Q2 2023 Crescent Capital BDC Inc Earnings Call
Good morning, and afternoon, ladies and gentlemen, and welcome to the Q2 2023 question Capital BDC, Inc. Earnings Conference call. At this time all lines are in a listen only mode. Following the presentation we will.
A question and answer session.
At any time during this call you require immediate assistance. Please press star zero for the operator also note that this call is being recorded on Thursday August 10th 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 second quarter ended June 30th 2023 earnings Conference call.
Please note that Crescent capital BDC may be referred to as C cap Crescent BDC.
Or the company throughout the call.
Before we begin I will start with some important reminders.
It has made over the course of this conference call and webcast may contain forward looking statements and are subject to risks and uncertainties. The company's actual results could differ materially from those expressed in such forward looking statements for any reason, including those listed in its SEC filings.
The company assumes no obligation to update any such forward looking statements. Please also note that past performance or market information is not.
Not a guarantee of future results.
During this conference call, we may discuss certain non-GAAP measures as defined by SEC regulation G. 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 be found in the accompanying slide presentation for this call.
In addition, a reconciliation of this measure may also be found in our earnings release yesterday. After the market closed the company issued its earnings press release for the second quarter ended June 32023, and posted a presentation to the Investor Relations section of its website at Www Dot Crescent BDC Dot com.
The presentation should be reviewed in conjunction with the company's Form 10-Q 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 <unk>, Chief Financial Officer, Gerhard Lombard and managing director Henry Chung.
With that I'd now like to turn it over to Jason.
Thank you Dan Hello, everyone and thank you for joining our earnings call. We appreciate your continued interest in <unk>.
I'll begin the call by providing a brief overview of our second quarter results before discussing the current market environment in more detail.
I will then touch on our dividend policy before turning it over to Henri to review, our recent investing activity and portfolio performance.
<unk> will then review our financial performance for the second quarter.
Let's begin.
Please turn to slide six where youll see a summary of our results.
For the second quarter, we reported record net investment income of 56 per share up from 54 per share in the prior quarter.
This quarter's net investment income continues to reflect the strength in the core earnings power of our portfolio as we over earned our base dividend by 37%.
This over coupled with unrealized depreciation in the portfolio on a net basis.
<unk> and net asset value per share of $19.58 as of quarter end.
Up 1% as compared to the prior quarter.
Please turn to slides 14, and 15 of the presentation.
Which highlight certain characteristics of our portfolio.
We ended the quarter with nearly $1 6 billion of investments at fair value across our highly diversified portfolio of 187 companies with an average investment size of approximately <unk>, 5% of the total portfolio.
Our investment portfolio continues to consist primarily of senior secured first lien and Unitranche first lien loans collectively representing 89% of the portfolio at fair value at quarter end unchanged from the prior quarter.
This speaks to our continued focus on maintaining a defensively positioned portfolio with greater downside protection and lower risk of loss compared to second lien and subordinated debt focused portfolios.
We remain well diversified across 20 industries continue to lend almost exclusively private equity backed companies with.
With 98% of our debt portfolio and sponsor backed companies as of quarter end.
We generally believe that private equity sponsors can provide operational and financial support to strengthen their portfolio companies for long term value creation.
In terms of industry composition, you can see on the right hand side of slide 15 that the majority of our investments continued to be in service based businesses.
With a particular focus on healthcare software and commercial and professional services.
This is by design as crescents private credit team is always focused on underwriting free cash flow generative businesses and.
And what we deem to be more recession resilient industries.
A few more credit trends to review.
Performance ratings and non accrual levels.
Our weighted average portfolio grade of $2, one improved from two two last quarter.
And the percentage of risk weighted wanted to investments the highest ratings of our portfolio companies can receive.
Counted for 87% of the portfolio at fair value up from 85% last quarter.
As of quarter end, we had investments in eight portfolio companies on nonaccrual status, representing two 2% and one 7% of our total debt investments at cost and fair value respectively. A decrease from the prior quarter.
Moving to the current market backdrop.
Transaction activity in the second quarter was lighter as compared to the prior year, albeit busier than what we witnessed during the first quarter given the challenges in the regional banking space.
We've seen direct lending continued to gain share from the syndicated markets with approximately 85% of new issue LBO financing in the U S completed by direct lenders in Q2.
A lack of CLO issuance and volatility in the BSL market have made certainty of execution and depth of capital in the direct lending space increasingly attractive for issuers.
Valuation expectations between buyers and sellers have remained apart for much of 2023, thus far driver.
Driving a decline in overall M&A volumes.
That said on the demand side private equity dry powder is at record levels and on the supply side, an increasing number of private companies are looking for potential exit opportunities.
With many backed by sponsors that may be seeking to monetize longer held investments.
Looking ahead to the remainder of the year and beyond as buyers and sellers acclimate to the new market environment. We see early signs that LVL volume has picked up despite overall economic uncertainties that continue to exist.
Before I turn it over to Henry I'd like to touch on our dividend policy.
On our call in May we announced our intent to implement a variable supplemental dividend program beginning this quarter, which is the first full quarter of combined results. Following our acquisition of first Eagle BDC in March.
For the second quarter, we were pleased to declare an inaugural supplemental dividend of eight <unk> per share payable on September 15th.
As detailed in slide seven of our earnings presentation. It is calculated as 50% of net investment income in excess of our regular <unk> 41 per share dividend.
Subject to our measurement test.
NII per share has been comfortably outpacing the base dividend for some time.
Which we have seen accelerate in recent quarters as higher underlying reference rates have resulted in higher portfolio yields given our 99% floating rate portfolio.
And looking at the current shape of the forward curve. However, we do expect rates will come down over time, which will impact the entire BDC sectors earnings profile.
We believe the formulaic framework offered by our supplemental program ultimately strikes the right balance of increasing total distributions to our stockholders, while preserving the stability of our NAV over time.
Ross different base rate outlooks.
Total dividends of 49 per share for the second quarter represent a 10% annualized yield based on our June 30 NAV.
I'd now like to turn it over to Henry to discuss our Q2 investment activity Henry.
Thanks, Jason Please turn to slide 16, where we highlight our recent activity gross deployment in the second quarter was $38 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 during the quarter, we closed on two new investments totaling $24 million with the remaining.
$14 million coming from incremental investments.
<unk> portfolio of companies.
The new investments during the second quarter were loans to private equity backed companies with silver floors attractive fees and an average spread of approximately 660 basis points.
The $30 million in gross deployment compares to approximately $28 million in aggregate exits sales and repayments.
We remain highly selective from a credit and risk adjusted return perspective.
Our long term strategic view on capital deployment that is insulated by our orientation to first lien credit risk.
In the near term we remain focused on the continued rotation of the acquired first Eagle BDC assets and maintaining stable leverage levels and have progressed on both of those fronts during the second quarter.
Balance sheet leverage is down quarter over quarter and as of last Friday, we had realized approximately 16% of the acquired first eagle portfolio since closing in March.
Turning to slide 17, you can see that the weighted average yield of our income producing securities at cost increased quarter over quarter from 11, 4% to 11, 7% and is up 340 basis points year over year, driven by the increasing their respective base rates.
As of June 30, 99% of our debt investments at fair value were floating rate with a weighted average floor of 80 basis points, which compares to our 66% floating rate liability structure based on debt drawn with zero percent floors.
This situate us well to benefit from increases in base rates above our average floors as was the case this quarter with continued growth in our net interest margin.
Overall, our investment portfolio continues to perform well with strong year over year weighted average revenue and EBITDA growth.
That being said, we continue to closely monitor the impact of rising borrowing cost on our portfolio companies. The weighted average interest coverage of the companies in our investment portfolio at quarter end held stable at one seven times. It is important to note that we calculate our interest coverage ratio using annualized interest expense that reflects the latest respective base rates.
Contrast to a trailing 12 month interest expense calculation, which would have resulted in an interest coverage ratio of two one times.
We believe this provides a more relevant metric when evaluating the ability of our portfolio companies to continue to service their respective interest obligations.
We also continue to closely monitor how our portfolio companies are managing operating fixed charges in this environment.
Our analysis demonstrates that our portfolio companies in the aggregate are well positioned to address fixed charges with operating cash flows and available balance sheet liquidity.
As of quarter end, approximately 60% of aggregate revolver capacity was available across the portfolio and we have not seen an increase in aggregate revolver utilization during the second quarter the.
The strength of our portfolio continues to benefit from the substantial amount of equity invested in our company's most of its applied by well established private equity firms with whom we have long standing relationships and have partnered with in multiple transactions.
The weighted average loan to value the portfolio at the time of underwrite is approximately 41%, which provides us a margin of safety from an enterprise value coverage perspective.
Crescent his track record of successfully managing through multiple economic and market cycles provides us with significant and relevant experience to navigate the challenges that the current environment brings with it.
With that I'll now turn it over to Joe Hart.
Thanks, Henry and Hello, everyone. Our net investment income per share of <unk> 56 for the second quarter of 2023 compares to 54 per share for the prior quarter.
Total investment income of $46 7 million for the second quarter compares to $39 3 million for the prior quarter, representing an increase of approximately 19%.
Driven by rising base rates and adjusting for the impact of the first Eagle acquisition recurring yield related investment income.
Price of interest income Pik income amortization and unused fees and dividend income from the Logan JV.
Was up 19% quarter over quarter from.
From $38 5 million to $45 7 million ultimately accounting for 98% of this quarters total investment income.
Pik income continues to represent a modest portion of our revenue at one 8% of total investment income.
Our portfolio is a combination of a substantial majority of recurring investment income paired with modest noncash Pic based income provides the basis for a high quality income stream that in years to the benefit of C cap stockholders.
Our GAAP earnings per share or net increase and net assets, resulting from operations for the second quarter of 2023 was <unk> 61.
Which compares to <unk> 24 per share for the prior quarter.
At June 30, our stockholders' equity was $726 million, resulting in net asset value per share of $19 58.
As compared to $718 million from $19 38 per share last quarter.
The positive net deployment of $11 million in the second quarter, coupled with net unrealized depreciation on our investments ultimately led to modest portfolio growth.
And a total investment portfolio at fair value $1 6 billion as of June 30th.
Up approximately $15 million quarter over quarter.
Turning to slide 18, our internal portfolio ratings at the end of the second quarter were largely consistent with prior quarters with 87% of the portfolio rated one or two our highest rating categories.
Now, let's shift to our capitalization and liquidity on slide 20.
As of June 30, our debt to equity ratio was one nine times.
From one to three times in the prior quarter.
The weighted average stated interest rate on our total borrowings was 673% as of quarter end.
In May we completed a private offering of $50 million.
Aggregate principal amount of 754% senior unsecured notes due July 28 2026.
These notes became effective upon the repayment of the 2023 notes at their maturity on July 30.
Adjusted for this activity and as we've highlighted on the right hand side of the slide there are no debt maturities until 2026.
Our liquidity position remains strong with $315 million of undrawn capacity subject to leverage borrowing base and other restrictions.
And $21 $5 million of cash and cash equivalents as of quarter end.
We believe this level of dry powder positions us well to selectively invest in new opportunities, while continuing to support our existing portfolio company commitments.
Finally for the third quarter of 2023, our board declared a <unk> 41 per share quarterly cash dividend, which will be paid on October 16 2023 to.
Stockholders of record as of September 32023.
Additionally, as Jason discussed our board declared a supplemental cash dividend of <unk> <unk> per share, which will be paid on September 15 2023.
To stockholders of record as of August 31, 2023.
And with that I'd like to turn it back to Jason for closing remarks.
Thanks, Karen.
In closing, we're pleased with our strong financial results for the quarter and believe <unk> remains well positioned to deliver strong results going forward.
Our portfolio is diverse and healthy.
We're in excellent financial condition to selectively capitalize on this volatile yet attractive investment environment.
As always we appreciate you all joining us today and we look forward to speaking with you next quarter.
And with that operator, we can open the line for questions.
Thank you, ladies and gentlemen, if you would like to ask a question. Please press star followed by one on your Touchtone phone you will Dan here.
Prompt acknowledging your request and if you would like to withdraw from the question queue. Please press star followed by two.
And if you're using a speaker phone, we do ask that you. Please lift the handset before pressing entities.
Please go ahead and Crestar one now if you have any questions.
And your first question will be from Ryan Lynch <unk>. Please go ahead.
Hey, good afternoon.
Nice quarter.
My first question just has to do with.
Now that you guys are fully integrated with with.
Yes, Craig acquisition in their portfolio I would just love to hear.
How has been the initial performance of that portfolio specifically add.
Obviously, you guys bought some of those assets at a discount what's your sort of outlook for potential.
Turnover in that portfolio and even is there any outside or in any of those investments or how would you just performing at least initially.
Hey, Ryan it's Jason Thanks for the question I can I can start that and maybe Henry I'll have some additional comments, but.
Yes, now there were.
Under the Hood I guess on that officially for.
Yeah.
For four months or so five months or so I would say that the.
The diligence that we did through the process on the portfolio is largely checked out.
I think the team did a nice job in looking at the credits before we had direct access to the company's now we have direct access to the companies and.
And the sponsors, but I would say.
No major surprises.
Relative to do the underwriting of the book I think Henry made a comment.
In the prepared remarks around realizations to date, I think were running around 15%, 16% realized on the on the CRE portfolio.
As of last week.
Yes, and just a comment on the second part of your question with respect to outlook around the rotation and upside here. The names that we did rotate out of through the second quarter and the beginning part of July how we've been able to realize at cost or better.
So making good progress initially on that front as well and I think it's a little too early to say, if we see meaningful upside from our cost basis at the remaining named.
<unk> that are in the portfolio, but.
To Jason's point, we have.
I think our diligence has proven out initially here in terms of what we expected in terms of the assets that we on boarded.
Okay.
That's helpful. And then if I look at both the combination of realized and unrealized movements in the portfolio because I know sometimes when you.
Realized loss.
The unrealized loss can flipped to positive so you guys had.
Overall net $2 million of gains.
This quarter was there.
Driven by by one investment or was that.
There are small number of investments or was that kind of broadly speaking.
That drove that upside in the gains this quarter.
Yes.
Yeah, Hey, Brian it's gearhart.
Nothing really stood out I think we saw.
You kind of move into movement across the portfolio and that kind of contributed to that number you called out.
Thanks.
Okay.
Yes.
And then one last one.
For me just regarding.
The dividend and dividend policy.
Obviously, you guys put in the supplemental dividend program that seems to be working out well.
Is this sort of because the earnings have increased nicely from rates and maybe they'll come back down but with the with the supplemental dividend, there's still pretty significant earnings well above kind of total dividends.
Is this where you sort of want to be from a dividend coverage standpoint or would you ever consider.
Either increasing the core dividend or even changing the payout ratio to something.
<unk> that bad.
50% access just wanted to hear your thoughts on that.
Yes, Thanks, Brian Jason again.
Yes.
We spent a lot of time thinking about.
Our dividend policy over the last several quarters and as you know.
We've really consistently prioritized, earning our dividend.
Which we've done every quarter.
We believe that the supplemental dividend framework.
Certainly ensures our stockholders will benefit from the earnings generated in excess of the regular dividend, but it will also provide us with.
Preserving.
A stable NAV for our stockholders as well.
With with sulfur hovering around $5 five 5%.
Over 300 basis points increase relative to a year ago certainly the earnings for the sector are up meaningfully including for C cap.
That being said if you look at the curve.
Which is what the what the market at least is suggesting we could see a.
An initial decline in rates in the first half of 'twenty four.
And as we think about this we try to take a long term approach to it and we really.
We really want to be in a position.
Five five plus years from now where we can continue to say that we've.
Earned our dividend we've delivered the stable <unk> 41 a share.
Each and every quarter and.
And that our stockholders have also been able to participate in a lot of the upside along the way.
During the significant over earn quarters so.
We're really trying to take that.
Long term view on this and right now I think we're comfortable with with the approach.
Okay.
Makes sense I appreciate it. Thank you that's all for me.
Thank you Ryan.
Next question will be from Mitchel Penn at Oppenheimer. Please go ahead.
Thanks.
Good quarter guys a couple of questions on your.
Our weighted average loan to value you guys said.
41% at origination was hit today.
For the portfolio.
We actually this is Henry Mitch we haven't seen that metric actually tick up heavily we're still in the low 40% range in aggregate across the portfolio.
And what.
What percent of the portfolio is.
Greater than.
70%.
70% loan to value.
Yes.
I don't know if we've got that at our fingertips right now Mitch let us.
Let us do a little work on that and we can circle back to yet.
Okay great.
You might have said I wasn't sure what's the average interest coverage ratio of the portfolio.
Yes.
I think Henry said in the remarks that it's a one seven times and that's on an annualized interest expense figure for current base rates.
Got it and what.
What percent are are below one.
Let us let us circle back to you on that as well I don't think we've talked about that.
On the on prior calls.
Okay, Great. That's all for me guys. Thanks. Thank.
Thank you Mitch.
Yes. Thank you.
Once again, please press star one if you have a question.
And your next question will be from Sean Paul Adams at the Raymond James. Please go ahead.
Hey, guys good afternoon.
Regarding your credit facilities.
I know in the Q you guys disclosed.
Both facilities maturing in 2026, but I didn't see any mention of window revolving period for either of those facilities and.
I was hoping if you could provide some details on that as well is if youre looking at.
Adding any additional unsecured.
That I know you guys just add.
An additional note for 'twenty 'twenty, six, but just need a little bit more clarification on that.
Okay.
Yes. Thanks for the question this is Gary Hart.
Maybe take the second part first.
We feel.
Pretty good about our capital structure today, we have.
But just over $300 million of kind of available capacity on the on the combination of credit facilities in the cap structure. So we're we're not while we keep an eye on what the market is doing at all times, we're not.
Considering adding additional unsecured debt in the near term and I think that is in part a factor also for kind of the <unk>.
Relative high cost of debt in todays market.
And then circling back on the first part of your question.
The two revolving.
Facilities, we have generally speaking have revolving periods, just kind of two to three years.
We are as you might might expect in constant combination with the lenders there and so I think the way we manage those facilities, it's really through a kind of an approach of.
Annual or biannual extension of those reinvestment period. So we don't get all the way to the end of <unk>.
Our against our maturity wall.
So I think I think as you think about the capital structure at least for <unk> as you should expect that that will continue to.
Amend and extend those facilities as we approach the end of the reinvestment period for either the SPV or the SBC revolving credit line.
Got it perfect. Thank you Krishna.
Yes.
Thank you and at this time.
We have a follow up from Ryan Lynch. Please go ahead.
Hey, guys, Hey, one more question I had.
What is your guys' long term outlook for.
First Eagle's Logan JV I know in the past it seems that you guys did not necessarily want to want to operate. These JV. Obviously you inherited this with the acquisition.
What should we expect from this long term.
Yeah, Hey, Ryan Jason here.
Okay.
I would say that we did a fair amount of diligence on that joint venture during the process and the structure.
The vast majority of the assets in the structure are contained within a CLO.
Which is a relatively new vehicle it was done about a year ago year and change ago.
While under under first Eagle's management.
So it was actually quite sorry price quite attractively.
And I think from an income standpoint.
Rose off a pretty attractive yield to the equity.
It's also a very well diversified.
COO with about two years left on the reinvestment period on that so for the time being I think we're thinking of it as steady state.
We expect it to continue to perform.
And we're going to we're going to see it out at least over the next several quarters.
Okay.
Makes sense I appreciate the follow up.
Thank you.
Thank you and at this time gentlemen, it appears we have no. Other questions registered. Please proceed with any closing remarks.
Okay. Thank you operator, thank you all for joining the call today. We appreciate your continued interest and support in C cap.
And we look forward to speaking with you all again next quarter if not sooner.
Thank you, Sir ladies and gentlemen, this does indeed conclude your conference call for today. Once again. Thank you for attending at this time, we ask that you. Please disconnect your lines.
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