Q1 2021 Crescent Capital BDC Inc Earnings Call
Good day, and thank you for standing by and welcome to the Q1 question capital BDC earnings call. At this time all participants are in a listen only mode. After the speakers' presentation there.
A question and answer session, who asked the question during the session you. The press Star one on your telephone if you require any further assistance. Please press Star then zero I would now like to turn the call over to your home state of Mcmahon you may begin.
Thanks, Kevin.
Good morning, and welcome to Crescent capital BDC Inc's first quarter ended March 31.
2021 earnings conference call.
Please note the Crescent capital BDC, Inc. May be referred to of C cap Crescent BDC or the company throughout the call.
Before we begin I'll start with some important reminders comments made during the course of this conference call and webcast may contain forward looking statements and are subject to risks and uncertainties.
The company's actual results could differ materially from those expressed in such forward looking statements for any reason, including those listed in its SEC filings.
The company assumes no obligation to update any such forward looking statements.
Please also note the past performance or market information is not a guarantee of future results.
During this conference call, we may discuss certain non-GAAP measures as defined by SEC regulation G.
Such as adjusted net investment income or NII per share the.
The company believes that adjusted NII per share provides useful information to investors regarding financial performance because it is one method. The company uses to measure its financial condition and results of operations.
A reconciliation of adjusted net investment income per share to net investment income per share the most directly comparable GAAP financial measure can.
It can be found in the accompanying slide presentation for this call.
In addition, a reconciliation of this measure may also be found.
In our earnings release.
Yesterday after the market closed the company issued its earnings press release for the first quarter ended March 31, 2021 and.
<unk> posted a presentation to the Investor Relations section.
Of its website at Www Dot Crescent BDC Dot com.
The presentation should be reviewed in conjunction with the company's form 10-Q filed yesterday with the SEC.
As a reminder, this call is being recorded for replay purposes.
Speaking on today's call will be Jason Brown, Chief Executive Officer of C cap and Gerhard Lombard Chief Financial Officer of C cap.
And with that I'd now like to turn it over to Jason.
Thank you Dan Hello, everyone and thank you for joining us.
We appreciate your continued interest in C cap for our call today I'll provide a few highlights from this quarters results review, our investing activity provide some thoughts on our current positioning and then turn it over to Gerhard to review our financial results in more detail before we open the call to Q&A.
So let's begin please.
Please turn to slide six where youll see a summary of our results.
We reported strong first quarter financial results with adjusted net investment income of 46 cents per share.
This quarter, we accrued a capital gains based incentive fee expense related to changes in net realized and unrealized gains and losses.
This non cash expense, which was not paid and is not payable was approximately <unk> <unk> per share for the quarter.
Our Q1 net investment income per share inclusive of the accrued capital gains incentive fee expense was 41.
Yeah.
Pausing on the impact of this adjustment for a moment.
Which is only payable at the end of each fiscal year based on our investment advisory agreement.
If we were to hypothetically and the year as of this March 31, the <unk>.
<unk> per share of cumulative accrued capital gains incentive fee expenses.
That we had at quarter end would not be paid or payable since the gains must be realized in order for us to be eligible to receive the fee.
Turning back to our results our net asset value per share increased for the fourth consecutive quarter.
Up approximately one 8% in Q1 to 2024.
One of the highest level since <unk> inception.
Gerhard 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.
And net unrealized mark to market gains related to the tightening of credit spreads relative to the end of the fourth quarter.
Please turn to slide four which highlights our historical NAV trajectory in cumulative dividends since inception.
Focusing on the right hand side of the page our business has performed well through the pandemic.
From a total economic return perspective, which is change in NAV plus dividends paid we've generated over 14% since the year ended 2019, just prior to the onset of COVID-19.
This was driven by growth in our net asset value per share up three 8% in that timeframe and the payment of our quarterly base dividends, which cumulatively represent another 10, 5%.
Overall, we're pleased with this outcome with our total investment portfolio carried at 103% of cost as of quarter end versus 102% as of year end, we remain comforted by the quality of our portfolio and its performance, particularly given the volatility we've all experienced since March of last year.
Let's now shift gears and turn to slides 13, and 14 of the presentation, which provide a snapshot of the current portfolio.
We ended the quarter with just under $1 1 billion of investments at fair value across 131 portfolio of companies with an average investment size of less than 1% of the total portfolio.
Our investment portfolio continues to consist 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 of wasn't sponsor backed companies as of year end consistent with prior quarters and 80% of the portfolio at fair value was first lien up from 78% as of year end, driven by our Q1 deployment, which I'll touch on shortly.
Yeah.
For the first quarter, our portfolio companies continue to perform well.
118 out of our 120 debt investment portfolio companies, representing 99% of total of debt investments at fair value.
The full scheduled principal and interest payments and pick interest represented approximately 4% of total investment income in Q1.
91% of our debt investment portfolio today is marked above 95 cents on the dollar.
And the average mark of the entire debt portfolio is 97 six.
Two more positive credit trends are outlined on slide 17.
Continued strong performance ratings and non accrual levels.
Our weighted average portfolio of grade of $2, one was unchanged as compared to year end and the percentage of risk graded one and two investments the highest ratings of our portfolio of companies can receive increased modestly to 87, 6% of the portfolio of fair value as compared to 87, 5% as of year end.
As of quarter end, we had investments in two portfolio of companies on non accrual status, representing one 7% and one 3% of our total debt investments at cost and fair value respectively unchanged from yearend.
Moving to our investment activity, please turn to slide 15.
In terms of the broader market backdrop spreads tightened across the board in Q1 as strong demand in the leveraged loan markets led to pricing and terms in favor of borrowers.
All in yields for new issuers were generally lower than the last few quarters and a larger percentage of new deals were covenant light.
Despite this competitive backdrop with record levels of dry powder on the direct lending market.
We continue to benefit from Crescent long standing reputation as a reliable partner and ability to offer surety of capital and scaled financing solutions to the sponsor community.
This was evidenced by over $1 billion of total deployment across Crescent private credit platform in Q1.
Sponsors and portfolio company management teams alike are in our view exhibiting a strong preference for flexibility of capital and a long term partnership approach with firms like ours.
<unk> gross deployment in the first quarter totaled $88 2 million <unk>.
Approximately 90% of which was in Unitranche first lien investments.
All told we closed on six new investments in 11 follow ons totaling $63 million and $13 million, respectively, with the remaining $12 million coming from revolver and delayed draw term loan activity during the quarter.
All six of the new investments were private equity backed loans at 600 to 675 basis points spreads.
Each with a LIBOR floor and oid's between one 5% and 275%.
In addition loan to value levels remain attractive averaging approximately 45 per cent for these transactions.
The $88 million gross deployment compares to $77 million, an aggregate of exits sales and repayments in the quarter.
It's also worth highlighting that the 63 million C cap invested in the six of aforementioned new deals represented only 12% of the over half of $1 billion total check size committed across crescent.
Highlighting the breadth of our platform.
For the month of April we closed on three new investments for $31 million and four add ons for $6 million.
The new investments are each private equity backed first lien of unitranche loans with.
With spreads LIBOR floors, and other characteristics fairly comparable to the aforementioned Q1 investments.
Yeah.
Two more updates before I turn it over to <unk>.
First as we have previously disclosed sunlight has advised us that it intends to purchase up to $10 million of C cap stock on the secondary market overtime pursuant to a <unk> one plan demonstrating its alignment with C cap stockholders.
We expect that the sunlight purchase plan will be adopted in this upcoming open trading window commence purchasing C cap stock this calendar quarter, if such purchases meet the terms of the plan.
And being in effect for approximately 12 months unless extended or until the aggregate approved purchased amount has been expanded.
This is in addition to a currently active $1 $2 million of affiliate purchase program funded by certain officers of fee cap and employees and affiliates of Crescent.
The third such plan implemented since our listing following the cumulative purchase of approximately $4 9 million of C cap stock pursuant to the first two plants.
And finally, our board has declared a <unk> 41 per share quarterly cash dividend for the second quarter of 2021 payable on July 15th to stockholders of record as of the close of business on June 30.
With that on.
Now I'll turn it over to gearhart to cover additional details on the quarter.
Thanks, Jason.
Our adjusted net investment income per share of <unk> 46 for the first quarter of 2021.
Pairs to $47 44 per share for the fourth and first quarters of 2020.
Our GAAP earnings or net increase and net assets, resulting from operations was <unk> 76 per share for the first quarter of 2021, which compares to one spot <unk> 22 per share for the fourth quarter of 2020 and minus two spot <unk> 84 per share for the first quarter of 2020.
Our first quarter adjusted earnings were driven by strong recurring interest and dividend income generated from our growing portfolio.
Our net unrealized gains on investments of $8 3 million or <unk> 30 per share primarily reflected the continuing tightening of credit spreads relative to year end and performance improvements in certain names.
At March 31 of stockholders' equity was $570 million, resulting in a net asset value per share of $20 24, as compared to $560 million of $19 88 per share at year end of.
$466 million or $16 52 per share at March 31, 2020.
The increase in our net asset value during the first quarter was primarily driven by net unrealized gains as highlighted on slide 10.
And we had six cents of realized gains per share.
Investments at fair value increased by two 3% in the quarter.
From 1 billion 34.
Two 1 billion 58.
Driven by approximately $11 million and net deployment. In addition to an increase in net unrealized portfolio appreciation.
Turning to slide 16.
This graph summarizes the weighted average yield on income producing securities and spread over LIBOR on our floating rate debt investments.
As of March 31, 2021.
The weighted average yield on our income producing securities at amortized cost was seven 9% as compared to 8% at year end.
As highlighted on slide eight the weighted average annual yield on the six new investments made in Q1, the adjacent walk through was seven 8%.
Which is particularly attractive given their senior secured nature and the competitive market backdrop to start the year.
98% of our debt investments bear interest at a floating rate and have a weighted average LIBOR floor of approximately 90 basis points.
Which is well above today's current three month LIBOR rate.
Now, let's shift to our capitalization and liquidity I'm on.
On slide 19.
As of March 31, our debt to equity ratio was <unk> 86 times up modestly from <unk> 85 times at the end of the year with significant cushion to our regulatory asset coverage of 150 per cent.
During the first quarter, we issued $135 million of 4% unsecured notes due 2026, our largest private placement to date.
The initial issuance of $50 million closed on February 17.
While the issuance of the remaining $85 million closed on May five the.
Unsecured offering coupled with the redemption of our remaining $16 4 million of inter notes, which we assumed in connection with the old Cintra acquisition, and which bore interest at fixed annual rates ranging from six on the quarter.
Two 675% led to an improvement in the maturity profile of our debt capital base.
We now have no near term maturities with 100% of the principal amount of debt outstanding maturing After June 2023.
From a liquidity perspective as of quarter end, we had $247 million of undrawn capacity subject to leverage borrowing based on the other restrictions.
As Jason mentioned, our board of directors declared a regular second quarter cash dividend of 41 cents per share, which is consistent with the regular.
Quarterly dividend paid in the first quarter.
And with that I'd like to turn it back to Jason for closing remarks.
Thank you Gerhard.
Overall, we are pleased with our financial results this quarter.
Additionally, our credit performance remains strong and we believe we have built a diverse and defensive portfolio of increasing scale supported by an increasingly attractive financing profile.
We are optimistic about the economy, given the pace of vaccinations and businesses reopening.
Our fundamental outlook for the performance of our portfolio of companies is positive.
And we look forward to leveraging our competitive advantages in the full crescent platform to continue to deliver attractive risk adjusted returns for our stockholders.
We'd like to thank all of you for your confidence and continued support and.
And with that operator, please open the line for questions.
Hello, Ladies and gentlemen, if you have a question of our comment at this time. Please press Star then the one key on your Touchtone telephone. If your question has been answered or you wish to move yourself from the queue. Please press the pound key.
Our first question comes from Robert Dodd Raymond James.
Hi, guys congrats.
Congrats on on the quarter and the year early on.
On that topic now.
Our first question is kind of kind of.
But also the al Central asset now you've owned them, obviously, but the.
Slightly more than a year.
Obviously they day.
They were in the at the end of Q1 last year, obviously during that time, we've had COVID-19, but could you tell us.
How much of your book is now represented by.
By the al Central of assets in the you got any color on kind of how those performed.
Over the last year buses versus your originated book.
Hey, Robert.
Thanks for the question.
Yeah on <unk>, we did provide the kind of a one year look back last quarter.
And I think.
As as was the case of last quarter. This quarter I think we continue to.
The pleased with the performance of that portfolio and it's in its totality. We did break out core non core buckets last quarter that we had sort of deemed.
When we when we underwrote that portfolio and I would say both.
Both of those buckets of continued to perform well and be up relative to respective cost basis.
And so I think.
And certainly some of the some of the appreciation in the portfolio is coming from some of the <unk>.
All central of acquired assets.
Okay fair enough. Thank you on that and the other one on.
The data you gave me is very interesting I mean the.
The platform as a whole deployed 1 billion the.
BDC accounts for all the sheet quite small part of that that tends to imply obviously that there's a lot of available capital in all of the.
The direct lending middle market Crescent fun.
Do you think that.
Available capital elsewhere in the platform is gun too.
Does that represent.
The mix doesn't mean that the the bad like Valley.
Two to the BDC being able to reach its leverage targets in the name of museums with with <unk>.
Presumably a lot of your activity is going to be allocated elsewhere, given given available capital.
Yeah. Thanks Robert.
I don't view that as an impediment for us I think we.
We view the benefits of being attached to the platform.
Really significant in terms of of deal flow and.
And on.
On the opportunities that we see.
There are there are certain investments that may fit certain fund parameters and not the BDC for instance, so we were conscious of.
Qualifying assets and certain yields and bogies that we're trying to achieve so not every investment that is sourced across the platform is appropriate for the BDC, but I think just generally speaking.
We think having a $20 billion credit platform with the BDC being able to participate in any of the deals that are sourced across that platform allows us to to service our client relationships best in our private equity firms best.
And ideally continues to sort of translate into more deal flow and larger commitments.
And larger holds across our investments.
Got it I appreciate that just one more if I can on on.
As you pointed out I mean, the markets in Q1.
It did become a bit more bullish than the very very competitive good number of originations for some of you guys.
In the quarter.
On the the payment side.
This is even harder to predict.
The payment activity was healthy I would say in Q1.
What's the.
On the outlook on on that so to speak do you expect that to remain elevated through say.
The middle of the year or do you think of lot of that is now.
Yeah.
On the rear view mirror on it goes back to of kind of a.
A normal.
Pattern kind of kind of asset lives.
Well.
Yeah.
Thank you I would say what we saw on the first quarter was certainly significant repayment activity.
And that would set against middle market sponsored volume being down.
The 20% quarter over quarter, which is seasonally a slower quarter throughout the year.
Our view is that the Q Q2 volumes are picking up.
And I think we're very constructive on.
Increased volumes throughout the balance of the year.
I think thats going to be driven by.
Growth expectations and prospects as we continue to emerge from the pandemic significant private equity dry powder.
Perhaps the potential for capital gains tax changes that might motivate.
The transactions as the sellers on transactions, so I do think that the.
We've seen some of the repayment activity continue in the second quarter, but I think as the supply and demand come more in balance through the balance of the year.
That's going to create.
Create more opportunities for net deployment growth.
For our BDC and certainly.
The sector and I think as we talked about just a few moments ago.
<unk> of the platform the relationships with sponsors and management teams that we have where we're quite constructive on our ability to to continue to deploy and scale of the portfolio over the course of the year.
Got it thank you.
Thank you.
Our next question comes from Finian O'shea with Wells Fargo Securities.
Okay.
Hi, guys just the follow up on your dialogue with Robert there.
It sounds like you'll be.
Going up market a bit larger larger holds with the larger capital base.
Can you talk about any.
The style drift, we should expect that it feels like it fit pretty well into the the.
The core middle market category of judging by your your senior spreads on your EBITDA levels and so forth.
How much of a change should we expect I suppose the near and longer term.
Yeah. Thanks, Jason.
Uh huh.
I wouldn't say.
You should expect any any style drift in terms of what we've been doing I will point out.
Look at sort of historical deployment, we have consciously taken the sort of unit tranche composition of the portfolio up.
As a percentage of the of the aggregate and that's been intentional I think thats.
Where the market is moving in a lot of cases as well.
So I do think unit tranche will continue to take more share as a percentage of the of the overall portfolio, but I might also just.
I kind of remind.
Everyone that.
Our core focus is kind of in two main areas, we spend a lot of time in the lower middle market.
Which we would characterize as businesses that have kind of $10 million to $40 million of EBITDA.
And we're operating and investing at the top of the capital structure. There and then when we're underwriting larger companies with more than $50 million of EBITDA.
We're oftentimes coming into the unit tranche or Orient, you second lien junior debt positions.
Certain cases first lien and unit will always be the core focus of the BDC, but.
And therefore are kind of median EBITDA will continue to hover in net lower middle market range.
But what we will continue to underwrite larger companies as well.
Given our given our focus on the upper middle market in units and in the second liens.
Okay very well it's the.
And then just the.
The I know you are.
It sounded pretty.
The positive on continuing to ramp the portfolio.
But the last couple of quarters of obviously, but were strong for you and most others there was seemingly a large.
Quantity of quality.
The deal flow.
How do you think the that.
The the.
Presumably the presumed decline of those conditions happening today true.
<unk> two to your origination per se the rest of the year.
Yes, Thanks fan I think youre right.
Back half of last year deployment was strong for US we saw a lot of high.
The high quality opportunities and I think what we've really seen more recently is more sort of demand come into the market.
I wouldn't say, we're necessarily seeing a decline in the quality of opportunities.
A day.
But theres certainly more.
More demand for private credit and.
As I mentioned, a little bit earlier I do think Q1, certainly was a little bit slower.
As is generally the case and I think we're quite constructive on on continuing to see good good volumes in high quality deals.
Sorry, I was on mute the salt for me. Thank you. Thanks.
Thanks Vin.
Again, ladies and gentlemen feel of a question of our comment at this time. Please press. The Star then the one key on your Touchtone telephone.
And I'm not showing any further question at the start I'd like to turn the call back over to our host for any closing remarks.
Great well. Thank you everyone for your interest and your time here today and listening to the <unk>.
Q1 earnings and we look forward to being in touch with you soon.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.