Crescent Capital BDC Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 9, 2023

There are 7 speakers on the call.

Operator

Good afternoon, ladies and gentlemen, and welcome to the Q3 2023 Crescent Capital Incorporated Earnings Conference Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Thursday, November 9, 2023. I would now like to turn the conference over to Dan McMahon.

Operator

Please go ahead.

Speaker 1

Good morning, Welcome to Crescent Capital BDC, Inc. 3rd quarter ended September 30, 2023 earnings conference call. Please note that Crescent Capital BDC Inc. May be referred to as CCAP, Crescent BDC or the company throughout the call. Before we begin, I'll start with some important reminders.

Speaker 1

Comments made over the course of this conference call and webcast may contain forward looking statements and are subject to risks and uncertainties. The company's actual results could differ materially from those expressed in such forward looking statements for any reason, including those listed in its SEC filings. The company assumes no obligation to update any such forward looking statements. Please also note that past performance or market information is not a guarantee of future results. During this conference call, we may discuss certain non GAAP measures as defined by SEC Regulation G, such as adjusted net investment income or NII per share.

Speaker 1

The company believes that adjusted NII per share provides useful information to investors regarding financial performance because it's one method the company uses to measure its financial condition and results of operations. A reconciliation of adjusted NII per share NII per share, the most directly comparable GAAP financial measure can be found in the accompanying slide presentation for this call. In addition, a reconciliation of this measure may also be found in our earnings release. Yesterday, after the market closed, The company issued its earnings press release for the Q3 ended September 30, 2023 and posted a presentation to the Investor Relations section of its website at www.crescentbdc.com. The presentation should be reviewed in conjunction with the company's Form 10 Q filed yesterday As a reminder, this call is being recorded for replay purposes.

Speaker 1

Speaking on today's call will be CCAP's President and Chief Executive Officer, Jason Breaux Chief Financial Officer, Gerhard Lombard and Managing Director, Henry Chon. With that, I'd now like to turn it over to Jason.

Speaker 2

Thank you, Dan. Hello, everyone, and thank you for joining our earnings call. We appreciate your continued interest in CCAP. I'll begin the call by providing a brief overview of our 3rd quarter results before discussing the current market environment in more detail. I'll then turn it over to Henry to review our recent investing activity and portfolio performance.

Speaker 2

Gerhard will then review our financial performance for the Q3. Before we begin, you will note the presentation format has changed. We trust the content remains helpful in providing an overview of CCAP's performance. The revised format is Crescent's brand refresh, which reflects the growth and consistency of our firm investing in private and tradable corporate credit over the past 30 plus years. Let's begin.

Speaker 2

Please turn to Slide 6, where you'll see a summary of our results. For the 3rd quarter, We reported record net investment income of $0.59 per share, up from $0.56 per share in the prior quarter. This quarter's net investment income continues to reflect the strength in the core earnings power of our portfolio as we over earned our regular dividend by 44%. We also paid our 1st supplemental dividend in September, which was $0.08 per share and announced on last quarter's call. CCAP's over earn of the combined dividend payments coupled with unrealized appreciation in the portfolio on a net basis resulted in net asset value per share of $19.70 as of quarterend, up 0.6% as compared to the prior quarter.

Speaker 2

For the Q3, we are pleased to declare a supplemental dividend of $0.09 per share, dollars 0.01 higher than last quarter's supplemental dividend payable on December 15. As a reminder, these supplemental dividends are calculated as 50% of net investment income in excess of our regular $0.41 per share dividend, subject to a measurement test. Our Board also declared a regular dividend of $0.41 per share for the 4th quarter, payable on January 16, 2024, which represents the 20th consecutive quarter of CCAP paying a regular dividend of $0.41 Please turn to slides 13 and 14 of the presentation, which highlights certain characteristics of our portfolio. We ended the quarter with approximately 1 point Our investment portfolio continues to consist primarily of Senior secured 1st lien and unitranche 1st lien loans, collectively representing 89% of the portfolio at fair value at quarter end, unchanged from the prior quarter. This speaks to our continued focus on maintaining a defensively positioned portfolio with greater downside protection and lower risk of loss compared to 2nd lien and subordinated debt focused portfolios.

Speaker 2

We remain well diversified across 20 industries and continue to lend almost exclusively to private equity backed companies with 98% of our debt portfolio in sponsor backed companies as of In terms of industry composition, you can see on the right hand side of Slide 14 that the majority of our investments continue to be in Services based businesses with a particular focus on healthcare, software and commercial and professional services. This is by design as Crescent's private credit team has always focused on underwriting free cash flow generative businesses in what we deem to be more recession resilient industries. A few more credit trends to review. Performance ratings and non accrual levels. Our weighted average portfolio grade of 2.1 remained stable quarter over quarter.

Speaker 2

And on Page 17, you will see that the percentage of risk rated 1 and 2 investments, the highest ratings our portfolio companies can receive, accounted for 89% of the portfolio at fair value, up from 87% last quarter. As of quarter end, we had investments in 9 portfolio companies on non accrual status, representing 2.3% and 1.8% of our total debt investments Moving to the current market backdrop, activity levels have picked up in the second half of twenty twenty three with new issuance in the 3rd quarter hitting its highest mark since the rate hike onset in Q1 2022. During the Q3, market pricing and terms continued to be attractive for new transactions. Credit spreads on new loans are above historical averages, Leverage levels are lower and equity contributions are at historical highs. We've continued to see private credit take share Looking ahead to the remainder of this year and 2024, we expect to see a continued uptick in M and A activity.

Speaker 2

On the demand side, private equity dry powder is at record levels. And on the supply side, an increasing number of private companies are looking for potential exit opportunities, with many backed by sponsors that may be seeking to monetize longer held investments. While these dynamics should lead to an acceleration of sponsor to sponsor portfolio company transactions. The current geopolitical situation, Perceptions around a slowing economy and potential recession and a higher for longer rate environment continue to weigh on the deal environment. When activity does pick up further, we do believe that Crescent's focus on sponsor backed opportunities and our deep relationships in the space Position us well to benefit.

Speaker 2

I'd now like to turn it over to Henry to discuss our Q3 investment activity. Henry?

Speaker 3

Thanks, Jason. Please turn to Slide 15 where we highlight our recent activity. Gross deployment in the 2nd quarter totaled $45,000,000 As you can see on the left hand side of the page, 99% was in senior secured 1st lien and unitranche investments. During the quarter, we closed on 3 new investments totaling $20,000,000 with the remaining $25,000,000 coming from incremental investments in our existing portfolio companies. The new investments during the Q3 were loans to Private equity backed companies with SOFR floors, attractive fees and a weighted average spread of approximately 5.90 basis points.

Speaker 3

Underscoring Jason's earlier point about the historically attractive relative value we are able to achieve in the current market, the weighted average loan to value of our new investments The quarter was below 30%. The $45,000,000 in gross deployment compares to approximately $62,000,000 in aggregate exits, sales and repayments. We continue to remain highly selective from a credit and risk adjusted return perspective and maintain a long term strategic view on capital deployment that is insulated by our orientation of 1st lien credit risk and non cyclical industries. We remain focused on the continued rotation of the acquired First Eagle BDC assets and maintaining stable leverage levels and have progressed on both of these fronts during the Q3. Balance sheet leverage is down quarter over quarter and as of last Friday, we have realized approximately 26% of the acquired First Eagle portfolio since closing in March.

Speaker 3

100% of the aforementioned $62,000,000 in aggregate exits During the Q3 for First Eagle names. Turning to Slide 16, you can see that the weighted average yield of our income producing securities at cost increased quarter over quarter from 11.7 percent to 11.9% and is up 2 40 basis points year over year driven by the increase in the respective base rates. As of September 30, 99% of our debt investments at fair value were floating rate With a weighted average floor of 80 basis points, which compares to our 66% floating rate liability structure based on debt drawn with 0% floors. Overall, our investment portfolio continues to perform well with strong year over year weighted average revenue and EBITDA growth. That being said, we have continued to closely monitor the impact of rising borrowing costs on our portfolio companies.

Speaker 3

The weighted average interest Coverage of the companies in our investment portfolio at quarter end held Fable at 1.7x. It is important to note that we calculate our which would have resulted in an interest coverage ratio of 2x. We believe this provides a more relevant metric when evaluating the ability of our portfolio companies We also continue to closely monitor how our portfolio companies are managing fixed operating charges in this environment. Our analysis demonstrates that our portfolio companies in the aggregate are well positioned to address fixed charges with operating cash flows and available balance sheet liquidity. At the quarter end, approximately 64% of aggregate revolver capacity was available across the portfolio, an increase from 60% in the prior quarter, And we have not seen an increase in aggregate revolver utilization during the Q3.

Speaker 3

Our private equity partners have been active in managing costs, Particularly SG and A in this environment, and we are starting to see operating results that demonstrate the effectiveness of these actions that have been taken. A significant majority of our portfolio companies have grown both revenue and EBITDA on a year over year basis. Additionally, we have seen some improvement in margin pressures at our portfolio While the current rate environment and economic outlook present a challenging environment for our companies to navigate, we are encouraged by the results of the early actions our sponsors and management teams have taken to date. The strength of our portfolio continues to benefit from the substantial amount of equity invested in our companies, most of it's applied by large and well established private equity With whom we have long standing relationships and have partnered with in multiple transactions. The weighted average loan to value in the portfolio at time of underwrite is approximately 41%, which provides us a margin of safety from an enterprise value coverage perspective.

Speaker 3

Crescent's track record of successfully managing through multiple economic and market provides us a significant and relevant experience to navigate the challenges that the current environment brings with it. With that, I will now turn it over to Gerhard.

Speaker 4

Thanks, Henry, and hello, everyone. Our net investment income per share of $0.59 for the Q2 of 2023 compares to $0.56 per share for the prior quarter. Total investment income of $48,200,000 for the 2nd quarter compares to $46,700,000 for the prior quarter, representing an increase of approximately 3%. Recurring yield related investment income comprised of interest income, PIK income, Amortization and unused fees and dividend income from the Logan JV was up 2% quarter over quarter from $45,700,000 to $46,700,000 ultimately accounting for 97% of this quarter's total investment income. Tech income continues to represent a modest portion of our revenue at 2% of total investment income, which based on our analysis is one of the lowest levels in the space given our focus on market leading companies with strong margins and a high free cash flow generation.

Speaker 4

Our GAAP earnings per share or net increase in net assets resulting from operations for the Q2 of 'twenty three was $0.61 unchanged from the prior quarter. At September 30, our stockholders' equity was $730,000,000 resulting in net asset value per share of $19.70 as compared to $726,000,000 or $19.58 per share last quarter. Net investment excess of $17,000,000 offset by net portfolio appreciation contributed to total Portfolio value of $1,600,000,000 as of September 30, down approximately $16,000,000 quarter over quarter. Now let's shift to our capitalization and liquidity. I'm on Slide 19.

Speaker 4

As of September 30, our debt to equity ratio was 1.18 times, down from 1.19 times in the prior quarter. The weighted average interest rate on our borrowings was 7.01 As we've highlighted on the right hand side of the slide, there are no debt maturities until 2026. Our liquidity position remains strong with $317,000,000 of undrawn capacity subject to leverage, borrowing base and other restrictions and $22,800,000 of cash and cash equivalents as of quarter end. We believe this level of dry powder positions us well to selectively invest in new opportunities while continuing to support our existing portfolio company commitments. Finally, for the Q4 of 2023, our Board declared a $0.41 per share quarterly cash dividend, which will be paid on January 16, 2024 Stockholders of record as of December 29, 2023.

Speaker 4

Additionally, as Jason discussed, Our Board declared a supplemental cash dividend of $0.09 per share, which will be paid on December 15, 2023, to stockholders of record as of November 30, 2023. And with that, I'd like to turn it back to Jason for closing remarks.

Speaker 2

Thanks, Gerhard. In closing, we're pleased with our strong financial results for the quarter and believe CCAP remains well positioned to continue to deliver strong results Our portfolio is diverse and healthy and we are in excellent financial condition to selectively capitalize on the current investment environment. On an annualized basis, we're currently delivering $2 per share in total dividends, which translates into a 10.2% yield on CCAP's current NAV and an over 12% yield on CCAP's current stock price, which we view as highly attractive given our predominantly first lien focus and track record of NAV stability. As always, we appreciate you all joining us today

Operator

Thank you. Ladies and gentlemen, we will now conduct a question and answer One moment please for your first question. Your first question comes from the line of Robert Dodd from Raymond James. Your line is now open.

Speaker 5

Hi, guys, and congratulations on the quarter. Some questions. I mean, first on the First Eagle, excuse me. You talked about obviously you realized 26% of the assets from that. So a quarter gone, 3 quarters left to go.

Speaker 5

Can you give us any color on kind of the mix? Obviously, the ones that are easiest to refinance The performance and then the struggles tend to get that went later. I mean OEM still there, load back is still there, etcetera. Some historic problem names that aren't a big PCE portfolio, but could represent a headache. Can you give us any update on how the rotation of the more troubled names in that portfolio has gone?

Speaker 2

Hey, Robert, it's Jason. Thanks for the question. You're right. I would say The non core bucket of the portfolio that we identified when we acquired the book is still in place. I think we I feel comfortable about where we've generally marked those positions and underwrote those positions.

Speaker 2

Those are not positions that we need to rush to exit. And it was our expectation that those might take some time to further develop and ultimately monetize. So I think your observation is accurate. We have Fully realized 20 names out of that 26%, but they all fall within the core bucket. I wouldn't say that they are just all natural realizations.

Speaker 2

I think there has been some proactive sort of movement on our part To try to rotate some of those names.

Speaker 5

Got it. I appreciate that. Then on the I think, The LTV for the quarter was about 30%. And you mentioned in your opening remarks, leverage is down, equity checks are up. I mean, on that 30%, can you give us so I mean, obviously, if for example, if they're ARR loans, we expect them to be low anyway.

Speaker 5

Is that mix the type of businesses? Or is it just PE firms Writing bigger checks in order to underwrite to lower interest or Better interest coverage than the current market would imply otherwise.

Speaker 3

Yes. Thanks for the question. This is Henry. I'll take that one. On the first part of your question, no, none of these are ARR loans.

Speaker 3

That's just not an area that we focus on historically nor one that we intend to focus on here in the near term. They're all Your typical vanilla cash flow based loans, I think you hit the nail on the head on the second point. We are seeing, Especially in this rate environment, sponsors are very focused on capitalizing the businesses in a way that can withstand the current rate environment that we're in. And oftentimes, especially with base rates where they are today, that's going to be much more moderate leverage than what we saw in A zero rate environment just a couple of years ago. So I think part of it is certainly the, I think, A thoughtful approach to capitalization from sponsors.

Speaker 3

I think the other side of that is also really disciplined on our end. There are Certainly, other sponsors that are out there that are still kind of trying to pursue, what I would say very full capital structures. And for us, credit is quite binary in terms of whether or not it fits our box. And if it doesn't fit the profile that we're looking for with Back to the amount of cash flow the business generates and its ability to cover its debt service, that's just something that's not going to work for our portfolio and ones that will We just look to pass on versus stretch on and or price that risk.

Speaker 2

The other thing I'd add, I agree with everything Henry said is that, as you know, we've talked in the past, Robert, about PIK interest and that Percentage of our portfolio and of our top line, which is something we really try hard to minimize. And so as Henry mentioned, when buyers, private equity firms or other buyers are looking to Put in place more full aggressive cash structures. There's you'll oftentimes find in this environment a pick component In those cash structures given where base rates are. And those are the types of deals that I think we will we obviously see them. We evaluate them.

Speaker 2

We'll participate on a very selective basis. But We overall are trying to keep our PIK income at a very modest level in our top line.

Speaker 5

Got it. Got it. I appreciate that color. If I can ask you to stretch the timeline a little bit more, I mean to your point, Sponsors are going to look to monetize more assets in 2024, It looks like currently rates are still going to be pretty high in 2024. So do you expect The kind of structures we see in 2024 to be more reminiscent of what you're doing In the Q3 here or do you think there's going to be some different evolution as we go through 2024 if monetization For PES funds do does increase, but rates remain high.

Speaker 5

Same kind of like Does Q3 apply to next year, I guess, is the question?

Speaker 2

I think that's a great question. It's something we're thinking a lot about. And I think We're going to see segments of the market evolve a bit depending on, I would say, the risk profile of The buyers and the lenders attached to those buyers In a very low rate environment, which we experienced for several years, you saw secured debt Continue to grow as a multiple of cash flow, and that wasn't necessarily surprising. Now we're in a different reality. And with where base rates Where they're at, I think what you'll start to see more of, are these conservative structures As Henry outlined for Q3 activity or potentially more aggressive leverage levels, but with Maybe a more traditional first lien loan that's cash pay and A more junior oriented piece of paper that might have a pick toggle option or a portion of it as pick to help owners manage their fixed charge burden in these acquisitions.

Speaker 2

So I do think it's something that we're going to start to see more of in 2024 than we've seen in some time.

Speaker 5

I appreciate that. Thank you for the color. Yes.

Speaker 2

Thank you.

Operator

Your next question comes from the line of Ryan Lynch from KBW. Your line is now open.

Speaker 6

Hey, good morning. First question I had, kind of following up on the previous line of question with the loan to value, 30% below 30% loan to value on kind of the On the investments made this quarter, it seems like that in combination with if I look at your overall weighted average Spread on new investments, which was 5.9% versus 6.7% in the prior quarter. It feels like you guys are purposely sort of Derisking on the new investments or your willingness on the level of safety you guys want on new investments. Is that Fair to assume that that's what's happening or are the terms and structures on these new Investments coming to market, are these just representative of kind of what's coming to the market today?

Speaker 5

Hey, Ryan, it's Jason.

Speaker 2

Thanks for the question. I think it's a little bit of both. I think we are Certainly trying to be selective in our underwriting in this environment. Not to mention, we're sort of at a leverage level on the overall fund that we're Comfortable at and so we're not looking to meaningfully lever up from where we are. The second point I would say is that Because we are in a slower volume environment, albeit certainly a tick up from Q2, That slower deal flow combined with significant capital that's been raised Targeting private credit has forced pricing to tighten a bit.

Speaker 2

So I would say We're generally probably 25 to 50 basis points inside of where we were a quarter or so ago, where unis now are in the, I would say, 5.50%, 5.75% range And 1st liens, not stretch, are in the 500 to 5.25 range today. So I think you've got a little bit of our conservative bias, but in addition to that just a supply demand imbalance, which we hope To even out and become more rational in 2024.

Speaker 6

Okay. That makes sense. That's helpful. The other question I had was, I think you said 26% of the FCred portfolio has been realized at this point. I'm just curious, from an aggregate level of those investments exited, do you know What sort of value you guys got versus what you guys purchased those investments for?

Speaker 6

And then separately on that point, It sounds like some of them were kind of exited in normal course and maybe it sounds like you're proactive in some of those exits. If the M and A environment does pick up over the next going into 2024, which it seems to be, Do you think that that would result in a higher correlation or some correlation of you being able to and actually exiting the F portfolio at a faster clip or do you think a more active M and A environment doesn't really have a high correlation with Your ability to and dispute of exiting those investments.

Speaker 3

Thanks for the question, Ryan. This is Henry. I'll take that one. The first question that you had on the fair value or the realized value relative to onboard cost basis. So we exited all the investments that we've realized either at or above cost respective cost basis, if that applies to the 20 investments That Jason referenced in an earlier question with respect to where those shook out at.

Speaker 3

On the second point, I think it's an interesting one because we did see a similar dynamic with Alcentra. We closed Alcentra right before The onset of COVID-nineteen, so we closed that portfolio or that acquisition into an environment where there is no deal activity. And then obviously as we all recall in 2021 and in the early part of 2022, M and A activity picked up Quite dramatically and we saw a very, I'd say, fast acceleration in the rotation of that portfolio during that Time frame as well. It's a little analogous to what we're seeing with First Eagle where we closed First, right before Silicon Valley Bank got taken over by the FDIC. And I think we all know that the deal environment was quite anemic shortly thereafter.

Speaker 3

And we are starting to see activity pickup, albeit modestly. And I think my expectation would be that As we see just M and A volumes pick up, given that almost all these businesses that we have in the portfolio are sponsor backed. And If there is an attractive opportunity for sponsors to be able to monetize assets, they're certainly not going to be shy about doing so. I can certainly see That potentially happening again here.

Speaker 6

Okay. Makes sense. I appreciate the color. That's all for me today. Thanks,

Operator

There are no further questions at this time. Please continue.

Speaker 4

Thank you,

Speaker 2

operator. Well, once again, I'd like to thank you all for joining our earnings call today and appreciate the questions. And we look forward to speaking with you again soon.

Operator

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

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Earnings Conference Call
Crescent Capital BDC Q3 2023
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