Investcorp Credit Management BDC Q3 2023 Earnings Call Transcript

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May 16, 2023

There are 7 speakers on the call.

Operator

Welcome to

Speaker 1

the Invescor Credit Management DDC Incorporated Schedules Earnings Release for Third Quarter Ended March 31, 2023. Your speakers for today's call are Mike Mauer, Suhail Shaikh and Rocco DelGuercio. A question and answer session will follow the presentation. I would like to now turn the call over to your speakers. Please begin.

Speaker 2

Thank you, operator, and thank you for joining us on our Q3 call today. 2019. I'm joined by Suhail Shaikh, my Co CIO and Rocco DelGuercio, our CFO. Before we and 2021.

Speaker 3

Thanks, Mike. I would like to remind everyone that today's call is being recorded and that this call is the property of Investcorp Credit Management BDC. 2019. Any unauthorized broadcast of this call in any form is strictly prohibited. Audio replay of the call will be available by visiting our Investor Relations page on our website at icmbdc.com.

Speaker 3

2019. I would also like to call your attention to the Safe Harbor disclosure in our press release regarding forward looking information 2019. And remind everyone that today's call may include forward looking statements and projections. Actual results may differ materially from these projections. We will not update forward looking statements unless required by law.

Speaker 3

2019. To obtain copies of our latest SEC filings, please visit our Investor Relations page on our website. 2019. At this time, I'd like to turn the call back over to our Chairman and CEO, Michael Maurer.

Speaker 2

Thank you, Rocco. March quarter marks the Q3 of our fiscal year. In the beginning of 2023, In the second half of the March quarter, we saw the level of activity pick up slightly. The collapse of Silicon Valley Bank and Signature Bank led to a broader broadly accepted credit contraction for middle market banks, which will further increase our opportunities. We saw our deal flow pick up after a slow December quarter, primarily driven by secondary opportunities across all industries.

Speaker 2

Especially during periods of market volatility, We actively focus on opportunities in both existing portfolio companies across our platform as well as in sectors we are familiar with. During the quarter, we invested in 1 new portfolio company and 3 existing portfolio companies. We have typically found that in a highly market environment or best opportunities companies we already lend to as these tend to have known performance and better structures. The investments we made during the quarter and after quarter end were all sponsor backed. Even in a competitive environment, we remain optimistic about our pipeline and believe our portfolio is well positioned to benefit from any further increase in interest rates.

Speaker 2

The weighted average yield of our debt investments during the quarter increased approximately 25% to 13.4% from 10.7% at twelvethirty 1. Although our pipeline is robust, we continue to be very selective when investing in new credits. 2019. We remain focused on investing in high free cash flow and recession resistant businesses. The credit quality of our current portfolio remains stable.

Speaker 2

Despite a challenging market environment, the weighted average EBITDA of our debt investments improved quarter over quarter. This is supported by the substantial amount of equity cushion in our portfolio companies provided by well established middle market sponsors. Our weighted average loan to value ratio for all debt investments is approximately 50%. We are proud of the continued improvement in the credit quality of our portfolio. Suhail will now walk through our investment activity During the March quarter and after quarter end.

Speaker 2

Rocco will go through the financial results. I'll finish with commentary on our non accrual investments, our leverage, the dividend and our outlook for the rest of 2023. As always, we'll end with Q and A. 2019. With that, I'll turn it over to Suhail.

Operator

Thank you, Mike. As Mike mentioned, We've been seeing a steady flow of new opportunities. These typically fall in 2 main categories, add ons or secondary purchases of existing portfolio investments and opportunistic secondary purchases and refinancings of new companies. We're beginning to see some new responsive platform transactions, but the volumes are significantly below our historical experience. We invested in 1 portfolio and 1 new portfolio company and 3 existing portfolio companies this quarter.

Operator

We also 2019. During the quarter, fundings for commitments and new investments totaled approximately $11,100,000 In the same period, repayments totaled approximately the same amount of $11,000,000 We invested in Sandvine, a portfolio company of Francisco Partners. We have been an investor in Sandvine and our other funds For over 4 years, the company is a leading provider of active network intelligence and security solutions for network operators and enterprises globally. We invested in the 1st lien term loan. Our yield at cost is approximately 11.8%.

Operator

We opportunistically added to our position in 2 existing portfolio companies. First, We invested in the 1st lien term loan of LaserAway. LaserAway is a leading chain of laser hair removal and noninvasive aesthetic dermatology Yield at cost is 11.3%. 2nd, we invested in the Priority term loan of BioPlan. BioPlan provides packaging and sampling solutions to the beauty and fragrance industry.

Operator

Our yield at cost is approximately 15.8%. We also participated in a small equity raise for Techniplas, 1 of our existing portfolio companies. 2ndplus is a global manufacturer of plastic components for automotive industry. As mentioned above, we fully realized our position in Liberty Oilfield Services, which was refinanced. 2019.

Operator

Our fully realized IRR was approximately 11.3%. We also fully realized a position in AgroFresh, which was repaid as part of our take private transaction by Payne Sports Partners. Our fully realized IRR was approximately 10%. After quarter end, we invested in 2 new portfolio companies. 1st, we invested in the 1st lien term loan of PureStar, also known as AMCP Clean Acquisition Company.

Operator

This is a good example of an opportunistic second repurchase of a credit that we had been tracking. PureStar is a portfolio company of Cornell Capital, is one of the largest commercial laundry providers to the hospitality industry in the U. S. We invested in the 1st lien term loan and delayed draw term loan. Our yield at cost is 15.7%.

Operator

We invested in the 1st lien term loan of American Auto Option Group, formally known as Accelerate. This is another example of an investment that we own in other portfolios, and we're able to find an attractive opportunity fully serviced used vehicle auction services provider for E2P customers. Our yielded cost is 13.3%. Using the GICS standard as of March 31, our largest industry concentrations were: Trading company and distributors at 15.9 percent professional services at 14% followed by IT Services at 10.8%. Commercial Services and Supplies are at 6.5% and software remain at 6.2%.

Operator

Our portfolio companies are in 20 cakes industries as of quarter end, including our equity and warrant position. I'd now like to turn the call over to Rocco to discuss our financial results.

Speaker 3

Thanks, Suhail. For the quarter ended March 31, 2023, 2019. Our net investment income was $2,500,000 or $0.18 per share. The fair value of our portfolio was 2021,300,000 compared to $228,600,000 on December 31. Our net assets were $88,200,000 a decrease of 3.6% from prior quarter.

Speaker 3

Our portfolio's net decrease from operations this quarter was approximately $1,100,000 Our debt investments May during the quarter had an average yield of 12.8%. Our realizations and repayments during the quarter had an average yield of 11.9% and our average IRR was 10.7%. 30 1. As of March 31, our portfolio consisted of 35 portfolio companies. 90.6 percent of our investments were in 1st lien and the remaining 9.4% is invested in equity warrants and other positions.

Speaker 3

99.6% of our debt portfolio was invested in floating rate instruments and 0.4% in fixed rate Investments. The average floor of our debt investment was 1.1%. Our average portfolio company Investment was approximately $6,300,000 and our largest portfolio company investment is Fusion at $12,500,000 We had a gross leverage of 1.65 and a net leverage of 1.49 as of March 31 compared to 1.55 gross and 1.46 net respectively for the previous quarter. As of March 31, we had 4 investments on non accrual, which included PGI Revolver and 3 investments in 18.88. This is a decrease of 4 investments from the previous quarter.

Speaker 3

With respect to our liquidity, as of March 31, We had approximately $14,100,000 in cash, of which $11,200,000 was restricted cash with $33,100,000 of capacity under our revolving credit facility with Capital One. Additional information regarding the composition of our portfolio is included in our Form 10, which was filed yesterday. With that, I'd like to turn the call back over to Mike.

Speaker 2

Thank you, Rocco. As mentioned last quarter, we acquired an SMA and had an initial close on our institutional fund. This doubled our platform AUM, expanding our level of investable assets and reducing average expenses across the funds. Experience of our expanded team and platform positions us to be more meaningful to the market in terms of sourcing and origination. I would like to also address that we have made significant headway in completing our portfolio rotation initiative.

Speaker 2

The number of portfolio companies on non accrual were reduced from 8 in the previous quarter to 4 investments in the current quarter, Those four investments across 2 companies. First, on Deluxe, we have recovered 8.9% of our principal and received principal and interest representing 106 percent of our cost on that position to date. We believe 2019. Future recoveries are likely to be minimal at this stage and have decided to write off the remaining position. In the 1st lien and second lien loans are not expected to realize any recovery on those and as such 2019.

Speaker 2

Bioplan successfully completed a balance sheet restructuring during the quarter. We currently hold positions in term loan income. The 2 Loan positions are on accrual and we're excited about the company's prospects going forward. In summary, we expect significant progress on the remaining non accruals over the next 12 months. Our NAV declined 3.6% this quarter.

Speaker 2

Equity positions represented a majority or $2,300,000 of this decline. While this is disappointing, we believe that we will see a bounce back in the coming quarters. We had 3 portfolio companies which declined in value by $500,000 or more. First, we mark down our investment in ArborWorks. ArborWorks is a vegetation management company providing services to utility companies.

Speaker 2

Their results have been challenged by weather patterns in California, their largest market. We reduced the mark in our equity positions in Tecnoplas due to increased margin pressures and low production volumes in the auto industry. We also marked down our equity position in Fusion due to changes in model inputs related to market conditions. Our gross leverage this quarter was 1.65, above our guidance of 1.25 times to 1.5 times. Our net leverage was 1 point or 9 times, which is within the target range.

Speaker 2

As mentioned last quarter, we expect to see our gross and net leverage generally converge. As of May 15, our gross and net leverage were 1.59 times and 1.56 times. As we have previously stated, the advisor will waive the portion of our management fee associated with base management fees over one turn of leverage. We covered our March quarterly dividend with NII. Company is expected to earn its dividend through the next quarter ending June 30.

Speaker 2

On May 4, 2023, the Board of Directors declared a distribution for the quarter ended June 30, 2023 of $0.13 per share payable on July 7, 2023 to stockholders of record as of June 16 and a supplemental distribution of $0.05 per share payable on July 7, 2023 to stockholders of record as of June 16, 2023. As we continue into the second half of twenty twenty three, We remain very optimistic about our team's ability to deploy capital in high quality credits. Our growing platform will allow us to be more meaningful as club partner, gives us expanded reach into origination and brings new and valuable relationships with private equity sponsors. Our growth will provide you, our investors, an increasingly diversified portfolio as we have access to a larger set of opportunities in the market. Our goal has not wavered and is, has always focused on capital preservation and maintaining a stable dividend.

Speaker 2

This concludes our prepared remarks. Operator, please open the line for Q and A.

Speaker 1

Thank you, ladies and gentlemen. At this time, we will conduct a question and answer session. Your question when prompted. We are now ready to begin. Our first question is from Chris Nolan.

Speaker 1

I'm opening the line now. Go ahead please.

Speaker 4

Hey guys. Congratulations on improving the non accruals in the quarter. On Deluxe, did I hear you correctly that there was an 89% recovery?

Speaker 2

I believe it's 80.9 Percent recovery on cost excluding the interest. Including the interest, it was 106% of our invested capital.

Speaker 5

Okay,

Speaker 4

great. And then, in the comments that you guys participated in equity raise for one of your portfolio companies, would that be a rights offering?

Speaker 2

It was a rights offering we participated, so we were not diluted down. It was less than $500,000

Speaker 4

Okay. I guess, on that note, given that you're focused on sponsored deals, Has there been conversations about from your sponsors where if they have to raise equity for their portfolio companies, They want you to participate. What are your thoughts around that?

Operator

Chris, this is Suhail. The short answer is no. I mean, I think in a couple of situations, we're looking at, sponsors come to us With a preferred equity investment opportunity, so that they don't have to refinance the existing capital structures. But as an equity co invest, If that's what you're looking for? No, we haven't been asked to participate in any equity comment with outside sponsors.

Speaker 2

Now just to clarify, in initial investment, we have looked at small equity co invest and you'll see them in our portfolio, but that's rare few and far between and that's at our option.

Speaker 4

And I guess final question on leverage. Given the uncertain economic times, is the intent to maintain leverage In your target area, which is less I know 1.4 to 1.5 times?

Speaker 2

The answer is yes. As we continue to look at new Opportunities as we reinvest money coming back in. We're not looking to invest incremental capital, but reinvestments Are all never say 100%, but are principally lower risk, more equity, Better covenants, so we're improving the quality of the portfolio and maintaining a consistent leverage against that.

Speaker 4

Great. That's it for me. Thank you.

Speaker 2

Thank you, Chris.

Speaker 1

Thank you very much. Our next question is Mr. Robert Dodd. I'm opening the line now.

Speaker 5

Okay. Thank you. On first, following on Chris' question, obviously, you're at 159 now in the target range of 1.4% to 1%.

Speaker 2

So I'd expect at quarter end that we're back in that range. That's the expectation. If you look at twelvethirty one, net leverage was 1.46. At threethirty one, it was 1.49. We'd expect to be somewhere around there on a net leverage at 6:30.

Speaker 5

Got it. Thank you. Then on the credit In your opening remarks, you talked about disruption in the bank, I mean, granted Capital One is exactly a regional. But have you started having any conversations with them about amending the facility? I mean, it doesn't start to mature until 2026.

Speaker 5

But the revolving period or reinvestment period ends next year. So any preliminary discussions that have occurred on that front?

Speaker 2

We've continued to have an active dialogue with Capital One, all positive. There's been no Indications that they are starting to pull back on the credit that they want to commit to us or the sector. But yes, we have ongoing dialogue with them.

Speaker 5

Got it. Thank you. And then one last one, if I can, on I'll put this question again. Technoplast, I mean, you said you participated in the rights issue, but in less than $500,000 but then it got written down obviously during the quarter because of margin pressures, etcetera, that you talked about. So I mean, yes, you did want to be diluted, But at the same time, you're putting more capital into a one of your larger light downs this quarter.

Speaker 5

So could you give us Any more thoughts on the capital purpose beyond non dilution, which May or may not be beneficial to shareholders.

Speaker 2

Yes. I'd make a couple Number 1 is kind of from our cost basis of that equity, we're averaging down. That having been said, We don't want to keep putting more money in if we don't think this will recover. We think they are a critical supplier to Tier 1 OEMs to top platforms. I think we've all seen the inventory constrained, especially from the foreign production and they've been hurt by that.

Speaker 2

The forecast is that that's starting to normalize, but I personally and anecdotally, I've not seen that fully normalized. We expect this to recover over the next 12 to 24 months And did not want to see that over a small investment hurting our existing investment.

Speaker 5

Got it. Thank you.

Speaker 2

Thank you very much, Robert.

Speaker 1

Our next question is from Paul Johnson.

Speaker 5

Hi, Paul.

Speaker 6

Good afternoon, guys. Thanks for taking my question. Yes, I only had one today, but I just I want to Get a sense, I mean, it sounds like you guys have obviously made some investments in the platform since Investcorp came on, possibly raised some funds along the way. I was just hoping to maybe get a sense of like how many people I guess at Investcorp today, including yourselves, Are working directly on the BDC?

Speaker 2

Well, the direct team on the BDC Is about 12 people. Then indirectly, there's another 30 people in Investcorp Credit, Which expands to other liquid and separate accounts that we leverage off of research and flow and relationships. And then there is the middle market private equity team that we interact with constantly from a standpoint of, I'll call it club origination, networking and other deal flow opportunities. So it's a broad base that we work within at Investcorp.

Speaker 6

Got it. Thanks for that. And then I guess just with the leverage, obviously it sounds like Kind of a focus to get that down further back in the line with the target range. But among all the other Funds that you have access to with Investcorp, I mean has the, I guess, maintenance of leverage been any kind of a Constraining factor for you guys in terms of participating on deals?

Speaker 2

No, it has not.

Speaker 3

Okay. Thanks. That's all for me.

Speaker 2

Thank you very much, Paul. We appreciate it.

Speaker 1

If you'd like to, there are no more questions at this time.

Speaker 2

Thank you very much, operator, and thank you, everyone, for dialing in.

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Earnings Conference Call
Investcorp Credit Management BDC Q3 2023
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