Q4 2022 Crescent Capital BDC Inc Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the Q4 2022 Kristen capital.
<unk>, Inc earnings conference call at.
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Following the presentation, we will conduct a question and answer session.
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This call is being recorded on Thursday February 23 2023.
I would now like to turn the conference over to Dan Mcmahon. Please go ahead.
Good morning, and welcome to Crescent capital BDC Inc's fourth quarter and year ended December 31, 2022 earnings Conference call. Please.
Please note that Crescent capital BDC, Inc. May be referred to as C cap Crescent BDC or the company throughout the 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 for market information is.
There 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.
Adjusted net investment income.
For sure.
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.
Reconciliation of adjusted net investment income per share to 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.
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Yesterday after the market closed the company issued its earnings press release for the fourth quarter and year ended December 31, 2022, and posted a presentation to the IR 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 is being recorded for replay purposes speaking on today's call will be <unk>, President and Chief Executive Officer, Jason Brown, Chief Financial Officer, Gary <unk>, Lombard and managing director Henry Chung 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. We appreciate your continued interest in C cap.
I'll provide some fourth quarter and full year highlights touch.
Touch on our current portfolio and positioning and then turn it over to Henri to review our recent activity in more detail.
Gerhard will then review our financial performance during the fourth quarter. So let's begin.
Please turn to slide six where youll see a summary of our results.
Adjusted net investment income increased 17% to <unk> 49 per share from <unk> 42 per share for the quarter ended September 32022.
This increase was driven primarily by rising base rates and higher spreads.
Total investment income again reached its highest level since inception and recurring yield related investment income continues to grow in both absolute dollars and as a percentage of our total revenue.
Which Gary will provide more color on.
On a GAAP basis fourth quarter net investment income per share was <unk> 52.
The difference relates to a noncash reversal of our capital gains based incentive fees on net realized and unrealized capital appreciation.
As of yearend. This GAAP expense accrual had been fully reversed.
Our net asset value per share ended the year at $19 83.
Down one 6% as compared to the prior quarter.
The decline relates primarily to unrealized losses, we took to reflect wider credit spreads in the market as volatility.
Volatility within the leveraged finance and equity markets continued during the fourth quarter.
Importantly.
We generated net realized gains for full year 2022, delivering positive realized gains in excess of our losses.
Realized gains and losses, we believe is a more important metric and grading our performance.
Then unrealized gains and losses, which is meaningfully less impact on our longer term results.
In our view, our long term track record of strong credit performance and NAV stability since inception.
Straight to the merits of our proven investment process as we work to deliver attractive results to our shareholders.
Please turn to slides 13, and 14 of the presentation.
Which highlights certain characteristics of our diversified portfolio.
We ended the year with nearly $1 3 billion of investments at fair value across 129 portfolio companies with an average investment size of less than 1% of the total portfolio.
Our investment portfolio continues to consist primarily of senior secured first lien and Unitranche first lien loans collectively representing 90% of the portfolio at fair value.
Up from 89% in the prior quarter.
And we remain well diversified across 18 industries and continue to lend almost exclusively to private equity backed companies with 98% of our debt portfolio and sponsor backed companies as of yearend.
We generally believe that our private equity partners provide operational.
Financial support to strengthen their portfolio companies for long term value creation.
Which is particularly valuable during periods of heightened volatility like the one we are investing in today.
For the fourth quarter over 99% of our total debt investments at fair value made full scheduled principal and interest payments.
Two more credit trends to highlight.
Continued strong performance ratings and low non accrual levels.
Our weighted average portfolio grade of $2, one was unchanged as compared to the past few quarters.
As a percentage of risk rated one or two investments the highest ratings of our portfolio companies can't receive.
Accounted for 87% of the portfolio at fair value.
Down modestly from last quarter.
As of yearend consistent with the prior quarter, we had investments in four portfolio companies on non accrual status reps.
Representing two point al and one 2% of our total debt investments at cost and fair value respectively.
A few more updates before I turn it over to Henry.
First we're targeting the closing of our announced merger with first Eagle BDC this quarter.
A couple of reminders as it relates to the transaction.
One the board of directors of Crescent, BDC and first Eagle BDC had each unanimously approved the transaction.
And on March 7th first Eagle is conducting a special meeting of stockholders, whereby they will be asked to adopt the agreement and plan of merger.
And to the.
The exchange ratio for the stock component of the merger consideration in the amount of cash from Crescent BDC.
We will be determined by the respective net asset values of Crescent, BDC and first Eagle BDC and customary merger adjustments two days prior to closing.
We will not be outlining additional details of the transaction on this call today and.
And we direct any interested investors to the proxy statement that was filed in January .
We remain very excited about the acquisition as we believe the combination provides many strategic and financial benefits to the combined company.
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Next <unk> senior loan fund our joint venture was formally dissolved during the fourth quarter after being largely wound down in recent quarters, we redeploy the majority of the proceeds from this monetization activity.
Primarily into directly originated higher spread private credit opportunities.
Finally for the first quarter of 2023, our board declared a <unk> 41 per share quarterly cash dividend, which will be paid on April 17, 2023 to stockholders of record as of March 31 2023.
I'd now like to turn it over to Henry to discuss our Q4 investment activity Henry.
Thanks, Jason.
Please turn to slide 15, where we highlight our recent activity.
Gross deployment in the fourth quarter was $46 million as you can see on the left hand side of the page over 99% wasn't existing senior secured first lien and Unitranche investments.
In total we closed on five add on and several revolver and delayed draw fundings with no new portfolio company investments in the quarter.
This was by design as we believe it is prudent to prioritize deleveraging and advance the first Eagle acquisition that.
That being said the broader crescent private credit platform remained active with over $800 million of capital committed to new portfolio investments during the fourth quarter and over $5 5 billion for the full year.
$46 million in gross deployment compares to approximately $71 million in aggregate exits sales and repayments in the quarter Inclusively final $8 million liquidating a return of capital from our joint venture, which as Jason noted is now fully resolved.
Moving to the right hand side of the page you will see that our Unitranche first lien investments have continued to become a more prominent percentage of our total portfolio return.
For 66% of total portfolio fair value at year end compared to 59% the year prior.
Our focus on Unitranche opportunities allows us to offer even greater certainty of execution to our private equity sponsors and enables us to enhance your yield opportunity while remaining at the top of the capital stack. This has proven to be a competitive advantage, particularly in the current lending environment.
Turning to slide 16, you can see that the weighted average yield of our income producing securities at cost increased meaningfully quarter over quarter from 95% to 10, 8% on the heels of the federal reserves interest rate hikes and is up 330 basis points year over year.
As of December 31, 99% of our debt investments at fair value were floating rate with a weighted average floor of 80 basis points, which compares to 72% floating rate liability structure based on debt drawn with no floors.
This situation as well to benefit from increases in base rates above our average floors.
It is the case this quarter with continued growth in our interest income line item.
While the higher rate environment is certainly beneficial from an earnings perspective. We're also cognizant of the fact that it is generally correlated with a slower U S economy, which together can create more stress in the portfolio.
Consistent with <unk> track record of investing through cycles over the past 30 plus years. We believe we have constructed a portfolio that consists of companies that are adequately capitalized to address the current macroeconomic environment and have taken a proactive approach to bolstering liquidity in select situations, where it may be warranted.
Our credit culture focused on preservation of capital has led to a highly diversified portfolio invested largely in resilient industries.
Jason reviewed several metrics related to our portfolio a couple more with highlighting youth.
Using market interest rates at year end weighted average interest coverage for the total portfolio was one nine times.
Additionally, the strength of our portfolio continues to benefit from the substantial amount of equity invested in our companies.
The weighted average loan to value in the portfolio at times of underwriting was approximately 40%, which provides us a margin of safety for both in enterprise value perspective, as well as capital at risk of beneath our tranche that is available to support our investments to.
The health of the portfolio is also demonstrated by the stable weighted average portfolio grade and low non accrual rates.
Questions track record of successfully managing through multiple economic and market cycles.
Rides us with significant and relevant experience navigating what could be a challenging environment in 2023 and beyond.
With that I will now turn it over to art.
Thanks, Henry and good morning, everyone. Our adjusted net investment income per share of 49 for the fourth quarter of 2022 compares to <unk> 42 per share for the prior quarter.
<unk> 43 per share for the fourth quarter of 2021.
Total investment income of $34 6 million for the fourth quarter, the highest quarterly figure we've reported since inception compares to 29 million for the prior quarter, representing an increase of approximately 19%.
Importantly, what we consider recurring yield related investment income comprised of interest income Pik income amortization and unused fees.
It was up 21% quarter over quarter.
Driven by rising base rates.
This recurring revenue ultimately accounted for 94% of this quarters total investment income up from 86% in Q4 of 2021.
We generated significant investment income in the form of fees dividends and accelerated amortization of OID from the El central portfolio.
Over close to the last two years.
Having realized 136% of our cost basis was approximately $22 million of unrealized value remaining.
That's nonrecurring income has now been replaced by a recurring yield related income from Crescent originated assets.
I'd also note that the income continues to represent a modest portion of our revenue at approximately 2% of total investment income.
Because we are invested in a largely first lien and unitranche focused portfolio, having largely rotated out of legacy all central names in a broadly syndicated bank loan joint venture.
We expect to generate a high quantity of topline revenue, primarily consisting of recurring scheduled interest income.
Turning back to this quarter's earnings.
Our GAAP earnings per share or net increase and net assets, resulting from operations for the fourth quarter of 'twenty, two was <unk>, which compares to negative eight cents per share for the prior quarter.
Net investment income outpaced our regular dividend by <unk> 11 per share, which was offset by net unrealized depreciation on investments of <unk> 44 per share.
Net unrealized losses were less than half a penny per share.
At December 31, our stockholders' equity was $613 million, resulting in net asset value per share of $19 83.
As compared to $623 million or $20 16 per share last quarter and $652 million or $21 12 per share at December 31, 2021.
Net realizations of 26 million in the fourth quarter, coupled with unrealized mark to market losses on our investments ultimately led to our total investment portfolio holding roughly steady at approximate fair value of $1 3 billion as of December 31, 2022.
Down approximately $30 million quarter over quarter.
To reiterate Henry's comments, we prioritize delevering.
During Q4 in advance of the close of the first Eagle acquisition.
We attributed the bulk of the quarter's NAV declined to widening credit spreads.
It's dynamic as evidenced by our internal portfolio ratings at the end of the fourth quarter largely consistent with prior quarters with 87% of the portfolio rated one two our highest rating categories.
We believe this is an important distinction to highlight for shareholders in a volatile market environment.
Now, let's shift to capitalization and liquidity I am on slide 19.
As of December 31, we managed our debt to equity ratio down to 1.08 times from $1. One one times at September 30th.
The weighted average stated interest rate on our total borrowings was six 3% as of year end.
As you can see on the right hand side of the slide we have a low level of debt maturities over the next few years with $150 million maturity related to our 595% unsecured notes due July 2023.
After that there are no remaining term maturities until 2026.
Also worth highlighting that in January we upsized, our SBC corporate revolving facility by 35 million to $385 million.
From a liquidity perspective as of yearend, we had $225 million of undrawn capacity subject to leverage borrowing base and other restrictions.
And $17 million in cash and cash equivalents.
Finally for the first quarter of 2023, our board declared a <unk> 41 per share quarterly cash dividend, which will be paid on April 17, 2023 to stockholders of record as of March 31 2023.
And with that I'd like to turn it back to Jason for closing remarks.
Thanks, Gary Hart.
We continue to believe that C cap remains well positioned to navigate the economic and market uncertainty ahead, while we do anticipate further market volatility and the potential for spread widening as the cycle progresses, we feel good about our current portfolio and we remain very excited about the first Eagle BDC transaction as we further enhance our scale and position.
We'd like to thank all of you for your continued support and time today, we'd be happy to take your questions and please understand that we may be limited in some answers due to the ongoing first eagle transaction.
And with that operator, please open the line for questions.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by the one on your Touchtone phone.
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One moment. Please for your first question.
The first question comes from Robert Dodd Raymond James. Please go ahead.
Hi, guys I'm going to ask your question sort of relates to that.
Yeah.
You talked about obviously, you've lowered leverage ahead of the acquisition do you expect to be running on a combined basis going forward do you expect to be running lower leverage.
Was the case.
Historically or is that just.
Yes he is.
Is your forward leverage radius childhood changing as a result.
Proposed acquisition.
Hey, Robert it's Jason Thanks for the question.
Excuse me.
We.
We did intentionally delever a bit here in Q4 in anticipation of the merger and a big driver of that is that the.
If you look back at the historical loss grid balance sheet.
They've historically had a bit higher leverage than us and so on a pro forma combined basis I think we're going to end up sort of right in the middle of our target leverage range.
We've publicly stated as kind of one one to one four.
Got it thank you.
Yes.
On another.
Deployments in the quarter, obviously the follow on.
I think you said something to the effect of.
The portfolio companies have adequate liquidity and in some cases.
<unk> been addressed on something like that.
Well.
The follow on was there any of the follow on capital to the portfolio of companies.
Two two pad out liquidity or was it.
More normal course of business.
Add ons.
Can you give us any color around that.
Yes.
As far as the.
The deployment in Q4, it was all normal course.
Getting drawn on.
Funded.
And existing commitments that we add to our portfolio companies.
Got it and then one more if I can.
I mean, how you gave the interest coverage based on at year end rates I mean, how would the.
How would the operating trends doing from an 87% this quarter, leaving one or two so pretty.
Pretty stable, but can you give us any color on how the portfolio companies are actually performing on.
We think all of that would be or anything like that I mean, what's the character how are things actually trending right now.
Sure.
I would say.
Broadly speaking, we continue to feel good about the health of the overall portfolio.
Companies continue to grow on the top line and the bottom line we have seen.
Revenue growth outpace EBITDA or cash flow growth.
Which we would attribute largely to inflationary pressures.
Higher wages labor market tightness in.
And the like.
But I would say overall, we are pleased with the underlying performance of the portfolio.
Thank you.
Thanks Robert.
Thank you once again, ladies and gentlemen, if you do have a question. Please press star one at this time.
There are no further questions at this time I will turn the call back to Jason Jason <unk> for closing remarks.
Okay, great. Thank you operator, thank you again, everyone for your interest and support of C. Cap, we look forward to speaking with you again soon.
Ladies and gentlemen, this does conclude our conference call for today, we thank you for your participation and ask that you. Please disconnect your lines.
Okay.
Okay.
Yes.
Yes.