Q4 2021 Investcorp Credit Management BDC Inc Earnings Call
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Yeah.
Okay.
Welcome to the Investcorp.
Alright.
Core BDC incorporated scheduled earnings release, our fourth quarter ended June 32021.
Speakers for today's call are Mike Mauer, Chris Jansen and Rocco Delguercio. All participants is available income during this conference My partner Star Zero, a question and answer session will follow the presentation I will now turn the call over to your speakers you may begin.
You operator, and thank you to all of you for joining us on our fiscal year end call today I'm joined by Chris Jansen My co Chief investment Officer, and Rocco Delguercio our CFO.
Before we begin Rocco will give our customary disclaimer regarding information and forward looking statements.
No.
Thank you Michael.
I would like to remind everyone that today's call is being recorded and that this call is a property than desktop credit management BDC.
Any unauthorized broadcast of this call.
<unk> is strictly prohibited.
Also a replay of the call will be available by visiting our Investor Relations page on our website at ICM BBC 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.
Again, our latest SEC filings. Please visit our Investor Relations page on our website at this time I would like to return the call back to our chairman and CEO Michael Mauer. Thanks.
Thanks Rocco.
The June quarter March our fiscal year end, we had a very active quarter with both highlights and challenges we had a lot of activity from our investment standpoint, both in terms of new investments and realizations, Chris will go into detail on a name by name basis.
Three of our four new portfolio company investments were in club loans, including one which we co led with the partner the fourth was the middle markets syndicated loan.
We continue to believe that the best value lies in the core middle market. We also see the relevance.
Our thoughtful structuring and covenants.
The pace of refinancing activity in the broader market seems to explode somewhat of course, it's also possible for summer doldrums hit early this year, but we had two refinancings announced mid summer and none are.
Our pipeline.
Is less focused on Refis now and more on new lbs, while there is still pricing pressure on new deals the market frenzy, feeling we saw four or five months ago seems to have abated somewhat.
We extended our financing capacity.
And lowered our cost during the quarter and also during the current quarter.
As we discussed last quarter, we repaid our 2023 notes and issued new notes due 2026.
This had some onetime effects on our earnings this quarter, which Rocco will discuss more recently, we secured a new credit facility with capital, one which will go which will eventually replace our borrowings under the UBS facility Rocco will go into more detail later in the call.
One thematic point I would like to make is that we have made great strides towards stabilizing.
Net asset value, we have reduced volatility by exiting investments as we did with <unk> technologies. This quarter, we have received payments on deluxe over the past year.
We have reduced our current fair value to 4% of our original cost.
We have also substantially eliminated downside risk to our NAV.
Through our March specifically on 18, 88 and Pgi.
I know that both of these positions have been of concern to you as well as to us for several years now.
Coincidentally, both have reached a point of restructuring at the same time.
Negative marks on these two positions over the past quarters.
Have offset and overshadowed our team's great work across the rest of the portfolio now with limited downside left we think the entire portfolio is poised to rebound.
Some examples include four L technip loss and arcade bio plan all of which have recovered from the fair value of low points and have begun to appreciate as the underlying borrowers performance has improved.
Chris will now take you through our investment activity during the June quarter and after quarter end.
Rocco will discuss our financial results and I'll finish with commentary on our financing activity, our leverage and invest corp share purchases the dividend and our outlook over the next few months as always we'll end with Q&A with that I'll turn it over to Chris.
Thanks, Mike reinvested in five new portfolio companies this quarter and one existing portfolio company.
We had six fold that realizations across five portfolio companies as well.
Our first new investment was in a club loan for <unk> Corporation.
We invested in NWS once before in 2015.
The company, which has grown substantially under the ownership of new state capital is a leading provider of managed cloud services solutions and systems.
Our yield at cost is approximately seven 7%.
Our second new investment was in the first lien term loan for innovations and nutrition and wellness for ITW.
<unk>, which was purchased by Cornell partners Formulates and produces a variety of products for the vitamin mineral and supplement markets.
Our yield at cost is approximately seven 4%.
Our third new investment was in the first lien loan for Lockwood shown in our financial statements as veterans services LLC.
Our loan to veteran services, because the one year bridge facility to support the redevelopment of a former hospital in the Chicago Metropolitan area.
Our yield at cost is approximately 17, 7%.
Our fourth new investment was in the first lien loan for <unk> International.
Portfolio Company of Center Lane partners.
<unk> provides inventory of our verification services and.
And merchandising services to customers across various retail industries.
Our yield at cost is approximately nine 5%.
Finally, our first investment was in the first lien loan for Atlantic Corporation.
Another portfolio company of Central Bank partners.
We co lead this club deal with our partners at capital dynamics.
Our loan supported the combination of Linux Hampton Forge and Oneida to form the leading tabletop business focused on the better market.
Our yield at cost is approximately nine 2%.
We also made an additional investment in Berry's financial group term loan, which is an existing portfolio company investments.
Our yield at cost on this incremental investment is approximately nine 5%.
Turning now to our realizations during the quarter Alpha.
Also equipment refinance the term loan in early April with the proceeds of the bond offering or <unk>.
Fully realized IRR was 17, 8%.
Flow control amended its credit facilities in April.
As part of this amendment, we opted not to roll our term loan C position into the new facility and we were repaid at par.
Our fully realized IRR was nine 2%.
Thanks.
Jay raised equity in the public markets to repay its debt facilities in fall.
Our fully realized IRR was 22, 8%.
AC products or ACP.
Refinance its loans in connection with the acquisition of the company by platinum equity.
Our fully realized IRR on this investment was seven 9%.
We also sold our positions and accelerating the term loan and bonds, Mike will discuss this further in his commentary.
Our realized IRR on the term loan was negative two 6%.
And the IRR on our position in the bond was a positive four 9%.
Since quarter end, we made several additional investments and had one full realization.
We invested in a club loan to easy way a portfolio company of insight equity.
Z wave is a designer and manufacturer of cushions covers umbrella and other accessories to the outdoor furniture market.
Our yield at cost is approximately eight 5%.
We invested in the first lien loan to agro fresh Foods Sciences company, whose product prolong the useful life of fruits.
Our yield at cost is approximately seven 3%.
We also invested in incremental term loan and delayed draw facility for Empire office, one of our existing portfolio companies.
Our yield at cost on this incremental investment is approximately eight 9%.
We also made an additional investment in tech the pluses equity as part of the strategic acquisition of navigate.
Which is expected to be highly accretive and complementary to the existing business.
And finally, we also invested in an incremental term loan to Golden Hippo, which had repaid a significant amount of debt to facilitate the purchase of additional equity by the Aesop.
Our yield at cost is approximately eight 6%.
After quarter end, we received the repayment in full of infrastructure and energy alternatives are IEA.
The company placed the bond to repay this loan defaults.
Our realized IRR was approximately 11, 8%.
We were also repaid on our investment in Hyperion as the company refinanced its first and second lien loans in the broadly syndicated market.
Our fully realized IRR was approximately seven 6%.
Using the <unk> standard as of June 30, our largest industry concentration was professional services at 10, 6%.
Followed by energy equipment and services at eight 3%.
Containers and packaging at seven 6%.
Construction and engineering at six 5%.
And commercial services and supplies at 6%.
Our portfolio of companies are in 25 industries as of quarter end, including our equity and warrant positions.
As of June 30, our portfolio Count was 36 versus <unk> 35 at March 31.
I would now like to turn the call over to Rocco to discuss our financial results.
Thanks, Chris.
For the quarter ended June 32021 on net investment income was $6.0 million or <unk> 11 per share.
Normalizing for the redemption of the 2023 note and the write off of capitalized offering expenses for those notes.
NII would have been $5.0 million or <unk> 17 per share.
The fair value of our portfolio was $245 million compared to $251 million on March 31.
Our portfolio's net decrease from operations this quarter was approximately $20.0 million.
Our new debt investments during the quarter had an average yield of 10, 3% while realization.
Repayments during the quarter had an average yield of 12, 8% and fully realized investments had an average <unk> are up 13, 9%.
The weighted average yield of our debt portfolio was eight 4% a decrease of 73 basis points from March 31.
The majority of this decrease is attributable to the repayment of our loan to GE.
As of June 30, our portfolio consisted of 36 portfolio companies.
<unk> 93, 7%.
Our investments were first lien two 5% of our investments were second lien and the remaining three 8% is invested in equity warrants and other positions.
96, 1% of our debt portfolio was invested in floating rate instruments, and three 9% and fixed rate investments.
The average LIBOR floor.
On our debt investments was one 4%.
Our average portfolio investment was approximately $14.0 million and our largest portfolio company was very at $13 million.
We were one seven times Levered as of June 30, as compared to $97.0 times Levered as of March 31, and our net leverage as of June 30 was one five times.
We had four investments on non accrual and one investment on partial accrual as of June 30.
With respect to our liquidity as of June 30, we had 26 excuse me, we had $18.0 million in cash of which $14.0 million was restricted cash as well as 29 capacity under our revolving credit facility UBS.
Finally.
On August <unk>, we closed on a new credit facility with capital one the new facility has an interest rate of LIBOR, plus 235% compared to Ubs's LIBOR plus one.
One 5% and.
An 80 basis point savings it has a three year investment period, the new facility will replace the existing UBS credit facility, which is set to mature in early December.
More details regarding this facility maybe are available in our recent leasing.
Our recently filed 10-K and our 8-K filed on August 25, I would also like to note.
That the December quarter will have onetime costs related to the two credit facilities until the UBS credit facility rolls off in early December.
Additional information regarding the composition of our portfolio included.
Included in our Form 10-K, which was filed yesterday with that.
I'd like to turn the call back over to Mike.
Thank you Rocco.
Over the past several months, we have established a new set of leverage facilities to provide us with expanded flexibility and lower cost in April we closed on $65 million of new $704.0 eights notes due 2026.
As Rocco noted.
There was.
A onetime cost associated with writing off the remaining capitalized operating cost of the 2023 notes, which reduced our NII by approximately 6%.
More recently, we secured a new credit facility with capital one are new facility with capital one will replace our borrowings with UBS our guidance on leverage remains a target of one and a quarter to one five times, we have been working to reduce our leverage over the past two quarter.
Bringing it down from $97.0 in March.
Which was inflated due to the note refinancing.
Described to 172 times in June.
Today. It stands at approximately 168 times, we're going to continue to work towards reducing our leverage over the coming quarters and I'd note that the persistently high leverage.
He is not the typical result of our normal investment activity, but rather a direct consequence of the decrease in our NAV.
On that front I'd like to discuss the decline in our book value. This quarter, we took significant markdown from two portfolio company investments in particular these were 18.88 and Pgi both have been credit concerns for some time and both were already on nonaccrual while.
While.
For confidentiality reasons I cannot discuss many of the details of these companies I would like to share more color on each with you all.
88 has several term loans, we have begun discussions for a balance sheet restructuring in recognition that the dip.
Subordinated term loan B will not resume paying interest and that <unk> would benefit from the acquisition of a significant portion of its debt by restructuring into an equity interest we will retain the ability to realize upside value.
The company performance recovery.
<unk> has been on non accrual for several months.
After a defaulted on interest payments to both the first and second lien loans.
Lenders in both tranches have been working together constructively to preserve liquidity and to find a path toward recovering value.
I can't go into detail about the restructuring at this point, but we believe our mark appropriately limits.
Further downside risk in our position.
We believe that reducing further downside risk to our NAV was an important theme for us. This quarter. In addition to our marks on 18.88 in Pgi. We also sold our holdings in <unk> technologies. After a significant increase in the market price of the debt we exited at a mirror.
<unk> IRR.
After holding their positions through remarkable price volatility.
This exit reduces uncertainty and the portfolio, especially should accelerate ultimately restructure which we view as a real possibility.
As part of 18.88 in Pgi.
We have two marks.
Sorry, apart from <unk> 88, and Pgi, we have two March below 50 as of June 30.
<unk> you.
In wind down position, which ive discussed in prior quarters.
We have a market position.
As a sum of the probable future cash receipts.
As recoveries or realize the principal balances reduced and the Mark is adjusted based upon our most recent view of remaining sources of value, it's a small position.
But I would like to note that we have recovered in excess of 74% on our investment at this time and we expect to recover additional amounts in the future.
As of today, the fair value of DSD.
<unk> represents approximately 4% of our original cost.
Fusion.
Second our take back paper is market 47 this quarter.
This is indicative of our underlying challenges facing the business.
As well as the unsustainable capital structure, which would put it on.
On the business during its bankruptcy two years ago I would note that we continue to mark the first out loan at par due to its low loan to value and we have great. We have a great deal of confidence in the Companys management and their vision and vision for the future.
Sure.
In addition to working hard to limit further downside on our NAV.
We have a number of positions with asymmetric upside potential.
We own equity positions in for Al ASI.
<unk> plus.
As well as 18.88 in fusion <unk> plus has begun to see recovery and as Chris noted made an acquisition, which should be immediately accretive.
For al is stable.
And as we believe position for future recovery ASI continues to perform well.
Beyond our current portfolio.
We also recently received.
Expanding exemptive relief to co invest with investcorp is private equity funds.
Which will allow us to invest in equity of <unk>.
Investcorp <unk> alongside them.
I would like to note, we will never invest in the debt of an inverse core portfolio company in order to avoid conflicts.
However, we are excited about investing alongside our private equity partners and the prospect of creating additional avenues for growth.
We did not cover our June quarterly dividend with NII as Rocco noted, however, onetime costs associated with.
Writing off capitalize offering costs from our 2023 notes served to bring our NII per share from <unk> to <unk> 11 per share except for these one time costs, we more than covered the dividend we're committed to a disciplined investment approach and we are confident that we have the appropriate capital resource.
So as to generate NII to cover the dividend going forward as we committed to do we waived a portion of our management fee associated with base management fees over.
One times leverage.
Our board of directors declared a distribution for the quarter ended September 32021, or <unk> 15 per share payable.
On October 14th to shareholders of record as of September 24 at.
The board did not declare a supplemental distribution this quarter.
I'll leave the dividend level should be sustained stable and sustainable and the supplemental distribution approach remains the best way to capture fluctuations in the portfolio income generation.
Investcorp made two separate commitments to purchase shares.
In <unk>, while investcorp did not make any open market purchases hundreds <unk> five program or any purchases of shares at NAV. During the June quarter Investcorp has made purchases to fulfill all of its commitments during.
During the current quarter.
In summary, since March 31, we have successfully invested in seven new portfolio companies. Despite a challenging environment for origination. We remained focused on club deals, where we find better structural protections pricing and covenants than our typically in current vintage broadly syndicated.
Actions. We are also looking at existing portfolio companies for opportunities to make incremental investments we.
We will manage the portfolio through the cycle and keep our focus on consistent income generation and preservation of shareholder capital.
That's the end of our prepared statements.
Operator, please open the line for Q&A.
Ladies and gentlemen at this time, we will conduct a question and answer session.
If you would like to take a question. Please press star one on your phone now and Youll be placed into the queue in order to receive a question at any time to remove yourself from the queue. Please listen for your name to be announced have you prepare to ask a question one pumpkin.
Once again to ask a question. Please press star one on your phone now.
We are now ready to begin.
Our first question comes from Christopher Nolan. Please state your question.
Hey, guys let's.
What's the advance rate on the new capital one facility Rocco.
The advance rate, yes, I'm sorry.
Berry's, yes, Chris.
It varies.
Advance rate in total.
Hello, Hello, Hello.
Yes, okay. Okay.
It should average about where we were with UBS.
Which is about 60% and it depends upon the portfolio there are different advance rates for obviously different classes of loans and also theres the size factor is well understood.
Understood 888 are there sponsored private equity sponsors associated with that company.
There was a sponsor it's Mike thanks for the question.
Before I answer that I did want to clarify one thing I think earlier Rocco going through his.
Statements talked about net leverage and it sounded like one 5% to $1 five to eight just to be clear for everyone. I wanted to clarify that an <unk> 88 in the initial transaction back in 2014, there was a sponsor.
When it was restructured several years ago that sponsor was removed they were not it was a fund list sponsor did not have additional capital to put in.
So the lenders stepped into the equity.
And some of the strategic sellers continue to participate.
At this point the strategic sellers are helping from an operating standpoint, but not from a capital standpoint next to Welles family out in the DJ Basin.
Great and I guess a final question on 888, it's a term b loan which is non accrual.
Just that one.
Ill.
Turning to equity or bid all the exposure turn into equity.
We are growing so I would expect that there is some debt still on it we are finalizing.
If it's the term loan b or some other amount, but that has not been finalized at this point great. Thank you.
Our next question comes from Robert Dodd. Please state your question.
Hi, guys.
First one is kind of a housekeeping one indicate fusion connect is Martin this partial non accrual.
Explain.
What that means I think is counted fully in your own molecule accrual numbers that you gave us that it's listed as parcel so what's the distinction there yes, so Robert.
That pays us it's at 3%.
Cash I believe 8% Pik Pik portion is on non accrual. It is only paying the cash we're only recognizing the cash portion of it.
Got it got it I appreciate that.
And then one other question is on.
It might be.
You gave some color I mean, do you expect to be able to cover the dividend this quarter without the one time costs, yes, it would have been.
On 17, but you also had very high fee income this quarter the highest.
I can find in my model at least to be plus yet.
So you're confident.
Either fee income is going to stay elevated.
All without the benefit of.
Extra fee income mix that refinancing market has slowed.
Can cover the dividend with <unk>.
With normal fee income.
With normal Robert.
Thanks for the question of two things one is with normal fee income we expect to cover the 15th.
And we have done our models out through year end I think beyond year end.
We get a little bit into the guessing.
The reinvestment rates and the level of the portfolio et cetera.
Got it got it understood beyond beyond year end is get more tricky than the last one penny of global American Teleconferencing.
You emphasized you wanted to eliminate.
The juice at least downside risk going forward, but when I look at your Mark.
That's five other bdcs in that in your markets substantially lower than anything anybody else has.
Is that all is <unk>.
Something different about your low and it does look you've got some pick on that and I think other people. So I'm not sure it would get accelerated exactly the same trends as others or is there something you know about that business.
As it relates to the mall.
<unk> lower than that I think the lowest Dow that has that.
<unk> 42, and you've got a 15th which implies being tight.
So any more color on how that's.
<unk>.
<unk> factored into that or is that just you wanted to take an ultra conservative position.
On the valuation of stock.
Robert I appreciate the way you tried to worded the question because you know it sensitive given the.
Non public information.
All I'd say is that my expectation is that we do not have any asymmetric information to any other first lien lenders okay.
And we.
Thought that.
You're focused on the first lien second lien is effectively.
One dollar zero or whatever.
And we have felt that it's a very difficult loan.
And that we wanted to if there is a range, which we believe there is a range for valuations that we went to the conservative end of the range to minimize I can never say eliminate unless you're at zero.
But minimized the downside risk and.
We have sensed the market shareholder analyst frustration with some of the bits and pieces of marks on the portfolio. So that is a bit of background on the overall portfolio and pgi specific.
Got it got it and then Amit.
On the net leverage it obviously things can move around.
As UBS gets replaced with with capital and et cetera, you can allocate cash balances definitely potentially.
158, I presume that was quarter end, what's the debt leverage today.
Taking into account obviously in Mexico.
<unk>, which which gave you a little bit of a.
<unk>.
They bought at EV per share but.
And obviously that would have a beneficial impact on our leverage all other things being equal so where do we stand today on that basis.
It would be closer to one 504.
Got it.
Okay.
That's it for me thank you.
Okay.
Our next question comes from Paul Johnson. Please state your question.
Hey, good afternoon, guys. Thanks for taking my questions just going off of Rob's last question.
I'm just curious going forward I know you've had a little bit of net growth quarter to date.
I mean, how do you guys I guess balance any sort of new growth that you have.
Are you planning on drawing more on the new facility or do you have more.
More visibility into incoming repayments.
How do you balance all of that which is the level of cash on that on the balance sheet, obviously leverage just running I think a little bit higher than higher than your previous target is around one five or so I think on the high end.
Just to clarify the growth in what were you referring to.
Quarter to date third quarter just to.
The investments that you've made quarter to date.
The gross investments.
So there is.
We've got some visibility on some repayments that are coming in and some visibility on some redeployments.
We've got some visibility on.
And de Minimis I Wouldnt say its a lot.
So mark ups because of some notifications of repayments.
Vis vis where we have the mark we don't see any downside to our overall NAV today, we see modest upside.
And then just take this opportunity to reiterate what I talked about earlier and I don't think its a next 90 day I think it's six months to 36 months this strategy of deploying into <unk>.
Equity to grow the NAV, which will allow us to grow the asset base.
And with Investcorp, we've now spent a year and a half plus getting the enhanced order for Exemptive relief to co invest we will all look today I think we are 4% plus or minus in equities think about that.
Good portion of that is restructured equities will manage those over time, but versus that 4% or 10%.
Near term to medium term target.
And that being that 6% to 36 months and that May change and they will be a diversified portfolio of co investing in investcorp sponsored deals.
Right alongside so another way of growth.
Got you. Thanks, Thanks for that I was actually going to be my next question was.
On the private equity strategy, which I think makes sense now that you are.
Alright.
<unk> with the Investcorp platform.
So I appreciate it those are all my questions. So I have today.
No I appreciate it looked at I don't know how familiar to all of you are with the investcorp platform.
The private equity sponsor next year will be the 40 <unk> anniversary of them being a p/e.
Investor and one of the original private equity investors in the <unk> always been focused on middle market and continues to be focused on middle market. So not only do we think that it will be accretive to shareholders to be able to.
Exercise around a co investment strategy, but it is now also starting to help us originate.
Debt investments away from Investcorp deals because there are.
A lot of the market calls on investcorp.
And to their P/e deals, that's helping our partnerships on non investcorp deals.
Any other questions.
Yes.
Once again to ask a question. Please press star one on your phone now.
Okay.
At this time there are no further questions.
Thank you very much we appreciate it everyone. We will talk to you next quarter.
Okay.
This concludes today's conference call. Thank you for attending.
[music].
The host has ended this call goodbye.