First Eagle Alternative Capital BDC, Inc.

Good morning and welcome to First Eagle Alternative Capital BDC, Inc.' 's earnings conference call for its fourth fiscal quarter ended December 31, 2021. It is my pleasure to turn the call over to Sabrina Rosna Carlson of First Eagle Alternative Capital BDC, Inc. Ms. Rosna Carlson, you may begin.

Thank you, Operator. Good morning and thank you for joining us. Joining me on today's call are Chris Flynn, President of First Eagle Alternative Credit, Michelle Handy, Head of Portfolio and Underwriting for Direct Lending, and Jen Wilson, our Chief Accounting Officer and Treasurer. Before we begin, please note that statements made on this call may constitute forward-looking statements within the meaning of the Securities Act of 1933 as amended. Such statements reflect various assumptions by First Evil 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. as updated by our quarterly report on Form 10Q and our periodic and other filings with 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 BDC undertakes no duty to update any forward-looking statements made herein unless required by law. All forward-looking statements speak only as of the date of this call. Our earnings announcement and 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 available until March 14, 2022, starting approximately two hours after we conclude this morning. To access the replay, please visit our website at www.feacbbc.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, I'll provide an overview of our fourth quarter results, some portfolio highlights, and Michelle will share some market perspectives. And then Jim will discuss the portfolio and financial results in more detail. Let's begin with our quarter results first. It was a productive quarter for the BDC, and we feel good about the balance sheet and are proactively taking actions to increase net investment income now. Current key initiatives include the following. Further reduce our cost of debt. Restructure the financing package inside of Logan. increase our portfolio allocation to higher-yielding ABL transactions, and then further increase our portfolio diversification and reduce exposure to the legacy concentrated positions. Now with a stable balance sheet, we can look forward to growing our net investment income, which we believe will assist the narrowing of the gap between our stock price and book value. The fourth quarter net invested income was slightly lower than expectations at $0.09 per share compared with our $0.10 per share dividend and this quarter of $0.11 per share in Q3. We continue to focus on expanding our portfolio investments through continued utilization of our leverage capacity. We concluded Q4 with consolidated leverage of 1.18 times, up from 1.13 times at the end of Q3. As you may recall, last quarter, we increased our target leverage ratio to 1.2 and 1.3 in light of our continued improvement in diversification and stabilization of our investment portfolio. We made significant progress in deploying capital with 53 million par in new investments made during the quarter. Despite the seasonality of origination activity in the first quarter typically being slow, we continue to believe we have the ability to move into our target leverage ratio of 1.2 to 1.3 this year based on the deal pipeline and current lending environment. During the quarter, we continued our progress of refinancing our balance sheet through a $42 million add-on offering of our 5% notes due in 2026 and the redemption of our 6 and 1-8 notes due in 2023. We ended the quarter with a net asset value of $6.34, down 2.5% on a quarter-over-quarter basis, however, on a year-over-year basis, net asset value was up 3%. During the quarter, we had a net realized gain of $3.1 million, or 10 cents a share. The gain realized was primarily comprised of the sale of our preferred stock in Science Building Solutions and the sale of our common stock in Urology Management Associates. The impact of this realized gain was offset by a change in unrealized depreciation, net of tax, of $7.8 million, or $0.26 per share. Over half of this write-down, or $0.14, was related to our non-income-producing second lien position in OEM and loadmaster. The remaining write-downs were not material on an individual investment basis and spread across a handful of names in the portfolio. As we communicated on our Q3 earnings call, we exited Igloo at the end of October. Our debt investment was repaid at par, and our equity position was acquired for cash with a one-year earn-out. EGLE was one of the two remaining legacy concentrated positions. It represented 5.5% of our portfolio as of September and was the largest single position prior to that redemption. Overall, the portfolio continues to perform well amid the continuing impact of the COVID-19 pandemic. Revenue and EBITDA levels and liquidity for the most COVID-impacted businesses in the portfolio continue to improve and, in many instances, have returned to or exceeded pre-COVID levels. Companies that have not fully rebounded continue to maintain good liquidity profile. There are no significant amendments to existing loans in Q4. We added two new names to non-accrual this quarter, Smart Tours and Orotech, with a combined par balance of $4.4 million. This represents less than 1% of the total portfolio based on fair value. With regard to Smart Tours, a provider of direct-to-consumer prepackaged international travel tours, primarily targeted at retirees and seniors, only the $1.4 million second lien pick-only loan was placed on non-accrual. As a reminder, we received the second lien loan as part of the restriction that took place at the end of 2020. The first lien loan continues to perform. While the pick-only loan was put on non-accrual, we still remain confident in the turnaround of this business despite the delayed recovery due to Omicron. Aerotech, a provider of digital transformation services and business solutions primarily to the U.S. federal healthcare agencies, underperformed and elected not to make its principal and interest payments in December 2021. We are pursuing strategic alternatives and expect to exit this $3.3 million position in the coming quarters. With regard to OEM, we held our first lien position at PAR, took a write-down on the second lien non-income producing position in Q4. Under the plasma therm transaction that we consummated at the end of 2020 to commercialize and distribute OEM's technology to the market, the principal consideration was in the form of deferred payments for several years. These payments are contingent on certain milestones, including manual annual payments for the first four years that will be used to service our debt and cover certain operating costs. OEM received its required minimum annual payment for 2021. First Eagle direct lending origination activity picked up in the fourth quarter, making 44 new investments across the entire platform, totaling over $1 billion in Q4 alone. It was a strong year for the industry, and it was no different for us, with a direct lending platform deploying approximately $2.4 billion in assets across 114 investment portfolios in 2021. The FCRD portfolio consisted – invested in $33.2 million, and 14 new portfolio investments in Q4 alone, and $172 million in 39 new investments for the full year. The pace of deployment not only speaks to the overall level of deal activity in the market, but also the power of being part of the First Eagle direct lending platform. FCRD was also made an additional $20.1 million of follow-on investments, including rollover and delay draw fundings during the quarter. We were able to monetize two non-income-producing equity positions, providing an additional $4.3 million in capital, which will be deployed into income-producing assets. Additionally, there were six debt pre-payments at par. Our direct lending pipeline remains strong, and the BDC continues to benefit from the First Eagle's approximately $5 billion direct lending platform. The growth of the platform allows the BDC to hold a more diversified portfolio with a number of positions up from 45 in Q1 of 2018 to 76 this quarter, while also allowing First Eagle to provide more capital to middle market companies. You may recall in early 2020, First Eagle's direct lending platform expanded its capacities to include asset-based lending. ABL is another incremental solution First Eagle can provide to sponsors and middle market companies in cases where a company needs liquidity but may not be able to utilize the traditional cash flow lending option. ABL deals generally also provide a higher yield relative to cash flow deals. We have found ABL deals spread to be anywhere from 150 to 300 basis points wider than the middle market cash flow deal. We've added two new ABL deals to the quarter this quarter, Own Yourself and XL Brands. While we are doing ABL deals for the direct lending platform, these are the first ABL deals for the BDC. They represent 5.6% of the portfolio on a fair value basis, and we plan to grow this allocation to approximately 15% over time as we get repaid on lower yielding assets. Own Yourself is a holding company for intellectual property companies that license the Jessica Simpson brand, which is a signature lifestyle concept inspired and designed in collaboration with Jessica Simpson. The company offers multiple product categories, including footwear, apparel, fragrance, fashion accessories, maternity apparel, girls' clothing, and home products. Capital provided by First Eagle supported Jessica Simpson and her mother, Tina Simpson, in buying back the company from Sequential Brands, which had acquired a majority stake in 2015. XL Brands is a brand management company engaged in the design, production, and marketing of apparel, jewelry, and other home goods and consumer products through interactive television, brick-and-mortar, and e-commerce channels. Capital provided by First Eagle supported the company and its operations and growth of the business. First Eagle's direct lending platform has remained robust, and we expect it to continue to provide us with attractive investment opportunities. We continue to be very selective about where we deploy capital and are mindful of the macro environment on our investment committee decisions. To that end, we have invited Michelle Handy, head of portfolio and underwriting of the direct lending platform, to provide a brief update on the market. Michelle?