First Eagle Alternative Capital BDC, Inc. (NASDAQ:FCRD) Q2 2022 Earnings Conference Call August 10, 2022 9:30 AM ET
Company Participants
Sabrina Rusnak-Carlson – General Counsel & Secretary
Christopher Flynn – CEO & Director
Jennifer Wilson – CAO & Treasurer
Conference Call Participants
Operator
Good morning, and welcome to First Eagle Alternative Capital BDC, Incorporated Earnings Conference Call for its second fiscal quarter ended June 30, 2022.
It is my pleasure to turn the call over to Sabrina Rusnak-Carlson of First Eagle Alternative Capital BDC, Incorporated, Ms. Rusnak-Carlson, you may begin.
Sabrina Rusnak-Carlson
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 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-Q were released yesterday afternoon, copies of which can be found on our website, along with our Q2 earnings presentation that we may refer to during this call. A webcast replay of this call will be available until August 10, 2023, starting approximately 2 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.
Christopher Flynn
Thanks, Sabrina. Good morning, and thank you for joining us on our earnings call today. On today’s call, I’ll review our second quarter results and share some portfolio highlights. I’ll then hand the call over to Jen Wilson, who will discuss our portfolio on the financial results in more detail. The results for the second quarter were mixed. We ended the quarter with a net asset value of $5.30 per share, down 13.4% on a quarter-over-quarter basis. This drop in NAV can be broken down as follows: $0.36 of the decline is related to the Logan JV, which generally follows the drop off in the Credit Suisse Leveraged Loan Index during Q2.
The balance of the NAV decline was primarily related to 3 specific investment’s: Matilda Jane, $0.21; Loadmaster, $0.14 and OEM $0.06. Even with the write-downs, the earning powers of the book has increased given our much more efficient capital structure. To that end, the Board has improved increasing the dividend from $0.10 to $0.11 next quarter.
In April, we closed on the refinancing of the Logan JV into a middle market CLO structure to support our strategic initiatives. The cost incurred by the Logan JV on this refinancing reduced our distribution received by approximately $1.3 million in the quarter. And as discussed in our last call, we went our management fee in Q2 to offset the impact of the FCRD shareholders.
As of June 30, FCRD’s exposure to Logan was 17% of the total investment. As part of this transaction, there was a $12.8 million return of capital to the BDC in July. The return of capital reduced our exposure to Logan further from 17% to 13%. The return of capital distributions received in July will be invested in new and follow-on direct loan net investments in our portfolio.
This brings me to our results for the quarter. Our net investment income was in line with expectations at $0.10 per share. Jen will go through our results of operations in more detail shortly. As previously mentioned, the Logan JV contributed $0.36 or approximately 5.9% to the decline in NAV from Q1. As a reminder, the Logan JV is primarily composed of broadly syndicated loans and the NAV impacted was driven by market volatility as opposed to any credit-specific issues. From March 31 to June 30, the average price on the Logan JV portfolio declined from $95.7 million to $92.8 million.
This decline is consistent with the change in average price of the Credit Suisse leveraged loan index, which declined from 97.4% to 92% over the same period. Subsequently to quarter end, we have seen broadly syndicated market prices begin to recover. The latest round of market volatility reinforces the benefit of transitioning the Logan JV to a middle market CLO structure, which allows us more capital flexibility. Under the previous Logan JV, capital structure, Logan may have been forced sellers in this environment in order to pay down a credit facility to maintain asset coverage covenants. In the current structure, Logan is able to retain investments and recover value in the event the market recovers.
In line with our goal to exit non-performing positions, Aurotech, LLC was sold in early April and the proceeds were used to pay off and terminate the outstanding credit agreement. As a result of the recent performance and related markdowns and valuation of Matilda Jane, the credit was placed on non-accrual during the second quarter. At the end of the second quarter, 2.3% of the total portfolio based on fair market value was on non-accrual.
From an origination perspective, we saw a healthy volume of deals but are mindful of an ongoing geopolitical and economic issues around the world. As a result, we are very cautious in putting new money to work and are looking for recession-proof businesses. We are carefully considering the current potential future state of our industry verticals, which include asset-based lending, health care, business and financial services, information technology and consumer services.
First Eagle’s Direct Lending origination activity in the quarter was mainly focused on portfolio add-ons plus one new investment. Total capital deployed across all Direct Lending platform was over $270 million for the quarter. FCRD participated in $25.9 million, of which $4.6 million was in a new portfolio investment with the remainder invested and follow-on investments, including revolvers and delayed draw fundings.
We had 7 realizations during the quarter with total proceeds received at $33.3 million. First Eagle Direct Lending platform has remained robust, and we expect it to continue to provide us with attractive investment opportunities. More recently, we have found demand is up for asset-based loans, while the cash flow pipeline is holding steady.
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 this number of positions up from 45 in Q1 of 2018 to 71 this quarter, which also allows First Eagle to provide more capital to middle market companies.
With that said, I’ll turn the call over to Jen.
Jennifer Wilson
Great. Thank you, Chris, and good morning, everyone. First, I’ll start off with some investment and portfolio highlights. As Chris mentioned, Q2 was relatively muted quarter for new activity with 1 new addition to the portfolio at $4.6 million.
However, we did have several follow-on investments in funding of commitments totaling an additional $21.3 million in capital deployed. The blended yield of new investments was 7.75% based on underlying benchmark rates and spreads as of June 30. Additionally, we had 7 notable realizations during the quarter, receiving total proceeds of $33.3 million. As of June 30, our portfolio was valued at $366.8 million, down from $400.7 million at the end of Q1. It was invested 80.4% in first lien senior secured debt and 16.5% in the Logan JV.
As a reminder, the Logan JV is 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 costs and including Logan was 6.8% as of the end of Q2, which is up slightly from 6.5% at the end of Q1. During Q2, we placed Matilda Jane, our first lien term loan and revolver on non-accrual. Additionally, Aurotech was paid off and no longer included in our non-accrual assets. Total non-accruals as a percentage of our portfolio at fair value and at cost were 2.3% and 7.4%, respectively.
Now I’d like to address the financials for the second quarter. During Q2, we recognized $6.9 million of investment income primarily from interest and dividend income. Interest income increased approximately $866,000 from Q1 to $6.3 million for Q2. The increase was primarily driven by prepayment premiums of $552,000 earned on the realization of 2 of our positions.
These realizations also contributed to the increase an accelerated amortization of OID of approximately $232,000. As expected, the dividend income from Logan JV decreased significantly from Q1 to $320,000 in Q2. This decrease is the result of 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. Other income was up slightly to $263,000 in Q2. Total expenses, net of management fee waivers for the quarter were $4 million, down from $4.5 million in Q1. The biggest driver of this decrease was the $629,000 decrease in management fees due to a full waiver of our Q2 management fee.
This decrease was offset slightly by an increase of approximately $143,000 of interest and fees on borrowings due to an increase in the underlying reference rate. From a leverage perspective, we ended Q2 with a debt-to-equity ratio of 1.42x. Our increase in our debt-to-equity ratio was driven by our decrease in net asset value at the end of the quarter. We continue to have ample borrowing capacity on our credit facility to continue to grow our portfolio and fund any calls on our untended commitments.
With that, I’d like to turn the call back over to Chris.
Christopher Flynn
Thanks, Jen. We sought to provide shareholders a clear time line on narrowing FCRD’s discount to NAV and raising the dividend. We were able to raise the dividend this quarter as designed.
As we have articulated previously, the current discount in NAV is not accepted, and we as management will not be satisfied until that is rectified.
With that, I will turn the call back over to the operator.
Operator
This concludes today’s conference call. Thank you for participating. You may now disconnect.
Question-and-Answer Session
Q –
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