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Capitala Finance Corp. Reports Second Quarter 2018 Results

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Capitala Finance Corp. (NASDAQ:CPTA) ("Capitala," the "Company," "we,"
"us," or "our") today announced its financial results for the second
quarter of 2018.

Second Quarter Highlights

  • Net investment income of $4.2 million, or $0.26 per share
  • Net asset value per share increased to $13.71, up from $13.66 at March
    31, 2018
  • Completed our first co-investment with Capitala Specialty Lending Corp.
  • Opened a New York office, our sixth full service office

Management Commentary

In describing the Company's second quarter results, Joseph B. Alala,
III, Chairman and Chief Executive Officer, stated, "We are pleased with
our second quarter results, most notably continued coverage of quarterly
distributions, stability of NAV per share, and a reduction in balances
on non-accrual status. We continue to evaluate a number of lower middle
market investment opportunities and expect the second half of the year
will be active from an investment standpoint. Significant platform
liquidity will allow us to underwrite and invest in quality senior
secured opportunities up to $75 million, including Capitala Finance
Corp. Lastly, we expect to monetize several equity positions in the
normal course of business during the second half of the year, allowing
us to rotate the proceeds into debt investments and to support growth in
our net investment income."

Second Quarter 2018 Financial Results

During the second quarter of 2018, the Company originated $11.2 million
of new investments, and received $32.3 million of repayments. All second
quarter 2018 investments were first lien structures, with a weighted
average annualized yield of 9.0%.

Total investment income was $11.9 million for the second quarter of
2018, compared to $12.4 million in the second quarter of 2017. Interest
and fee income increased by $0.7 million in the second quarter of 2018
compared to 2017, while PIK income decreased by $1.1 million for the
comparable periods.

Total expenses for the second quarter of 2018 were $7.7 million,
compared to $11.7 million for the comparable period in 2017. The
decrease of $4.0 million is attributable to (1) a decrease of $2.7
million related to loss on extinguishment of debt arising from the early
redemption of 7.125% fixed rate notes during the second quarter of 2017,
and (2) a decrease in interest and financing expenses of $1.2 million
for the comparable periods, resulting primarily from interest on the
redeemed notes during the notice period while both the 2022 notes and
the 2022 convertible notes were issued and outstanding during the second
quarter of 2017.

Net investment income for the second quarter of 2018 was $4.2 million,
or $0.26 per share, compared to $0.7 million, or $0.04 per share, for
the same period in 2017.

Net realized losses totaled $22.6 million, or $1.42 per share, for the
second quarter of 2018, compared to net gains of $4.7 million, or $0.30
per share, for the same period in 2017. During the quarter, the Company
realized losses on Cedar Electronics Holding Corp. ($20.6 million),
CableOrganizer Acquisition, LLC ($1.6 million), and Caregiver Services,
Inc. ($0.5 million), partially offset by other gains totaling $0.2
million. The loss on Cedar Electronics Holding Corp. is a result of our
previously disclosed restructuring and did not have an impact on the
Company's net asset value per share for the second quarter of 2018.

Net unrealized appreciation totaled $22.0 million, or $1.38 per share,
for the second quarter of 2018, compared to depreciation of $10.9
million for the second quarter of 2017. Appreciation for the second
quarter of 2018 was primarily due to the reversal of previously recorded
unrealized depreciation for Cedar Electronics Holding Corp.

During the second quarter of 2018, the Company recorded a tax benefit of
$1.3 million, primarily related to net losses from our tax blocker
subsidiary. There was no tax provision for the second quarter of 2017.

The net increase in net assets resulting from operations was $4.9
million for the second quarter of 2018, or $0.31 per share, compared to
a net decrease of $5.5 million, or $0.35 per share, for the same period
in 2017.

Investment Portfolio

As of June 30, 2018, our portfolio consisted of 43 companies with a fair
market value of $483.3 million and a cost basis of $426.7 million. First
lien debt investments represented 50.9% of the portfolio, second lien
debt investments represented 6.6% of the portfolio, subordinated debt
investments represented 16.6% of the portfolio, and equity/warrant
investments represented 25.9% of the portfolio, based on fair values at
June 30, 2018. On a cost basis, equity investments comprised 13.5% of
the portfolio at June 30, 2018. The weighted average yield on our debt
portfolio was 11.4% at June 30, 2018, compared to 12.0% at March 31,
2018.

At June 30, 2018, we had debt investments in three portfolio companies
on non-accrual status with a fair value and cost basis of $25.8 million
and $31.9 million, respectively. Non-accrual loans, on a fair value and
cost basis, represent 5.3% and 7.5%, respectively, of the portfolio at
June 30, 2018. At December 31, 2017, the fair value of the non-accrual
investments was $25.0 million, with a cost basis of $50.1 million.

Liquidity and Capital Resources

At June 30, 2018, the Company had $40.8 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, 2018, the Company had $5.0 million outstanding and
$109.5 million available under its senior secured revolving credit
facility, which is priced at LIBOR plus 3.0%. The Company's regulatory
leverage ratio at June 30, 2018 was 0.60x, compared to 0.61x at December
31, 2017.

Subsequent Events

On July 31, 2018, the Company sold its investment in Kelle's Transport
Services, LLC, receiving $13.3 million in proceeds upon exit.

On August 2, 2018, the Company invested $13.0 million in the first lien
debt of Sunset Digital Holding, LLC, yielding 1-month LIBOR +7.25%.

Second Quarter 2018 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 7, 2018. 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.

About Capitala Finance Corp.

Capitala Finance Corp. is a business development company that invests
primarily in first and second liens, subordinated debt and, to 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 $2.7 billion asset management firm that provides
capital to lower and traditional middle market businesses throughout
North America with office locations in Atlanta, Charlotte, Fort
Lauderdale, Los Angeles, New York, and Raleigh. Capitala's lower
middle market investment strategy
focuses on investing in debt
securities with minority equity co-investments with less than $250
million in enterprise value through its permanent capital vehicles,
Capitala Finance Corp. (NASDAQ:CPTA) and Capitala Specialty Lending
Corp. (CSLC). Capitala's growth
fund strategy
targets control and minority equity investments,
typically coupled with credit investments, in lower middle market
companies with less than $30 million in enterprise value through both
SBIC (CapitalSouth SBIC Fund IV, L.P.) and non-SBIC closed-end funds.
Capitala Group has invested in over 150 companies since its inception in
1998 and seeks to partner with strong management teams to create value
and achieve optimal outcomes for its investors. For more information,
visit our website at 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, 2018     December 31, 2017
(unaudited)
ASSETS
Investments at fair value
Non-control/non-affiliate investments (amortized cost of $236,344
and $298,132, respectively)
$ 253,813 $ 288,374
Affiliate investments (amortized cost of $98,046 and $77,336,
respectively)
118,664 103,957
Control investments (amortized cost of $92,357 and $89,559,
respectively)
  110,784     107,608  
Total investments at fair value (amortized cost of $426,747 and
$465,027, respectively)
483,261 499,939
Cash and cash equivalents 40,826 31,221
Interest and dividend receivable 3,420 2,976
Due from related parties - 95
Prepaid expenses 260 309
Deferred tax asset, net 6 -
Other assets   84     55  
Total assets $ 527,857   $ 534,595  
 
LIABILITIES
SBA debentures (net of deferred financing costs of $1,995 and
$2,300, respectively)
$ 168,705 $ 168,400
2022 Notes (net of deferred financing costs of $2,245 and $2,496,
respectively)
72,755 72,504
2022 Convertible Notes (net of deferred financing costs of $1,423
and $1,583, respectively)
50,665 50,505
Credit Facility (net of deferred financing costs of $1,078 and
$1,293, respectively)
3,922 7,707
Management and incentive fees payable 2,560 2,172
Interest and financing fees payable 3,111 3,141
Trade settlement payable - 175
Deferred tax liability, net - 1,289
Written call option at fair value (proceeds of $20 and $20,
respectively)
6,815 6,815
Accounts payable and accrued expenses   7     -  
Total liabilities $ 308,540   $ 312,708  
 
 
NET ASSETS

Common stock, par value $.01, 100,000,000 common shares
authorized, 15,994,690 and 15,951,231 common shares issued and
outstanding, respectively

$ 160 $ 160
Additional paid in capital 241,350 241,027
Undistributed net investment income 16,541 15,854
Accumulated net realized losses from investments (88,459 ) (61,982 )
Net unrealized appreciation on investments, net of deferred taxes 56,520 33,623
Net unrealized depreciation on written call option   (6,795 )   (6,795 )
Total net assets $ 219,317   $ 221,887  
Total liabilities and net assets $ 527,857   $ 534,595  
 
Net asset value per share $ 13.71 $ 13.91
 
 
 
 
 
 
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

2018     2017 2018     2017
INVESTMENT INCOME
Interest and fee income:
Non-control/non-affiliate investments $ 6,867 $ 7,405 $ 14,223 $ 17,043
Affiliate investments 2,077 1,112 4,018 2,156
Control investments   1,838     1,583     3,687     3,571  
Total interest and fee income   10,782     10,100     21,928     22,770  
Payment-in-kind interest and dividend income:
Non-control/non-affiliate investments 427 1,530 1,132 2,708
Affiliate investments 289 411 775 642
Control investments   254     162     420     408  
Total payment-in-kind interest and dividend income   970     2,103     2,327     3,758  
Dividend income:
Non-control/non-affiliate investments 59 - 59 168
Affiliate investments 29 29 58 58
Control investments   25     25     50     305  
Total dividend income   113     54     167     531  
Other Income   -     77     -     77  
Interest income from cash and cash equivalents   17     28     32     41  
Total investment income   11,882     12,362     24,454     27,177  
 
EXPENSES
Interest and financing expenses 4,331 5,488 8,695 10,141
Loss on extinguishment of debt - 2,732 - 2,732
Base management fee 2,314 2,505 4,617 5,019
Incentive fees - - 244 1,308
General and administrative expenses   1,006     934     2,229     2,041  
Expenses before incentive fee waiver 7,651 11,659 15,785 21,241
Incentive fee waiver   -     -     -     (958 )
Total expenses, net of fee waivers   7,651     11,659     15,785     20,283  
 
NET INVESTMENT INCOME   4,231     703     8,669     6,894  
 
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND WRITTEN CALL
OPTION:
Net realized gain (loss) from investments:
Non-control/non-affiliate investments (21,115 ) 214 (25,694 ) 5,045
Affiliate investments 139 4,473 863 4,489
Control investments   (1,646 )   -     (1,646 )   -  
Net realized gain (loss) from investments (22,622 ) 4,687 (26,477 ) 9,534
Net unrealized appreciation (depreciation) on investments:
Non-control/non-affiliate investments 25,093 (6,454 ) 27,227 (12,849 )
Affiliate investments (5,227 ) 746 (6,003 ) 972
Control investments   2,128     (4,280 )   378     (2,782 )
Net unrealized appreciation (depreciation) from investments 21,994 (9,988 ) 21,602 (14,659 )
Net unrealized depreciation on written call option - (927 ) - (2,412 )
Net realized and unrealized gain (loss) on investments and written
call option
  (628 )   (6,228 )   (4,875 )   (7,537 )
Tax benefit   1,345     -     1,295     -  
Total net realized and unrealized gain (loss) on investments and
written call option, net of taxes
  717     (6,228 )   (3,580 )   -  
 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 4,948   $ (5,525 ) $ 5,089   $ (643 )
 
NET INCREASE (DECREASE) IN NET ASSETS PER SHARE RESULTING FROM
OPERATIONS - BASIC
$ 0.31 $ (0.35 ) $ 0.32 $ (0.04 )
 
WEIGHTED AVERAGE COMMON STOCK OUTSTANDING - BASIC 15,981,857 15,889,682 15,970,599 15,881,712
 
NET INCREASE (DECREASE) IN NET ASSETS PER SHARE RESULTING FROM
OPERATIONS – DILUTED
$ 0.26 $ (0.35 ) $ 0.27 $ (0.04 )
 
WEIGHTED AVERAGE COMMON STOCK OUTSTANDING - DILUTED 19,297,331 15,889,682 19,286,073 15,881,712
 
DISTRIBUTIONS PAID PER SHARE $ 0.25 $ 0.39 $ 0.50 0.78
 
 
 
 

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