Investcorp Credit Management BDC Q4 2023 Earnings Call Transcript

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September 19, 2023

There are 6 speakers on the call.

Operator

Welcome to the Investcorp Credit Management BDC Incorporated Schedules earnings release of 4th quarter ended June 30th. Your speakers for today's call are Mike Mauer, Suhail Shaikh and Rocco DelGuercio. Operator assistance is available at any time during this conference by pressing 0 pound. I would now like to turn the call over to your speakers. Please begin.

Speaker 1

Thank you, operator, and thank you for joining us on our Q4 call today. I'm joined by Suhail Shaikh, My co, CIO and President of Investcorp Credit Management, BDC and Rocco DelGuercio, our CFO. Before we begin, Rocco will give our customary disclaimer regarding information and forward looking statements. Rocco?

Speaker 2

Thank you, 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. Any unauthorized broadcast of this call in any form is strictly prohibited. Audio replay I would also like to call your attention to the Safe Harbor disclosure in our press release regarding forward looking information and remind everyone That today's call may include forward looking statements and projections. Actual results may differ materially from these projections.

Speaker 2

We will not update forward looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our Investor Relations page

Speaker 1

Thanks, Rocco. The June quarter marks the last quarter of our fiscal year. New deal activity in the primary markets, Especially new LBOs and refinancings remained limited during the quarter. High interest rates have discouraged sponsors from doing dividend recaps or acquiring new companies. As a result, our investment activity remained lower this quarter And we continue to see compelling investment opportunities in our pipeline.

Speaker 1

We made several investments this quarter in the secondary market. These opportunities were primarily borrowers we are familiar with and have exposure to in our other funds across our platform. During the quarter, we invested in 2 new portfolio companies and 2 existing portfolio companies. The weighted average yield of our debt investments during the quarter decreased 12.5% from 13.4% at threethirty 1. We remain very focused on portfolio management and risk mitigation.

Speaker 1

We continue to diversify our investments into new borrowers To reduce our average position sizes and to work with borrowers to have covenant or liquidity issues In the current high interest rate environment, this quarter, we increased our number of borrowers and the number of GICS Industries across our portfolio to 21 industries when compared to the previous quarter. As we look at our borrowers' operating performance, the credit quality of our portfolio remains stable. Our weighted average net leverage is relatively unchanged from the quarter ended threethirty one at 3.9 times. Additionally, our weighted average loan to value ratio for all debt investments is approximately 48%. Looking forward, we expect to continue our theme of risk management and diversification.

Speaker 1

We are expecting repayments in both the current quarter In the Q4 this year, which we expect to redeploy across new borrowers in a smaller average size. While we suspect there is pent up demand for primary issuance, we remain focused on secondary opportunities as well, Where we can create positions with shorter maturities, convexity and establish track records of operating As leverage borrowers, Suhail will now walk through our investment activity during the quarter and after quarter end. Rocco will go through our financial results. I'll finish with commentary on our non accrual Investments, our leverage, the dividend and our outlook. As always, we'll end with Q and A.

Speaker 1

With that, I'll turn it over to Sue Hale.

Speaker 3

Thank you, Mike. As Mike mentioned, this quarter's activity was characterized by secondary opportunities. Market estimates have direct lending volume in this quarter down almost 50% year over year. However, We're beginning to see primary deal flow pick up after the summer slowdown. We're being highly selective in this credit environment, High cash flow generating businesses with enhanced structural protections and supported by experienced sponsors.

Speaker 3

During the quarter, we invested in 2 new portfolio companies and 2 existing portfolio companies as Mike mentioned. We also fully realize our position in 1 of the portfolio companies. During the quarter, fundings for commitments and new investments totaled approximately $15,100,000 of cost with a weighted average yield of approximately 15.5%. In the same period, Prepayments totaled approximately $8,700,000 from one investment with an IRR of approximately 9.8%. To talk you through the new investments, first, we made an investment in the 1st lien term loan of CP Clean Acquisition Company, also known as PureStar.

Speaker 3

This is a good example of an opportunistic It is one of the largest commercial laundry providers in the hospitality industry in the U. S. We invested in the 1st lien term loan and delayed draw term loan. Our unit cost is approximately 16.5%. 2nd, we invested in the 1st lien term loan of American Auto Auction Group, Also known as Accelerate.

Speaker 3

This is an example of an investment that we own in other portfolio and we're able to find an attractive opportunity Purchase in the secondary market. Our Brightstar Capital Portfolio Company, Accelerate is a full service Used vehicle auction services provider for B2B customer. Our yield at cost is approximately 13.6%. Finally, we invested in the priority term loan of BioPlant. BioPlant provides packaging and sampling solutions to the beauty and fragrance industry.

Speaker 3

Our yield at cost is approximately 13.6%. During the quarter, we fully realized our position in auto and marketing, Which was refinanced. Our fully realized IRR was approximately 9.8% as I mentioned above. After quarter end, we invested in 1 new portfolio company and 1 existing portfolio company. First, we invested in the 1st lien firm loan of Acxiom Global.

Speaker 3

Acxiom is a leading and global provider of expertise with talent offering, legal counseling and representation services. Acxiom is a portfolio company of Premera. We have been an investor in Acxiom for a few years in our other portfolios And similar to Accelerate, we've been able to purchase it at an attractive price. Our yielded cost is approximately 10.1%. We also made a follow on secondary investment in PureStar.

Speaker 3

I knew that cost is approximately same as our original investment of 16.5%. I'd like to note that the GICS standard was updated in May of this year. As such, our industry categorizations for portfolio companies have changed in some cases and our industry ratings have also changed. As of June 30th, our largest industry concentrations were The following: Trade Company and Distributors at 16% professional services at 12.8% Our portfolio companies are in 21 Kix Industries, as Mike mentioned, as of quarter end, including iEquity and Warren Physician. I'd now like to turn the call back over to Rocco to discuss our financial results.

Speaker 2

Thank you, Suhail. For the year ended June 30, 2023, our net investment income was $9,400,000 or $0.66 The fair value of our portfolio was $220,100,000 compared to $221,300,000 on March 31. Our net assets were $87,700,000 a decrease of 60 basis points from the prior quarter. Our portfolio's net increase from operations this quarter was approximately $2,200,000 Our debt investments made during the quarter Had an average yield of 5.5%. Our realizations and repayments during the quarter had an average yield of 11.3 And our average IRR was 9.8.

Speaker 2

The weighted average yield on our debt portfolio was 12.5%, A decrease of 90 basis points from March 31. As of June 30, our portfolio consisted of 36 portfolio companies. 89.2 percent of our investments were 1st lien, the remaining 10.8 percent is invested in equity, warrants and other positions. 88.8% of our debt portfolio was invested in floating rate instruments and 0.4% in fixed rate investments. The average floor on our debt investments was 1.1%.

Speaker 2

Our average portfolio Investment was approximately $6,100,000 and our largest portfolio company investment is BioClan at $13,000,000 We had a gross leverage of 1.54 times and a net leverage of 1.44 times As of June 30, we had 6 investments on nonaccrual, which included the 3 investments in 18/88, The PGI revolver and 2 investments in American Nuts. This is an increase of 2 investments Related to American Nuts from the previous quarter. With respect to our liquidity, as of June 30, we had approximately $9,200,000 in cash, of which $8,100,000 was restricted cash with $28,100,000 of capacity under our revolving credit facility with Capital One. Additional information regarding the composition of our portfolio is included in our Form 10 filings, which will be filed later this week. With that, I'd like to turn the call over back to Mike.

Speaker 1

Thank you, Rocco. As mentioned earlier, we remain focused on portfolio management and risk mitigation, especially in our borrowers that are Experiencing periods of stress. We added 2 new positions on non accrual, American Nuts Term Loan A and Term Loan B positions. American Nuts sources, procures and distributes nuts, seeds and dried fruits among other products. Their results have been challenged in the recent period.

Speaker 1

We are currently working with the sponsor and other co lenders on the path forward. We continue to make progress rotating the portfolio and expected progress on the remaining non accruals over the next 12 months. Our NAV remained relatively unchanged declining by 60 basis points. Our gross leverage was 1.54 Above our guidance of 1.25x to 1.5x, our net leverage at 1.44x Was within the target range. As mentioned last quarter, we expect to see our gross and net leverage converge.

Speaker 1

As of September 15, Our gross and net leverage were 1.51 and 1.50. 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 June quarterly dividend with NII. The company is expected to earn its dividend through the next quarter ending September 30. On September 14, 2023, the Board of Directors declared a distribution for the quarter ended June 30, 2023, of $0.12 per share as well as a supplemental distribution of $0.03 per share, both payable On November 2, 2023, to shareholders of record as of October 12, 2023.

Speaker 1

It is worth noting that the $0.03 supplemental distribution is related to fiscal year 2023 spillback. As previously mentioned, we doubled our platform AUM through the acquisition In terms of sourcing and originating, and as a result, we expect our pipeline to remain healthy for the remainder of the year. As always, we remain increasingly focused on capital preservation and maintaining a stable dividend. We are continuing our work rotating and diversifying the portfolio, all while focusing on mitigating risk in our borrowers experiencing short term stress. As we head into the back half of the year, we remain optimistic about our pipeline and our ability to deploy our capital

Operator

Ladies and gentlemen, at this time, we will conduct the question and answer Our first question comes from Paul Johnson with KW. Paul, go ahead please.

Speaker 4

Good afternoon, guys. Thanks for taking my questions. Just clarifying your comments on repayments for next Quarter or the second half of this year, I guess, you said you expect repayments. Do you expect is this net repayments that You're talking about above what you're expecting to redeploy or is these just repayments that you have kind of line of sight on for the rest Not necessarily net repayments.

Speaker 1

No, not net repayments, Paul. Thank you for taking the time today. These are Payments that we have line of sight on today, there will be some coming in, but we will be redeploying.

Speaker 4

Got you. Okay. Thanks for that. And then my second question or possibly a follow-up to that, a little bit broader, but Just kind of taking a step back and looking at the quarter, I think in the context of the Space, obviously, this has been a pretty good year for BDC so far, kind of despite, what we expected earlier in the year. And a lot of the BDCs pretty much almost every BDC in the sector has benefited quite a bit from the rate hike cycle.

Speaker 4

I'm just kind of curious your thoughts on the portfolio this year in particular And why I guess that hasn't really worked to your benefit quite as much as the rest of the space? And then I guess in addition to that, what are some of the things that you think you could do with the advisor To hopefully help improve performance. So you mentioned SINGR too in terms of raising new funds and potentially lowering costs. But anything to that end would be helpful.

Speaker 1

Yes. Paul, thank you. It's I know it's on your minds. It's on Our minds every day, how do we continue to advance the platform. And I think that's and you hit on it there that We need to have a broader platform so we can originate more.

Speaker 1

We're making headway with that. We've done a first close as we talked about on the last call of a fund. That fund is bringing in additional money throughout this year. The second thing is we did bring in an SMA. We're in discussions on another.

Speaker 1

We are targeting An additional fund first closed the Q1 of next year. All of that not only spreads cost and you touched on bringing down cost, but I think equally important, It generates more origination and better terms on origination as we have a bigger platform. We really just started getting traction on that earlier this year and I expect that to continue to pick up. But those are the areas that we're really focused on because I think you've seen a lot of big platforms that have some small funds and they are the beneficiary of it.

Speaker 4

Thanks, Mike. And I appreciate that. I mean, I guess, I mean, at this point, Yes. The advisor, Investcorp, I think they came in roughly 4 years ago. I mean, do you see it as a case at this Point where the equity base has essentially shrunk to a point where scale is just not Quite possible with the size of the BDC, being about roughly $90,000,000 Equity based BDC, one of the smaller smallest market cap BDC space, BDCs in our coverage at least.

Speaker 4

I mean, Do you see that as a, I guess, inhibitor to pulling these levers? Or, I mean, what do you expect, I guess, out of this, The growth that you're kind of calling for in the next few years.

Speaker 1

I don't think the BDC is an inhibitor. I think that there was a lot of time spent over the 1st 2 years looking at strategic ways to grow it and those did not happen for a lot of different reasons I can't go into, but mostly Our choice not to execute around a lot of that, and we've been focused over the last 12 months on organic growth. And so the size of the external publicly traded BDC has not been the inhibitor. But Going forward, hopefully, it will be one of the beneficiaries.

Speaker 4

Got it. Thanks. I appreciate you for taking my questions and that's all for

Speaker 5

me. Thank you

Speaker 1

very much, Paul. Appreciate it.

Operator

Thank you, Paul. Our next question comes from Robert Dodd with Raymond James. Robert, go ahead please.

Speaker 2

Hi, guys.

Speaker 5

First, a housekeeping one, if I can. I mean, there was a Fairly sizable dividend in the Q4. I mean, was that related to a one time event or is that a new position in, say, I've got equity or something, I. E. Is it going to continue or is that a one off source of income?

Speaker 1

That $0.05 that you're, I think, referring to was a one Time event. So we've got the base going forward at 12 and we'll have a supplemental to the extent that it makes sense. And we will As we have in the past, we give visibility for the next quarter and we said we expect to cover the dividend for the next quarter.

Speaker 5

I appreciate that color. I meant the income to the BDC. That was a 690,000 Dollar dividend in total investment income for the BDC this quarter, is that sustainable number?

Speaker 2

Oh, Robbie, you're talking on the income statement, correct?

Speaker 5

Yes. Yes, yes, yes. Correct.

Speaker 2

Yes, yes. Mike, he's talking about the technical loss dividend that we I think some of the equity position paid a dividend. I don't think they're I think they're one offs.

Speaker 1

Yes, those are one offs, the dividends coming in. I would not think about those as recurring dividends. We do think that we'll get them episodically, but not on a quarterly basis.

Speaker 5

Got it. Got it. Appreciate that color. Then if I can, I thought you obviously amended the credit facility and we spoke about that That's quarter 8? That amendment does not and I apologize for the background noise, hasn't changed the revolving period.

Speaker 5

So can you give us any color on what you're doing to extend that? Obviously, it's an evolving period of current expiries all this next year. That's part of it. Also, in that I do note that in the credit facility amendment, you've now added an advanced rate bucket for broadly syndicated loans. Is it a plan to do more of that within the BDC in terms of more secondary purchases on BSLs or is that just

Speaker 3

Yes. Hi, Robert. This is Suhail. So I'll let Rocco Pickup on the credit facility. The short answer is we didn't have an expiration coming due.

Speaker 3

I think we have amended the credit facility To allow for some financial flexibility in it. With respect to secondary positions, I think we are the big picture Our response is, we're being very selective in this marketplace from a deal flow perspective. As you know, Deal flow, primary deal flow for buyouts is down almost 50% year on year. So what we see is, Frankly, a lot of that stuff we're passing on. So we're looking at secondary Investments where either we know the credit or we can leverage the broader Investcorp platform of private equity or our liquid credit businesses To source ideas from.

Speaker 3

So that's really the theory behind doing some of those investments. And because they are Somewhat more liquid than your traditional middle market loans. We can move in and out of those

Speaker 5

Yes, yes. That answers that question. Thank you. And then just on there's no imminent maturity on the revolving credit The credit facility, but the revolving period now has less than 12 months. To keep the one of the times on that

Speaker 1

The term out goes further, the revolver ends.

Speaker 2

The Revolve of the Capital One facility ends in 2026.

Speaker 5

Right. But the revolving the reinvestment period ends in 2024.

Speaker 1

And we'll go back and review all that. But we've been working with Capital One ongoing, and All those relationships are very healthy. I'll double check that, Robert, and we'll come back. Yes. I'm sorry, Robert.

Speaker 1

Yes.

Speaker 5

Yes. No worries. Appreciate it. Thank you for answering my questions.

Operator

Thank you very much. Our next question comes from Paul Johnson again with KBW. Paul, go ahead please.

Speaker 4

Yes, thanks. Sorry, one more follow-up. During the remarks, you guys said that you Full $0.15 distribution or are we talking about just simply the base distribution of $0.12

Speaker 3

No. Paul, this is Suhail. It's The base distribution of $0.12 and to the extent there is any spillover or supplemental that's going to be on top of that.

Speaker 1

Thank you. If there's no other questions, we'll talk to everyone next quarter. This was a long gap

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Investcorp Credit Management BDC Q4 2023
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