Sabrina Rusnak-Carlson - General Counsel Sam Tillinghast - Co-CEO Chris Flynn - Co-CEO Terry Olson - COO & CFO.

Kyle Joseph - Jefferies Joe Mazzoli - Wells Fargo Securities Lee Cooperman - Omega Advisors.

Good morning and welcome to THL Credit's Earnings Conference Call for its First Fiscal Quarter 2017 Results. It is my pleasure to turn the call over to Ms. Sabrina Rusnak-Carlson, General Counsel of THL Credit. Ms. Rusnak-Carlson, you may begin..

Thank you, operator. Good morning and thank you for joining us. With me today are Sam Tillinghast and Chris Flynn, our co-Chief Executive Officers and Terry Olson, our Chief Operating Officer and Chief Financial Officer.

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 THL Credit 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 including the factors described from time to time in our filings with the Securities and Exchange Commission.

Although we believe that the assumptions on which any forward-looking statements are based 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 those forward-looking statements.

THL Credit 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 announcement and 10-K were released yesterday afternoon, copies of which can be found on our website along with the Q1 Investor Presentation that we may refer to during this call.

A webcast replay of this call will be available until May 12, 2017 starting approximately two hours after we conclude this morning. To access the replay, please visit our website at www.THLcreditBDC.com. With that I will turn the call over to Sam..

Thank you, Sabrina. Good morning everyone. I'll begin today's call with a general update of the first quarter, including financial and portfolio highlights. Chris will discuss our investment activity and provide more details on our portfolio including the Logan joint venture and Terry will discuss our financial results in more detail.

Our efforts and activities during the first quarter continue to be focused on repositioning the BDC into a predominantly first lien centric portfolio. We specifically focused on three key initiatives in support of this repositioning.

First, we continue to use proceeds from sales and repayments to invest in first lien loans to companies backed by private equity sponsors. During the quarter, we invested $39.3 million of which 83% was in first lien loans. The balance of that amount was in the Logan joint venture and in follow-on investments in existing credits.

Our second initiative was in fact to invest in the Logan joint venture, which is a predominantly first thing for this vehicle. We increased -- we increased our investment in the Logan joint venture during the quarter to $63 million which represents 9% of the portfolio on a fair value basis as of March 31.

And third, we continue to proactively manage the five portfolio companies where we now have a controlling interest. C&K, Copperweld, OEM, Loadmaster and Tri-Starr. We're very active and engaged owners of these businesses and our ownership we've put in a new CEO and a new CFO in three of the five company.

We've run in operating advisers who have deep experience for much larger companies in the same sectors to focus on operational efficiencies and lien manufacturing and cost cutting. We are actively involved in working capital management and in strategic planning and new business initiatives for revenue enhancement and margin improvement.

Our long-term objective is to build value and eventually sell these businesses. As we've mentioned on previous calls, shifting of private debt portfolio takes time and we continue to be pleased with the progress we've made thus far.

We feel strongly that these three initiatives increasing our allocation to first lean or in the size of Logan joint venture and building value in our five portfolio companies continue to constitute the right strategy for the BDC.

Moving on now into some financial and portfolio highlights, our net investment income per share for the quarter was $0.29 relative to our dividend paid of $0.27 per share. We're pleased to announce that on May 2, our Board of Directors approved a quarter dividend of $0.27 per share for the second fiscal quarter of 2017, which is payable on June 30.

As of March 31, we had 47 portfolio investments valued at $693.1 million, investment in first lien loans in the Logan joint venture together included 67% of the portfolio up from 64% last quarter.

The remainder of the portfolio was invested in 15% second lien loans, 13% in equity of which 5% is income producing and pays a dividend, 3% in subordinated debt and 2% in other securities.

Consistent with the prior quarter, 89% of the debt portfolio was invested in floating-rate loans, which results in a portfolio that we believe is well-positioned to earn incremental yields from rising interest rates.

Despite ongoing competitive dynamics in the direct lending space, we continue to maintain an attractive weighted average investment yield on the portfolio of 11.4% for the quarter.

This was due in part to the dividend yield of 13.6% generated by the Logan joint venture, which offsets the natural yield compression that comes along with investing higher up in the capital structure. We saw a strong overall yield of 11.7% of the new investments made in Q1. With that, I'll turn the call over to Chris..

Thanks Sam and good morning, everyone. I will begin by providing some highlights from the first quarter. First, we invested $22.5 million in a first lien term loan to Fairstone Financial Inc. a Canadian-based consumer finance company. We partnered with other senior lender to provide financing to support the acquisition.

Together with an affiliate, we also made a $5.8 million first lien loan and a $1.7 million revolver commitment in Sciens Building Solutions, a fire detection services company in support of an acquisition. The facility has a built-in accordion to support future acquisitions that we may elect to participate in.

We also made a $4 million equity contribution to the Logan JV and $7 million in follow-on investments in seven existing portfolio companies. Subsequent to quarter end, we've now closed two new and two follow-ons first lien investments totaling $16.9 million.

Notable realizations for the quarter included the sale of our two remaining CLO equity investments to Flagship VII and Flagship VIII which generated gross IRRs of 7.6% and 9% respectively in total proceeds of $7.8 million.

As a reminder, we exited our six CLO positions in an effort to construct an investment portfolio that is more easily understood by our shareholders and increased our exposure to first lean loans in the lower middle market. We were pleased with the overall performance of all six realized CLO low investment, which have an aggregate gross IRRs of 12.9%.

These CLO equity realizations coupled with our new investments resulted in net portfolio growth of $27.5 million from investment activity in the quarter.

Post quarter end we were repaid on $8.3 million of our first lien loan in Healthcare First at par and we sold our $17.5 million second lien term loan in Hostway for $16.4 million well above our quarter-end mark of $0.84. While we continue to prudently invest in new investment opportunities, credit quality continues to be our number one focus.

As Sam mentioned, we believe that our portfolio continues to get stronger and more resilient as a result of our repositioning effort. Credit quality was generally stable over the quarter.

As of March 31, 97% of the companies that are portfolio on a fair value basis were either rated one, two or three, which means their performing loans and we do not see concern at this time with collection of interest or principal.

Tri Starr, Loadmaster and WIS were all five rated credits, meaning that original principal and interest are not expected to be fully collected and represent the remaining 3% of the portfolio. Certain investments in the three portfolio companies remained on nonaccrual in Q1, representing 1.9% of the portfolio at a cost basis.

No new investments were added to nonaccrual during the quarter. We wrote down substantially all of our second lien investment in WIS this quarter. Current confidentiality requirements preclude us from discussing specific of this investment. We also took an additional markdown of our investment in Loadmaster in 2016.

The company's performance continues to be challenged due to the deferral of its backlog and pipeline of offshore oil rigs. We own a 100% of the equity of this company and continue to work with financial advisor to execute a business plan and provide operational support.

I would like to highlight that our other two energy investments Allied and Holland have outperformed us more in 2017 as it marked up accordingly as of March 31. We continue to be pleased with the progress made on our other portfolio of companies.

We market for investments in OEM, Tri-Starr and Copperweld modestly as of March 31 to reflect positive improvements both restructuring and as these businesses stabilize, we continue to support and work close with the management teams to grow EBITDA and position the companies for an exit.

Before I turn the call over to Terry, I would like to provide an update on our investment in the Logan joint venture. As of March 31, THL Credit had invested $63 million in the Logan joint venture, which consist of 95 companies totaling $2.3 million at par.

The portfolio which is marked at one or two of our cost as of March 31 continued to perform well. We recognize $2.1 million of dividend income for the first quarter representing the 13.6% dividend yield. The Logan JV continues to be an important part of our strategy and we look to continue to grow the BDC's investment over time.

With that, I'll turn the call over to Terry..

Well thanks Chris and good morning, everyone. I'll provide a little more color on our financial performance this quarter.

We generated $19.8 million of investment income in this quarter, which is relatively flat quarter-over-quarter, including an investment income of $14.5 million of interest income on debt securities, which includes $0.8 million of income and nominal prepayment premiums and accelerated amortization.

We earned $3.1 million in dividend income during the quarter from the Logan JV and our equity investment in C&K and we also generated $1.3 million of interest income from other income-producing securities including interest from our investment in the Duff & Phelps tax receivable agreement.

And finally, we had $900,000 of other income comprised of fees from our managed funds and other fee income from several credits during the quarter. We incurred $10.1 million of expenses during the first quarter, compared to $10.8 million in the fourth quarter of 2016.

Seasonal expenses related to our borrowings including amortization and deferred financing costs were $4.3 million. This represents a more normalized level after recognizing accelerated financing costs in Q4 of 2016. We also incurred $2.6 million in base management fees and $1.3 million of incentive fees.

The total return provision in our investment management agreement prohibited us from fully earning our incentive fees, which would've been $2.1 million during the quarter, which was as a result of NAV declines. And finally, our administrator and professional G&A and tax expenses totaled $2.2 million, which is consistent with prior quarter.

As Chris mentioned, we sold our two remaining CLO equity positions. This resulted in a loss of -- loss in our remaining cost basis of $1.5 million. There was no book value impact for the quarter as this resulted in a similar increase in unrealized appreciation.

The realized loss was partially offset by a realized gain on our fund investment in Gryphon Partners and we had a net change in unrealized appreciation of about $3.7 million during the quarter, which is largely driven by additional markdowns taken on WIS and Loadmaster as Chris previously discussed.

These were the primary contributors to the quarter-over-quarter decline in our net asset value from 11.82% to 11.71% or just under 1% and as Chris mentioned, our sale of Hostway yesterday resulted in a $1.7 million NAV increase in Q2 of $0.05 a share.

As of March 31, our leverage level was 0.82 times equity, which is slightly above our targeted range. This is primarily related to the timing of repayments and sales, first as repaid in April at par and our second lien investment in Hostway was sold this week.

We expect to continue to utilize proceeds from the repayments to pay down our revolver, fund new investment activity -- new investment opportunities including the Logan JV and/or repurchase stock should market conditions and liquidity warrant.

We did not purchase any stock in Q1 given our leverage levels in March and in the short window after the filing of our 10K ending March.

With that I'll turn the call over to the operator?.

[Operator instructions] Our first question is from the line of Kyle Joseph of Jefferies. Your line is open..

Good morning, guys. Thanks for taking my questions.

Just wanted to touch base on the yield expansion in the quarter, are you guys seeing any relief from rate increases or were those, what enables you guys to have a higher yield on both new investments and for the portfolio overall?.

Hey Kyle, this is Chris. I think from a competitive standpoint; the market continues to be competitive. I think if you look at the data set that we had two new investments, one was a high yielding firs lien piece of paper, I wouldn't try to interpolate that as a go-forward rate.

We're seeing first lien paper attractively priced and as low as 750, 800 to as high as L plus 10 to 11. So, I wouldn't draw any conclusion based on just the two new investments that we had. Obviously, we pick and choose our spots now.

We're going with our most high conviction assets given more fully deployed and these are the two that made the most sense if not next quarter the yields maybe slightly lower depending on that's where the signed the best adjusted value..

Hey Kyle, it's Sam. One thing I would like to say to that on what Chris said, Fairstone was one of the transactions we did and that high yielding first lien piece of paper, that's our financial services company. As we mentioned in our prepared remarks, Monty Cook is our financial services expert.

That company is in a relatively complex situation and that a lot of the assets are in securitizations and portfolios that are serviced and managed and where the assets are originated by Fairstone and so those cash flows are in excess collateral flow of two Fairstone as the manager and so understanding those complexities we think is a strategic advantage that we had because of Marty's experience in financial services.

Month is the Co-Head of Direct Lending and I have a lot of financial services experience background as well. So, we see that as a competitive advantage. So, we think that's a good transaction for us..

Let me expand on that for a second, JC Flowers is private equity sponsor on that. They're obviously a top-tier sponsor. This a very, very large facility.

We had a co-investor alongside as a partner for THL as well as JC Flowers, but again it was our continued effort to invest and through specialization that enable us to punch above our way and lead a transaction of this size with the sponsor of the quality of JC Flowers..

That's helpful, thanks.

And just wanted to get an update on your thoughts on the economy, we had a sluggish TDP number in the first quarter, but can you talk about just overall company performance maybe just in terms of revenue and EBITDA trends from the quarter?.

Yeah Kyle, I think it's been eight weeks since we had our last call. There isn’t really a lot of change from my remarks last time. We haven’t seen any dramatic growth in the underlying portfolio and we also haven’t seen any dramatic deterioration in the portfolio. So, I would say it's fairly steady..

I think Kyle, just I think one of the benchmarks to point folks to is our ratings. So, if you think that 70% of our loans are performing at or above expectations and only 30% are underperforming our expectations. So, the rating as well might give you some indication of overall performance as well without getting into specifics of revenue and EBITDA..

Okay. That makes sense and then last one just on the Logan dividend yield tick down in the quarter, what drove that and can you give us a sense for the long-term outlook on that yield..

Sure Kyle, this is Terry. We had several repayments in the fourth quarter that gave us a little more juice. I wouldn't suggest that 14.1% Q4 was indicative of our yield expectation going forward.

I think of this more with 85% of this being more syndicated paper and continued pressure on yields and refinancing activity, we could see some pressure on the yield. So, I would model this or I think about this as more of kind of 13.2%, 13.3% yields as kind of our go-forward as we think about the return profile here..

It's very helpful. Thanks a lot for answering my questions and congrats on a good quarter..

Thanks Kyle..

Thank you. Our next question is from Jonathan Bock of Wells Fargo Securities. Your line is open..

Good morning. Joe Mazzoli filling in for Jonathan Bock. Thank you for taking my questions this morning. The first relates to Logan and as you mentioned, Logan is delivering a nice return and there was an additional investment into the fund this quarter and now I think it makes up 9% of the portfolio.

So, it would be helpful if you could you remind us again what is the target size of your investment into the Logan JV and what are your thoughts on the ramp to this size?.

Sure. Joe this is Terry. I don't think we're a publicly -- we don't really have the view on a specific target in mind. We think about the growth of Logan per se. It's more driven by the portfolio of composition and mix of assets that comprise our borrowing base and overall portfolio. As you know to fund the growth, Logan is not a borrowing base asset.

So, we're mindful of its growth relative to what the rest of the portfolio looks like.

That being said, I think you'll continue to see us as we exit some of these equity positions and the likes of the CLO equity continue to redeploy those proceeds for things that aren’t otherwise in the borrowing base into Logan and other first lien positions directly. So, I can't really say where we're headed with that.

I would say it's directly up, but we don't have a target in mind..

Maybe I can add, this is Sam, maybe I can add a little bit to that. So, if you think about Logan, the way we think about it, is that Logan and our first lien assets together now make up 67% of the portfolio. Ultimately, we want to review just kind of anything that's outside of that. It's a very small percentage of the portfolio.

So, Logan and the first liens together should be over 90% of the portfolio at some point in the future. Hard to say how quickly we get there. Logan is also part of the 30% bucket. So, there is a natural limit to how big Logan can get. We'll continue to grow and obviously it's not going to hit 30..

This is Chris. Since the last comment on Logan from a ramp perspective, you're asking about ramp, just as a reminder, if you look at the overall platform of THL Credit, we have direct lending exposure obviously and we have a tradable credit business that manages roughly $8 million.

So, as we put more equity into the Logan joint venture, we're able to leverage the overall platform to source transactions.

So, it's really not an ability to source and ramp transactions, our ability to originate the transactions even on direct lending or through our liquid loan strategy is not the issue, it's just more of a function of us repositioning the portfolio, getting the equity base large enough to continue to expand it..

I totally understand that point and also understand the 30% bucket and some of the borrowing base limitations, but certainly a nice return from that investment.

Now on to the next question, we see that Washington inventory services was marked down by an additional $4.5 million in the quarter and this is a name that I think if I'm remembering correctly was marked down in each of the last four quarters.

Can you give us a sense of what's going on with the company? Obviously not a lot of downside from the current mark, I think less than $1 million of fair value, but I believe labor costs were an issue with the company and then if you could just provide some color on the slow decline of the fair value versus maybe a sharp markdown, just kind of the valuation methodology I think would be helpful for some folks?.

Joe, this is Chris. Obviously, we can't really discuss the individual performance metrics of the business. I'll just step back from a macro level and say as you work through a troubled credit, you're in a situation with various constituents in the capital structure.

Sometimes you can get to the table and cut a deal that makes sense and sometimes you can't. This has been something that I think we worked hard on to try to get a solution we thought made sense. As you can see in the existing mark, we're ahead as on how we think it's going to move going forward..

And Joe this is Terry, just to put a little more color on that, each quarter we got different information right that allows us to evaluate what direction or what possible outcomes are possible at any given point in time.

So, in a very fluid process has been evolving and we do the best we can with the information to get the mark where it should be relative to what we have and this is where we bottomed out at this stage of the game..

That makes sense and that's helpful. Thank you and the final question I think about 14% of the portfolio falls into equity as of 3/31. What are the prospects for equity rotation? Is most of that I'm assuming is probably noncontrolled holdings.

So maybe you have to wait for the control -- controlling equity holder to drive a transaction or is there -- do you see near-term exits as this could potentially increase the size of the interest-earning portfolio?.

This is Sam. Most of that is actually control positions and so that makes up the five portfolio companies that we now -- all have a controlled position in those companies. So, our plan is to build value there, continue to grow those businesses.

We are very, very active on a weekly basis with those companies and at some point, we will exit those transactions. I'll point out one example of that C&K we're actually in that one with another previous sub debt lender.

With then owners now for three years, but we know that on our books at a higher mark than our original cost because we've changed the management team there. We've made a lot of changes to the business. Sold off unprofitable divisions and at some point, we'll exit that credit.

That one is probably taking a little bit longer because we are in there with another equity owner. The other four, we're in more control of the more recent restructurings, but we're making a lot of progress on those credits. So, at some point we'll exit those transactions and redeploy that money into income producing personal loans..

And Joe this is Terry, just to clarify you may or may not have caught it in our prepared remarks that the 13% equity in a portfolio 5% of that is yielding in the form but primarily related to the C&K dividend that continues to be paid as we own this position..

And Joe, the only thing I would add if you link though and Sam highlighted this in the prepared remarks, when you think about some of the unsponsored businesses that we invested with historically and you have to go through some form of the restructuring, if you think about those businesses where you the entrepreneur that is a majority owner, he is not only the face of the organization internally, he is also the face of the organization externally, it's very difficult and it takes a lot of time to basically remove that individual out of that business and get it stabilize and then turned up into the right if you go from a profitability standpoint.

So, we've now successfully done that when we've needed to and we're the majority owner. We've controlled the Board and as Sam said, we've replaced the CEOs and the management team when needed. It does take time, obviously from our perspective, we're a dividend paying stock. We want to transition into dividend paying securities.

It just takes time for us to get those businesses stabilize and convert that equity, but you're right to highlight it because it’s something that we focus on a lot when we can make that transition, but we're not going to do it if we're leaving dollars on the table from a capital preservation standpoint..

Okay. That's it for me and thank you again for taking my questions..

Thanks Joe..

Thank you. [Operator instructions] Our next question is from Lee Cooperman of Omega Advisors. Your line is open..

Thank you. Three or four question I guess put a math there and you can handle it anywhere you want. It sounds to me like you fully deployed your capital.

So, do you need additional capital and how do you raise with the stock filling the discount to book value? Secondly, could you comment on your scale, are you relevant to the size that we're at? Third, what is a reasonable return on the shareholder's investment net of all expenses that one should be looking at given the way you intend to run the business and finally, you resize the dividend to your expectations, are you comfortable with the current dividend is sustainable, thank you for the help..

Thanks Lee, this is Chris you said in no particular order, so I guess from a scale perspective, I'll hit that one first. If you look at the BDC itself, the balance sheet of the BDC ranges anywhere between around $650 million to maybe $700 million and $750 million. We've disclosed publicly that we've raised private capital alongside the vehicle.

So, when you put both of those vehicles together and alongside with the exempt to release that we have from the SEC, we're absolutely meaningful in our ability to execute across the lower end of the middle market where we're focused, to think about as $10 million to $25 million in EBITDA is kind of a range I think the portfolio is right around $17 million or $18 million.

So, from a sizing perspective, from a scale perspective, we're absolutely very, very comfortable with our ability to execute and execute on the strategy. To deploy the comment, Terry or Sam can chime in, you're absolutely right. We are fully deployed. We don't see that as a negative.

We see that as a positive that we're sitting here and we're able to be very, very selective in new assets that we booked. You're right, we're not able to grow the BDC portfolios if the stock trades above par but from our perspective as we get these repayments, we're able to redeploy and be very, very selective at how we hit those assets.

When you're able to put the leverage off of that high-end of our range at 0.75 or 0.8, you have a good quarter like you did today when you generate $0.29 versus the $0.27 that we're paying out..

Lee on a quarterly basis, or an annual basis, I think that available capital from the BDCs just natural turnover in that $150 million to $175 million range to go alongside that private capital as well..

Thank you..

Lee this is Sam. For your last couple of questions were about where we think there is a reasonable return, is the dividend sustainable. So, the portfolio as we said is two thirds of it now is first lien assets and the Logan joint venture.

So as first lien assets tend to be 9% transactions that Logan is paying 13% yield, we think the dividend is sustainable at its present level, as we transition that last third of the portfolio, we will be investing that in first lien in Logan and so we think the yield of the portfolio at 10% or 11% will continue to maintain for foreseeable future and the dividend probably will be sustained..

Thank you very much. Good luck..

Thanks Lee..

Thank you. And that concludes our Q&A session for today. I would like to turn the call back over to Sam Tillinghast for any further remarks..

Thanks everybody for joining. We appreciate all the questions and everybody's interest and we'll talk to you next quarter. Thank you..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone have a great day..