Q4 2022 Investcorp Credit Management BDC Inc Earnings Call
This call is being recorded.
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Welcome to the Investcorp credit management BDC conference call.
Your speakers for today's call are Mike Mauer, Chris Jansen and Rocco Delguercio.
Operator assistance is available at any time during this conference by pressing zero pounds.
A question and answer session will follow the presentation.
I would now like to turn the call over to your speakers. Please begin.
Thank you operator, and thank you for joining us on our fourth 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.
Today's call is being recorded and that this call is the property of the desktop credit management BDC.
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 I C. M. B D C dot com.
I would also 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.
Pain 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.
June quarter marks our fiscal year end this quarter.
And the 10 weeks since quarter end has seen significant volatility in the broader markets as the fed hike rates several times.
Both supply chain and inflationary pressures continue.
Interest rates rose well above our average floor levels and credit spreads widened in the broadly syndicated market going into the quarter and although spreads have moderated somewhat in the weeks ahead.
Spread widening in the middle market has been more moderate despite the impact to their credit spreads have had on the fair value of our debt investment the underlying operating performance across most of our portfolio continues to be strong.
The primary market saw an increase in activity in the June March June quarter.
Our pipeline remains robust and has been focused.
More on new L. B O's, we made three new investments and reinvested in one of our existing portfolio of companies.
None of which were covenant light and three of them, which were club financings. We continued to execute under our plan to co invest in equity positions with Investcorp North America private equity group with one new position this quarter.
We also saw several of our loans in our portfolio get refinanced.
Although the market has been active despite this volatility we haven't chased deals with unattractive structures.
Even where we are comfortable with the fundamental investment opportunity, we remain selective about the structures, we lend into and rigorous in our diligence.
We have generally seen loans with higher yields stronger covenant protections.
Protections and lower closing leverage multiples. This quarter, we were successful in deploying capital at an average yield of 10, 4%.
Our investment strategy has not wavered, and we continue to maintain our credit discipline.
Even in the face of the macro economic backdrop, we remain focused on investing in middle market companies with attractive free cash flow characteristics defensible market positions and strong management teams and sponsors.
Sector selection remains a key tool in our portfolio management decisions. We're focused on resilient end markets and are consciously avoiding adding exposure to sectors that are most vulnerable.
In periods of recessionary environments.
Chris will now walk through our investment activity during the June quarter and after quarter end.
After his discussion Rocco will go through our financial results I'll finish with commentary on our N a nonaccrual.
All investments our leverage the dividend and outlook for 2023 as always we'll end with Q&A with that I'll turn it over to Chris.
Thanks, Mike.
We invested in three new portfolio companies this quarter.
We fully realize our positions in three portfolio companies.
We also fully realize our position and then reinvest that and one existing portfolio company.
First we invested in the club financing for American nuts, which supported the refinancing of the company and the acquisition of DST Merchandisers.
American nuts provides procurement processing and packaging services.
Nuts seeds and dried fruits.
The acquisition of D. S. The merchandisers creates a fully vertically.
Vertically integrated business.
Our yield at cost is approximately 10, 7%.
We led the club financing aboard genius supporting its acquisition of J D C.
Org genius is the technology integrated staffing cut firm.
Our focus is on end to end freelance hiring.
We invested in both the first lien term loan and common equity.
Our yield on the term loan at cost is approximately nine 7%.
We made our third equity co investment alongside and best Corp's, North American private equity group.
Country consulting.
And our schedule of investments as victors C. C C aggregator L P.
Is it business advisory firm offering corporate advisory services to Fortune 500 companies.
Client Hirsch refinance its debt that's part of the conversion to and Aesop structure.
Our existing investment was fully realized with an IRR of approximately 12, 5%.
We invested in the new last out term loan, which had a yield at cost of approximately 11%.
Regarding our other realizations and new Jack's pro loans made in the first quarter 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 fully realize our position in Australia, which was acquired by D. C. S.
Our position was refinanced as part of that transaction.
Our fully realized IRR was approximately 23, 7%.
We opportunistically exited our position and momentum manufacturing group.
In favor of new opportunities that we originated this quarter.
Our fully realized IRR was approximately six 5%.
After quarter end, we invested in four new portfolio companies and had one realization in an existing portfolio company.
First we invested in Archer systems, which supported the LBO of the company by fortress.
We invested in the revolver term loan and common equity.
Archer as an outsource provider of administrative services focus on providing mass tort settlement services.
Our yield at cost is approximately nine 9%.
We invested in evergreen North American industrial services, a portfolio of company of the Sterling group.
We invested in the revolver and term loan.
Evergreen as a provider of industrial cleaning and related specialty cleaning services.
Our yield at cost is approximately nine 5%.
We also invested in the club financing a P V I Holdings, Inc.
To support the LBO of the company by Middle ground capital.
P V I holdings as a lead in flow control distributor focused on MRO applications and diverse end markets.
Our yield at cost is approximately nine 7%.
We also invested in the club financing for America L. L C.
To support the acquisition of the company by J M C.
America Quip is a designer and manufacturer of add on equipment for Oems and the construction waste lawn care and snow removal markets.
Our yield at cost is approximately 10, 9%.
Lastly, we fully realized our position atlantica.
As a company made a substantial acquisition and refinance its debt.
Our fully realized IRR was approximately 12, 5%.
Using the <unk> standard.
As of June 30, our largest industry concentration was professional services at a 11, 6%.
I'll buy it services at nine 3%.
Internet and direct marketing retail.
At 9.0%.
Household durables at seven 4%.
And trading company and distributors at six 7%.
Our portfolio of companies are in 20 kicks industries as of quarter end, including our equity and warrant positions.
As of June 30th we have 35 portfolio companies unchanged from March 31.
As of today, we have 38 portfolio companies.
I would now like to turn the call over to Rocco to discuss our financial results.
Thanks, Chris for the quarter ended June 30th 2022, our net investment income was $2 $5 million or <unk> 18 per share.
Fair value on our portfolio was $233 7 million compared to 242.0 million on March 31.
Our portfolio's net decrease from operations this quarter was approximately $4 1 million.
Our debt investments during the quarter at an average yield of 10, 4%.
While realizations and repayments during the quarter had an average yield of 12% and fully realized investments had an average IRR of 23, 7%.
All of this was distorted by the timing of a delayed draw before the repayment of the G. S operating which created an exceptionally high IRR, excluding GFS operating the IRR was 15, 3%.
The weighted average yield of our debt portfolio was 10%.
And an increase of 186 basis points from March 31.
Approximately 22, 9% of this change is a result of the increase in LIBOR Slashdot LIBOR sulfur.
As of June 30th our portfolio consisted of 35 portfolio companies 91, 9% of our investments were first lien and the remaining eight one is invested in equity warrants and other positions.
Yeah.
99, 6% of our debt portfolio was invested in floating rate instruments, and <unk>, 4% and fixed rate instruments.
The average floor on our debt investments was one point out 3%.
Our average portfolio investment was approximately was approximately $6 $7 million and our largest portfolio of company is fusion at $13 $2 million.
We had a gross leverage of 157 times and net leverage of 148 times at June 30th compared to $1 71, gross and $1 63, net respectively for the previous quarter.
As of June 30th we had six investments on nonaccrual, which included all three investments in Pgi two investments in 18, 88 and one in deluxe.
With respect to our liquidity as of June 30th we had $9 2 million in cash of which $6 6 million was restricted cash with $31 million of capacity under our revolving credit facility with capital one.
Additional information.
And the composition of our portfolio is included in our form 10, which we expect to file on Monday September 12, with that I'd like to return I'd like to turn the call back over to Mike.
Thank you Rocco.
First of all I'd like to address the decline in NAV This quarter, which was driven from a variety of factors, including the broad based market movement in credit spreads.
In a few specific portfolio of companies, including Technet, plus Careerbuilder and Pgi.
Approximately one third of the change in unrealized depreciation.
<unk> value of investments for the quarter is related to the markdown of detecting plus position, which was driven by inflationary headwinds into the auto sector and volatility in the public equity markets are evaluation is based on the fair value of the company using public Comparables, if we look at.
The trends in the stock price of the public comps that we use the significant decline from the quarter ended $3 31 to the quarter ended 630 has recovered with modest but broad based gains over the past few weeks.
Careerbuilder is underlying business has been in spirit experiencing challenges for some time for.
For confidentiality reasons I can't give details about company's performance.
That said the revolver matured in July and the term loan matures in less than one year quotes have declined during the quarter. Our mark is informed by all of these factors. However, we are optimistic that a constructive conclusion.
Is possible and we believe it's short maturity provides a catalyst for M&A or capital markets activity Careerbuilder as Mark accounted for just over 10% of the change in unrealized depreciation in value of investments for the quarter.
We experienced a significant write down in our position in Pgi this quarter.
Efforts to Manav ties the company's assets have thus far been short of our expectation.
We no longer expect to recover value on our term loan or second lien positions, we do expect a recovery on our revolver position.
Although that may take some time to fully realized and we expect significant impairment on that position.
Pgi is responsible for a further 14% change in unrealized depreciation.
In value over that.
The investment.
Yeah.
The majority of our portfolio is marked using the yield method.
Our fair value takes a new account movement in broad market spreads as well as company specific factors, both positive and negative over one third of our NAV decline. This quarter is attributable to the marked down.
Okay.
Physicians marked down using the yield method since June 30th spreads have tightened fairly significantly making us optimistic about a reversal of some of these mark to market effects.
Our gross leverage this quarter was 157.
<unk>.
Above our guidance of one and a quarter to one five times in 2014 basis points lower compared to last quarter. Our net leverage was 148 times.
In the target range.
As mentioned last quarter, we expect to see our gross and net leverage generally converge as of September 2nd our gross and net leverage were 163 times.
As we have previously stated the adviser will waive the portion of our management fee associated with base management fees over one times leverage.
We covered our June quarterly dividend with NII.
Through the calendar year to date in fiscal year end June 30. The company has earned its dividend is expected to earn its dividend through the next quarter ending September 30.
On August 25th our board of Directors declared a distribution for the quarter ended September 32022 of <unk> 15 per share payable on October 14th to shareholders of record as of September 23.
We believe the dividend level is sustainable and stable and that it represents an attractive yield given the market price of <unk> stock looking.
Looking ahead, we remain highly focused on our risk management.
Although we cannot predict the timing of the fed's actions. We believe the portfolio is well positioned to benefit from any increase in short term rates and defensively positioned to navigate broader macro and geopolitical challenges we believe.
We will continue to maintain our credit discipline and invest primarily in first lien floating rate loans and a diverse set of industries. We remain focused on finding investment opportunities with attractive pricing structural protections.
And structural protections in order to achieve our goals to preserve capital and maintain a stable dividend.
Yes.
Sure.
Thank you.
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. If you would like to state. A question. Please press seven pound on your phone now and you will be placed in the queue in the order received our press seven pound at any time to remove yourself from the queue. Please.
Please listen for your name to be announced and be prepared to ask your question when prompted.
You are now ready to begin.
Yeah.
Our first question comes from Robert Dodd.
With Raymond James Robert Go ahead. Please.
Hi, guys.
In Europe had remarks.
The underlying operating performance of most of our portfolio companies remained strong overseas. Some some not the case I mean you.
Outlined some specific ones obviously children.
Et cetera.
Although any pauses because if I if I do the math.
It looks like you said just over a third was mark to market, which employs two thirds wasn't.
That implies.
Something more than Technip, plus career builder and pgi.
Accounting.
So it could be credit Mark Downs can you give as it is.
Is that just the small pieces of 18 88 or is there.
Now that business.
Obviously, we don't have the 10-K sarcoptidae the marks of amendment, but instead of another business or anything like that where there are incremental performance and clear.
Got it concerns.
Robert.
The answer the short answer is no there's not credit concerns away from the ones you've highlighted I think if you look at Careerbuilder and <unk>.
<unk> plus those two account for I think over half of the write.
Right down and then a third of it being market spreads that you are between 80, and 90% and the balance I think are small movements, but Chris Yeah, Hey, Robert Pgi is an additional 15% of that so those three names basically our two third.
Got it got it.
Just on all on that I mean, with Batesville team, we'd go up inflation still running high obviously.
Sounds like that was having an impact.
I mean, if we look forward well then the numbers you have already seen which obviously a backwards looking in terms of the performance of this well.
Are there any areas, where you're concerned about the high levels of inflation.
Eating away at interest coverage or anything like that also.
Also in the Perpetuals, Archie you talked about staying away from certain industries right. So obviously demo.
Do you have.
Any exposure there.
Wait about.
Yeah.
LIBOR sofa or whatever it goes to 400 basis points, which is close to where the forward curves.
Indicating at the moment.
Yeah, I think a couple of things Robert I think.
The last.
Three or four quarters in particular, we've been really focused on.
Lower leverage companies.
When I look at the bulk of our companies they are.
Two plus three plus times levered.
You know as they tended to be on the smaller side, we wanted to put it another level of conservatism in there and on all of our management calls were asking about.
More labor input costs and things of that nature. In addition to the diligence we're doing upfront, that's really where we see a lot of.
Lot of the cost pressures with a lot of our.
A lot of our investments and today.
You know I don't think any management teams are really bullish on labor costs, but.
By and large they have a under control and B.
Taken other cost saving initiatives out of their cost of goods sold to a lot for that.
And Robert it's Mike.
I'd just add a couple of things that on the ones that Chris highlighted that we've been focused around lower leverage is two other key things we've been focused around loan to value. It's typically been at the high and low 50%.
It's been significant equity and junior capital in principally equity below its an all new deals.
<unk>.
Covenant heavy not covenant light and the other thing we've been focused on is the quality of the EBITDA to your point around cash availability and we've done a lot of sensitivities around LIBOR increases beyond where we are as well as.
Sensitivities to EBITDA deterioration and we feel very good about the portfolio.
Got it I appreciate that color.
If I if I can.
One more on the dividend obviously, you said you expect to win.
Type a quarter and I realize it's.
Hard to project out long term.
With the fed.
Doing whatever they're going to do but just conceptually catch wound the dividend without a V where it is right now hopefully it would be bounce back where it is right now you need to.
And income, let's turn on equity before realized gains and losses are unrealized as well.
<unk>.
Do you believe that the business at this size.
We have some management fee structure, the cost of debt et cetera.
The overhead costs.
Can the business sustained.
Okay.
In the Fas.
Income Malawi Hello.
<unk> one <unk>.
As it relates to me that's what you need to earn the dividend do you believe that's feasible with the business.
Yes.
The short answer we looked at it yet.
Got it I appreciate it.
Thank you very much Robert.
Yeah.
Our next question comes from Chris Nolan with Ladenburg Thalmann. Chris Go ahead, please hi, I'm given the delay in the K can you tell us what the percentage of the.
The portfolio the non accrual investments were on a cost basis and fair value.
Okay.
Alright.
What is it.
As of June 30, the non accruals.
Based upon our fair value or 1.8%.
Approximately $2 $5 million fair value.
And cost basis.
Do not have that I haven't followed it I have to get back we'll get back with its Rocco I'll I'll have to get back on the.
Number is up just so.
Non accruals have not changed from quarter to quarter.
They are the exact same not so the names had not changed the amounts have actually gone down quarter over quarter. So that.
Nonaccrual fair market value was three four in March and is now $2 five.
And then I guess in terms of your operating leverage.
Taking it all in and understanding to go to Roberts point earlier about the dividend you're operating at a very high leverage at a time when the economy can really weakened in your credit quality.
Erode quickly.
Hmm.
What's your plan in terms of your debt.
The equity ratio going forward for the second half of the calendar year.
Yes.
I think we were over $1 seven at a point earlier.
December quarter March.
And it came down from there.
June we were at net of $1 481.
157 gross we're around one six now that is knowing that we've got some maturities and repayments coming in we're going to continue to try to target in this 125 to one five range now we made straddle back and forth.
But we want to stay away from where we were earlier in the year.
And that 107% range, Chris Okay, and can you sustain the dividend at a 125 leverage ratio or would you have to be higher than that.
In the range of the 125 to one five yes.
Okay. Thank you.
Yes.
Okay.
Thank you very much thank you our.
Thank you very much. Our next question comes from Paul Johnson with <unk>.
Yeah, Yeah. Good afternoon, guys. Thanks for taking my question I only have one.
Just wondering if we can get kind of your expectations around the portfolio yield for the portfolio.
Obviously with rates going higher bdcs are going to benefit from that mainly floating rate.
Assets in there but.
We've seen kind of a trend, but the euro yield differential coming down with higher yielding investments.
Getting repaid or exited do you have any kind of expectations in terms of the benefit you might expect for yield in the portfolio kind of going forward with the with higher rates or do you kind of expect you know for the most part to kind of maintain relatively what.
What you sort of have today give or take some some benefit from EQT.
Let me answer that and maybe some detail.
As we watched LIBOR and so for go up we've had contracts that keep rolling off and resetting all of those resets are causing an average.
Average to increase June has not seen the peak that will continue over the short to medium term. That's number one number two is that spreads while they are they're widening not tightening which is in my experience over 25 years.
That won't continue for the high quality borrowers, where you keep seeing the base rate go up you'll see a little bit of contraction on spread but we're actually seeing that widened a bit right now and we're continuing to see.
First lien and first lien or first lien stretch, but first lien loans have significant equity.
Ponant in new deals.
I'd say that if you go back two or three quarters. The average yield was probably around $848 50 on the portfolio that has increased new deals. We're looking at on the low side or nine to nine five.
And I'd say the core of what we're looking at is over 10% on new deals.
That's an all in yield including that so for where it is today as well as the spread and assuming a OID of 2%. So long way of saying if you look at our portfolio today I think there is some increased.
<unk> I wouldn't say it's significant.
By definition, a significant would be over 100 basis points on average, but I do think that the directionally is up not down from where it is today.
I appreciate that that's great details or are all my questions for today.
Thank you.
Thank you very much Paul.
And as a reminder, if you have any questions. Please press seven pounds.
Yes.
We have no further questions.
Thank you very much we appreciate everyone's time.
Okay.
This concludes today's conference call. Thank you everyone for attending.
Okay.