Good morning and welcome to the First Eagle Alternative Capital BDC Inc. Earnings Conference Call for Third Fiscal Quarter ended September 30, 2021. It is my pleasure to turn the call over to Sabrina Rusnak-Carlson, our First Eagle Alternative Capital BDC Inc. Ms. Rusnak-Carlson you may begin..

Thank you, operator. Good morning and thank you for joining us. Joining me on today’s call are Chris Flynn, President of First Eagle Alternative Credit; and Jen Wilson, our Chief Accounting Officer and Treasurer.

Before we begin, please note that the statements made on this call may constitute forward-looking statements within the meaning of the Securities Act of 1933 as amended.

Such statements reflect various assumptions by First Eagle Alternative Capital BDC concerning anticipated results that are not guarantees of future performance and are subject to known and unknown uncertainties and other factors that could cause actual results to differ materially from such statements.

The uncertainties and other factors are in some ways beyond management’s control and include the factors included in the section entitled Risk Factors in our most recent annual report on Form 10-K as updated by our quarterly report on Form 10-Q and our periodic and other filings with the Securities and Exchange Commission.

Although we believe that the assumptions on which any forward-looking statements are based on are reasonable, any of those assumptions could prove to be inaccurate. And as a result, the forward-looking statements based on those assumptions also could be incorrect. You should not place undue reliance on these forward-looking statements.

First Eagle Alternative Capital BDC undertakes no duty to update any forward-looking statements made herein unless required by law. All forward-looking statements speak only as of the date of this call.

Our earnings announcement and 10-Q were released yesterday afternoon, copies of which can be found on our website along with the Q3 earnings presentation that we may refer to during this call. A webcast replay of this call will be available until November 15, 2021 starting approximately two hours after we conclude this morning.

To access the replay please visit our website at www.feacbdc.com. With that, I’ll turn the call over to Chris..

Thanks, Sabrina. Good morning and thank you for joining us on our earnings call today. I’ll provide an overview of our third quarter results, some portfolio highlights and then Jen will discuss our portfolio and financial results in more detail. Let’s begin with the quarter.

Net investment income for the third quarter was $0.11 per share compared with our $0.10 per share dividend this quarter and $0.9 per share of NII in Q2. We continue to increase leveraging Q3 up to 1.13 times up from 1.1 at the end of Q2. We have previously communicated our plan to move closer to our long term leverage target of 1.2 times.

As we continue to diversify the portfolio in the portfolio stabilized we are increasing our target leverage ratio from 1.2 to 1.3. Based on our deal pipeline and lending environment today, we continue to believe we have the ability to hit our target leverage ratio of 1.2 times by the end of the quarter.

During this quarter book value was essentially flat at $6.50 per share.

During the quarter we saw a change and unrealized appreciation net of tax of $700,000, or $0.03 per share, or equity position and was the primary contributor to this decrease this quarter with a change and unrealized appreciation of $0.05 per share, as the public share price of the stock declined approximately 33% from the end of Q2 to the end of Q3.

Subsequent to quarter end, we have seen the share price improve approximately 15% through the market closed last night. Additionally, [Aerotech] America will contribute a $0.02 per share change and unrealized appreciation during this quarter.

The decreases were offset by a change in net unrealized appreciation across the broader portfolio $0.05 per share due to continued performance of the portfolio companies, typing spreads and the benefit for taxes on unrealized depreciation of $0.01 primarily attributed to the value of Wheels Up.

As we delve deeper into the portfolio, we believe there have been great deals of progress made and we continue to be optimistic about the portfolio repositioning.

Overall the portfolio continues to perform well amid the continued impact of the COVID-19 pandemic, revenue and EBITDA levels and liquidity for most COVID impacted businesses in the portfolio continued to improve and in many instances have returned to or exceeded pre-COVID levels.

Companies that have not yet fully rebounded continue to maintain good liquidity profiles. There are no significant amendments to existing loans in Q3. Consistent with Q2 we did not add any new non-accruals during the quarter. Loadmaster and the only portfolio company on nonaccrual.

At OEM the Plasma Therm transaction we consummated in Q4 to commercialize a distributed technology to the market is performing in line with expectations. As a reminder, the principal consideration was in the form of deferred payments for several years.

These payments are contingent upon certain milestones, including minimum annual payments for four years that will be used to service our debt and cover certain operating costs. The BDC retained all the equity in these remaining businesses.

Igloo our other concentrated position was represented 5.5% of the portfolio and with the largest holding at September 30 was repaid at the end of October. Our equity position and all accrued to ASH plus a one year earn out.

With the repayment of the Igloo OEM is the last remaining credit of the 14 concentrated positions held in our portfolio in early 2018. We are pleased with our progress on equity in these legacy investments and this gives us confidence to proceed with a plan to increase leverage.

We are very active in the quarter making 33 new investments across the entire direct lending program platform totaling over $615 million, of which 34 million are eight new portfolio investments companies were allocated FCRD.

This pace of deployment not only speaks to the overall level of deal activity in the market, but also the power of being part of the First Eagle direct lending platform. FCRD also made an additional $8.5 million add on investment during the quarter. During the quarter that were for debt repayments at par with two included prepayment penalties.

Our direct lending pipeline remains strong and the BDC continues to benefit from the deal flow generated by First Eagle’s approximately $5 billion direct lending platform.

The growth of the platform allows the BDC to hold a more diversified portfolio with a number of positions up from 45 in Q1 of 2018 to 68 this quarter while less allowing First Eagle to provide more capital to middle market companies.

Since the beginning of the pandemic, First Eagle’s direct lending platform has remained robust and we expect it to continue to provide us with attractive investment opportunities. We continue to be very selective about where we deploy our capital and are mindful of the macro environment in our investment committee decisions.

Our goal is to continue to diversify our investment approach as a BDC continues to grow in 2001 and beyond. With that, I’ll turn the call over to Jen..

And good morning everyone. First we’ll start off with some investment and portfolio highlights. As Chris mentioned, we had an active quarter with eight new and several follow on investments totaling 43 million at a blended yield of 7.5%.

Additionally, we had four notable realizations through the repayments of our first lien positions and women’s health USA, PDFTron Systems, ABC legal services and Finxera Intermediate generating 29.3 million of cash proceeds including prepayment premiums. As of September 30, our portfolio was valued at 402 million up from 395 million at the end of Q2.

It was invested 74% in first lien senior secured debt at 18% in the Logan JV. As a reminder, the Logan JV is 98% invested in first lien assets. The remaining 8% of the BDC portfolio was held in second lien, sub-debt and other non income producing an equity holding in including our restructured equity like second lien investment and OEM.

The weighted average yield on the debt and income producing portfolio based on cost and including Logan was 6.9% in Q3. This was in line with prior quarter. We didn’t place any additional investments on nonaccrual during Q3. Total non-accruals as a percentage of our portfolio at fair value, and it costs for 2% and 3.5% respectively.

Now, we’d like to address the financials for the third quarter. During Q3 we recognize 8.4 million of investment income primarily from interest in dividends. Interest income increased approximately 400,000 from Q2 to 6.3 million for Q3. The increase was driven by an improvement in coupon interest as we continue to add new names to the portfolio.

Included in the 6.3 million is 156,000 related to prepayment premium and 214,000 related to accelerated amortization of OID. Dividend income from the Logan JV was relatively flat quarter over quarter at 1.7 million and other income increased 131,000 primarily related to an increase in one time fees such as amendment and arranger fees.

Total expenses for the quarter were 5 million down slightly from Q2. With respect to other items below the net investment income line, the company had a small net realized gain for Q3 of approximately $100,000. From a leverage perspective, we ended Q3 with a debt to equity ratio of 1.13 times.

We have ample borrowing capacity on our credit facility to continue to grow and increase leverage towards our target of 1.2 times by the year end. With that, I’ll turn the call back over to Chris..

Thanks, Jen. Overall, this is another stable quarter for FCRD. We continue to deliver steady improvements to credit, quality and enhance our ability to utilize leverage, recorded positive results in most portfolio companies. We also made additional progress in derisking the portfolio with respect to several remaining legacy positions.

Origination activity remains strong and we are confident in our ability to prudently increase our leverage profile but it’s in a position to meet or exceed our current dividend level. I would now like to turn the call over to the operator for Q&A..

[Operator Instructions] First question comes from the line of Matt Jaden from Raymond James..

Good morning and appreciate you taking my questions. First one for me maybe on the capital structure. So looks like that the 2023 notes are now redeemable at a higher cost than the 2026 notes.

Any high level color you can give on kind of plans for that issuance and maybe revisiting the unsecured market?.

Yes. Thanks Matt this is Chris. We appreciate it. Obviously, as we’ve improved the balance sheet obtained the investment grade rating, we were able to refinance the portion of the bonds early this year. We continue to look at the market based on our current rate the market remains strong.

So we’ll take that into consideration obviously as we finish up the quarter and get our 10-Q out..

Got it. Maybe take one for me on OEM. So it sounds like it’s going to be somewhat of a process. In terms of when we could see OEM fully roll off the books that a 2023 years or maybe beyond kind of process just to complete the legacy rotation..

Yes. That’s a great question, Matt. I wish I had a better answer for you.

Probably too early to tell as structured, it’s a longer dated investment I’d like to see where we stand at the end of the year and have some discussions based on the performance to see if there’s a way to convert that the cash sooner but we’re not in a position to do that right now.

But to the extent we can, we would and we will but that’s a bit early right now..

Got it. Last one for me just more so a housekeeping one looks like yields in the Logan JV were down 30 bips quarter-over-quarter. Any noise within matter was not just a function of kind of deployment and repayment yields. .

I think it’s just more of a function of where the market is right now. You step back for a bit pre-COVID, the market was pretty aggressive. When COVID first hit the market gapped out. As I say today, we’re probably back at pre-COVID levels are slightly tighter in other areas. So it’s just a function of the overall competitiveness of the market. .

Got it. That’s it for me. I appreciate the time..

Matt we appreciate it. Thank you..

Our next question comes from the line of Paul Johnson from KBW..

Good morning, guys. Thanks for taking my questions. Hey, on the JV, as that has stabilized, I’m just wondering, are you guys I think there’s some stills a few remaining commitments inside of the JV.

Is that something that you’re still looking to grow at this point or kind of just maintain where it’s at currently?.

Look, we think it’s an attractive return for the shareholder. We also asked the manager as it relates to our 30% buckets. As the portfolio started to grow, again, it’s created some incremental capacity. So I think you could see some incremental capital contributed to Logan to the extent the return on equity makes sense.

I say we’re also trying to figure out more efficient ways to not only finance the BDC balance sheet, but also the Logan balance sheet to drive a higher ROE.

So not only growth that we’re focused on, but also, again, a consistent theme we’re going to hear is now that we’ve got a consistent stable balance sheet, we should be able to drive a higher ROE based on lower cost of financing, not only for the BDC, what we’ve done with the bonds, but also what we could potentially do with Logan..

Got it. And then on the Igloo repayment. Forgive me if I didn’t catch this in your remarks, but were there any exit fees or ideas associated with repayment in fourth quarter..

There were not. It was a long dated investment. We were well beyond the call protection. .

Got it. And I’m guessing that investment that was probably refinance, are you allowed to probably get a business out of the portfolio..

[Operator Instructions] At this time, I would like to hand the conference back to Chris Flynn..

Thank you, operator. We appreciate the support of our shareholders and look forward to providing you with an update in late February early March and our full year results. Feel free to reach out to me or Jen if you have any questions before then..

This concludes today’s conference calls. Thank you for participating. You may now disconnect..