Q3 2021 Investcorp Credit Management BDC Inc Earnings Call
Okay.
Welcome to the invest Corp credit management BDC incorporated of scheduled earning release of third quarter ended March 31 2021.
Your speakers for today's call are Mike Mauer, Chris Jansen and Rocco Delguercio operating assistance is available anytime during this conference of our questions Star Zero, a question and answer session will follow the presentation I'll now turn the call for the speakers. Please begin.
Thank you operator, and thank you for all.
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 Rocco will give you.
Of our customary disclaimer regarding information forward looking statements.
Rocco.
Thanks, Mike.
I would like to remind everyone that today's call is being recorded and that this call is the property of the desktop 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 on the site at IC.
BBC Dot com.
I would like to.
For your attention to the Safe Harbor disclosure in our press release regarding forward looking information and.
I'll 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 would like to turn the call back over to our chairman and CEO Michael now.
Thanks, Rocco for the past.
Past quarter saw a marked increase in activity in the broader market refinancing activity, which began to pick up around year end accelerated and drove a large number of transactions.
We saw several of the loans in our portfolio of get refinanced both during and after quarter end.
As we consider our pipeline refis and <unk> of the primary drivers.
With the robust primary market, we continue to see strong competition for deals.
With most of the pressure coming on pricing at the larger end of the market.
We have maintained our credit discipline.
We Havent chase deals.
To recap unattractive structures.
When these deals the refinancing of the portfolio of companies that we are comfortable with.
Apart from structural trends, we also see the most deals are pricing higher.
We are focused on credit quality and loans structure first we stepped debt in this market spreads are tightening.
The sector selection remains a key tool in our portfolio management decisions.
We are avoiding.
New investments in the oil and gas as well as in sectors, which were hit hardest by the pandemic.
Such as retail and hospitality.
Many of our borrowers we are well positioned to rebound from the effects of COVID-19 on their businesses. We've seen this begin to play out in the numbers with strong second half performance in 2020.
Our investment activity during the quarter of continues to be balanced between club loans and middle market syndicated loans.
During the quarter, we invested one of each and since quarter end, we are investing in two additional new portfolio of company, Chris will go into detail about the investments and realizations during the quarter and then Rocco will discuss our financial results all for.
Finish up with commentary on our financing activity during the quarter our leverage investcorp.
Share repurchases, our dividend and our outlook for the next few months as always.
We will end with Q&A with that I'll turn it over to Chris.
Thanks, Mike.
For your investment in two portfolio of companies this quarter, both of which were new.
We also had three full debt realization.
One equity realizations.
Our first investment was in the first lien term loans for Galaxy brands.
Galaxy design courses and markets footwear products.
Sponsor of gain line capital partners.
Our yield on this club loans at cost.
The eight 5%.
Our second new investment this quarter was in the first lien term loans for auto lenders the company as a vertically integrated auto sales and leasing platform.
The cost of eight 5%.
Now for the realizations, our first realization of this quarter was also.
While this is one of our lower yielding assets our entry point with the attractive and we sold our loans over par before the refinance.
Our fully realized IRR was approximately 12, 7%.
Our second realization was limbach limbach credit profile of improved dramatically during the current of our investments.
And the company refinanced our debt of much lower rates.
Our fully realized IRR was approximately 16, 1%.
Our third realization.
For the Empire resorts.
Originally known as non training.
The bulk of our position was repaid at par of year ago.
With the small portion of the refinance into a one year bridge loans.
The bridge loan was repaid and our IRR was 3%.
Our fully realized IRR over the entire life of the investment was approximately 10, 6%.
We also had the realization of our position in the open mobile warrants.
Our combined our IRR.
On all open mobile positions for the life of that investment was approximately 11, 4%.
Since quarter end, we of May two new investments.
Our first is in the club loans for end of the UN Corporation.
Yes.
The company is the leading provider of managed cloud services solutions and systems.
Our yield the cost is approximately seven 7%.
Our second recent investment is in the first lien term loans for innovations of nutrition and wellness.
W.
I N W. Formulates and produces a variety of products, where the vitamin mineral and supplement markets.
Our yield the cost of approximately seven 4%.
We also had two full realizations since quarter end.
First <unk>.
We raised equity in the public markets to repay its debt facilities in salt.
Our fully realized IRR was 2021, 3%.
The second.
The equipment refinance the term loan in early April with the proceeds of the bond offering.
Our fully realized IRR was approximately 16, 7%.
Using the <unk> standard.
As of March 31, our largest industry concentration was for.
Professional surfaces services at 12, 4%, followed by energy equipment and services of 10, 1%.
Trading companies and distributors at <unk>.
Nine 8%.
Containers and packaging of 7%.
And commercial services and supplies at six 6%.
Our portfolio of companies are in 23, <unk> industries as of quarter end.
Including our equity and warrant positions.
As of March 31 of our portfolio company Count was 35%.
Versus 37 at December 31.
I would now like to turn the call over to Rocco to discuss our financial results.
Thanks, Craig for the.
The quarter ended March 31, 2021 on net investment income was $1 8 million <unk> 13 per share.
The fair value of our portfolio was $251 8 million compared to $257 7 million at December 31.
Our portfolio of net increase from operations. This quarter was approximately $3 7 million.
Our new our new debt investments during the quarter had an average yield of eight 5%.
Realizations and repayments during the quarter had an average yield of 11, 3%.
Our fully realized investments had an average price.
<unk> of 12, 3%.
The weighted yield of our debt portfolio was 877% a decrease of 99 basis points from December 31.
As of March 31 of portfolio consisted of 35 portfolio companies.
The 87% of our investments will firstly for 6% of our investments for secondly, and for 8% of our portfolio was in the Unitranche loans. The remaining three 6% is invested in equity warrants and other positions.
99, 3% of our debt portfolio was invested in floating rate debt.
Okay.
Seven per se in fixed rate investments.
The average LIBOR floor.
On our debt investments was one 7%.
Our average portfolio of companies investment was approximately $7 $2 million and our largest portfolio company investment was <unk> at 12 $12 million.
We were 196 times Levered as of March 31, compared to one for three times Levered as of December 31 of leverage.
Subsequently reduced to one five times went out baby bond was fully repaid on December 26.
We had for investments on non accrual as of March 31, finally with respect to our liquidity as of March 31, we had $86 4 million in cash published $6 5 million was restricted cash as well as 2009 capacity under our revolving credit facility with UBS.
No. The $51 4 billion of this cash was earmarked to repay of 2023 notes, which occurred on April 26.
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 the months.
Thank you Rocco.
We were very pleased to place of new bond. This quarter, we closed on $65 million of new four and seven 8% notes due 2026, which raised net proceeds of 63 million $63 1 million.
In April we.
We use the seeds to fully redeem our 2023 notes.
The net effect is to provide us with the additional long term capital to fund our investing activities as well as lowering the cost of leverage.
Our guidance on leverage remains a target of one of the quarter to one five times.
Last quarter, we were with.
In that target.
I have one for three times this quarter, our leverage artificially peaked at quarter end due to the notes placement.
Before normalizing at one five times.
We anticipate that our normal investment activity will keep us around this range.
I do want to touch on the non accruals in the portfolio DSG, formerly known as deluxe.
On non accrual last quarter disposition of small cells for more investment in deluxe Toronto limited.
Represents of our interest in the final wind down of the company.
We have received the number of small pay down debt expect to collect additional funds over the coming quarters.
88 had several terminal the term loan b the subordinated to the term loan a.
The and revolver.
With those loans remaining non accrual absent of significant change the drilling activity.
If the market, we do not expect the term loan b to resume paying interest.
Pgi unexpectedly fail to make the interest payment on both of its first and second lien loans.
We are engaging constructively with our fellow lenders and both prices as well as the sponsor.
For confidentiality reasons, we can't say more on this at this time.
We did not cover our March quarter dividend with NII, However, using our prior for spillover income we more than covered the March dividend.
While disappointing we are committed to the disciplined investment approach and we are confident that we have the appropriate capital resources to generate the NII to cover the dividend going forward.
As we committed to do we waived the portion of the management fee associated with base management fees over one turn of flow.
Our board of directors declared the distribution.
For the quarter ended June 32021 of $15 per share payable on July nine 2021 to share holders of record as of June 18.
The board did not declare a supplemental dividend distribution. This quarter. We believe that this dividend level is stable and the supplemental distribution of <unk>.
Approach remains the best way to capture fluctuations in the portfolios income generation.
Investcorp has made two separate commitments to purchase shares in <unk>.
<unk> did not make any open market purchases under the terms of the five program 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 December 31st of March 31.
It has purchased 227000 shares to date.
In an increasingly frothy market, we continue to focus our efforts on the core middle market.
Specially for deals we find the structural protections pricing and covenants are holding up much better than in the larger broadly syndicated transactions.
Our team is working hard to identify additional investment opportunities to deploy cash we have in the portfolio.
As I said last quarter, we want to seize the opportunities. We are presented with manage the portfolio through the cycle and keep our focus on consistent income generation.
And the preservation of shareholder capital.
That's the end of what we have prepared operator, please open the line for Q&A.
Ladies and gentlemen, operating time, we will conduct a question and answer session. If you would like to say the question. Please press star one on your phone now and the replacement of the Qunar to receive our price time at any time to remove yourself from the queue. Please listen for your name to be announced and we prepare to ask a question one pumpkin.
Once again to ask a question. Please press star one on your phone now.
Okay.
Our first question comes from Robert Dodd from Raymond James Please state your question.
Hi, guys.
Plenty of global and I understand there's confidentiality so without going into all the details of what went on can you give us any color on on what's the reasonable timeframe to expect the resolution of the asset.
Entirely all of the covenants.
Whatever they may be issues going on of the business.
Okay.
Yes, Robert Unfortunately, we don't have the timeline has been of recent event. So everyone is in the beginning stages of discussions is not in the later stages. So we do not have the timeline at this point on that.
Got it.
Thank you.
Another one that stands out kind of excel into maybe I mean, obviously, it's marked down its still on the call, but its markdown true any.
<unk> so.
Can you give us any any color on.
On what are your expectations of that I mean will it stay on accrual.
Status.
And.
On that Mark.
Is there anything you can tell us about.
<unk> of potential outcomes with the thought to that asset.
Yeah, Robert on that we keep watching it closely we have discussions of among some of the lenders.
It is one of that the company continues to make moves and Theyre all public information out there on some of the financings they've done some of the contracts have gotten so they've made.
Several moves in order to keep liquidity.
And so they have continued to make payments.
We think that we got it mark to add actually a pretty attractive level.
And we think that that is indicative from a market perspective.
But until we get some guidance that theyre not going to make an interest payment we're going to keep it on accrual.
Okay.
And then just in general with let's say beyond those assets.
Well all of the of any of the.
Asset debt.
So you are seeing any warning signs in or anything that we should be paying particular attention to given obviously the huh.
The other options, there's still some stress that in the in the economy et cetera.
Yes, no it is.
Great question and I'll just use your question is maybe digress I'm two or three things one is I think in speaking.
My partner.
Kicked me from six feet away under the table here I think I said $15 net 15 cents.
For the dividend next quarter.
And so that I wanted to highlight.
The other thing is when we look forward the June quarter.
I would expect to debt because of the bond and we had several investments repay in the strong market and we had two or three delay in funding that the June quarter.
Well not necessarily cover the dividend.
But our projections are with the reinvestment.
We should be covering the dividend going forward beyond that.
So I think Thats one important thing the other thing is the asset that we always talk about.
And you did not ask about today, so I think you, but I'll bring it up 18 88.
If oil continues to hold the new 60, plus or minus it's been $64 66 last couple of weeks, but high <unk> low <unk>, we are seeing a fairly slow but constant increase in rigs, especially in the Permian, it's still significantly below where it was.
The pre COVID-19, but we are seeing a very nice <unk>.
Consistent pickup in that business. So we're not concerned.
On that one.
The current environment.
Got it got it thank you.
Okay.
Our next question comes from Paul Johnson. Please state your question.
Okay.
Good morning, guys. Thanks for taking my questions are good afternoon of sick.
I suppose it's non accruals for a big driver of this but I'm just and I know you answered the question a little bit to Robert with the around the dividend, but in terms of like the interest income coming off the portfolio.
Just given yields and spreads in the repricing that are taking place in the market. I mean, do you expect to be able to bring that level of interest income kind of up from this quarter.
Six to 7 million kind of range or.
Thank you of any kind of line of sight.
Maybe kind of where we run from here.
So.
New investments, we are assuming because of the environment and we're not going to stretch and take an undue risk.
We're assuming are kind of in an eight 5% to 9% average.
We also.
We're assuming that.
From our quarter end, which was around $2 51 of invested assets.
We are in the process and we've got a pipeline of deals. We're looking at that we should be closer to a $2, 70% of $2 75 that would not change of our leverage that's primarily using the additional cash that came from the baby bond.
Hopefully that helps.
Gotcha Okay.
And then.
I guess, just one kind of broader question I mean within your portfolio.
All of your companies or even deals that you've looked at.
Particularly with the businesses that are maybe more labor manual labor intensive.
I mean have you have you seen any signs of inflation pressure.
Throughout the economy or just in the middle market businesses.
Yes, it's Chris and the good question Paul.
We havent seen it specifically.
We're aware of in the lower middle market, there are those pressures with hourly workers.
But of.
A number of our businesses that.
Rely on a more skilled workers they are seeing some wage pressure, but they're seeing pricing coming in.
Some of our companies like an Iga for example that.
Yes.
Can drive pricing.
And others.
Kind of across the portfolio, we've been surprised by the.
Of the resiliency on the revenue side as well.
So, let's say for the discussions we've had on pgi in a couple of others.
Okay.
Okay. Thanks, those are all my questions I appreciate it.
Thank you Paul.
Our next question comes from Christopher Nolan of please state your question.
Mike what was the driver for the decrease in portfolio yields.
Quarter.
Yes.
The primary driver of the decrease in portfolio was that we had repayments and they were coming in.
The average around 11, 3% and our new investments were at about eight 5%.
Great and then.
More strategic question.
Month, or so ago, there was talk about significantly increasing the capital gains tax.
Do you think the FX.
Your company of the BDC group given.
So many deals come from private equity.
Yeah, It's a great question.
Sure.
The.
The short answer is I'm not sure of changes it materially other than.
There is a real motivation by private equity sponsors at the margin to monetize.
So that they can to the extent.
Available avoid the increased tax rate assuming that the tax rate goes up prospectively, not retrospectively that having been said and why I say I don't see it as huge is there is about the trillion five depending on who you talk to of private equity capital that's been raised.
So from the new deal forget about deals being.
<unk>.
Refinance new deals there.
A significant amount of new deals.
Fairly good pipeline of things for us to look at so.
I think that you will see some pressure from the $1 billion five.
Sourcing new deals but.
The capital gains tax definitely is the motivation for monetization at the margin people aren't going to sell things below where it makes economic sense.
Great. Thank you that's it for me.
Once again, if you would like to ask the question. Please press star one on your phone now.
At this time, we have no further questions.
Thank you everyone. We look forward to talking to you soon.
This concludes today's conference call. Thank you for attending.
The House has ended this call goodbye.