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Edited Transcript of CMFN.OQ earnings conference call or presentation 8-May-19 5:00pm GMT

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Q3 2019 CM Finance Inc wage Call

NEW YORK can 11, 2019 (Thomson StreetEvents) -- Edited Transcript of CM Finance Inc wage assembly exclaim or presentation Wednesday, can 8, 2019 can 5:00:00pm GMT

TEXT translation of Transcript

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Corporate Participants

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* Christopher Edward Jansen

CM Finance Inc. - President, Treasurer, Secretary & Director

* Michael C. Mauer

CM Finance Inc. - Chairman of the Board & CEO

* Rocco Angelo DelGuercio

CM Finance Inc. - head Compliance officer & CFO

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Conference exclaim Participants

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* Christopher Whitbread Patrick Nolan

Ladenburg Thalmann & Co. Inc., investigation part - EVP of Equity Research

* Paul Conrad Johnson

Keefe, Bruyette, & Woods, Inc., investigation part - Associate

* Robert James Dodd

Raymond James & Associates, Inc., investigation part - investigation Analyst

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Presentation

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Operator [1]

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Welcome ought the CM Finance wage free exclaim Third area Ended March 31, 2019.

Your speakers although today's exclaim are Mike Mauer, Chris Jansen and Rocco DelGuercio. (Operator Instructions) I'll now become the exclaim can ought your speakers. entertain begin.

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Michael C. Mauer, CM Finance Inc. - Chairman of the Board & CEO [2]

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Thank you, operator. Thank you crude although dialing can this afternoon. I'm joined by Chris Jansen, my Co-Chief Investment Officer; and Rocco DelGuercio, our CFO.

Before we begin, Rocco will grant our usual disclaimer regarding news and forward-looking statements. Rocco?

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Rocco Angelo DelGuercio, CM Finance Inc. - head Compliance officer & CFO [3]

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Thanks, Mike. I used to although ought recolect everyone that today's exclaim is being recorded and that this exclaim is the quality of CM Finance, Inc.

Any unauthorized declare of this exclaim can any roll is strictly prohibited.

Audio replay of the exclaim will exist available by visiting our Investor Relations page can our website can www.cmfn-inc.com.

I used to although strong although ought exclaim your attention ought the safe harbor disclosure can our publication free regarding forward-looking news and recolect everyone that today's exclaim can embrace forward-looking statements and projections.

We petition that you refer ought our most offer 10-Q filing although significant factors that can manufacture genuine results ought disagree materially from these projections.

We will no update forward-looking statements unless required by law. ought acquire copies of the latest SEC filings, entertain see our Investor Relations page can our website.

At this time, I'd although ought become the exclaim backward ought our Chairman and CEO, Michael Mauer.

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Michael C. Mauer, CM Finance Inc. - Chairman of the Board & CEO [4]

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Thanks, Rocco. final night, we reported our results although our fiscal third area ended March 31. We added more new positions than we consume can any previous area and had a net appendix of 3 portfolio companies. We consume diversified our portfolio more than ever before, with investments can 20 different industries. fat and gas, which was once, by far, our largest sector weighting, is now our third-largest sector can 10.5% of the portfolio. I'm same proud of the task our team has done originating new opportunities, proactively managing the danger and repositioning us into a more resilient portfolio.

The just can the first calendar area of 2019 was surprisingly active. after a tumultuous December, secondary levels snapped backward faster than we and perhaps anyone expected. Volatility, which we saw no only can our just nevertheless along the global equity and fixed wage markets, resolved itself quickly. And we saw a tightening of spreads beginning ought receive contain fairly early can the quarter.

While new commerce economics snapped backward ought autumn levels, we are heartened by the fact that new question deals consume no quickly regressed ought the borrower- and sponsor-friendly condition we saw then, specially when considering leverage levels, maintenance covenants and the ability ought earnings dividends and other elements, which add danger from a lender's perspective.

We consume a broad perspective can structural condition can the leverage finance just although we invest can rule association loans and secondary opportunities, where we see catalysts and robust relative evaluate and level selectively, can main syndications. This quarter, we made investments can a immerse loan, can a high-yield bond, can personal association transactions and can the secondary just purchases of loans. Dislocated lend pricing created secondary opportunities nevertheless although strong echoes can new question lend condition and pricing.

When the secondary just is weak, the main just is effectively forced ought multiply coupon and can many cases, change noneconomic condition can the lender's favor. ought condition the obvious, this makes although a improve surroundings although us ought deploy capital.

For the final few quarters, our prejudice has strongly favored investments can first liens. between realizations can second liens and new first-lien investments, we've grown our exposure can first-lien investments ought can 40 -- I'm sorry, 75% of our portfolio. still this can exist higher than it will exist can the future, it is directionally indicative of where we concentrate our origination efforts. We abstract ought invest can short weighted medium life assets, where we see opportunity ought generate superior returns along early repayment. We are although strong focused can adding positions can association deals, which we will exist a step removed from just volatility.

With that, Chris will further along our investment activity during and after the area can greater detail. And then Rocco will discuss our economical results. I'll finish with the concrete detail almost our largest marks, both definite and negative. I'll discuss our write-off of Trident and shift of Fusion ought nonaccrual. I'll tongue almost our expectation can the next little months, and although always, we'll purpose with Q&A.

With that, I'll become it can ought Chris.

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Christopher Edward Jansen, CM Finance Inc. - President, Treasurer, Secretary & Director [5]

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Thanks, Mike. We had a same active quarter, investing can 10 portfolio companies, including 5 brand-new portfolio companies and one which had previously been a portfolio corporation can which we consume previously exited.

Of our $65.6 million of new investments, anything nevertheless $2 million were first lien. We although strong had 4 entire realizations during the quarter.

I'll quickly cover our additions ought existing positions first. We continued adding ought our first-lien investment can Arcade Bioplan. We began protection this place 2 accommodation ago. Our harvest can cost, including this quarter's purchases, is almost 9.6%.

We added ought our place of ProFrac, a pressure-pumping services provider operating can the Permian, DJ and Haynesville Basins. Our harvest can price is now 8.6%.

We added ought our place can 4L Technologies' first-lien loan. This is another short-dated vocabulary lend maturing can 2020. Our harvest can price is almost 8.1%.

The next type I'd although ought cover are our fundings can revolving and delayed tug positions, which included Sears Holding's immerse loan, blank Mobile's delayed tug lend and 1888's revolver. can total, these fundings accounted although almost $8.9 million of our new investments this quarter.

We had 7 other new investments this quarter. First, we invested can the FILO exit lend although Sears. This lend was isolate of the financing parcel which allowed the corporation ought exit bankruptcy, and this lend repaid our investment can Sears' immerse loan. Our harvest can price can the FILO lend is 10.6%. Our investment can the immerse lend was paid off concurrently with this transaction.

We invested can FleetPride, which had previously been a corporation -- a portfolio corporation of ours. This new first-lien lend backed the LBO of the corporation by American Securities. can the degree of our 2 previous investments, we consume had an IRR ought engagement of 15%. still we desire ought manufacture a lower answer can this investment, we although strong consume a big commerce of belief can the company. Our harvest can price is 7.9%.

We invested can ACTi, a manufacturer of kitchen and bathroom cabinets. Our first-lien lend supported the company's acquisition of ELKE. Our harvest can price was 9.8%.

We made an investment can the first-lien lend of KIK habit Products. KIK is a diversified manufacturer of consumer packaged goods, can particular, personal care products, antifreeze and pool chemicals. This is a shorter-dated lend maturing 4 years from now. Our harvest can price is 8.4%.

We consume a moment investment can the first-lien notes although Nexeo Plastics. These notes were isolate of the financing parcel although the carve-out of the plastics distribution material from Univar. The sponsor is One Rock. Nexeo Plastics is a part of Nexeo Solutions, a foregoing portfolio corporation of ours. Our harvest can price is 10.5%.

We invested can a association commerce with both the first-lien lend and a second-lien lend ought Carlton Group. The corporation manages rewards programs although corporate customers. These loans were originally placed although an acquisition financing. Our first-lien harvest is 9.9% can cost, and our second-lien harvest is 14.8%.

Finally, we invested can the first-lien lend ought Empire Office. Empire is the nation's largest Steelcase businessman and is the largest commercial furniture businessman more broadly. The harvest can price of this investment was 10.5%.

We had 4 fully realized investments this area although well. The first of these, the immerse lend although Sears Holding I mentioned a little moments ago. By its nature, the immerse was a short-term financing, and this obviously has a meaningful result can the IRR. Our harvest was 18.2%, and our fully realized IRR can this investment was 59.1%.

We were repaid can Caelus Energy, which had been one of our largest positions although early 2014. Caelus was almost 8% of the portfolio, and its par repayment is one of the chief drivers of the reduction can our exposure ought fat and gas. Our realized IRR was 12.4%.

Our first-lien lend ought Zinc Borrower was repaid. The company's deed has been excellent, and we abstract ought contain an equity co-invest place can the company. Our fully realized IRR can the lend was almost 14.4%.

Finally, we consume now fully realized our place can U.S. strong Services. although Caelus, U.S. strong was a debt investment we made can the fat and gas sector can 2014. U.S. strong reorganized can 2017, and our first-lien lend was structured into a new vocabulary lend although strong although degree A and degree B LLC units. can the time of the restructuring, we although strong participated can a new revolving faith facility although the company. We sold our LLC units can the second area of 2018, fully realizing that part of our exposure.

In the fourth area of 2018, U.S. strong was acquired by SPAC. Our revolver exposure was repaid, and we fully realized that part of our exposure then. can conjunction with the SPAC transaction, 92% of the first-lien lend was repaid with cash, and the remaining 8% of the lend received shares can the newly public company. The money was a substantial part of the first-lien realization. nevertheless this quarter, we sold our USWS shares. With the USWS shares sold, we consume now fully realized our investment can U.S. Well. Our IRR from our first investment can the first-lien lend can in of 2014 ought our final sale of shares can March this year was 15.1%.

Our portfolio corporation compute was 32 can March 31 versus 29 although of December 31 and stands can 33 today. We consume no had any entire realizations although area end, nevertheless we did create a new investment can the first-lien lend of Limbach Holdings, a contractor focused can HVAC, plumbing, electric and mechanical services although commercial construction. Our harvest can price can Limbach was 10.8%.

Using the GICS measure although of March 31, our largest industry concentration was professional services can 14%; followed by media can 10.7%; energy, device and services can 10.5%; commercial services and supplies can 8.9%; and construction and engineering can 7.1%.

I'd now although ought become the exclaim can ought Rocco ought discuss our economical results.

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Rocco Angelo DelGuercio, CM Finance Inc. - head Compliance officer & CFO [6]

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Thanks, Chris. although the area ended March 31, 2019, our net investment wage was $3.4 million or $0.25 per share. The beautiful evaluate of our portfolio was $299.1 million compared ought $283.3 million can December 31. Our investment activity accounted although a $21 million multiply can our portfolio, including $4.8 million of net realized and unrealized losses. Our new investments during the area had an medium harvest of 10.63%.

The weighted medium harvest of our debt portfolio was 10.44%, a decrease of 64 base points from 11.08% can December 31. The chief drivers of this decrease was a decline can LIBOR; the repayment of Sears debt, which had an extremely tall yield; and the shift almost investment can Fusion mingle ought nonaccrual.

As of March 31, our portfolio consisted of 32 portfolio companies. 75.9% were can first-lien investments, an multiply from 63.7% final area greatly driven by the repayment of $24.3 million of Caelus second-lien and $63.6 million of new first-lien investments can this quarter. although of March 31, 19.9% of the portfolio is can second lien, 3.8% is can unitranche investments and almost 0.3% is can equity warrants and other positions.

94.9% of our debt portfolio was invested can floating-rate loans and 5.1% can fixed impose positions. Our medium portfolio corporation investment was almost $9.3 million, and our largest portfolio corporation investment was PGi can $18.7 million.

We were 0.91x levered although of March 31 versus 0.86x levered although of December 31.

Finally, with glory ought our liquidity, although of March 31, we had $6.8 million can cash, $3.9 million can restricted money and $46 million of ability beneath our revolving faith facility. additional news regarding the paper of our portfolio is included can our roll 10-Q filed yesterday.

With that said, I'd although ought become the exclaim backward can ought Mike.

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Michael C. Mauer, CM Finance Inc. - Chairman of the Board & CEO [7]

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Thank you, Rocco. We're proud of the proceed we've made repositioning the portfolio. no only consume we maintained our concentrate can secured lending, nevertheless the team has done a phenomenal task originating first-lien opportunities. We can no frequently consume can excess of 3/4 of the portfolio can first-lien investments, nevertheless the lower-risk profile that we consume developed is something that we conduct intend ought affirm can the near ought medium term. We conduct no consume a significant part of the portfolio can second-lien investments, and we don't see any discuss ought achieve down the main structure although harvest ought possess the portfolio can the 10% ought 11% context that we believe is proper can the modern just environment.

This quarter, we did write off Trident although strong although 2 markdowns, which I desire ought discuss with you. although we study the probability of any question recovery can Trident is minimal, we consume written off the 0 evaluate can the modern quarter. There is no money result of this write-off. It is simply a change from unrealized loss can Trident ought a realized loss. That is why you won't see Trident can the rgeister of investments.

We marked down our place can the first- and second-lien loans can Premiere Global Services by an aggregate of $3.1 million. PGi's basic results consume been challenged although the corporation transitions its material ought subscription-based models, continues ought create operational changes and diminish costs and faces a main structure that now has higher leverage than anyone expected when we underwrote the transaction.

That said, the sponsor, Cyrus Capital, continues ought exist supportive and behaves can a stand that gives us belief can the material can the desire term. We bug PGi closely and affirm a compatible conversation with colleague lenders and with Cyrus.

Finally, we reduced our symbol can Fusion from 95 ought 80. Fusion is a public corporation trading beneath the ticker FSNN. They released an 8-K can April 2 announcing that they had failed ought create a scheduled amortization payment ought the first-lien lenders, including us. although then, there consume been a sequence of forbearances signed, nevertheless the main payment has no been made. although such, our expectation is that the corporation will fail ought create advantage payments although strong and will responsible need additional liquidity can the near term. Given our confidentiality obligations, I'm no can freedom ought state more, nevertheless we are working closely with our colleague lenders and legal and operational advisers.

We remain extremely selective can our new investments. We consume added association deals, originated along the team's long-standing relationships with other lenders. We consume utilized our relationships with investment banks ought see opportunities that others consume not. We consume although strong found short-dated loans can the secondary, where we desire ought generate above-average returns.

Our concentrate is can the characteristic of the management team, the rigid evaluation of lend faith and security documentation and can loan-to-value

(technical difficulty)

balances ought ensure

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protection. This manner is dedicated ought preserving main and maintaining a firm dividend. final quarter, I guided that we expected ought exist can 30 portfolio companies can the near term. And we're same pleased ought consume crossed that threshold during this area and farther grown the corporation compute ought 33 today. And we consume an additional investment that we consume committed ought that we'll fund can the coming days.

Despite the unpredictable personality of unscheduled prepayments, we believe the growth of the corporation compute is evidence of our proceed and portfolio repositioning that we began few accommodation ago. We consume targeted opportunistic sales ought help fund the buy of new loans, and we consume reinvested the proceeds of larger repayments can multiple new portfolio companies. Our largest virgin investment is now $15 million versus $26 million a year ago.

We impartial reached the anniversary of our Board's approval of the modified asset coverage requirements of the moment material faith Availability Act. post can plainer terms, although of can 2, we consume the ability ought multiply our leverage from a boundary of 1x ought 2x. We consume the leverage queue ability ought multiply beyond 1:1 today and are negotiating additional ability presently.

I used to direct that our new leverage aim will exist can a 1.25x ought 1.5x context. This change can the leverage boundary is the major discuss that our leverage increased quarter-over-quarter although we ramped up with good opportunities although they consume become available ought us.

Lastly, can this point, the adviser will waive the basis management fees can excess of 1% can the next area can leverage can 1x. We covered the March area dividend with NII and fully earned our incentive fee, though we waived a part of that incentive fee. We desire ought cover the dividend and earn our incentive charge can the June quarter.

Our Board of Directors declared a distribution although the area ended June 30, 2019 of $0.25 per portion payable can July 5, 2019 ought shareholders of record although of June 14. We consume maintained our dividend of $0.25 although March of 2017 and are confident that this is a flat that is supported by our ability ought generate NII without reducing the characteristic of our investments or changing our concentrate from secured lending opportunities.

This quarter, we were can an extended blackout epoch and although such, were unable ought buy any additional shares. can in 1, the Board approved the extension of this $5 million program along can 1, 2020. We are currently continuing ought task with the Board ought impose the reactivation of the portion buyback program.

Operator, entertain blank the queue although Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Christopher Nolan.

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Christopher Whitbread Patrick Nolan, Ladenburg Thalmann & Co. Inc., investigation part - EVP of Equity investigation [2]

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On your new investments, how many turns of EBITDA?

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Michael C. Mauer, CM Finance Inc. - Chairman of the Board & CEO [3]

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Chris, I'm sorry, you're breaking up. Could you attempt it again? perhaps if you're can speakerphone, elect up, I'm no sure.

(technical difficulty)

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Christopher Whitbread Patrick Nolan, Ladenburg Thalmann & Co. Inc., investigation part - EVP of Equity investigation [4]

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Can you hear me now?

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Michael C. Mauer, CM Finance Inc. - Chairman of the Board & CEO [5]

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Go ahead. grant it a shot. Sorry.

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Christopher Whitbread Patrick Nolan, Ladenburg Thalmann & Co. Inc., investigation part - EVP of Equity investigation [6]

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Okay. How many turns of EBITDA although the new debt investments?

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Christopher Edward Jansen, CM Finance Inc. - President, Treasurer, Secretary & Director [7]

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