First Eagle Alternative Capital BDC, Inc.

Good morning and welcome to First Eagle Alternative Capital BDC, Inc.' 's earnings conference call for its third fiscal quarter ended September 30th, 2022. It is my pleasure to turn the call over to Sabrina Rusnack-Carlson of First Eagle Alternative Capital BDC, Inc. Ms. Rusnack-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, and Jen Wilson, our Chief Accounting Officer and Treasurer. Before we begin, please note that the 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 undertakes no duty to update any forward-looking statements made herein unless required by law. All forward-looking statements speak only as to the date of this call. Our earnings announcements and 10Q were released yesterday afternoon, copies of which can be found on our website along with our Q3 earnings presentation that we may refer to during this call. A webcast replay of this call will be available until November 9th, 2023, 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 our earnings call. On today's call, we'll review our third quarter results and share some portfolio highlights. Then Jen Wilson will discuss our portfolio and the financial results in more detail. We know folks are interested in hearing our view on the transaction announcement. I'll address that at the end of the call. But first, let's cover the quarter. The results of the quarter were as expected. We saw some softness in the overall portfolio, given continued softness in the market, but nothing outside of expectations. The positive news is this quarter really showed the earnings power of the portfolio once all of our key areas were implemented. Lower cost of debt, more efficient financing in the Logan Joint Center, coupled with rising rates on a floating rate book. contributed to $0.13 a share at NII versus our dividend of $0.11. We ended the quarter with net asset value of $5.14 per share, down 3% on a quarter-over-quarter basis. The NAB decrease was driven primarily by three positions, the Logan Joint Venture, $0.08, Loadmaster, $0.07, Matilda Jane, $0.02. As of September 30th, FCRD's exposure to Logan's joint venture was 12.5% of our total investments, During the quarter, the Logan JV returned approximately $12.8 million of capital as a result of refinancing via the issuance of a middle market CLO. Interest income was about $200,000 higher than last quarter. This is the result of a combination of new investments in Q2 and Q3, plus increased yield due to rising benchmark rates. The Logan JV dividend was $2.1 million in the third quarter, representing a 24% increase from the Q1 dividend. which is the last dividend paid before the Logan JV refinance was done. The increase in the dividend income is directly correlated with the refinancing of the Logan Joint Venture Facility into a middle market CLO, coupled with increases in LIBOR and SOFR. As discussed in prior calls, one of the expected outcomes of the middle market CLO was a higher Logan JV dividend income to the BDC. As a reminder, the Logan JV is primarily comprised of first lien broadly syndicated CLO loans. From an origination perspective, the overall First Eagle direct lending platform remains robust, deploying over $490 million in first-link capital and middle-market sponsor-backed companies. Given the continued economic and geopolitical landscape, Q3 volume was driven by a mix of new investments and add-on activities. We maintain a cautious view in putting money to work and where new cash flow and asset-based lending deals arise. We are looking for recession-resistant businesses across our main industry verticals. which include healthcare, business and financial services, information and technology, and consumer services. In the third quarter, FCRD invested a total of $24.7 million, of which $12.1 million was in three new portfolio investments, with a remainder to follow on investments, including revolvers and delayed draw funding. We had run repayment of a tradable credit asset during the quarter, with total proceeds of $3.9 million. As I mentioned earlier, the Logan JV returned approximately $12.8 million of capital to its quarter as well. The SRD position portfolio ended the quarter with 73 investments. With that, I'll turn the call over to Jen.

Great. Thank you, Chris, and good morning, everyone. First, I'll start off with a few investment and portfolio highlights. Chris previously mentioned, we did have three new investments added to the portfolio at $12.1 million par. However, in addition to that, we also had several follow-on investments and funding commitments totaling $12.6 million for a total deployment of $24.7 million par. The blended yield of new investments was 9.1% based on underlying benchmark rates and spreads as of September 30th. Additionally, we did have one repayment during the quarter, receiving total proceeds of $3.9 million, and that repayment was made at par. During the quarter, as a result of its financing of its capital structure through the issuance of its middle market CLO, the Logan JV also returned $12.8 million to FCRD. As of September 30th, our portfolio was valued at $363.2 million. down from $366.8 million at the end of Q2. It was invested 84.4% in first lien senior secured debt and 12.5% in the Logan JV. As a reminder, the Logan JV is approximately 99% invested in first lien assets. The remaining 3.1% of the BDC's portfolio was held in second lien debt and other non-income producing and equity holdings, including our restructured equity-like second lien investment in OEM. The weighted average yield on the debt and income producing portfolio based on cost and including Logan JV was 8.2% at the end of Q3, which is up from 6.8% at the end of Q2. The increase is attributable to both the rising benchmark reference rates as well as the increase in the Logan JV dividend during the quarter. During Q3, there were no new assets placed on non-accrual. Total non-accruals as a percentage of our portfolio at fair value and at cost were 1.9% and 7.5% respectively. Now I'd like to address the results of operations for the third quarter. During Q3, we recognized $8.9 million of investment income, primarily from interest and dividends. Interest income increased approximately $0.2 million from Q2 to $6.5 million for Q3. The increase was primarily driven by an increase in cash interest of $0.9 million due to capital deployment in Q2 and Q3, coupled with increasing benchmark reference rates. This was offset by a decrease of approximately $700,000 in prepayment premiums and accelerated amortization, as there were no significant prepayment realizations during the period. As expected, the dividend income from Logan JV increased significantly to $2.1 million in Q3. The Q2 dividend was lower than normal due to certain one-time charges and write-offs associated with the termination of the Logan JV credit facility, in connection with the issuance and refinancing of the Logan JV middle market CLO. The Q3 dividend of $2.1 million represents the return to a normalized quarterly dividend from the Logan JV, enhanced by the more efficient financing structure of the middle market CLO and rising benchmark reference rates. The term was flat at $300,000. Total expenses net of management fee waivers for the quarter were $5 million up from $4 million in Q2. The biggest driver of the increase was the $1 million increase in management fee due to a full waiver of our Q2 management fee and no waiver in Q3. From a leverage perspective, the Q3 debt to equity ratio was up marginally to 1.44 times due to the decrease in net asset value at the end of the quarter. We continue to have ample borrowing capacity under our credit facility to manage our portfolio and fund calls on our unfunded commitments. With that, I will turn the call back over to Chris.

Thanks, Jen. I'd like to take a moment to address the announcement of our entry into a merger agreement with Crescent Capital BDC on October 4th. We're pleased with this outcome as we believe it's in the best interest of the SDRD stockholder. Since 2015, as the advisor, we executed on a variety of initiatives to close the valuation gap between the SDRD NAV and its stock price. These initiatives and subsequent portfolio developments did not translate into a narrowing of the trading discount, unfortunately. While that's unfortunate, all the efforts spent improving the book enabled the board to run a very efficient process, which resulted in what we believe to be an extremely compelling offer from Crescent Capital. As both the advisor and the largest shareholder, our interests are aligned with our stockholders, and we, alongside with the board, fully support the proposed combination with Crescent Capital BDC. Furthermore, First Eagle Investment Management has signed a support agreement to vote in favor of the transaction. The details around the board's process can be found in the N-14 filing, which is made public on November 4th, 2022. And we look forward to working with Crescent to both close the transaction and assist with the transition of portfolio management. We have spent extensive time with Crescent, and we believe they are the right partner to manage the VDC going forward. As a reminder, we will not be answering any questions about the transaction. If you have any questions about portfolio results, we'll be happy to take them now. Operator, please open up the line for questions.

As a reminder, to ask a question, you will need to press star 1-1 on your telephone. Please stand by while we compile the Q&A roster. And our first question comes from Lee Cooperman with Omega Family Office. Your line is open.

I feel like George Washington the first time I've ever been first. Anyway, I want to congratulate you on the transaction. I know that this was an outcome that you did not want initially when you went public, but I think all along the way you've represented the best interest of the shareholders and I congratulate you. My only question is when do you expect the transaction to close?

Perfect. Thanks for that. And I'll defer to Sabrina. Sabrina, do you have any timelines that we're able to speak to publicly?

Yeah. I mean, I think we've publicly stated that, you know, we endeavored by end of year, but, you know, likely would slip probably into Q1 2023. Gotcha.

Thank you. Good luck and thanks again. Thanks, Lee.

Thank you. Thank you. One moment for our next question. And our next question comes from Robert Dodd with Raymond James. Your line is open.

Hi, guys. Just to echo Lee, congratulations on getting the transaction laid out. That's not my question. On the portfolio, for the markdowns in particular for Loadmaster and Matilda Jane, which were some of the larger contributors, I mean, is that the result of spread widening being greater at you know, lower rate of credit, so to speak, or actual dependent rate. Credit specific. Credit specific, okay. Any color or you can get any feel for like how close that is to the bottom or is it still subject to how the economy develops over the next kind of 12 months?

Obviously, as a market portfolio, we feel that the number that we put in the queue is an accurate reflection of what we think the recovery is on any position. So this is our our best estimate based on the information that we have at hand.

Understood, with the caveat that it's based on the information you have. But has the information, say, the most recent data, has that deteriorated from continuing it down?

I understand your question now, Robert. No changes from my opinion on performance from when we snapped the tape at 9.30 versus where we are today on those two names.

Got it. Thank you.

Thank you. And as a reminder, to ask a question, please press star 1 1 on your phone. And I'm showing no further questions at this time. I would now like to turn the conference back to Chris Flynn for his closing remarks.

Thank you, operator. We appreciate the support of our stockholders and look forward to providing you with an update on the SDRD CCAC transaction when appropriate. Feel free to reach out to Jen Wilson or myself if you have any questions before then. Thank you.

And this concludes today's conference call. Thank you for participating. You may now disconnect.