Q3 2022 Investcorp Credit Management BDC Inc Earnings Call
Okay.
Okay.
Welcome to them that core credit management CVC scheduled earnings release for third quarter ended March 31 2022.
Your speakers for today's call are Mike Mauer, Chris Jansen and Rocco Delguercio operator assistance is available in Hungary. This conference by pressing Star Zero, a question and answer session will follow the presentation.
Now I'll turn the call over to our speakers you may begin.
Thank you operator, and thank you for joining us on our third 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 our customary disclaimer regarding information and forward looking statements Rocco.
Thanks, Mike.
I would like to remind everyone that today's call is being recorded and that this call is the property of the desktop credit management BDC.
Unauthorized broadcast of this call in any form is strictly prohibited.
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 to obtain copies of our latest SEC filings. Please visit our Investor Relations page on our website at this time I would like to turn the call back over to our chairman and CEO Michael Mauer.
Thank you Rocco I'd like to start by updating invest corp's ownership stake in <unk>.
On Thursday may five investcorp entered into a stock purchase agreement to purchase 2.165 million shares at March 31 NAV.
From Cyrus Cyrus was an original seed capital investor in the predecessor, private fund and the anchor Investor in ICM Cyrus.
<unk> has been invested in <unk> for over 10 years between the predator predecessor fund.
And the existing BDC.
This position has created significant overhang in the stock as Cyrus was an unnatural long term holder with in excess of 820.
20% position in this course intention in buying the stock with multiple.
This demonstrates our continued commitment to CMV.
And conviction in the underlying value of the investments at <unk>.
It also reduces the overhang on the stock and allows all shareholders to see this commitment and benefit from the reduced overhang.
This past quarter, we saw the broader market faced significant volatility and a slowdown in the number of transactions in the loan market driven by geopolitical events.
The majority of transactions, we saw we're either <unk> or refinancings.
We have typically found that.
A highly competitive market environment, our best opportunities come from companies, we already learned to as these deals tend to have better structures.
As we continue to see strong competition for deals, we see pressure coming from both tighter pricing and higher closing multiples.
However.
We remain focused on credit quality and our selective about the structures, we are willing to lend into.
And thorough in our due diligence process.
This quarter, we were successful in deploying our capital at an average yield of eight 5%.
We made two new investments and invested in three of our existing portfolio company.
None of which were covenant light.
And our sponsor friendly market environment.
We also continued to execute under the plan to co invest in equity positions with Investcorp North America private equity group.
With more momentum in the pipeline under that plan.
We continue to focus on the portfolio rotation that we began earlier this year, while maintaining our credit discipline. This.
This past quarter, we opportunistically sold out of positions in the portfolio in favor of new opportunities with higher yields and better loan structures our.
Our investment activity during the quarter continues to be balanced between club loans and middle market lightly syndicated loans.
We have also further reduced our exposure to energy equipment and services, which represents five 4% of the portfolio compared to a year ago at 10, 1%.
Additionally, we continue to make progress with legacy credit issues in the portfolio, we completed the restructuring of fusion connect in January .
Speak more about that.
Later in the call.
Chris will now walk you through our investment activity during the March quarter and after quarter end. After his discussion Rocco will go through our financial results I'll finish with commentary on the restructuring of fusion connect and our <unk>.
Non accrual investments.
Our leverage the dividend and our outlook for the rest of 2022 and as always we'll end with Q&A.
With that I'll turn it over to Chris.
Thanks, Mike <unk>.
We invested in two new portfolio companies this quarter as well as three existing portfolio companies.
We fully realize our positions in five portfolio companies and also refinance our position in <unk> grow.
And fully realize our position in the fusion exit loan.
We invested in the first lien loan of IHS products, which supported the LBO by pace line equity partners.
IHS products is a leading producer of hard surface and solid wood flooring in North America.
Our yield at cost is approximately seven 4%.
We made our second equity co investment alongside Investcorp, North American private equity group.
<unk> truck parts LLC.
Listed in our schedule of investments as Pegasus aggregator.
One of the largest suppliers of new aftermarket parts for medium and heavy duty vehicles.
In terms of investments and current portfolio companies, our existing loans. The jacks pro was refinanced in January as.
As part of a larger transaction, which back several acquisitions.
Our yield at cost on <unk> funded revolver is approximately seven 5%.
And term loan and delayed draws approximately seven 4%.
We also made an additional investment in the equity of PEC, the plus to support an asset purchase of a molded products facility sold by a while industries.
As part of Fusion's restructuring process, we were joint lead arranger on the new first lien term loan.
Has the yield at cost of approximately nine 6%.
We also participated in the company's new series, a preferred equity, which has a coupon of 12, 5% and.
And the yield at cost of approximately 13, 1%.
Mike will provide additional detail about fusion's restructuring later in the call.
Turning now to our realizations are loans suggests pro was repaid in full as the company refinanced in January .
Our fully realized IRR was approximately 10, 4%.
Our second realization was pro Frac services Pro Frac completed the acquisition of Fts International in March and we were refinanced out of our position.
Our fully realized IRR was approximately nine 9%.
We also received repayment in full for fusions exit loan.
As a physician was refinanced through the broader restructuring of the company.
Our fully realized IRR was approximately 14, 1%.
We exited several investments opportunistically this quarter in.
In order to reduce our leverage and rotate into higher yielding credits.
We fully realize our position in <unk> with an IRR of approximately nine 7%.
<unk> Tec with an IRR of approximately eight 7%.
Flow control with an IRR of approximately eight 1%.
And galaxy with an IRR of approximately seven 2%.
After quarter end, we invested in one new portfolio company, one existing portfolio company and had two realizations and existing portfolio companies.
First the new <unk> pro loans made in the first quarter, we were repaid in April as the company merged with Lawson products.
Our fully realized IRR on the term loan was approximately 19, 7%.
Although we are pleased with the return on the revolver and the delayed draw the IRR is not meaningful given the short holding period.
We invested in the clubs financing for American nuts, which supported the refinancing of the company and the acquisition of DSD Merchandisers.
American nuts provides procurement processing and packaging services.
CS and dry fruits the.
The acquisition of DSD merchandisers creates a fully vertically integrated business.
Our yield at cost is approximately nine 9%.
Lastly, we fully realize our physician inclined harsh as the company simultaneously refinance its loans and converted to in Aesop.
Our fully realized IRR was approximately 11, 8%.
We also invested in the new transaction our yield at cost is approximately nine 2%.
Using the <unk> standard as of March 31, our largest industry concentration was trading companies and distributors.
At nine 5%.
Followed by services.
Services at nine 2%.
Internet and direct marketing retail at 9.0%.
Professional services at seven 8%.
And household durables at seven 1%.
Yes.
Our portfolio of companies are in 20 gigs industries as of quarter end, including our equity and warrant positions.
As of March 31, we had 35 portfolio companies a decrease of three from December 31.
I would now like to turn the call over to Rocco to discuss our financial results.
Thanks, Chris.
For the quarter ended March 31, 2022, our net investment income was $1 8 million or <unk> 12 per share.
The fair value of our portfolio was 242 million compared to $269 4 million on December 31.
Our portfolio's net decrease from operations this quarter was approximately $63000.
Our investments in that.
Our investments in that purchased during the quarter had an average yield of eight 5%, while realizations and repayments during the quarter had an average yield of 859% and fully realized investments had an average IRR of nine 5% 6%.
The weighted average yield of our debt portfolio was eight 4% a decrease of two basis points on December 31.
As of March 31, our portfolio consisted of 35 portfolio companies.
91, eight of our investments were first lien the remaining eight two has invested in equity why 10 other physicians.
91, 3% of our portfolio was invested in floating rate instruments, and <unk>, 5% and fixed rate investments.
The average floor on our debt investments was one 4%.
Our average portfolio company investment was approximately $6 9 million and our largest portfolio company is fusion at $13 4 million.
We had a gross leverage of 171 times and net leverage of 163 times as of March 31, compared to $1 74, gross and 1.39 net respectively from the previous quarter.
Our net leverage adjusted for open sales and open purchases was 141 times.
As of March 31, compared to $1 six one times for the previous quarter.
As of March 31, we had six investments on nonaccrual, which included all three investments in Pgi as well as deluxe and true investment in 18 88.
With respect to our liquidity as of March 31, we had $7 6 million in cash of which $4 7 million was restricted cash.
With $7 3 million as capacity under our revolving credit facility with capital one additional information.
Information regarding the composition of our portfolio is included in our Form 10-Q, which was filed yesterday.
With that I'd like to turn the call back over to Mike.
<unk>.
Thank you Rocco.
We are proud of the progress that we've made repositioning the portfolio and we continue to remain selective in our new investments, we continue to focus on adding club deals.
There were originated through the team's relationships as well as add on investments in refinancings of existing portfolio companies. We remain focused on the credit quality of our deals included and comprehensive evaluation of loan credit and.
And documentation and downside protection.
Fusion completed its restructuring in January we were joint lead Arrangers on the new first lien loan we refinanced fusions exit moment. We're also a backstop party to the company's new money series a preferred equity.
By virtue of our backstop commitment as well as investment in the series a preferred equity we received warrants with a fair value of $636000.
The take back loan, which was the bulk of the company's debt with expertise in the series B equity.
And we.
We will convert to common shares upon the receipt of regulatory approvals.
Which we anticipate will occur later this year. We also received out of the money warrants.
The restructuring significantly de Levered fusion's balance sheet and positions the company to execute on its growth initiatives.
Our gross leverage this quarter was 171 times above our guidance of one and a quarter to one five times and three basis points lower than last quarter. Our net leverage was 163 times.
Due to the timing of investments and repayments our leverage remained above the targeted range as mentioned last quarter, we expect to see our gross and net leverage generally converge.
We've closed around the high end of our target range as of May 2nd our gross leverage was 148 and our net leverage was four five times.
At the high end of our target range.
As we have previously stated the adviser will waive the portion of our management fee associated with base management fees over one turn of leverage.
We did not cover our March quarterly dividend with NII.
Through this.
Fiscal year and to date. The company has earned its dividend and is expected to earn its dividend during the fiscal year ending June 32022.
Our board of directors declared a distribution for the quarter ended March 31, 2020 to <unk> 15 per share payable on July eight to shareholders of record as of June 17.
We believe the dividend level is stable and sustainable and that it represents an attractive yield given the market price of <unk> stock.
As mentioned earlier, we continue to remain selective on our new investments and our portfolio.
Repositioning strategy.
We are focused on improving industry concentration in diversification and managing our average position size.
All of which help manage risk.
Our investment strategy has not wavered and we are focused on investing in primarily first lien loans preserving capital and maintaining a stable dividend, while creating upside to the NAV.
Through our existing and new equity investments.
As we enter the last quarter of our fiscal year, we expect to continue executing on our strategy.
The diversity and stability of our portfolio.
That concludes.
Foods, 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.
License plate a question. Please press star one on your phone now and it was placed into the queue in order to receive our first kind of any time to remove yourself from the queue.
Once again to ask a question. Please press star one on your phone now.
Our first question comes from Paul Johnson with <unk>.
Your line is open.
Yes. Good afternoon, guys. Thanks for taking my question.
The first question is just kind of about.
The market and the investment pipeline.
That you are looking to build I guess.
With just kind of the advent of the unit tranche in the growth of that product in.
Direct lenders and what they have to offer the market does that pushed out in any way I guess kind of the more traditional club deals and affected any sort of Cindy.
Syndicated like deals that you guys participate in.
Thanks, Paul It's Mike.
Before I answer your question Rocco just hit me that I misspoke.
Earlier in the call.
The distribution.
The board of directors declared as for the June 30 quarter ended March 31, I just wanted to correct that.
And coming back to your.
Question, we are seeing actually a reasonable pipeline of deals to look at.
The <unk>.
Emergence of.
Unit tranche that you are talking about and I'll use some names generically but.
Yes.
Blackstone KKR Apollo these large.
Multibillion dollar <unk>.
Direct lending vehicles, they tend to focus on a lot larger deals then we focus on.
The deals were focused on are typically on the low side, 40% to $60 million tranche up to a couple of hundred million dollars.
My experience in running into and talking to a lot of former colleagues at some of those places.
Our that probably around the upper end of that range. I. Just gave is where they get interested so deals that are 100 $150 million, it's almost hard for them to do them. When you look at their allocation policy across all of the vehicles and so they are very focused on.
The middle market that is probably 50 to 200 million of EBIT Doc.
And so those tranches by definition are $200 million to $500 million. It really is not affecting us at this point and we are still seeing many club deals.
And.
Less of the lightly syndicated from the regional banks, but.
Very good flow from partners in the club Arena.
Got that and got it appreciate that.
My other question just on the debt market for the portfolio for the for the D. C. This quarter.
A little bit of.
Right down in the quarter of one $9 million or so is that related to more mark to market spread widening or is there any sort of credit deterioration specific credit deterioration.
Baked into that.
Yeah, Hey, Paul It's Chris Jansen.
It's all due to a little bit of spread widening from.
So first beginning in the first quarter from $12 31 to $3 31.
Anecdotally spreads are coming back in.
From a performance perspective.
The numbers, we've seen in the fourth quarter and early in the first quarter of this year I've been surprised.
Rising we healthy.
So we haven't really seen any pockets of.
Resistance or downward pressure from an operating viewpoint, it's just been either spread widening or in the case of techno plus which is our equity large equity position for us. It's just been the market comps have gone down by almost two full turns.
Nothing to do with the operating performance.
<unk>, plus or really anything within the portfolio.
Got it appreciate that.
I also have a question on the dividend level I know that you mentioned in your prepared remarks at the board and the company believes it sustainable level, where it is today.
Just given the gaps from NII this quarter.
The dividend I'm, just hoping you can maybe talk about the levers that you have to pull in order to get NII back within that dividend range and.
Anything that I guess would help improve that I mean is it rate is it.
Refinancing.
Anything any sort of color you can have on that would be great sure Paul.
I am glad you asked that because it probably a little more color around.
We came in at 12 <unk> the dividend 15 that gap of three two thirds of that gap is the excise tax that is a onetime in the quarter. So.
If it weren't for the excise tax we would've been at 14.
We are in the leverage while the headline continues up in this one seven this quarter was we had a bunch of sales that hadn't settled and things like that we would have been below and in the targeted range. If the receivables had been cash from a net perspective.
That cash we had we would have paid down the capital one facility so running the portfolio.
Around the level that we are gets us to that 15.
Raising rising rate environment.
We'll help all things being equal that having been said I think people, who including yourself who've followed us for a while watched us over the last four to six years move from what was a 60% first lien to today at 90% first lien, but given the inflation in the.
Outlook I think we would expect to stay in this 80% to 90% first lien.
At least.
Range because.
We've got rising rates, but we also have rising risk around the inflation and companies.
Got it appreciate that and my last question if I can.
Just on the.
The the large holder selling out are partially selling out this quarter.
Cyrus partners I'm, just curious if you have.
Any details as far as was that a partner that was contributing I guess assets in any way or was there any sort of relationship there prior to the sale.
And their position and I also ask him.
If you are in.
In dialogue with the M&A any way or any of your other large shareholders.
Yes, potentially further exits of those large insiders.
So let me start with the last part I'm not.
Aware of any.
Near term exit by any existing shareholder today, Cyrus or anyone else.
I can't speak for what their plans are.
From a liquidity from a appreciation et cetera, but I'm not aware of any I do talk to our.
Our shareholders.
<unk> has been a great partner for a very long time.
Dating back to the predecessor fund, it's well over 10 years.
That Cyrus was involved in this from seeding the original private fund.
And there has been a view for a while that they wanted to get some liquidity. So this was creating overhang.
It was an opportunity for us to show conviction around the value and to relieve some of that overhang.
Got it I appreciate it.
All I have today, thanks for taking my questions. Thank you Paul.
Okay.
As a reminder, if you do have a question. Please press star one on your Touchtone keypad.
And our next question comes from Robert Dodd from Raymond James.
Your line is open.
Hi, guys.
Following up on that last part.
Next question.
The goal and perhaps you can give some color on that.
<unk>.
Managed to kind of give investors comfort that belief.
NAV Wouldnt it have made more sense for the manage it.
To tender for $15 million of stocks for all investors.
Rather than take out.
One particular investor because obviously, if you believe in NAV.
Given the opportunities for everybody just south of the manager rather than constantly.
So one in Boston.
Yes, Robert Thank you for the follow up.
If that were the only objective I would agree.
Having a 25% shareholder who had been in for 10 years.
<unk> had another objective alongside in parallel and we're trying to solve for several <unk>.
Items at the same time, so that was the road we chose.
Okay understood.
Then in your prepared remarks, Mike you mentioned.
A comment about making progress on some of the non accruals, obviously that meant that the names at the same but can you give us any more color on.
What progress has been made obviously you've talked on prior quarters is a long term process multiyear.
In many cases, but can you give us an update yet.
And there is a lot of needs, we rotated out of and maybe.
It's a great point that on our next call. We should just highlight over the last 12 to 18 months, how we have actually rotated in and give you some granularity around that but a couple of names.
That we have spent time around ill, let Chris talk and these are all still work in progress, but lots of momentum on bringing unit advisors, bringing in management.
Shifting strategies technical flaws, we <unk>.
The debt, we went into the equity with Jordan, who was a third party coming into the situation putting fresh cash in.
Theres been small tag on acquisitions made there's been facility shutdown as a new CEO in.
It's actually performing quite well the comps are weak because of what's going on in the auto industry globally, but the company is performing quite well and we feel very very good about that future.
Fusion New management is installed there.
There is a lot of activity going on looking at whether or not.
Small acquisitions that need to round out the.
The product suite in order to make it an attractive strategic alternative for others or whether or not there are some businesses that did not make sense and those are being addressed with new management.
And we recapitalize that to reduce the debt and put it into preferred equity. So thats. Another major one when you look at it ill, let Chris talk to Pgi.
Yes.
<unk>.
The new owner and there has been doing.
A great job at actually managing the business and.
Preserving whatever value is there.
It's hard to be too optimistic on that being a large increase from where we are right now, but we feel rock solid about the valuation we have on it now.
We are looking to that to that for that to increase a bit but not.
Not make up close to anywhere the losses. Unfortunately.
Okay.
Thank you.
And Robert I, just appreciate all the questions and Paul also around when we knew that when investcorp did the purchase it would ask questions and I just want to reiterate that set the investcorp level, we know they own the manager, but it's not the manager and it's not the BDC.
100% understood.
Last one if I can.
On the dividend.
You said you expect to earn the dividend for the fiscal year, just to clarify is that before or after tax on the.
The dividend, we'd see excise tax payments.
Asking that.
Hey, Paul its Rocco, yes, with the excise tax payments.
Got it thank you.
Thank you and.
And we have a question from Christopher Nolan from Ladenburg Thalmann.
Your line is open.
Yes, hi.
Most of my questions been asked on 888 excuse me if you've answered this.
It seems like.
You have a nonaccrual pik loan, but then you have an accruing cash loan.
And I'm, just trying to get a clarification around that.
Yes, its priority.
The first priority is expected to be able to pay the interest and the principal there the non accruing pic.
Is where we have a question right now as we go through our evaluations on whether or not that will be realized and we will continue to evaluate that on an ongoing basis.
Great Thats it from me thank you.
Okay.
Thank you we have no further questions in queue at this time.
Thank you everyone. We appreciate the time and look forward to talking after the next quarter. Thank you.
This concludes today's conference call. Thank you for attending.
The host has ended this call goodbye.