Q1 2020 Earnings Call
At this time all participant lines are in a listen only mode. After the speakers presentation. There will be a question answer session. So the question. During the session. You want me to press Star one on your telephone. Please be advised that todays conference is being recorded it here. According to further assistance. Please press star zero I when I like to have the conference over to your speaker today, Dan Mcmahon. Thank.
Q. Please go ahead Sir.
Good morning, and welcome to crushing capital BDC Inc.'s March 31st 2020 quarterly earnings Conference call.
Please note the crushing capital BDC, and maybe referred to as crushing PTC seek out where the company through optical.
Before we begin I'd like to remind our listeners that remarks made during the call may contain forward looking statements.
Statements other than statements of historical facts made during this call may constitute forward looking statements and are not guarantees of future performance.
Our results and involve a number of risks and uncertainties.
Actual results may differ materially from those in the forward looking statements.
As a result of a number of factors, including those described from time to time and Crescent Bdcs filings with the Securities and exchange collection.
The company so assumes no obligation to update any such forward looking statements.
Please note that this call is the property of Crescent BDC.
Any unauthorized rebroadcast of this call in any form is strictly prohibited.
Yesterday after the market close Crescent BDC issued its earnings press release and posted an earnings presentation for the first quarter ended March 30, Onest 2020.
The presentation, which is available on the company's website under the Investor Relations section.
We'll be referenced throughout today's call and should be reviewed in conjunction with the company's form 10-Q filed yesterday with the FCC.
Unless otherwise noted all performance figures mentioned in today's prepared remarks, or as though and for the first quarter ended March 31st 2020.
As a reminder, this call is being recorded for replay purposes.
Speaking on today's call will be Jason Bro, Chief Executive Officer of Crescent, BDC, and Gerhard Lombard Chief Financial Officer of Crescent BDC.
With that I'd now like turn it over to Jason.
Thank you Dan.
Good morning, everyone and thank you for joining us today for first earnings call as a publicly traded company.
I would like to take a moment to welcome all the shareholders and the equity research community for dialed in.
We look forward to working together and maintaining an active dialogue with each of you as we entered this new chapter of Crescent Bdcs evolution.
We want to start by recognizing this very challenging time, and we send our best wishes to those most impacted by the cobot 19 pandemic.
Particularly those who have suffered from the virus and the essential individuals on the front lines for dedicated to the health and safety of our country.
Fortunately, our employees are safe and healthy and we have implemented our business continuity procedures and remote working arrangements to successfully.
I'll begin by providing a brief introduction on crescent capital, our firm's investment strategy and the roadmap to see caps lifting on February threerd.
I'll then provide some color on our current positioning in light of the market volatility we all experienced in Q1.
And touch on a few recent announcements.
Gerhard will then review details related to our acquisition about center capital.
Discuss our financial results for the first quarter and review our liquidity profile.
So let's begin.
Crescent BDC is part of the Crescent capital group platform.
An independent employee owned alternative credit manager with over 180 employees, including 80 investment professionals across the U.S. in Europe with over 27 billion in assets under management.
We're nearly 30 years Crescent capital group has been investing and senior secured loans.
Bonds mezzanine debt and distressed debt securities through our private and public credit strategies.
We are one of the oldest private credit managers with a track record dating back to 1992.
Our team has invested roughly 20 billion in private credit transactions since the firm's inception.
We have differentiated ourselves by strategically growing our asset base across multiple economic and business cycles to be more effective and relevant to our clients, including our investors as well as the private equity community, whose companies we finance.
Question Capital group seeks to deliver attractive returns with less volatility.
We're default rates and higher recoveries than the market average.
Our disciplined investment approach based on current income and principal preservation.
Our proprietary research platform.
Our origination capabilities have resulted in many long standing investor and sponsor relationships.
To give you a sense we've reviewed over 10000 private equity transactions and provide a debt financing to over 200 unique private equity sponsors.
Any of which are repeat clients.
Turning back to Crescent BDC.
Christian Bdcs externally managed by an affiliate of pressing capital group.
Providing it with broad access to Crescent capitals, private credit expertise and scaled investment platform.
Gryphon BDC has exemptive relief from the SEC to co invest alongside Crescent capitals private credit strategies.
Thus, preventing it with access to a large right if opportunities based on Crescent capitals long established private credit origination and underwriting capabilities.
Since its launch as a private vehicle in 2015.
I think BDC has grown by raising primarily committed institutional capital and deploying that capital into attractive opportunities.
Our portfolio was further augmented on January 30, Onest with the closing of the Alcentra capital acquisition.
Which served as a catalyst for our February threerd listing on NASDAQ.
As part of the listing we introduced a number of shareholder friendly initiatives.
Further align ourselves with our Investor base.
We've implemented a compelling fee structure, including a permanent reduction in the management fee to 1.25% and.
And an increased hurdle rate of 7% on a 17.5% incentive fee.
In addition, we're providing 18 months of base management fee waivers, a 50 basis points, reducing our effective management fee rate to 75 basis points with full income incentive fee waivers.
Turning to the quarter.
Our interest in the public markets preceded the most dramatic economic period since the global financial crisis.
Building and liquid credit markets and the BDC sector experiencing their worst quarter in over a decade.
Please turn to slide three where you'll see a summary of our first quarter results.
She caps net asset value per share declined 15% in Q1 to 16 52.
Gerhard will walk through our now bridge in more detail.
But the primary driver this quarter is decrease was unrealized depreciation in our portfolio.
In terms of earnings we reported 44 cents of after tax net investment income per share.
Covering our 41 cents per share first quarter dividends.
Slide 11 of the presentation provides a snapshot of our portfolio.
We manage diversified $883 million portfolio, consisting of 127 portfolio companies across 21 industries.
She kept access to the broader crescent platform has been extremely beneficial during this period of dislocation.
Given the deep bench of talent and collective experience managing private credit portfolios through numerous cycles.
The breadth of the team at our reputation as a trusted partner have allowed us to maintain an active recurring dialogue with the sponsors and management teams of our portfolio companies to develop action plans to navigate through this rapidly changing landscape.
On the upper right hand side of the slide.
You'll see that 99% of our debt portfolio is in sponsor backed companies.
As we generally believe that private equity sponsors can provide operational and financial support to strengthen their portfolio companies for long term value creation.
For the quarter, all but three of our debt investment portfolio companies.
Representing 98% of total investments at fair value made full principal and interest payments.
As of quarter end, our total investment portfolio was carried at 91% cost versus 100.3% of cost at December 31.
Well, we were not immune to the consequences of cobot 19 in terms of mark to market volatility in Q1.
We do feel well situated as their portfolio is highly diversified.
We invested largely in defensive industries.
On slide 12, you'll see that our top three industry exposures commercial and professional services healthcare equipment and services and software and services represent 21%, 20% and 14% of the portfolio at fair value respectively.
Our focus on constructing a defensively positioned portfolio has led to relatively modest exposure to cyclical industries impacted most by recent events.
Energy retailing and transportation cumulatively represent 5% of our portfolios total fair value as of quarter end.
With no travel or aviation exposure.
We aim to invest primarily in first lien opportunities, which accounted for roughly 80% of total portfolio fair value as of March 30 Onest.
Activity in the first quarter reflected this approach.
93% of gross deployment was in first lien positions.
You'll see on slide six.
In total excluding assets acquired in the Alcentra capital acquisition.
We invested 117 million in Q1.
The components consisted of seven new investments totaling 67 million.
Three add on investments totaling 5 million.
And 45 million of total fundings across our existing revolver delay draw an LLC LP commitments.
While we did experience an increased level of funding request from certain of our borrowers in March.
Activity has since slowed materially and we fully funded all contractual request to date.
In Q1, we had 74 million in aggregate exits sales and repayments.
I'll now spend a minute on several recent corporate announcements before turning it over to gear or.
First.
We declared our normal 41 cents per share quarterly cash dividend for the second quarter of 2020.
Second.
Yesterday Kroll bond rating agency assigned to see cap a rating of triple B minus with a stable outlook.
This represents an important milestone for sicad.
As we seek to further optimize our capital structure over the coming months.
We continue to monitor the debt capital markets and would like to issue new unsecured notes now that we are investment grade rated.
Doing so we'll provide for a more flexible capital structure and allow us to lower our utilization under our secured facilities.
Part of the strategic rationale for lifting see cap.
Was improved access to the capital markets for growth and financing.
And obtaining unsecured financing fits squarely within that framework.
Third.
At our annual meeting on May four our stockholders approved the application of the 150% minimum asset coverage ratio following our board of directors unanimous approval in March.
As a result.
She caps minimum asset coverage ratio is now 150%.
This improves our financial flexibility.
Allows us to operate with an increased cushion to the regulatory limit.
And aligns us with the public peer group.
Given the NAV declined during the first quarter, our ending debt to equity ratio was 0.92.
Overtime, we expect to operate within a range of 1.0 to 1.3 times.
Finally on April nine we terminated our stock repurchase program after the close of trading.
We believe it was due just to take this action in order to preserve our financial flexibility and liquidity in the near term.
To be clear Crescent capitals employee stock purchase program has not been impacted.
On a combined basis. These programs at purchased 280000 shares of common stock as of Monday is close.
Looking ahead, we remain focused on actively managing and supporting our current portfolio.
Underwriting high quality, new opportunities and optimizing our capital structure.
We believe that size scale portfolio diversification and strong underwriting at selectivity matter now more than ever.
And that we are well situated to weather the near term volatility and capitalize on dislocation.
By continuing to partner with and provide committed capital to quality companies.
I will now turn it over to gear hard to cover additional details on the quarter.
There are.
Thank you Jason.
I'll start by providing a brief summary of the Netcentric Capital Corp acquisition, and then review our financial results for the first quarter.
As a reminder, we closed the acquisition on a sentra on January 31 2020.
While the first quarter balance sheet includes the net assets acquired in the transaction.
Yes financial results for the quarter exclude L. Centrus results for the month of January before the acquisition closed.
Net assets acquired as part of the transaction exceeded consideration paid in the form of cash and stock like $3.5 million.
Before transaction expenses of $7.3 million, resulting in a $3.8 million net loss from acquisition.
14 cents per share disclosed consolidated statement of operations.
It's worth noting that our advisor demonstrated meaningful alignment with stockholders by contributing approximately $23 million in the form of transaction support in January.
This is in addition to a 10 million dollar investments in see kept stock since the Bdcs launch in 2015.
The transaction added a diversified pool of $196 million in invested assets to our portfolio.
Representing an increase of approximately 27% over our December 31, 2019 portfolio $727 million.
Turning to slide four where you can find our financial highlights for the first quarter net investment income was 44 cents per share.
Exceeding our first quarter dividend of 41 cents per share.
Net unrealized losses per share net of taxes.
$3.14.
These losses largely reflects the macroeconomic impact of cobot 19 on the fair value of our portfolio during Q1.
40% of total net unrealized depreciation was attributable to brokered quoted positions in our portfolio that with directly impacted by the dislocation in the syndicated markets towards the end of Q1.
Approximately 30% of total net unrealized depreciation was attributable to the widening of credit spreads on forming investments.
Our internal risk ratings as you'll see on slide 14.
Have been impacted by the economic shutdown as well.
As of quarter end, 19% of our investment portfolio at fair value was rated three.
Meaning that while a borrowers loan payments are generally not cost you and more likely than not the bar will remain in compliance with debt covenants their risk has somewhat increase since our initial investment.
This compares to 7% of the portfolio being three rated at year end.
As we believe it was prudent to property reflect the recent economic uncertainty in our portfolio monitoring process.
Turning back to results for the first quarter total investment income was $18.8 million up from $14.7 million in the prior quarter, primarily due to an increase in the size of our portfolio, which is largely related to the El Centro acquisition.
Interest and dividend income was $18.4 million up from $14.6 million from the previous quarter again, primarily due to the El Centro acquisition.
Net expenses inclusive of taxes were $7.3 million up from $6.4 million in the previous quarter, primarily due to an increase in interest and other debt financing costs.
Resulting from an increase in the weighted average debt outstanding.
And again largely due to the health Center acquisition.
The weighted average interest rate on average debt outstanding decreased from 4.4% in the prior quarter to 4.0% Q1 as benchmark rates declined.
Moving to the balance sheet. Please turn to slide nine which contains a net asset value per share bridge.
Reported net asset value per share at quarter end was $16.52, a decrease of $2.98 or 15% compared to the prior quarter.
Walking through the components, we added 44 cents per share from net investment income against the dividend of 41 cents per share.
The aforementioned unrealized mark to market depreciation net of taxes.
Of $3.14 per share was the primary driver of the NAV change in Q1.
Investments at fair value increased by 23% in the quarter to 883 million as the acquisition of El Centro <unk> 196 million dollar investment portfolio, coupled with $44 million of net deployments.
At the Mark to market unrealized depreciation, which flowed through our portfolio.
As of March 31, the weighted average total yield on our debt investments at amortized cost was 7.8% as compared to 8.2%.
At December 31.
While spreads on the underlying investments increased quarter over quarter. The decline in LIBOR resulted in a lower weighted average yield.
96% of our debt investments were floating rate and had an average LIBOR floor of approximately 79 basis points as of quarter end.
Below three month LIBOR of 1.5% at March 31.
While the floors will be beneficial in future quarters, assuming the recent decline in LIBOR remains unchanged.
Q1 change in LIBOR did result in an approximately 40 basis point reduction in our total weighted average yield at amortized cost quarter over quarter.
Moving to the right hand side of our balance sheet. Please turn to slide 16.
In March we entered into an amendment to our SPV asset facility.
Amendment increased the total facility size by 100 million $350 million.
And extended the final maturity date to 2025.
Our total liquidity is supported largely by longer dated financing.
Over 90% of the principal amount of debt outstanding maturing in either 2024 2025.
In connection with the center acquisition, we assumed 50 million of inter notes of which we redeemed $17 million in March and another 70 million in April subsequent to quarter end as we continued to focus on capital structure optimization.
From a liquidity perspective as of quarter end, we had 157 million of Undrawn capacity on our SDB assets and corporate revolving facilities.
Subject to leverage borrowing base and other restrictions.
This compares to 72 million of unfunded commitments available to be drone based on contractual requirements and the underlying agreements with our portfolio company.
I'll delayed draw term loan commitments generally have incurrence test in place, which limits the amount of total leverage our portfolio companies can take on.
As such while we do expect some usage over the coming months, we do not expect the entirety of these commitments to be called upon.
Our debt to equity ratio was 0.92 times as of March 31, compared 2.74 times at year end.
And we are in compliance with terms and covenants of each of our debt agreements.
Importantly, we recently obtained stockholder approval for reduced asset coverage. So we have sufficient cushion from a regulatory perspective.
As Jason mentioned this morning, we declared a regular second quarter cash dividend of 41 cents per share, which is consistent with a regular quarterly dividend paid in the first quarter.
This second quarter dividend is payable on July 15, 2022 stockholders of record as of June 32020.
With that I'd like to turn it back to Jason for closing remarks.
Thanks, Gary Hart.
In closing.
While the current market environment, it's certainly challenging we remain optimistic with regards to Crescent BDC today.
As discussed we built a defensively positioned portfolio and benefit from the Crescent platform and highly seasoned team.
Collectively managed portfolios through multiple cycles.
We'd like to thank everyone on the call for your continued interest in time today.
Operator, please open the lines for questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound Kane. Please standby what we compile the Q1 a roster.
Our first question comes from the line of Robert Dodd from Raymond James Your line is now open.
Pardon me Robert Dodd Raymond James Your line is now open please check your mute button.
I apologize I was muted so let me thank you Beth.
All right plus on liquidity person that I've got into the portfolio.
All the.
The main thing balances.
Payable and principal.
On the SPV into the goal by how much if that is actually dual bowl given given the cover the base.
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Yes, Hi, Robert This is there are thanks for the question.
So we we had $157 million capacity on a combined credit facilities as of March 31.
During the difference between 800, sorry, 583 million total combined facilities and 426 million drawn under those facilities on the balance sheet.
Substantially all of that 157 of capacity was available to us as of March 31.
Given the collateral in the portfolio and advance rates.
Valuable to us against that collateral.
Keep in mind that we were subject to a 200% asset coverage limits as of March 31.
So we would not have.
Drawing the full amount available to us, but subsequent to quarter end as we remarked earlier, our asset coverage of threshold produced from 200% to 150.
So the short answer to your question is the full 157 was available.
Got it. Thank you. Thank you.
Okay.
Own owing to the portfolio.
Yeah, Joe as you mentioned three portfolio companies Didnt make that PNR payments at the end of March I mean.
You give us any color on.
Who those who those wells or were they in the albeit sexism I mean, obviously energy retail travel expenses on the small PC portfolio, but only a small a little companies.
Or was there any surprises in terms of the guys that.
Didnt make the payments in being not less so they expected just thanks.
Hey, Robert it's Jason Thanks for the question.
Let me, let me, let me comment on that but but before I do that specifically on the companies.
I would just say more broadly we had roughly.
Call. It a couple handfuls of portfolio companies out of about 115, or so debt issuers reach out toward the end of Q1 for some form of amendment or relief that wasn't completely innocuous or technical in nature a.
Covenant relief Pik interest et cetera.
Three concessions were made of the three one went too.
Full pick and we actually placed it on non accrual.
One is currently in default and we are negotiating an amendment with that company and one pay partial cash and partial pick in order to preserve some liquidity.
The one that went to pick and non accrual as a marketing services company that had some challenges before the cobot 19 pandemic kit.
The sponsor actually infuse additional equity recently.
And the lenders agreed to pick for an extended period of time to get the company breathing room to effectuate in operational turnaround.
The one currently in default as an oilfield services company that as you can imagine faces a tough look out.
The decline in oil prices.
And the last that paid cash interest and pick interest.
As reasonable liquidity today, it's in the healthcare services space.
But depending on the duration of shelter in place protocols could certainly be negative negatively impacted further and I would say geographically.
Their main operations are in the Tri state area.
Which could be under extended sort of lockdown procedures.
Got it got I I really appreciate the color will now all so the the.
<unk> expenses session. This question, obviously, you mentioned sponsor in one of those cases being willing to put in more equity how.
The conversations going on over the last.
I guess what to bumps into this now.
In terms of both obviously you.
Contact with the bar was but also the sponsors what would you say is is the level of willingness to support that youre having.
The sponsors, particularly obviously, the ones, where whether thats more or less.
Yes, I think.
Generally and broadly speaking there's been.
People have kind of locked arms and really fully acknowledge that the crisis that we're currently in.
Needs.
Needs to be addressed as a group.
And we're fully focused on.
Supporting and protecting our interests and our portfolio companies and I think generally speaking private equity sponsors are as well.
It is our expectation that when relief is sought from the lenders in some four in some and some capacity whether its.
Covenants capital.
Interest modifications that.
The equity will also be contributing to the support and that historically has been our experienced thus far so I would say.
Generally speaking we it has been a very regular dialogue and a very constructive dialogue amongst.
Equity and the.
The lenders.
So on it got it. Thank you on that one and one more one more if I can you had in your prepared remarks, you talked about 40% of the unrealized losses being broken quotes 30% widening spreads that skills leaves 30% leftover.
So is that what was the I mean, obviously, that's the potential that together just credit box.
How much of that 30.
You can could you say was was credit how concentrated is that within the portfolio any color you can give us on when obviously you guys. It's the level three assets as well, but we're not level three assets level to risk weighted assets, but any more color on on the maintenance 30 of the marks.
Yes happy to provide some color there and I think you touched on it when we.
Calculated the 40% broker quoted in the 30% related to spreads we carved out of that analysis, the three rated or higher asset. So.
Maybe just as a reminder, that risk rating the assets each quarters obviously.
Subjective qualitative process, there's no real guidance to ensure.
Compatibility between FCC, filers, but but I'll read our risk rated three or higher assets increased from 7.5 percents at the end of Q4 to about 20.5% this quarter.
An 18.
8% of that 20.5, which is everything thats three four or five rated.
His into three way to category, So Robert that's really where the remainder of the 35% to 30% of the remaining 30% of.
Unrealized losses is situated and the majority of that is related to two spreads as well.
The true.
Correct distressed or credit impact a portion of our portfolio. If you look at our non accrual disclosure is relatively small non accruals were eight 1.8% of the portfolio at quarter end concentrated and for names.
Maybe I could just add to what Gerhard was just saying Robert.
As we look to risk rate our portfolio from March 31.
We looked at our investments through multiple lenses.
We wanted to see how the cobot 19 pandemic would impact our portfolio companies and Bucketed those impacts bi severity in into several categories.
Such as.
Elective procedure deferrals and non critical medical for our health care names.
Companies reliant on large event gatherings limited or reduced access to customers.
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Very small piece of this but energy related names and then disruption somewhere along the supply chain.
And we took those risks buckets and overlaid the financial condition of each of our portfolio companies to arrive at a list of those companies, which we thought risk was elevated relative to underwrite I think we took what we believed to be a conservative approach and that risk rating assessment that said if the current cobot 19.
Okay pandemic forces us to maintain shelter in place protocols for multiple additional months. It will most certainly continue to negatively impact the portfolio.
Got it I really appreciate that extra color. Thank you guys short.
Thank you as a reminder, ladies and gentlemen task a question. Please press the star the number one key on your Touchtone telephone.
This concludes our QNX session at this time, we would like to turn the call back over to Jason Brown for closing remarks. Please go ahead.
Okay. Thank you.
Thank you, ladies and gentlemen for joining today's call. We we appreciate your time and interest in Sicad, particularly in these challenging times.
And we look forward to staying in touch. Please please feel free to reach out to us with any additional follow up questions and we look forward to speaking again soon.
Ladies and gentlemen, this concludes today's conference call. Thanks for participating you may now disconnect.
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