Q1 2022 Investcorp Credit Management BDC Inc Earnings Call
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Okay.
Yeah.
Investcorp credit management BDC, Inc.
The earnings release, our first quarter ended September 32021.
Your speakers for today's call are Mike Mauer, Chris Jansen and Rocco Delguercio.
Operator assistance is available anytime during this conference by pressing Star zero.
A question and answer session will follow the presentation.
I would like to now turn the call over to your speakers. Please begin.
Yeah.
Thank you operator, this is Mike Mauer and I'd like to thank all of you for joining us on our first quarter call today I'm joined by Chris Jansen My co Chief investment Officer, and Rocco Delguercio our CFO.
Before we begin Rocco will give you our customary disclaimer regarding information and forward looking statements Rocco. Thanks.
Thanks, Mike.
I would like to remind everyone that today's call is being recorded and that this call is the property of Investcorp credit management BDC Annie.
Any 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 our website at ICM.
D C dot com.
I'd 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 to obtain.
Copies of our latest SEC filings. Please visit our Investor Relations page on our web site at this time I would like to.
At this time I'd like to turn the call back over to our chairman and CEO Michael Mauer. Thanks.
Thanks Rocco.
September is the first quarter of our fiscal year.
As we look out from here, we are optimistic that June 2021 will mark the low point of our in App.
We saw an increase in the marks of many of our physicians and increase in the average yield of the <unk>.
Portfolio and an average IRR of over 10% on our realizations. We recognize that there has been more volatility in our portfolio than we or you would like the team is working hard to continue to find good direct lending opportunities to reduce sector concentrations and diverse.
Supply the name count further.
We added two new portfolio companies this quarter and made additional investments in the three other portfolio companies.
After quarter end, we invested in two additional portfolio companies and made one incremental loan to an existing investment.
We have found that in a highly competitive environment some of our best opportunities come from companies, we already know <unk> lend to.
These deals also tend to have better structures.
Typical of one to two years ago, when we made our initial investments.
Refinancing activity continues to be a major theme in the near term, we expect to see refinancings of three of our investments and we expect to take part in the new financings for two of those portfolio companies is always a challenge to maintain price and structure in a highly competitive market environment.
And when we are able to express a preference.
Is to give a bit on the yield in exchange for covenants and better protection.
For our capital last quarter, we had significant markdowns specifically on 18 88 in Pgi I'll discuss those two investments towards the end of today's call dramatically one of our goals is to stabilize our net asset value.
This quarter our March we're net positive and we had a single material negative mark in fusion connect feedback.
No.
I'll discuss that situation later as well other investments, which have exhibited volatility in the past were stable or positive this quarter, including four L. Bio plant pet complex and zero talent.
We continue to gradually increase the number of industries, we invest in and to maintain or increase the number of portfolio companies with the goal of improving the stability of the portfolio Chris.
Chris will now walk through our investment activity during the September quarter and after quarter end Rocco will then discuss our financial results I will finish with some commentary on our investments on non accrual or leverage the dividend and our outlook for the balance of the year.
As always we'll end with Q&A with that I'll turn it over to Chris.
Thanks, Mike.
Vested in two new portfolio companies this quarter and three existing portfolio companies.
We had two full realizations as well.
Since our last conference call was so recent much of what I'm about to cover it was discussed on our call in September as well.
We invested in the first lien loan to agro fresh food Sciences company, whose products prolong the useful life of fruits are.
Our yield at cost is approximately seven 3%.
We invested in a club loan to easy way a portfolio company of insight equity.
Easy way as a designer and manufacturer of cushions covers umbrellas and other accessories for the outdoor furniture market.
Our yield at cost is approximately eight 5%.
Turning to our existing portfolio companies, we invested in an incremental term loan and delayed draw facility for Empire office.
Our yield at cost on this incremental investment is approximately eight 9%.
We also invested in incremental loan to Golden Hippo, which have repaid a significant amount of debt through.
To facilitate the purchase of additional equity by the Aesop.
Our yield at cost is approximately eight 6%.
We also made an additional investment in technical losses equity as part of strategic acquisition of navigate which is expected to be highly accretive and complementary to the existing business.
Turning to our realizations are loan to infrastructure and energy alternatives are IEA was repaid.
Our realized IRR was 11, 8%.
We were also repaid on our investment in high period as the company refinanced its first and second lien loans in the broadly syndicated market.
Our fully realized IRR was approximately eight 3%.
After quarter end, we made two new portfolio company investments made one incremental investment in an existing loan and had one full realization.
We invested in the first lien loan of laser away a portfolio of companies a company of Ares management.
Laser away as a leading chain of laser hair removal and skincare boutiques, our yield at cost is approximately seven 1%.
We also invested in the first lien loan of momentum manufacturing group to backed the LBO of the company by one equity partners.
Momentum provides metal machining wellbeing bending and finishing services for diverse end markets.
Our yield at cost is approximately six 9%.
We also made a small incremental investment in depth pros first lien term loan to support an acquisition.
Yes.
Our loan to zero chaos or workforce logic was repaid in fall as the company was acquired by Pro Unlimited.
Our fully realized IRR was approximately 11, 2%.
Using the Kik standard as of September 30, our largest industry concentration was professional services at 10, 8%.
Followed by energy equipment and services at eight 3%.
Commercial services and supplies at seven 3%.
<unk> and packaging of five 8%.
And trading companies and distributors at five 6%.
Our portfolio companies are in 26 gets industries as of quarter end.
Our equity and warrant positions.
As of September 30, we had 36 portfolio companies unchanged from June 30.
I would now like to turn the call over to Rocco to discuss our financial results.
Thanks, Chris.
For the quarter ended September 32021 hour.
Our net investment income was $2 $5 million or <unk> 18 per share.
The fair value of our portfolio was $245 3 million compared to $245 9 million on June 30.
Our portfolio's net increase from operations this quarter was approximately $3 $3 million.
Our investments in new and new debt during the quarter had an average yield of eight 5% while wheel realizations and repayments during the quarter had an average yield of eight 7% and the fully realized investments.
Average IRR of 10, 4%.
The weighted average yield on our debt portfolio was eight 2% an increase of eight basis points from June 30.
As of September 30, our portfolio consisted of 36 portfolio companies.
92, 8% of our investments our investments were first lien two 8% of our investments were second lien and the remaining four 4% as investing equity warrant 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 investment was one 5%.
Our average portfolio of company investment was approximately $6 8 million and our largest portfolio company investment was Empire office at $12 9 million.
Yeah.
We had a close leverage.
163 times and net leverage of 147 times as of September 30, compared to one 7% <unk> growth and 158, respectively for the previous quarter.
As of September 30, we had five investments on nonaccrual, which include all three investments in Pgi.
88 term loan b as well as deluxe and one investment on possible for fusion take backlog.
With respect to our liquidity as of September 30, we had $16 3 million in cash of which $7 7 million was restricted cash as well as 20 million capacity under our revolving credit facility with UBS and $115 million under our capital one facility, which will be utilized over the next few weeks to.
Retire the UBS term loan and revolver.
Additional information regarding the composition of our portfolio include is included in our Form 10-Q, which was filed yesterday with that I'd like to turn the call back over to Mike.
Thanks Rocco.
As we discussed last quarter, we extended our financing.
Past and lowered our cost of borrowing we secured a new credit facility with capital, one which will replace borrowings with UBS this quarter.
Between the capital one facility and the 2026 nodes, we feel very comfortable about our leverage capacity.
Our guidance on leverage remains a target of one and a quarter to one five times.
We've been working to reduce our leverage over several quarters, bringing it down from one an artificially high level of $1 96 in March to 163 at September quarter end.
There will always be fluctuations due to the timing of investments and repayments, but we expect to continue to see our leverage trend downward.
As we committed to do we waived a portion of our management fee associated with base management fees over one times leverage.
Last quarter I discussed the decline in our book value. This was driven by several of our investments on non accrual which included 88 <unk>.
Pgi and to take back loan for fusion, which is on partial accrual.
<unk> hundred 88 balance sheet restructuring discussions continue we still expect that the term loan b will be <unk>, leaving us significant upside opportunity as companies performance recovers with no expected downside from our current Mark.
Restructuring is expected to be completed this quarter.
Pgi remains on nonaccrual.
Serious the former sponsor sold their interest in the company to resi for a nominal amount.
Lenders remain in forbearance as operational turnaround work is underway.
To aid in that effort a portion of the first lien term loan was converted into a super priority revolving facility.
Our view of the fair value of our total investment in Pgi did not change this quarter.
But that value is now allocated across an additional tranche the revolving facility can be repaid in re borrowed like a standard revolver.
<unk> fusions.
Our take back loan was marked down last quarter and again this quarter. The first out loan remains market par and we are not concerned about value through debt tranche for confidentiality reasons I can't go into much detail.
About fusion at this time, but we are closely monitoring credit and are in regular touch with management and our fellow lenders.
At this stage, we think that 18 88 pgi infusion.
Limited ability to cause further negative volatility in our NAV.
We see upside potential in our equity investments as well as in our loans marked below par.
In the current quarter. There was also there will also be from the repayment of the Bureau kiosks.
A recovery.
Recovery.
Which was marked at 85 at September 30.
We covered our September quarterly dividend with NII looking at our portfolio on a run rate basis, we expect to cover the dividend in December as well and to have fully covered the calendar year, our disciplined investment approach and appropriate capital resources leave us well positioned.
To cover the dividend with NII going forward.
Our board of directors declared a distribution for the quarter ended December 31, 2021 of <unk> 15 per share payable on January four 2022 to shareholders of record as of December 10.
We believe the dividend level, it should be stable and sustainable and that it represents an attractive yield given the market price.
Of <unk> stock.
So far this quarter I am sorry, so far this calendar year, we have successfully invested in nine new portfolio companies. Despite a very competitive environment for originations and we have done so without compromising our principles. Our pipeline is focused on club deals where we find better.
Structure protections pricing and covenants.
We also expect to find opportunities for incremental investments in existing portfolio companies. We will continue to manage the portfolio with a goal of consistent income generation and preservation of shareholder capital.
That concludes our prepared remarks, operator, please open the line for Q&A.
Ladies and gentlemen at this time, we will conduct a question and answer session.
I would like to ask a question. Please press star one on your phone now and you will be placed in the queue in the order received.
How old anytime to remove yourself from the queue. Please looking for your name to be announced and be prepared to ask your question. When prompted once again, if you would like to ask a question. Please press star one on your phone now.
And our first question comes from Robert Dodd from Raymond James. Please go ahead Robert.
Hi, guys and congratulations on the quarter I've got a.
Couple of questions first kind of going down the P&L.
On the dividend income.
Yes.
Kind of a one time dividend recap or something like that I mean, that's pretty sizable.
Especially in context of what the size of your overall equity book, which is not big so it makes sense I mean is it sustainable.
Sustainable and can you give us any color on the soul.
This quarter.
Yes, as far as one time income other fees, there was probably a little less than a 100000.
In the current quarter.
And then there were that was in the other fees and nonrecurring there was probably a little over 200000.
And so when we looked at.
The forecast for the dividend.
We're very comfortable that we should continue to cover it this quarter and next quarter.
Sorry, I meant the dividend income to you about the dividend to shareholders that 296000.
And yet in this quarter.
Okay.
I'm, sorry, Okay, Im going to look at Rockville, and while he's looking that up.
Hello.
Bob is talking about tech plus dividend. The one time, yes that is a one time fee, yes, <unk> I'm, sorry, Robert I didn't understand that the tech plus fee Thats paid a dividend of the equity portion of it paid a dividend I apologize I didn't get that.
So yes, we I mean, when we filled through that out we do still easily cover at the current dividend level without a material change in the portfolio.
Understood on that.
And you gave Ken.
On the fee waiver, obviously, waiving waiving management fees over seven.
75 basis points on over 100 tena.
Leverage should go.
Do you think it's reasonable for investors to Sue.
Expect that to be continued long term or is that something that is being evaluated on a quarter to quarter basis or should we factor that in as kind of a long term base plan.
Let me answer that two ways. One is there is no plan to change that so from the way you factored in it is something that is revisited it on a quarter to quarter basis with the board, but there is no plan to read to revisit what we're doing at this point.
Got it.
Sure.
On the interest expense.
Yes.
You've done a lot of work.
With the new Volvo et cetera et cetera.
We look at that.
The new structure say next quarter or however.
How much do you think.
The new.
Instructions in total will say in quarterly interest expense versus say that the one.
The 186 this quarter under one nine last quarter.
Alright, So let me put it together this way maybe Robert maybe I can say that our current credit facility is at $3 55, plus LIBOR and our new one is at $2 15, plus LIBOR.
And then Theres also I'm, sorry, 35, 35, I'm, sorry, $2 35, plus LIBOR, so that UBS credit facility will roll off on December six.
And that credit facilities $1 15.
The first is if you look at what we have now will ubs's, one or two plus 120.
Got it got it.
Yes, Robert is one more thing I'd add to Steve's, we're all looking at each other here is that under the current structure because UBS is a term loan we've been carrying minimum $10 million to $20 million of cash.
Cash and paying the full interest under the term loan to have that under the new capital. One we've got more flexibility. So that if we have excess cash we will pay it down and we will not be paying on borrowed funds there.
Got it got it I appreciate that okay.
Just slightly.
I appreciate the color.
Pgi fusion et cetera.
888 restructuring to be completed this this this quarter.
Sure.
And I realized you can't say anything about fusion, but on pgi.
Is there anything.
I realize you're not in control.
Anything any color you could give us on kind of.
A reasonable.
<unk> to kind of expect.
I'm not sure I think that we're all patient I think it was a big plus to bring RFS ion.
Okay.
And is it going to be six months to a year I would say no.
I think that it could be two.
Two years, plus or minus and if you ask me my my bias would be plus unless.
And this is the big plus wildcard someone looks at it strategically and comes in but we've got I think a good management team.
And the way.
Third with Rsi, we've got real upside as they realize more value over time.
Got it yeah, Robert Justin Thank you.
Chris Robert other other lenders have used rsi before and past performance is not guarantee of future results.
Perm is but.
They had surprisingly good results to be all in all seriousness agenda too.
They had a surprisingly good over performance on the couple of deals that rsi manage for them.
With the complexity of this business.
It fit really fit what rsi strengths are.
Mike said.
We're optimistic but we don't want we're optimistic long term and we have not built in that optimism upside into our valuation.
We've done well.
Thank you Doug.
Yeah, Yeah, yeah, Yeah. Appreciate it thank you.
Our next question comes from Paul Johnson from <unk>. Please go ahead Paul.
Hey, good morning, guys. Thanks for taking my questions I.
Go ahead sort of a high level question for you guys.
I don't know if there is necessarily a right or wrong answer here, but I'd be curious to hear from you.
How do you balance out I guess first I should say with the goal of obviously achieving greater diversification in the portfolio. How do you guys balance the idea of taking positions.
New investments new companies along side, obviously, the opportunity to invest in existing businesses in your portfolio.
I'd just be curious if you had any preference for one or the other or just how you balance that out.
Yes. Thanks, Paul This is Chris it's really a case by case basis.
And I hate to be.
Noncommittal, but yes, something like.
Credit like Golden Hippo, which significantly repaid the first lien debt we're in when they come back to.
Reload the facility.
For the Aesop to buy more shares back from the three original founder is that that is.
As close to a no brainer.
I've ever encountered.
We are mindful of.
How the how we manage the portfolio in the past and we do.
Make every effort to keep our.
Average hold levels down below the double digits.
So sometimes we are mindful of it.
But there is a comfort with.
Deals are management teams were invested with that of a run the company on a leverage state better longer and be paid that down.
It will tend to be a little bit higher if I've tried to answer your question now and I apologize.
It's a little higher hurdle for a new deal when we're looking at an older deal, where we have a manageable position and are ready to us manageable is.
$7 million or less where we made top up for two or three more.
Sure. Okay, I appreciate that and we ended up but hopefully give you some flavor for how we looked at it.
Yes, I understand it's complicated in any deal.
By deal basis is probably the best way to say it.
My other question was.
For the advisor I'm just curious.
Does the advisor or in any sort of partnership along with.
ICM in any way do you guys manage any other assets outside of the BDC or are you in the process of raising any additional capital outside of the BDC.
So there is two parts to that which are number one.
<unk> had been pre COVID-19 talking about raising a private fund we are back in those discussions.
That should all.
Progress during 2022 I'm not sure if the first close will be in the first half or second half thats the target too.
Close on a new FERC closed on a new private fund during 2022.
But I think <unk>.
Coincidental with that not separate from it but coincident with it and it will probably overlap some.
I think now its a week and a half ago.
Investcorp had an announcement that they were supplying the capital for an acquisition of a insurance company shell that owns 44 licenses throughout the United States.
They have so think about the.
Analogy would be a theme during.
During ramp up so there is a new insurance company investcorp.
Has gone through the process of identifying hiring.
<unk> CIO, we've got the shell they're capitalizing it.
That will.
Start to rate premiums during 2022, and it will hopefully create additional assets for.
US to manage along with the opportunity to to raise a private fund.
So there is a platform that is building around it.
Okay great.
Great. Thanks for that that's very good color and.
I appreciate that.
And last just one quick question, but on your leverage target ratio.
Was that.
Is that on a gross basis or net basis.
So.
So it was I did it both ways. The 163 was growth the $1 47 with net Paul and the target of $1 25 to $1 50 is a gross number.
And we.
We would expect to.
Based upon.
Great example, is we said that we have we know that there are a few that are supposed to repay.
In anticipation of repaying, we're trying to make sure that we deploy now we have a repayment get delayed and we have deployed it would be a little bit higher until the repayment comes in but being.
Being in that one.
<unk> hundred $25 150 is the target and Paul just to follow up Mike said earlier, if you think about the way our credit facility as we just sit on cash were in the new credit facility.
Net and gross would be the same because that would pay down the credits until I need to borrow on it.
If you kind of look at it that way too and by December one we will be fully into the new facility and out of the UBS facility.
Okay got it so gross basis on the target targeted range. That's what I was looking for I. Appreciate it guys. Thanks for taking my questions. Thank you.
Once again, if you would like to ask a question. Please press star one on your phone now.
And gentlemen at this time there appears to be no further questions.
Thank you very much.
This concludes today's conference call. Thank you for attending.
The host has ended this call good.