Q3 2023 Crescent Capital BDC Inc Earnings Call
[music].
Good afternoon, ladies and gentlemen, and welcome to the Q3 2033 Crescent Capital incorporated earnings Conference call. At this time all lines are in a listen only mode.
Following the presentation, we will conduct a question and answer session. If at any time. During this call you had acquired immediate assistance. Please press star zero for operator.
This call is being recorded on Thursday November nine 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 third quarter ended September 32023 earnings Conference call.
Please note that Crescent capital BDC, Inc may be referred to as <unk>.
The BDC or the company throughout the call.
Before we begin I will start with some important reminders.
That's 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.
Company assumes no obligation to update any such forward looking statements. Please also note that past performance or market information is not a guarantee of future results.
During this conference call, we may discuss certain non-GAAP measures as defined by SEC regulation G.
Such 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 NII per share.
Per share the most directly comparable GAAP financial measure can be found in the accompanying slide presentation for this call in.
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 third quarter ended September 32023.
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.
<unk> financial Officer, Gerhard Lombard and managing director Henry Chen 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 C cap.
I'll begin the call by providing a brief overview of our third quarter results before discussing the current market environment in more detail.
I will then turn it over to Henri to review, our recent investing activity and portfolio performance.
<unk> will then review our financial performance for the third quarter.
Before we begin you will note the presentation format has changed.
We trust the content remains helpful in providing an overview of <unk> performance.
The revised format is crescent brand refresh.
Which reflects the growth and consistency of our firm investing in private and tradable corporate credit over the past 30 plus years.
Let's begin please turn to slide six where youll see a summary of our results.
For the third quarter, we reported record net investment income of 59 per share up from 56 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 regular dividend by 44%.
We also paid our first supplemental dividend in September, which was <unk> <unk> per share and announced on last quarter's call.
C caps over earn of the combined dividend payments, coupled with unrealized depreciation in the portfolio on a net basis resulted in net asset value per share of $19 70 as of quarter end.
0.6% as compared to the prior quarter.
For the third quarter, we were pleased to declare a supplemental dividend of <unk> <unk> per share one penny higher than last quarter's supplemental dividend payable on December 15th.
As a reminder, the supplemental dividends are calculated at 50% of net investment income in excess of our regular <unk> 41 per share dividend subject to a measurement test.
Our board also declared a regular dividend of <unk> 41 per share for the fourth quarter payable on January 16, 2024, which represents the 28th consecutive quarter of C cap paying a regular dividend of <unk> 41.
Please turn to slides 13, and 14 of the presentation, which highlights certain characteristics of our portfolio.
We ended the quarter with approximately $1 6 billion of investments at fair value across our highly diversified portfolio of 185 companies with an average investment size of approximately 0.5% 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 and continue to lend almost exclusively to private equity backed companies with 98% of our debt portfolio and sponsor backed companies as of quarter end.
In terms of industry composition, you can see on the right hand side of slide 14 that the majority of our investments continue to be in services based businesses.
With a particular focus on health care software and commercial and professional services.
This is by design as Crescent private credit team is always focused on underwriting free cash flow generative businesses.
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 remains stable quarter over quarter and on page 17, you will see that the energy of risk rated one and two investments the highest ratings our portfolio companies can receive accounted for 89% of the portfolio at fair value.
From 87% last quarter.
As of quarter end, we had investments in nine portfolio companies on non accrual status.
Representing two 3% and one 8% of our total debt investments at cost and fair value respectively.
Moving to the current market backdrop activity levels have picked up in the second half of 2023 with new issuance in the third quarter hitting its highest mark since the rate hike onset in Q1 2022.
During the third quarter market pricing and terms continue to be attractive for new transactions.
Credit spreads on new loans are above historical averages leverage levels are lower and equity contributions are at historical highs.
We've continued to see private credit take share from the broadly syndicated market.
Which we believe to some extent is a more permanent structural shift.
Looking ahead to the remainder of this year in 2024, we expect to see a continued uptick in M&A activity.
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.
While these dynamics should lead to an acceleration of sponsor to sponsor portfolio company transactions.
The current geopolitical situation perceptions around a slowing economy and potential recession at a higher for longer rate environment continued to weigh on the deal environment.
When activity does pick up further we do believe that crescent focus on sponsor backed opportunities and our deep relationships in the space position us well to benefit.
I would now like to turn it over to Henry to discuss our Q3 investment activity Henry.
Thanks, Jason Please turn to slide 15, where we highlight our recent activity.
Gross deployment in the second quarter totaled $45 million as you can see on the left hand side of the page, 99% was in senior secured first lien and Unitranche investments.
During the quarter, we closed on three new investments totaling $20 million with the remaining $25 million coming from incremental investments in our existing portfolio companies.
The new investments during the third quarter were loans to private equity backed companies with silver floors attractive fees and a weighted average spread of approximately 590 basis points.
Underscoring Jason's earlier point about the historically attractive relative value, we were able to achieve in the current market the weighted average loan to value of our new investments for the quarter was below 30%.
The $45 million gross deployment compares to approximately $62 million in aggregate exits sales and repayments.
We continue to remain highly selective from a credit and risk adjusted return perspective, we maintain a long term strategic view on capital deployment that is insulated by our orientation of first lien credit risk and non cyclical industries.
We remain focused on the continued rotation of the acquired first Eagle BDC assets to maintaining stable leverage levels and our progress on both of these fronts during the third quarter.
Balance sheet, leverages down quarter over quarter and as of last Friday, we have realized approximately 26% of the acquired first eagle portfolio since closing in March.
100% of the aforementioned $62 million in aggregate exits during the third quarter for first Eagle names.
Turning to slide 16, you can see that the weighted average yield of our income producing securities at cost increased quarter over quarter from 11, 7% to 11, 9% and is up 240 basis points year over year, driven by the increase in their respective base rates.
As of September 30th 99% of our debt investments at fair value were floating rate with a weighted average floor of 80 basis points, which compares to a 66% floating rate liability structure based on debt drawn with zero percent floors.
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 annual interest expense that reflects the latest respective base rates. In contrast to a trailing 12 months interest expense calculation, which would have resulted in an interest coverage ratio of two 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 fixed operating charges in this environment.
Our analysis demonstrates that our portfolio companies in the aggregate are well positioned to address fixed charges, but the operating cash flows and available balance sheet liquidity.
As of quarter end, approximately 64% of aggregate revolver capacity was available across the portfolio and increase from 60% in the prior quarter and we have not seen an increasing aggregate revolver utilization during the third quarter.
Our private equity partners have been active in managing costs, particularly SG&A in this environment and we are starting to see operating results that demonstrate the effectiveness of the actions that have been taken.
A significant majority of our portfolio companies have grown both revenue and EBITDA on a year over year basis.
Additionally, we have seen some improvement in margin pressures at our portfolio companies that resulted from COVID-19 related economic pressures, particularly supply chain issues and elevated employee turnover.
While the current rate environment, and economic outlook present, a challenging environment for our companies to navigate we are encouraged by the results of the early actions our sponsors and management teams have taken to date.
The strength of our portfolio continues to benefit from the substantial amount of equity invested in our company's most of its supply by large and well established private equity firms with whom we have long standing relationships and have partnered with in multiple transactions.
Weighted average loan to value in the portfolio at time of underwriters, approximately 41%, which provides us a margin of safety from an enterprise value coverage perspective.
Presence 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 will now turn it over to Gerard.
Thanks, Henry and Hello, everyone.
Our net investment income per share of <unk> 59.
For the second quarter of 2023 compares to <unk> 56 per share for the prior quarter.
Total investment income of $48 2 million for the second quarter compares to $46 7 million for the prior quarter.
Representing an increase of approximately 3%.
Recurring yield related investment income comprised of interest income Pik income amortization and unused fees and dividend income from the Logan JV.
It was up 2% quarter over quarter from $45 seven to $46 7 million ultimately accounting for 97% of this quarters total investment income.
Pik income continues to represent a modest portion of our revenue at 2% of total investment income, which based on our analysis.
As one of the lowest levels in this space given our focus on market, leading companies with strong margins and high free cash flow generation.
Our GAAP earnings per share, our net increase and net assets, resulting from operations for the second quarter of 2003 was <unk> 61.
Unchanged from the prior quarter.
At September 30, our stockholders' equity was $730 million, resulting in net asset value per share of $19 70.
As compared to $726 million or $19 58 per share last quarter.
Net investment exits of $17 million offset by net portfolio appreciation contributed to total portfolio value of $1 6 billion as of September 30 down approximately $16 million quarter over quarter.
Now, let's shift to our capitalization and liquidity I'm on slide 19.
As of September 30, our debt to equity ratio was 118 times down from $1 one nine times in.
In the prior quarter.
The weighted average interest rate on our borrowings was 7.01% as of quarter end.
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 $317 million of Undrawn capacity subject to leverage borrowing base and other restrictions in.
And $22 $8 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 fourth quarter of 2023, our board declared a <unk> 41 per share quarterly cash dividend, which will be paid on January 16, 2024 to stockholders of record as of December 29, 2023.
Additionally, as Jason discussed our board declared a supplemental cash dividend of <unk> <unk> per share, which will be paid on December 15 2023 to.
To stockholders of record as of November 32023.
And with that I'd like to turn it back to Jason for closing remarks.
Thanks, Gary Hart and closing.
Pleased with our strong financial results for the quarter and believe C cap remains well positioned to continue to deliver strong results going forward.
Our portfolio is diverse and healthy and we are in excellent financial condition to selectively capitalize on the current investment environment.
On an annualized basis, we're currently delivering $2 per share in total dividends.
Which translates into a 10, 2% yield on <unk> <unk> current NAV and in over 12% yield on <unk> current stock price.
Which we view as highly attractive given our predominantly first lien focus and track record of NAV stability.
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, we will now conduct the question and answer session. If you have a question. Please press star followed by the number one on your Touchtone phone.
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One moment. Please for your first question.
Your first question comes from the line of Robert Dodd from Cleveland James Your line is now open.
Hi, guys and congratulations on the quarter.
First on the first Eagle excuse me.
You talked about obviously, you've realized 26% for the assets from that so our quarter gone three quarters left to go.
Can you give us any color on.
The mix obviously.
The ones that are easiest to refinance you can see the performance in the.
<unk> 10.
Hey, Tommy Oems still Siloed Baxter is still that et cetera.
Some of his stock.
Couple of things that are a big piece of your portfolio, but could.
Okay.
Can you can you give us any update on how the rotation of the more trouble.
Thanks, Kevin.
Excuse me Hey, Robert as Jason Thanks for the question.
Youre right.
I would say the noncore bucket of the portfolio that we identified.
When we acquired the book is still in place I think we feel comfortable about where we've generally march those positions and underwrote those positions.
Those are not positions that we need to rush to exit.
And it was our expectation that those might take some time to further develop and ultimately monetize. So so I think your observation is accurate we have fully realized 20 names.
Out of that 26%, but they all fall within the core bucket I wouldn't say that they are just all natural realizations I think there has been some proactive.
Sort of.
Movement on our part to try to rotate some of those names.
Got it I appreciate that.
I think the <unk>.
<unk> for the quarter was about 30% you mentioned.
And that Leverages down equity checks up.
On that 30% can you give us.
So Bobby obviously.
For example, all loans, we expect them to be low anyway.
Is it.
Is that mix the type of businesses or is it just P firms right.
Writing bigger checks in order to.
Yes.
Undivided too.
Lower interests better insurance coverage.
<unk> market with.
Would employ.
Otherwise.
Yes. Thanks for the question. This is Henry I'll take that one on the first part of your question no. None of these are <unk> loans. That's just not an area that we focus on historically, nor one that we intend to focus on here in the near term they are all.
Your typical.
<unk> cash flow based loans.
I think you hit the nail on the head on the second point, we are seeing especially in this rate environment sponsors are very focused on capitalizing the businesses in a way that can withstand the current rate environment that we're in and often times, especially with base rates, where they are today.
That's going to be much more moderate levers and what we saw in a zero rate environment, just a couple of years ago. So.
I think part of it is certainly the.
I think a thoughtful approach to capitalization from sponsors I think the other side of that is also.
Really disciplined on our and there are certainly other sponsors that are out there that are still kind of trying to pursue.
What I would say very full capital structures and for US credit is quite binary in terms of whether or not it fits our box.
If it doesn't fit the profile that we're looking for with respect to the amount of cash flow the business generates and its ability to cover its debt service. That's just something that's not going to work for our portfolio and ones that we just look to to pass on versus stretch on an oil price that risk.
The other thing I would add.
I agree with everything you said is that.
As you know we've talked in the past Robert about.
Pik interest and that percentage of our of our of our portfolio and of our top line, which is something we really.
Try hard to minimize and and so.
As Henry mentioned win win.
Buyers private equity firms or other buyers are looking to put in place.
More full aggressive cap structures youll oftentimes find in this environment a pick component in those cap structures, given where base rates are and those are those are the types of deals that I think we will we obviously see them. We evaluate them we will participate on a very selective basis, but we overall are trying to keep our pik income is.
At a very modest level.
In our top line.
Got it got it I appreciate that color if I can execute to.
To stretch the timeline.
Okay.
This is all going to look to.
To monetize more assets in 2020.
It looks like currently late ticket still going to be putting call. It 2024.
So do you.
The net cleaned instructions, we see in 2000 <unk> thousand Fortunately more reminiscent of what you're doing in the third quarter here or do you think thats going to be some some definite evolution as we go through 2024.
Monetization.
But peace.
Does it increase.
<unk> remained high same content.
This Q3 apply to next year I guess is the question.
No.
I think thats, a great question and something we're thinking a lot about and I think we're going to see.
Segments of the market evolve a bit depending on.
I would say the risk profile of the buyers and the lenders attached to those buyers.
And in a very low rate environment, which we experienced for several years you saw <unk>.
Secured debt.
Continue to grow as a multiple of cash flow.
And that wasn't necessarily surprising.
Now we're in a different reality.
And with where base rates, where they are at I think what youll start to see more of.
Are these conservative structures as as Henry outlined for Q3 activity.
Or potentially more aggressive leverage levels, but with maybe a.
A more traditional first lien.
Loan that's cash pay and.
A more junior oriented piece of paper that might have.
A pik toggle option or a portion of it is as pik to help owners manage their their fixed charge burden in these acquisitions. So.
I do think it's something that we're going to start to see more of.
In 'twenty four.
Than we've seen in some time.
I appreciate that thank you for the color.
Thank you.
Okay.
Your next question comes from the line of Ryan Lynch from <unk> W. Your line is now open.
Hey, good morning.
First question I had kind of following up on the previous line of question with the <unk>.
Loan to value.
30%.
Below 30% loan to value value on kind of the.
On the investments made this quarter.
It seems like that in combination with if I look at your overall weighted average spread on new investments, which was five 9% versus six 7% in the prior quarter.
Feels like you guys are purposely sort of de risking on the new investments or your willingness on the level of safety you guys won on new investments is that fair to assume that that's what's happening or are the terms and structures.
On these new.
Investments coming to market.
Or are these just representative of kind of what's coming to the market today.
Yes.
Hey, Ryan it's Jason Thanks for the question I think it's a little bit of both.
We are.
Certainly trying to be selective in our underwriting in this environment.
Not to mention we're sort of at a leverage level on the overall fund that we're comfortable at and so we're not looking to meet.
Meaningfully lever up from where we are.
The second point I would say is that.
Because we are in a slower volume environment.
Certainly a tick up from Q2.
That slower deal flow deal flow combined with <unk>.
Significant capital that's been raised targeting private credit has.
Forest pricing to tightened a bit so I would say where we.
We're generally probably.
25% to 50 basis points inside of where we were.
A quarter or so ago.
Where <unk> now are in the I would say $5 $55 75 range.
And first liens.
Not stretch are in the 500 to five and a quarter range. Today. So so I think you've got a little bit of.
Our our conservative bias, but in addition to that just a supply demand imbalance, which we hope to.
Two two.
To even out.
And become more rational in 'twenty four.
Okay.
Makes sense that's helpful. The.
The other question I had was I think you said, 26% of the <unk> portfolio has been realized at this point.
I'm just curious.
From an aggregate level of those investments exited.
Do you know what sort of value you guys got versus where do you guys purchased those investments for and then separately on that point.
It sounds like some of them were kind of exited in a normal course, and maybe it sounds like you were proactive in some of those exits.
If the M&A environment does pick up.
Over the next going into 2024, which it seems to be.
Do you think that that would result in a higher correlation or some correlation of you being able to and actually exiting the credit portfolio at a faster clip.
Or do you think a.
A more active M&A environment doesn't really have a high correlation with your your ability.
And speed of exiting those investments.
Thanks for the question Ryan This is Henry.
That was the first question that you had on the fair value or the the realized value relative to onboard cost basis.
So we exited all of the investments that we've realized.
Either at or above cost the respective cost basis that that applies to the 20 investments that Jason referenced earlier.
Earlier question.
With respect to what.
Were those shook out on the second point I think it's an interesting one because we did see a similar dynamic with al Sentra.
We closed all central right before the onset of COVID-19, so weak.
We closed that portfolio or that acquisition into an environment, where there is no deal activity and then obviously as we all recall in 2021 and the early part of 2022 M&A activity picked up quite dramatically and we saw a very.
I'd say SaaS acceleration in the rotation of our portfolio during that timeframe as well.
Little analogous to what we're seeing with first Eagle aware.
We closed first Eagle right before Silicon Valley Bank got taken over by the FDIC.
And I think we all know that the deal environment is quite anemic shortly.
Shortly thereafter, and we are starting to see activity pick up albeit modestly.
And I think my my expectation would be that as we see just M&A volumes pick up given that almost all of these businesses that we have in the portfolio are sponsor backed.
And.
If there is an attractive opportunity for sponsors to be able to monetize assets.
There is certainly nothing to be shy about doing so I can certainly see.
That potentially happening again here.
Okay.
It makes sense I appreciate the color that's all for me today.
Thanks Rod.
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Thank you operator.
Well once again I'd like to thank you all for joining our earnings call today and appreciate the questions and we look forward to speaking with you again soon.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.