-end travel and vacation tours, was significantly impacted by COVID. Restructured in Q4 and subsequently removed from non-accrual. The company has emerged from Chapter 11 in December after we reached an agreement with a sponsor on a balance sheet restructuring that included approximately $10 million of capital support, split evenly among the lenders and the sponsor. a partial term loan equitization, and other modifications. Smart Tours is performing as expected and is beginning to see some earlier-than-expected traction with booking activities for the second half of 2021 and 2022. We also continue to make progress on our goal of exiting or de-risking the remaining concentrated positions. The sale of the two principal businesses of OEM allowed us to meaningfully reduce our exposure to this credit, which previously represented our single largest position. This has been a priority and will contribute importantly to the ongoing efforts to diversify our portfolio into first-lane positions and sponsor-backed companies, consistent with our strategy since the end of 2014. As we mentioned on our last call, we had completed a restructuring of our holdings in OEM at the end of Q3, which resulted in returning a portion of our holdings to income-producing status beginning in Q4. We upsized our $7.5 million first-lane term loan slightly at the end of 2020 and to $8.5 million to provide short-term transitional capital in connection with the sale process. The 8K that was filed provides additional details on this transaction, but in short, the consideration for the sale of one of the businesses, the Plasma Therm, was in the form of deferred payments that will take place over several years contingent on certain milestones, including minimal annual payments for the first four years. These payments will be used to service our debt and cover certain operating costs. The sale of the other business, which was based in Pennsylvania, to a minority investor will not result in any cash consideration. Our first and second lien term loans remain in place after completing this sale. We retain all the equity of the remaining business and will be the beneficiary of the aforementioned deferred payments. After investing in OEMs technology for several years, we are pleased to have found the right partner in Plasma Therm to commercialize and distribute this to the market. CNK Markets A 5% position, which had been in the portfolio since 2010, was sold in December to an ESOP trust. We received $10.7 million of cash at closing, plus a $5.8 million subordinated seller note with an 11% yield, comprised of 8% cash pay and 3% pick, and warrants in the business with nominal value. Our sub-debt position represents 1.8% of the portfolio at fair value. C&K continues to be one of our top-performing credits during the pandemic. Igloo, the largest single holding at year-end, represents 6.4% of the portfolio. The company continues to perform very well. Our position is marked at par, up from 95% of par in Q3, reflecting improved performance and the overall effect of spread tightening. After the C&K transaction, only two of the 14 concentrated positions we held in early 2018 remain in the portfolio, OEM and Igloo. And during 2020, we added 15 new direct lending investments to the portfolio with an average hold size of approximately $4 million. We also increased our first lien exposure, which includes the company's investment in LoganJB, to approximately 90%. Our direct lending platform and the market in general has seen a pickup in both new business as well as M&A activity and our existing portfolio companies during the quarter. The BDC continues to benefit from the deal flow generated by First Eagle's $5 billion direct lending platform and this provides more opportunities for diversification. We added eight new investments in Q4, totaling $23 million, while seeing three debt repayments at par and a substantial realization of our C&K investment. Since the beginning of the pandemic, First Eagle's direct lending platform has remained robust, and we continue to provide us with investment opportunities. We continue to be very selective about where we deploy capital. and are very disciplined about sticking to our strategy of investing in first-line, highly diversified positions in select industries where we have expertise and a sponsor to be supportive partners. Our goal is to continue to diversify as we can grow the BDC portfolio in 2021. With that, I'll turn the call over to Terry.

Thanks, Chris, and good morning, everyone. First, some investment portfolio highlights. As Chris mentioned, we had an active quarter with eight new investments and several follow-ons totaling $31 billion. million for a blended yield of 7.9%. We also had four notable realizations. Chris mentioned generating $34 million of cash proceeds that included the exit of our first lien positions in Cineract, Simplicity Financial, NCP Investors, and our equity holdings in C&K. As of December 31st, our portfolio of $338 million was invested 69%. In first lien senior secured debt, 20%, Logan JV, As a reminder, the Logan JV is 97% invested in first lien assets. The remaining 11% of the portfolio was held in the second lien, sub-debt, and other income-producing and equity holdings. Weighted average yield on the debt and income-producing portfolio based on cost, including Logan, was 7.1%, a modest increase over prior quarter. As Chris mentioned, we had no investments added to non-accrual in Q4, and the non-accruals as a percentage of our portfolio at fair value and cost were 2.2% and 3.9% respectively. Moving on to the financials for the fourth quarter, I'll highlight some of the components of our $7.5 million of investment income this quarter. These include interest income of $5.1 million, which was up half a million dollars quarter over quarter as we added several names to the portfolio while experiencing some back-ended repayments. Included in the 5.1 of interest income is $100,000 related to prepayment premiums, and approximately $300,000 related to accelerated amortization of OID. Dividend income decreased this quarter to $2.2 million due to a smaller dividend from C&K that was paid in connection with the closing of the sale. Logan's dividend contributed $1.6 million to the dividend income in Q4. Total expenses for the quarter were $4.2 million, which were flat versus Q3. Slightly higher borrowing costs, which were associated with the write-off of certain deferred financing costs related to our credit facility amendment this quarter, were offset by lower professional fees. With respect to other items below the net investment income line, net realized gains of $1.6 million in Q4 was largely related to the gain on the C&K transaction and a realized loss from the SMART tours restructuring, which was for accounting purposes only. Each of these were already reflected in our Q3 NAV, and as a result, they had a limited impact on the NAV change in Q4. From a leverage perspective, we ended the quarter with a debt-to-equity ratio of 0.93. Additionally, we have ample borrowing capacity in our credit facility to continue to grow and increase leverage towards our target Chris mentioned through the first half of the year, given where we are with the portfolio risk overall. As a reminder, we mentioned on our last call that we completed an amendment and extension of our senior credit facility in October, which included a commitment of $100 million with the option to increase the facility up to $200 million. We're currently in the process of increasing our commitments to $125 million. Notable changes associated with this amendment included the extension of the revolving period to October 2023, a reduction in the asset coverage test from 165% to 150%, A modest price increase to LIBOR plus 300. From an unsecured debt standpoint, we continue to evaluate the market and potential to refinance our $60 million of currently callable bonds in light of our current and expected investment rating. We believe the diversity and flexibility of our capital structure continues to be a strength. as the challenges presented to all in 2020 remain, but to a much lesser extent. We have ample capacity to borrow, to fund new investments, and to provide follow-ons to our existing portfolio companies. With that, I'll turn the call back over to Chris.

Thanks, Terry. Overall, this is a good quarter for SCRD. We continue to see positive trends at our portfolio companies as the economy has begun to open up over the last several months. We have de-risked the portfolio with changes to the outside's legacy positions. We have seen an uptick in deal activity that will help drive additional growth in the coming months. We believe this has put us in a positive position to cover the dividend without a management fee waiver beginning in Q2. We remain focused on the last two remaining concentrated names in our confident and underlying portfolio and our go-forward strategy. With that, I'll turn the call over to the operator for questions.

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the candidate roster. Our first question comes from Paul Johnson with KBW. Your line is now open.

Good morning, guys. Thanks for taking my questions this morning. On the Logan JV, I'm just – was kind of going back and looking at some of the numbers, I believe, in the first quarter of last year when it took a fairly sizable write-down, I believe the assets were roughly 86% of cost, fair value of cost. This quarter, it's about around 96% or so, I think, if I'm looking at that right. and obviously the equity investment took a little bit more of a write-down as well and is still held at a discounted point. How do you guys feel about further potential recovery in the assets of the Logan JV?

Paul, this is Terry. Thanks for the question. You're right. You've got the numbers directly right, unrealized numbers. Unrealized loss within Logan at 1231 was about $9.6 million. So FCRD's portion of that would be just under $8 million. The low market continued to be strong in Q1. So to date, we've seen the prices run a little further from 1231. So at this point in time, we'd expect to see a little bit of uplift on the NAV within the Logan portfolio. No credit concerns at this point that would give us any pause. that could drive any material change in NAV. There's still, you know, obviously three or four weeks left in the month here, and provided the markets change, I would say that, you know, the direction has been positive. So we should continue to close some of that gap.

Okay, great. Great. And then... On the yield of the JV, if I look back roughly a year ago, maybe a little bit more, it was basically low double-digit yield coming from the JV. COVID happened and obviously had its issues for everyone and helped to, I guess, reduce the yield of that portfolio. It's at 7.6% today. I'm just curious, what do you think that the JV can generate, I guess, long-term? What type of yield and maybe how long do you think it would take to get there?

Yeah, sure. I think the way to look at Logan, maybe just that yields on cost, maybe just translate it to NAV to make it a little simpler. So $68 million-ish of NAV and about $1.6 to $1.7 million a quarter of dividend income. So that's about a 10% yield on NAV. We've held that steady for the past couple of quarters. I would anticipate the portfolio to be able to generate 1.6 to 1.8 per quarter of dividend income for TCRD, which would equate to a 10% yield on the NAV and similar level as you mentioned, the 7.6 related to cost. We'll probably grow the portfolio modestly. Again, it represents 20% of the overall book. I still think there's room to deploy some capital. So I would anticipate over the next few quarters to expect it in that, you know, 1.6 to 1.8 range from an income producing standpoint.

Okay. Thanks for that. And then my last question was just around leverage at the BDC. You know, obviously as we're moving past the credit issues and you guys feel good about, you know, the performing portfolio and the economy recovering, and as you said, you know, you're seeing good activity. pick up for your pipeline this year. Do you still look at the leverage, target leverage range of about 1.1 to 1.2 as what you're comfortable with today, or do you think that could potentially move higher, or how do you look at that?

Hey, Paul, it's Chris. I appreciate the question. Yeah, we're still comfortable in that, you know, call it 1.1 to 1.2 range. Again, as we said up front, We've been comfortable with that number earlier. It's just the fact that the underlying portfolio, in our opinion, didn't support that. Now that we've transitioned out of these names, the portfolio is substantially more diversified, much more comfort in moving those levels up to that range. And as we said on the call, moving the leverage to that level will enable us to still cover our dividends and pay the management fee going forward.

Okay, great. That's all for me. Thanks.

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. Our next question comes from Robert Dodd with Raymond James. Your line is now open.

Hi, guys. First of all, thanks for the presentation, by the way. I have a question about sort of slide 18. There's basically five assets from 2015 or earlier that are still remaining, haven't been realized, obviously. OEM, Loadmaster, and Smart Tools are three of those. Igloo, you mentioned. There's Merchants Capital as well. I mean, if we look at Igloo and Merchants Capital, they seem to be performing well. pretty well, but they're six, seven years old now at 11 and a half percent. I mean, what's the probability that those get refinanced? I mean, above average yields would have an impact on earnings, obviously, if those who did get refinanced, they'd lose also a big position, obviously. So what's the outlook for those two assets, for lack of a better term, leaving the portfolio?

Yeah, nothing we can comment right now as it relates to, you know, specific actions being taken. We'll just say both credits are performing. We recognize EGLU is a concentrated position. It's also high-yielding. You know, from my perspective, I'd rather exit the facility, continue to diversify the program, and potentially then address the question that Paul had earlier, do you want to take leverage up slightly higher? So to the extent it does get refied, are repaid, we feel we'll be able to offset any contraction in yield, either through adding more names in the existing portfolio or taking the fact that the concentration has been reduced and move leverage more higher if needed.

Got it. Got it. On one of your equity successes, right, wheels up. You've got an unrealized gain in there. It looks like they're getting taken out by a SPAC right now. Is, or in the process, the mark at 1231, does that take any of that into account, or is that just, you know, that was, I think, pre-SPAC announcements?

You're right. There's some upside associated with that name to the extent that moves forward. Obviously, that transaction hasn't closed yet, so we haven't taken the number up to what the math would be. But we've read the news, same as you have, had those discussions. So if that continues to move forward, obviously that would result in some upside here in Q1 or Q2, whenever that transaction closes.

Got it. Got it. Then flip into the liability side. I mean, Terry mentioned the $60 million is callable. the 50 the other one isn't until the end of this year but bluntly right now at 675 on the 60 million once the waiver expires and you're paying a base management fee on assets associated with that that's a seven and three quarter kind of cost which is higher than your portfolio yield you'd be underwater if that stays out and you'd be underwater on the other one as well what's what's the view here what why wouldn't you call that um And or if you don't call it, wouldn't it be appropriate maybe to continue to waive the management fee on assets funded with that, given its cost is higher than your portfolio yield right now?

Yeah, let me take the first part of that. As I mentioned in the remarks, Robert, we're kind of continuously looking at opportunities to waive refinance that expensive debt, and certainly the market conditions are favorable, albeit a bit more favorable with the investment grading label. So we are looking at the announcement of these earnings and moving forward, hopefully, with a path to restore our rating to investment grade, which will allow us the opportunity, we think, in light of the existing market conditions to reduce that costs significantly. So we're balancing where we are today versus where we expect to be in the coming months. But we are active. We would fully expect to refinance both of them this year. I think the 23 bonds are callable at the end of October, if my memory is correct.

Yeah, at the end of this year, for sure.

I would say, listen, it's front of mind for me. We're certainly... As Chris talks about the math and increasing leverage, we certainly think one of the other levers to pull is addressing the cost of financing. So I would say it's ongoing as it always is in this business.

Got it. Got it. Thank you. And on the concept of a waiver, I realize that's a board question, not technically for you guys. But right now, shareholders obviously, I think you probably will get it refinanced. But hypothetically, if it goes later in the year, you know, has there been any discussion on waiving that? Because frankly, right now, shareholders are losing money on those bonds. The only person, the only entity making money on that capital outstanding right now is the advisor. And the advisor has waste fees and has made, you know, shareholder favorable steps. But would that be something that would be considered?

No, Robert, this is Chris. Appreciate the question. You know, we've said up front as we We were willing to waive the management fee as we wanted to work through and transition the portfolio. We believe that is, you know, close to being done, if you will, or it's far enough along where we're comfortable, you know, moving our leverage up. We'll take that same analysis, as Terry said, and have these conversations with the rating agencies to the extent we're able to obtain that investment-grade rating. I think you'll see a substantial reduction. And the cost of those bonds, to the extent that doesn't come to fruition, you'll still see a reduction in the price of those bonds. There's been plenty of bonds printed that you can see they're well inside of this. So for us, it's just a matter of time. It's not a question of this. It's just a question of when. And I'd much rather do it and see a substantial step down with that investment grade rating. But if for some reason the investment grade rating doesn't take place, we can still bring these bonds in at a much lower rate. lower yield today than where they are just based on the current market data.

Got it. Thank you.

Thank you. This concludes the question and answer session. I would now like to turn the call back over to Chris Flynn for closing remarks.

Thank you, Operator. We appreciate the support of our shareholders and look forward to providing you with an update in early May with our first quarter results. Thank you.

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