Good morning, and welcome to the THL Credit Inc. Earnings Conference Call for its First Fiscal Quarter ended March 31, 2020. It is my pleasure to turn the call over to Sabrina Rusnak-Carlson of THL Credit Inc. 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 Chief Investment Officer; and Terry Olson, our Chief Operating and Chief Financial Officer.

Before we begin, please note 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 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.

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 earnings presentation that we may refer to during this call.

A webcast replay of this call will be available until May 18, 2020, 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. First, let me say we hope you and your families are safe and healthy during these challenging and unprecedented times. I'm worth -- I'm sorry, on April 20, we issued a letter to stockholders providing a business update, including the recent $30 million stock issuance.

Since then, we have held a proxy for our special meeting on May 28. On today's call, we'll expand on some of these topics discussed in the letter in our proxy. First, we'll provide an update on our response to COVID-19, some high level financial results for the quarter, and then recent business updates.

Jim will provide some additional color on the market and our managing the portfolio. And Terry will discuss our financial results and portfolio in more detail. Our first priority during this pandemic has been the health and safety of our people.

I could not be more proud by the way, our team seamlessly transitioned to working remotely beginning back in mid-March. Our robust technology infrastructure has made it possible for 100% of our firm to work productively from home and our business has been able to operate with minimal disruption.

The team continues to effectively manage all aspects of our business, including TCRD, and we are already benefiting from the scale and resources of the larger First Eagle asset management platform.

While there is no certainty in how long current conditions will persist, on what shape and rebound it will take, we are confident in the experience and capabilities of our team and the support of our infrastructure to continue to manage the approximately $23 billion in credit assets we have under management.

The breadth and scale of our platform but First Eagle positions us to steer beyond these challenging times and continue to support our investors. Moving on to discussions of the highlights for the first quarter.

NAV for the quarter declined to $5.22 per share, while this decline is significant, approximately half of this is related to our Logan joint venture, which value is driven by loan prices in the broadly syndicated market. As a reminder, we are running two distinct portfolios in TCRD. One, a direct lending portfolio held directly on the balance sheet.

And two, a highly diversified portfolio primarily broadly syndicated senior secured loans held off balance sheet and the Logan joint venture.

The Logan joint venture had total assets of $330 million with loans to over $128 million unique issuers as of March 31 2020, and represents the single largest investment on our balance sheet, where their equity valued at $46 million as of March 31, 2020.

The broadly syndicated market experienced unprecedented volatility since early March, but as rebounded quite meaningfully in recent weeks, as Jim will discuss shortly. This reflected somewhat in our NAV increase of $5.34 per share as of April 13 -- I'm sorry, as of April 15. It was recently reported in connection with a $30 million equity infusion.

We've been actively managing this portfolio and have opportunistically traded out of select names to reduce leverage. We remain in compliance with a Logan joint venture credit facility do not anticipate any restrictions as it relates to our ability to continue to pay dividends on TCRD equity position and the Logan joint venture.

The remaining NAV redemptions relate primarily to assets held on our balance sheet and increased credit risk associated with COVID-19. Unrelated to COVID-19, OEM was our largest right now for the quarter at $0.30 per share and our holdings are put on non-accrual status.

We also took a $0.14 write-down on Allied Wireline to put that loan on non-accrual ahead of the restructuring of the credit which has been significantly impacted by the drop in oil prices. We're optimistic for the longer term prospects of the Allied business. I'd like to provide some additional color on OEM.

OEM continues to feel pressure from customer delays in Q1 that impacted liquidity. The company has responded with prudent costs, cutting initiatives and remains active in assessing strategic alternatives to monetize certain business units and technology that is enhanced in recent quarters.

Net investment income for the third quarter was $0.09 a share, or $0.10 for one-time adjustments associated with downsizing and mending our credit facility. The declining quarter-to-quarter is primarily due to OEM and Allied Wireline going on non-accrual.

As highlighted in our last earnings call, we expect to take more aggressive actions to exit our legacy investments like the OEM. As a result, these markdowns on the credits in the portfolio do not support the current dividend level.

Accordingly, the Board of Directors has reduced -- the Board of Directors has approved a reduction of our dividend to $0.10 per share for Q2, 2020. While we believe this dividend level appropriately reflect the current earning hours of our portfolio, we will continue to evaluate the dividend each quarter in light of COVID-19.

Next, I'd like to highlight the amendments of TCRD syndicated credit facility by ING. TCRD was modestly levered compared to many other BDCs at about 0.7 times to 0.8 times going into the COVID crisis. Were able to successfully reset covenants to us and it was immediately headroom to run our business and continue to pay a cash dividend.

From a liquidity perspective, the balance sheet of TCRD is well positioned with cash and credit facility availability. We have been conservative in providing undrawn capital commitments to borrowers given the uncertainty in the market. Many of our issuers’ in our portfolio did draw under the revolvers.

TCRD has been and continues to be well capitalized to meet these obligations. Finally, I want to highlight the $30 million equity offering that closed in April. As noted in our press release and shareholder release on April 20, First Eagle in the form owners and THL Credit advisors purchase $30 million worth of newly issued shares from TCRD is NAV.

On a proforma basis, such persons now collectively owned approximately 20% of TCRDs outstanding stock. TCRD intends to use these proceeds to tender for shares if and when the shareholder approval the management contract at the upcoming special meeting scheduled for May 28.

The advisors also agreed to waive the management fee and incentive fees for both the third and fourth quarter of 2020 and in the first quarter of 2021 also shareholder approval and a management contract.

The fee waivers are intended to provide support to TCRD journeys unprecedented times and we are pleased to be able to give them the size and scale of the First Eagle platform. I will now turn the call over to Jim Fellows to discuss what we're seeing in the broader market and how we're managing our portfolio through the pandemic..

Thanks, Chris, and good morning everyone. The first quarter was the worst that the syndicated loan market has seen since the 2008 financial crisis with the broadly syndicated loan market falling roughly 12.5%.

The Logan JV is directly correlated to these prices and its portfolio was marked down accordingly in Q1, contributing to nearly half the total portfolio markdown for the quarter. We have seen improved conditions in the liquid markets since then, as prices have rebounded to some extent.

This is largely determined based off ratings and liquidity of the underlying loans. Next, I will talk a bit about how we are managing the portfolio in light of COVID-19. We've been in regular dialogue with our sponsors and borrowers since the start of the pandemic earlier this year.

We've implemented a steering system for all of our credits, based on a scale of one through three, largely determined by the amount of direct exposure these credits have to the virus. Our primary focus now is on managing liquidity and working with our sponsors to extend duration for these investments that needed.

To the extent relief is required in the form of interest or amortization deferral, we expect to be appropriately compensated. We believe now more than ever, that having a portfolio that is predominantly first lien loans will be crucial in – to managing through this crisis. With that, I'll turn the phone over to Terry..

Thanks, Jim, and good morning everyone. First on portfolio highlights, as of March 31, our portfolio of [indiscernible] to 75% in senior secured debt and 15% in the Logan JV as reminder, Logan JV is 93% invested in personally in assets, the remaining 10% of the portfolio was held and secondly in other income producing equity holdings.

Weighted average yield on the debt and income producing portfolio including Logan decrease to 6.8% declined quarter-over-quarter is primarily a result of that in the non-accruals which as of quarter-end on a cost basis increased from 14% of the portfolio to 21%.

Loadmaster and Holland are the only other companies in addition to OEM and Allied on non-accrual at $331 million. Moving to the financials for the fourth quarter and looking at some of the components of our $7.9 million of investment income. Interest income represented $4.7 million a decrease related to the non-accruals.

Dividend income was basically flat quarter-over-quarter $3 million comprised of $2.3 million from Logan and about $700,000 from C&K. On the expense side, total expenses for the quarter are flat at $5.2 million.

But Q1 did include a one-time charge of $318,000 related to the acceleration of the amortization of certain financing costs in connection with the amendment of our credit facility. From a leverage on liquidity perspective, leverage levels increased to 1.25 times as of March 31, due to the sizable markdowns in the portfolio.

As part of the credit facility amendment as Chris mentioned, we increased our leverage capacity at 1.55 times or 165% asset coverage ratio reduced the net work cash from $175 million to $140 million and downsized our facility from $150 million to $120 million in exchange for a 25 basis point rate increase to [indiscernible].

We believe that the smaller be slightly higher price facility provides us more flexibility with the structure and leaves us with adequate cushion to manage through the COVID-19 crisis.

We started off taking revolver draws in March and April TCRD had $22 million of cash on the balance sheet at March 31, largely as a result of selling our broadly syndicated holdings purchased in December in late February.

We currently have remaining unfunded commitments of around $8 million and are well positioned from a liquidity standpoint to fund these commitments if necessary. And with that, I'll turn the call back to Chris..

Thanks, Terry. While we've made progress on our strategy, there's been pain as a result of the anticipated health and economic crisis.

Nonetheless, we remain committed to continue this portfolio repositioning we have diversified our bulk over the past two years and sponsored back firstly positions and remain well positioned to manage the portfolio going forward with good liquidity in the market.

We've made all of our decisions with TCRD and the [stock] over the net interest [indiscernible] and we believe longer term commitment to TCRD is evident in the financial support in the form of non-dilutive equity contributions, fee waivers and a commitment to a sizeable and creative tender offer.

We believe [indiscernible] on May 28 in favor of the contract renewal is in the best interest of the shareholders and we look forward to a favorable outcome so we can complete the execution of the Strategic Plan we laid out two years ago now inside the First Eagle platform. With that, I'll turn the call over to the operator for questions..

[Operator Instructions] Please stand-by, while we compile the Q&A roster. Our first question comes from Lee Cooperman of Omega Family Office..

Yes, hi. What was the FFO -- good morning. Hope you're safe and healthy. What was the FFO in the quarter? I didn't get a chance to read the release yet..

That's okay.

You're saying free cash flow from operations, Lee?.

Yes..

Yes, it was $0.10 a share, excluding the fee that we paid to amend the credit facility..

Okay.

And in the future when you are paying the new owner new operator a full fee, what would that reduce the FFO on a quarterly basis, a few pennies for quarter?.

No, that is a fully-loaded number going forward as the contracts approved we would add $0.03 a share. So you're being paid that that $0.10 was included a management fee [indiscernible]. .

That was already included. Okay..

That’s included..

Okay, can you explain to me, I haven't read the document yet.

But the -- if the approve of the deal, the First Eagle was approved, what is the cost of terminating them and how long do they have the contract for before they can be terminated?.

Yes, I'll answer that. And Sabrina our General Counsel will correct me if I'm wrong, but there's no brokerage fee associated with the contract being terminated. If the contract is approved, I believe there's a two-year window before we would be up for renewal.

At the end of that two-year window, though, again, there's no brokerage fee if that's what you're implying..

Got you. Okay, so the $0.10 is after accruing a fee that we're not paying. So the actual cash FFO was $0.13..

Excluding the management fee, then $0.13 cents. Yes..

Right. Right, which is being included until the end of the first quarter of next year..

It is. Yes. So again, all things being equal without a management fee, in Q3 and Q4, it would have been at $0.13 a share..

Right, right. And --.

One of the things Lee, it's with OEM, it's our largest position. We put that on non-accrual because it's a -- it was important for us to make the determination that we need to preserve NAV, as you've said as we've recognized, there's been too much NAV deterioration in the portfolio.

We need to take some capital reinvest back into the business to ensure some more NAV stability. We've taken cost cutting measures in the business; we've invest in a lot of good technology.

We've got some very, very good discussions with strategic partners that we think and create a situation or solution where -- sometime in the future, there's a chance it can come back on but right now, just given the size and scale the position, felt prudent to put it on non-accrual to ensure or to take steps necessary to minimize any further NAVdeterioration..

What is the size of the OEM commitment?.

Lee, it’s Terry. It’s valued at around $29 million..

And what is their business..

In the semiconductor space, it makes wafers that for end markets that I think of 5G products -- felt it's got a good, it's got a good technology, it just has -- its doesn't have the size and scale for distribution.

And you need both like we can make a really, really good product but if we can't sell it if we can't push it to the channel that's what we're having issues on the revenue side, that's one of the main focuses are right now for us to find -- get strategic partner to monetize that technology that we've invested over the last two years..

Good. Do you have a qualitative view, whether you think the 522 NAV at the end of the first quarter with the bottom of the cycle or you just don't know, you don't have a view..

It's difficult to say Lee, just given the uncertainty when the economy is going to come back. You'll see from 331 to 522, the Logan portfolio moved up almost $0.12 a share for the NAV that we actually purchased the $30 million in stock was $5.34. The loan market continues to stabilize, so we feel good about that.

And again, that was almost half of our NAV deterioration was associated with Logan. The good news is we've repositioned the portfolio to 90% first lien including Logan. So we are at the top of the capital structure, we have managed liquidity and trying to extend duration on all of our portfolio companies until the economy turns back on.

So listen, if the economy turns back on quickly, I'm not suggesting that's going to happen. But if it wouldn't turn off quickly, I feel pretty good.

But if this turns out to be a protracted cycle, where you could see further deterioration, I don't think we're unique to that, I think that would be across all asset managers if the economy does not turn on. So there's going to be continued pressure on assets..

And then tell me a little bit about the Allied Wire commitment and exactly what they do..

Allied Wirelines in the oil and gas industry as you can imagine, tremendous pressure in that portfolio, we're a small investor and a fairly large business The decision was made to convert our debt into equity. That process is ongoing once it's done we'll own a combination of a small debt security a preferred equity security in the business.

There is a chance if when [oil] comes back then this can go back on an earnings status, but right now given oil prices and demand for the company's services, it's fairly low..

One other the question is [indiscernible] me.

Oh, yes, you keep talking about tender offer? Is that a commitment that you've already made that you are going to do a tender offer or is it a chance that you might go a different route?.

No, I appreciate the question. So we've raised $30 million, specifically, earmarked to do a tender, we're continue d to have discussions with our Board and with advisors on the best way to execute that. There's two different ways we can move forward. You can do a [indiscernible] auction, we could do a fixed price.

We may end up staging it over time, depending on the stock price and current market conditions, but the $30 million is highlighted is -- was raised this is --.

Well, my point you keep talking to tender [offer], but it may not be tender [offer] it maybe this open market purchases and maybe over an extended period of time.

That decision has not yet been made?.

Right. I mean, if the money's been raised to do a tender, it's subject to the contract being approved, but once a contract is approved, we plan on outlining at a minimum step one what the tender will be..

Thank you. Stay healthy, stay safe. Talk to you later. Bye-bye..

Take care..

Our next question comes from Robert Dodd of Raymond James..

Hi, guys, good morning. Can you talk a little bit about capital allocation if the pandemic hadn't happened, we know kind of where you wanted to allocate capital. Firstly loans et cetera, et cetera. Obviously now OEMs on non-accruals for example, they may have some more capital needs, which potentially could improve an ultimate recovery.

But what's your appetite to put potentially more liquidity into some of these already markdowns [tuck-in] positions to kind of maximize long-term recovery versus trying to minimize that segment of the portfolio, I mean how is that going to be balanced over the next call three, six, nine months?.

Yes, Robert, that's a great question. We appreciate it. So maybe just step back and expand a little bit on what Jim covered. So when we stepped into the pandemic, we, along with our many other asset managers tried to sort of score or weight our portfolios into categories Tier 1, 2 and 3 on who had the most exposure or the direct impact.

The second part that we've done now is dive back into these businesses, we try to evaluate, which companies will come back sooner when the economy opens back up, and then we're ranking those. So my -- our focus right now is extending the duration and managing liquidity.

And in the terms, to the extent there is an incremental capital needed to bridge that gap, we're going to start with the businesses that we [indiscernible] are going to come back because we think those will be [bigger] investments.

The good news is, is we're primarily a sponsor back portfolio, most of the conversations we've had and been in the partnership with the sponsors. So to the extent there is a solution needed, we're optimistic there'll be something that we'll work on and do together.

In a downside scenario, if the sponsor is not willing to step-in, and we have to provide that liquidity. As Jim said, we'll be compensated for that. And if we have to run the businesses, we will..

Okay, I appreciate that. Thank you. And the sponsor question was the follow up. So you already answered that as well. So thanks a lot guys. And stay healthy..

Thanks Robert..

Our next question comes from Paul Johnson of KBW..

Good morning, guys. Thanks for taking my questions.

My first question was around the credit facility, I believe you have about $38 million of available capacity undrawn is that fully drawable today or any of that subject sort of borrower based restrictions?.

Hi Paul, this is Terry Olson, can't draw the full amount today don't have an expectation of drawing more in the near-future, given the cash levels we are running with on the balance sheet today, but it is subject to borrowing base governors..

Hey Paul, the only thing I'd add to that, if you look at our unfunded commitments, the revolver draws are delayed our term loans. The amount that's not funded on our balance sheet is less than $10 million. And today, Terry, we're [sitting] with $22 million of cash --.

No less than 20 just that $20 million in cash. So we do not have a liquidity issue as it relates to our need to access that revolver..

But Paul, let me just clarify something, if we do have sufficient borrowing base to draw the full amount we wouldn't draw to that level of utilization on the existing facility. One, why did that [indiscernible] two, we don't have a capital need to do that. Just let me figure out another way, apologies..

Leverages, again, I think leverage is important because you've seen certain managers get off sites a bit either with their manager or overextended on unfunded commitments. We manage a lot of leveraged vehicles, not just TCRD and I think we've been very, very prudent you've seen that.

And in the fact that we we've stayed on sides with ING we're able to get an amendment done where we can continue to pay a cash dividend. We've been able to manage our Logan facility aggressively to manage leverage there.

So while we don't like the volatility in the market, we do have a tremendous amount of experience across the platform managing leveraged vehicles. And from that standpoint, we feel like we've got a very, very good team in place, namely with Jim Fellows as our CIO..

Okay, thanks for that. And my second question was around dividend. I'm just hoping to get an understanding of what the policy is going forward.

Obviously, earnings are still a little bit uncertain at this point, you guys have higher non-accruals, how are you looking to set that? Is that something that can fluctuate going forward or are you looking to potentially hold the dividend where you've set it today? What are your thoughts around that?.

Now listen, we've come into this pandemic wanting to be conservative, obviously, we took a steep discount or cut to the dividends at $0.10. All things being equal and a pretty bad quarter we earned that $0.10 and that's what we've paid out. We've got some incremental cushion going forward with the management fee waivers that add about $0.03 per share.

But, we're no different than anybody else with a fixed income portfolio of levered borrowers if the pandemic continues for an extended period of time, there could be incremental pressure. We don't have a crystal ball on that that aspect. So that's why we made the commentary that we'll continue to manage it quarter-to-quarter.

It was another part of the decision and moving OEM to non-accrual. Again, no one likes that. We prefer to be in a position where that wasn't the situation but again, as we try to signal to the market where earnings power is, we're doing this and generating that $0.10 with our single largest investment not being paid on earning our current basis..

Okay, that that's very good detail. Thanks for thanks for that. And then on the JV, obviously, that was marked down fairly heavily this quarter.

I'm just curious, where was the markdown in the JV? Was that entirely due to the market credit related, credit spreads related adjustments or were there any credit issues in there? I think there was one non-accrual this quarter, couple of last quarter. Just any kind of commentary on the credit quality in there that’s great..

Yes, this is Terry, Paul, appreciate that. I think it's two loan our non-accrual very minor positions. I think 85 80% of that portfolio is tied to what I'll call the more broadly syndicated or more syndicated side of the market, which took a much heavier hit.

This quarter, so I would say it's more market driven across that portfolio than anything credit related big picture..

Okay. And lastly, you guys mentioned that you're already seeing benefits from the First Eagle platform today. Just curious if you talk about what those benefits are so far..

Yes, sure. Thanks, Paul, I appreciate that question. So, the good news is when we announced the transaction in December, we were able to close very quickly in January, we did a tremendous amount of work up front. So we knew the exact team that we wanted to put on the field going forward.

We were probably slightly overstaffed after that process was done which, quite frankly, given where we are today is a positive. So we feel good about the team. And we feel good about the experience.

One of the benefits though being part of the larger asset manager is to the extent there is issues we have the size and scales and continue to invest in the team. So I've spent a lot of time Jim has spent a lot of time talking to the folks that are managing his individual portfolios.

So, to the extent we need to [beep] up teams that have experience and workouts or restructurings. We have a large [in amount], balance sheet and income statement to add those resources. Much smaller platforms, unfortunately won't be able to make those same investments as we see potential pressure on management fees are our carry income..

Okay, okay. So those are all my questions. Thanks..

Thanks Paul..

I would now like to turn the conference back to Chris Flynn..

Thank you all for joining our quarterly update this morning. I hope you're all leaving this call with a better sense of the meaningful progress we've made in executing our strategic initiatives. We'll also work in the navigate our portfolio to the economic consequences of the self crisis.

Hope you and your family remain healthy and safe as we navigate these unprecedented times. And by the next earnings call, we'll be well on our way to return to normalcy. Thanks again..

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. And you may all disconnect..