Q1 2022 Crescent Capital BDC Inc Earnings Call
Thank you for standing by and welcome to the Q1 2022 classic capital BDC.
Earnings Conference call at this time, all participants are in listen only mode.
The speaker's presentation there'll be a question and answer session to ask a question at that time. Please press Star then one when you touch tone telephone.
As a reminder, today's conference call is being recorded I would now turn the call to your host Mr. Dan and Matt Sir you may begin.
Good morning, and welcome to Crescent capital BDC Inc's first quarter ended March 31, 2022 earnings conference call.
Please note that Crescent capital BDC, Inc. May be referred to as C cap Crescent EDC or the company throughout the call.
Before we begin I will start with some important reminders comments made over the course of this conference call and webcast may contain forward looking statements and are subject to risks.
Uncertainties, the company's actual results could differ materially from those expressed in such forward looking statements for any reason.
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 SEC regulation G such.
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.
Can be found in the accompanying slide presentation for this call.
In addition, a reconciliation of this measure it may also be found in our earnings release.
Yesterday after the market closed the company issued its earnings press release for the first quarter ended March 31, 2022, and 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 of Sika, and Gerhard 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 C cap.
I'll provide some first quarter highlights review, 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 you'll see a summary of our results.
We reported strong first quarter financial results with adjusted net investment income of 42 cents per share.
Similar to the last four 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 <unk> <unk> per share for the quarter.
On a GAAP basis, our first quarter net investment income per share inclusive of the accrued capital gains based incentive fee expense.
39 cents.
Our net asset value per share reached its highest level since <unk> inception, and in the quarter at $21.18.
Representing approximately 5% year over year growth.
When you combine this nap growth with cumulative dividends paid over the past 12 months.
We generated a 13, 2% total economic return for our shareholders.
Let's turn to slides 13, and 14 of the presentation.
Which provide a snapshot of the current portfolio.
We ended the quarter with our largest portfolio since inception with nearly $1 3 billion of investments at fair value across 130 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 first lien loans.
<unk>, representing 86% of the portfolio at fair value.
And we remain well diversified across 18 industries and continue to lend almost exclusively through private equity backed companies.
With 98% of our debt portfolio and sponsor backed companies as of quarter 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, we invest in.
For the first quarter 128 out of our 130 debt investment portfolio companies, representing over 98% of total debt investments at fair value.
Full scheduled principal and interest payments.
92% of our debt investment portfolio today is marked above 95 cents on the dollar with an 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 two one was unchanged as compared to year end.
Our percentage of risk rated one or two investments.
Hi, its ratings of our portfolio companies can receive remains healthy at 90% of the portfolio at fair value.
As of quarter end, we had investments in three portfolio companies on nonaccrual status.
Representing one 4% and one 1% of our total debt investments at cost and fair value, respectively, as compared to one 6% at one 2% at year end.
Moving to our investment activity, please turn back to slide 15.
After a record finish to 2021.
Market transaction activity was as we expected slower to start the year given the uncertainty created by the geopolitical backdrop and more aggressive signaling from the federal reserve.
As a result gross deployment in the first quarter was $60 million.
As you can see on the left hand side of the page.
All of which was in senior secured first lien and Unitranche investments.
All told we closed on two new and five follow on investments totaling $32 million and 5 million respectively.
With the remaining $23 million coming from revolver and delayed draw term loan activity.
Both of the new investments were private equity backed loans with floors of 75 and 100 basis points.
<unk> of 175%.
And two 5% and a weighted average spread of approximately 575 basis points.
In addition loan to value levels remain attractive averaging roughly 42% for the transactions.
$60 million in gross deployment compares to approximately $50 million in aggregate exits sales and repayments in the quarter.
It's also worth highlighting that <unk> total commitment for the two aforementioned new deals represented about 12% of the over $300 million total check size committed across crested accounts to those deals.
During periods of heightened volatility like we saw in the first quarter.
<unk> fast sourcing capabilities and deep sponsor relationships forged over our 30 plus year operating history.
Serve as key competitive advantages and allow us to be highly selective on transactions.
Given our focus on preservation of capital and recognition of the asymmetric downside risk in credit investing.
We will continue to pass on opportunities that don't meet our rigorous standards on terms.
We generally view credit selection is binary regardless of pricing.
Shifting to the right hand side of the page, you'll see that over the past several quarters. Our net investment activity has led to Unitranche first lien is becoming a more prominent percentage of our total portfolio.
This increase from 45% a year ago to 61% today.
It's by design as it allows us to offer even greater surety of execution to the sponsor community.
And enables us to enhance our yield opportunity while remaining at the top of the capital stack.
We expect this trend will continue.
Particularly given the wind down of CBD <unk> senior loan fund, our joint venture that I touched on last quarter.
Proceeds from the monetization activity will provide us with additional dry powder.
Which we expect to redeploy into directly originated higher spread crescent private credit.
<unk> opportunities.
To date, we've sold roughly 90% of the approximately $300 million pool of first lien broadly syndicated loans within the joint venture.
Upon monetizing the remaining 10% and formally winding down the entity, which we still believe is on track for the end of this summer.
We will receive our share of the proceeds which were marked at $39 4 million as of quarter end.
A few more items before I turn it over to Gary.
First I'd like to highlight the effects that we believe are tightening monetary cycle would have on us.
As of quarter end 98, 8% of our debt investments were floating rate.
The weighted average floor of 83 basis points.
Which compares to our 71% floating rate liability structure with no floors.
We believe this positions us well to have our net interest income benefit from rising rates.
As of quarter end, holding all else equal and after considering the impact of income based incentive fees, we calculated that a 100 basis point increase in short term rates could increase our annual earnings by approximately <unk> 19 per share.
While a 200 basis point increase could increase our annual earnings by approximately 38 per share.
In terms of the impact of rising rates on our debt investments. We believe we have constructed a highly diversified and defensive portfolio and sitting here today credit metrics remained strong.
Our debt investments ended the quarter with weighted average interest coverage of 274 times.
Holding all else equal short term base rates would need to rise roughly 300 basis points before aggregate interest coverage would dip below two times.
I'd also note that the breadth of our team and our reputation as a trusted partner have historically allowed us to maintain active recurring dialogues with the sponsors and management teams of our portfolio companies.
Over the course of Crescent history with.
Developed action plans alongside both constituents to navigate through periods of heightened volatility.
I believe it's another one of our competitive advantages.
Finally for the second quarter of 2022, our board declared a <unk> 41 per share quarterly cash dividend.
Which will be paid on July 15, 2022 to stockholders of record as of June 32022.
Additionally, the third in a series of four previously declared <unk> <unk> per share special cash dividends will be paid on June 15, 2022 to stockholders of record as of June three 2022.
So with that I will turn the call over to get hard to cover some more details on the first quarter.
Sure.
Thanks, Jason and good morning, everyone.
Our adjusted net investment income per share <unk> 42 for the first quarter of 2022 was in line with the 43 for the prior quarter.
Total investment income of $26 4 million for the first quarter compares to $24 1 million for the prior quarter.
Interest income, excluding one time accelerated amortization, which represents the more recurring component of our revenues.
<unk> grew from $20 8 million in Q4, $21 7 million for the first quarter and was a key driver of quarter over quarter total investment income growth.
We benefited from a full quarter of interest income generation from the investments originated during a record fourth quarter, which was largely back weighted in November and December .
Additionally, we had a sizable monetization from our investment in battery solutions.
And the previously unapproved pick income recognized at exit.
Dividend income increased to $2 3 million for the first quarter of 2022 from $1 8 million in the prior quarter.
The increase was due to a dividend distribution from our equity investments in Southern Technical Institute for STI provider of educational and training services and a variety of medical and technical areas.
Our GAAP earnings per share or net increase and net assets, resulting from operations for the first quarter of 2022 was 52.
Which compares to <unk> 44 per share for the prior quarter.
Our GAAP earnings included net realized and unrealized gains on investments 13 cents per share offset by our second.
Five cents per share special dividend.
On March 31.
Stockholders' equity was $654 million.
Results in a net record net asset value per share of $21 18.
As compared to $652 million or $21 12 per share last quarter and.
$570 million or $20 24 per share at March 31, 2021.
Despite a lower deployment backdrop for the first quarter as Jason discussed.
Our total investment portfolio at fair value of $1 3 billion as of March 31, 2022.
It was the largest it's ever been and represents a 21, 8% year over year increase.
This growth was primarily fueled by $185 6 million in net deployments, coupled with net realized and unrealized gains on investments.
Turning to slide 16.
Rough summarizes the weighted average yield on income producing securities and spread over LIBOR of our floating rate debt investments.
As of March 31, 2022, the weighted average yield on our income producing securities at amortized cost was seven 5% unchanged from the prior quarter.
As Jason mentioned, we remain well positioned to benefit from a rising rate environment.
Following the Feds 50 basis point rate hike announced last Wednesday, we are not comfortably passed the interest rate floors for certain of our investments.
As such we expect to see our weighted average yield increase next quarter.
Now, let's shift to our capitalization and liquidity on slide 19.
As of March 31, our debt to equity ratio was <unk> 97 times virtually flat.
With not 0.98 times at year end in March we amended our senior secured revolving credit facility with SBC.
Upsizing by $50 million to $350 million.
The weighted average stated interest rate on our total borrowings was 346% as of quarter end.
We expect that near term all deployment activity will be financed by our attractively priced secured facilities.
As you can see on the right hand side of the slide we have a low level of debt maturities over the next two years with no maturities in 2022 and $150 million maturity from our most expensive unsecured notes in July 2023.
Which can be redeemed at par plus accrued interest on January 32023 without penalty.
After that there are no remaining term maturities until 2026.
From a liquidity perspective as of quarter end, we had $249 million of Undrawn capacity.
Capacity subject to leverage borrowing base and other restrictions and $18 million in cash.
Cash and cash equivalents.
As expected proceeds from the wind down of our JV as Jason mentioned, we will provide for some incremental liquidity.
On May <unk>, our board of directors declared a second quarterly cash dividend of <unk> 41 per share, which is consistent with the regular <unk>.
Quarterly dividend paid in prior quarters old meant that by the third 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've entered an operating environment, which has changed meaningfully over the past few months.
Inflation rising rates and geopolitical factors have begun to create headwinds for the economy that may persist for some time.
However, similar to C caps positioning before heading into the uncertainty of COVID-19 during the first quarter of 2020.
We continue to be invested in high quality strong free cash flow generating companies in primarily non cyclical industries.
On the liability side, we've continued to enhance our liquidity profile and made further improvements this quarter with the upsize of our SMB CLEC facility.
Given our modest leverage and ample liquidity profile.
We feel well situated to lean into attractive opportunities created by market dislocation.
While of course, maintaining the same rigorous underwriting standards, we have always implemented.
We'd like to thank all of you for your confidence and your continued support.
And with that operator, please open the line for questions.
Thank you again, ladies and gentlemen, if you'd like to ask a question. Please press Star then one on your Touchtone telephone again to ask a question. Please press Star then one.
One moment please.
Our first question comes from Matt Tjaden of Raymond James Your line is open.
Hey, guys. Good morning, I. Appreciate you taking my questions, Jason I wanted to start off a little high level and ask what's your outlook for the private credit default environment at year end 'twenty two versus maybe six months ago.
Hey, Hey, Matt Thanks, Thanks for joining and thanks for the question.
I think it's probably it's.
It's early to predict something like that there are certainly counter.
Counterbalancing factors at play here with respect to how we think about the default environment today, it's still quite low we think our portfolio remains quite healthy.
We talked about in the prepared remarks I think.
The discipline that we try to exercise on the private side in terms of.
Underwriting too meaningful equity cushions and strong.
Interest and leverage metrics.
Puts our portfolio in a good position here today.
As we look forward.
There is certainly.
Some uncertainty in the marketplace on the macro side.
We will see what happens with that.
The feds ability to tame inflation, and whether we will see a softer landing or a harder landing that might destroy more demand.
So I think it's.
It's early to tell how how things are going to play out, but what I would say here today is that we feel quite good about the health of the portfolio and we're constructive on the new deal environment.
Without compromising any of our underwriting discipline.
Fair enough, if I could maybe follow up a little bit on that given the kind of uncertain economic outlook anything you can tell us on expectations for net fundings for the remainder of 2022.
It's another good question, Matt I think.
If you look back historically over the last few years <unk> net deployment is roughly $40 million to $50 million a quarter probably on average.
As we also in the first quarter.
Deployment is in.
And activity is definitely lighter.
Seasonally but but in addition to that.
I would say we saw we saw sort of a slowdown from a busy Q4.
With deals getting closed at the last week of the year as well.
Early stages of omicron.
Peaking sort of around year end.
Which probably pushed out some deal launches and office openings as we look forward there is a tremendous amount of private equity.
Dry powder that that still needs to get deployed and what I would say is that the pipeline of activity that we've seen has picked up and it is picking up.
In a healthy way and has done so for the last several weeks.
We feel good about the opportunities that we're seeing here today, what I would say is.
Some of the fringe year opportunities maybe.
<unk> in terms of.
Industry or.
Adjustments to cash flow.
Might not get done in an environment like this but that's not really our focus our focus is really on the on the higher quality deals and I think our view is that we will still continue to see those here over the course of.
Of the next couple of quarters.
The other thing I mentioned is that sorry, Matt the other thing I'd mentioned is that.
With rising.
Base rates.
And certainly spreads on the rise at least in the liquid markets.
<unk> refinancing activity should be slowing that's our view so from a net standpoint.
You might you might sort of factor that in as well.
Got it fair enough last one for me just more housekeeping one than anything the.
The dividend income line $2 3 million any sense, you can give us on how much of that we should interpret as nonrecurring and then as a follow up to that the Sof, obviously didn't pay a dividend this quarter should we be expecting one maybe in <unk> from the the resolution.
Yes.
I can take that question. Thank you.
We would generally expect to have some level of income that is not the kind of core cash pay interest just given the level of diversification of the portfolio.
That could be in the form of dividends accelerated OID pick or fee income.
While we continue that there'll be some level of continuing income from these sources.
Obviously, the core portfolio has increased 30 meaningfully by about 22% year over year. So the recurring cash income behind.
The additional fee and dividend income is also increasing.
Circling back to your question on the on the.
The joint venture dividend.
You are correct.
I think as we mentioned.
Prior remarks that structure is unwinding and so they will be a liquidating distribution that may take the form of <unk>.
Multiple distributions as that portfolio fully winds down we repay the debt. So you correctly I think that.
Depending on timing the timing of the wind down there that could be a second quarter third quarter event.
And then.
Certainly we expect some level of continuing.
Dividend income from our equity positions.
<unk> in particular, which you called out has performed well to date and continue.
Continues to be a healthy portfolio companies.
Got it that's it for me I appreciate the time.
Thank you again, ladies and gentlemen, if you'd like to ask a question. Please press Star then one Touchtone telephone. Our next question comes from Derek Hewett Bank of America. Your line is open.
Good morning, everyone in terms of the potential earnings accretion disclosed.
Given rising rates in the prepared remarks did that figure include the incentive fee as well or do we need to make that adjustment.
Hey, Derek this is Gil.
Yes.
Correct that in the prepared remarks that includes the impact of the incentive fee and there is also a disclosure in the 10-Q, obviously when the MD&A section, which does not include that net impact but okay.
Okay Jason's prepared remarks included the impact from the fee.
Okay, Great and then just given rising rates.
How far would rates need to rise before your portfolio companies' cash flow, we start to get a little bit stretched and maybe could you talk about it in terms of maybe the run rate for the base case for.
Top line growth and then maybe under a static revenue.
Case as well.
Derek.
Good question.
We have run.
Lots of sensitivities around the very questions that you're asking I know that we pointed to interest coverage on the prepared remarks I don't have the specific.
Metrics by portfolio company here with me at the moment, but that's something that we can follow up on.
Okay, great. Thank you.
Thank you.
Thank you.
I'm showing no further questions at this time I'd like to turn the call back over to Jason <unk> for any closing remarks.
Okay. Thanks, operator, thank you everyone for joining our call here today for the first quarter results. We appreciate your continued interest and support and we look forward to speaking with you soon.
Thank you ladies and gentlemen, this does conclude today's conference. Thank you all participating you may now disconnect have a great day.
Okay.
Okay.
Okay.
Sure.
Yes.
Okay.
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