Q4 2020 Crescent Capital BDC Inc Earnings Call
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Ladies and gentlemen, thank you for any by I'll walk up to the Crescent Capital BDC, Inc. Fourth quarter and year ended December 31st earnings conference call at <unk>.
This time, all participants are in a listen only mode.
After the Speakers' presentation there'll be a question and answer session to ask the question of at that time since for Skagen want when you touched on the telephone.
As a reminder, today's conference call is being recorded.
I will now turn the conflict of Pier House, Mr. Dan of Mail box.
Vice President and head of Investor Relations, Sir you may begin.
Thank you.
Morning, and welcome to our fourth quarter and year ended December 31, 2020 earnings Conference call.
Please note the Crescent capital BDC, Inc. May be referred to of C cap Crescent BDC, whereas the company throughout the call.
Before we begin I would like to remind our listeners that remarks made during the call may contain forward looking statements.
Statements other than statements of historical facts made during this call may constitute forward looking statements and are not guarantees of future performance or results.
All of the number of risks and uncertainties.
Actual results may differ materially from those of the forward looking statements as a result of a number of factors, including those described from time to time.
The caps filings with Securities and Exchange Commission.
The company assumes no obligation to update any such forward looking statements.
Yesterday after the market closed the cap issued its earnings press release and posted an earnings presentation for the fourth quarter and year ended 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-K filed yesterday with the essence of sleep.
As a reminder, this call is being recorded for replay purposes.
Speaking on today's call will be Jason growth, Chief Executive Officer of C cap and Gerhard Lombard Chief Financial Officer of C cap.
With that I'd now like to turn it over to Jason.
Thank you Dan Good morning, everyone and thank you for joining us today.
We appreciate your continued interest in C cap.
For those of you who are new to see cap our investment strategy is and since inception has been to focus on providing financing solutions to healthy resilient middle market companies that are backed by strong partnership oriented private equity sponsors.
Today, I'll highlight our strong fourth quarter and full year results review, our current positioning for them.
An update on our acquisition of the centric capital Corporation, which closed just over a year ago.
And touch on a few more announcements.
Gerhard will then discuss our financial results in more detail and review our liquidity profile.
So let's begin.
Please turn to slide five where you'll see a summary of our results.
For the fourth quarter, we reported after tax net investment income of 47 per share.
Which concluded a strong year for C cap, despite the challenging macro backdrop.
We are appreciative of how our team manage through the difficult conditions created by the COVID-19 pandemic and believe we believe our performance is consistent with Crescent nearly 30 year history of managing assets through multiple market cycles.
Yeah.
Our net asset value per share increased approximately four 2% in Q4 to $19 88.
Howard will walk through the key drivers in more detail.
But the increase was primarily driven by a 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 of the third quarter.
It's worth noting that nap is up 2% year over year.
Meaning we've recovered more than all of the attrition experienced in the first quarter.
With our total investment portfolio carried at 102 per cent of cost as of year end versus 91% of cost at March 31, we.
We are comforted by the quality of the portfolio and its performance. Despite the significant challenges of the past year presented.
Slides 12, and 13 of the presentation provide a snapshot of the portfolio.
We ended the year with over $1 billion of investments at fair value across 132 portfolio companies.
An average investment size of less than 1% of the total portfolio.
Our investment portfolio, which grew approximately 42% year over year.
Consists primarily of senior secured first lien and Unitranche first lien loans.
We are well diversified across 20 industries and lend primarily two private equity backed companies.
99% of our debt portfolio was in sponsor backed companies as of year end consistent with prior quarters.
For the fourth quarter, our portfolio of companies generally continued to perform well.
119 out of 120 debt investment portfolio of companies, representing 99% of total debt investments at fair value.
The full scheduled principal and interest payments.
This compares to 116 out of 118 in the prior quarter.
Pik interest represented less than 5% of total investment income for the quarter.
Year to date periods, and our investment in NFC holdings, or Napa management moved back to cash pay for pick and Q4.
Two additional positive credit trends are outlined on slide 16.
Improved internal performance ratings and declining non accruals.
Our weighted average portfolio grade of 2.1 improved modestly over last quarter.
And the percentage of risk weighted one and two investments the highest ratings of our portfolio of companies can receive.
Increased to 87, 5% of the portfolio at fair value as compared to 79, 4% last quarter.
As of year end, we had investments in two portfolio companies on non accrual status, representing one seven and one 3% of our total debt investments at cost and fair value.
An improvement from three 8% and two 1% from the prior quarter.
During the fourth quarter no new loans were placed on non accrual and two investments systems maintenance services and Mcs came off of non accrual following restructurings.
Moving to our investment activity, please turn to slide 14.
In conjunction with the economic and capital markets recovery during the back half of the year.
Crescent scaled the direct origination platform allowed us to see a large set of opportunities in the financing market.
Which led to a record $124 million in gross deployment in the fourth quarter the.
The largest origination level for C cap in any quarter since our inception.
We closed on nine new investments and five follow ons totaling $101 million at $6 million, respectively with the.
The remaining 17 million coming from revolver and delayed draw term loan activity during the quarter.
All nine of the new investments, where private equity backed loans at 575% to 850 basis points spreads.
Each with a 1% LIBOR floor at.
And oid's between 175% and 3%.
In addition loan.
Loan to value levels remain attractive averaging below 40% for these transactions.
The 124 million of gross deployment compares to $77 million in aggregate exits sales and repayments in the quarter.
During periods of volatility like we experienced in 2020, we believe crescents reputation as a reliable partner and ability to offer surety of capital and scaled financing solutions to the sponsor community are critical competitive advantages.
Particularly as non bank lenders continue to become the financial backbone of the private debt markets in the United States.
It's worth highlighting that the 101 million C cap invested in the nine aforementioned new deals.
Represents only 9% of the $1 1 billion total check size committed to these deals across the full crescent platform.
We're off to an active start in 2021 from a deployment perspective underwriting several high quality new opportunities.
Since January one we've closed on for new investments for $39 million and for add ons for $9 million.
The new investments are all private equity backed unitranche loans with spreads LIBOR floors, and other characteristics fairly comparable to the aforementioned Q for investments.
Looking forward, we continue to see an attractive pipeline of new opportunities and we will continue to participate alongside the broader crescent platform on all new investments that fit within our mandate.
We remain optimistic that the continued firming economic conditions and healthy amounts of sponsor capital.
Provide a supportive backdrop for stronger deal activities throughout the year.
Shifting gears I'd.
Now I'd like to spend a minute on our acquisition of Alt centric capital Corp.
Which we completed just over a year ago now.
Please turn to slide 17.
When we announced the transaction in the summer of 2019.
I noted that through the merger C cap would enhance its asset diversification, while still staying true to our core strategy of maintaining a high quality senior secured first lien focused portfolio amongst other benefits.
As you can see on the slide performance of the acquired portfolio has been strong generating.
Generating a 25% IRR the <unk>.
Healthy level of realization activity to date.
At the time of announcement of <unk> investment portfolio was $625 million at fair value across 91 investments and was pro forma for all sentra, 73% Firstly.
As of the year ended 2020, our investment portfolio eclipsed $1 billion for the first time.
Diversification has never been stronger with 132 portfolio companies and an average investment size of less than 1% of our total portfolio as I previously noted.
And the percentage of the combined portfolio in the first liens has improved as well.
We continue to believe that this transaction served as an important step in our continued growth trajectory as a scaled BDC.
Ultimately demonstrating our ability to underwrite and obtain approval for strategic and accretive pool of assets.
I'd now like to cover a few more updates before I turn it over to care of arc.
First.
We thought it would be helpful to provide everyone with an update on our fee waiver.
As a reminder.
Since <unk> inception in 2015.
We have been operating with fee waivers in place.
Highlighted by 75 basis point management fee that was applicable prior to our exchange listing.
Although our management fee is $1, two 5% and our incentive fee of 17, 5%.
Our advisor agreed for six quarters post listing to preserve our industry low 75 basis point management fee and the charge no income based incentive fee.
While this current waiver is set to expire on July 31 this year.
Our adviser has notified our board of directors of its intent to voluntarily waive income based incentive fees to the extent our net investment income fell short of the declared dividend.
We expect that this new incentive fee waiver will become effective upon the expiration of the current waiver on July 31.
And continued through the end of 2022.
Sitting here today, we would expect net investment income to trail our regular dividend level beginning in Q4 without the introduction of this new waiver.
Importantly over time, we believe we can support the dividend from an earning standpoint without the need for waivers.
The key factor to help US drive continued earnings growth is ramping our portfolio to our target leverage level, while maintaining our focus on credit quality.
While we remain pleased with the quality of our portfolio.
The economic climate for much of 2020 presented challenges to our goal of progressing to scale on the portfolio.
Deployment levels in the first half of the year and into the summer months lagged our historical pace as transaction activity slowed materially and we took a cautious approach to investing.
While it will take additional time for us to fully scale the portfolio to our target leverage level.
We want to ensure that we remain aligned with the interest of our stockholders as we continue to grow by obtaining our advisors commitment to this incremental income based incentive fee waiver.
Next.
On January 5th.
Crescent parent of the advisor to see cap and Sun life consummated, the previously announced transaction whereby sunlight acquired a majority of economic ownership interest in Crescent.
Crescent is now a part of SLC management.
Unlike alternative investment management platform.
As a reminder, the same team that was responsible for the investments in operations of C cap prior to the close of the transaction continues to focus on executing the same proven investment strategies and processes as we always have.
As we have previously disclosed sunlight has advised us that it intends to purchase up to $10 million of C cap stock in the secondary market over time.
Demonstrating its alignment with C cap stockholders.
Such repurchases are expected to be made pursuant to a <unk> one plan.
And we expect to announce the implementation of such plan prior to the time the chairs of such common stock our purchase they are under.
Yeah.
Third.
Last week, we announced that we agreed to issue $135 million in aggregate principal amount of 4% senior unsecured notes due February 2026.
The notes will intentionally be issued in two separate closings.
The initial issuance of $50 million of notes closed on February 17th.
And we expect the second closing for the remaining $85 million to occur on or before May 17.
Which is beneficial in terms of managing our interest expense as we continue to deploy capital over the next several months.
This financing helps to further diversify our funding sources.
<unk> provides us with a more flexible capital structure.
And allows us to lower our utilization under our secured revolving facilities.
As of year end, our debt to equity ratio was 0.85.
Well below our longer term target range of $1 one to one four times.
So the enhanced flexibility this issuance affords us is particularly beneficial as we continue to deploy capital into an attractive and increasingly robust investment pipeline.
Two more quick items before I turn it over to care of art.
The exploration of the third and final tranche of our share lockup of occurred on February 2nd increasing C caps public float from approximately $26 million to all $28 2 million shares outstanding.
And finally, our board has declared a normal 41 cents per share quarterly cash dividend for the first quarter of 2021.
I will now turn it over to gearhart to cover additional details on the quarter.
Sure.
Thanks, Jason.
Our net investment income per share of <unk> 47 for the fourth quarter of 2020 was higher than both 43 for the third quarter of 2020.
And 41 for the fourth quarter of 2019.
Our GAAP earnings per share for the fourth quarter of 2020 was $1 22.
Which compares to $1 36 for the third quarter of 2020.
<unk> 45 per share for the fourth quarter of 2019.
Our GAAP earnings per share for the fourth quarter of 2020 included $1 24, <unk> of net unrealized gains offset by 49 per share of net realized losses.
Both figures include the impact of taxes.
As Jason mentioned, we closed the year with a very strong fourth quarter that helped drive our full year net investment income per share of $1 80.
And along with recovering valuations of our GAAP net income per share of $1 98.
Our fourth quarter earnings of 47 cents per share.
Were driven by strong recurring interest and dividend income generated from our growing portfolio.
Our net unrealized gains on investments of $34 9 million for the fourth quarter of 2020, primarily reflected the continuing tightening of credit spreads relative to the end of the previous quarter.
And performance improvements in certain names.
At December 31 of stockholders' equity was $560 million, resulting in a net asset value per share of $19 88.
As compared to 537 million for $19 seven per share at September 32020.
And 407 million for $19 50 at.
At December 31, 2019.
The increase in our net asset value during the fourth quarter of 2020 was primarily driven by the net unrealized gains.
As highlighted on slide nine.
Investments at fair value increased by seven 6% in the quarter.
From $961 million to just over $1 billion.
As of $124 million in gross deployment, coupled with $21 million of realized and unrealized net appreciation was offset by $77 million of principal repayments and sales.
Turning to slide 15.
This graph summarizes the weighted average yield on income producing securities and spread over LIBOR of our floating rate debt investments.
As of December 31, 2020, the weighted average yield on our income producing securities at amortized cost was 8%.
As compared to seven 9% and eight 1% respectively. At September 32020, and December 31 2019.
98% of our debt investments bear interest at a floating rate and have a weighted average LIBOR floor of approximately 90 basis points, which.
Which is well above today's current three month LIBOR rate.
Now, let's shift to our capitalization and liquidity I'm on slide 19.
As of December 31, our debt to equity ratio was <unk> 85 times.
Up from seven nine times at the end of the third quarter.
We continue to be in compliance with the terms and covenants of each of our debt arrangements and have a significant cushion to our regulatory asset coverage of 150%.
Our debt capital base is supported largely by longer dated financing with 100% of the principal amount of debt outstanding maturing. After June 23, when factoring in the repayment of our remaining inter notes, which we expect to be redeemed next month.
From a liquidity perspective as of quarter end, we had $140 million of undrawn capacity across our SPV asset and corporate revolving facilities.
Subject to leverage borrowing base and other restrictions.
To recap a busy capital activity year for us during 2020, we upsized, our SPV asset facility with Wells Fargo.
<unk>, an investment grade rating and subsequently completed in the inaugural unsecured notes offering in July.
Jason touched on our second unsecured deal, which closed last week.
Assuming the full $135 million in proceeds are used to partially pay down one of our outstanding secured credit facility.
And fully refinance us out of the remaining outstanding inter notes.
Our pro forma debt funding mix improved from 8% unsecured as of March 31 of <unk>.
First quarter as a public BDC.
The 9% the unsecured as of year end 2020.
Our board of directors declared a regular first quarter cash dividend of 40 <unk> per share, which is consistent with the regular quarterly dividend paid in the fourth quarter.
The dividend will be paid on April 15, 2021 to stockholders of record as of March 31 2021.
And with that I'd like to turn it back to Jason for closing remarks.
Thanks Kara.
Despite the many challenges that 2020 brought we're pleased with the performance of C. Cap this past year, and we feel well positioned for 2021 and beyond.
Looking to the future our strategy remains the same.
We will continue to focus on effectively deploying capital to optimize our portfolio performance by generating a strong recurring earnings stream, while focusing on preservation of capital.
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.
Thank you again, ladies and gentlemen, if you'd like to ask the question. Please press Star then one when you touch tone telephone.
Again to ask the question. Please press Star then one.
One moment please for our first question.
Our first question comes from Matt Tjaden of Raymond.
Raymond James Your line is open.
Hey, everyone I appreciate I appreciate the time first question, if I can on GAC Pete too.
So over the last couple of quarters saw the cost basis shrinking.
Is the is the asset winding down and if so is there any plans for a similar type of equity investment given the strong income the assets generated just trying to get a sense of kind of forward dividend levels.
Yeah, Hey, Matt it's Jason Thanks for the question on <unk>, Yes that is a.
That is a harvesting fund investment.
So that's that's why you see the.
The capital continuing to decline and that investment.
As far as going forward. It is it is an investment debt.
We sort of look at it is somewhat differentiated in the sense that the primary strategy of that investment was too.
Make asset based or collateral based loans as opposed to what we typically do here at Crescent, which is providing.
Sponsor backed cash flow based loans.
As far as sort of looking forward I probably.
Can't really comment too much on what we're going to do on that front, but we do think that is an interesting asset class.
From an investment standpoint.
Okay Fair enough secondly, congrats on the unsecured issuance.
With leverage of <unk> eight five.
You mentioned the target of one one to one for <unk>.
Any any commentary you can give on when you kind of expect to hit that target range and anywhere within that range is kind of where you would expect.
The steady state leverage level the settle.
Yeah, Hey, Matt. Thanks for the question this is <unk>.
Youre correct, our target debt to equity ratio is in that one one to one for range and it is it is a pretty wide range dependent really on portfolio performance and market conditions macroeconomic environment and so on.
We're obviously well below that level.
Look I think it's hard to really look forward into two of the crystal ball here.
Predict when we're going to get there if you look at our historical net deployment over the last couple of quarters and cutting out some of the COVID-19 noise in the maybe the second quarter of <unk>.
Last year.
Our deployment is generally ranged in the I'd say from a net standpoint, and the kind of low $50 million to $70 million per quarter, and if you forecast that.
Assume that same deployment level of sustainable and we think it is given the pipeline in the market today.
We'd probably get to full ramp at some point in the.
The middle of 2022 so.
The other comment I would make on that is we're certainly well capitalized for the.
The medium term year, given the unsecured offering we closed on until we feel very good about our ability to book dissipate in pipeline opportunities.
The need to grow the portfolio.
Okay. That's helpful. And then just last one for me on the on the pipeline. So it sounds like terms and spreads.
The new investments year to date, our kind of comparable to the prior quarter any commentary you can give on where spreads in terms of our sitting right now to kind of pre COVID-19 levels.
Yes, Thanks, Matt it's Jason.
So happy.
We're happy to make some comments on that.
I think as we said in the prepared remarks, we are seeing fairly comparable.
Terms in terms of what we are doing to Q4 that said.
If you look at the syndicated loan market certainly it is it is tight.
With with first liens for better credits in the $3 75 to 400 over range second liens in the.
Tight as high sixes to maybe low eights im sorry, low sevens.
Which can result in a pretty tight blended spread of call. It mid to high for hundreds to low five hundreds, which does I think put some pressure on the larger end of the middle market.
Where the broadly syndicated loan market is a potential option.
Additionally, I'd say LIBOR floors are.
Are anywhere from zero to 75 bps I think in the syndicated market today.
Which could apply some additional incremental pressure. However, I think it's been our experience that most of it.
Direct lenders. These days are still holding the line it at 1% LIBOR floors.
I would say that the the syndicated markets are largely back to pre COVID-19 levels.
That being said there are sponsors debt value certainty of execution.
Small groups in terms of lender groups, no or limited flex no need for rating no need for syndication are willing to pay a premium for that type of execution over the syndicated markets, which is why.
We play in the market that we play in and that can be a meaningful opportunity set.
The private unit tranches as a result, I think are still pricing.
100 to 150 200 basis points north of that broadly syndicated kind of one <unk> that I mentioned earlier.
And I think when you look at the lower middle market, which we typically.
Spend a lot of time in this area and we sort of define that as kind of $10 million of EBITDA of about $35 $40 million of EBITDA.
A lot of our origination efforts of our R&D.
Net area.
Without the broadly syndicated loan market option available pricing has held up better.
I'd say, we're still probably 25 to 100 basis points higher than pre COVID-19 levels in terms of spread.
Part of that is due to the lack of the BSL debt as well as <unk>.
Candidly less less competition at that end of the market.
That being said there is plenty of capital.
And like the BSL market demand for quality deals is high it is important to be able to speak for sizable commitments.
Indirect lending and be able to grow with portfolio companies as they execute the growth plans, which often involve M&A.
And certainly being constructive and partnership oriented with sponsors and management teams is important and so I think a lot of the kind of platform experience.
In relation to the ships that we have as well as the platform size is really an important differentiator here.
Great. That's it for me I appreciate the time.
Thanks.
Thank you. Our next question comes from Robert Dodd of Raymond James Your line is open.
Hi, guys I apologize on my matches, that's the part of your questions, but I joined late so I've got.
A couple of what you may have already come at.
On the debt stack side, obviously, you've completed some unsecured so I mean the.
The latest one of the 4% book looks pretty good.
The private placement of this environment, obviously, the one in July.
Great at the time.
But the 595 and it is callable with the premium Amit how.
While the how one of US is the make whole premium on that and how should we.
<unk>.
On the secured to develop.
As of.
Part of the liability side, obviously, you get a year past.
Past IPO the shelf eligible now et cetera can you give us any more color on that.
Hey, Robert this is Gary.
And things we were very pleased with the execution on the unsecured deal as well that added a $135 million to our capital stack.
I think the couple of things as we scale the portfolio be also other beyond $1 billion and given the unsecured secured mix. We have currently we will actively pursue.
And <unk>, our investment grade credit rating and further.
Improving our ability to exit of traditional institutional DCM channel, which will give us access to lower price debt the fifth.
<unk> million, we took on during the summer of last year, you'll recall was intentionally.
Shorter dated it wasn't a traditional five year unsecured offering and so.
I think youre correct, we it is unlikely that we would.
Prepay that due to the make whole payment, but we're able to.
The make hold expires six months prior to maturity at around two and a half years until we will obviously positioned to look at the market closer to the time.
Maybe just add from a weighted average cost of debt perspective that $50 million in the total debt stack does not move the needle that much.
<unk>.
As you probably noticed we have been actively paying down some of the higher price.
Intra inter notes that we acquired back in January of 2020.
So.
We're talking about a couple of basis points in the in the overall cost of equity and debt as we as we look at that.
Of that $50 million I believe it was.
Helpful. Do you have the additional liquidity in the capital stack because it allowed us to participate and deploy into kind of the tail end of Covid and there was some really attractive.
Opportunities for us on a risk return basis that we took advantage of it.
Got it got it I appreciate that if I kind of one more kind of.
Portfolio.
Structure of style I mean, obviously I think masks for the back to ACP. So I won't touch on that one but this seems to be the the first quarter I can remember the portfolio of balance sheet, except for the JV wasn't disclosed but it had been it wasn't the last SKU for example at both of them in.
In the 10-K is that component of the strategy being de emphasized to just put the loans on balance sheet.
Anything you can say.
Salon JV structures.
The stock you've generated some padding.
Pretty decent returns so.
Is that fading away or can you give us any color on that.
Yeah.
Yes, I can certainly comment on the on the disclosure aspect.
There was simply from a GAAP requirement standpoint, we did not have to to disclose the kind of the additional.
The footnote language that we had in prior quarters and so it wasn't it wasn't.
Intentionally deemphasize by us from a strategy perspective. It was it was just being responsive to the GAAP requirement in the financial statements.
Okay. Thank you.
Good morning, Robert Hey, it's Jason just to comment on the JV itself.
It has been.
A helpful driver of incremental yield.
Over the years I will say with the significant decline in the LIBOR rate last year it became less interesting.
From a yield standpoint, it has been certainly something that we are quite capable of doing.
And we could ramp up or ramp down because we've got for that that expertise in house to.
To buy syndicated loans.
When we want to but I would say with the with the meaningful decline in the in the base rate that that segment of the market has certainly become less interesting than our core mandate, which is the the first liens and unis.
Okay. Thank you.
Sure.
Thank you again, ladies and gentlemen for like to ask the question. Please press Star then one on your touch tone telephone.
One moment please.
I'm showing no further questions at this time I'd like to turn the call back over to Jason <unk> for any closing remarks.
Okay great.
Thank you operator, thank you all for your interest in C cap and your time today.
Look forward to speaking with you all soon.
Thank you ladies and gentlemen does that conclude today's conference. Thank you all for participating you may all disconnect for great day.
Losses.
In the center.
Sure.
Non.
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Yes.
One of them.
We will be moving.
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