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Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to Crown Capital's Q1 2018 Results Conference Call.Please note that today's call contains forward-looking statements within the meaning of the applicable Canadian security legislation. Forward-looking statements involve known and unknown risks and uncertainties and other factors that maybe cause actual financial results, performance or achievements to be materially different from estimated future results, performance or achievements expressed or implied by those forward-looking statements. For a description of the risks associated with Crown's business, please refer to the company's filings for Q1 as well as its AIF at sedar.com.Chris Johnson, Chief Executive Officer, you may begin your conference.
Thank you, operator, and good afternoon, and welcome to Crown Capital's First Quarter 2018 Results Conference Call. I'm joined today by Mike Overvelde, our Chief Financial Officer. I'll start today's call with a few comments on the portfolio before Mike reviews the financials, and we'll open up the call to questions.Coming off an active fourth quarter in 2017, we've had a positive start to the year. We've announced $45 million of new transactions bringing additional scale and diversification to the portfolio. We now have $220 million at work in 13 different investments, and our late-stage pipeline, [ as always ], bodes well for a strong 2018.As we reviewed on the last earnings call, we started 2018 with a sizable transaction, a $33 million loan to Baylin Technologies, a publicly-listed global provider of innovative wireless antenna solutions. And early this month, we announced a $12 million investment, a 5-year loan to DATA Communications Management, a leading provider of integrated business communication solutions to companies across North America.In addition to these new investments, we made further progress with the realization of our loan to Petrowest. To date, in 2018, Crown and our syndicate partner have received 2 distributions totaling $7.5 million, of which Crown Fund IV received $7 million. We expect to recover the remaining $3 million -- approximately $3 million from Petrowest over the coming few months, which positions us to generate a healthy return from this investment.As part of the Petrowest process, we acquired substantially all the assets of the Rbee Aggregate and Crushing business. Since that time, Rbee has experienced a significant increase in revenue and margins, and we're expecting a strong year there as well.In terms of the other portfolio of companies, we're generally pleased with the performance and outlook of the companies we have in our portfolio. I encourage you to review the Company Update section of our MD&A for more detail, including the risk ratings we have for each loan.Another important highlight of Q1 was the receipt of our first credit rating by a rating agency. DBRS has assigned Crown a Long-Term Issuer Rating of BB (low) with a stable trend. This initial rating supports our objective to build and diversify our capital sources to provide additional avenues for growth. In addition to these operating highlights, we increased our quarterly dividend to $0.15 per share in February, representing a 15% increase over the previous quarter. Since the beginning of last year, we increased the dividend now 3x for a total increase of 36%. And today, we announced another dividend of $0.15 per quarter.Our business has significant operating leverage, and as we put more capital to work, we expect to generate growing earnings and cash flow to fund an increasing dividend. Our growth target for dividend is 25% per year.With that, I'll turn the call over to Mike for financial results.
Thanks, Chris. Good afternoon, everyone. I'll quickly cover the highlights for the quarter, and I should note right at the outset that Q1, as you have seen, represented our first quarter reporting under IFRS 9. As a result, some of our debt investments are now carried at amortized cost, with other debt investments and all equity investments carried at fair value through profit and loss. Previously, you'll recall, all of our assets had been treated at fair value through profit and loss.Comparative periods prior to January 1, 2018, were not restated for the impact of IFRS 9 and, accordingly, we reflected the impact in our retained earnings as at January 1. The impact on carrying value of investments in our retained earnings as at January 1, 2018, were reductions of $2.1 million and $0.9 million, respectively. In addition, I'll just note that the financing fees earned in relation to debt investments carried at amortized cost in Q1 to supply to the new Baylin investment, these are now deferred and amortized over the term of related loans as part of the effective interest rate and are no longer recognized immediately in revenues.I'll note that we did add some disclosure to -- I guess, throughout the document to discuss various places impacted by IFRS 9. In particular, there's an Investment Summary table in the MD&A, where we now identify which loans are now carried at amortized cost versus being carried at fair value.Revenues for Q1 were $5.3 million. That compares to $6.8 million in Q1 of last year. I guess, importantly, we look at the fact that we're building a solid base of interest revenues as the portfolio grows, with interest revenue of $5.6 million in the quarter, up 27% from last year. You'll note that last year's interest revenue did include about $0.5 million of interest earned from Bancroft II, which was wound down in mid-2017. The main difference, if you're looking year-over-year in total revenue, was a shift in net gains and fair value of investments, which was negative $0.5 million in the quarter compared with a positive $1.8 million last year. The most significant contributors in Q1 of 2018 were decreases in the fair values of the Source shares, Medicure and Marquee warrants, partially offset by an increase in the value of the Baylin warrants, and modest increases in the fair value of several loans.Fees and other income were $0.2 million in the quarter, that's down from $0.5 million last year. Prior to adopting IFRS 9, we would've taken fees related to the Baylin loan into our Q1 revenues and earnings, and that would have made this revenue line materially higher in the period. I will highlight that you can find some disclosures, I guess, in terms of the cash impact of things like fees in our statement of cash flows. For Q1 2018, you'll see that we received finance fees of $715,000 in aggregate, of which just $30,000 was included in our revenue line for the period.Total expenses were $1.9 million in the first quarter. That's up modestly from $1.7 million in Q1 2017. That's mainly just due to the timing of our accrual for annual staff bonus expense, which was, I guess, weighted a little bit differently throughout 2017, is intended to be recorded a little bit more smoothly throughout 2018.Adjusted EBIT was $2 million compared with $3 million in Q1 of 2017. Total comprehensive income, net of noncontrolling interest, was $0.9 million, or $0.09 per basic share, in the quarter compared with $1.7 million, or $0.18 per basic share, in the first quarter last year.In Q1, we announced a quarterly dividend of $0.15 per share payable, which, as Chris mentioned, was a 15% increase over the prior level. We announced another dividend today payable on June 1.Total assets at the quarter-end were $225 million. It's up from $199 million this time last year, but down modestly over year-end 2017, with the quarter-over-quarter decrease due mainly to the adoption of IFRS 9. I would remind that although we invested $30 million in Baylin in the quarter and we had no repayments, we had prefunded this transaction in late Q4 such that the impact on assets during Q1 was net neutral, but we did have that investment growing the investment portfolio.Total equity was $103.2 million, or $10.88 per basic share, again up over the comparable period in 2017, but down modestly over year-end due mostly to the adoption by IFRS 9. At quarter-end and prior to the $12 million investment in DATA, we had access to approximately $61 million for additional portfolio investments, and that includes our working capital, about $27 million of committed -- $27 million of committed capital available to Crown Fund IV from parties other than Crown and amounts available under our credit facility. Based on the current pipeline, we do intend to deploy the majority of our cash and to finally be well drawn on our credit facility to fund investments by mid-2018. As this money is put to work and our portfolio grows, we'd expect to see a corresponding increase in interest revenue, although the impact on fees and other income may be muted somewhat compared with actual fees received and compared with how revenues might have been recognized prior to the adoption of IFRS 9.I'll turn the call back to Chris for some closing comments.
Thanks, Michael. Looking ahead, we're well positioned for a strong profitability in 2018. As we deploy more capital and apply modest leverage, our business model allows us to generate significant increase in earnings cash flows and dividends. We're pleased with the overall quality and performance of the current portfolio and our focus is to continue to build the scale and diversification through additional investments.[ Demand ] from borrowers for our non-dilutive capital alternatives is strong, and it reflects -- is reflected in the robust pipeline across multiple sectors. We have an exceptional platform to serve their needs, and we'll continue to build upon our reputation and track record in this industry. The demand from our borrowers is matched by strong demand from institutional investors who are seeking exposure to private credit. These conditions, together with our credit rating, support our objectives to build further and diversify our funding structure. We look forward to update you with our release of Q2 results, and I hope to see many of you at our AGM this afternoon. The details of such are on our website.We'll now open the call for questions. Operator?
[Operator Instructions] Your first question comes from the line of Stephen MacLeod with BMO Capital Markets.
Just when you think about the pipeline for deal flow as well as, I guess, roughly the $61 million in available capital that you have, what do you -- what are your plans or expectations for funding additional deal flow as you get through mid-2018?
Yes. So what we have available is somewhat matched within our pipeline. So we're at a point now we're assessing further upsizing in the fund. So that's obviously one way. And on our own balance sheet, it's more through the debt capital markets type of options.
Right. Okay. Okay, that's helpful. And can you talk a little bit about -- I mean, any additional color you can give around the pipeline and what you're seeing out there by industry or geography?
Yes. I don't want to get into the specifics until we actually get them closed because the nature of the beast [ is until ] they're closed, and -- there's some risk of not closing them. But it's pretty diversified, like we [ got some interesting ] mix of also some short- and long-term deals in there. So it's just -- yes, I don't think there's a rhyme or reason to -- what exactly is in there, just fairly broad.
Okay. Okay, that's great. And then just finally, in terms of IFRS 9, is -- would you expect to see that being reflected on the income statement mostly through that fees and other income line? I mean, that seemed to be where most of the delta was relative to last year and what we were looking for.
Yes. It's Michael here. So you're going to actually see that impact on a few of the revenue items. One -- I mean, one offset, of course, is that you are going to see, and you are seeing slightly higher interest revenue recorded for the loans and amortized cost. So just to be 100% clear, again, this impacts a subset, although it's the majority of our debt portfolio, not the other investments. For those investments, whereas we previously would have been accruing interest based on coupon, the nature of setting up amortized cost is such that you defer those fees upfront. And in our case, our loans, when we establish them, the initial cost is almost always lower than the amount we expect to receive upon final payment. Therefore, there is a discount that then has to be recognized over time into revenues. So all of that is background. The impact going forward is that, whereas previously we might have seen that discount versus par kind of eventually materialize as an -- through unrealized gains line, that will now be factored into this effective interest rate, and any fee income that's been deferred will be factored into that effective interest rate. So what you're going to end up seeing is very muted fee income in periods where we originate loans compared with what we would have had. And that's only going to be partially offset, I guess, in any given period where we have activity through the interest revenue line.
May I just add to that, like, you're also going to feel it when you have prepayments because, like, to the extent that our loans prepay, which, for the special situations, is the norm, all that then gets recognized in the period of the prepayment.
[Operator Instructions] Your next question comes from the line of Brenna Phelan with Raymond James.
So I just wanted to start on the provision for credit losses. So the opening, it's about $100,000 and then added to a bit. Is that one specific credit?
No, it isn't actually. It's quite spread. And as you're probably noting, it's actually quite a small number relative to the size of our portfolio. And we spent a fair amount of time dealing with advisers and sort of looking at sort of historical data sets and that kind of thing to the extent that we could find information relevant to us. Under IFRS 9, we now have to take -- the backdrop here is we now have to take provisions and set up allowances on -- for any loan that is accounted for under amortized cost. So that's for some loans, but not for others. And the terminology there, of course, is expected credit loss. And for a loan -- at point of initiation of that loan, we have to determine this, but we only determine it based on what we expect is the expected credit loss over the following 12 months, so kind of like what's probably...
Unless it's impaired, right?
Well, unless -- I guess, the definition is along the lines of unless we know of a significant increase in credit risk. So -- and we must monitor that, and we've got our tools to do that. If we determine -- it doesn't have to become impaired. It just has to be a "significant" increase in credit risk, at which point you revert from the 12 months expected credit loss message to looking out over the lifetime of the loan, in which case the probability of default would absolutely increase and, presumably, the loss given default would increase materially if you've noted that increase in risk as well. But in our case, as we look across the portfolio, most of these loans, as you'll recall, has been originated within the past year or 2. And -- so from point of having done the due diligence, at which point, clearly, we were quite satisfied with credit risk, until today, there really haven't been any cases of significant increases in credit risk. And if we're looking out at 12-month horizon for any of these loans, our assessment is that the probability of default is very low. On top of that, we've got very strong loan-to-value on -- across the majority of the portfolio, such that our loss given default on anything that might happen on a 12-month horizon is also quite low. So the product of all that is, at this point, quite low expected credit losses. Now we do have one loan, of course, that is impaired, it's the Petrowest situation. But in that particular case, we have taken 0 expected credit loss because it is adequately collateralized to the point where we really don't think there's any risk in collecting the full amounts in the very near term. So that's, in summary, how we get to the numbers that we've got. That is spread across the portfolio, and it's quite a small number for each of the loans we have in the books.
Right. Okay. So it's spread out quite small, and loss given default for all of them is still expected to be 0?
Well, it wasn't 0 for -- the only loan we assigned 0 to was Petrowest, given the status of the expected cash flows and recoverability. For each of the other loans, we have assigned loss given default and probability of defaults above 0 in every case, it's just when the product of those ends up being quite a small number.
Okay. And then in looking at the difference in the amortized cost, number of loans versus the, like, the principal amount, there's about $7 million in difference. Is that just the fact that all of these that had -- because of the amortized cost, portion is only principal and interest. Oh, I guess, you still could have received equity kickers so that carrying value is less and you're accreting. Is that entire difference between the principal amount of the loan versus what the carrying value and amortized cost is just related to those discounts? Or is there something that's being assigned lower value?
I guess, maybe I'll just add, Brenna -- first of all, which numbers specifically are you comparing? And I have the financials in front of me, if you have the numbers.
So if I take the principal values of the ones that are asterisked with that.
Okay. So without getting into too much detail, the idea is that if we -- when we extend a loan, and I'll use -- Baylin was an example in the quarter. I won't get into specific numbers. But if that's a $30 million investment on behalf of CCF IV, the fund invests $30 million. That's its aggregate cost for the investment, but the investment is comprised of 2 pieces. The loan has a par value of $30 million, but we also get warrants. So we have to assign some value to the warrants, and we do that using Black-Scholes and so on. So we assign a fair value to those warrants, and then we will -- and that's the cost up front. And then each quarter thereafter, right, we're revaluing the warrants in the loan because its cost has been -- the cost is $30 million less the value of the warrants at origination. That's the prime -- that's the discount I'm referring to. So par value is $30 million. Cost and amortized cost is something less than that. And we actually -- fair value is actually something less than that as well because in our methodology, we don't just immediately assign $30 million to that because that's what we think we're going to get down the road. We accrete that a little bit gradually as well. But the -- the primary -- the difference used to be the value at the inception of loan, what the associated equity kicker was. Now for amortized cost loans, it's that plus whatever fees have been received upfront.
Okay. Okay. And the fees are amortized on a straight line basis over the term of the loan.
More or less. It's not quite a straight line. It's what they refer to as the effective interest rate method. So what that, in a nutshell, is if the starting point is a cost, and amortized cost equals our cost less the fees, right, we have to get from point A, that cost $30 million, in the Baylin example, at maturity, so 5 years out. So the question is what is the effective interest rate if we were to earn interest that would sort of include -- that would get us there. So it's like -- so we end up with, if you will, a single interest rate applied to a growing principal balance that gets us to $30 million at the end. So it's not quite a straight line, and I know that I can walk you through the technicalities for anyone on the line that's interested, but it achieves the same sort of result.
Okay. And then just last one for me. On the credit rating that you just obtained, so what kind of flexibility does that give you on accessing debt markets? And what -- are you constrained at all by your current leverage covenants with the current piece of debt you have? What do you see as optionality there?
Yes. I'm not sure I can answer that specific question because I don't know like we'd evolve -- we will be evolving our current line of credit as time moves on in any event. So putting that aside, the plan for the credit rating was to get more term capital as opposed to revolving capital on our own balance sheet. And it just -- the debt markets -- there are certain investors who have much greater availability to buy rated assets than unrated assets, so [indiscernible] the doors on those parties.
Okay. And do you see that being a near term? Or is that sort of like a laddering function, you need to find the investment and then match to try to go to the debt market?
Well, it's one of several capital-raising initiatives we're working on. So it's -- and they'll come together in sort of a blended format, would be my guess. I don't necessarily say it's necessarily near term, it's -- it will as needed, but not necessarily tying to an individual investment. It's something that I see ourselves using in the course of the next 12 months, for sure. Whether I would do it in the next 3 months, 6 months, 9 months, that will be sort of dependent on the other sort of capital initiatives we have underway as well as the pipeline.
[Operator Instructions] There are no further questions at this time. I will now turn the call back over to Chris Johnson.
Okay. Well, we're glad we could update you on IFRS 9 today. It was Mike's pleasure to do that, but certainly appreciate everybody taking the call today, and we look forward to talking with you next quarter. Thank you.
Thank you all.
This concludes today's conference call. You may now disconnect.
Bye.