At this time, I would like to welcome everyone to the Capitala Finance Corp’s Conference Call for the Quarter Ended March 31, 2020. All participants are in a listen-only mode. A question-and-answer session will follow the Company’s formal remarks.

Today’s call is being recorded and will be available for replay approximately 3 hours after the conclusion of the call on the Company’s website at www.capitalagroup.com under the Investor Relations section.

The hosts for today’s call are Capitala Finance Corp’s Chairman and Chief Executive Officer, Joe Alala and Chief Financial Officer and Chief Operating Officer, Steve Arnall. Capitala Finance Corp issued a press release on May 4, 2020 with details of the Company’s quarterly financial and operating results.

A copy of the press release is available on the Company’s website. Please note that this call contains forward-looking statements that provide information other historical information, including statements regarding the Company’s goals, beliefs, strategies, future operating results and cash flows.

Although the Company believe in these statements are reasonable, actual results could differ materially from those projected in the forward-looking statements.

These statements are based on various underlying assumptions and are subject to numerous uncertainties and risks, including those disclosed under the sections titled Risk Factors and Forward-Looking Statements in the Company’s quarterly report on Form 10-Q. Capitala undertakes no obligation to update or revise any forward-looking statements.

At this time, I would like to turn the meeting over to Joe Alala..

Thank you, operator. Good morning everyone and thank you for joining us today. First, I hope you and your families are safe and healthy. The well-being of our team is at the utmost important to us.

Having the technology platform to allow us to work from home has enabled our team to comply with all the stay-in-home pandemic policies without impacting our firm’s ability to focus on our investment portfolio and operations.

Our net asset value declined by $2.87 per share during the quarter of this amount $1.18 or 41.1% is related to unrealized depreciation on equity investments. We ended 2019 with no non-accrual loans. We now have 8 debt investments on the non-accrual status driven by the shutdown in the economy.

Our seasoned team of portfolio management professionals is managing the status of all investments on a daily basis. Based on uncertainty related to the future, net investment income, we have decided to suspend our distributions effective for the second quarter of 2020.

This was a difficult decision, but ultimately, the right one so we can better project cash flows related to interest and principal payments from our portfolio investments. We are committed to retaining our status as a registered investment company. And we'll make the necessary distributions to shareholders as required during 2020.

We are pleased to announce that the small business administration has issued us a green light allowing the application process to proceed for Capitala SBIC Fund VII, which will be a wholly-owned subsidiary of Capitala Finance Corp.

By lowering our cost of capital and accessing additional capital through the addition of another SBIC Fund, we are able to generate additional net investment income in support of future distribution payments. Looking ahead, we are in a good position from a liquidity standpoint, both at Capitala Finance Corp and across our entire portfolio.

When the economy reopens, we will be prepared to evaluate investment opportunities and make significant investments into new lower middle market opportunities originated by our direct origination platform. At this point, I'd like to ask Steve to provide some color on our first quarter financial results..

Thanks, Joe. Good morning, everyone. Total investment income was $7.1 million during the first quarter of 2020, $5.6 million lower than the first quarter of 2019.

Interest fee and PIK collectively declined by $4.3 million driven by, first a decrease in average debt investments outstanding during the comparable periods and most importantly two, $1.6 million of interest not earned during the first quarter of 2020 related to non-accrual loans.

Dividend income decreased by $1.3 million, as we received a $1.3 million dividend from our equity investment in Nth Degree during the first quarter of 2019. Total expenses for the first quarter of 2020 were $7.1 million compared to $8.5 million for the first quarter of 2019.

Interest in finance and expenses declined by $0.6 million related to a reduction in debt outstanding, base management fees declined by $0.4 million as total assets declined over the comparable periods. Incentive fees declined by $1 million, as incentive fees were not earned during the first quarter of 2020.

And general and administrative expenses increased by $0.5 million mainly related to the timing of legal and other professional fees. Net realized gains totaled $1 million or $0.06 per share for the first quarter of 2020 compared to net realized losses of $5.8 million or $0.36 a share for the same period 2019.

Net unrealized depreciation totaled $43.4 million or $2.68 per share for the first quarter of 2020 compared to net unrealized appreciation of $1.5 million for the comparable period in 2019. Approximately 44% of the net unrealized depreciation during the period related to equity investments.

The net decrease in net assets resulting from operations totaled $42.4 million or $2.62 a share for the first quarter of 2020 compared to a net decrease of $0.2 million for the comparable period 2019. Net assets at March 31, 2020, totaled $102 million or $6.27 per share, compared to $9.14 per share at December 31, 2019.

At March 31, 2020, we had $56.4 million in cash and cash equivalents. Also at March 31, 2020, the company was not in compliance with certain debt covenants in our credit facility, including its minimum net asset value covenant and its minimum interest coverage covenant.

The company is not in compliance with these covenants was largely driven by the increase in non-accrual loans and an increase in the unrealized depreciation as the results of the impacts of COVID-19.

The company will not be able to borrow under its line of Credit Facility until a waiver or amendment can be attained from ING Capital, LLC and the lender group or until such time that we can comply with the existing debt covenants in the credit facility. Should be noted that the facility was undrawn at March 31, 2020.

Also, as of March 31, 2020, our asset coverage ratio was 180.2%, if our asset coverage ratio falls below 150% due to decline in the fair value of the portfolio including the results of the economic impact of COVID-19. We may be limited in our ability to raise additional debt in the future.

At March 31, 2020, our investment portfolio includes 41 investments with a fair value of $321.2 million and a cost basis of $356 million. First lien debt investments on a fair value basis at March 31, 2020, comprise 65.7% of the portfolio. Second lien represents 16%.

Equity and warrant investments represent 14%, and our investment in Capitala Senior Loan Fund represented 4.3% At quarter end, we had eight debt investments on non-accrual status totaling $42.9 million on a fair value basis, compared to zero at the previous year end.

The significant change in non-accrual loans is mainly driven by current economic conditions resulting from COVID-19. As previously mentioned, our portfolio management group is actively engaged with management teams and sponsors as appropriate to assess needs and provide assistance as appropriate.

Regarding the valuation process, at quarter end, our Board approved the fair value of the investment portfolio of $321.2 million in good faith in accordance with the Company's valuation procedures.

The Company's Board of Directors approved the fair value of the Company's investment portfolio, with input from a third-party valuation firm and the investment advisor based on information known or knowable at the valuation date, including trailing and forward-looking data.

The COVID-19 pandemic is an unprecedented circumstance that materially impacted the fair value of the company’s portfolio in March 31, 2020. At this point operator, we will entertain questions..

Thank you, sir. [Operator Instructions] Your first question comes from the line of Kyle Joseph with Jefferies..

Hey, good morning, guys. Thanks for taking my questions. Hope everyone is safe. I just wanted to obviously broader equity markets have recovered since March 31. And it sounds like a lot of the unrealized depreciation in the first quarter was tied to equity investments.

I just want to -- can you give us a sense for at current levels, how much of a NAV has recovered post March 31?.

Hey, Kyle, this is Steve. Good question, I think, for us to try to [indiscernible] quantify what those equity values would be subsequent to March 31 would be inappropriate. We'll go through a full some exercise internally and with our Board, at June 30.

But, I understand what you're asking and hope that that, that that momentum continues, but to try to quantify that for you would just be inappropriate at this time..

That's totally fair.

Congratulations on the new SBIC, can you just give us a reminder of the timing and the process for rolling that out?.

Yes, Kyle, this is Joe. S we received a green light letter, which basically, it's invitation to submit an application which we have already submitted the application. So we are in process with the SBA on obtaining a subsequent license in the BDC. So we have filed the application and it goes into legal review now.

And we think it's a this quarter event that we would be fully licensed. All that is uncontrollable and part of the SBA control of all that, but -- and we are already preparing to -- we had to fund some of the SBIC to start the application process, which we've already done and committed to.

And we think that'll be a great new subsidiary, that's going to get low cost attractive, long-term debt capital. With the 10-year, 65 basis points around their balance, it's very low cost of capital for us plus increases our access to capital. So we're excited about the new SBIC license and the application has already been submitted..

Thank you. And then last question from me. Obviously, deal flows kind of dried up given all the volatility.

But, as we hopefully emerge on the other side of this, can you give us a sense for how you anticipate new transactions looking?.

Well, I will say that what we've focused on is one to keeping the team healthy and two keeping the team together. So we've had no turnover on our origination office, no turnover on our core investment team and we're going to keep that team intact.

When deal flow does come back we're able to start visiting companies again and investing in new opportunities. We have substantial liquidity besides the BDC and our private funds and in addition to get an SBA fee license in our BDC, we actually got a another SBIC green light in a private fund.

So the platform is probably one of the more liquid lower middle market platforms that we compete with. And we've no change in investment team. So when the market does turn, we have tremendous liquidity, same team and are ready to start investing in quality lower and middle market companies again..

Okay. Thanks, guys. Thanks very much for answering my questions..

Thanks, Kyle..

Your next question comes on the line of Christopher Nolan with Ladenburg Thalmann..

Hey guys, hope everyone is well..

Thank you, hope you are..

Joe, what is the amount of for the new SBIC sub, how much can that lend up to once it's fully capitalized?.

Then the new family of funds limit is $175 million per fund and this -- that would apply to this new fund..

Okay. And then going forward, what is the balance sheet strategy given that your leverage ratios are going up, your unrealized depreciation is increasing as well.

I mean, is it to stop doing investments build cash, pay down debt, issue equity I mean, can you give us an idea of what you are thinking is in terms of how you manage the balance sheet and your capital ratios?.

Chris, this is Steve. I think in the short-term, what we are focusing on is the portfolio and trying to make sure that we're here to provide liquidity and support to our portfolio companies. So that's the nearer term goal.

I think longer term, you touched on a number of topics that are of importance to us, timing to be determined in terms of potentially refinancing some of our baby bonds and pushing those maturities out, maybe repaying some additional SBA debentures early. We've got one coming up in September.

Raising some equity, that's a topic of discussion, but it’s probably not right now. And certainly with the liquidity that we have not only at the BDC, but at the platform level, we fully expect to be active in the lower and middle market. And hopefully that the BDC can participate in those deals once those are -- once those are active.

So short-term focus on the portfolio, longer term, we build our portfolio in the BDC and try to continue to build NII and reassess that distribution level..

Great. Thanks, Steve.

And also where you're looking to keep cash levels on the balance sheet given the absence of the credit facility?.

I'm not sure, how to answer that in terms of a number, I think we will continue to through cash that we have now and repayments the normal cash flow, be in a good position. So not only service all of our obligations, but repay all the debentures that have come in due.

So internally, I think we feel pretty good about our liquidity position, in that regard, but we'll see where circumstances go with the situation in the economy and to the extent it opens back up and we can get some deal flow going here..

Great. Final question, dividend. Given that -- it sounds from Joe's comments that the dividend will be probably just sufficient to keep the rig status.

Would that be a stock dividend?.

Too premature to discuss what any distribution might look like. I think we've suspended it for the second quarter until we -- again can get a better look at what NII looks like for the rest of the year. We over distributed for Q1. We'll talk with our Board and determine what's the right thing to do going forward.

But, that would be premature to talk about the mix of any future distribution. It’s an option but not something we're prepared to talk to..

Okay, great. Thank you..

Your next question comes to line of Bob Strong, Private Investor. Mr. Strong, your line is open. At this time sir, we have no further questions..

Thank you, everyone. We are around today if you want to contact us. Thank you for your participation. Everyone keep safe and socially distant. Thank you..

End of Q&A:.

This does conclude today's conference. You may now disconnect..