Q3 2020 Crescent Capital BDC Inc Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the third quarter 2020 Crescent Capital BDC earnings Conference call.

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After the speaker's presentation, there will be a question and answer session.

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I'd now like to hand, the conference over to your host today Cinedigm in head of Investor Relations. Please go ahead Sir.

Good morning, and welcome to Crescent Capital BDC, Inc.

2020 quarterly earnings conference call.

We know concession cap will be eating maybe with logisticare.

You can see what the company throughout the call.

Before we begin I would like to remind all listeners that remarks made during this call may contain forward looking statements.

People other than statements of historical facts made during this call may constitute forward looking statements are not guarantees of future performance or 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.

It was described from time to time Teacups filings with Securities and Exchange Commission.

The company assumes no obligation to update any such forward looking statements.

Please note that this call to talk to each other.

Got authorized rebroadcast of this call in any form strictly.

Yesterday after the market close he jumped issued its earnings press release and I'm sitting earnings presentation third quarter ended September Thirtyth 2020.

The presentation, which is available on the company's website under the Investor Relations section will be referenced throughout todays call.

Should be reviewed in conjunction with the company's form 10-Q filed yesterday Susie.

Unless otherwise noted all performance figures mentioned in today's prepared remarks are again for the third quarter.

Thirtyth 2020.

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

Speaking on today's call, we'll be chasing Bro, Chief Executive officer of C cap and your hard lumbar cheap.

Chief Financial Officer Speakeasy.

With that now, let's turn to be able to Jason.

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

We appreciate your continued interest in C cap and hope you and your families are safe and healthy.

I'll begin today's call by reviewing our results investment activity and other highlights from the third quarter.

And finish with a few remarks on the recently announced transaction between Sun life and our external advisor.

Gerhard will then discuss our financial results for the third quarter in more detail.

Let's begin with a few highlights from the quarter, which are summarized on slide five.

In terms of earnings we reported 43 cents of after tax net investment income per share.

Covering our 41 cents per share third quarter dividend.

She gets net asset value per share increased 5.2% in the third quarter to $19.07.

Gerhard will walk through the NAV bridge in more detail, but the increase was primarily driven by a net change in unrealized depreciation specific to our first lien and unitranche portfolio companies.

Coupled with the 10% NAV increase we reported in Q2, we've now recovered nearly 90% of the Nab attrition experienced in the first quarter.

Our top priority is and always will be protecting the value of our existing investments and getting car back on our loans.

With our total investment portfolio carried at 98, and a half of cost as of quarter end versus 91 up cost at March 31.

We're comforted by the quality of the portfolio and its performance. Despite the significant challenges this year has presented.

Slides 13, and 14 of the presentation provide a snapshot of the portfolio.

We ended the third quarter with $961 million of investments at fair value.

Across 128 portfolio companies with an average investment size of less than 1% of the total portfolio.

Our investments consist primarily of senior secured first lien and Unitranche first lien loans.

We are well diversified across 20 industries and lends primarily to private equity backed companies.

99% of our debt portfolio was in sponsor backed companies as of September 30.

Consistent with prior quarters.

In line with last quarter, our three largest industry exposures, our health care equipment and services commercial.

Commercial and professional services.

In software and services.

Representing 22%, 19% and 14% of the portfolio at fair value respectively.

We like investing in these industries as many of the businesses provide nondiscretionary were essential services and to date have demonstrated resilience characteristics.

Our focus on constructing a defensively positioned portfolio.

Led to modest exposure to cyclical industries, including energy retailing and transportation.

Which cumulatively represent approximately 5% of the portfolios fair value as of quarter end.

With no travel or aviation exposure.

For the third quarter 116 out of our 118 debt investment portfolio companies.

Representing 99% of total debt investments at fair value.

Made full scheduled principal and interest payments.

Pick interest represented approximately 5% of total investment income for the quarter and year to date periods.

Let's turn to slide 16, which provides a snapshot of our investment portfolio performance ratings.

Our weighted average portfolio grade of 2.2 improved modestly versus last quarter.

And the percentage of risk rated one into investments the best ratings our portfolio companies can receive.

Increased to 79.4% of the portfolio at fair value as compared to 77.4% last quarter.

As of quarter end, we had investments in four portfolio companies on nonaccrual status.

Representing 3.8% and 2.1% of our total debt investments at cost and fair value respectively.

For the quarter no new loans were placed on non accrual.

And one investment southern Tech came off of non accrual.

Our subordinated position in southern Tech was realized in September.

Resulting in a 1.3 million realized gain.

And we upgraded our performance rating from a four to a too on the equity position we hold.

We continue to work closely with the four remaining portfolio companies and their sponsors to help maximize the value of our investments and have made progress.

Subsequent to quarter end, we successfully restructured our investment in Mcs.

Which as a result will come off of non accrual in Q4.

Moving to our investment activity, please turn to slide eight.

Following lower than average origination levels in Q2 activity picked up this quarter with gross deployment totaling 84 million.

We closed on six new investments and two follow ons totaling $61 million and $6 million respectively.

With the balance coming from our funding of existing revolver and delayed draw term loan or ddgs commitments.

All six of the new investments were private equity backed loans at 600 to 700 basis points spreads each.

Each with a 1% LIBOR floor and ladies between two and 3%.

In addition.

Loan to value levels remain attractive averaging 38% for these transactions.

The $84 million and gross deployment compares to $48 million in aggregate exits sales and repayments in the quarter.

Given our modest leverage profile and dry powder, we have been active in our deployment in the fourth quarter as well.

Underwriting several high quality new opportunities.

Since October Onest, we closed on six new investments and one add on for an existing investment.

Totaling approximately 60 million of funded capital.

These two are all private equity backed with six of the seven traditional first lien or unitranche loans.

With spreads LIBOR floors, and other characteristics comparable to the aforementioned Q3 investments.

We also made one second lien loan investment.

Looking forward, we continue to see an attractive pipeline of new opportunities and we'll continue to participate alongside the broader crescent platform on all new investments that fit within our mandate.

I'd now like to shift gears and provide some color on the recently announced transaction between Sun life, and our external advisor Crescent capital Group LP or Crescent.

Please turn to slide 20.

As background sunlight was a Toronto, Canada based financial services firm known primarily for its global insurance and wealth management capabilities.

With nearly one trillion in assets under management and operations in 27 markets globally.

Sun life has been acquisitive and scaling its alternative investment platform.

Celsion management in recent years.

As many of you are aware on October 20, Onest sunlight and Crescent entered into a definitive agreement pursuant to which sunlight would acquire a 51% economic interest in crescent.

With a put call option to acquire the remaining interest in crescent in approximately five years.

Following consummation of the transaction crest.

Crescent will form part of SLC management.

To us the most important aspect of this transaction is that it provides for full continuity of our team.

The same team that is responsible for the investments and operations of C cap today.

We will continue to focus on executing the same proven investment strategies and processes as we always have.

Upon consummation of the transaction and subject to shareholder approval Crescent.

Crescent is expected to remain the investment advisor to see cap as you can see on slide 21.

And then with the exception of a two year initial term.

All other terms will remain unchanged from our current investment advisory agreement with Crescent.

We'll be maintaining the same best in class advisory fee structure Fisher.

Efficient cost structure and commitment to a consistent dividend policy.

As summarized on slide 23.

We believe this transaction will enable us to further strengthen our competitive position.

By first providing greater access to scale and resources needed to continue augmenting our global financial sponsor and corporate bar reach.

Second.

Further improving our access to capital markets.

And finally, enhancing our institutional relevance and market coverage.

We're very excited about the transaction and look forward to the benefits it will bring.

Importantly, Sun life has already demonstrated its alignment with C cap stockholders, having advised us that it intends to purchase up to $10 million of C cap stock in the secondary market overtime following.

Following the closing of the transaction.

Which we expect will occur by the end of this year.

Before I turn it over to gear hard I want to touch on a few more quick updates.

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

Second on October 28.

We closed on the second 25 million issuance of unsecured notes initially announced in late July.

Recall.

We agreed to issue 50 million aggregate principal amount of 5.95% senior unsecured notes due July 2023.

The notes were intentionally issued in two separate $25 million closings to manage interest expense.

The financing helped to diversify our funding sources provide.

Provides us with a more flexible capital structure.

And allows us to lower our utilization under our secured revolving facilities.

And finally, the expiration of the second third of our share lockup occurred on October Thirtyth increase.

Increasing C cap public float meaningfully from approximately $12.9 million to 20.6 million shares.

As a reminder, 100% of our pre lifting stockholders other than those Alcentra Capital Corporation stockholders, who received CE cap shares in connection with the L. Centre acquisition.

We are subject to a lockup on approximately 23.2 million shares outstanding at the time of our listing on February Threerd.

The third and final tranche of locked up shares will become freely tradable on February 2nd 2021.

While we are pleased with the dialogue, we've had and continue to have with investors since our public listing in February.

In our view the current stock price does not reflect the true value of the portfolio we have constructed.

We expect that enhance float will overtime contribute to greater average daily trading volume in C cap stock.

And allow for a broader universe of relevant institutional investors to more easily transact.

Additionally, we believe that Sun lifes stock purchase commitment and a second crescent employee Tenbfive one program.

Which brings total employee commitments to approximately $5 million and began purchasing C cap shares in mid October.

We will create additional demand in stock.

I will now turn it over to gearhart to cover additional details on the quarter.

Sure.

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 six.

You can find our financial highlights.

For the third quarter net investment income was 43 cents per share.

Exceeding our third quarter dividend of 41 cents per share.

The change in unrealized gains per share net of taxes was 95 cents.

Fair value marks on debt investments increased by approximately two points.

The attributable to the tightening of credit spreads on performing investments.

Separately approximately 13% of the change in net unrealized gains came from a joint venture, which invests in a diversified pool of broadly syndicated first lien bank loans and that benefited from the BSL recovery experience in the third quarter.

For the third quarter total investment income was $18.7 million down from $19.3 million in the previous quarter due primarily to a decrease in nonrecurring other income.

The 18.7 million of total investment income was comprised of $16.5 million from interest income.

$1.2 million from dividend income.

In $1 million from other and paid in kind income.

Net expenses inclusive of taxes were $6.5 million.

Compared to $6.4 million in the previous quarter, primarily.

Primarily due to higher operating costs, resulting from the growth and seek aeps aggregate portfolio fair value.

Offset by a decrease in borrowing costs.

Due to a decrease in LIBOR.

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 $19.07.

An increase of 95 cents.

Were just over 5% compared to the prior quarter.

Walking through the components, we added 43 cents per share from net investment income against the dividend of 41 cents per share.

As mentioned before unrealized depreciation net of taxes was 95 cents per share and the primary driver of the NAV change in Q3.

Investments at fair value increased by 7% in the quarter.

From $895 million to $961 million.

As 84 million of gross deployment, coupled with $28 million of realized and unrealized net appreciation was offset by $48 million principal repayments and sales.

Turning to slide 15.

As of September Thirtyth, the weighted average yield on our income producing securities at amortized cost was 7.9%.

Unchanged quarter over quarter.

98% of our debt investments bear interest at a floating rate and had an average LIBOR floor of approximately 81 basis points at quarter end.

Moving to the right hand side of our balance sheet. Please turn to slide 18.

Our debt capital base is supported largely by longer dated financing with over 90% of the principal amount of debt outstanding maturing off through June 2023.

From a liquidity perspective as of quarter end.

We had 189.5 million of undrawn capacity across our unsecured notes.

And SPV asset in corporate revolving facilities subject to leverage and borrowing base and other restrictions.

Our reported debt to equity ratio was <unk> 0.79 times as of September Thirtyth.

Compared to.

Seven eight times at June Thirtyth.

We continue to be in compliance with the terms and covenants of each of our debt arrangements.

And having significant cushion to a regulatory asset coverage ratio of 150%.

As Jason mentioned, our board of directors declared a regular fourth quarter cash dividend of 41 cents per share.

Which is consistent with the regular quarterly dividend paid in the third quarter.

The dividend is payable on January 15, 2021 to stockholders of record as of December 31, 2020.

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

Thanks, Gary Hart.

We continue to work hard to protect our current portfolio of investments, while selectively pursuing attractive new opportunities.

Overall, we are pleased with both our origination activity and financial results this quarter.

Looking to the future our strategy remains the same.

We will continue to focus on deploying capital into attractive opportunities to optimize our portfolio performance and generate a strong recurring earning stream.

While focusing on preservation of capital.

We are excited about our partnership with Sun life, and the enhanced opportunities that it will provide for our stockholders.

We would like to thank all of you for your confidence and continued support.

And with that operator, please open the line for questions.

Thank you Josh.

Good question you need to press Star then one on your telephone.

I will draw your question. Please press the pound key.

Our first question comes from the line of Robert Dodd with Raymond James Your line is now open.

Hi, guys.

Susan.

I have a couple of questions I guess I'll start off with these new inputs on the other income I mean.

Mentioned God, but.

Obviously it was a.

Come to visit to Colin coming down and it was essentially zero this quarter.

Is there anything obviously it can be volatile it's tough to predict is there anything structurally in the portfolio, where we should expect that number to be.

Actually lower than than some of the numbers, we've seen historically or is it just oh.

Random event. This this quarter that it happened to be about.

Yes, Hi, Robert.

So nothing structural.

Other income on the BNL generally represents nonrecurring non yield related revenue for example amendment fees funds.

Consent fees and structuring fees that we did see a large number of covidien related amendments in the second quarter that drove that large second quarter number and that trailed off in the third quarter.

Having said that we don't always charge fees on amendments there are a number of non monetary ways that we can enhance the quality of a dead investments of tighter or an on covenants better economics in the form of higher spreads and prepayment terms and so on.

You are correct Q3 did have an unusually low level of other income.

Most likely due to the fact that we proactively identified and entered into.

Amendments during the second quarter. However, we do we do expect that future quarters will have some level of other income. It's just hard to predict for a specific quarter what the level of other income will be given that this is mostly nonrecurring.

Got it got it thank you.

On on the sunlight deal.

Yes, there was obviously you sound like this is an extremely large platform I mean, when it was announced that there was talk about them.

With Crescent expanding.

Products when you.

Can we expect or what would that be in and any intention to put.

Some of those additional.

Opportunities into the BDC, obviously asset that was mentioned some of us some bite the BBC appropriate some might not be well could we expect from the portfolio I mean, it obviously is not going to change this quarter, but right now it.

For lack of a better term plain vanilla grossly neither trenchless for them for the most part.

How could that how would you expect that to a volvo, but tight given the new Sun life relationship.

Okay.

Hey, Robert it's Jason Thanks for the question.

We're as we as we discussed on the on the remarks, we are very excited about transaction that the $750 million of seed capital.

Can be used to.

Seed new strategies anchor existing funds as well.

I suspect.

That will play out over the course of time in both areas as of now the transaction has obviously not not yet closed so.

I'm not sure there's much I can say at this point other than to say that.

We have grown crescent.

Over the last 30 years in a methodical way always sort of focusing on.

Up credit certainly add on yield.

And capital preservation and I think.

That will continue to remain sort of the core discipline for US you mentioned asset base that certainly could be.

An area of pursuit, but but we're not we're not going too far astray from from what we do and what we've done for the last 30 years.

Got it I appreciate it.

One more if I can on obviously sunlight intend to buy stock in the open market employees are doing the same has the board given where the stock is trading has the board contemplated.

And then just.

Traditional buyback program for the BDC, which obviously would yes.

Yes, it could be accretive 20, maybe as well as providing support for the project.

Yes.

I would say.

We continually evaluate that at the at the company level.

We do believe that when we terminated the original plan backhaul spring that was certainly the thing to do.

The initial employee plan was not impacted at that point in time, So we continue to feel well aligned with the shareholders.

And obviously, we believe that our our broader expense structure should be viewed favorably by investors and the street.

Given the waivers in place and the permanent restructure that'll take take effect later as being one of one of the best in class we.

We certainly continue to evaluate the option of of implementing a.

A company funded buyback plan in the future.

Okay got it thank you and congrats on the quarter, that's all I have thank.

Thank you.

Thank you as a reminder to ask a question you need to press Star then one on your telephone.

Right.

There are no further questions I would now like to turn the call back to Jason both for any further remarks.

Okay, great operator. Thank you. Thank you everyone for joining see caps third quarter earnings call. We appreciate your interest and support greatly and look forward to speaking with you all soon.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

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