Sabrina Rusnak-Carlson - General Counsel and Chief Compliance Officer Chris Flynn - CEO Jim Fellows - Chief Investment Officer, THL Credit Advisors Terry Olson - COO and CFO.

Leon Cooperman - Omega Advisors Leslie Vandegrift - Raymond James.

Good morning and welcome to THL Credit's earnings conference call for its third fiscal quarter ending September 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 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, and 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 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 Q3 investor presentation that we may refer to during this call.

A webcast replay of this call will be available until November 15, 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..

Thanks, Sabrina, and good morning, everyone. I'd like to begin today's call by summarizing our financial results for the third quarter and will provide an update on our strategic plan. NII for the third quarter was $0.26 a share relative to our dividend of $0.27 a share.

NAV per share was $10.10 as of September 30, down slightly from $10.23 in the prior quarter. The slight decline in NII versus the dividend was mostly attributed to portfolio contraction. We had a handful of repayments at the beginning of the quarter that had not yet been put all the capital back to work as of 09/30.

The modest NAV decline was related to write-downs in Charming Charlie and LAI, which Jim will cover more detail later on. Moving to our strategic plan, on our March call, I articulated the specific steps we are taking to create a more resilient portfolio and stable earnings that we believe will benefit and drive shareholder value.

First, I said on previous calls that we will focus on reducing non-core assets and exiting or monetizing up to 50% of our non-cash generating equity investments. As disclosed in our subsequent events and our 10-Q, we achieved a realization on a non-core asset, control investment and Tri-Starr in October.

With this most recent exit, we have nearly achieved our objective and reduced non-cash generating equity investments from $41 million at December 31, 2017 to $22 million or by 44%. This $19 million reduction reflects realizations or investments moving into income-producing status.

Consistent with our strategy, we intend to redeploy proceeds from Tri-Starr's equity and lower yielding term loan into the Logan joint venture and senior secured term loans which will be accretive to the dividend. As a reminder, this exit also further thus on our goal of reducing our past investments and unsponsored deals.

Tri-Starr was an unsponsored [ph] mezz deal and we just took the restriction in 2016. We replaced the management team, hired an advisor, stabilized and grew EBITDA and positioned the company for sale. The cash proceeds and escrow dollar proceeds were in line with the mark of our portfolio position as of September 30.

We consider Tri-Starr to be a good example of how we want to execute our asset control equity for investments going forward. We continue to make progress on our remaining control equity investments that Jim will cover in more detail.

Second, I discussed the objective of redeploying proceeds from non-core assets and control equity investments like Tri-Starr into our core assets consisted of Logan and first lien loans. The target redeployment of the assets in the Logan joint venture was 15% has already been achieved.

As of September 30, Logan represents 16% of our portfolio and we will target additional growth in Q4 with a longer term target of approximately 20%. Logan continues to perform well, generating over a 13% return on equity for Q3.

The Logan portfolio continues to be highly diversified, with approximately $330 million invested across 130 borrowers and benefits from the strength and size of the broader THL Credit platform to drive shareholder value. The third key objective of our strategic plan was to increase portfolio diversification by targeting hold sizes of less than 2.5%.

We continue to make good progress here as well. The BDC has closed two new investments in Q3 and two more post quarter end, all of which were less than $10 million, well below the 2.5% target. The average hold size of these new investments closed year-to-date is $6.5 million or 1.2% of the portfolio as of September 30.

Given the growth of our private capital business, we're still able to lead transactions and maintain a diversification given our ability to allocate exposure across multiple vehicles across our platform.

It is worth noting that our incentive release application was recently modified this quarter to include co-investments with our new middle market CLO business which will further expand our wallet on direct lending deals.

We also continue to proactively reduce some of our portfolio's larger positions during the quarter with a partial prepayment of Alex Brands. Alex has over a 4% position as of June and now represents less than 1%, 1.6% position of the portfolio. Tri-Starr, which came off the books in October was also greater than 2.5%.

Lastly, we believe we have taken steps to better align ourselves with our shareholders, while we execute our plan. Back in March, we announced that our advisor would buy up to $10 million of TCRD stock through the 10b5-1 program. Advisor achieved that goal in Q3.

We would also like to announce that the advisor intends to buy up to another $10 million of TCR stock under prospective new 10b5-1 trading plan. We believe that another meaningful investment by the BDC's advisor is a strong signal to the markets and shows our commitment to the BDC. We have also agreed to waive our incentive fees for all of 2018.

And last quarter we announced that we would continue to waive our incentive fees through Q2 of 2019 as we finish executing our plan. I'm proud of the progress we've made and showed on executing our plan thus far.

While we have already achieved many of our objectives in 2018, we continue to be proactive as it relates to further diversifying our balance sheet; our existing remaining control equity positions and redeploying those proceeds into the Logan joint venture and senior secured assets which we hope will be substantially complete by June of 2019.

Our goal at such point is to re-evaluate our dividend along with increased leverage, the appropriate deconstructs with the aim of generating an attractive and sustainable ROE to our shareholders. With that, I'll turn the call over to Jim to provide a further update on some of our portfolio companies..

Thanks Chris. First let me address the Charming Charlie and LAI. As you may recall, Charming Charlie successfully exited bankruptcy in April.

The company now has a 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 stronger balance sheet.

Recognizing the positive impacts of this restructuring, the company does faced potential uncertainty as it relates to recent tariff activity. Our mark as of 09/30 represents the potential risk as a result of these tariffs. The fourth quarter obviously will be very important one for Charming Charlie.

And early indications, although limited, looks favorable. Moving on to LAI, which was marked down this quarter, LAI is a provider of comprehensive engineering manufacturing and quality control solutions for critical components assemblies found in the variety of end markets.

Due to recent project delays, management has revised its projected EBITDA downward for the remaining part of 2018. While we expect performance to improve in 2019 once the projects go online, our 09/30 mark reflects the near-term pressure on earnings and liquidity.

Copperweld continues to perform well which is reflected in the additional mark-up this quarter. As a reminder, Copperweld have restructured in 2016. The company's management team has executed and grown EBITDA nicely and has now positioned the company for a sale.

We began accruing a 12% dividend on our $3.4 million preferred investment and now receive a dividend on our common equity position which together are accretive to earnings per share by approximately $0.04 per year. Finally, an update on Loadmaster.

While the investment continues to be stressed as evidenced by our Q3 mark, the company is currently pursuing a new strategic opportunity which is potentially very accretive to value. We've elected to free-up additional capital that is required to pursue this opportunity for Loadmaster.

Now shifting to the market environment, which continues to be competitive with tighter spreads and more aggressive structure and covenants. We continue to maintain a strong credit discipline; first lien sponsored led transactions in industries where we have a favorable outlook.

Continuing to lever our industry and credit origination efforts with sponsors has resulted in a robust pipeline. We closed two new investments in Q3 and two more new investments subsequent to quarter end, all first lien and sponsored companies.

I would also point out that the increased deal flow in the second half of the year is a result of the organizational enhancements we made at the beginning of this year. As previously highlighted on our March call, the support natural growth and evolution of our business, we centralized the underwriting and portfolio functions in our Chicago office.

This transition is now substantially complete and has resulted in two positive outcomes for our business. First, this freed up our originators to generate more deal flow. And second, it has improved our consistency and efficiency in our underwriting process in general.

I think a large part of that is due to the fact that there is more communication and interaction with our credible credit investment professionals who are also located in Chicago. With that, I'll turn the call over to Terry..

Thanks Jim, and good morning, everyone. First a few portfolio highlights. The portfolio of $533 million was invested 64% first lien senior secured debt, 16% in the Logan JV. As a reminder, the Logan JV is 95% invested in first lien assets. The remaining 20% of the portfolio was held in second lien sub-debt and other income producing and equity holdings.

Apart from the certain credits that Jim mentioned earlier, overall our credit quality was stable this quarter with no new companies placed on non-accruals.

Total non-accruals as a percent of the portfolio, our cost increased slightly quarter-over-quarter from 1.7% to 2.7% as Loadmaster's revolver was moved to non-accrual as Jim mentioned preserving the cash. We also reversed the Q2 income that was re-accrued on that loan and on the revolver in Q3.

At the end of the quarter, 75% of the companies in the portfolio on a fair value basis were rated either 1 or 2 credit scores which means they are performing at or above our expectations, 21% were rated 3 that performed below our expectations the payments accounts.

As a reminder, we don't view 3 rated [indiscernible] to be at risk of payment default, but rather reflect recent performance trends which ebb and flow periodically. Certain circumstances for these credits were effectuated amendments which have also included additional financial support from sponsors.

There were no investments for the 4 credit score and only 2% or 4% of the portfolio with a 5 credit score at the end of the Q3, one of which was Tri-Starr which was realized post quarter-end. Weighted average yield on the debt and income producing portfolio including Logan was 11.6%.

The portfolio remains well positioned from an interest rate perspective with 96% of the portfolio on floating rate loans as of September 30 that continues to benefit us as LIBOR continues to rise. Moving on to the financials, as Chris mentioned, NII for the quarter of $0.26 relative to our dividend of $0.27.

This is down from $0.31 of NII in Q2 and that was driven largely by a smaller portfolio which the proceeds from early repayments this quarter were not fully invested as well as the elevated level of prepayment premiums that accelerated amortization of upfront fees in Q2 which was a bit outsized.

Looking at some of the components of our $16.1 million of investment income this quarter, our interest income decreased from $14.8 million in Q2 to $12.2 million in Q3 due to the portfolio contraction that I just mentioned.

Our dividend income increased from $2.8 million to $3.3 million, primarily from a higher dividend from the growth of Logan this quarter. And other income in Q3 was also bit lower than Q2 due to lower amendment fees this quarter. On the expense side, total expenses for the quarter were $7.5 million compared to $8.3 million in Q2.

The decrease quarter-over-quarter was primarily due to lower borrowing cost as well as lower other G&A and professional fees which were elevated in Q2 due to proxy and annual meeting related activities. Portfolio also incurred a small realized loss of $286,000 in Q3, primarily from our escrow receivable related to our sale of Aero sales in Q1.

From a leverage and liquidity perspective, leverage levels remained lower than recent levels at 0.68 times at September 30 proceeds from the full realization of Dodge, our benefits in [ph] gold and the partial repayment in Alex were used to pay down the revolver, leaving us with excess capacity and capital to invest in core assets moving forward.

We've made several investments post quarter-end increasing this leverage. And we continue to target a range of 0.6 times to 0.8 times and we expect to operate closer to 0.75 times as we further the repositioning of the portfolio.

As we continue to evaluate ways to reduce our cost to capital, extend and ladder our maturities, I'd also like to highlight that we closed on a $51.6 million public debt offering in early October of the new notes priced at 6.125% that are due in 2023 and are not callable for three years.

The proceeds from the offering were used to redeem our 6.75% 2021 notes and to repay some of our revolver. This redemption occurred on November 5. As a result of the redemption, we will recognize approximately $900,000 of one-time cost related to the accelerated amortization of deferred financing cost in Q4 or above $0.03 per share.

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

Thank you. [Operator Instructions] Our first question comes from Lee Cooperman from Omega Advisors. Your line is open..

Thank you very much.

What would the $0.26 of net investment income be if you accrued your normal fee which you've been very gracious and foregoing?.

It's around $0.21 or $0.22, Lee..

Excuse me?.

About $0.21 or $0.22 if we adjust the full fee under our existing fee schedule..

Which brings me to the second question, given the change in the environment - look, let me first complement you guys, you guys have gone anyway try to support the entity as much as you can.

But my concern or question is whether the environment has sufficiently changed that the rational for the business has changed or is this roughly about a 3 percentage point quest of running the business? And if you're investing at 9% and 10%, obviously you will get some amount of leverage into the system, but you're going to return 7% or 8% to the investor that wasn't envisioned initially and we continue to have this erosion in book.

Tell me what you're going to look like a year from today if your plan is executed as you expect and hope kind of your exploration goal?.

Yeah. Thanks Lee. I appreciate the question and the comment. We are working hard to continue to execute on what we think is a path forward.

And again, as we've said before and I'm not trying to dodge the question, I think as we sit back and work to execute here, there's still a few more questions we need to have answered different ways and come back with a strong degree of conviction and do the math around the question you're asking us to do.

I think we've signaled to the market with our intention to continue to waive the incentive fee through Q2 of 2019 that between now and then we should be able to come back and do that. I think the rough math that you're doing makes sense.

With that said, our ability to increase our leverage, adjust our fee construct is to your point the market has changed to what we can have the right balance between what makes sense for us to run the fund with an ROE that makes sense for our shareholder.

We're still looking and thinking if we can get that done and we expect and hope to have that question-and-answer within the next six months..

Thank you.

Based on whatever you guys have done to-date, assuming it be very rational, if we conclude that the vehicle doesn't make a lot of sense, you'll take the logical steps in terms of returning money by the shareholders?.

Lee, we've locked $10 million in stock at the beginning of the year and we did the math in another program continue to buy, I think that's the strongest signal that we've got alignment with all shareholders on what we wanted to do to drive value..

Right. A fair statement. Thank you..

Thanks Lee..

Our next question comes from Leslie Vandegrift from Raymond James. Your line is open..

Good morning. Thank you for taking my questions. You mentioned the co-investment release with the other THL CLOs now that you know have the ability too.

Is that the ability to co-invest in the CLOs or ability to co-invest in the same loans that the CLOs are doing?.

It's the ability to co-invest in the same loan. So, if you think about our platform, we continue to grow private capital over and above the BDC. As an example, I think over the last 12 months we've probably booked roughly $400 million of exposure. That gets booked between the BDC, our private funds and now our middle market CLOs.

Our goal as you can see one of the mistakes that we made historically and the BDC was running too concentrated with portfolio. So, it's my job or senior management team's job to expand the number of wallets enable us execute our plan, but also maintain the needed diversification. The exempted release enables us to execute that that much easier..

And you talked about the strategy and what kind of launch you're moving towards in routine in the portfolio and to over the next few quarters. Do those CLO loans match that or are they even higher up against the structure, maybe some unit tranche.

What's the typical profile of those loans that are going into the CLOs?.

Yeah. If you look at our CLO portfolio and our middle market CLO, the overlap on our middle market CLO book and our BDC book is probably only about a third. You're right, a traditional CLO portfolio was higher that's a higher quality, lower yielding senior secured assets.

We have some in the direct lending space that toggle between the two, but it's around a 100% correlated..

Okay. Thank you. And you mentioned a dividend from the common stock of Copperweld in the quarter.

Is that something one-time or expect to repeat, and if so, kind of at that asset level?.

Sure. Leslie, this is Terry. Thanks for the question. We began the dividend last quarter about $240,000 per quarter, so $1 million over the course of the year. We would expect it to continue so long as we continue to hold the investment in the portfolio..

Okay, perfect. And on the Loadmaster update, you said some of the second quarter income was reversed. How much….

Yeah. We had a receivable booked in June 30 of about a $115,000 related to Q2 interest. And we - again when we put the loan on non-accrual in Q3, we reversed that receivable, didn't book income in Q3. So, the net impact was about $225,000 to $235,000 impact Q3 on NII..

And Leslie, this is Chris. The only thing I'd add on that I know this might seem counterintuitive given that we've put the investment on non-accrual and took a markdown. There actually is good opportunity going forward for Loadmaster. The management team has done an excellent job in positioning the business for some future business.

And from our perspective, as a debtholder and the equityholder here in this restructured balance sheet, the business needs capital. And it made sense for us to provide long-term value to free-up that capital and not take current income.

So, it made - like I said, it might seem counterintuitive, but we don't feel it actually reflects our point of view long term on where Loadmaster is going. It's - when a business needs capital, usually that's a good thing because they've got some stuff coming out in their horizon that could be accretive..

Thank you for that color on that. On - you've talked about the sponsored deals and that's part of the new strategy to get into those.

Have you been working with kind of different sponsors each deal? Do you have maybe a few sponsors that you'll work really well with, so you've done them? Just kind of looking for the concentration there?.

Yeah. It's a pretty diversified group. I think we've closed transactions over the last 10 years with 76 different sponsors going over $2 billion to $2.5 billion of transactions across the platform.

I think as with every direct lender, there is a handful of sponsors that we have deeper relationships with, but that was until we have any concentration with any one sponsor..

Perfect. Thank you. And my last question.

You were talking about in the prepared remarks evaluating the dividend as like you and the board do annually as every other BDC, but do you reevaluate it at this point or in the normal course have always evaluated it versus that one?.

Hey Leslie, you broke up there and it's an important question.

Do you mind repeating part of it please?.

Of course. Sorry. My headset probably is dying on me here in the middle of earnings of course. On the dividend level, you talked about reevaluating the dividend.

Is that in the normal course of business as you and other BDCs do annually or in the sense of your outlook going forward you need to reevaluate the dividend?.

I think it's a fair question. I don't know if everybody has their BDC from our perspective. We have a question about our dividend and a discussion internally with the board every quarter. So, I wouldn't believe that this is anything new in a normal course of how we evaluate the business, evaluate the balance sheet.

I think our commentary here as it relates to our dividend vis-à-vis the incentive fee waivers what we've highlighted given the fact that we've agreed to continue to waive the incentive fee as we execute our business plans for June.

That it - come June, we feel like we should be in a position to see where the balance sheet is so we can make a lot of decisions as it relates to what the asset mix should be, how stable our equity base should be, what we should do with the potential for incremental leverage.

So, there is a lot of decisions that need to be made once we get our plan executed. And our dividend and our fee construct would be both on the table..

Okay. Thank you. And just last portfolio question. Mortex Fiber maturity was December 2018. So, coming up here subordinated loan and it was marked down last quarter and this quarter again, some remarks.

Is there any outlook there for a repay in the quarter?.

Mortex, I think we believe Mortex was a slight mark-up this quarter, there wasn't amendment. So, let's say that they extended that maturity date possibly. We can chat offline if need to something, are you looking at the right at July on that front..

Got it. Yes. And last quarter was at December 2018, I apologize..

And again not to get into many specifics, this is a slot for that transaction and the response have been very, very supportive of the business as they work further on transition.

We look at that financial support from a sponsor, but we have to take into consideration the performance of the business which is why we might see some variability and mark from quarter-to-quarter..

Okay. Thank you for answering my questions this morning..

Okay.

Operator, any other questions?.

I'm showing no further questions at this time. I would now like to turn the call back over to Chris Flynn for closing remarks..

I want to thank you everyone for joining the call today. Our goal in today's call as it has been since mark would be to provide a clear path and foundation and what we believe is the right plan to improve performance of our stock and to provide you an update, to reiterate what our plan is.

We want to monetize our non-cash generating equity investments which will be accretive to our earnings power and grow Logan to offset the contraction associated with higher quality first lien investments, improve diversification going forward with our existing portfolio when possible, to continue to take steps to align ourselves and our shareholders, while we execute our plan via incentive fee waivers under the 10b5-1 share repurchase program at our advisor.

I want to reiterate that the BDC remains our priority for $16 billion plus platform. We believe this plan of action will result in improved performance of our stock. Thank you. We look forward to updating you on our progress the next quarter..

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may disconnect and have a wonderful day..