Alaris Equity Partners Income 6 25 Senior Unsecured Debentures T.AD.DB.A

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Their upside scenario target is $22.00. GLTA

May 10, 2023

Alaris Equity Partners Income Trust 
Q1/23 normalized EBITDA slightly below forecast

Our view: Q1/23 results were neutral in our view as normalized EBITDA was slightly below our forecast. Overall portfolio health has weakened in the last few quarters coming off historical highs as Alaris’ weighted-average Earnings Coverage Ratio (ECR) declined to ~1.6x in Q1/23, down from the recent peak of ~2.1x in Q2/22 and at a level not seen in 3 years, but is at a level that is roughly in line with its historical average. Given the weaker macro environment and uncertainty on the degree of its impact on Alaris’ investment partners, we have a more cautious view on the shares, but acknowledge the company has done relatively well at navigating the past few years. Reducing target to $18 (was $19) primarily due to a lower-than- forecast Q1/23 BVPS, but maintain Sector Perform.

Key points:

Q1/23 normalized EBITDA of $32.2MM was slightly below our $33.0MM forecast, but ahead of $31.2MM consensus (range of $27.6MM to $33.0MM). Of note, we backed out $13.1MM in litigation costs; $1.7MM of F/X losses; $0.8MM from investment fair value gains; and $1.4M of transaction costs from Alaris’ reported EBITDA of $16.8MM. Distribution income was slightly lower than our forecast due to deferred distributions from LMS, but partially offset by slightly higher-than-forecast distributions by BCC. The lower-than-forecast distribution income was offset by higher- than-forecast realized/unrealized gains on investments and lower-than- forecast finance costs in the quarter.

Investment portfolio health continued to weaken Q/Q, albeit at a slower rate. Alaris’ Q1/23 weighted-average ECR was ~1.6x (vs. ~1.7x in Q4/22) with ~46% (vs. ~57% in Q4/22) of its portfolio having an ECR >1.5x (see page 3 for more analysis on Alaris’ reported ECRs this quarter).

Investments and redemptions: (1) Carey Electric redeemed the remaining US$1.0MM in eligible redeemable units during Q1/23; and (2) Alaris’ capital deployment to-date in 2023 has included its US$36.5MM investment in Federal Management Partners (see here for details and our thoughts) and re-investing in BCC (see here).

Other takeaways: (1) Alaris expects total partner revenue of ~$36.1MM in Q2/23; (2) LMS deferred part of its 2023 distributions due to margin pressures, but Alaris expects distributions to resume in H2/23 with any unpaid amounts to be recovered in 2024; and (3) Alaris has $203MM drawn on its credit facility pro forma its recent investment in FMP and can draw up to an additional $247MM for investments.

Reducing target to $18 (was $19) primarily due to a lower-than-forecast Q1/23 BVPS, but maintain Sector Perform.

Conference call today (Wednesday) at 11am EST; webcast link available on the company’s website.