Crescent Capital BDC Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 10, 2023

There are 7 speakers on the call.

Operator

Morning and afternoon, ladies and gentlemen, and welcome to the Q2 2023 Crescent Capital BDC, Inc. 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. Also note that this call is being recorded on Thursday, August 10, 2023.

Operator

I would now like to turn the conference over to Dan McMahon. Please go ahead.

Speaker 1

Good morning, and welcome to Crescent Capital BDC, Inc. 2nd quarter ended June 30, 2023 earnings conference call. Please note that Crescent Capital BDC may be referred to as CCAP, Crescent BDC or the company throughout the call. Before we begin, I'll start with some important reminders. Comments made over the course of this conference call and webcast may contain forward looking statements and are subject to risks And uncertainties.

Speaker 1

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. 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.

Speaker 1

A reconciliation of adjusted net investment income per share To net investment income 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 Q2 ended June 30, 2023, and posted a presentation to the Investor Relations section of its website atwww.crescentbdc.com. Presentation should be reviewed in conjunction with the company's Form 10 Q filed yesterday with the SEC. 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 Cheung. 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 I'll begin the call by providing a brief overview of our 2nd quarter results before discussing the current market environment in more detail. I'll then touch on our dividend policy before turning it over to Henry to review our recent investing activity and portfolio performance.

Speaker 2

Gerhard will then review our financial performance for the Q2. Let's begin. Please turn to Slide 6, where you'll see a summary of our results. For the Q2, we reported record net investment income of $0.56 per share, up from $0.54 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 base dividend by 37%.

Speaker 2

This over earn, coupled with unrealized appreciation in the portfolio on a net basis, resulted in net asset value per share of $19.58 As of quarter end, up 1% as compared to the prior quarter. Please turn to Slides 1415 of the presentation, which highlights certain characteristics of our portfolio. We ended the quarter with nearly $1,600,000,000 of investments at fair value Across a highly diversified portfolio of 187 companies with an average investment size of approximately 0.5% of the total portfolio. 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 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 quarter end.

Speaker 2

We generally believe that private equity sponsors Can provide operational and financial support to strengthen their portfolio companies for long term value creation. In terms of industry composition, you can see on the right hand side of Slide 15 that the majority of our investments continue to be in service 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 improved from 2.2 last quarter and the percentage of risk graded 1 and 2 investments, The highest ratings our portfolio companies can receive accounted for 87% of the portfolio at fair value, up from 85% last quarter.

Speaker 2

As of quarter end, we had investments in 8 portfolio companies on non accrual status, representing 2.2% and 1.7% of our total debt investments at cost and fair value respectively, a decrease from the prior quarter. Moving to the current market backdrop. Transaction activity in the Q2 was lighter as compared to the prior year, albeit busier than what we witnessed During the Q1, given the challenges in the regional banking space. We've seen direct lending continue to gain share from the syndicated markets With approximately 85 percent of new issue LBO financing in the U. S.

Speaker 2

Completed by direct lenders in Q2. A lack of CLO issuance and volatility in the BSL market have made certainty of execution and depth of capital in the direct lending space increasingly attractive for issuers. Valuation expectations between buyers and sellers have remained apart for much of 2023 thus far, driving a decline in overall M and A volumes. That said, 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 With many backed by sponsors that may be seeking to monetize longer held investments.

Speaker 2

Looking ahead to the remainder of the year and beyond, As buyers and sellers acclimate to the new market environment, we see early signs that LBO volume has picked up despite overall economic uncertainties that continue to Before I turn it over to Henry, I'd like to touch on our dividend policy. On our call in May, We announced our intent to implement a variable supplemental dividend program beginning this quarter, which is the 1st full quarter of combined results Following our acquisition of First Eagle BDC in March. For the Q2, we are pleased to declare an inaugural supplemental dividend of $0.08 per share, payable on September 15. As detailed in Slide 7 of our earnings presentation, it is calculated as 50% of net investment income in excess of our regular $0.41 per share dividend subject to a measurement test. TCAP's NII per share has been Comfortably outpacing the base dividend for some time, which we have seen accelerate in recent quarters as higher underlying reference rates Have resulted in higher portfolio yields given our 99% floating rate portfolio.

Speaker 2

In looking at the current shape of the forward curve, however, We do expect rates will come down over time, which will impact the entire BDC sector's earnings profile. We believe the formulaic framework offered by our supplemental program ultimately strikes the right balance of increasing total distributions to our stockholders while preserving the stability of our NAV over time across different base rate outlooks. Total dividends of $0.49 per share for the 2nd quarter represent a 10% annualized yield based on our June 30 NAV. I'd now like to turn it over to Henry to discuss our Q2 investment activity. Henry?

Speaker 2

Thanks, Jason. Please turn to Slide 16, where we highlight our recent activity. Gross deployment in the 2nd quarter was $38,000,000 as you can see on the left hand side of the page, all of which was in senior secured 1st lien and unitranche investments. During the quarter, we closed on 2 new investments totaling $24,000,000 with the remaining $14,000,000 coming from incremental investments in our existing portfolio companies. The new investments during the Q2 were loans to private equity backed Companies with sulfur floors, attractive fees and an average spread of approximately 6.60 basis points.

Speaker 2

The $38,000,000 in gross deployment compares to approximately $28,000,000 in aggregate exits, sales and repayments. We 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 to 1st lien credit risk. In the near term, 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 those fronts during the Q2. Balance sheet leverage is down quarter over quarter. As of last Friday, we had realized approximately 16% of the acquired First Eagle portfolio since closing in March.

Speaker 2

Turning to Slide 17, you can see that the weighted average yield of our income producing securities at cost increased quarter over quarter From 11.4 percent to 11.7 percent and is up 3 40 basis points year over year driven by the increase in the respective base rates. As of June 30, 99 percent 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. This situation is well to benefit from increases in base rates above our average floors as was the case this quarter with continued growth in our net interest margin. 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 2

The weighted average interest coverage of the companies in our investment The portfolio at quarter end held stable at 1.7 times. It is important to note that we calculate our interest coverage ratio using annualized interest That reflects the latest respective base rate in contrast to a trailing 12 month interest expense calculation, which would have resulted in interest coverage ratio of We believe this provides a more relevant metric when evaluating the ability of our portfolio companies to continue to service their respective interest obligations. We also continue to closely monitor how our portfolio companies are managing operating fixed 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 60% of aggregate revolver capacity was available across the portfolio and we have not seen an increase in aggregate revolver utilization during the The strength of our portfolio continues to benefit from the substantial amount of equity invested in our companies.

Speaker 2

Most of it's applied by well established private equity firms With whom we have long standing relationships and have partnered with in multiple transactions. The weighted average loan to value in the portfolio at the time bound to your right is approximately 41 Which provides us a margin of safety from an enterprise value coverage perspective. Crescent's track record of successfully managing through multiple economic and market provides us with 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 3

Thanks, Henry, and hello, everyone. Our net investment income per share of $0.56 for the Q2 of 2023 compares to $0.54 per share for the prior quarter. Total investment income of $46,700,000 for the 2nd quarter compares to $39,300,000 for the prior quarter, representing an increase of approximately 19%. Driven by rising base rates and adjusting for the impact Of the First Eagle acquisition, recurring yield related investment income comprised of interest income, PIK income, amortization And unused fees and dividend income from the Logan JV was up 19% quarter over quarter from $38,500,000 to $45,700,000 ultimately accounting for 98% of this quarter's total investment income. Pick income continues to represent a modest portion of our revenue at 1.8% of total investment income.

Speaker 3

Our portfolio's combination of a substantial majority of recurring investment income paired with modest noncash Our GAAP earnings per share or net increase in net assets resulting from operations for the Q2 of 2023 was $0.61 which compares to $0.24 per share for the prior quarter. At June 30, our stockholders' equity was 726,000,000 resulting in net asset value per share of $19.58 as compared to 718,000,000 For $19.38 per share last quarter. The positive net deployment of $11,000,000 in the 2nd quarter, Coupled with net unrealized appreciation on our investments, ultimately led to modest portfolio growth and a total investment portfolio at fair value $1,600,000,000 as of June 30, up approximately $15,000,000 quarter over quarter. Turning to Slide 18. Our internal portfolio ratings at the end of the second quarter were largely consistent with prior quarters, With 87% of the portfolio rated 1 or 2, our highest rating categories.

Speaker 3

Now let's shift to our capitalization and liquidity. I'm on Slide 20. As of June 30, our debt to equity ratio was 1.19x, down from 1.23x in the prior quarter. The weighted average stated interest rate on our total borrowings was 6.73% as of quarter end. In May, we completed a private offering of $50,000,000 aggregate principal amount of 7.54 percent senior unsecured notes Due July 28, 2026.

Speaker 3

These notes became effective upon the repayment of the 2023 notes at their maturity on July 30. Adjusted for this activity and 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 $315,000,000 of undrawn capacity subject to leverage, borrowing base and other restrictions And $21,500,000 of cash and cash equivalents as of quarter end. We believe this level of dry powder positions us well to selectively invest and new opportunities while continuing to support our existing portfolio company commitments. Finally, for the Q3 of 2023, Our Board declared a $0.41 per share quarterly cash dividend, which will be paid on October 16, 2023, to stockholders of record as of September 30, 2023.

Speaker 3

Additionally, as Jason discussed, our Board declared a supplemental cash dividend of $0.08 per share, which will be paid on September 15, 2023, to stockholders of record as of August 31, 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 deliver strong results going forward. Our portfolio is diverse and healthy, And we are in excellent financial condition to selectively capitalize on this volatile yet attractive investment environment. As always, we appreciate you all joining us today, and we look forward to speaking with you next quarter. And with that, operator, we can open the line for questions.

Operator

Thank You will then hear a 3 tone prompt acknowledging your request. And your first question will be from Ryan Lynch at KBW. Please go ahead.

Speaker 4

Hey, good afternoon. Nice quarter. My first question just has to do with, Now that you guys are fully integrated with the Fcred acquisition and their portfolio, I would just love to hear How has been the initial performance of that portfolio specifically? And I'd So you guys bought some of those assets at a discount. What's your sort of outlook for potential Turnover in that portfolio and even is there any upside on any of those investments or how is it just performing at least initially?

Speaker 2

Hey, Ryan, it's Jason. Thanks for the question. I can start that and maybe Henry will have some additional comments. But Yes. Now that we're under the hood, I guess, on that officially 4 months or so, 5 months or so, I would say that the diligence that we did through the process on the portfolio has largely Checked out.

Speaker 2

I think the team did a nice job in looking at the credits before we had direct access To the company, now we have direct access to the companies and the sponsors. But I would say no real major surprises Relative to the underwriting of the book, I think Henry made a comment in the prepared remarks around realizations. To date, I think we're running around 15%, 16% realized on the FCRD portfolio As of last week. Yes. And just to comment on the second part of your question with Back to outlook around the rotation and upside here.

Speaker 2

The names that we did rotate out of through the Q2 and the beginning part of July, We've been able to realize that costs are better. So making good progress initially on that front as well. I think it's a little too early to say if we see meaningful upside from our cost basis in the remaining Names that are in the portfolio, but to Jason's point, we have I think our diligence has proven out initially here in terms of What we expected in terms of the assets that we onboarded.

Speaker 4

Okay. That's Helpful. And then if I look at both the combination of realized and unrealized movements in the portfolio, because I know sometimes when you have a realized loss that the unrealized Loss can flip to positive. So you guys had overall net $2,000,000 of gains this quarter. Was that driven by one investment or was that or a small number of investments or was that kind of broadly speaking that drove that upside in the gains this quarter?

Speaker 3

Yes. Hey, Ryan, it's Gerhard. Nothing really Stood out. I think we saw kind of movement across the portfolio and that kind of contributed to that number you pulled up.

Speaker 4

Okay. And then one last one for me just regarding The dividend and dividend policy, obviously, you guys put in a supplemental dividend program that seems to be working out Well, is this sort of because earnings have increased nicely from rates and maybe they'll come back down. But With the supplement of dividend, there's still pretty significant earnings well above kind of total dividends. Is this where you sort of want to be from a dividend coverage standpoint? Or would you ever consider either increasing the core dividend or even That the payout ratio to something besides that 50% access.

Speaker 4

Just wanted to hear your thoughts on that.

Speaker 2

Yes. Thanks, Ryan. Jason, again, we spent a lot of time thinking about Our dividend policy over the last several quarters and as you know, we've really consistently prioritized earning our dividend, Which we've done every quarter. We believe that the supplemental dividend framework Certainly ensures our stockholders will benefit from earnings generated in excess of the regular dividend, but it will also provide us with Preserving a stable NAV for our stockholders as well. With sulfur Hovering around 5%, 5.5%, over 300 basis points increase relative to a year ago.

Speaker 2

Certainly, the earnings for the sector are up meaningfully, including for CCAP. That being said, if you look at the curve, Which is what the market at least is suggesting, we could see An initial decline in rates in the first half of twenty twenty four. And as we think about this, we try to take a long term approach to it and We really want to be in a position 5 plus years from now where we can continue to say that we've Earned our dividend. We've delivered the stable $0.41 a share each and every quarter And that our stockholders have also been able to participate in a lot of the upside along the way during these significant over earned quarters. So we're really trying to take a long term view on this.

Speaker 2

And right now, I think we're comfortable with the approach.

Speaker 4

Okay. Makes sense. I appreciate the time today. That's all for me.

Speaker 2

Thank you, Ryan.

Operator

Next question will be from Mitchell Penn at Oppenheimer. Please go ahead.

Speaker 5

Thanks. Good quarter, guys. A couple of questions on your weighted average loan to value. You guys said It's 41% at origination. What's it today for the portfolio?

Speaker 2

We actually this is Henry, Mitch. We haven't seen that metric actually tick up heavily. We're still in the low 40 That range in aggregate across the portfolio.

Speaker 5

And what percent of the portfolio is Greater than 70%.

Speaker 2

70% loan to value?

Speaker 3

Yes.

Speaker 2

I don't know if we've got that at our fingertips right now, Mitch. Let us do a little bit of work on that and we can circle back to you.

Speaker 5

Okay, great. And you might have said, I wasn't sure, what's the average interest coverage ratio of the portfolio?

Speaker 2

Yes. In the I think Henry said in the remarks that it's 1.7 times and that's on an annualized interest expense Figure for current base rates.

Speaker 5

Got it. And what percent are below 1?

Speaker 2

Let us circle back to you on that as well. I don't think we've talked about that On prior calls.

Speaker 5

Okay, great. That's all for me guys. Thanks.

Speaker 2

Thank you, Mitch.

Operator

Thank you. And your next question will be from Sean Paul Adams at Raymond James. Please go ahead.

Speaker 5

Hey, guys. Good afternoon. Regarding your credit facility,

Speaker 6

I know on the Q you guys disclosed Both facilities maturing in 2026, but I didn't see any mention of when the revolving period for either of those facilities end. I was hoping if you could provide some details on that as well as if you're looking at adding any additional unsecured Debt, I know you guys just added an additional note for 2026, but just need a little bit more clarification on that.

Speaker 3

Yes. Thanks for the question. This is Gerhard. I'll maybe take the second part first. We feel Pretty good about our capital structure today.

Speaker 3

We have about just over $300,000,000 of kind of available capacity on the A combination of credit facilities in the GAAP structure. So we're not I mean, while we keep an eye on what the market is doing at all times, we're not Considering adding additional unsecured debt in the near term, I think that is in part a factor also of the kind of relative high cost of debt in today's market. And then circling back on the first part of your question, the 2 revolving Facilities we have, generally speaking, have revolving periods kind of 2 to 3 years. We are, As you might expect, in constant combination with the lenders there. And so I think the way we manage those facilities, it's really Through kind of an approach of annual or kind of biannual extension of those Reinvestment period, so we don't get all the way to the end of or against a maturity wall.

Speaker 3

So I think as you think about the capital structure For CCAP, as you should expect that we'll continue to amend and extend those facilities as we approach The end of the reinvestment period for either the SPV or the SMBC revolving credit line.

Speaker 5

Got it. Perfect.

Operator

Thank you for sharing. Thank you. And at this time, it appears we have a follow-up from Ryan Lynch. Please go ahead.

Speaker 4

Hey guys. Hey, one more question I had. What is your guys' long term outlook for First Eagle's Logan JV. I know in the past, it seems that you guys did not necessarily want to operate These JVs, obviously, you inherited this with the acquisition. What should we expect from this long term?

Speaker 2

Yes. Hey, Ryan, Jason here. I would say that we did a fair amount of diligence on that joint venture During the process and the structure the vast majority of the assets in the structure are contained within a CLO, Which is a relatively new vehicle. It was done about a year ago, year and change ago, while under First Eagle's management. So it's actually quite sorry, priced quite attractively.

Speaker 2

And I think from an income standpoint, it throws off a Pretty attractive yield to the equity. It's also a very well diversified CLO With about 2 years left on the reinvestment period on that. So for the time being, I think we're thinking of it as steady state. We expect it to continue to perform and we're going to see it out at least over the next several quarters.

Speaker 4

Okay. Makes sense. I appreciate the follow-up.

Speaker 2

Thank you.

Operator

Thank you. And at this time, gentlemen, it appears we have no other questions registered. Please proceed with any closing remarks.

Speaker 2

Okay. Thank you, operator. Thank you all for Joining the call today, we appreciate your continued interest and support in CCAP, and we look forward to speaking with you all again next quarter, if not sooner.

Operator

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, we ask that you please disconnect your

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Crescent Capital BDC Q2 2023
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