Crescent Capital BDC - Q2 2024

Transcript

Operator (participant)

Good day, everyone, and welcome to the Q2 2024 Crescent Capital BDC Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. You may register to ask questions by pressing the star and one on your telephone keypad. You may withdraw yourself from the queue by pressing star two. Please note this call may be recorded, and I will be standing by should you need any assistance. It is now my pleasure to turn the conference 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 second quarter ended June 30, 2024 earnings conference call. Please note that Crescent Capital BDC may be referred to as CCAP, 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 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 second quarter ended June 30, 2024, and posted a presentation to the Investor Relations 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 CCAP'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. It was great to see some of you in person at our inaugural Analyst and Investor Day in early June. I'll start today's call by highlighting our second quarter results, follow that with some thoughts on our investment approach, and touch on our portfolio. Yesterday evening, we reported another quarter of solid earnings with continued strong credit performance across the portfolio. Net Investment Income, or NII, was $0.59 per share, which translates into an annualized NII return on equity of 11.7%. With our earnings again well in excess of the recently increased regular dividend, our board has declared a supplemental dividend for the second quarter of $0.09 per share.

When coupled with our previously declared regular dividend of $0.42 per share, this equates to a 10% annualized dividend yield on June 30, 2024 NAV. The strength of our earnings also led to growth in our net asset value, which increased to $20.30 per share, which is the highest it has been since June 2022. Let's shift gears and discuss the investment portfolio. Before I get into specific data points, I'd like to spend a minute on our investment approach and where we seek to originate new opportunities. It's no secret that in recent quarters, there has been a lot of competition in private credit, both with the syndicated markets and significant capital that we have seen raised in the sector.

In recent quarters, the average tranche size of transactions that are being refinanced by the direct lending markets from the syndicated markets is well north of $1 billion. This segment of the market is not where we focus. Where we focus our efforts is in what we call the lower and core middle market, segments of the market that are typically not able or less able to access the syndicated loan markets due to issuer size. So think issuers with EBITDA of $10 million on the low end, up to roughly $150 million-$200 million on the high end. In the lower and core middle market, we are able to directly negotiate terms with our sponsors that have structural features around collateral protection that we deem critical for investing in the space.

This is in direct contrast with the looser documentation for some of the mega unitranche deals completed over the past few quarters that resemble broadly syndicated loan documents, some of which have garnered significant public attention. Our segment focus provides us with an opportunity to truly lead our transactions and drive the documentation. We are focused on strong cash flow generation, tight EBITDA definitions, as well as enhanced monitoring rights, which allow us to be proactive versus reactive as we think about our approach to portfolio management. We are cash flow lenders, so we focus on underwriting businesses that have been operating for a long time, that have a history of being able to generate cash flow consistently with low working capital requirements. It's for these reasons we do not invest in annual recurring revenue or ARR loans.

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 first lien loans, collectively representing 90% of the portfolio at fair value at quarter end, unchanged from the prior quarter. We continue to focus our investing efforts on non-cyclical industries 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 nonaccrual levels. Our weighted average portfolio grade of 2.1 remains stable quarter-over-quarter. On slide 17, you will see 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, also stable quarter-over-quarter. As of quarter-end, we had investments in eight portfolio companies on nonaccrual status, representing 1.6% and 0.9% of our total debt investments at cost and fair value, respectively, which was flat quarter-over-quarter. I'd now like to turn it over to Henry to discuss the market, our Q2 investment activity, and the portfolio. Henry?

Henry Chung (President)

Thanks, Jason. Middle market loan volume for the first half of the year increased nearly 20% as compared to the second half of 2023, with most of the pickup in volume driven by refinancing activity. LBO activity, which represented approximately one-third of middle market loan volume in the first half of 2024, continues to increase, albeit modestly, driven by continued strong business fundamentals, better clarity on rates, declining spreads, and strong demand from the private credit market. Coupled with continued pressure from LPs to return capital, we believe that conditions are in place for LBO volume to continue to accelerate in the second half of the year.

While the syndicated markets are open, as Jason discussed, 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 uncertainty of execution and flexibility around the ability to craft bespoke capital structures. Please turn to slide 15, where we highlight our recent activity. Gross deployment in the first quarter totaled $119 million. As you can see on the left-hand side of the page, 92% of which was in senior secured first lien and first lien unitranche investments. During the quarter, we closed 6 new platform investments totaling $62 million, with the remaining $57 million coming from incremental investments in our existing portfolio companies.

Incremental investments as a percentage of overall activity was elevated in the first half of 2024 compared to prior periods, as we continue to see 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. The $119 million in gross deployment compares to approximately $73 million in aggregate exits, sales, and repayments, resulting in $46 million of deployment on a net basis. 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 530 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 31%. Turning back to the broader portfolio, please flip to slide 16. You can see the weighted average yield of our income-producing securities at cost came down modestly quarter-over-quarter to 12.2%, primarily due to lower-yielding assets that we originated in the second quarter, coupled with the exit of certain higher-yielding assets. As a reminder, this metric, represented by the dark blue line at the top of the chart, now includes the impact of income-producing equity investments. This includes dividends from the Logan JV, as well as our partnership interests in GACP II and WhiteHawk.

As of June 30th, 97% of our debt investments at fair value were floating rate, with a weighted average floor of 80 basis points, which compares to our 67% 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 borrowing costs on our portfolio companies, given the elevated interest rate backdrop. The weighted average interest coverage of the companies in our investment portfolio at quarter end remained stable at 1.7x as compared to the prior quarter. As a reminder, this calculation is based on the latest annualized base rates each quarter. We also continue to closely monitor how our portfolio companies are managing fixed operating costs.

Our analysis demonstrates that our portfolio companies in the aggregator are well positioned to address fixed charges with operating cash flows and available balance sheet liquidity. As expected, we saw a modest decrease in aggregate revolver utilization during the second quarter, with approximately 57% of aggregate revolver capacity available across the portfolio as of quarter end, which is sufficient in our view. It is worth noting that we have seen an increase in repricing requests given tightening spreads. Our approach to repricing is that a portfolio company ought to have demonstrated improvement in creditworthiness since underwriting through growth and deleveraging in order to warrant a repricing. 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.

We note that the weighted average loan to value in the portfolio at time of underwrite is approximately 40%.

...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 $0.59 for the second quarter of 2024 compares to $0.63 per share for the prior quarter and $0.56 per share for the second quarter of 2023. Total investment income of $49 million for the second quarter compares to $50.4 million for the prior quarter. The primary driver of this decrease relates to what we classify as non-recurring investment income. Consisting of accelerated amortization, fee income, and common stock dividends, non-recurring income of $1.8 million decreased quarter over quarter from $2.6 million.

As noted on last quarter's call, while we expect some level of non-recurring or transactional investment income every quarter, our non-recurring investment income last quarter, driven primarily by two large realizations and an increase in structuring fees for a new platform investment, was meaningfully higher than in previous quarters. Importantly, our recurring yield-related income continues to represent the lion's share of total investment income, contributing over 95% of this quarter's total income, consistent with prior quarters. PIK income continues to represent a modest portion of our revenue at 4% of total investment income, which compares favorably to the BDC peer group. We remain highly focused on our level of PIK income, particularly in this environment, and believe that this will be a differentiator for BDC performance in the coming years. Our GAAP earnings per share or net income for the second quarter of 2024 was $0.55.

This was primarily the result of net investment income outpacing the regular and supplemental dividend, offset by $0.07 per share of net unrealized and realized losses. As of June thirtieth, our stockholders' equity was $752 million, up modestly from the prior quarter, resulting in net asset value per share of $20.30. Now let's shift to our capitalization and liquidity. I'm on slide 19. As I noted in June at our Analyst Day, in terms of our leverage strategy, we have generally prioritized measured growth and have historically operated at the relatively conservative debt-to-equity ratio. This quarter's investment activity brought our debt-to-equity ratio up to 1.18x from 1.11x in the prior quarter.

This quarter's increase puts us closer to the midpoint of our stated leverage range of 1.1x to 1.3x. With $294 million of undrawn capacity, subject to leverage, borrowing base, and other restrictions, and $36 million in cash and cash equivalents as of quarter end, we have sufficient liquidity to fund further investment activity while maintaining a debt-to-equity ratio that we are comfortable operating at. The weighted average stated interest rate on our total borrowings was 6.91% as of quarter end. As we've highlighted on the right-hand side of the slide, there are no debt maturities until 2026. One additional item to highlight here relates to our SPV asset facility.

In May, we tightened the spread by 30 basis points to SOFR plus 245 and extended the maturity from March 2028 to May 2029. As Jason mentioned, for the third quarter of 2024, our board has declared our recently increased regular dividend of $0.42 per share, which we believe we are well positioned to cover over the longer term. We also plan to continue to declare and pay quarterly supplemental dividends pursuant to the current calculation to provide further distributions to stockholders. And with that, I'd like to turn it back to Jason for closing remarks.

Jason Breaux (CEO)

Thanks, Gerhard. In closing, we are pleased with this quarter's 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. At our Analyst and Investor Day in June, one thing we hope everyone left with was that CCAP benefits from its affiliation with Crescent, a proven cycle-tested manager. As credit investors, Crescent's approach to investment selection has remained consistent and disciplined for over three decades, and we believe this level of experience will serve as a point of real differentiation for CCAP in less benign credit environments. Even though the private credit landscape continues to rapidly evolve, we want to assure our shareholders that our investment approach remains disciplined and consistent.

As we look forward over the remainder of 2024, we remain confident in the continued strong performance of CCAP's portfolio and believe we are on track to continue to deliver attractive risk-adjusted returns to our stockholders. With that, operator, we can open the line for questions.

Operator (participant)

At this time, if you would like to ask a question, please press star and one on your telephone keypad. You may withdraw your question by pressing star two. Once again, to ask a question, please press star and one on your telephone keypad. We'll take our first question from Lee Cooperman with Omega Family Office. Please go ahead.

Leon Cooperman (Chairman and CEO)

Thanks. I've been first. Thank you. Two questions. One, I need a little help. On all these calls I've listened to, everybody says interest rates are very high. What is the evidence that interest rates are very high? They're higher than they've been, but, you know, the stock market's at a record high. If you take the unweighted averages, the market is at a record high. There's some speculation going on in the market. You know, prior to 2008, the 10-year government bond yield in line with nominal GDP. So if you take 2%-3% inflation, 2%-3% real growth, the 10-year wouldn't be undervalued, or at 4%-6% yield. So what is the evidence that interest rates are too high? And that's number one. And then I have a second question.

Jason Breaux (CEO)

Hey, hey, Lee, thanks for joining. Thanks for the question. I think we would agree with you. I think we would say that interest rates are high looking back at the last, let's say, 10 years, they're high. But if you go back historically over a longer period of time, I wouldn't call them necessarily high today.

Leon Cooperman (Chairman and CEO)

Right. Secondly, you know, Wall Street has created a lot of companies in the BDC space, REIT space, that only made sense when stocks sell at a premium to NAV, because the game was, you know, sell stock, buy assets, raise a dividend, you know, sell stock, buy assets, raise a dividend. And once the stocks go to a discount to NAV, it's game over. And you want to be with the guys that are smart enough to understand that the game has changed and are willing to engage in capital management. So with our stocks selling below book value, do you guys have any plans to return capital via repurchase, or is this something that you don't consider?

Jason Breaux (CEO)

Yes. Lee, thanks again. It's Jason. This is something that we evaluate, and we will continue to evaluate. As of today, the asset yields that we're getting are still compelling, with leverage, even more compelling. That said, I think that's something that we're going to continue to be mindful of as we look at our stock price and we look at where the rate environment heads going forward, because we obviously need to evaluate both of those measures. We also have to take into consideration on buybacks, that we make sure to balance that with the benefits of having scale in the space, just given the fixed charges that are associated with managing a registered vehicle. And then the last point is, where our leverage is at. So, today, for instance, we're basically on top of our target leverage.

A buyback would be a levering, leveraging transaction, but it is something if we are to do it. I think we would make sure to manage that within our target leverage.

Leon Cooperman (Chairman and CEO)

A reasonable answer. Thank you very much, and good luck.

Jason Breaux (CEO)

Thank you.

Operator (participant)

We'll take our next question from Robert Dodd with Raymond James. Please go ahead.

Robert Dodd (Senior Equity Research Analyst)

Hi, guys. I'm looking at the liability side of the balance sheet. Can you give us any color on the plans? I mean, as it stands right now, you've got about 60% of your debt stack maturing in an 8-month window in 2026, and the SMBC facility goes into amortization roughly a year from now. So I mean, it's pretty crowded in that window. It's a couple of years from now, but can you give us any thoughts on what you would expect to do to maybe ladder it out more over the period that you still have available to manage that?

Gerhard Lombard (CFO)

Yeah. Hey, hey, hey, Robert, it's Gerhard. Good morning. Thanks for the question.

Robert Dodd (Senior Equity Research Analyst)

Thanks.

Gerhard Lombard (CFO)

It's a good question. You know, we certainly feel good about our cost of capital today. Those unsecured debts with, you know, as you know, have a kind of a low fixed coupon relative-

Robert Dodd (Senior Equity Research Analyst)

Mm-hmm

Gerhard Lombard (CFO)

-to where they would be today, so that's, that's very attractive. We are not in a rush to refinance those notes immediately. You know, we—as you, as you saw from the 8-K on our SPV facility and the prepared comments we made a few minutes ago, we are actively looking at our capital structure and taking advantage opportunistically of opportunities to kind of, you know, manage that and optimize the capital structure. But, but as you might imagine, we are in constant dialogue with the market and with our lenders, and, and so, you know, you, you should expect that we will take action on those notes as well in terms of maturity. And, you know, to comment on, about laddering, I think that does make a lot of sense.

I don't think we necessarily like the idea of having, you know, a large bullet maturity on our unsecured debt, and so I think we like the idea of laddering that so you are, you know, in the market all the time and you are diversifying away that refinancing risk that you would have otherwise if you had a kind of a larger single maturity on your unsecured capital.

Robert Dodd (Senior Equity Research Analyst)

Got it. Thank you. Appreciate that. On the Henry's comments about the portfolio aggregate liquidity, and 57% of all the capacities available, which it sounds very good. Are you seeing any shifts on the margin? Because obviously, the aggregate, I'd expect the aggregate portfolio companies to be doing pretty well. But have there been any shifts at the margin? It doesn't look like it from your internal ratings, right? But anything that you're monitoring, when it happens you're monitoring at an increased rate, given how relatively high rates have been for the prolonged period and the liquidity that has been consumed, on the plus side for shareholders, by those rates and higher cost of funding for portfolio companies.

Henry Chung (President)

Yeah, this is Henry. I can comment on that. I would say that, you know, there's certainly on the margin we're focused on is indicated by our watch list, which represents just around 10% of our overall portfolio. Within the watch list, I'd say that liquidity is, as we sit here today, liquidity needs are really concentrated in less than a handful of portfolio companies that we're highly focused on. And, you know, these are companies where it's not necessarily just a rate issue, there's some operating performance near-term challenges that those companies are working through, that coupled with the higher fixed charges that are resulting from the current rate environment are creating some needs for liquidity.

I'd say that, you know, given that 99% of our portfolio is sponsor-backed, we look to the sponsors to solve those liquidity needs to the extent that outside capital is needed. But, to your comments, if you were to look at it on an aggregate basis, we're not seeing any heightened revolver utilization, which is something we track real-time, given that we are typically the revolver lenders in these transactions as well. It's really going to be on the margins, as you said, and really a subset of our watch list.

Robert Dodd (Senior Equity Research Analyst)

I appreciate that, and you opened the sponsor door. To the point of Jason's comments in the beginning as well, sponsors for different parts of the market appear to be acting differently. Are you seeing those sponsors step up? I mean, certainly in some of the large mega deals, we have not, clearly. Are you seeing the sponsors continue to step up to provide the liquidity where needed in your segment of the market?

Jason Breaux (CEO)

Yeah. The short answer is we absolutely are. And it really comes down to the assessment of the constituents within the capital structure of whether the issue that the company is facing is really a secular or a longer term fundamental issue, or something that's short term that can be bridged with some amount of equity capital. And I think, you know, we've certainly been fortunate within our portfolio, and I think this is really, given our investment approach and our underwriting process, to be in situations where any liquidity needs that we have seen have been really short term needs in nature.

That's allowed the sponsor to be able to be comfortable putting in capital beneath us in a position where they feel like they'll, you know, get a return on that capital, and also for us to credibly come to a view that that's all that's needed within that respective situation. So, I'd say that certainly in the situations where we've seen sponsors need to step up, we've seen them continue to do so.

Robert Dodd (Senior Equity Research Analyst)

Got it. Thank you. Appreciate the call.

Daniel McMahon (Head of Investor Relations)

Robert?

Operator (participant)

We'll take our next question from Paul Johnson with KBW. Please go ahead.

Paul Johnson (VP and Equity Research Analyst)

Yeah, thanks. Good morning. Thanks for taking my questions. So I just wanted to ask a question on the PIK income statistic you gave, 4%. I just wondering if you can kind of talk to why that is so much lower than the average kind of BDC PIK, PIK percent across the space. You know, weighted average leverage of 5.5x, you would expect in this environment that might be higher, but is it just simply because there's less borrowers in the portfolio that have this option available, or is, you know, less being utilized at the moment? But comments there would be helpful.

Jason Breaux (CEO)

Yeah. Hey, hey, Paul, it's Jason. Thanks for the question. Let me take a stab at that, and, Henry, feel free to chime in if you've got additional thoughts. A little bit of this is speculation around, you know, maybe why we're lower than our peers. I can certainly comment on why we're low, which is we are and have been, since inception, very focused on earning cash at the top line, since we're distributing cash at the bottom line. And, so, we have a high degree of sensitivity to PIK toggle options, for instance, in deals at underwrite.

I can't say that we don't do them, but we do them very selectively, in terms of deals that we underwrite that have a PIK option. That probably falls in contrast to some of our peers who do more of that. ARR loans, for instance, oftentimes have a PIK feature because they don't necessarily generate profitability as they're investing in their business. And so, ARR loans are not an area of focus for Crescent, really never have been. Secondarily, I would say, you know, the other way you find PIK in portfolios is when you've got amendment or workout activity. And I would say we certainly have some of those situations contained within our watch list.

Oftentimes, as Henry mentioned, when sponsors are wanting to write a check to support a business, they're also looking for concessions from lenders. The top ask these days is cash interest burden relief in the form of PIK. That's the other way that you know you would find PIK income come into portfolios. And I would say, we do our darndest on those types of situations to make sure that if we are PIKing, we are getting real value from ownership as well to compensate for that concession that we're making. You know, as you know, we try to be extremely selective in terms of the credits that we choose to put into our portfolio.

So my hope is that over the long term, you won't see that as a material part of our portfolio at any time.

Henry Chung (President)

... Yeah, the other thing I'll comment on there, Jason already touched on ARR loans, but, you know, during that 2021, early 2022 vintage, or I shouldn't say a lot, but a top deal structure that was fairly popular was a uni plus PIK preferred structure, where sponsors were looking to be able to stretch leverage without overburning from a cash interest perspective, to be able to, you know, pay those top decile multiples that were needed to prevail in auctions. That was something that I think, especially the PIK preferred piece, we just shied away from, given our focus since the inception of CCAP, to stay away and minimize PIK income, as much as we can on the front end.

So that's, I think, certainly something that you'll see as a minority in our portfolio relative to some of the other peers that are out there. And I think the last point I'll make is that, you know, if you were to ask us two years ago, I think we would've certainly seen more PIK amendment asks than we've seen now. But the other side of the coin that I think has been a positive surprise is that the business fundamentals have just been quite strong. You know, revenue and EBITDA growth, you know, on an aggregate basis continued. We've seen both of both top line and bottom line growth across the book.

As a result, you know, while certainly, borrowers are contending with higher fixed charges, the numerator of that has grown to be able to address that. That's been, I'd say, certainly a positive development that's helped ameliorate what we would've thought, you know, several quarters ago, would've been a much more robust environment for PIK requests.

Paul Johnson (VP and Equity Research Analyst)

Thanks for that. That's, that's great color. And then on the new activity, $119 million in the quarter, I know, looks like there was about, you know, six new deals in there. What was kind of the mix of just, you know, the repricing activity that you mentioned, and then the new deals within that, and then, as well as just kind of, the pipeline overall?

Jason Breaux (CEO)

Let us... Henry's pulling that up here. While he does, Paul, I think I can comment just broadly on the market. You know, we're certainly seeing a pickup in general activity. I think first half, middle market loan volume was up 20%, relative to the second half of last year, albeit most of it driven by, by refinancings. I think LBOs represented about a third of volume in the, in the second quarter, so still lighter than, than where we want it to get to, and we expect it to get to. That said, still a meaningful increase over Q1. I think a 70%+ increase over, over Q1 LBO activity.

Henry Chung (President)

Yeah, and to follow back up on the first part of your question, six new platforms totaling $62 million, and then we had 13 add-ons, that was $33 million, and then the remainder were fundings on our existing unfunded commitments, DDTLs and revolvers. The new platforms that you referenced, those are new LBOs versus repricings.

Paul Johnson (VP and Equity Research Analyst)

Thanks for that. Last question. Was just wondering if you can give kind of an update on the performance of the Logan JV and where that's at. It looks like that was written down a little bit this quarter. But just a status update there would be helpful. Thanks.

Henry Chung (President)

Yeah. So, the JV, just as a reminder, the largest investment in the JV is a middle market CLO. And as a result, you'll see that fair value kind of move on a quarter-to-quarter basis based on the mark-to-market of the underlying obligors within that CLO. In terms of the performance of the JV as a whole, you know, we're very focused on assessing the distributions that we're receiving from that CLO and the loans within relative to our projections. And I'd say that they've been in line since we've onboarded the asset. One thing to note with Logan JV is that CLO that's in the JV, the reinvestment period is coming up.

It's going to expire in August of next year, or sorry, not August, April of next year. So right now, the base case here, the thought around that is, that once that reinvestment period lapses, the portfolio will monetize here. But that's something that we're evaluating in real time as we kind of think about next steps with respect to that vehicle. But I'd say performance-wise, it's kind of been in line with the cash flow expectations that we've been expecting to receive from that vehicle.

Paul Johnson (VP and Equity Research Analyst)

Thank you very much. All for me.

Jason Breaux (CEO)

Thanks, Paul.

Operator (participant)

We will move next with Finian O'Shea with Wells Fargo. Please go ahead.

Finian O'Shea (Director and Senior Equity Research Analyst)

Hey, everyone. Good morning. Wanted to go back to the debt side discussion. It sounded like there'll be emphasis on or perhaps more of a laddering what that might look like if, if we'll have even more and smaller pieces that would thereby presumably be more expensive, or if you think that you'll be able to do this and keep that cost down or perhaps reduce them. Thank you.

Gerhard Lombard (CFO)

Yeah. Hey, Finn, this is Gerhard. Yes, it's a good question. We have three tranches of unsecured notes right now maturing in February, May, and July of 2026. We do not see, and those are all, those were all issued through the private placement channel. You know, we're evaluating both private placement and DCM options. But we don't see debt costs necessarily tick up due to size. We'll make sure that we size those issuances appropriately to, you know, get best execution in the market.

You know, I think it is fair to say, you know, just given that those notes currently are priced at 4%, 5%, and 7.5%, that they'll probably price up a little bit, given, you know, if you look at the spread environment today. But other than that kind of, you know, price to market effect that we expect, you know, we will make sure we size those tranches appropriately.

Jason Breaux (CEO)

And, and Finn, thanks for the question. Jason, too. I just wanted to add that I think as we continue to look at the market, and we want to be very opportunistic about when we penetrate the market. But, you know, we will also be looking at swapping as well, just given the environment that consensus seems to think we're in today.

Finian O'Shea (Director and Senior Equity Research Analyst)

Okay, that's helpful. For a follow-up, Jason, to what extent do you see the larger players moving into that territory? And, what's the sort of level of competition that brings?

Jason Breaux (CEO)

Yeah, thanks, Finn. I think. So everybody has their own definitions of middle market, but just as a reminder, we deem the lower mid-market roughly $10 million to about $35-$40 million of EBITDA, and then we call the core middle market, say, $40 million to $150 million or so. That's really those are the two areas of focus for CCAP. I would say competition from folks who are generally going after the upper middle market has not been all that meaningful in the lower mid-market. I think it's a different market focus. It's a different sponsor focus, generally, than the upper middle market players.

In addition to that, you know, a lot of the upper middle market deal making is really getting done because of the significant flows coming into the non-traded space on the retail side, where managers are taking in monthly subscriptions and needing to put that capital to work immediately. So it's certainly beneficial to put larger amounts of capital into each deal. In the core, I would say it's, you know, we do see some of the upper mid-market players dip down into the core at times, and these are folks that have been in the core middle market as well, so folks that we, we've partnered with before, we've competed with before.

So, there is some level of activity from the folks that do, you know, the mega unitranche deals as well, dipping down into the core at times.

Finian O'Shea (Director and Senior Equity Research Analyst)

Thanks so much.

Jason Breaux (CEO)

Thank you.

Operator (participant)

We'll take our next question from Derek Hewett with Bank of America. Please go ahead.

Derek Hewett (Senior Equity Research Analyst)

Good morning, everyone. Focusing on slide 13, what's driving that 71% of the portfolio as financial covenants? I would have expected the percentage to be a little bit higher, just given the focus on the lower-end Core Middle Market.

Jason Breaux (CEO)

Sorry, Derek, you said slide 13. Can you repeat your question?

Derek Hewett (Senior Equity Research Analyst)

Yeah, I was—what's driving the 71% of the portfolio that has financial covenants? Just given the focus on the lower and mid and core middle market, I would expect that number to be higher. So it—does that have to do with any sort of legacy investment from First Eagle, or is there something else driving that number?

Henry Chung (President)

No, I think it's. And this is Henry speaking, Derek. It's really a function of the segmentation of the two different markets. So when you think about how we define Lower Middle Market, which is $35 million of EBITDA and below, all of those deals are virtually all those deals are going to have at least one Maintenance Covenant. In the Core Middle Market, keep in mind how we define that. That's a much larger band. That's $35-$200 million in EBITDA. So when you get to the upper end of that size spectrum, you do see situations where you do not have a Maintenance Covenant. So as a result-

... That's why you're seeing that mix. It's a function of the two different markets where we focus. I do think that one thing that we always do like to point out here is that, you know, this is, I'd say, almost a direct inverse of what you're kind of seeing, like, in the Upper Middle Market with respect to covenants, probably more so nowadays. But that's really a function of just how wide that, that, that band is in terms of company size, when you think about the Core Middle Market and what you'll see on the larger issuer side of that spectrum.

Jason Breaux (CEO)

We're also. I would just add to that. I agree with everything Henry said. I would just say that, you know, even in the core, Derek, when we, when we don't necessarily have maintenance covenants, we are still highly focused on the documentation and having protections in place, to the fullest extent that we can negotiate around things like baskets and asset dispositions and the like. So, while this is representative of true financial covenants, that doesn't mean that in the core middle market, our documents look like, you know, look like broadly syndicated loan documents.

Henry Chung (President)

Yeah, and I think that's an important point, because there certainly can be a tendency to oversell the protection you get with maintenance covenants. You know, we've seen in certain situations, maintenance covenants are quite wide relative to having some real teeth to them. And we covered this during a segment within our Analyst Day presentation. But the key here is really the document as a whole and our ability to ensure that our collateral stays within our credit box, and that we're limiting leakage of our collateral to the extent that a situation may go sideways in terms of operating performance.

So I think this is one barometer, and then we really use this to kind of indicate that our deals are not really just a variation or a variant of what you're seeing in the broadly syndicated loan market. But if you were to kind of dig beneath that, you'll really see that even in deals that are cov-lite, the documentation is not indicative or does not resemble that of what you would see in an upper middle market, broadly syndicated loan type construct.

Derek Hewett (Senior Equity Research Analyst)

Okay. Thank you for that. And then circling back to PIK. I realize that PIK is well below industry peers, but how would you characterize it? Was the PIK that you have structured into the original deals, or was that result of amendments?

Henry Chung (President)

Yeah. This is Henry. I can respond to that. I'd say the majority of that PIK income is going to be related to. It was available at origination. So it's. I mentioned in my comments to an earlier question here, that the volume of PIK amendments that we've seen has actually been quite a bit lighter than we would have initially guessed, several quarters ago. So the majority of which you'll see there is gonna be related to investments that have a PIK, a PIK component at origination. And which will. That will really be more so for investments that are second lien or unsecured, which represent a minority of our portfolio.

Derek Hewett (Senior Equity Research Analyst)

Thank you.

Henry Chung (President)

Thanks, Derek.

Operator (participant)

Thank you. This will conclude our Q&A session, as well as our conference call.