Q1 2020 Garrison Capital Inc Earnings Call
New York May 14, 2020 (Thomson StreetEvents) — Edited Transcript of Garrison Capital Inc earnings conference call or presentation Wednesday, May 13, 2020 at 2:00:00pm GMT
TEXT version of Transcript
* Brian Steven Chase
Garrison Capital Inc. – COO, Secretary & Director
* Joseph B. Tansey
Garrison Capital Inc. – Chairman & CEO
Welcome to today’s Garrison Capital Inc. First Quarter ended March 31, 2020 Earnings Call. For the first quarter ended March 31, 2020, earnings presentation that we intend to refer to on the earnings call, please visit the Investor Relations link on the homepage of our website, www.garrisoncapitalbdc.com, and click on the first quarter ended March 31, 2020, earnings presentation, under Upcoming Events.
As more fully described in that presentation, words such as anticipates, believes, expects, intends and similar expressions identify forward-looking statements. Actual results could differ materially from those implied or expressed in our forward-looking statements for any reason, and future results could differ materially from historical performance. You should not rely solely on the matters discussed in today’s call as the basis of an investment in Garrison Capital.
Please review our publicly available disclosure documents for further information on the risk of an investment in our company. Questions will be taken via the phone during the Q&A session at the end. It is now my pleasure to turn the webcast over to Mr. Joseph Tansey, CEO. You may begin, sir.
Joseph B. Tansey, Garrison Capital Inc. – Chairman & CEO 
Good morning, everybody, and thank you for joining our call. I’m joined by Brian Chase, our Chief Operating Officer; and Dan Hahn, our Chief Financial Officer. On Monday afternoon, we filed our Form 10-Q along with our press release with the SEC that included the financial results for the first quarter ended March 31, 2020. We’ve also posted our earnings presentation in Form Q to our company website.
I’ll begin today’s call with some broad commentary on the market environment and significant macro events that occurred during the quarter, I’ll then highlight the investment activity during the quarter, followed by a few thoughts around the investment portfolio position in light of the current market conditions. Brian will then summarize the first quarter’s results and discuss some of the actions that we took to strengthen the company’s financial position, given the impending economic downturn before opening up the lines for Q&A.
Before getting to this quarter’s activity, I want to thank all of the front line workers who are putting their own safety at risk. So the rest of us are able to manage through these challenging circumstances. Our thoughts and best wishes go out to all of those families that have been impacted by COVID-19 pandemic, and I hope everyone listening is safe and in good health.
In addition, I would like to recognize our employees who remain focused on ensuring a seamless transition in our business operations as we navigated to a remote working environment in mid-March. We are fortunate that our employees are safe and healthy, and they remain committed to serving our clients and stakeholders for the duration of this health crisis.
Finally, before digging in, I want to remind everyone that GARS has retained KBW is in the midst of a strategic review process. We are — while we continue to actively work with KBW to explore all options and are committed to taking actions that will maximize shareholder value. We cannot make any assurance that the company will be able to execute on any of them. As we have said previously, we do not expect to comment further on or provide any periodic updates to the market until the company’s Board of Directors has approved a specific transaction or otherwise deemed disclosure appropriate or necessary. And I will not be commenting further or answering questions today regarding the strategic review process.
Turning now to the overall market. The first quarter experienced unprecedented volatility as a result of the outbreak of COVID-19 pandemic, combined with the collapse of oil prices. These events resulted in sharp decline — sharp price declines across both equity and debt markets, including high-yield — the high-yield and liquid credit markets. The uncertainty around the magnitude and duration of the pandemic resulted in virtually no volume of new issuances of leveraged loans and M&A transactions.
Most businesses, in some regard, have been impacted by the economic consequences of the COVID-19 pandemic. Although the government’s extraordinary monetary and fiscal policy responses have led to a rebound in asset prices subsequent to the quarter end, most market participants are anticipating following into a recession.
The first quarter’s market activity certainly has impacted our quarter — our first quarter results. We reported net investment income of $0.15 per share, which was in line with our first quarter dividend of $0.15 per share. However, our NAV fell $1.92 per share or approximately $0.22 to $6.59, primarily due to net losses as a result of broad market dislocation. Of the losses, approximately 38% were driven by investments in existing credit issues prior to the pandemic that were unable to recover. Approximately 50% of the losses were due to the decline in prices in the liquid credit market, with the rest of the losses coming from broad market spread widening across our direct lending portfolio.
In light of the first quarter results, I wanted to spend a few minutes adding some context around the portfolio position that we’ve undergone over the last couple of years. As we have said on previous calls, our portfolio strategy around — since around 2016 has been to reduce the risk by increasing industry diversification, reducing our investment sizes and increasing the size of the companies we invest in. In order to do that, we have oftentimes found better relative value and purchase syndicated assets in the secondary market.
As a result, our portfolio — our current portfolio consists of over 97% first lien senior secured floating rate investments across 29 industries, with an average position size of less than 1% of our total investment portfolio fair value. We believe that this diversified liquid portfolio provides us with greater flexibility in managing the risks of our portfolio.
On the flip side, the drawback of such a portfolio is the increased mark-to-market volatility, as evidenced in the first quarter. Finally, while we received the vast majority of our 1Q interest payments, we did place 2 additional investments on nonaccrual status, bringing the total nonaccrual loans up to 4 investments, representing 2.7% of our total portfolio’s cost.
New par additions in the first quarter totaled $1.3 million, which was comprised almost entirely of existing borrower drawing down their unfunded revolver. As of March 31, 2020, we had a total of $1.1 million of remaining exposure to unfunded revolvers and delayed draw commitments. This was offset by total repayments and sales of $24.4 million across 5 portfolio companies resulting in a net decrease of $23.1 million. We have used a portion of these proceeds to repay additional SBIC debentures, which Brian will discuss in further detail.
With that, I’ll pass the discussion to our COO, Brian Chase.
Brian Steven Chase, Garrison Capital Inc. – COO, Secretary & Director 
Thanks, Joe. Our net investment income remained relatively stable at $2.4 million or $0.15 per share for the first quarter ending March 31, 2020, as compared to $2.5 million or $0.16 per share in the prior quarter. We declared a second quarter dividend of $0.15 per share that is payable on June 26 to shareholders of record as of June 6. As the company’s debt is currently comprised of notes issued pursuant to our CLO, which were privately placed, the company is not prohibited from paying a cash dividend to stockholders, despite the fact that we had reached the 150% asset coverage ratio at quarter end.
The company, however, cannot incur more debt until such time as it regains compliance with the asset coverage requirements. The company has adequate liquidity without the occurrence of more debt to make the current dividend payment and dividend payments for the foreseeable future. Future dividend payments are, of course, subject to declarations by our Board and no decisions regarding future dividends have been made at this time.
Fortunately, heading into this crisis, the right side of our balance sheet was intentionally structured to insulate the company from market volatility. As we have noted on previous calls, CLO financing is not subject to margin calls and is structured to self amortize, if certain triggers are exceeded.
In other words, shareholders can feel very secure that market volatility won’t create any foreselling of assets or punitive capital raises as a result of covenants or triggers relating to our financing. The structure naturally delevers and rightsizes its liabilities over time, utilizing its net interest margin to pay down notes as required.
Additionally, we have further simplified our capital structure by repaying the remaining SBA debentures subsequent to quarter end and are in the process of winding up that subsidiary. More importantly, as a result of the wind up, we were able to generate approximately $11.5 million of unrestricted and unencumbered cash that sits at the company level outside of the restricted CLO subsidiary.
Additionally, over the coming quarters, we are expecting repayments outside of the CLO subsidiary, which could generate another $5 million to $10 million of unrestricted and unencumbered cash. In total, we expect cash outside of the CLO subsidiary to eventually be around $20 million, which is equal to about $1.25 per share. We don’t have any immediate or planned uses for that cash and expect to retain that liquidity for the foreseeable future.
That concludes our prepared remarks for today’s call. And with that, I’d like to open up the line for questions.
And at this time, I’m showing no responses.
Brian Steven Chase, Garrison Capital Inc. – COO, Secretary & Director 
Okay. Great. Well, thanks for joining the call, everyone, and we’ll speak to you next time.
Ladies and gentlemen, thank you for participating in today’s conference call. You may now disconnect.