Q4 2021 Crescent Capital BDC Inc Earnings Call
Good day, and thank you for standing by welcome to the fourth quarter and full year 2021 Crescent Capital BDC, Inc Earnings Conference call at.
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After the speaker's presentation, there will be a question and answer session.
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I'd now like to hand, the conference over to your host today, Dan Mcmahon had been Investor Relations. Please go ahead.
Good morning, and welcome to Crescent capital BDC Inc's fourth quarter and year ended December 31, 2021 earnings conference call.
Please note that Crescent capital BDC, Inc. May be referred to a C cap crescent BDC or the company throughout today's 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.
The 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 FCC 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's one method the company uses to measure its financial condition and results of operations.
A reconciliation of adjusted net investment income per share.
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 fourth quarter and year ended December 31, 2021 and 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.
K filed yesterday with the SEC.
As a reminder, this call's being recorded for replay purposes.
Speaking on today's call will be Jason Bro, Chief Executive Officer of C cap.
Their hard Lombard Chief financial officer of CECO.
With that I'd now like to turn it over to Jason.
Thank you Dan Good morning, everyone and thank you for joining our earnings call. Today. We appreciate your continued interest in <unk>.
I'll provide some fourth quarter and full year highlights.
View, our investing activity provide some color on our current portfolio and positioning and then turn it over to get hard to review our 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 financial results for the fourth quarter and full year.
We generated adjusted net investment income of 43 per share for the quarter.
And $1 89 per share for the full year.
Our financial results reflect the strongest quarterly and annual origination activity since our inception.
With $280 million of new investments for the fourth quarter and $647 million for the year.
Similar to the last three quarters, we accrued a capital gains based incentive fee expense related to changes in net realized and unrealized gains and losses.
This noncash expense was less than one cent per share for the quarter.
On a GAAP basis, our fourth quarter net investment income per share inclusive of the accrued capital gains based incentive fee expense was 42.
And $1 67 for the full year.
As a reminder.
Capital gains expense is only payable at the end of each fiscal year and based on our investment Advisory agreement.
And as of the fiscal year ended December 31, 2021, no capital gains incentive fees were payable.
Turning back to our results our net asset value per share increased six 2% for the year.
When you combine this NAV growth with our dividends paid during 2021, we.
We generated a 14, 7% total economic return for our stockholders for the 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 year with our largest portfolio since inception with nearly $1 3 billion of investments at fair value across 134 portfolio companies with an average investment size of less than 1% of the total portfolio.
Our investment portfolio consists primarily of senior secured first lien and unitranche loans collectively representing 85% of the portfolio at fair value as of year end.
And we remain well diversified across 18 industries and continue to lend almost exclusively to private equity backed companies with 99% of our debt portfolio and sponsor backed companies as of year end.
We believe our focus on market, leading companies with strong margins and high free cash flow generation and resilient industries has positioned our portfolio to avoid segments of the economy.
That are in our view more negatively impacted by recent inflation and supply chain issues.
As a result, we have seen last 12 months revenue and EBITDA growth in the majority of our portfolio companies across all the primary sectors that we invest it.
Yes.
For the fourth quarter 121 out of our 123 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 3% of total investment income for the year.
94% of our debt investment portfolio today is marked above 95 on the dollar.
And average mark of approximately 99.
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 increased.
Increased to 91.0% of the portfolio at fair value as compared to 89, 4% last quarter.
As of year end, we had investments in three portfolio companies on nonaccrual status.
Representing one 6% and one 2% of our total debt investments at cost and fair value respectively.
Okay.
Moving to our investment activity, please turn back to slide 15.
Focusing on the left hand side of the page we had our most active quarter to date with $280 million in gross deployment.
The vast majority or 89% of activity.
What's in senior secured first lien and Unitranche investments.
All told we closed on 17, new in 2014 follow on investments totaling 177 million and $47 million respectively.
With the remaining $56 million coming from revolver and delayed draw term loan activity.
All 17 of the new investments, where private equity backed loans with.
With LIBOR floors between 50, and 100 basis points.
<unk> between 175% and two 5% and.
And our weighted average spread of approximately 600 basis points.
In addition loan to value levels remain attractive averaging roughly 40% for these transactions.
The $280 million in gross deployment compares to $152 million in aggregate exits sales and repayments in the quarter.
It's also worth highlighting that <unk> total commitments for the 17 aforementioned new deals represented about 12% of the nearly $2 billion.
Check size committed to those new deals across Crescent highlight.
Highlighting the breadth of our platform.
On the right hand side of the page you will see that over the course of the year.
Our net investment activity has led to Unitranche first lien is becoming a more prominent percentage of our total portfolio.
This increase from 42% to 59% is by design as it allows us to offer even greater surety of execution to the sponsor community.
It enables us to enhance our yield opportunity while remaining at the top of the capital stack.
A few more updates before I turn it over to Gary Hart.
First in November we completed our first follow on public equity offerings since listing ultra.
Ultimately issuing $2 7 million shares inclusive of the green shoe for approximately $58 million in total proceeds.
Given the active deployment backdrop I previously highlighted.
We believed and continue to believe that it was prudent to gain additional investing capacity to further grow our portfolio over time.
Importantly, the offering has also enhanced our stocks liquidity.
With average daily trading volume improving meaningfully since the closing.
Allowing for a broader universe of investors.
We also believe that additional size and scale will generate opportunities for us to further optimize <unk> cost of capital over time.
And cost synergies are available via the ability to spread fixed operating expenses across a wider asset base.
As outlined at the time of announcement, our investment advisor continued its history of stockholder alignment via its supplemental payment to cover the discount to NAV and payment of the underwriter's fee.
Second we've begun the process of winding down CBD <unk> senior loan fund joint venture with Master land, which commenced operations in 2019.
The joint venture.
Which was invested in an approximately $300 million pool of first lien broadly syndicated loans has run its course and we currently expect to fully wind down the entity by the end of the summer.
Proceeds from the monetization activity will provide us with additional dry powder capital.
Which we expect to redeploy into directly originated higher spread crescent private credit opportunities.
Finally.
For the first quarter of 2022, our board declared a <unk> 41 per share quarterly cash dividend, which will be paid on April 15, 2022 to stockholders of record as of March 31 2022.
Additionally, the second in a series of four previously declared <unk> <unk> per share special cash dividends will be paid on March 15, 2022 to stockholders of record as of March four 2022.
As a reminder, the series 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.
With that I'll now turn it over to Gary hard to cover additional details on the quarter.
Sure.
Thanks, Jason and good morning, everyone.
Our adjusted net investment income per share of <unk> 43 for the fourth quarter of 2021 compares to <unk> 48 for the prior quarter and <unk> 47 for the fourth quarter of 2020.
Our GAAP earnings per share or net increase and net assets, resulting from operations for the fourth quarter of 2021.
44.
Which compares to <unk> 59 per share for the third quarter of 2021, and $1 22 per share for the fourth quarter of 2020.
Total investment income of $24 1 million for the fourth quarter compares to $25 5 million for the prior quarter.
The decrease primarily relates to lower levels of discount amortization in Q4 as a component of interest income when compared with the prior quarter.
We recognized $3 9 million of accelerated OID last quarter versus $1 $1 million this quarter in Q4.
Dividend income was also down approximately <unk>.
Zero point $5 million quarter over quarter due to a tax distribution from a portfolio company in Q3.
Importantly, interest income, excluding accelerated amortization, which represents recurring yield related revenue grew from $19 million in Q3 to $21 million for the fourth quarter.
At December 31, our stockholders' equity was $652 million.
Resulting in a net asset value per share of $21 12.
As compared to $596 million or $21 16 per share last quarter.
$560 million from $19 88 per share at December 31, 2020.
Okay.
The increase in our total net asset value during the fourth quarter was primarily driven by the equity offering that Jason discussed.
On a per share basis.
<unk> special dividend paid in December was the primary driver of the 0.2% NAV declined in Q4.
Net realized and unrealized gains on investments were relatively immaterial for Q4.
2021 was our most active year ever which helped drive our total portfolio at fair value at the end of the year to nearly $1 3 billion, an increase of 23% from the end of 2020.
This growth was fueled by $186 1 million in net deployment, coupled with approximately $37 million and net realized and unrealized gains in investments.
Turning to slide 16.
This graph summarizes the weighted average yield on income producing securities and the spread over LIBOR on our floating rate debt investments.
As of December 31, 2021, the weighted average yield on our income producing securities at amortized cost was seven 5%.
As compared to seven 6% in the prior quarter and 8% at December 31 2020.
Given that 98, 5% of our debt investments bear interest at a floating rate and have a weighted average LIBOR floor of approximately 85 basis points.
The rising interest rate environment provides an earnings tailwind for our business once we reach our average floors.
We expect that <unk> stockholders will be fairly well insulated against negative development in net interest income up to our average floors because of the existing incentive fee waiver that is focused on the preservation of the <unk> 41 per share dividend.
To give an illustrative example of the impact once we retail floors.
Assuming our balance sheet remains constant as of Q4 2021 for.
For the first 100 basis point increase in rates, we would expect an increase of approximately 15.
Annual net interest income after the impact of income based incentive fees.
Under the same approach a 200 basis point increase would result in approximately 34 per share of annual net interest income lift.
Now, let's shift to our capitalization and liquidity I'm on slide 19.
As of December 31, our debt to equity ratio was <unk> 98 times up from <unk> 94 times at September 30, as net investment activity during the quarter allowed us to deploy and lever up the proceeds of our November equity offering.
In October we entered into a new senior secured revolving credit facility with <unk>.
Upsizing by 100 million to $300 million as compared to the prior facility while simultaneously swapping out.
L plus 235 facility for a L plus 187, five facility and resetting the maturity from August 2024 to October 2026.
The refinancing coupled with a higher utilization on our revolving credit lines allowed us to lower the weighted average interest rate on total borrowings from 3% to 6% at the end of 2022.
To three 5% as of December 31, 2021.
We expect that the weighted average interest rate will decline further as we lever up to grow the investment portfolio.
As you can see on the right hand side of the slide we are well positioned for a rising rate environment with long dated maturities on our attractively priced for floating rate facilities.
Our first maturity is $50 million of unsecured notes maturing in July 2023, and which can be.
<unk> without penalty early in 2023.
Beyond that there are no remaining term maturities until 2026.
From a liquidity perspective as of yearend, we had $197 million of undrawn capacity subject to leverage borrowing base and other restrictions and.
And $24 million in cash and cash equivalents.
The expected proceeds from the wind down of our JV as Jason mentioned, we'll provide for some incremental liquidity.
Our board of directors declared a fourth quarter cash dividend of <unk> 41 per share, which is consistent with our regular quarterly dividend paid in the fourth quarter augmented by the second of four special cash dividends, Jason walk through.
And with that I'd like to turn it back to Jason for closing remarks.
Thanks, Gary Hart in closing, we believe 2021 was an excellent year for C cap capped off by record deployment in the fourth quarter.
The strong position of the company as reflected in our adjusted net investment income per share outpacing the dividend each quarter. This year.
And our declaration of a series of special dividends, resulting from our over earn.
Our credit performance remains strong.
We believe we have built a diverse and defensive portfolio of increasing scale.
And we continue to focus on investing in high quality sectors with a selective approach to financial sponsors and management teams.
We're constructive on the opportunity set ahead of US and are frankly excited at the prospect of return to a more normalized post COVID-19 environment and seeing many of you in person this year.
We would like to thank all of you for your confidence and continued support.
And with that operator, please open the line for questions.
If you'd like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telephone.
To withdraw your question press the pound key.
Our first question comes from Robert Dodd with Raymond James.
Hi, guys. So a few questions first on the SLS.
The wind down plan.
Looking at the <unk>.
Return on invested capital on the ex us.
Was underway.
Alright, so lower than that just straight length.
Two components would you expect to wind down to be accretive to earnings and then secondarily somewhat related.
Are there any plans so expect and should we have expectations that.
That would be a new loan fund.
Some points different part of maybe a slightly different strategy or is this just kind of.
End of <unk>.
That approach within the BDC.
Hi, Robert It's Jason Thank you for the question on the joint venture.
I think to your first question there.
I would say that the answer is yes.
To be accretive.
<unk> redeployed into the private credit opportunities that we originate here at Crescent relative to the exposure that was in the in the joint venture, which was primarily broadly syndicated first lien.
On your second point.
For your second question.
I would say at the moment.
I don't anticipate.
That's sort of a subsequent kind of unconsolidated joint venture.
At this point.
I appreciate that.
Sure.
Not a new fund at the BDC, but obviously the Crescent platform has recently raised very large.
A large private credit fund.
6 billion targeted at AUM four times the size of the previous when you've done that is that targeting the same.
Kind of asset.
Into the BDC or is it targeting.
<unk> segment of the market and could you give us any color on if that if it is talking to even say Bob Hau.
What.
Potential.
That could if any that could be on the BDC potentially.
Any more opportunities.
Increasing the number of names in the portfolio anything like that.
Yes, thanks, Robert Thank you for <unk>.
Calling that out.
We did raise some meaningful institutional pools of capital and what we call our crescent direct lending strategy, which is really our core strategy here at Crescent focused on what we call the lower middle market.
Those are companies that we define as roughly 10 to about 35% or $40 million of EBITDA.
It's a market that as you might suspect as highly fragmented from a sponsor coverage standpoint, given that we're calling on lots and lots of mid market sponsor for those opportunities, but it's a core craft the strategy thats been in place.
Really since about 2012.
The BDC with Exemptive relief to co invest across the platform.
Participates in opportunities that are sourced.
By all of our strategies, but.
Certainly crescent direct lending is it's a big feeder into the opportunity set that the BDC takes advantage of.
From a sizing standpoint.
I'd say I view this as a.
A big positive.
For the platform and for the prospects for the BDC.
We've seen tremendous <unk>.
Capital getting raised in the private markets, both on the private equity and the private credit side.
It's important to continue to grow and.
And have meaningful scale in the marketplace and be relevant in the marketplace, which which we believe that we are.
And while there has been certainly competition I would say the competition is more muted in the lower end of the middle market than in the upper end and Theres certainly less less.
Less competition from the syndicated markets as a result of that but we've clearly seen with all the capital getting raised.
<unk> share being taken away as well from the syndicated markets into the private market. So I think all in all we are very pleased and constructive on the fund raise and the future prospects for the BDC going forward.
Got it got it I appreciate that.
Couple more if I can on the.
And then on the call and Chegg.
I know you want to disclose much about private companies, but.
Some of it out in the past.
<unk>.
It was targeted to get acquired that fell through it sounds like it's back on is there is there any anything post quarter that you can you can tell us about what's going on there.
With that business.
Yes, thank you for asking Robert.
I can't really comment on that situation, specifically I will say that we did place that integra second lien on non accrual in the fourth quarter. It.
It is a small position for us it represents less than one half of 1% of fair value.
But at this point there is not much more that I can say specifically.
That name.
Okay.
Final one I promise.
I mean, you obviously you did execute a follow on in November .
There is more liquidity now, but the valuation.
Ben.
Impacted I mean, there's a lot of other moving parts go into valuations obviously.
So stock's now trading at a relatively meaningful discount to book.
Has the board discussed any any plans to to anything that can be done to maybe.
Add incremental value beyond just investing which always is a core competency, but it might seem kind of productive to ask given that you just raised equity but has has a buyback been considered even a modest one or anything like that.
Thanks, Robert we talk with the board regularly about all kinds of topics, including this and certainly the value of our stock price I think we.
We certainly view our stock prices is cheap relative to to.
Where we think it should be.
I would I can't I can't comment on any.
Any plans for a buyback program I will.
Recall that.
Sun life our parents.
<unk> implemented a buyback plan and there is some disclosure on that in the 10-K around shares owned as of as of year end, but.
But I would say that we're certainly in regular discussions with our board about those types of topics.
Okay. Appreciate it thank you.
Thank you Robert.
As a reminder, if you'd like to ask a question at this time that is star then one.
Again, ladies and gentlemen that is star then one to ask a question.
We have a question from the line of Derek Hewett with Bank of America.
Good morning, everyone could you remind me what your target leverage range is and then also will that change now that you're kind of collapsing that that joint venture.
Yes, Hi, Derek this is ger hard I can take that question our target leverage when we think about that more as a range then as a kind of a point estimate but it's.
111 times to about one four times.
We closed the year at two nine times Levered so were.
Relatively still under Levered relative to that target range in.
As to where we land in that range is I think a function of the kind of the macroeconomic backdrop the portfolio composition and by that I mean, we lean.
Senior secured.
Kind of a strong first lien focused and so I think looking at the portfolio today, we probably.
Wood.
<unk> comfortable it's kind of the higher end of the range versus the lower.
The second part of your question.
The additional liquidity that would be made available as that senior loan fund on lines would be redeployed with leverage into other opportunities and I don't think it changes the target leverage but certainly given that that is currently an unlevered investors investments.
As we redeploy redeploy the capital that it would be it would translate into its currently $40 million of committed capital on our balance sheet and that would become 40 plus times X.
Depending on the target leverage on top of that.
Okay, great. Thank you.
Thanks Derek.
I am showing no further questions in queue at this time I'd like to turn the call back to Jason Brown for closing remarks.
Okay. Thank you operator, thank you all for joining the call. We appreciate your continued interest in fee cap and your support and we look forward to speaking with you soon.
This concludes today's conference call. Thank you for participating you may now disconnect.
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