Crescent Capital BDC - Q1 2024

Transcript

Operator (participant)

Good day, everyone, and welcome to today's Crescent Capital BDC, Inc. first quarter earnings call. At this time, all participants are in a listen-only mode. Later, you will have an opportunity to ask questions during the question-and-answer session. You may register to ask a question at any time by pressing star 1 on your telephone keypad. Please note this call is being recorded, and it is now my pleasure to turn today's call over to Dan McMahon, Head of Investor Relations. Please go ahead.

Daniel McMahon (Head of Investor Relations)

Good morning and welcome to Crescent Capital BDC Inc.'s first quarter and its March 31, 2024, earnings conference call. 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 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 a guarantee of future results.

Yesterday, after the market closed, the company issued its earnings press release for the first quarter ended March 31, 2024, and posted a presentation to the IR section of its website at crescentbdc.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 C-Cap's Chief Executive Officer, Jason Breaux, President Henry Chung, and Chief Financial Officer, Gerhard Lombard. With that, I'd now like to turn it over to Jason.

Jason Breaux (CEO)

Thank you, Dan. Hello, everyone, and thank you all for joining us today. We're very pleased to report another record quarter of earnings with continued strong credit performance across the portfolio. Net investment income, or NII, was $0.63 per share, up $0.02 from last quarter. Our NII has increased in each of the past five quarters, resulting in record NII for the fifth consecutive quarter. This quarter's earnings translated into an annualized NII return on equity of 12.6%. With our earnings well in excess of the regular dividend, our board has declared a supplemental dividend for the first quarter of $0.11 per share, which, when coupled with our previously declared regular dividend of $0.41 per share, equates to a 10.3% annualized dividend yield on March 31, 2024, NAV. We've demonstrated meaningful earnings in excess of our base dividend over the last several quarters.

In response, we implemented a supplemental dividend policy in the first quarter of 2023 to share additional earnings upside with our stockholders in the form of increased distributions. This was in light of our view that earning the base dividend has always been a key part of the C-Cap story. We've never cut it, and we've paid the current base dividend of $0.41 for 22 consecutive quarters. Reflecting confidence in both the sustainability of C-Cap's NII and the continued strong credit performance of our portfolio, we are pleased to announce that our board recently approved a $0.01 increase to our regular dividend, increasing the second quarter regular dividend to $0.42 per share. What underpins this increase in our base dividend is our conviction in C-Cap's longer-term earnings power.

Having reviewed firsthand the impact of a higher-rate environment on our portfolio and the origination opportunities in our private credit pipeline, we are bullish on C-Cap's longer-term ability to continue its track record of earning its regular dividend. We also note that we have benefited from managing and monitoring the loans that we acquired from First Eagle BDC for over a year now and believe that the earnings from the current assets, as well as the loans that we expect to rotate into, will continue to be attractive for C-Cap's longer-term earnings profile. The strength of our earnings and the positive valuation momentum in our portfolio also led to growth in our net asset value, which increased 1.2% in the quarter and 4.6% year-over-year to $20.28 per share, which is the highest it has been since June 2022.

Net income per share was $0.76 in the first quarter, corresponding to an annualized ROE of 15.2%. Let's shift gears. Please turn to slides 13 and 14 of the presentation, which highlight certain characteristics of our portfolio. We ended the quarter with approximately $1.6 billion of investments at fair value across a highly diversified portfolio of 183 companies, with an average investment size of approximately 0.5% of the total portfolio. We've deliberately maintained an investment portfolio that consists primarily of senior-secured first lien and unitranche first lien loans, collectively representing 90% of the portfolio at fair value at quarter end, up modestly 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 portfolios with greater second lien and subordinated debt exposure.

We have focused our investing efforts on non-cyclical industries with high free cash flow characteristics and remain well diversified across 20 broad industry categorizations. Our investments are almost entirely supported by well-capitalized private equity sponsors, with 98% of our debt portfolio in sponsor-backed companies as of quarter end. We've been pleased with the fundamental performance of our portfolio, as indicated by our performance ratings and non-accrual levels. Our weighted average portfolio grade of 2.1 remained stable quarter-over-quarter, and on slide 17, you will see that the percentage of risk-rated one and two investments, the highest ratings our portfolio companies can receive, accounted for 89% of the portfolio at fair value, an improvement from 87% at year end. As of quarter end, we had investments in seven portfolio companies on non-accrual status, representing 1.6% and 0.9% of our total debt investments at cost and fair value, respectively.

This compares to nine portfolio companies on non-accrual status, representing 2.0% of total debt investments at cost as of year-end, as our position in Matilda Jane, a First Eagle name, was realized above our acquired cost basis, and Integro was removed from non-accrual status. As previously noted, we are pleased to declare a supplemental dividend of $0.11 per share for the first quarter, payable on June 17. Our board has also declared a regular dividend of $0.42 per share for the second quarter, payable on July 15, 2024. I'd now like to turn it over to Henry to discuss the market, our Q1 investment activity, and the portfolio. Henry.

Henry Chung (President)

Thanks, Jason. In terms of the market, first quarter direct lending volume was down nearly 30% from the fourth quarter, driven primarily by lower LBO and M&A activity. The majority of activity came from refinancings, which represented 36% of overall activity in the first quarter, much of which was in the upper middle market where broadly syndicated loan arrangers and upper middle market focused direct lenders competed for transactions. March LBO volumes, however, were at their highest level since November and almost doubled February's total. As a result of this momentum, a stable economy, a strong private credit market, and a significant backlog of transactions that sponsors are holding, we are optimistic that we will see a pickup in LBO volume through the remainder of the year.

And while this indicated markets are open, we believe the direct lending market remains the market of choice for sponsors in the lower and core middle market, given the benefits of the direct lending expertise offered by managers like Crescent, including speed and certainty of execution and flexibility around the ability to craft bespoke capital structures. Please turn to slide 15, where we highlight our recent activity. As you can see on the left-hand side of the page, gross deployment in the first quarter totaled $74 million, 95% of which was in senior-secured First Lien and Unitranche investments. During the quarter, we closed seven new platform investments totaling $43 million, with the remaining $31 million coming from incremental investments in our existing portfolio companies.

Incremental investments as a percentage of overall activity was elevated in Q1 compared to recent quarters, as we've seen higher levels of opportunistic refinancing and add-on opportunities within our existing borrower universe. This provides an ongoing opportunity set for us to make incremental investments in existing, well-performing companies seeking to grow via the pursuit of accretive M&A. $74 million in gross deployment compares to approximately $98 million in aggregate exits, sales, and repayments. The new investments during the first quarter were loans to private equity-backed companies with SOFR floors, attractive fees, and a weighted average spread of approximately 600 basis points. We continue to back well-capitalized borrowers with significant equity cushions, and the weighted average loan to value of our new investments for the quarter was 40%. Turning back to the broader portfolio, please flip to slide 16.

You can see that the weighted average yield of our income-producing securities at cost remained flat quarter-over-quarter at 12.3% and is up 50 basis points year-over-year. It is worth noting that for the first time, this metric, represented by the dark blue line at the top of the chart, includes the impact of income-producing equity investments. This includes dividends from the Logan Joint Venture as well as our partnership interests in GACP II and WhiteHawk. Prior period yield figures have been retroactively updated for consistency. We believe that this update provides a more comprehensive view of expected near-term investment income from C-Cap's portfolio. As of December 31st, 98% of our debt investments at fair value were floating rate with a weighted average floor of 80 basis points, which compares to our 65% floating rate liability structure based on debt drawn with 0% floors.

Overall, our investment portfolio continues to perform well, with strong year-over-year weighted average revenue and EBITDA growth. That being said, we have continued to closely monitor the impact of rising borrowing costs on our portfolio companies. The weighted average interest coverage of the companies in our investment portfolio at quarter end improved from 1.7 times at year end to 1.8 times as of quarter end. As a reminder, this calculation is based on the latest annualized base rate as of each respective quarter. We also continue to closely monitor how our portfolio companies are managing fixed charges. 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 expected, we saw a modest increase in aggregate revolver utilization during the first quarter, with approximately 56% of aggregate revolver capacity available across the portfolio as of quarter end, which is more than ample in our view. The strength of our portfolio continues to benefit from the substantial amount of equity invested in our companies. Most of it's applied by large and well-established private equity firms with whom we have longstanding relationships and have partnered with in multiple transactions. And we note that the weighted average loan to value in the portfolio at time of underwriting is approximately 41%. With that, I will now turn it over to Gerhard.

Gerhard Lombard (CFO)

Thanks, Henry, and hello everyone. Our net investment income per share of $0.63 for the first quarter of 2024 compares to $0.61 per share for the prior quarter and $0.54 per share for the first quarter of 2023. Total investment income of $50.4 million for the first quarter, the highest quarterly figure we've reported since inception, compares to $50.0 million for the prior quarter. Recurring yield-related income was flat quarter-over-quarter at $47.8 million and accounted for approximately 95% of this quarter's total investment income. PIK income continues to represent a modest portion of our revenue, 3% of total investment income, which compares favorably to the BDC peer group. We remain highly sensitive to PIK income, particularly in a higher-for-longer rate environment.

What we consider non-recurring investment income, which consists primarily of accelerated amortization, fee income, and common stock dividends, increased approximately $500,000 quarter-over-quarter from $2.1 million-$2.6 million, driven primarily by two large realizations and an increase in structuring fees. While we expect some level of non-recurring or transactional investment income each quarter, our non-recurring investment income over the last two quarters was unusually high, exceeding $2 million in each of those two quarters. Our GAAP earnings per share, or net income, for the first quarter of 2024 was $0.76. This was primarily the result of net investment income outpacing the regular and supplemental dividends, coupled with $0.13 per share of net unrealized depreciation. As of March 31st, our stockholders' equity was $752 million, resulting in net asset value per share of $20.28 as compared to $743 million or $20.04 per share last quarter.

Now let's shift to our capitalization and liquidity. I'm on slide 19. We continue to maintain a conservative mindset to both balance sheet liquidity and BDC leverage, maintaining the company with a full economic cycle mentality. While this starts with our underwriting of new investment opportunities, it also applies to how we manage C-Cap's capitalization and liquidity. As of March 31, our debt-to-equity ratio was 1.11 times, down from 1.15 times in the prior quarter. Our liquidity position remains strong, with $344 million of undrawn capacity subject to leverage, borrowing base, and other restrictions, and $32 million in cash and cash equivalents as of quarter end. The weighted average stated interest rate on our total borrowings was 6.97% as of quarter end. As we've highlighted on the right-hand side of the slide, there are no debt maturities until 2026.

As Jason noted, for the second quarter of 2024, our board increased our regular dividend to $0.42 per share, which we are well positioned to cover over the longer term. As a point of clarification, we will continue to declare and pay quarterly supplemental dividends subject to approval by the board to enhance stockholder distributions. With that, I'd like to turn it back to Jason for closing remarks. Thanks, Gerhard. In closing, we are pleased with this quarter's strong financial results and the performance of our investment portfolio. We've continued to maintain a defensively positioned portfolio that delivers a stable NAV profile with consistent dividend coverage, and the announced increase in our base dividend highlights our conviction in C-Cap's long-term earnings power.

As we look forward over the remainder of 2024, we remain confident in the continued strong performance of C-Cap's portfolio and believe we are on track to deliver attractive risk-adjusted returns to our stockholders. Finally, in just over a month, on June 11th, we will be hosting our inaugural Analyst and Investor Day. We look forward to speaking with many of you then. With that, operator, we can open the line for questions.

Operator (participant)

Thank you. At this time, if you would like to ask a question, please press the star and one on your telephone keypad now. You may remove yourself from the queue at any time by pressing star two. Once again, that is star and one if you'd like to ask a question. We'll pause for just a moment to allow questions to queue. Just a reminder, that was star and one for any questions and/or comments. Our first question comes from Paul Johnson with KBW.

Paul Johnson (Analyst)

Good afternoon, guys. Thanks for taking my questions. Congrats on a good quarter. Weighted average yield this quarter was obviously pretty stable as was the spread. I was just kind of wondering if you'd kind of speak to that in the market, you know, into your portfolio and kind of what you're seeing, you know, in the market.

Gerhard Lombard (CFO)

Hey, hey, Paul. It's Jason. Thanks for the question. You know, I think we're pretty pleased with where we've been able to price new opportunities in this environment. Henry talked a little bit about the competition that we're seeing here in 2024 for deals. We've certainly, you know, had lower volumes, which has driven pricing tighter, as well as the presence of the BSL market again, which has certainly been active here in 2024. That's largely been focused on the upper mid-market, where they're competing with some of the larger private credit arrangers in deals that generally, you know, we would characterize as in excess of $1 billion in deal size.

I think if I were to sort of think about pricing over the last couple of quarters, in the upper mid-market, I would say that on the uni side, you know, pricing has come down generally 25-50 basis points, probably from a 525-type spread to 500 and even in some cases 475. And then, in the core and lower middle market, which is where, we at Crescent generally focus, I'd say pricing over the same period of time has probably come in about 25 bips, from a 575-550 deal or from a 550 deal to a 525 deal.

Paul Johnson (Analyst)

Thanks for that. That's really good color. And then, kind of just on the marks for the quarter, NAV is up nicely. Just, was that just kind of general portfolio kind of marks broadly across, you know, your book, or is that, you know, anything specific driving that, like, in the non-accrual resolutions or anything like that?

Gerhard Lombard (CFO)

Hey, good morning. This is Gerhard. I can take that. There's nothing individually material. We'd really link that increase in marks to what Jason said a minute ago, which is tightening of spreads.

Paul Johnson (Analyst)

Got it. Thanks. And then last one for me, just, you know, on your comment on the non-recurring income being a little bit higher the last two quarters, you know, by about $2 million or so, you know, I guess just kind of how should we think about that going forward? Would you expect that to, you know, basically not to really basically not get, you know, another $2 million or so, you know, kind of going forward? And is that, you know, is that kind of non-recurring income factored into your kind of weighted average yield calculation for the quarter?

Gerhard Lombard (CFO)

Yeah. Thanks. I'll maybe take those in reverse. The second part, we generally do not include the non-recurring income in our yield calculation. So that would be, you know, the yield calc is recurring income only, including OID. Regarding the first part of your question, it is obviously difficult to project non-recurring income because the two highest drivers are accelerated OID and transactional fee income. And it's just an inherent level of uncertainty or volatility in those numbers quarter-over-quarter. I will say that 95+% of our total revenue is recurring. Our historical range in non-recurring has been between about $500,000 and over $2 million, which you heard in the prepared remarks.

So while, you know, while we don't provide forward-looking guidance on NII as we look at Q2 today, while we expect some level of non-recurring income, we don't believe it'll be quite as high as in Q1 of 2024 and Q4 of last year.

Paul Johnson (Analyst)

Got it. Appreciate that. That's helpful. That's all from me. Thanks again.

Gerhard Lombard (CFO)

Thanks a lot, Paul.

Operator (participant)

Just a reminder, if you'd like to ask a question, that was star and one on your telephone keypad now. Once more, that was star and one for any questions and/or comments. At this time, I'm currently showing no questions in the queue. I'll now turn it back over to management for any closing remarks.

Gerhard Lombard (CFO)

Thanks very much, everyone. We appreciate your time and attention and support of C-Cap. We look forward to speaking with you next quarter and, also, at the Analyst and Investor Day in the interim. Thank you.

Operator (participant)

This does conclude today's program. Thank you for your participation. You may now disconnect.