Sabrina Rusnak-Carlson - General Counsel and Chief Compliance Officer Chris Flynn - Chief Executive Officer Jim Fellows - Chief Investment Officer, THL Credit Advisors Terry Olson - Chief Operating and Chief Financial Officer.

Kyle Joseph - Jefferies Leslie Vandegrift - Raymond James Ryan Lynch - KBW Christopher Testa - National Securities.

Good morning and welcome to THL Credit's Earnings Conference Call for its Second Fiscal Quarter Ended June 30, 2018. It is my pleasure to turn the call over to Ms. Sabrina Rusnak-Carlson, General Counsel and Chief Compliance Officer of THL Credit. Ms. Rusnak-Carlson, you may begin..

Thank you, Operator. Good morning and thank you for joining us. With me today are Chris Flynn, our Chief Executive Officer; Jim Fellows, our Advisors Chief Investment Officer; and Terry Olson, our Chief Operating 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 these 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-Q were released yesterday afternoon, copies of which can be found on our website along with the Q2 investor presentation that we may refer to during this call.

A webcast replay of this call will be available until August 16, 2018, starting approximately two hours after we conclude this morning. To access the replay, please visit our website at www.thlcreditbdc.com. With that, I'll turn the call over to Chris..

Good morning, thank you Sabrina. I hope everyone is having a good summer and thank you for joining us this morning for some color on our performance for the second quarter and an update on our progress we've made on the objectives laid out in early March focused on improving our stock price and narrowing the gap between the stock price and NAV.

At a high level we are very pleased with the earning power of the balance sheet as we continue to transition this portfolio. We earned $0.31 versus our dividend of $0.27. Terry will provide more color on our second quarter financial results in more detail shortly.

We continue to make progress this quarter on the plan of action we outlined in our March call. As for our target to reduce non income producing securities we remain confident in our ability to hit our target of 50% reduction by the end of the year and we have made some good progress on that front.

We continue to be proactive with our equity investments in the portfolio that we control leveraging internal resources and utilizing advisors to assist in driving performance. Copperweld and Tri- Starr are good examples of our ability to enhance value in these controlled investments.

As noted in our previous earnings call Copperweld was restructured in October 2016 and in October 2017 managerial changes were implemented. We have been very pleased with the performance of this new team. You will see this reflected in the mark up this quarter which contributed a positive $0.21 to NAV.

I would highlight that given Copperweld's strong performance we are now receiving current income on our preferred equity holdings. Tri- Starr continued to perform well from a gross margin and EBITDA liquidity standpoint.

As mentioned last quarter, when we restructured the balance sheet our mark in our equity investment in Tri- Starr reflected a 15% recovery on our cost basis in the initial subordinated loan.

This quarter reflects the mark at 51% estimated recovery on the loan, while it still represents a loss that shows a nice recovery from the initial standpoint when we took over the investment.

We continue to believe the improvements are attributable to the execution by the current team and the advisors put in place in connection with this restructuring. We expect Tri- Starr to progress through the sales process in the coming quarters.

The turnarounds we have had to date with these two investments require patience, resources and a new management team. This quarter, the 2% NAV decline was primarily attributed to three investments which include OEM, CNK and Alex brands. Jim and I will cover each of these investments.

We believe steps taken like those in Copperweld and Tri- Starr and other companies like OEM will continue to drive long-term value, enhancement and preservation.

With respect to OEM after implementing certain managerial changes in a thorough review of the business, it was determined that the incremental capital was required by us to execute a revitalization plan that provided sufficient resources to maintain inventory levels and fund research and development efforts.

As of all plans there is execution risk and this risk has resulted in the markdowns for this quarter, but we are confident with the plan despite the company's markdown and our view and our valuation for the quarter. CNK continues to perform but has been a tough sector with valuation multiples contracted and that has reflected in our mark.

From a cash flow perspective, the company has continued to pay us its current dividend income and while it may be tempting to continue to own the business and taking the current income we recognize this is not our core business and therefore look forward to utilization on this investment. The evaluation expectation is reflected in the current mark.

Jim Fellows, our CIO will cover the other names in more detail. Another goal of our increased portfolio diversification which continues to improve as our last four new investments we made in the BDC has all been less than $10 million positions.

As we've been able to leverage the overall size and scale of the platform to help manage diversification we're also able to exit or reduce three large outside positions attend with a 4.4% position in Q1 was a full pay off this quarter.

Alex Brands with a substantial prepayment in late July and now we hold less than $10 million in the BDC down from 24 million. We also reduce exposure on home partners with America comparison, proceeds from these new payments and reductions will be deployed and new investments including Logan to the Logan joint venture.

With respect to Logan we invested 11.2 million this quarter and is hit by year-end target of growing Logan to 15% of our portfolio. We expect to continue to invest in Logan for about the remainder of the year, Logan continues to perform very well generating a 14% ROE for Q2.

The portfolio continues to be highly diversified with approximately $300 million invested across the 124 borrowers, again we're leveraging the strength and size of the overall platform to drive returns for our shareholders with the Logan joint venture.

Lastly, we announced 10b5-1 one program where the advisor would buy us a 10 million of TCRD stock I'm pleased to announce that the advisor has achieved that goal and that the advisor will continue to evaluate some of those programs in the future. Now before I turn the call over to Jim to cover portfolio highlights.

I'd like to take a minute to talk about our dividend stock performance.

Since we announced our plan of action in the March earnings call the stock has performed generally in line with the BDC index, as it relates to the mass stability we are working efficiently and methodically to diversify portfolio exit outside position in home credit and redeploy capital from non-income producing equities.

We are making progress and I'm optimistic this progress will continue to accelerate and as the portfolio becomes more diversified we believe the stability of NAV will improve. As for the dividend we've been very upfront in our willingness to support the dividend with incentive fee waivers as we transition to the portfolio.

To that end I'm pleased to announce that we will agree to waive incentive fees for the first two quarters of 2019 as we finish this execution plan we detailed in the March earnings call.

If our execution is delayed we may consider future waivers but our goal is to set point is to reset the balance sheet, evaluate increased leverage and reflect an appropriate fee structure by this time with the aim of generating very attractive ROE to our shareholders. With that I'll turn the call over to Jim..

Thank you, Chris. Good morning everyone. I'd like to provide an update on a few initial portfolio companies.

First of all of Charming Charlie successfully exited bankruptcy in April recognizing that retail remains a very challenged industry, the company has a much leaner store base with a strong four wall EBITDA, a rationalized cost structure, improved trade terms and most importantly a new and talented management team operating with a much stronger balance sheet.

Currently, our loan is now recurring income, at a combined cash in fixed yield of 12.4%. As Chris mentioned earlier, Copperweld continues to perform well, the management team has improved operations, product development and expanded its sales team which has continued to drive profitability and liquidity.

For Q1 we began incurring 12% dividend on our $3.4 million deferred equity investments. In addition as of Q2 we are now receiving a dividend on our common equity position. For Alex brand we will repay FPAR on $15 million of our $24 million position subsequent to quarter end, the remaining $9 million position is held at 75% on the dollars.

Finally with respect to Aerosol the settlement of bankruptcy proceedings continued to be protracted and the resulting legal costs have resulted in a lower recovery of our remaining receivable. So those are the additional portfolio company updates. So now shifting to the market environment.

To state the obvious it is a very competitive market with tighter spread and more aggressive structure in covenants. We continue to maintain a strong credit discipline, focusing on first lien sponsor led transactions in industries where we have a favorable industry outlook.

Continuing to leverage our industry and credit origination efforts with sponsors has resulted in a very robust pipeline.

Additionally we have been able to raise additional direct lending capital away from the BDC which has increased our scale which is very beneficial to T credit as Chris has stated previously diversifying the BDC is key to a long-term success and having more scale allows us to do that more efficiently and effectively.

Finally I’d like end with some organizational updates at the advisor levels. We have promoted Eric Lee, who is based in our LA office to managing director, congratulations to Eric, much needed and deserved promotion. And then also year-to-date we have hired seven direct lending investment professionals.

So with that, I'll turn the call over to Terry to talk more on our portfolio and Q2 financial results..

Thanks Jim and good morning everyone. First a few portfolio highlights. Our $559 million portfolio was invested 66% in first lien senior secured debt, the 15% LOGAN JV, as a reminder the Logan JV is 92% invested in first lien assets.

The remaining 19% of the portfolio was held in second lien subordinated debt and other income-producing and equity holdings the portion of the assets or non-income producing equity category was 4.3% at the end of second quarter versus 6.1% at the end of Q1.

Apart from certain credits that Chris and Jim mentioned earlier overall the credit quality was stable this quarter with no new investments placed on nonaccrual. Total nonaccrual as a percentage of the portfolio cost declined quarter-over-quarter from 6.7% to 1.7% as Charming Charlie returned to accrual status and we sold our second lien position.

In specialty brands, only Tri- Starr and Loadmaster have certain loan tranches on nonaccrual at this point in time. At the end of the quarter 74% of the portfolio companies the companies in our portfolio on a fair value basis were either one or two credit score, which means that they're performing at or above our expectations.

22% rate of three meaning they are performing below our expectations for payments or current. As a reminder we don’t view three rating credits to be a risk of payment default but rather reflect recent performance trends which can ebb and flow periodically.

And in certain circumstances for these credits we have effectuated amendments which included additional financial support from sponsors. There were no investments for the four credit score only 2% or 4% of the portfolio of the five there only two with representing 4% of the portfolio with our five credit scores at the end of the quarter.

The weighted average yield on the debt and income-producing portfolio, including Logan, was 11.3% and the portfolio remains well positioned from an interest rate perspective, with 95% of the portfolio on floating rate loans. That continued to benefit us as we saw the three month LIBOR north of 2.3% for most of the quarter.

Now moving on to the financials as Chris mentioned, NII was $0.31 an increase from the $0.27 in Q1 and this is largely driven by an increase in prepayment premiums and additional dividends and accelerating amortization of upfront fees from certain exited investments.

And looking at some of the components of our 18.4 million of investment income this quarter a dividend income increases including an increase of 120,000 for C&K compared to Q1 and 240,000 for Copperweld. These were slightly offset by the impact of certain dividends from the Logan JV this quarter being classified to gains.

Prepayment premium this quarter totaled 465,000 in Q2 which were notably higher than Q1 and previous recent quarters. Our accelerated amortization levels were also elevated in Q2 as we benefitted from an income perspective on this quarter from the exit of Aten, John Gore, HPA and Fairstone.

I pointed out that our prepayment fee levels and any related accelerated amortization of unamortized fees has been relatively muted over the last several quarter well it's always difficult to predict Q2 levels were more consistent with historic levels than more recent ones.

On the expense side, total expenses for the quarter were $8.3 million compared with $7.9 million in Q1. Our credit facility fees reflect the full quarter of an increase in LIBOR. Other G&A and professional fees were elevated this quarter which is typical for Q2 with the refresh of our M2 as well as our proxy and annual meeting related activities.

These increases were offset by lower management fees given our level of assets and we have continued reduction in administrator expenses during the quarter as we continue to scale our direct lending platform.

Portfolio incurred realized losses of 25 million in the second quarter associated with the sale of specialty and the final debt restructuring of Charming Charlie bankruptcy proceedings, 23 million of these realized losses were already reflected in our NAV of unrealized and do not impact NAV for the quarter but the unrealized losses reversed in Q2.

Realized losses also included $1.4 million adjust in our receivable to our sales of Aerosol in Q1 this year which Jim highlighted earlier.

Form the leverage liquidity perspective we continue to remain largely invested and leverage remains suddenly below recent levels generally speaking we expect to manage these levels in the near term below 0.8x going forward as we continue to reposition the portfolio and further diversify.

With that I'll turn the call back over to the operator to begin the Q&A..

[Operator Instructions] Our first question comes from Kyle Joseph with Jefferies. Your line is now open.

I hopped on a little bit late so apologies if you guys covered this but just wanted to get your outlook on target leverage given overall asset coverage has gone down for the industry?.

Are you implying the change in legislation?.

Correct..

Yes, I think from our perspective as we said historically our view is we need to further diversify the balance sheet, exit some of the owned positions before we consider adding a incremental leverage to our balance sheet. So as we sit here today we don’t see any change.

With that said going forward I think we highlighted that the increased leverage plays to the strength of the overall platform. We pointed at Logan as an example of that Logan is a very, very strong performing asset to the BDC. It sources opportunities and assets from across the platform and I think this quarter generated a little over 40% ROE.

So I’m not saying -- just not now it's not never, maybe some time in the future most likely see if we are able to stabilize the equity base..

Got it. And then given your new strategies you guys outlined in the last conference call, combining that with rising interest rates and what not I just kind of want to get a sense for your outlook for the yield on the portfolio going forward..

Kyle, this is Chris. from a pricing standpoint as we look to continue to transition into the first lien assets there has been some compression in the threat over LIBOR but the increase in LIBOR has resulted in basically flat overall all in yield. So our expectations are for substantial changes..

Our next question comes from with Lee Cooperman with Omega Advisors. Your line is now open. Moving on to the next question in queue. It looks like our next question comes from Leslie Vandegrift with Raymond James. Your line is now open..

Thank you, good morning. Just a quick question on your originations first in the quarter, the ones you highlighted in the press release two of those three excluding the investment in the JV but two of those three were actually follow on investments to existing portfolio companies.

I’m just curious what your outlook is on continuing follow ons given that you are talking about diversifying the portfolio..

Thanks Leslie, it's a good question. If you look at where our leverage was coming out of last quarter our focus was on reducing some of our cost and traded positions, reducing at leverage increasing incremental liquidity on the balance sheet, which we believe we have done.

Our expectation into Q3 and Q4 of 2018 was the BDC you know an increase in new assets being added to the balance sheet. As it relates to the existing portfolio we always maintained incremental capital needed to support businesses when and if needed..

Okay, so that was more of the quarterly issue rather or just this is right now meeting the cash rather than liking the ones on the balance sheet more than the pipeline..

Yes..

Okay. And then on Logan, another investment there. That’s been a good performing JV for you guys 14% ROE in the quarter like you said.

Has there been any update to what you see as the optimal size in the near term, until you decide on balance sheet leverage later but before then what size are you looking out for that?.

We have stated it in the March call as with our goal is to -- our goal is to reach 15% by the end of the year we have obviously achieved that early. We haven’t set a new target by the end of the year but I would anticipate it growing, I would not be surprised if it was in the 17% to 20% range by the end of the year..

Okay. And then I'm just writing that down on Tri-Starr you talked about looking for maybe a repayment exit some of sort of strategy there in the short-term as you've seen a bit of improvement from it what does that process look like right now. .

We don’t want to talk too specifically on any of the owned portfolio companies and as we've said this historically as you look at the over writing performance of the businesses that we own once they start to stabilize and turned up we're not long-term asset holders of any of these assets that include Tri-Starr so as we've said just trying to keep it more generic, our expectation and goal is to liquidate at least half of these positions by the end of the year, but we wouldn’t provide any color specifically on any name..

Okay. And on the 10b5-1 obviously the Advisor purchased a lot in the quarter and the BDC didn’t but my question is, is the plan there to use the advisor repurchase or is the advisor purchasing shares rather than that BDC having another repurchase program or is it there going to be a duolease there in the future. .

We have made the announcement on the 10b5-1 program we thought it was important to have more flexibility where we were able to buy in size overtime and it was best to do that at the advisor level just given the leverage levels of what's good in the BDC.

Long-term our objective is to actually grow the equity base of the business and not shrink it so we will opportunistically look to buy back stock at a discount retire but long-term our overall objective is to stabilize the balance sheet and hopefully effectively grow. We need to a bigger balance sheet not a small or long-term. .

Okay, and thank you.

And then just last question from modeling wise what was the spillover income what lead has had at the end of the quarter?.

Spillover, $0.31..

Our next question comes from Ryan Lynch. Your line is now open..

Good morning guys, I wanted to dive into your additional it said these two waivers that you guys added this quarter I just want to understand I'm a little better -- I definitely appreciate the additional incentive to various and that’s a very shareholder friendly action to take it’s very good for shareholders but I just want to understand and better are you waiting to see through June 30, 2019 while you complete I guess the portfolio of repositioning goals and then at that point post then you guys hope to have the portfolio repositioned and you hope to earn the dividend without any sort of fee waivers going forward or is it more we're just going to wait maybe this incentive fees while we reposition the portfolio at that point we will come up to see where we are and then potentially look at the dividend at that point?.

Thanks Ryan for the question. I think it's a combination right we're trying to execute our plan and project that into the future how that performance is going to be, our open goal is to align our interest with that as a shareholder and as we are executing we've highlighted that we will continue to waive those incentive fees.

As we look forward it's difficult for us to come back with a high degree of certainty on exactly what the portfolio will look like, what decision we're going to make as it relates to leverage and what decision if any we would make as it relates to c-constructs associated with set leverage increase.

So we will continue to work on that and come back as we get further down the road and have more conviction as it relates to outlining that in future calls.

So right now as we step back we're hopefully reestablishing credibility in the market as it relates to our ability to execute on a plan and we don’t want to come back out and get too far ahead of ourselves with putting something down on paper that we can't execute behind..

Okay, that's fair enough. And then I believe Jim said that you guys have hired seven direct lending professionals year-to-date.

I was wondering, does that just replace may be some exiting direct lending professionals that exited TCRD or you guys actually expanding the direct lending team? And the reason I ask is just because you guys haven’t paid yourselves an incentive fee since mid 2017 so I’m just wondering how are you able to make these new additional hires and expand and if that is the case because the broader platform is growing or just any additional color around that would be very helpful..

No thanks. We appreciate the question. As a direct lending platform the overall platform continues to grow and continues to perform. This is a core sentiment to our focus here on the BDC.

The BDC is one piece of a very large platform and as the platform continues to grow we continue to invest in the team and the said resources, and all of that equates to the benefit of the shareholders. The exact number of people that we added are all new people.

The direct lending side of the business area is continue to grow both and private funds and other vehicles and estimates.

So all of that drives the -- if you think about the business we are trying to attract capital have a large enough balance sheet we can maintain diversification and better position ourselves to continue to lead deals and maintain that discipline as it relates to diversification..

And our last question comes from Christopher Testa with National Securities. Your line is now open..

Just curious what do you guys see as the most challenging control equity positions for you to exit and in sort of your worst-case scenario what do you foresee the timeline being for the exit of these positions?.

That’s a tough question but I appreciate and I understand why you're asking.

I guess probably easiest way without getting into specifics on each individual name if you look at the overriding change in valuation over time that’s probably the best indication where we think our most liquid option is, if that makes sense so if you think about the lifecycle the credit that’s underperformed its value is decreasing, we need to step in, stabilize it.

We have highlighted some of the stuff we've done with Copperweld and Tri-Starr where we have made management changes, stabilized the businesses now you can imply given the mark ups that we have taken in both those credits the EBITDA performance is up and that’s usually a good indication of what it makes sense.

We had something to do in the opposite that probably made its profit and little more long dated..

Got it, that's fair, but I mean can you give us an idea on obviously you guys are working a base case scenario and a more optimistic estimate and some pretty pessimistic scenarios.

So in the most pessimistic case I guess what I’m getting at is how long do you think these things end up staying on balance sheet without you being able to successfully recycle where pair of the positions at least..

I think as I said in the March call historically we were probably slow to recognize the opportunity cost of holding these not income producing securities. We are not going to repeat that again. So I guess the best thing I can highlight is we're moving as fast as possible to move out of these positions.

Obviously net incremental investments in OEM and a few others so our hope is that these investments pay off and we are able to have those businesses stabilize and put them in a position where we can exit.

As we highlighted if you look through the incentive fee waiver through 2019 we're trying to put out a strong indication when you think we can execute. .

Okay, that's fair, absolutely.

And just philosophically speaking on that how is this I guess if in any way changed how you think about taking control positions in companies when they get in trouble and putting more capital into these and trying it to around versus just kind of cutting and taking your losses and running, just curious if in the past couple of years have kind of changed your philosophy at THL about this..

It's our ability it's a great question it's something that we evaluate everyday as we look at businesses, obviously our first our ultimate goal would be to avoid trouble to begin with but to the extent you are faced with it we estimate the evaluation whether or not if we thought we put incremental capital in this business if that would consistently drive value and earn a stronger return versus to use your words cut your losses and move forward with that situations and portfolio companies where we've done that we've just exited because we don’t think it makes sense to drive incremental dollars into the business to force a turnaround.

The business that we own here today that we are backing we obviously have confidence in the plan that we are putting forward in these companies and as we sit here today we are optimistic that, the money that we spent will be money well spent and drive value. .

Got it..

And as we highlighted if you think through it again and that goal to align interest not only with the incentive fee waivers we've also at the mandatory level at the departmental level we bought 10 million of stock in the last 90 days so we're buying our own investments pieces if you will right alongside the shareholders. .

That's definitely appreciated and appreciate the detail on my questions as well. How do you guys see the addressable opportunities set for Logan going forward I mean I know the larger borrowers obviously we had worse terms and more cap light and tighter pricing but that's backed up at least a little bit on the broadly syndicated market.

Just where do you guys see this shaking out for the opportunities that you can put into Logan or through the remainder of 2018. .

I think it's one of the strengths of the overall platform the we manage it a little over $15 billion across a broad mandate and that's the beauty of Logan is our ability to toggle between both strategies and where we see the most value at some point in time it's on the direct lending side and other points in time it's a broader market backs up it's on the broader market but the key from my perspective is we make these decisions daily as we reposition that portfolio is that an access to all of the opportunities that come in and build that out but we want to maintain high diversification across the platform we will toggle back and forth between direct and when I say syndicated or likely syndicated based on where we see the most value.

Difficult to predict what that's going to look like in the future what that mix will be but I can tell you that we actively trade and moved and repositioned the portfolio as we see changes which again is one of the reasons why I think the Logan joint venture since we put it in place has averaged 13% to 14% ROE it's been a very-very lucrative piece of business for the shareholders and I think I guess that plays to the strength of the overriding platform we will continue to do that through 2018 and beyond.

.

Ladies and gentlemen, this does concludes today's Q&A session. I would now like to turn the call back over to Chris Flynn, for any closing remarks..

I want to thank everyone for joining the call today. Our goal on today's call as it has been since early March is to be clear on what the foundation is and what we believe is the right plan to improve the performance of our stock and to update you on that progress.

So very early in our plan we continue to execute on the following, improving diversifications, going forward with our existing portfolio when possible, monetize noncash, generating equity investments will be accretive to our earnings power, grow Logan to offset yield contraction associated with higher quality of first lien investments and support the dividend with the incentive fee waiver through 2018 and the first half of 2019.

I want to reiterate again the BDC remains the top priority of our $15 billion plus platform and we believe that this plan of action will result in improved stock performance. Thank you we look forward to updating on our market progress next quarter..

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