Q3 2021 Crescent Capital BDC Inc Earnings Call
Yeah.
Thank you for standing by and welcome to the Crescent Capital Bdc's third quarter 2021 earnings Conference call. At this time all participants are in listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press star one on your telephone.
As a reminder, today's program may be recorded I would now like to introduce your host for today's program Ed Mcmahon head of Investor Relations. Please go ahead.
Good morning, and welcome to Crescent Capital BDC, Inc. Third quarter ended September 32021 earnings Conference call.
Please note that Crescent capital BDC, Inc.
Be referred to as C cap Crescent BDC or the company throughout the call.
Before we begin I'll start with some important reminders comments made over the course of this conference call and webcast.
They 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.
Company assumes no obligation to update any such forward looking statements.
Please also note that 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 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 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 third quarter ended September 32021.
Posted a presentation to the Investor Relations section of its website.
At Www Dot Crescent BDC Dot com.
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 Bro, Chief Executive Officer, a 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.
Morning, everyone and thank you for joining US we appreciate your continued interest in <unk>.
For our call today.
I'll provide a few highlights from this quarters results.
Review, our investing activity.
To provide some thoughts on our current portfolio and positioning.
Touch on a few more updates before turning it over to Gearhart to review our quarterly financial results in more detail.
So let's begin.
Please turn to slide six where youll see a summary of our results.
We reported strong third quarter financial results with adjusted net investment income of 48 per share.
Similar to the prior two quarters, we accrued a capital gains based incentive fee expense related to changes in net realized and unrealized gains and losses.
This noncash expense, which was not paid and is not payable was approximately <unk> <unk> per share for the quarter.
Our Q3 net investment income per share inclusive of the accrued capital gains based incentive fee expense was 45, respectively.
As a reminder, the.
Capital gains expense 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 September 30.
The 22 per share of cumulative accrued capital gains incentive fee expenses debt.
That we had at quarter end would.
Would not be paid or payable since the gains must be realized in order for us to be eligible to receive a fee.
Turning back to our results our net asset value per share increased for the sixth consecutive quarter.
Up approximately 1% in Q3 to $21 16.
The highest value since <unk> inception.
Gary Hart will walk through the key drivers in more detail, but the increase this quarter was primarily driven by a net change in unrealized depreciation specific to certain portfolio companies, coupled with our net investment income outpacing the dividend per share.
Since our listing in early 2020.
Prior to the onset of Covid.
NAV per share has grown eight 5%.
From a total economic return perspective, which is change in NAV plus cumulative dividends paid.
We've generated 23, 2%.
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 over $1 1 billion of investments at fair value across 132 portfolio 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.
100% of our debt portfolio wasn't sponsor backed companies as of quarter end.
84% of the portfolio at fair value was firstly as compared to 80% in Q2.
Driven by our origination activity in the quarter as outlined on slide 15, which I'll touch on shortly.
For the third quarter 120 out of our 121 debt investment portfolio companies, representing over 99% of total debt investments at fair value.
Full scheduled principal and interest payments.
And pick interest represented approximately 1% of total investment income in Q3.
93% of our debt investment portfolio today is mark above 95 on the dollar.
With an average mark of approximately 98.
Two more positive credit trends are outlined on slide 17.
Continued strong performance ratings and non accrual levels.
Our weighted average portfolio grade of $2, one was unchanged as compared to last quarter and the percentage of risk rated one and two investments.
The highest ratings of our portfolio companies can receive increase.
Increased to 89, 4% of the portfolio at fair value as compared to 88, 1% last quarter.
As of quarter end, we had investments in two portfolio companies on non accrual status.
Representing one five and one 1% of our total debt investments at cost and fair value respectively.
Moving to our investment activity, please turn back to slide 15.
Focusing on the left hand side of the page, we had an active quarter.
$158 5 million in gross deployment.
Nearly all of the activity were approximately 95% was in senior secured first lien or Unitranche investments.
All told we closed on 12, new investments and 10 follow ons totaling 116 and $16 million respectively.
With the remaining $27 million coming from our revolver and delayed draw term loan activity.
All 12 of the new investments, where private equity backed loans at 500 to 675 basis points spreads and.
<unk> between 1% and 275%.
In addition loan to value levels remain attractive averaging approximately 41% for these transactions.
The $158 5 million in gross deployment compares to $122 8 million in aggregate exits sales and repayments in the quarter.
It's also worth highlighting that <unk> total commitments for the 12 aforementioned new deals.
Represented only 14% of the approximately $1 $2 billion total check size committed to these deals across crescent.
Highlighting the scale of our platform.
Activity, thus far in the quarter has been strong.
The month of October we closed on six new and four follow on investments totaling $49 million and $15 million respectively.
The six new investments are each private equity backed first lien or unitranche loans with spreads and other characteristics comparable to the aforementioned Q3 investments.
As we sit here today, our origination pipeline for the remainder of Q4 is robust.
Coupled with an expectation for a slowdown in prepayment activity.
We think Q4 may end up being the strongest net deployment quarter of the year.
Driving continued investment portfolio growth and a further increase in our debt to equity profile as we approach the lower end of our target range.
A few more updates before I turn it over to Gary.
First a quick update on our acquisition about centric capital Corp.
As a reminder, we completed in Q1 of 2020.
Please turn to slide 18.
Keep see on this slide performance of the acquired portfolio has been strong.
Generating a 28% IRR with a healthy level of realization activity through September 30.
Almost all or 97% of our cost basis in the acquired assets has been realized in the approximately $84 million in remaining fair value translates to about 7% of <unk> total investment portfolio as of quarter end.
Overall, we are pleased with this outcome, thus far which has been accretive to see cap and our stockholders.
Second in mid October sunlight completed its stock purchase program, having acquired $10 million of <unk> stock pursuant to its <unk> five one plan.
Demonstrating its alignment with C cap stockholders.
Sunlight has advised us that it seeks to introduce a second <unk> five one plan of comparable size to the first plan.
We believe that our stocks current discount represents a particularly compelling opportunity to acquire shares and what we view as an increasingly well diversified.
Festively constructed first lien focused BDC.
That has committed to ensuring 100% dividend coverage via incentive waivers on an as needed basis through 2022.
Finally for the fourth quarter of 2021, our board declared a <unk> 41 per share quarterly cash dividend payable on January 17, 2022 to stockholders of record as of the close of business on December 31.
Our board has also approved a series of four consecutive quarterly special cash dividends of <unk> <unk> per share beginning this quarter.
As we've historically over earned our base dividend our spillover income has grown to approximately <unk> 48 per share as of quarter end.
The payment of approximately half of this balance in the form of special dividends serves to enhance our capital efficiency by eliminating some of the excise tax drag on our spillover income.
Which provides for a modest ROE uplift on an annualized basis.
The first special cash dividend is payable on December 15th to stockholders of record as of the close of business on December 3rd.
And the second third and fourth <unk> specials will be paid on the 15th of March June and September 'twenty two respectively.
The record dates for these payments have been disclosed in our 10-Q and earnings release and again all of these have already been approved by our board of directors.
With that I'll now turn it over to gearhart to cover additional details on the quarter.
Sure.
Thanks, Jason our adjusted net investment income per share of 48 for the third quarter of 2021 compares with 53 for the prior quarter.
<unk> 43 for the third quarter of 2020.
Our GAAP earnings or net increase and net assets, resulting from operations per share for the third quarter of 2021 59.
Which compares to $1 16 for the second quarter of 2021.
And $1 36 for the third quarter of 2020.
Third quarter adjusted earnings were driven by strong recurring interest and dividend income from our growing portfolio. In addition to accelerated accretion of OID related to an elevated level of pay down activity.
At September 30, our stockholders' equity was 596 million.
Resulting in a net asset value per share of $21 16 increase.
Increasing from $591 million or $20 98 per share last quarter.
And $537 million or.
Or $19 <unk> per share at September 32020.
The increase in our net asset value during the third quarter with the result of the continued over earn the dividend coupled with overall appreciation in our investment portfolio.
Net investment income outpaced our base dividend contributing an additional <unk> <unk> per share of growth as you can see on slide 10.
I would note that the 99.
Net realized gain per share in the middle of the page relates primarily to a sizeable monetization out of our equity investments in kinesis.
As you May recall kinesis, a provider of strategic medical communication services to the biopharmaceutical industry with the largest driver of mark to market unrealized depreciation in our portfolio last quarter.
So this quarter's realization also resulted in a reversal of that previously unrealized mark.
Investments at fair value increased 4% in the quarter from one spot zero 95 billion to one spot $103 9 billion driven by approximately $36 million and net deployment.
Turning to slide 16.
Summarizes the weighted average yield on income producing securities and spread over LIBOR of our floating rate debt securities.
As of September 32021, the weighted average yield on our income producing securities at amortized costs was.
With seven 6% as compared to seven 8% in the prior.
Good quarter.
99, 7% of our debt investments bear interest at a floating rate.
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 on slide 20.
As of September 30, our debt to equity ratio was <unk> 94 times.
Up from <unk> 87 times at June 30, resulting in a continued significant cushion to our regulatory asset coverage of 150%.
On October 27, we entered into a new senior secured revolving credit facility with SMB CLEC.
Upsizing by 100 million to $300 million as compared to the prior facility.
While simultaneously swapping out.
L plus $235 million facility for an L. Plus 187, five facility and extending the maturity from August 2024 to October 2026.
The maturity profile of our debt capital base continues to remain attractive with no near term maturities and 100% of the principal amount of debt outstanding maturing After June 2023.
From a liquidity perspective as of quarter end, we had $173 1 million of undrawn capacity subject to leverage borrowing base and other restrictions.
Our board of directors declared a fourth quarter cash dividend of 41 per share, which is consistent with our regular quarterly dividend paid in the third quarter.
This will be augmented by the series of special dividends that Jason walk through it here.
Yeah.
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.
<unk>, 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.
As noted earlier the overwhelming majority of our portfolio companies continue to perform well.
Most of our borrowers have returned to normalized operating levels and we maintain our positive outlook for the overall economy for the remainder of the year as demand further rebounds.
As previously noted.
We're constructive on the deployment pipeline in the coming months, which will allow us to continue to deliver attractive risk adjusted returns for our shareholders.
We'd like to thank all of you for your confidence and continued support.
And with that operator, please open the line for questions.
Certainly ladies and gentlemen, if you have a question at this time. Please press Star then one on new Touchtone telephone. If your question has been answered and you'd like to remove yourself from the queue. Please press the pound key.
Our first question comes from the line Robert Dodd from Raymond James Your question. Please.
Hi, guys I have two open one.
And then again on the.
<unk>.
The new originations this quarter.
The weighted average.
Portfolio LIBOR floors about 90 bps looks like in Q3 that may have been some pressure on.
On that the delta between.
The interest rate.
Go ahead.
Shrink this quarter could you give us any color is.
The incremental pressure on LIBOR floors versus what your average in the portfolio or was that just.
Okay Q3 mix.
No.
Hey, Hey, Robert it's Jason Thanks for the question.
I would say that.
There has been some pressure on LIBOR certainly in the syndicated markets more so than in.
Private lending market, but.
What we've what we've seen generally is LIBOR floors in our end of the market our.
Call. It 75 bps to 100 bps, depending on the.
The negotiation and it's dropped further on the syndicated side.
<unk> down to call. It 50 bps generally speaking.
I would say a little bit of pressure relative to historical kind of.
Seeking generally seeking and getting 1% for us.
Okay.
Thank you.
The one on <unk>.
On the asset side again.
Great American has been a great performer for you.
Paying a lot of the vendors is obviously widening that you now have that.
Let me see the investment in White Oak, which is the same people behind it.
Any color you can give us on how fast do you expect committed capital to that white vehicle to maybe ramp up too.
Two G ACP type levels or when that vehicle could stop paying dividends and I realize you are not in control of the dividends on that side.
Yes.
That's a good question Robert I think we are an investor in the White Hot funds just as we were in the Great American Fund.
I would I would have expected sort of deployment comparable to our deployment out of the great American fund too given it's the same team and the same strategy.
And.
If I had to sort of yes, I think that deployment to kind of fully.
Called deployment is probably about a year and a half to two years.
Got it.
Thanks Kim.
And then just flipping.
Ken.
On the liability side, congratulations on the new revolver.
Improved terms.
<unk>.
But most spreads although we can put wood on the unsecured component.
A third of your debt stack right now and I know a vaccine.
Before.
Sure.
Yes.
The two.
<unk> notes that you have currently.
Probably well above where you could borrow.
The institutional market today.
Is the two components.
All of them.
<unk> to take up unsecured above kind of the <unk>.
Has there been any contemplation on the 2020 please.
To maybe pay the make whole take them out.
Just replace them with something that might be.
The coupon that might be a little generous but substantially cheaper.
Hey, Robert this is Guillermo and I can I can take that question.
Youre correct and we obviously are very focused on our debt capital structure.
The secured lines, we have in place today, especially with the refinancing. We just mentioned had mentioned on the prepared remarks allow us to borrow very effectively so we feel very good about our weighted average cost to borrow which as we continue to kind of ramp the portfolio and utilize.
<unk> lines, a little more we expect our weighted average cost to kind of dip below 3%, which we feel good about.
Circling back to your question about unsecured.
Youre correct, especially those 2023 nodes.
We're keeping an eye on those we are able to prepay those without penalty in January of 2023, and so as we think about our capital structure planning.
For the next 12 months, that's probably the kind of the.
Kind of a PZ kind of near term objective that we are focused on.
Got it thank you.
Congratulations on a really good quarter.
Thank you.
Thank you once again and if you have a question. Please press Star then one.
And this does conclude the question and answer session of today's program I'd like to hand, the program back to Jason for any further remarks.
Okay. Thanks, Jonathan Thank you for your time and interest in C cap as always we appreciate it and we look forward to speaking with you next quarter.
Yeah.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
Okay.
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