Q2 2021 Investcorp Credit Management BDC Inc Earnings Call
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Yeah.
Welcome to Investcorp credit Magic BBC scheduled earnings release of second quarter ended December 31 2020.
Your speakers for today's call are Mike Bauer, Chris Jansen and Rocco Delguercio operator assistance is available anytime during this conference by pressing Star zero.
Question and answer session will follow the presentation.
Now I'll turn call over speakers gentlemen, you may begin.
You operator, and thank you to all of you for joining us today.
I'm joined by Chris Jansen, My co Chief investment Officer, and Rocco Delguercio our CFO.
Before we begin Walker will give our customary disclaimer regarding information and forward looking statements.
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Thanks, Mike I would like to remind everyone that today's call is being reported at this call.
Happy of Investcorp credit management BDC.
Unauthorized broadcast of this call in any form is strictly prohibited.
Audio replay of the call will be available by visiting our Investor Relations page.
Website at Ics.
<unk> Dot com.
I would also like to call your attention to the Safe Harbor disclosure in our press release regarding forward looking information and remind everyone that today's call may include forward looking statements and projections actual results may differ materially from these projections, we will not update forward looking statements unless required by law to obtain.
Copies of our latest SEC filings. Please visit our Investor Relations page on our website.
At this time I'd like to turn the call back Chairman and CEO Michael Mauer.
Thanks, a lot growth.
Activity in the quarter ending December 31 was robust as economic and political uncertainty began to resolve primary loan activity increased we own.
Also began to see strength refinancings dividend recaps and re pricings emerging in the broader market.
We made investments in three new portfolio companies and fully realized investments in four portfolio companies this quarter.
One of our new investments was a refinancing two of our realizations were due to dividend recaps of our portfolio companies.
In this type of a market.
Market, we are disciplined we continue to focus on credit quality and loan structure and economics.
We have found that by staying nimble.
With positions relatively smaller than many of our competitors, we can identify opportunities and avoid mispriced poorly structured loans.
Sector selection remains a key tool for avoiding distress in the portfolio.
We have zero investments in the hospitality restaurants, and traditional retail sectors by design.
Most of our borrowers have recovered well from the early impacts of the pandemic. In addition, we are evaluating any of them that might be eligible for a second round of PPP.
Our investment activity during the quarter was roughly consistent with the character of our pipeline.
We invest in one middle market syndicated loan and free club loans.
This is squarely where we want to be investing in the core middle market.
Chris will go into detail about our investments and realizations during the quarter and then Rocco will discuss our financial results.
Ill finish with commentary on our leverage investcorp share repurchases, our dividend and our outlook for the next few months.
As always we'll end with Q&A.
With that I'll turn it over to Chris.
Thanks, Mike.
We made first lien investments four portfolio companies this quarter.
Adding three new portfolio companies.
We also had full realizations and four investments during the quarter and one significant partial realization.
First we funded the second draw under Deluxe Entertainment services Super priority term loan.
As we noted last quarter the entire facility was repaid in full not long afterwards.
Our fully realized IRR was extremely high given the short term nature of this loan.
Second we made an investment in the first lien loan to Verity.
<unk> is an energy services company, providing environmentally efficient upgrades to systems per the municipal University School and hospital markets.
Our yield at cost is seven 8%.
Third.
We invested in first lien loans declined Hirsch.
This club deal supported the LBO of the company by New State.
Client <unk> is a leading retained executive search firm.
On the healthcare and life Sciences verticals.
Our yield at cost is nine 7%.
Finally, we invested in adaptive spectrum and signal alignment our sphere.
This first lien club deal provided the company with additional capital for growth.
<unk> provides software to communication services providers worldwide.
Their products improve connectivity for their broadband customers.
Our yield at cost was 13, 2%.
Our first realization during the quarter was deluxe is super priority term law, which I mentioned a moment ago.
<unk> had a significant partial realizations.
Overall loan to deluxe Toronto limited as well.
As creative Division was sold and the proceeds fully repaid the super priority loan.
Were sufficient to partially repay book the Toronto alone.
What's his U S term loans.
Which are a power pursue tranche that we do not hold.
We have received partial repayments since quarter end.
<unk> that a recovery will continue to improve as additional funds are received over the coming quarters.
Our second full realization was RPX, which repay this loan during the quarter.
Our realized IRR was nine point out per cent.
Northstar group repaid its loans during the quarter as well.
We elected not to participate in the dividend recap.
Our fully realized IRR for North Star was seven 8%.
Kik custom products also refinance its loans during the quarter.
Kick was an opportunistic investment for us and we're pleased to have realized a 10, 9%.
IRR on the loan despite us LIBOR plus 400 coupons.
We have not had any investment activity since quarter end.
Using the <unk> standard as of December 31.
Our largest industry concentration was professional services at 12%.
Followed by energy equipment and services at 10, 2%.
Construction and engineering.
At nine 7%.
Trading companies and distributors at nine 6%.
And commercial services and containers and packaging both at six 4%.
Our portfolio companies are in 24 industries as of quarter end.
<unk>, our equity and warrant positions.
As of December 31.
Folio a company accounts was 37.
Versus 38 at September 30.
I would now like to turn the call over to Rocco to discuss our financial results.
Thanks, Chris for the quarter ending December 31 2020.
Net investment income was $3 million or 22 per share.
The fair value of our portfolio was.
$257 7 million compared to $261 3 million at September 30.
Our portfolio's net increase from operation this quarter was approximately $3 $1 million.
Our new debt investments during the quarter had an average yield of 11 eight.
Realizations and repayments during the quarter also had an average yield of three eight.
And fully realized investments had an IRR of 34, 3%.
Usual high IRR is attributable to deluxe entertainment Super priority term loan.
Which is an outlier the weighted average yield of our debt portfolio.
976%.
Kris a 51 basis points from September 30.
As of December 31, our portfolio consisted of 37 portfolio companies.
87, 2% around vessels were firstly.
Four 9% of our investment with second lien and four 4% our portfolio was in Unitranche loans.
Remaining three 5% is investing in equity and warrants and other positions.
Okay.
99, 6% of our debt portfolio was invested in floating rate investments.
4% in fixed rate investments.
The average LIBOR floor on our <unk>.
Noting right investments was 1%.
Our average portfolio company investment.
It's approximately $7 million, our largest portfolio company investment was pgi at $12 2 million.
A single investment is Empire office at $11 $7 million, we were 143 times Levered as of December 31, compared to 153 times leverage.
September 30th.
We had two investments on non accrual as of December 31, finally with respect to our liquidity as of December 31, we had $3 8 million in cash $4 $7 million in restricted cash.
16 million capacity.
Under our revolving credit facility with UBS.
Additional information regarding the composition of our portfolio is included in our form 10-Q, which was filed yesterday with that I'd like to turn the call back over to Mike.
Thank you Rocco.
Our guidance on leverage remains a target of one and a quarter to one five times.
In this environment period last quarter, we were above that target at 153 times and this quarter, our leverage came down into our targeted range of 143 times.
We anticipate that our investment activity, we will keep this around this target range.
We covered our December quarterly dividend with NII, and we expect to cover our current quarter as well.
As we committed to do we waived the 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 <unk> 15 per share payable on April one 2021 to shareholders of record as of March 12.
The board also declared a supplemental distribution of <unk> <unk> per share on those same dates.
We believe that this dividend level is stable and the supplemental distribution is the prudent method to capture the additional earnings power of the portfolio.
Investcorp has made two separate commitments to purchase ICM B shares investcorp did not make any open market purchases under a <unk> five program in this quarter to date 281775 shares have been purchased since the inception of that program.
Secondly, investcorp has committed to purchase shares at NAV Investcorp did not make any purchases between September 30, and December 31, and has purchased 227000 shares to date.
Our team has worked together through multiple market cycles over the past few months.
We are seeing continued competition for deals as well as the expected follow on effects of that competition.
The tighter pricing weaker structures and fewer protections for lenders, especially in the larger deals structural weaknesses always begin in the large syndicated market before moving into the middle market as.
As an example of the kinds of signals we watch for.
Kik custom products refinanced the loan we were invested in this past December.
In January they re price that new law.
We intend to combat frothy environment by focusing our pipeline non core middle market loans, including club deals.
The portfolio is.
Also well diversified and contains a mix of sponsor and non sponsor companies.
Staying disciplined and seizing the opportunities we are presented with.
We intend to manage the portfolio through this cycle as we have through past cycles with a focus on consistent income generation and preservation of shareholder capital.
Ladies and gentlemen at this time, we will conduct a question and answer session and we would like to state. A question. Please press star one on your phone now and your replacement to the QM or do we see our price Todd of encounter yourself from the queue.
Please listen for your name to be announced and we prefer to ask a question one profit once again to ask a question. Please press star one on your phone now.
Our first question comes from Christopher Nolan. Please state your question.
Hey, guys.
Lux.
Is.
Deluxe Entertainment services as the new investment made in the quarter is one of the new investments made in the quarter is that correct.
So Chris.
There was new money made invested during the quarter I'll, let Chris walk through it but it was part of facilitating the sale of the company. So there was money put in during the quarter to facilitate the sale that was done in the waterfall Super priority with Chris I don't know if you want to go into more detail.
Yeah, Thanks, Mike Chris that that loan was fully paid out with senior structurally to our existing.
Exposure and we got a nice fee for doing that so it made perfect sense to do that under program you invested and then exited within the same quarter.
Yes, yes.
Gotcha.
And then I guess the change in yields.
Roughly 50 bps Hum.
Any reason, particularly for that.
Yes, if you look at the average of everything that came out RPX North star.
Subsea kit pixel et cetera, the average weighted average yield there was at seven four and that was heavily weighted down between six 5% to seven 5% across four different names the RPX Northstar all subs and kick those were.
And the average close to 7%, but the overall average coming out with 74 and the three new investments at $17 million.
Were an average of 10 six four.
Gotcha, and Mike do you anticipate that the new investments will continue towards that 10% to 11% yield range and thus the overall yield will continue to go up.
I would say that the overall, where we're focusing on 10, plus or minus and if I.
I was going to give a range I would say that it's 9% to 10 10 to 11 and I hope to outperform not underperform, but I think that nine to 10 is in at the higher end of that closer to 10, but I think 11 would be too high of an assumption right now there will be some but on average.
Final question is on Empire office, which is a large.
Office furniture.
<unk> in New York City.
No. The loan as you know has a couple of years to run out but.
No.
Given the impact.
Impact that Covid has had on that office market.
Is this a credit that we should be keeping an eye on given the size.
I will pass it over to Chris, but I would say we have kept a very close eye on it and.
And we're very happy with management and the way they've managed it but I'll let Chris.
Obviously, we can't go into details from an NDA, but I'll, let Chris talk about itself.
Yes. This is Chris this is one where.
The owner is the founder actually I think he is the son of the founder and he's run the company for quite a while.
Performance is really consistent with what we had anticipated and honestly above.
We're personally I thought this company was going to be the revenue has been down the EBITDA has basically been flat.
So in my personal view this as well outperformed.
What you would think in general.
A big presence in the New York City market with office furniture would be gasping.
We knew that would not be the case however.
Personally I feel like that they've outperformed and they do have operations in Florida as well so they have diversified a bit.
But this is where again you have your management team.
Thats an owner.
That is accustomed to the ups and downs.
In the.
Office market.
Got it.
We're going to react on the cost front.
Sure.
Thank you very much for the detail.
Thanks.
Our next question comes from Paul Johnson. Please state your question.
Hey, good morning, guys. Thanks for taking my question good afternoon, I should say.
I know I asked last quarter, but just kind of wanted to ask again to get your thoughts.
I'm just curious I know you said that.
Several of the portfolio of companies had been relative to be impacted by Covid.
And that's kind of held back appreciation during the last couple of quarters.
At the same time, we've seen quite a few bdcs mark their books up fairly meaningfully over the second half of 2020.
Is that still the case with the portfolio that the same kind of.
Pressures on these businesses that are holding it back in any kind of.
Commentary you could share there would be great.
Yeah listen I would say I can't comment on how those go through their valuation, we think that we've done a very thorough and fair valuation of the portfolio.
I would highlight.
Two credits that.
Continue to weigh on us.
Covid related.
To some degree into a lot. One is 18 88 industrial services slow recovery.
The oil markets are coming back to your service is coming back.
We put that b loan on non accrual in the current quarter.
And we are watching it closely and we talked to them at least once a week. So we are hands on the other one.
As pgi without Pgi, you would've seen a nice I think in line with the market recovery on NAV.
Pgi, we marked down during the quarter, we had seen.
A recovery.
From Covid actually Covid benefiting in the second quarter of 2020, we saw a significant slowdown of that benefit.
And the second half of the year and so we've become.
A bit more conservative as we look at that valuation given that we don't have the same tailwind that we had in the second quarter and so that's another one that we continue to watch, but hopefully that gives you a little bit of color.
Yeah No. That's that's that's really good color did you by any chance.
Have those that number off your hand, what the.
What the markdown was with Pgi this quarter.
Okay.
I think I do.
I think that was $2 8 million.
Chris you can check me on that and I'll follow up if that's different but.
At $2 8 billion.
Between the two Jeff Mike too.
Correct Okay.
Okay. Thanks, I appreciate that.
And then.
Just trying to make sure I understand this right and I understand you you explained it to Chris and as well in your prepared remarks, but the deluxe piece that remains in the portfolio the non accrual so.
So why I guess is that on non accrual if the investment prepaid and I guess, if I'm understanding it right.
Super.
Seniority term loan that you provided was that almost like akin to like a bridge loan to the company.
So the answer is yes.
Like I've got this Mike Okay guys.
Yes, It was a bridge loan to facilitate the sale of the business. The work no longer has any operating businesses. So when they sold the business typically as is typical in these M&A transactions.
The sale of the business created the involve the creation of <unk> growth, which will be released in time subject to.
Final.
Adjustments.
So with that where we carry deluxe now reflects our evaluation of the probability of an amount of collecting I believe theres three or four different ex growth involved.
Okay. So once we receive those couple of payments.
Well, we'll no longer have any exposure to deluxe.
Okay.
At this point, it's fairly small piece that remains in the portfolio.
And.
Bigger picture.
Looking at kind of I guess.
Obviously COVID-19 is infected.
A bit of the.
Net.
Almost everything that we do.
How has that affected any of your relationships with partners that you've worked with in the past is that.
Forced you to change your approach in any way are you working with the same partners or maybe even a more defined select list of partners that you've worked with in the past and is that in any way change the way that you source business.
I'll take first shot and see if Chris wants to add anything but.
In a word I'd say no the only thing it's done is.
In this environment ramps up the dialogue around sourcing new opportunity.
And we still are partnering and club deals with the same partners that we partnered before plus new partners, but the new partners or people, we had a dialogue with before but if you look at our portfolio. We may partner with somebody two years or three times out of the 37 investments.
We've never had a concentration of partners.
At the same time, the advisors boutiques lawyers et cetera, we've got a dialog with we've got one that we're working on right now with one of those advisors.
So I don't think it's really changed.
The dynamic, but Chris I don't know if you'd want to add anything there.
No nothing to add.
Okay, and then I just had actually had one last question I wanted to ask if that's all right I was hoping to maybe get.
And idea of one investment in the portfolio I think it was.
March pretty stable quarter over quarter, but it's been marked.
It's fairly discounted Mark a bio plan could.
Could you guys give any kind of update on that company and what exactly that businesses.
Yes.
Chris do you want to take that.
Yeah Bio plan, there's not much of an update on bio plan.
The sponsor has been very very supportive of the deal, but we're under confidentiality.
We're this is another one where in all personalized us a little bit as you know.
Personally the company is performing a lot better than I had anticipated.
But the numbers are still down from pre.
Pre COVID-19.
The company basically.
<unk> sells testing products for fragrances, so they have.
Yeah.
Shifted their business from their product mix to get away from some of the more contagious.
Pipes of sprays and stuff like that.
And again, the sponsor supportive and the lenders have been very constructive.
Here and we own the first lien and there is a second lien behind US in addition to an equity sponsor, but thats really all I can say because of coffey.
That's reality share.
Okay.
I appreciate that thanks for taking my questions and thanks for the comments and.
Have a great day.
Okay.
Thank you. Thank you.
Our next.
Question comes from Matt Tjaden. Please state your question.
Hey, all afternoon, and thanks for taking my questions first one on market competition any color you can give.
I'm kind of lab leverage spreads and documentation relative to pre COVID-19 levels on your on the deal flow that youre seeing.
Yes.
It's an interesting question because what we're seeing is if you start at the top of firm value for New L. Bose.
Things that are exposed to or at risk because of Covid just aren't trading so things that are insulated or COVID-19 beneficiaries have traded.
But what that tends to mean is that what we're seeing is things are trading at a little bit higher multiple than maybe pre COVID-19, but that's a little bit of the statistical sample that youre dealing from because you don't have the same companies being sold.
We're seeing similar multiples of leverage that we saw pre COVID-19, we're seeing bigger equity checks than we saw pre COVID-19 to get those done so in two of the new investments. We did it was just shy of 50%.
Equity going in on those.
So.
Leverage similar equity.
A bit higher and spreads may be a little bit tighter.
And the other thing is that we are focusing more in this environment in the last six to eight months on I'll call. It.
$10 million EBITDA to $50 million EBITDA and less on the 50 to 150.
The larger the 100, plus EBITDA, where we've done a lot historically.
I think the competition is more I think the structural points are more aggressive and larger players.
Trying to take the whole tranche. It so it's an area that we've kind of avoided and we've been very active in club deals.
Two to 10 players down in our neighborhood.
Okay. That's helpful. And then just one more if I could on leverage so at 1.43 at the you know kind of at the upper end of the $1 25 to one five range are you all comfortable running in at that level. This will plan to deleverage a little bit more or how are you thinking about leverage going forward.
So I would start saying, we're comfortable where we are I think on the last call. We were at like 153. Similar question. There, we said listen I'm not sure. If we will be below one five for the December quarter. We are below it we continue to look at new investments we continue to see.
That there are two or three portfolio companies that are.
At a high probability of getting repaid or refinanced.
So we want to make sure we continue to keep.
The ability to reinvest so that may mean that we may go slightly above and come back down but in the neighborhood. We are is an area, we're very comfortable right now.
Great Thats it from me I appreciate the time.
Thank you very much.
Once again, if he would like to ask a question. Please press star one on your phone now.
Okay.
At this time, we have no further questions.
Thank you very much we appreciate it and we will talk to everyone. Soon.
This concludes today's conference call. Thank you for attending.
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The host has ended this call goodbye.