Q1 2025 Investcorp Credit Management BDC Inc Earnings Call

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Speaker Change: Good afternoon and thank you for joining today's InvestCorp Credit Management BDC, Inc. Schedules Earnings Release for the quarter ended September 30, 2024.

Speaker Change: It is now my pleasure to turn the floor over to Walter Tsin, CFO.

Walter Tsin: Thank you, Operator. Welcome, everyone, to Invesco Credit Management BDC Quarter-Ended September 30, 2024, Earnings Call.

Walter Tsin: I am joined by Suhail Shaikh, President and Chief Executive Officer of the company.

Walter Tsin: I would like to remind everyone that today's call is being recorded and that this call is the property of Invesco Credit Management, BDC. Any unauthorized broadcast of this call in any form is strictly prohibited.

Walter Tsin: Audio replay of this call will be available by visiting our investor relations page on our website at ICMVDC.com.

Walter Tsin: 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.

Walter Tsin: We will not update forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our Investor Relations page on our website.

Walter Tsin: The format for today's call is as follows. Suhail will provide an overall business and portfolio summary, and I will then provide an overview of our results, summarizing the financials, followed by a Q&A. At this time, I would like to turn the call over to Suhail.

Suhail Shaikh: Thanks, Walt, and thank you to everyone for joining us today. I'm pleased to announce that we delivered a strong quarter, reflecting our focus on maintaining a resilient portfolio and capitalizing on selective opportunities in a challenging market environment.

Suhail Shaikh: Despite economic uncertainties, we are well positioned to navigate challenges and consistently deliver value to our shareholders.

Suhail Shaikh: Our net asset value rose by $0.34 per share to $5.55, up from $5.21 as of the quarter ended June 30, 2024.

Suhail Shaikh: The increase was primarily driven by higher net investment income, unrealized gain on investments from aftermarket adjustments, and solid credit performance across our portfolio.

Suhail Shaikh: For the quarter, we generated an investment income of $2.3 million, or approximately 16 cents per share.

Suhail Shaikh: reflecting a $1 million increase over the prior quarter. Additionally, we were successful in deploying $13.1 million across six portfolio companies, marking an uptick in activity compared to recent quarters.

Suhail Shaikh: These achievements reflect the durability of our strategy and our continued focus on credit selection and proactive portfolio management, which remains unwavering even as economic conditions shift.

Suhail Shaikh: Turning to the broader market environment, new deal flow, particularly in M&A and LPO activity remains subdued. However, we achieved high origination volumes this quarter driven mainly by refinancing the past.

Suhail Shaikh: We also made two secondary investments at attractive prices, allowing us to further diversify our portfolio with favorable sales.

Suhail Shaikh: Although competition remains intense and high-quality opportunities are scarce, we continue to deploy capital strategically, maintaining our optimal portfolio leverage between 1.25x and 1.5x.

Suhail Shaikh: Our investment pipeline remains robust and we are optimistic about the opportunities ahead. We prioritize building relationships with high-quality sponsors, investing in companies within defensible industries that demonstrate strong cash flows.

Suhail Shaikh: We continue to rotate the portfolio toward larger, more stable credits and focus on senior secured investments within the core middle market. Our portfolio companies are performing well, with only a small number of challenged positions. The median EBITDA of our portfolio rose from approximately $55 million

Suhail Shaikh: last quarter to 61 million dollars this quarter, while the weighted average net leverage declined from 5.1 times to 4.7 times over the same period.

Suhail Shaikh: Non-accruals as a percentage of total fair market value improved to 4.8% this quarter from 5% last quarter.

Suhail Shaikh: These outcomes reinforce the durability of our strategy, our focus on credit quality, and our proactive portfolio management as we look forward to a strong remainder of the year.

Speaker Change: I will now turn to details of our portfolio activity during the quarter.

Speaker Change: During the quarter and September 30th, we invested in three new portfolio companies and three existing portfolio companies.

Speaker Change: Fundings for new investments total approximately $13.1 million at cost, as I mentioned, of which half a million dollars...

Speaker Change: represents the reinstatement of previously recorded paydowns for interest received from client Hirsch LLC while it was on non-accrual status.

Speaker Change: The weighted average yield of debt investments made in the quarter was approximately 10.7%. In the same period, we fully realized two portfolio company investments, totaling $15.4 million in proceeds with an IRR of approximately 11.8%.

We invested in the first re-interim loan.

of Argonauts to support the refinancing of the companies.

Speaker Change: capital structure. Argonaut is a leading provider of mission-critical digital transformation services to corporations. Argonaut is a Trinity Partners portfolio company. Our yielded cost is approximately 11.5 percent.

Speaker Change: We also made an investment in the first lien term loan and delayed draw term loan of LifeWise Corporation to support the refinancing and GenStar Capital's purchase of the company.

Speaker Change: from Brightstar Capital. Likewise provides technology, device protection and support. Our yielded cost is approximately 11.5%.

Speaker Change: Finally, we made an investment in the first lien term loan and delayed fraud term loan of Integrity Marketing Acquisition. Integrity is an insurance broker that distributes and markets life and health insurance products and wealth management solutions.

Speaker Change: We purchased Integrity in the secondary market. Hildit cost is approximately 10%.

Speaker Change: We also made a follow-on investment in the first lien term loan of Victra, also known as LSF9 Atlantis Holdings LLC. We purchased Victra in the secondary market for a yielded cost of approximately 9.8 percent.

Speaker Change: And finally, we made another investment in Crafty Apes. Crafty Apes is a full-service visual effects studio that works with studios across the globe. Our yielded cost is approximately 14.9%. We continue to work with the company's management to provide them with financial flexibility.

Lastly, we realize that firstly...

Speaker Change: Terminal positions in Retail Services, WIS Corporation, and South Coast Terminals, both of which were refinanced during the quarter. We've been invested in both of these companies since May and December of 2021, respectively.

Speaker Change: Our realized IRR on WIS was approximately 12.9% and our realized IRR on South Coast was approximately 10.7%.

As of September 30th, our largest industry concentrations

Speaker Change: By fair market value were professional services at 14.6%, containers and packaging at 11.7%,

Speaker Change: commercial services and supplies at 10.3 percent, trading companies and distributors at 8.8 percent, followed by insurance at 7.6 percent, and specialty retail at 7.2 percent.

Speaker Change: Our portfolio companies are in 20 GICS industries as of the quarter end, including our equity and warrant positions, which is a decrease of three industries from the previous quarter.

Speaker Change: I would now like to turn the call over to Walt to discuss our financial results.

Walter Tsin: Thanks, Suhail. For the quarter ended September 30, 2024, the fair value of our portfolio was $190.1 million compared to $184.6 in June 30th.

Walt: Our net assets were $79.7 million, an increase of $4.9 million from prior quarter. Our portfolio's net increase in net assets from operations this quarter was approximately $6.6 million.

Walt: The weighted average of our debt portfolio was 10.5%, a decrease from 12.3% in the previous quarter ended June 30th, largely driven by declining SOFR and tighter spreads on new investments.

Walt: As of September 30th, our portfolio consisted of 45 borrowers. Approximately 82.5% of our investments were in first lien debt, and the remaining 17.5% were invested in equity, warrants, and other positions.

Walt: 90% of our debt portfolio was invested in floating rate instruments and 3% in fixed rate instruments.

Walt: The weighted average spread in our debt investments was 4.3% and the weighted average floor was 0.9%, a slight decline compared to the previous quarter, which had a weighted average spread of 5% and a weighted average floor of 1%.

Walt: Our average portfolio company position on a fair market basis was approximately $4.2

basis is by bio plan at 17.4 million.

Walt: We are pleased to announce that on November 4, 2024, the Board of Directors declared a distribution for the quarter ended December 1, 2024, of $0.12 per share, payable in cash on January 8, 2025, to stockholders on record as of December 20, 2025.

Gross leverage was 1.39x and net leverage was 1.26x

Walt: as of September 30th compared to 1.42x gross, 1.35x net respectively for the previous quarter.

Walt: With respect to our liquidity, as of September 30th, we had approximately $10.1 million in cash, of which approximately $8.3 was restricted cash, with $52.5 million of capacity under our revolving credit facility with Capital One.

Speaker Change: Additional information regarding the composition of portfolio is included in our Form 10-Q which was filed earlier this week. With that I would like to turn the call back over to Suhail.

Suhail Shaikh: Thank you, Walt. In closing, we are encouraged by our performance this quarter and are confident in our ability to navigate the complexities of the current environment.

Suhail Shaikh: Our disciplined approach, strong sponsor relationships, and focus on resilient portfolio companies provide a solid foundation for continued success.

Speaker Change: Thank you all for your support and we look forward to taking your questions.

Speaker Change: That concludes our prepared remarks. Luke, please open the line up for Q&A.

Speaker Change: Ladies and gentlemen, at this time we will conduct a question and answer session. If you would like to state a question, please press 7 pound on your phone now and you will be placed in the queue in the order received. Or you can press 7 pound at any time again to remove yourself from the queue.

Speaker Change: Please listen for your name to be announced and be prepared to ask your question when prompted.

We are now ready to begin.

Go ahead, sir.

Speaker Change: Hi, congratulations on a good quarter. Can you clarify? I didn't hear it as overlapping calls. What was the driver of the pick income for the quarter, please?

Yeah, hi Chris. Thank you. So a big driver was

The reversal of non-approval to approval of Klein-Hirsch.

Speaker Change: The company continues to perform well, and so that was, as you recall, previous quarter of the last at least three quarters we've had it on non-approved. So that was put back on approval, and a big portion of that coupon is back.

Thank you for watching. See you next time.

Was there anything else?

That was the biggest driver.

Chris.

Speaker Change: Okay, and then I was curious whether or not there are timing issues at play in the quarter here. Last quarter's results tend to be a little, if I recall, a little bit on the lower side. And I just didn't know whether or not any deals, which were normally would have flows last quarter, actually spilled over to this quarter.

Speaker Change: Yeah, you're absolutely right. There were a couple of the deals that did spill over into this quarter. We've been working on them for a while.

Speaker Change: and as you know this is a lumpy business so we'll have that trend every now and then because it's hard to sort of plan when some of those transactions are going to close.

Speaker Change: But what we're trying to do... Sorry, go ahead. No, no, please continue.

Speaker Change: What we're trying to do in the interim is, as you've noted in the portfolio, we've tried to

Speaker Change: smooth out some of that activity by purchasing some loans in the secondary market, whether it's through add-ons to existing positions or something that we find attractive that we know well, leveraging our expertise on some of those names.

Great. I'll get back in the queue. Thank you.

Thank you.

Speaker Change: Thank you very much. Again, if you have any questions, please press seven pound.

Thank you.

Please press 7-pound for your questions. We'll wait for...

Alright, I'll open the line up for Mr. Nolan again.

Mr. Nolan: Hi, I'm back. Also, could you give a little detail in terms of the realized loss and the unrealized gain? I presume some of the unrealized gain was just a true-up, but a little detail will be helpful.

Speaker Change: Sure. So, the realized loss was a function of a couple of names.

Speaker Change: Unrealize was really was a function of Klein-Hirsch markup and BioPlan markup, so that was the easy, I mean so both of those have performed well, so we've marked both of those.

may it stop.

Speaker Change: and the realized was Crafty Apes which happens to be all non-cruel and you know we've had to take a realized loss on that piece.

Speaker Change: There's more to come on that name in the subsequent period, so we will have some more to talk about. And then, you know, we did clean up the portfolio with some smaller trades, but those are the big movers in the portfolio.

Speaker Change: And I guess my final question, Suhail, given that you are new into the CEO spot, could you articulate a little bit of your vision in terms of where in the market you want

Speaker Change: ICMB to source deals and if there's a particular strategy and or competitive advantage you might have.

Suhail Shaikh: Yeah, that's a great question, Christopher. So what we are trying to do is...

Suhail Shaikh: build a business around what we describe as corporate markets and that's really companies with sort of 15 to 20 or even down the low end to 50 to 75 million dollars on the upper end.

A large portion of those deals are...

Suhail Shaikh: that we look at and what we actually end up investing in are club deals. So these are, I'd say, more than 50% of our transactions are coming in directly or from sponsors, which is why the portfolio tends to be heavily weighted towards sponsor-backed deals.

And then the rest are opportunistic.

you know, investments.

Suhail Shaikh: could be sponsor-backed names in the secondary market and leveraging, at times, our liquid credit teams' analysis on various name switches which are less liquid for them but sort of fit our yield focus.

Suhail Shaikh: That's what we're trying to do. Given we have three other vehicles that we manage besides ICMD, we can actually write decent-sized checks for, and meaningful checks for sponsors to actually have us be relevant to their solutions.

Suhail Shaikh: That number of check sites will continue to grow as we continue to raise money which ultimately benefits ICMB and as you can tell over the last

Suhail Shaikh: you know, 12 to 18 months, we've been steadily increasing the average EBITDA of the portfolio, decreasing the leverage, increasing the ability to do more deals where directly sourced from sponsors. So that's really our strategy.

Suhail Shaikh: We expect to have ICMB benefit from a wider portfolio of opportunities that we seek in the marketplace in that core middle market.

Final question.

Speaker Change: Your expenses tend to be a little bit heavy in terms of the percentage of revenues.

Speaker Change: Any plan in terms of improving operating efficiencies? That's it for me, thank you. Great question. We are taking a very deep dive into just across our portfolios and across our business, and specifically for ICMB, ways that we can efficiently

to manage our expenses.

Speaker Change: That number is going to come down over time as the rest of the...

Speaker Change: portfolio when our business grows. I mean ICMP is obviously one portion of our strategy, so that number should come down organically, but also on an inorganic manner. We are looking at ways to use technology more efficiently to lower our expense base.

Thank you. Thank you. Thank you.

Thank you very much and there are no further questions.