First Eagle Alternative Capital BDC, Inc.

Good morning and welcome to First Eagle Alternative Capital BDC Incorporated Earnings Conference Call for its first fiscal quarter ended March 31, 2022. It is my pleasure to turn the call over to Sabrina Rosnock-Coulson of First Eagle Alternative Capital BDC Incorporated. Ms. Rosnock-Coulson, 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, Jen Wilson, our Chief Accounting Officer, Jim Fellows, our Chief Investment Officer. And 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 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 as updated by our quarterly report on Form 10-Q 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 announcements and 10-K were released yesterday afternoon, copies of which can be found on our website along with our Q1 earnings presentation that we may refer to during this call. A webcast replay of this call will be available until May 14, 2022, 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, I want to discuss recent actions we've taken to drive strategic initiatives, as well as review our first quarter results and share some portfolio highlights. From there, I'll hand the call over to Jen to discuss our portfolio and financial results in more detail. We had a busy quarter working toward our three strategic initiatives, one, reducing our cost of debt, two, increasing our portfolio yield, and three, increasing our portfolio diversification. We've made progress on these three goals this year. First, we've effectively reduced our debt financing. As announced in Q1 through our 8K, we amended our credit facility to reduce the weighted average borrowing cost by 26 basis points. Further, since December 31, 2020, we have reduced our weighted average borrowing cost by 148 basis points. Second, we refinanced the Logan JV into a middle market CLO structure, which we expect to increase the dividend to FCRD as a result of this incremental leverage. We were very pleased that we were able to close the Logan JV CLO transaction on April 19th. Despite a challenging market seeming from the war in Ukraine, inflationary pressures, competition for AAA buyers, we were able to secure a deal that we believe is favorable to our shareholders and that speaks to the overall strength of our platform. The Logan JV CLO supports our strategic initiatives by increasing portfolio diversification through reduction in FCRD's exposure to Logan to a 15% to 16% and increasing our portfolio yield. Moreover, we expect the Logan JV return on equity to increase from around 10% historically to approximately 14% going forward with this new structure. At the same time, the middle market CLO, like many refinances, entails some upfront one-time costs to achieve longer-term benefits. To show our alignment with shareholders, we agreed to waive $400,000 of our management fee in Q1 and part of the management fee waived in Q2 in order to maintain the 10-cent dividend. We noted during our last call in connection with increasing portfolio yield, we aimed to increase our leverage range and increase our allocation to higher-yielding asset-based loans. In connection with the amendment to the credit facility, we've increased the credit facility size to $175 million and pushed out a maturity date, which allowed us to further increase leverage. At 331, our consolidated leverage was 1.26 times up from 1.18 at the end of Q4. This brings me to the results of FCRD's first quarter net income, which was in line with expectations at $0.10 per share. We anticipate the reduction in financing costs, more flexible capital, and increased utilization of leverage to drive a more investment activity, which will help further stabilize NAB and drive NII. We entered the quarter with a net asset value of $6.12 per share, down 3.5% on a quarter-over-quarter basis. The decrease in that was primarily driven by the change in unrealized appreciation. Our non-income-producing second-linked position in Loadmaster and our first-linked position in Matilda Jane were written down $0.06 per share. The remaining write-downs were not material on an individual investment basis and spread across a handful of names in the portfolio. In line with our goal to reduce or eliminate exposure to non-income-producing positions, as noted in our recent update section in 10Q, in early April, Aerotech LLC entered into a purchase agreement to sell its common shares. The proceeds of the sale, which includes cash and amounts placed in escrow, were used to pay off and terminate the outstanding credit agreement. The company realized the loss of $1.8 million as a result of this transaction. This amount will be offset by a reversal in the unrealized loss on the investment. The remaining value on non-accrual in the portfolio represents about 1.8% of the total portfolio based on fair market value at March 31st. We announced last quarter Aerotech defaulted. Since we monitored re-under oath the company and the prospects and ultimately believed that exit was in the best interest for shareholders, therefore sought to exit the position as quickly as possible. Overall, the core portfolio continues to form well in line with expectations. We believe our portfolio companies continue to maintain good liquidity profiles, and the support from private equity sponsors. There were no significant amendments to existing loans in Q1 and no new loans placed on non-accrual. Similar to the broader market trends, we have seen a few of our portfolio companies facing supply chain challenges, labor shortages, as well as inflationary pressures, including increased wages and material costs. Matilda Jane in particular was impacted by supply chain issues and labor shortages. We continue to keep a close eye on impacted companies and the economy for signs of further weakness. As we've noted before, portfolio diversification and stabilization of our investment portfolio has been a paramount focus. Our ability to increase leverage across more flexible capital terms will further these goals over time as we invest capital and add new investments. From an origination perspective, the private debt market kept up its typical trend of a slower Q1 relative to the rest of the year. We saw our private equity partners focused on closing and settling into new deals from a record year of deployment in 2021. First Eagle direct lending origination activity in the first quarter was mainly focused on portfolio add-ons plus one new investment. Total deployment was $114 million versus $69 million in Q1 of 2021. In line with that trend, the FCRD portfolio invested $2.3 million in a new portfolio investment in Q1, with an additional $17.5 million invested in follow-on investments, including revolvers and delayed drop fundings. There were no significant repayments during the quarter, which resulted in an atypical quarter with no prepayment premiums received or accelerated amortization of OID this quarter. Looking forward, our direct lending pipeline remains strong, including agency, cash flow, and asset-based deals. The BDC continues to benefit from deal flow generated by First Eagle's approximate $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 77 this quarter, while also allowing First Eagle to provide more capital to middle market businesses. 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 in our investment committee discussions. With that, I'll turn the call over to Jen.