Investcorp Credit Management BDC Q4 2024 Earnings Call Transcript

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September 27, 2024

There are 4 speakers on the call.

Operator

Thank you for joining today's Investcorp Credit Management BDC Third Quarter Fiscal Year 20 24 Earnings Call. It is now my pleasure to turn the floor over to Mr. Walter Tim, CFO.

Speaker 1

Thank you, operator. Welcome everyone to Industrial Credit Magazine's Q4 and full year 2024 earnings call. I am joined by Chief El Sheikh, President and Chief Executive Officer of the company. I would like to remind everyone that today's call is being fully recorded and that this call is the property of Universal Credit Management, CBC. Any unauthorized forecast of this call in any form is strictly prohibited.

Speaker 1

Available by visiting our Investor Relations page on our website icmbdc.com. 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. We will not update forward looking statements unless required by law. For taking copies of the latest SEC filings, please visit our Investor Relations page on our website.

Speaker 1

The format for today's call is as follows: Sue Hale will provide an overall business and portfolio summary, and then I will provide an overall view of our results summarizing the financials followed by a Q and A. At this time, I would like to turn the call over to Sohail.

Speaker 2

Thank you, Walt, and thank you to everyone for joining us today to discuss our results for the Q4 and full year 2024 earnings. I'm proud of the team's efforts during fiscal year 2024 and in the portfolio. We successfully executed our portfolio rotation strategy, which we've been discussing over the past year, resulting in the rotation of about a third of our portfolio into larger, more stable credits. This strategic shift has positioned us well for the future. Despite the challenging market environment marked by loan, new deal activity and intense competition for quality credit investments, the team was able to deploy approximately $56,000,000 of capital by leveraging our proprietary relationships with sponsors and club partners.

Speaker 2

We were able to source attractive opportunities for health meals, refinancing and secondary investments. Notably, our disciplined approach has paid off as our investments are non accrual as a percentage of fair market value declined significantly from 10.6% at the end of our 1st fiscal quarter to 5% in the current fiscal quarter, stability and resilience of our portfolio. During our fiscal year ended June 30, 2024, ICNB generated net investment income of $6,600,000,000 or $0.46 per share. This was a decrease of approximately 30% from the prior year's net investment income, largely driven by market spreads tightening and shifting into larger, more stable credits, which in average have a lower spread. The weighted average spread declined from approximately 6.2% as of June 30, 2023 to 5% as of the end of the current quarter.

Speaker 2

Net asset value per share declined approximately 14% to $5.21 per share from $6.09 per share last year. In terms of our 4th quarter results, we generated net investment income of income of $1,300,000 or approximately 9 shares. NAV per share declined approximately 5% from the previous quarter. The decline in NAV was driven by 2 factors. First, the decline was driven by mark to market adjustments on a few equity positions, while all but one of our credit positions remained relatively stable quarter over quarter.

Speaker 2

2nd, the timing of several refinancings and the ramp up of new deals were back end loaded during the quarter affecting overall NII. Despite these factors, our credit portfolio continues to show stability and resilience as the underlying performance of our borrowers has improved over the past 4 years. The median EBITDA of the portfolio increased from approximately $47,000,000 last quarter to $55,000,000 in the current quarter. And our weighted average loan to value ratio of our performing debt investments is approximately 58%, an increase from 48% last quarter. Over the same period, the weighted average of the portfolio increased from 4.2% to 5.1% as we continue shifting towards larger credits that are backed by sponsors that we know.

Speaker 2

The market remains highly competitive with all lenders experiencing some level of spec compression. We saw a number of refinancings occur in our portfolio, especially over the last few quarters, primarily consisting of legacy portfolio company. Competition for new investment continues to be intense, partly due to LPO and M and A volumes remaining below average levels. Our team remains disciplined originating new investments to offset the repayments and maintain leverage in our targeted range. While new deals remain competitive, we are committed to maintaining strong structural protections in our documentation and capital structures.

Speaker 2

During the quarter ended June 30, we invested in 2 new portfolio companies and 3 existing portfolio companies. Fundings for new investments totaled approximately $17,000,000 at cost with a weighted average yield of approximately 10.2%. In the same period, we fully realized 3 portfolio company investments totaling $22,100,000 and proceeds with an IRR of approximately 11.3%. First, we invested in the 1st in term loan of Crisis Prevention Institute or CPI to support the refinancing of the company's capital structure. CPI provides de escalation training and consulting for human care professionals.

Speaker 2

CPI is a bundled portfolio company. Our yield at cost is approximately 10.4%. We increased our existing position in the first lien term loan of Multicolor Corp, also known as LABL, or LAD, to take advantage of an extractive price in the secondary market. Our yield at cost is approximately 11%. We also participated in the refinancing of an existing portfolio company, NorthStar.

Speaker 2

Our yield at cost is 10.4% and the realized attachment was 12.8%. We made an investment in the 1st lien term loan B10 of Asurion. Asurion is the leading provider of device insurance, warranty and support services for cell phones, consumer electronics and home appliances. We purchased Assurant in secondary market at an attractive price. Our yield at cost is approximately 9.8%.

Speaker 2

We also made a small follow on equity co investment in an Invescor North America private equity portfolio company listed on our SOI as Pegasus Accredited Holdings LP. Lastly, we realized our 1st lien term loan positions with Empire Office and Popery, both of which refinanced during the quarter. We have been invested in both these companies since March June of 2019, respectively. Our realized IRR on Empire was approximately 10.5% and our realized IRR on PORI was approximately 11.8%. After the quarter end, our net investment activity remains at a healthy pace, which we will discuss in the next quarter.

Speaker 2

As of June 30, our largest industry concentrations by fair market value were Commercial Services and Supplies at 13.5%, Professional Services at 11.2%, training company and distributors at 9.1%, containers and packaging at 7.3%, followed by food products at 4.8% and entertainment at 4.8%. Our portfolio companies are in 23 GICS Industries as of quarter end, including our equity and warrant positions, which is an increase of 1 industry from the previous quarter. I would now like to turn the call back over to Ward to discuss our financial results.

Speaker 1

Thank you, Hill. For the quarter ended June 30, 2024, the fair value of our portfolio was $184,600,000 compared with $192,200,000 on March 31. Our net assets were $75,000,000 a decrease of $4,100,000 from the prior quarter. Portfolio's net decrease in net assets from operations this quarter was approximately 3,500,000 dollars The weighted average yield of our debt portfolio was 12.33 percent as you percent of 12.36 percent in the previous quarter ended March 31. As of June 30th, our portfolio consisted of 41 borrowers, approximately 85% of our investments were in proceeds and a remaining 50% of investment in equity and reaching other positions.

Speaker 1

97% of our debt portfolio was invested in floating rate instruments, 3% invested in fixed rate instruments. The weighted average spread in our debt investments is 5% and the weighted average rate flooring is 1%. Our average portfolio company position on a fair market value basis was approximately 4,600,000 dollars and our largest portfolio investment in a fair market value basis is bioplan with $13,500,000 We are pleased to announce that on September 18, 2024, the Board did write this down to declare the distribution for the quarter ended September 30, 2024 of $0.12 per share. This would be payable on November 6, 2024, to the stockholders' equity as of December 16. We had a gross leverage of 1.42x and net leverage of 1.25x as of the year 30 compared to 1.42 gross and 1.36 net respectively for this quarter.

Speaker 1

With respect to our liquidity, as of June 30, we had approximately $5,100,000 in cash, of which approximately $4,900,000 was restricted cash with $57,000,000 of capacity under our revolving credit at Capital One. Additional information regarding the composition of our portfolio is included on our Form 10 ks, which was filed earlier this week. I would also like to address the change of our independent auditor. As a part of the ongoing commitment to best practices and compliance, we have engaged KPMG as our new independent auditor. We want to share all stakeholders this is a change not related to issues with our financial statements or accounting practices.

Speaker 1

It is simply a reflection of our regulatory view of service providers to ensure that we are receiving you the best possible expertise and support. We are happy to address any questions on the matter at the end of the prepared remarks. And with that, I'd like to turn the call over to Doctor. Suh.

Speaker 2

Thank you, Walt. This year, we've been successful in notating and diversifying our portfolio into more stable credits. As we look towards our next fiscal year, we're excited about our pipeline and our capacity to continually invest in high quality opportunities. As always, our top priority has and will continue to be focused on capital presentation and maintaining a stable dividend. That concludes our prepared remarks.

Speaker 2

Luke, please open the line up for Q and A.

Operator

Ladies and gentlemen, at this time, we will conduct the question and answer Our first question comes from Mr. Chris Nolan at the Ladenburg Thalmann. Go ahead, sir.

Speaker 3

Hi. Well, congratulations on the step up to the new role. The lower yields on the new investments, is that should be used as a good proxy for more direction of investment yields going forward?

Speaker 2

Hi, Chris. This is Suhail. I think the way we should think about those is, it's market reflection. We're seeing spreads come in for new deals, probably 50 to 75 basis points across the board.

Speaker 1

We I

Speaker 2

mean, we can make it all our liabilities should also be following that at some point. So we think that the market is it's tightening. I mean, there's a lot more capital available, not enough deals in supply. So my guess is where it is today is what we should continue to see for the rest of the year. Don't have a crystal ball beyond that just yet.

Speaker 2

We do expect volumes to pick up and tail flow to pick up and just given our own pipeline of activity. So we think at some point we're going to be might see some spread widening or some action in the way we look at that. And

Speaker 3

what would be the catalyst for the spread widening? Would it be lower funding costs using the facility or would be a more attractive investment for more attractive

Speaker 2

I think all of the above, yes. Yes, both of them.

Speaker 3

Okay. So we should expect a lower funding cost from the rate change by the Fed to impact your facility, but also you expect better days for lenders ahead?

Speaker 1

Correct.

Speaker 3

Okay. That's it for me. Thank you very much.

Speaker 2

Thank you, Chris.

Operator

Thank you very much. Again, if you have any questions, please press 7 pound on your phone I don't see any other questions, Sudhayo.

Speaker 2

Thank you, Luke. Thank you, everyone, for participating in the call. We look forward to announcing our next quarter's earnings and look forward to talking again next quarter. Thank you again. Thank you, Luke.

Operator

Thank you, everyone. You're welcome. And this concludes today's conference call. Thank you, everyone, for

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