Capitala

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Aug 07, 2017

Capitala Finance Corp. Reports Second Quarter 2017 Results

CHARLOTTE, N.C.--(BUSINESS WIRE)-- Capitala Finance Corp. (Nasdaq:CPTA) ("Capitala", the "Company", "we", "us", or "our") today announced its financial results for the second quarter of 2017.

Second Quarter Highlights

  • Redeemed $113.4 million of 7.125% fixed rate notes from proceeds of two debt offerings during the quarter
    • Sold $75.0 million of 6.0% fixed rate notes due in 2022, redeemable in 2019
    • Sold $52.1 million of 5.75% convertible notes due in 2022
  • Successfully renewed and extended terms under our Senior Secured Credit Facility
  • Net investment income was $0.7 million for the second quarter of 2017 and was impacted by the following:
    • Non-recurring refinancing related charges of approximately $3.3 million, or $0.21 per share:
      • Non-cash charge of $2.7 million related to the remaining deferred finance charge on the 7.125% fixed rate notes redeemed during the quarter
      • Interest on the redeemed notes during the notice period while both 2022 notes were issued and outstanding amounted to $0.6 million
    • Non-accrual loans negatively impacted net investment income by approximately $3.7 million, or $0.23 per share
  • Net asset value per share of $14.97 at June 30, 2017, compared to $15.79 at December 31, 2016

Management Commentary

Commenting on the Company's second quarter report, Joseph B. Alala, III, Chairman and Chief Executive Officer, stated, "While we are pleased to have lowered our cost of capital during the quarter, we are working to reduce the current level of non-performing investments. We have committed additional resources to our portfolio group in an effort to address investments that are performing below expectations. The Company has significant liquidity to be active in lower middle market investing; however, we remain cautious from an underwriting standpoint as market conditions have become very competitive. We are focused on long-term NAV per share growth by generating total investment returns in excess of our distributions."

Second Quarter 2017 Financial Results

Total investment income was $12.4 million for the second quarter of 2017, compared to $17.0 million for the comparable period in 2016. Interest, fee and PIK income collectively were $4.2 million lower in the second quarter of 2017 as compared to the same period in 2016. Contributing to the variance was (1) the increase in lost interest related to non-accrual loans ($3.7 million for the second quarter of 2017 versus $1.1 million for the same period in 2016), and (2) a 17% decline in the cost basis of debt investments for comparable periods. Dividend income was $0.5 million lower in the second quarter of 2017 as compared to the same period in 2016, mainly due to $0.5 million of income in 2016 from the recently wound down Capitala Senior Liquid Loan Fund.

Total expenses for the second quarter of 2017 were $11.7 million, compared to $9.6 million for the comparable period in 2016. The increase of $2.1 million is attributable to (1) an increase of $2.7 million related to a loss on extinguishment of debt, (2) an increase of $0.5 million in interest and financing expenses, (3) a decrease of $0.2 million in management fees, and (4) a decrease of $0.9 million in incentive fees, net of the waiver. The loss on extinguishment of debt for the second quarter of 2017 of $2.7 million related to the remaining deferred financing charges on the 7.125% fixed rate notes that were redeemed during the quarter. Interest and financing fees for the second quarter of 2017 included $0.6 million of interest on the 7.125% fixed rate notes during the notice period while both 2022 notes were issued and outstanding.

Net investment income for the second quarter of 2017 was $0.7 million, or $0.04 per share, compared to $7.4 million, or $0.47 per share, for the same period in 2016.

Net realized gains totaled $4.7 million, or $0.29 per share, for the second quarter of 2017, compared to net losses of $5.6 million, or $0.35 per share, for the same period in 2016. During the quarter, the Company realized a $4.5 million gain related to MJC Holdings, LLC and $0.2 million in net gains on the remaining portfolio.

Net unrealized depreciation totaled $10.9 million, or $0.69 per share, for the second quarter of 2017, compared to appreciation of $5.4 million, or $0.34 per share, for the second quarter of 2016. During the second quarter of 2017, net unrealized depreciation included $4.7 million related to realized gains, while the remainder of the portfolio collectively depreciated by $6.2 million.

The net decrease in net assets resulting from operations was $5.5 million for the second quarter of 2017, or $0.35 per share, compared to a net increase of $7.3 million, or $0.46 per share, for the same period in 2016.

Investment Portfolio

As of June 30, 2017, our portfolio consisted of 46 companies with a fair market value of $487.0 million and a cost basis of $473.8 million. First lien debt investments represented 45.5% of the portfolio, second lien debt investments represented 8.4% of the portfolio, subordinated debt investments represented 24.4% of the portfolio, and equity/warrant investments represented 21.7% of the portfolio, based on fair values at June 30, 2017. On a cost basis, equity investments comprised 11.1% of the portfolio at June 30, 2017. The debt portfolio has a weighted average yield, exclusive of the impact of our non-accrual debt investments, of 13.2% at June 30, 2017.

At June 30, 2017, we had debt investments in six portfolio companies on non-accrual status with a fair value and cost basis of $50.7 million and $85.3 million, respectively. At December 31, 2016, the fair value of the non-accrual investments was $17.4 million, with a cost basis of $29.5 million.

Liquidity and Capital Resources

At June 30, 2017, the Company had $76.9 million in cash and cash equivalents. In addition, the Company had SBA debentures outstanding totaling $170.7 million with an annual weighted average interest rate of 3.29%, $75.0 million of fixed rate notes bearing an interest rate of 6.00%, and $52.1 million of convertible notes bearing an interest rate of 5.75%. At June 30, 2017, the Company had $30.0 million outstanding and $84.5 million available under its senior secured revolving credit facility, which is priced at LIBOR plus 3.0%.

Subsequent Events

On July 7, 2017, the Company repaid $20.0 million on its Credit Facility.

On July 24, 2017, the Company sold $5.6 million of its investment in CSM Bakery Solutions, LLC at a price of 87.5% of par value, receiving cash proceeds of approximately $4.9 million.

On July 31, 2017, the Company restructured its investment in Sierra Hamilton, LLC, exchanging its $15.0 million first lien debt investment yielding 12.25% for 13.7% equity ownership in Sierra Hamilton, Inc. and $0.9 million in cash proceeds related to past due interest. On July 31, 2017, the Company also received $1.2 million in cash repayment on its first lien debt investment in Sierra Hamilton, LLC yielding LIBOR + 8.00%.

On July 31, 2017, the Company received $1.3 million for its equity investment in Source Capital Penray, LLC.

On August 4, 2017, the Company received $6.0 million for its subordinated debt investment in B&W Growers, LLC. In addition, the Company received $1.5 million in proceeds for a partial redemption of its warrants.

Second Quarter 2017 Financial Results Conference Call

Management will host a conference call to discuss the operating and financial results at 8:30 a.m. on Tuesday, August 8, 2017. To participate in the conference call, please dial 1-877-312-5507 approximately 10 minutes prior to the call. A live webcast of the conference will be available at http://investor.CapitalaGroup.com. The Company will post a pre-recorded podcast on the investor relations section of its website at 5:00 p.m. on August 7, 2017.

About Capitala Finance Corp.

Capitala Finance Corp. is a business development company that invests primarily in first and second liens, subordinated debt and, to a lesser extent, equity securities issued by lower and traditional middle-market companies. The Company is managed by Capitala Investment Advisors, LLC. For more information on Capitala, or to automatically receive email notifications of Company financial information, press releases, stock alerts, or other corporate filings, please visit the Investor Relations section of our website.

About Capitala Group

Capitala Group is a leading provider of capital to lower and traditional middle market companies, through its family of credit focused funds. Since 1998, Capitala Group's managed funds have participated in over 138 transactions, representing over $1.3 billion of investments in a variety of industries throughout North America. Capitala Group manages both public capital (Capitala Finance Corp.) (Nasdaq:CPTA) and private capital (Capitala Private Credit Fund V, L.P. and CapitalSouth SBIC Fund IV, L.P.) for institutional and individual investors, and seeks to partner with strong management teams to create value and serve as long term partners. For more information, please visit www.CapitalaGroup.com.

Forward-Looking Statements

This press release contains certain forward-looking statements. Words such as "believes," "intends," "expects," "projects," "anticipates," and "future" or similar expressions are intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance, condition or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in the Company's filings with the Securities and Exchange Commission. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law.

   
Capitala Finance Corp.
 
Consolidated Statements of Assets and Liabilities
(in thousands, except share and per share data)
 
As of
June 30, 2017 December 31, 2016
(unaudited)
ASSETS
 
Investments at fair value
Non-control/non-affiliate investments (amortized cost of $317,406 and $391,706, respectively) $ 306,376 $ 393,525
Affiliate investments (amortized cost of $69,857 and $39,279, respectively) 93,014 61,464
Control investments (amortized cost of $86,508 and $82,791, respectively)   87,585     86,650  
Total investments at fair value (amortized cost of $473,771 and $513,776, respectively) 486,975 541,639
Cash and cash equivalents 76,867 36,281
Interest and dividend receivable 3,608 5,735
Due from related parties 129 182
Prepaid expenses 139 506
Other assets   98     72  
Total assets $ 567,816   $ 584,415  
 
LIABILITIES
SBA debentures (net of deferred financing costs of $2,608 and $2,911, respectively) $ 168,092 $ 167,789
2021 Notes (net of deferred financing costs of $0 and $3,025, respectively) - 110,413
2022 Notes (net of deferred financing costs of $2,739 and $0, respectively) 72,261 -
2022 Convertible Notes (net of deferred financing costs of $1,724 and $0, respectively) 50,363 -
Credit Facility (net of deferred financing costs of $1,437 and $759, respectively) 28,563 43,241
Due to related parties 74 35
Management and incentive fee payable 2,267 6,426
Interest and financing fees payable 3,013 2,657
Accounts payable and accrued expenses 35 536
Written call option at fair value (proceeds of $0 and $20, respectively)   5,148     2,736  
Total liabilities $ 329,816   $ 333,833  
 
Commitments and contingencies
 
NET ASSETS
Common stock, par value $.01, 100,000,000 common shares authorized, 15,902,495 and 15,868,045 common shares
issued and outstanding, respectively $ 159 $ 159
Additional paid in capital 240,633 240,184
Undistributed net investment income 17,479 22,973
Accumulated net realized losses from investments (28,347 ) (37,881 )
Net unrealized appreciation on investments 13,204 27,863
Net unrealized depreciation on written call option   (5,128 )   (2,716 )
Total net assets $ 238,000   $ 250,582  
 
Total liabilities and net assets $ 567,816   $ 584,415  
 

Net asset value per share

$ 14.97 $ 15.79
 
           
Capitala Finance Corp.
 
Consolidated Statements of Operations
(in thousands, except share and per share data)
(unaudited)
 
For the Three Months Ended June 30 For the Six Months Ended June 30
  2017     2016     2017     2016  
 
INVESTMENT INCOME
Interest and fee income:
Non-control/Non-affiliate investments $ 7,405 $ 10,604 $ 17,043 $ 21,351
Affiliate investments 1,112 2,240 2,156 3,603
Control investments   1,583     2,282     3,571     5,136  
Total interest and fee income   10,100     15,126     22,770     30,090  
Payment-in-kind interest and dividend income:
Non-control/Non-affiliate investments 1,530 912 2,708 1,790
Affiliate investments 411 98 642 193
Control investments   162     234     408     465  
Total payment-in-kind interest and dividend income   2,103     1,244     3,758     2,448  
Dividend income:
Non-control/Non-affiliate investments - - 168 205
Affiliate investments 29 29 58 58
Control investments   25     545     305     1,590  
Total dividend income   54     574     531     1,853  
Other Income   77     43     77     43  
Interest income from cash and cash equivalents   28     4     41     6  
Total investment income   12,362     16,991     27,177     34,440  
 
EXPENSES
Interest and financing expenses 5,488 5,029 10,141 10,051
Loss on extinguishment of debt 2,732 - 2,732 -
Base management fee 2,505 2,702 5,019 5,430
Incentive fees - 1,667 1,308 3,373
General and administrative expenses   934     927     2,041     2,096  
Expenses before incentive fee waiver 11,659 10,325 21,241 20,950
Incentive fee waiver   -     (765 )   (958 )   (1,361 )
Total expenses, net of incentive fee waiver   11,659     9,560     20,283     19,589  
 
NET INVESTMENT INCOME   703     7,431     6,894     14,851  
 
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from investments:
Non-control/Non-affiliate investments 214 69 5,045 69
Affiliate investments 4,473 (5,819 ) 4,489 (8,081 )
Control investments   -     145     -     145  
Total realized gain (loss) from investments 4,687 (5,605 ) 9,534 (7,867 )
Net unrealized appreciation (depreciation) on investments (9,988 ) 5,431 (14,659 ) (3,917 )
Net unrealized depreciation on written call option   (927 )   -     (2,412 )   -  
Net gain (loss) on investments   (6,228 )   (174 )   (7,537 )   (11,784 )
 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ (5,525 ) $ 7,257   $ (643 ) $ 3,067  
 
NET INCREASE IN NET ASSETS PER SHARE RESULTING FROM OPERATIONS - BASIC AND DILUTED $ (0.35 ) $ 0.46 $ (0.04 ) $ 0.19
 
WEIGHTED AVERAGE COMMON STOCK OUTSTANDING - BASIC AND DILUTED 15,889,682 15,807,340 15,881,712 15,796,642
 
DISTRIBUTIONS PAID PER SHARE $ 0.39 $ 0.47 $ 0.78 $ 0.94

Capitala Finance Corp.
Stephen Arnall, 704-376-5502
Chief Financial Officer
sarnall@capitalagroup.com

Source: Capitala Finance Corp.

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