Q2 2020 Crescent Capital BDC Inc Earnings Call

It would be a question answer session to ask a question during that portion of the cool we need to press star one on your telephone. Please be advised to today's conference is being recorded if you're required.

The first start until I would now and the conference over to your Speaker Mcmahan Investor Relations.

Good morning, and welcome to Crescent, Calcutta BDC Inc.'s June Thirtyth 2020 quarterly earnings Conference call.

Please note that Christian capital BDC, Inc, maybe referred to as Crescent BDC.

See cap, where the company throughout the call.

Before we begin.

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 that are not guarantees of future performance.

Our results that involve a number of risks and uncertainties.

Actual results may differ materially from those in the forward looking statement as a result of a number of factors.

Including those described from time to time in Crescent Bdcs filings with the Securities and Exchange Commission.

The company 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 fan is strictly prohibited.

Yesterday after the market closed Crescent BDC issued its earnings press release and posted an earnings presentation for the quarter ended June Thirtyth.

2020.

The presentation, which is available on the company's website under the Investor Relations section will 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 second quarter ended June Thirtyth 2020.

As a reminder, this call is being recorded for replay purposes.

Speaking on today's call will be Jason Bro, Chief Executive Officer Crescent BDC.

And Gerhard Lombard Chief Financial Officer Oppressing BDC.

With that I'd now like to turning over to Jason.

Thank you Dan Good morning, everyone and thank you for joining us today for our second quarter earnings call.

We appreciate your continued interesting Crescent BDC and hope you and your families are safe and healthy.

I'll begin today's call by briefly discussing our financial highlights for the second quarter provide some color on our current positioning and touch on a few recent announcements.

Gerhard will then discuss our financial results for the second quarter in more detail and review our liquidity profile.

So let's begin.

Please turn to slide eight where you'll see a summary of our second quarter results.

She caps net asset value per share increased approximately 10% in Q2 $218.12.

Good hard will walk through me Nab bridge in more detail, but the increase was primarily driven by net change in unrealized depreciation specific to certain individual portfolio companies and net unrealized mark to market gains related to the tightening of credit spreads relative to the end the first quarter.

This quarter's rebound represents a recovery of just over half of the Nab attrition experienced in Q1.

In terms of earnings we reported 46 cents of after tax net investment income per share.

Bring our 41 cents per share second quarter dividend.

Given our second quarter results reflect a full quarters impact of the economic shutdown related to the cobot 19 pandemic.

We're pleased with this quarter's results in our ability to deliver a stable dividend to our shareholders.

Slide 16, and 17 of the presentation provides a snapshot of our portfolio.

We manage a diversified 900 million dollar portfolio, consisting of 124 portfolio companies across 20 industries with an average investment size of less than 1% of the portfolio.

On the upper right hand side of slide 16, you'll see that 99% of our debt portfolio is in sponsor backed companies.

This has been particularly beneficial over the past quarter and a half as weve navigated the varying degrees of impact and volatility created by cobot 19 across our portfolio in lockstep with the private equity sponsors whose companies we finance.

The private equity owners of our portfolio companies had focused significant time.

Resources and capital supporting their companies do best navigate the challenges of operating in a corona virus impacted world.

As you'd expect we've maintained a regular and constructive dialogue with our borrowers in private equity backers during this period.

For the quarter.

All but two of our debt investment portfolio companies, representing 98% of total debt investments at fair value may full principal and interest payments.

Pick interest represented less than 5% of total investment income for the year to date period.

As of quarter end, our total investment portfolio was carried at 95.5% of cost versus 91.0% at March 30, Onest and 99.6% at year end 2019.

Our portfolio remains highly diversified and invested largely in resilient industries.

On slide 17, you'll see the inline with last quarter, our top three industry exposures are commercial and professional services.

Care equipment, and services and software and services, representing 21%, 20% and 13% of the portfolio at fair value respectively.

Our focus on constructing a defensively positioned portfolio has led to modest exposure to cyclical industries impacted the most by recent events.

Energy retailing and transportation cumulatively represents 5.7% of our portfolios total fair value as of quarter end.

With no travel or aviation exposure.

As a quarter end investments on nonaccrual status represented 3.9% and 2.4% up our total debt investments at cost and fair value respectively.

We're working closely with each portfolio company and its sponsor to help navigate these difficult times and to maximize the value of our investments.

Turning to our investment activity.

In the quarter, we invested 26 million, which consisted of one new unitranche term loan totaling 7 million.

And $8 million refinancing of an existing portfolio company.

And 11 million across our existing revolver and delayed draw term loan or ddgs commitments.

This compares to 60 million in aggregate exits sales and repayments in the quarter.

Consistent with the industry, we did see lower than average origination levels in Q2.

Reflective of lower private equity deal activity.

Revolver and Ddgs funding requests.

All of which we fully funded to date also slowed materially in the quarter. Following a very active March.

In Q2, we received 12 million of revolver in detail repayments.

We remain focused on actively managing and supporting our current portfolio, while continuing to selectively underwrite high quality new opportunities.

We believe that having a modest leverage profile and ample dry powder will be beneficial foresee caps return on capital.

As we are seeing superior terms and new opportunities compared to pre cobot transactions.

Today spreads are generally wider by 100 to 200 basis points and fees or Oh, I D or higher by 1% to 2%.

While leverage and loan to value ratios are lower than six months ago.

Often call protection is also better.

And this is across a deal pipeline of by and large high quality middle market businesses that are performed well through the current pandemic.

To provide some color on recent activity so far in the third quarter.

We closed on three new investments and one add on foreign existing investment.

Totaling about 30 million of committed capital.

These are all private equity backed traditional first lien or unitranche loans at 600 to 700 basis points spreads.

Each with a 1% LIBOR floor and all ideas between two and 3% with strong call protection.

In addition leverage levels remain low.

With LTV for these transactions averaging 32%.

It's important to flag that Sicad participated alongside the broader crescent platform on all four investments.

He kept benefits from the origination and underwriting capabilities of the broader 28 billion Crescent capital group platform.

Well see cap committed approximately 30 million in these transactions that broader crescent platform committed nearly 250 million in the aggregate.

Looking forward the deal pipeline remains robust with one new investment recently signed up.

We're now seeing an attractive pipeline of new investment opportunities given today's market dislocation.

Before I turn it over to Gearhart I wanted to touch on a few more updates.

First our board has declared a 41 cents per share quarterly cash dividend for the third quarter of 2020.

Second on the heels accrual bond rating agency assigning us investment grade issuer and senior unsecured debt ratings of Triple B minus in May.

We announced on July Thirtyth that we agreed to issue 50 million aggregate principal amount of 5.95% senior unsecured notes due July 2023.

The notes will intentionally be issued in two separate $25 million closings.

The first of which occurred on July Thirtyth.

We expect the second closing to occur on or before October 28.

Which is beneficial in terms of maximizing net investment income by managing our interest expense.

This financing helps to diversify our funding sources provides us with a more flexible capital structure and allows us to lower our utilization under our secured revolving facilities.

As of quarter end, our debt to equity ratio was 0.78 times.

Well below our longer term target of 1.0 to 1.3 times.

And assuming the full 50 million of proceeds are used to pay down one of our existing credit facilities.

Our pro forma debt funding mix improves from 92% secured as of March 30, Onest, 283% secured as of June Thirtyth.

As we stated in the past the IBG rating and this inaugural unsecured issuance are important initial steps in see cafs evolution as a public BDC.

With the enhanced flexibility, particularly beneficial given the attractive investment pipeline.

Finally, the expiration of the first third of our share lockup occurred on August Threerd.

More than doubling our public float from 5.2 million to 12.9 million shares.

As a reminder, 100% of our pre listing stockholders other than those Alcentra capital stockholders, who received crescent BDC shares in connection with the Alcentra acquisition.

We are subject to a lock up on approximately 23.2 million shares outstanding.

At the time of our listing on February Threerd.

The second tranche of locked up shares will become freely tradable on October thirtyth.

With the final tranche, becoming freely tradable on February 2nd 2021.

I will now I'll turn it over to get hard to cover additional details on the quarter Your heart.

Thank you Jason I will review, our income statement performance and highlights NAV unrealized and realized activity as well as leverage and liquidity.

Please turn to slide nine where you can find our financial highlights.

The second quarter net investment income was 46 cents per share.

Feeding our second quarter dividend of 41 cents per share.

And compares to Eni of 44 cents per share for the first quarter also over earning our dividend.

Change and unrealized gains per share net of taxes was $1.59 cents.

Approximately 62% of the net unrealized gain was attributable to the tightening of credit spreads on performing investments.

While the remaining 38% was primarily represented by credit related unrealized gains on two investments, which had meaningful near term credit outlook improvements relative to the first quarter.

Within the 62% related primarily to the tightening of credit spreads fair value marks on broker quoted positions increased by approximately four points quarter over quarter.

While internally more physicians increased by less than two points over the same period.

Separate from those two categories approximately one third of spreads related unrealized gains came from a joint venture, which invests in a diversified pool of broadly syndicated first lien bank loans.

We sold 37 million of liquid loans at cost for total proceeds of 36 million.

Recognizing 1 billion or four cents per share in realized losses.

The sales enhance our liquidity and positions us favorably to take advantage of current market conditions for capital deployment.

The sold investments generally were syndicated loans with no floors or with below market spreads that were already targets for rotation out of the portfolio.

For the second quarter total investment income was $19.3 million up from 18.8 million.

This quarter.

Net expenses inclusive of taxes were 6.4 million down from 7.3 million in the previous quarter.

Primarily due to lower interest rates and other debt financing costs.

Moving to the balance sheet. Please turn to slide 14, which contains a net asset value per share bridge.

Reported net asset value per share at quarter end was $18 in 12 cents, an increase of $1.60 cents 10 per cent compared to the prior quarter.

Walking through the components, we added 46 cents per share from net investment income against the dividend of 41 cents per share.

As mentioned before.

Unrealized depreciation net of taxes was one dollar and 59 cents per share.

In the primary driver of the NAV change in Q2.

Investments at fair value increased by 1% in the quarter from $883 million to $895 million.

As 26 million in gross deployment, coupled with 44 million of unrealized depreciation was offset by 60 million of principal repayments in sales and $1 million in net realized losses in taxes.

Turning to slide 18 as of June 30, the weighted average yield on our income producing securities at amortized cost was 7.9%.

Unchanged quarter over quarter.

As mentioned before we Opportunistically realized a number of lower yielding liquid investments in the quarter, which improved our weighted average floating rate spread which was offset by the decline in LIBOR.

97% of our debt investments bear interest at a floating rate and had an average LIBOR floor of approximately 81 basis points as of quarter end well above the three month LIBOR of 25 basis points today.

But below three month LIBOR for most of April.

Moving to the right inside of our balance sheet. Please turn to slide 21, our debt capital base is supported largely by longer dated financing with 96% of the principal amount of debt outstanding maturing After July 2023.

From a liquidity perspective as of quarter end, we had $166 million of undrawn capacity on our credit facilities.

Subject to leverage borrowing base and other restrictions.

Pro forma for the 50 million of unsecured notes that Jason touched on this means we have over 200 million of total undrawn capacity before taking into account any portfolio activity. After June 30.

Oh reported debt to equity ratio was 0.78 times as of June Thirtyth compared 2.92 times at March 31.

We continue to be in compliance with the terms and covenants of each of our debt agreements and as a reminder, we obtained stockholder approval for reduced asset coverage in may. So we have a significant cushion to a regulatory asset coverage ratio of 150%.

As Jason mentioned, a board of directors declared a regular third quarter cash dividend of 41 cents per share, which is consistent with the regular quarterly dividends paid in the second quarter.

This third quarter dividend is payable on October 15, 2020 to stockholders of record as of September 32020.

With that I'd like to turn it back to Jason for closing remarks.

Thanks, Gary Hart.

We'd like to thank everyone on the call for your continued interest and time today.

In closing broadly speaking, we believe that our portfolio has been resilient in the current economic environment.

We continue to work hard to protect our current portfolio of investments.

And our more flexible capital structure will allow us to selectively pursue attractive new opportunities to grow our asset base overtime.

Operator, please open the line for questions.

Thank you, ladies and gentlemen, like that's a question. Please press Star then one when you touched on telephone again, if you like that's a question. Please press Star then one.

Our first question comes from Robert Dodd Raymond James Sir Your line is open.

Hi, guys and congratulations on the quarter by settings and they be rebound.

You highlighted India.

A couple of questions about a highlight any prepared remarks.

That I think some portfolio companies were more top sector from tied to spreads also driving mockups. So could you give us any.

Any color on on themes that kind of drove that and then also.

On slide 19, if I look at three and four rated investments went up.

Couple of hundred basis points anything that you can tell us that on on on and I mean, it's a small change but on indices that saw that incremental deterioration.

From what you thought they would be.

In March.

Hi, Robert Thank you for the questions. This is Jason on your first question around individual portfolio companies I wouldn't say there is anything dramatic going on there.

Those movements pertain to two companies in particular, and while I can't really get into specifics on what's going on at each of those companies I will say that the companies are can nieces, where we hold preferred equity and common equity.

And black Diamond, where we hold a first lien term loan both of those situations the business outlook has.

Improved.

Significantly.

Got it thank you and that yeah got it sure on your second question around risk ratings.

What I would say on that is as a reminder, risk rating our assets each quarter is subjective its qualitative.

Theres no real guidance to ensure comparability amongst the filers.

And as we look to risk radar portfolio for June 30, we looked at our investments through multiple lenses. The same way, we didnt the first quarter.

We wanted to see how the cobot 19 pandemic would impact the portfolio companies and bucketed those impacts into severity and into categories, such as elective procedure deferrals and non critical medical for health care names.

Companies reliant on large event gatherings limited or reduced access to customers.

Very small piece, but energy related and then any disruption to the supply chain and as we took those risks buckets and overlaid the financial condition of each of those portfolio companies.

On top of that to arrive at a list of companies, which we thought risk elevated relative to underwrite.

Well I I I don't really get into individual drivers of this quarter's change what I'd say is that we did not see a material change in our internal ratings.

The percentage, which is three or four rated went to 22.6 as you said from from about 20%.

In the prior in the prior quarter and the lion's share the portfolio continues to be to be one or two rated meaning performing in line with.

Or above expectations overall, I think the approach that we took in Q1 and we continue to take was a conservative approach.

And our quarterly risk ratings and as I've mentioned in prior remarks.

Broadly speaking I think we believed that our portfolio has been resilient in the current economic environment.

I appreciate that color I forgot one more normalized that more the the the deployment outlook pipeline et cetera, you gave some color and you had about coming one thing we see 5%.

Full year right now is in Europe vast majority is in the U.S. are you seeing any opportunities added the London office or if he can give any color about how how that.

The pipelines Abbvies is rebounding best as the pipeline than the U.S. and if theres any material qualification and then into and open spread so ideal whatever between say Europe, and the U.S. and where the opportunities out to broader capital.

Thanks Robert.

We have a we have a sizable team based in London.

That that originates and underwrites European opportunities.

I would characterize the.

Environment is fairly comparable to what we're seeing here in the us in the sense that volumes of opportunities are picking up, albeit still well below what I would characterize as a more normalized level of volume.

The quality of the flow I think is pretty good in the sense that those companies that are actually April.

To tap private credit right now are are generally less impacted or not impacted by the current pandemic. So stable businesses over the last six months.

As well as as prior to that.

From a terms standpoint, I would say also comparable to here in the states in the sense that.

Economic terms are more favorable now than they were six months ago for lenders.

And leverage and loan to value metrics are lower than they were roughly six months ago.

Which is also favorable for for lenders.

Okay I appreciate that color those that's all my questions congratulations on the quarter.

Thank you.

Thank you.

No further questions at this time I'll turn the conference back over to Jason Brown for any closing remarks.

Great well. Thank you operator, thank you everyone for your time and interest in Crescent BDC no that we continue to be hard at work on the existing portfolio and scaling the vehicle in a measured fashion with good credits will speak with you all soon.

Thank you ladies and gentlemen that concludes today's conference. Thank you participating you may now disconnect have a great that.

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