Q1 2021 Investcorp Credit Management BDC Inc Earnings Call
Welcome to the schedule.
Okay.
Right.
At September 31st marketing call are Mike.
Oh, no christianssen and rocket Gawker.
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The stars or else equal.
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Speakers please begin.
Thank you operator.
Thanks to all of you for joining us today.
But Chris Jansen My co Chief investment Officer.
Good old girl.
Our CFO before.
Before we begin.
Our customary disclaimer regarding information and forward looking statements.
Well.
Thanks, Mike.
Hi, everyone.
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All right.
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I will be available.
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And everyone that todays call may include forward looking statements and projections.
Actual results may differ materially.
We will not be.
Thanks Bye bye.
Okay.
Oh, the filing season, that's really amazing.
Uh huh.
At this time I'd like to turn it over time.
MTO Michael.
Thanks Robby.
Good work from the Chinese proverb.
Finally to live in interesting times COVID-19 continues to be a public health catastrophes for people around the world.
First to contain the pandemic.
No significant economic consequences, we surpassed both large and small businesses.
Against this backdrop, our challenge is originating in maintaining a portfolio stable loan investments, which will form through the cycle with structural protections for the preservation of capital.
We're fortunate that our team has remained stable.
Safe and healthy over the past.
Working together seamlessly despite the challenges we face we have avoided distressed portfolio through select sector selection.
Mainly by staying away from industries, which have been hardest hit by the fans.
Such as hospitality restaurant and traditional retailers.
Our borrowers are in 24 sectors doing business across the country.
Our work to reposition the portfolio has brought this diversification.
And we will also decrease the average size of our loans from 11.2 million two years ago.
$6.6 million today.
Last quarter, we made investments in labor technology checked the box.
Cases to protect our existing interest.
This quarter, we took similar actions regarding loan to good luck throughout Europe.
Our new investment was at once opportunistic varied significantly better economics than a typical loan as well as protective.
The company to bridge to any sale of its assets Chris.
Chris will go into more detail about our deluxe investments.
As you walk through all of our investment activity.
During and after the quarter and then.
Rocco will discuss our financial results.
I'll conclude our prepared remarks with commentary on our leverage investments share repurchases or dividends and our outlook for the next few months.
As always we'll and would you agree.
With that I'll turn it over to Chris.
Thanks, Mike.
We didn't have to be re portfolio companies this quarter, including two new portfolio companies.
Okay first meaning basketball right.
Wallace from equity investments in one of our new portfolio companies.
You also had full realization going four investments during the quarter.
After quarter from the delayed draw term loan.
Full realizations on to investments.
No significant partial partial monetization on the phone.
First our additional investments in existing portfolio companies.
We increased our position first lien loan people didn't have.
This has been stellar performer for us.
First investment last year.
We also funded on the Golden Hippos revolver during the quarter.
The yield on both of these positions is approximately 8.6%.
Second.
We participated in a club deal for advanced solutions International or I guess huh.
Yeah, Hi, provide CRM software and related functionality to non profit organizations.
To help them manage membership termination income.
No the first lien investment, which yields approximately 9.4%.
Well I'd be preferred equity investment.
No wonder under Deluxe Entertainment services Super priority term.
Just want to say, the U.S. parent company or existing portfolio companies.
Sure on the.
Super priority term loan bridge loan.
<unk> liquidity.
Progress through an M&A process to sell the business.
This long short dated carried up front and backend fees into yield isn't particularly meaningful.
After quarter end, we funded a second draw on the Super priority term loan.
To share with you that last week.
That was completed.
And the Super priority term loan will be paid for.
The short holding period.
And the aforementioned fees could do some very high positive Iowa.
We also received the repayment of approximately 70% of our principal hard to watch Toronto Mall.
We expect additional recoveries on this loan over the coming quarters.
Turning to our realizations during the September quarter.
We received full repayment on the first lien loan to anymore early third quarter.
Our IR or.
On the ethanol investments, which we have had for approximately six years.
12.9%.
We also sold our remaining about the U.S. lumber.
Hi, all our of 8.3%.
Finally, we will be paid on the term loan B study for 18 days.
Rich on the smallest of the loan.
These two loans repaid in accordance with their terms.
Hi, all ours with 6.9% on.
After quarter end, we also received repayment in small far alone to Rps.
Our fully realized or <unk>, 9%.
Finally after quarter end, we committed towards new portfolio company.
Margins.
Never Genie energy services company, providing environmentally efficient upgrades.
Some synergies will be municipal.
University School in hospital markets.
Our yield at cost and 7.8%.
You seem to get standard I guess.
Pembrey Thirtyth.
Our largest industry concentration was professional services at 12%.
Followed by construction and engineering at 11.6%.
Energy equipment and services was 10.1%.
Trading companies and distributors at 9.5%.
Containers and packaging and 6.4.
Our portfolio companies only 24 gets industries as of quarter end.
Actually im warm position.
As of September Thirtyth, our portfolio company Count was 48.
Versus 38 at June Thirtyth.
Our portfolio company Count 37 today.
You're going to be payments of RPX Watson's Super priority long.
And I'm quoting a de leveraging.
I'd now like to turn the call over the Rocco to discuss our financial results.
Thanks, Chris.
For the quarter ended September.
32020.
Net investment income was $2.7 million or 20 cents per share.
The fair value of our portfolio.
Hi, 61.3 million compared to 270.69 at June Thirtyth.
Our portfolios increased operation this quarter was approximately 2.8 million.
Our new debt investments during the quarter had an average yield of 14.6%.
[laughter] exiting turned the corner.
<unk>, 0.9%.
Totally realized investment average high on our 12.3%.
The weighted average yield on that portfolio was 9.25, [laughter] decreased 32 basis points from June Thirtyth.
As of September Thirtyth.
Oh portfolio consisted of 13 portfolio.
87.8%.
That's right first lien.
5.4% on portfolio one secondly.
4.2% wasn't even watch loans, the remaining 2.6% was invested equity warrants and other conditions.
99.5% or not that portfolio was invested in floating rate instruments and 0.5% fixed.
Fixed rate investments.
Our average portfolio investments was approximately $6.6 million a largest portfolio company investments.
Hi at $14.8 million.
Our largest single investment in my office at $12 million.
We were 1.53 times Levered.
[laughter] thirtyth compared to 1.69 times Levered as of June Thirtyth.
We had one portfolio company on non accrual as of September 30, and finally with respect to our liquidity.
I have to tell you we had 8.4 million in cash 6.5 main restricted cash [laughter] Canadian capacity under our revolving credit facility.
Additional information regarding the composition of our portfolio is included in our form 10-Q.
Yes, there was.
That said I would like to turn the call back over to Mike.
Thank you Rocco our guidance on leverage is the target of one quarter to one and half times.
Last quarter, we were above that target at 1.69 times.
And this quarter, our leverage has come down substantially to 1.53 times.
Our guidance has not changed and we anticipate.
Our investment activity.
Into our target range.
We covered our September quarterly dividends within high and we expect to cover our current quarter as well.
We committed to do we waived a portion of our management fee associated with base management fees over one times leverage.
Our board of directors declared a distribution for the quarter ended December 31, 2020 of 15 cents per share payable on January 4th 2021 to shareholders of record as.
I'll just cover test.
The board also declared a supplemental distribution of three cents per share payable on those same thing.
We believe that this dividend level is stable and the supplemental distribution is prudent investments.
To capture the additional earnings power of the portfolio.
Investcorp has made two separate commitments to purchase shares.
Be pursued.
Corporate made open market purchases under a Tenbfive program.
And did not purchase any additional shares this quarter to.
Today 281775 shares have been purchased since the inception of the program.
Secondly, investcorp has committed to purchase shares at energy.
Investments did not make any additional purchases between.
June Thirtyth at September Thirtyth.
It has purchased 227000 shares today.
We look forward to a return to a more normal environment for lending for our team and for our country. So we are well positioned to stay the course.
This in their portfolio to have a strong focus on first liens to resilient borrowers and we will remain.
We will maintain our disciplined approach to underwriting.
Our pipeline opportunities are consistent with the themes in our portfolio at.
As always our foremost concern is the preservation of shareholder capital.
Thank you.
Operator, please open the line for QNX.
Ladies and gentlemen at this time, we will conduct a question and answer session. If you would like to see a question. Please press star one on your phone now anyway place in to the queue. An army seems policemen concerning to me announce EBITDA had asked a question when pumpkin once again asking questions. Please press star one on your phone now.
Our first question comes from Christopher Nolan. Please state your question.
Hey, guys clarification, why did interest income go up in the quarter when both here.
Investment assets went down and your portfolio yields went down.
Hello.
Hi, Chris its Rocco you talked about interest aren't of interest paid.
Interest interest income on the income statement, yes.
Yeah. So interesting so we had some oh acceleration of income on that notably and them all paid off.
So for about $400000 of acceleration that paid so that's that that's what's in those numbers. That's what's in that number. It's also disclose the accelerations also slows and then in another financial statement.
Correct.
Okay. Thanks, Rocco Oh.
And then I guess on the 18 88 industrial term B that is the non accrual put 18 18 has multiple from credit Suisse. You guys are the other credit so performing.
Yeah. So 18 80 times beat is the only one that is on non accrual books. The other tranches are all.
Performing.
Hey, sorry, I'm sorry.
I dropped their Rocco I'm, sorry, I couldn't even your technology can you call them.
Yeah go ahead, Chris King.
So how are you.
It's Chris Jansen Chris.
A question on 18 88, the term loan B is underway is a last out the others are on accrual.
D C, which were paid out.
Hey come due at the end of the quarter anyway, and those were first out positions as well and those were very small in comparison.
Okay, and then I guess my final question is the new and the yield on new investments of 14.6.
Seems quite high I'm, just trying to get an understanding why that might be.
Yeah, Let me give you a little bit of context, we have is short.
No duration on its super priority for deluxe that facilitated the sale that Chris talked about earlier, so yeah and that had because of the short duration I'd say.
Of skews the numbers a little bit.
That was around 50%.
We'll go over it short life, if you excluded that.
Loan we had two other new investments one too many existing portfolio company of Golden Hippo, which is about 8.6%.
Hi, I'm sure trucks is to add side, which is a new investment one trial introduces the super senior its 9.4 and a convertible preferred that actually has extremely attractive terms. It comes out little over 30%. If you average the yield of the Golden hit, but when you have so.
Hi, Hey, and ignore the walk to the average rate is about 10.8%. So hopefully that gives some context, Chris Christie three new investments were Golden Hippo and find deluxe.
Okay.
Yes.
Right.
Okay. That's it for me I'll get back into queue. Thank you.
Thank you Chris.
Our next question comes from Paul Johnson. Please state your question.
Hey, good afternoon, guys. Thanks for taking my questions.
My first question just had to do I was hoping to maybe get I don't know if you have a breakdown. If you just have maybe some some higher level commentary on NAV appreciation or I should say that recovery. This year I'm just curious what.
Has kind of held book value back this.
This year, so far I'm just in the backdrop of rising loan prices and if it is like a credit specific issues. Maybe you can talk about a few those.
Well I'll start and then I'll, let dog or Chris jump in with additional comments, but.
The main one that has held US back is 80 mediate oilfield services oil tank in the first quarter. It has made a slow recovery, but its slow recovery in oil prices has been extremely muted reaction to rig standing back up and.
Oilfield services being deployed again, so if you look at the Mark Downs are you seeing repeated mark downs around between 88, so that I would point to as the biggest thing holding back.
No recovery there had been a a couple of other credits that had been hit hard but are doing very well from a liquidity.
And I think that they will recover as a co bid disappears over the net hopefully over the next six to 12 months.
And you know examples well.
Those are things like arcade bio plan, probably being one of them.
United Road being another one that has recovered in the last quarter, but it dipped down in the first quarter.
One of the big beneficiaries of it really was a PG API.
As we saw from March going forward, but Chris I'll, let you.
Add to that.
Yeah, I mean, specifically this quarter, Paul its a premier global which has had.
You had a big blip up in their conference, calling in the first quarter and they seem to have maintained that a pretty pretty decent rates.
United Road. For example, also has there they transport automobiles.
From the dock to the ER dealerships et cetera.
They have benefited because they are one of the bigger players here and unfortunately or fortunately for them, but unfortunately, a lot of their competition is called the mom and Pops small operators, which unfortunately have not been able to weather the storm so as the SAR has been.
Just back from.
From U.S.U.S. manufacturing of automobiles.
They've been a beneficiary of that.
We haven't seen that come through their income statement, so far but the company has done a great job at.
Managing its liquidity to dovetail on Mike's point.
Hi, Taz arcade bio plan.
Which is also.
Starting to rebound but.
I had a lot of liquidity and a plan to to see themselves through.
Okay. Okay, that's a pretty good commentary thanks for that.
And then next I.
Just want to get a sense, maybe what is the plan over the next year or so in terms of managing leverage are you guys I'm sort of looking to.
The build up more repayments I guess I'm kind of put a limit or a control on the level of capital deployment to continue kind of.
Preserving a little bit of liquidity or paying down debt or or are you just basically looking to balance the two any commentary over kind of just your investment outlook as far as managing liquidity liquidity would be helpful.
Yeah, we bought we brought leverage down from close to one seven to just over one five over the last quarter. Our targeted range has always been one and a quarter one and a half.
We will continue to look at it in that range I think over the near term, it's probably at the higher end of that range around one five.
But that one in a quarter, one and a half we think is the prudent area right now the you know the thing that we continue to grapple with bin Chris highlighted is a lot of the good news you get repayments in and typically the notice when we get to repayment in is seven to 14 days and the amount of time to do a new and.
That's that you know if we were 14 days that would be lightning speed. It will there's one we've been working on now for six eight weeks and it still leaves four to six weeks away from completion, assuming that we get there and most story at least six eight weeks. So it's managing that pipeline of things coming in versus.
He said, we expect to go out and there are a few that we have today that we would expect to repay but that's not certain they don't give us 60 days notice and so managing around those flows.
Yes, the critical thing and.
And and so that target a one in a quarter to one and a half times is where we are and where we will continue to be.
Okay I appreciate that.
And then my last question I'm, just I guess from your perspective is a sort of a deal participants in the market participating in a lot of various sort of club deals.
Could you describe how would you really I guess described the economics I guess of the deal market today as far as what you guys are seeing I mean are there are you seeing in terms and the economics, meaning pricing as such.
Kinda back to pre Kogan levels is it more competitive.
Any color there would be helpful as well.
Sure for the larger deals and I think that as everyone. On the phone is aware we start in a 10 million kind of EBITDA and we go up to 102 at the high end, we've been over 200 million EBITDA.
When you start getting into the 50 to 100 million EBITDA I'd say, it is as competitive or more competitive as pretty cold it.
I think its a dearth of good deal opportunities and so all those are very very tight our recent deals have been in the 10 to 30 million EBITDA range.
Maybe even a tad below that but in that 10 million plus and what we've seen there is that their clubs. They are three to six lenders that the spreads are consistent or maybe a little bit wide of pre coded.
The equity checks are bigger than pre cogan I'm, we're tending to get instead of 30 to 40, I'd say 40 to 50 in one or two cases above 50 is what we're looking at as far as the equity piece of the capital structure I think that's driven by a one making sure that we've got comfort for the small.
The rebid dogs that people are consistent but also from an equity standpoint, I think that sponsors have a lot of capital to deploy and they're willing to put in a bigger check now to invest their capital in.
And portfolio companies, if they've got conviction around and they'd rather have less debt today at a 8% to 12% and their view is they went to co bid clears 12 to 24 months they'll probably come back in refinance but.
That's kind of where we are I think it's a little bit of a tale of two cities. The bigger guys are fairly aggressive.
And the smaller guys are more reasonable.
Okay, Great Thats a real.
Really good commentary that's all from me.
Our next question comes from Robert Dodd. Please state your question.
Hi, guys I'm just a.
To start with some questions simplify their companies. Obviously 18 88 like you said, it's been a bit of a drag it paid off.
Maybe small see any loans in the quarter. So.
So should we read anything into that about the sustainability all that capital structure for that business going forward and then kind of tied to that do you think that the the ultimate value of the business tough question is has that been.
Destruction that which implies something about ultimate recoveries.
Because of Kobe or do you believe it really is just it's a cycle issue about EPS, if and when oil gets back into the ER maybe.
Maybe not triple digits, but it's the full value of that loan recoverable a tool.
What I'd say without going into confidential information and Robert Thanks. It is the one that gets a lot of attention here everything gets attention, but that one gets a lot of attention and it's extremely complicated answer and I'd. Let me just give you.
At least three reasons why there's no doubt that we're in a cycle. There's no doubt the cycle will recover I have no idea. When so part of the question is it's not going to recover in the next 30 days, but if it were to go back to 60 Bucks a barrel in 30 days then the ultimate recovery of value is definitely.
There are no I know its not going back in 30 days. So the question then is when will it come back I don't know, we're managing and they've got adequate liquidity. They got triple B funds. They qualified we did all that.
The second piece is that there was a bit of a silver lining to this because there was two things the new CEO a really prove is worth in the way that he quickly managed expenses on the downside. So that was great to see the older a positive was that the.
The management team has been very focused on non oilfield services.
Business and they have one of the you know I'd say newest and best.
Construction fabrication plants in or outside of <unk> and <unk>.
Denver and northern Colorado. So they are in discussions with at least half a dozen non oil and gas counterparties about significant work to be done if they are able to complete that did the goal here is to diversify not move away from oil and gas but to diversify.
So that in every downside you've got 30% to 60% of your revenue coming from non oil and gas that pivot or diversification is underway to the extent that his successful over the next six to 12 months.
I think there's a lot of upside in value.
But it is a complicated in it is depended upon several factors and timing not being the least which so not sure. If I answered. Your question at all you did you did I I really appreciate that its a one one tiny.
On the fund move on to next question Verigy you know when you said the worlds energy services. It made me a little nervous for a while but it sounds I mean Muni School hospital can you clarify precisely what kind of energy services, it's it's providing that mean.
Hopefully, it's absolutely critical to one off or is that.
Yeah, Robert it's a it's more along the lines of more efficiently running their cost structures. So it's nothing to do with energy out of the ground that's.
Systems, and heating and cooling and pumping and things like that so okay. Okay.
Our.
The internal works and again trying to a fine.
Find more energy energy efficient solutions for their buildings when their facilities.
Got it I appreciate that classification that account was one last one kind of.
So to.
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Yeah, it looks like leverage.
It stands right now would go down this quarter I'm as you've taught me payments coming in pipelines, you know who knows.
Where would you expect.
You know what would be the goal in the niche two to approach the lower end of because obviously you're coming in at the high end color of the leverage range. I mean do you have a goal about way you would like to be at this point in the cycle within that that will have to make sure that.
And obviously, that's not going to happen to 30 days I thought just concept right.
So conceptually all things being equal what were finding right now in the new investments Verigy being one example of great backlog things like that.
And so I did we did a great non co related business diversified customer base or you know, it's a recurring revenue.
Integral part of you know.
Businesses across the country that if we can continue to reinvest in those as we get repayments, we will I would expect.
Back to debt, we could drop down into the low end of that range, but we're trying to make sure we keep a pipeline.
And if we keep reinvesting and find the right.
Vestments, we could very easily be in a 1.15, if repayments don't come in we could blip over the one five but we are not targeting to blip over it we're targeting probably would be more in the 1415, and then dropped down into lower end and make sure that weve got pipeline to redeployed to be in this one for one fives.
When we dropped down we're not dropping down from 1.25 to one does.
Does that makes on it yes that makes sense I appreciate it. Thank you.
Once again, if he would like to ask a question. Please press star one on your phone now.
At this time, we have no further questions.
Thank you everyone. We appreciate your time I will apologize now for audio quality technology has been a difficult during co bid and off.
Hopefully, we continue to get that better, but thank you very much.
This concludes today's conference call. Thank you for attending.
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