Ladies and gentlemen, thank you for standing by and welcome to the TCG BDC Inc Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions]. I would now like to turn the conference to your speaker today, Daniel Harris, Head of Investor Relations. Please go ahead, Sir.

Good morning and welcome to TCG BDC's Third Quarter 2020 Earnings Call. Last night we issued an earnings press release and detailed earnings presentation with our quarterly results, A copy of which is available on the TCG BDC Investor Relations website. Following our remarks today, we will hold a question-and-answer session for analysts and institutional investors. This call is being webcast and a replay will be available on our website. Any forward-looking statements made today, do not guarantee future performance and undue reliance should not be placed on them. These statements are based on current management expectations and involve inherent risks and uncertainties, including those identified in the Risk Factors section of our annual report on Form 10-K that could cause actual results to differ materially from those indicated TCG BDC assumes no obligation to update forward-looking statements at anytime. And with that, I'll turn the call over to our Chief Executive Officer. Linda Pace

Thank you, Dan. Good morning everyone and thank you for joining us on our call this morning to discuss our third quarter 2020 results.Joining me on the call today is our Chief Investment Officer Taylor Boswell and our Chief Financial Officer, Tom Hennigan. I'm going to focus my remarks today across 3 areas. First I once again start with a review of our portfolio, which continues to be in good shape. Second, I'll provide a quick review of our third quarter results. And third, will discuss all of the positive developments at TCG BDC that we've completed over the past year that has led to significantly improve performance. Let's start with a discussion of our current credit position which was stable in the quarter and continues to perform well despite the significant economic headwinds this year. Several key measures highlight our strong and improving outlook. We had zero new non-accruals during the quarter. In fact, the number of non-accruals across our portfolio has been flat the past 3 quarters. And on both a fair value and cost basis non-accruals ticked down in the quarter. The amount of investments in our risk level 3 to 5 buckets ticked down 2% sequentially during the third quarter. Recall, but last quarter, we changed our risk rating methodology to be more forward-looking based on business trends rather than backward looking. So improvement in these ratings gives us further confidence in our forward credit profile and our watchlist also continues to trend in a positive direction, and we believe the vast majority of amendment activity in our portfolio is now behind us. Along with other more granular factors these indicators give us increased confidence in the positive trajectory of our portfolio. Moving on to an overview of our financial results for the third quarter, we…

Thank you, Linda. As usual, I will begin today with a summary of what Carlyle's proprietary macro research is telling us about the global economy. After that I'll provide comment on both the evolution of credit in our portfolio, as well as the new deal environment. From Carlyle's perch, we witnessed the global economy continue its recovery in the third quarter. Those significant dispersion has emerged across industries and geographies. China continues to lead the global recovery, largely driven by domestic demand. In Europe, the travel and tourism sectors are bearing the brunt of the economic impact from a second wave of infections. Posing risk too many Southern European economies. While activity continues to improve and other areas of the continent. In the US, the economic impact of new infections has similarly been focused in the hospitality, travel and energy sectors. As hotel occupancy remained stuck at half capacity, airline passenger volumes hover 70% below year ago activity and gasoline demand has stagnated 10% below 2019 levels. However, more broadly, business and consumer spending remain robust and continue to drive the US recovery, led by software and services companies and searching online spending. More recently, we have been carefully monitoring the impact of second waves of COVID across several geographies, including the US. While our current view is that future disruptions will be less severe than those of the first half of 2020. We do not expect the path recovery will be without volatility. This is a perspective, we have held since the beginning of this crisis and one which continues to strongly inform our portfolio management decisions at CGBD. On the portfolio side, the last several months have generally played out as expected, transitioning out of an active period of COVID related covenant amendments and into a third more…

Thank you. Taylor. Today have to give you with a review of our third quarter earnings then I'll provide further detail on the portfolio and our balance sheet position. As Linda previewed we had another stable quarter of total income generation, particularly given the macroeconomic backdrop in some of the earnings headwinds we discussed last quarter. Total investment income for the third quarter was $43 million jump from $45 million in the prior quarter. The decrease was driven by a couple of factors. First the decrease in interest income on the core investment book driven primarily by a lower average invested loan balance however, despite the low rate environment, our portfolio yield increased slightly from the second quarter and second, lower amendment and underwriting fees. Total expenses were $22 million in the quarter, down from $24 million last quarter. The largest component of the decrease was again, interest expense due to lower LIBOR as we have the benefit of a full quarter of low LIBOR on our liabilities. Well, most assets in the portfolio benefited from LIBOR floors. This resulted in net investment income for the quarter of $20 million or $0.36 per common share which is right in line with the general guidance we provided last quarter when we set the regular dividend. On November 2, our Board of Directors declared the dividends for the fourth quarter of 2020 as Linda noted and total level of $0.36 per share, which is payable to shareholders of record as of the close of business on December 31. And I'll reiterate we remain very confident in our ability to meet the $0.32 regular dividend and anticipate continuing to pay special dividends this quarter there'll besides based on the prior quarter's actual earnings. Moving on to the JV's performance, the dividend yield on…

Thank you, Tom. Delivering a sustainable dividend to our shareholders alongside a stable or growing NAV are our top priorities, which all begins with strong credit performance. We are on the right track to deliver on these goals for our shareholders. Thank you all for your time and attention this morning and I'll now turn the call back over to the operator for Q&A.

[Operator Instructions]. Our first question comes from Rick Shane with JP Morgan. Your line is now open.

Hey, good morning everybody and thanks for taking my question. I'd love to go through the core investments on non-accrual and put them in context of their maturity dates. When we look at central security and derm growth, Central securities of 21 maturity, derm growth is a 22. Based on the timeline of when they went on non-accrual, it appears that that was idiosyncratic because it was before any COVID-19 related write-downs. I'm curious what the sort of outlook for both of those is, particularly Central security given the timeline to maturity.

Hey, good morning, Rick. Thanks for the questions. This is Tom. On both those-- you're correct, and they were idiosyncratic credit issues not related primarily to COVID. On Central security, I'll note that was one of the transactions that we restructured in early October. So that deal, now I'll say, has a new capital structure fit for the earnings profile and an extended maturity date. So see that one, we have appropriately restructured. Dermatology Associates is one we have been engaged and we remain engaged and we anticipate a similar resolution on that transaction or that current capital structure within, let's call it the next couple of quarters.

Got it. Okay, that's helpful. And then moving to the two investments that are potentially more COVID related, direct travel obviously that appears to be highly correlated to what's going on with developments there that's maturing in 21. How are the sponsors behaving, and how are they looking towards that maturity and then and I apologize if I mispronounced that but Solera Technologies. I can't figure that one out that business in theory making panels or solar panels for satellites shouldn't be impacted, but it does look like Softbank financing potentially related to COVID-19 issues, is that business fundamentally impacted and by the way, I'm sorry hopefully I am seeing of their largest customer, I should say.

Right. Good observation. So on Solaro that's a deal we actually restructured about a year and a half ago, that had just fundamental issues based on the industry solid industry. It's highly typical, and you're exactly right, that this is had some issues based on its ties to one web that's one that we are in the equity see in that transaction and it's one that we see a positive resolution going forward or at least we're in negotiations and hoping to have positive resolution in terms of that company, turning the corner and working with their top customer one web as one way emergence from their bankruptcy.

Got it. And then on direct travel.

Yeah. Direct travel probably one of, if not the most severely COVID impacted name on our book and that was the other transaction I noted, we had two deals that restructured that deal also restructured in early October timeframe and the lenders again supporting that business and are the majority owners going forward it providing the capital for that, for that business.

Got it. Okay, great. Thank you. Thank you very much, and sorry if I recovered some materials, we've had so many companies report today, it's a blur. I don't know.

No problem at all and bring this morning, I will say is each all four of those situations what I'd highlight is we are the original debt and existing debt is in the first lien position in each case. In three cases the lenders are there now all in the equity or we anticipate will own the equity. So we think we're in a good position based on our seniority and based on our equity position to drive strong outcomes in recoveries in those situations.

Great. Hey, Tom. Thank you so much.

Thank you. Our next question comes from Finian O'Shea with Wells Fargo. Your line is now open.

Hi, good morning. Thanks, I'll reiterate Rick's comments my questions might be a below on three here, but can you, first talk about the NAV improvement, you had a bit less of a write up then. Your peers. Is this a function of a name or two or is it less of a benchmark spread enhancement, any color you provide there.

Hey Fin it's Tom. When we look across the board I mentioned 3 buckets in categories. The performing book primarily valuations up based on stable credit and outlook and improving credit outlook. And then the benchmark yields improving. I think our legacy underperforming deals flat which is really good about those in terms of just stability and again those are more driven based on enterprise value and not necessarily market benchmark yields. And then that last bucket is the COVID bucket where we saw a little bit more deteriorations and will say that direct travel investment. I've mentioned the 5 million that represented more than half of that bucket to decline and that valuation went from roughly 80 to 70 round numbers. So I'd say that limited on media idiosyncratic besides direct route we think overall, which really good about the overall performance of the book and what we call modest migration upward and we expect to continue to see that migration going forward.

Yeah let me just add that as Tom kind of explained on his question. We were pretty busy in the third quarter sort of getting resolution on some of these restructured names and whatnot. So now that that is kind of set, what we see given how our visibility into the portfolio now is kind of a path to just continued improving NAV. So we feel pretty good about what's on the horizon and would kind of guide you to not necessarily a step function up but kind of slow and steady progress on increasing NAV.

Okay. That's helpful. And on the second joint venture can you just go through this sort of basics of kind of what segment of loans will go in there and what it's leverage will look like as well.

Hi Finn, it's Tom. Maybe best way if we compare it to what I'll call JV 1. The existing JV1 focuses primarily on first lien loans with a lower price point, let's say 0 plus 400 and that vehicle has ranged anywhere up to target leverage that 5 times right now, we're running at about half of that 2.5 times the distinction this JV 2 is primarily more unitranche loans and a higher percentage of second liens of the weighted average spread in that portfolio was spread around L plus 6 and based on a little bit more risk in that book, the leverage is lower the leverage will only be 1.7 times. That's a singular credit facility with a 63% advance rates.

Okay, that's helpful.

Maybe I'll just touch on the strategic rationale there quickly as well. We really think that's a transaction that serves us well in any variance of forward macroeconomic scenario. So in a in a downside case, of course, liquidity, enhancing and the like in a base case or an upside case frees up a fair amount of balance sheet for us to both pursue in this new investment environment, which we regard as attractive and also get going again on the share repurchase front.

Yeah. And that sort of segue into my last question and I'll hop off. Where does this pro forma you're one times is that about where you want to be, given obviously what we've gone through in COVID and but you have obviously the opportunity to buy back stocks is a few moving parts, just like what where if your leverage profile target has changed at all in light of these joint ventures in today's environment. Thank you.

Sure. I think I'll go ahead. Tom, you pick this one up.

For sure, but when I can say it's been again with our focus on net financial leverage. That's the 1.0 times and I think we still feel very comfortable based on the composition of our current portfolio. The composition of both JVs that running in that anywhere from one right now, we're at the lower end of to 1.4 times. We think ultimately, we're very comfortable settling right in the middle of that range. We anticipate will continue to operate within the range. Obviously, it's a low end now, which is quite frankly we feel very good about based on just more uncertainty in the market with COVID cases rising, who knows what's going to happen. Some noise with the elections, we feel very well positioned right now to feel that we're at a lower leverage position in case things turn negative. But also we're seeing quite frankly right now, a lot of very attractive opportunities in the market so to potentially put new money to work. And then as we noted to share buyback, but we expect to remains remain again in that one out of 1.4 range as a target.

Yeah. And it's, it's, Linda, just to sort of to drive at home Finn. We do continue to see really good value in CGBD share errors. So we're looking forward to restarting the repurchase program and in the past, we weren't market timers right, we just kind of we get it really, really steady Eddie and we would, we would take that same position going forward.

Sure. That's all from me. And congratulations on very good quarter here.

Thank you. Our next question comes from Paul Johnson with KBW. Your line is now open.

Hey, good morning guys. Thanks for taking my questions. Those have already been asked, but two short questions, one I was just curious, the slight tick up in portfolio yield this quarter, was that driven more upon and commence this quarter and last or was there something else driving that?

Hey, Paul, it's Tom. That's exactly right to ten basis points is roughly the 125 basis points across roughly 10% of the portfolio.

Okay, great. And then my last question is just on the you guys issued from the advisor. I'm just curious if that's something that is possible to be retired early and then I also realize that there is a conversion price attached to that is that something you would evaluate retiring, if price start of the conversion price or if you have any sort of plans with the preferred.

I'll. I'll take that. Carlyle obviously is a strategic investor in the BDC and the investment is looked at with that eye. It's, we're clearly long term constituents with that money coming from the firm so never say never say never, but there is, there is really not an eye towards terms what you're talking about right now, it's kind of a looked at as a key part of our, of our balance sheet and is meant to be able to position us to have not only an appropriate leverage profile and all Weather balance sheet as we mentioned, but really to be in a position to act accordingly when we see good opportunities to put money to work in the market. So, I would, I would, I would caution you to look at it as kind of a long-term piece of capital in our balance sheet.

Okay, thank you very much. That's all from me.

Thank you. Our next question comes from Derek Hewett with Bank of America. Your line is now open.

Good morning. And we want. My first question is more of a clarification. So what is that. The target leverage of 1 to 1.4 times. Was that based off of regulatory or statutory leverage or was that purely financial leverage.

Hey Derek, It's Tom to clarify, the 1.0 to 1.4 currently right now, we look at it, manage the business based on net financial leverage.

Okay, great. And then how should we think about the kind of the ongoing special dividend in terms of sizing that, is it more formulaic or are there other considerations being made.

Hey, Derek, it's Tom. Again, right now our call it our run rate earnings, we feel very comfortable that give or take each quarter based on repayment activity fees that will be in the mid 30s territory. Recall that our current normalized earnings, so we anticipate every quarter we'll be paying the stated $0.32 loss effectively the outperformance above $0.32.

Okay.

So, like we did, much like the third quarter, we earned $0.36 so we declined to $0.32 plus we're going to pay $0.34 next quarter.

Okay. I understood. Great, thank you.

Thank you. I'm not showing any further questions at this time, I would now like to turn the call back over to Daniel Harris for closing remarks.

Thank you everyone for listening and your time today. We look forward to speaking with you again next quarter. If you have any additional follow-ups after the call, feel free to contact Investor Relations at any time. Thank you very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.