Investcorp Credit Management BDC - Q4 2024

Transcript

Operator (participant)

Thank you for joining today's Investcorp Credit Management BDC third quarter fiscal year 2024 earnings call. It is now my pleasure to turn the floor over to Mr. Walter Chin, CFO.

Walter Tsin (CFO)

Thank you, operator. Welcome Everyone to Investcorp Credit Management BDC's Fourth Quarter and Full-year 2024 Earnings Call. I am joined by Suhail Shaikh, President and Chief Executive Officer of the company. I would like to remind everyone that today's call is being fully recorded and that this call is the property of Investcorp Credit Management BDC. Any unauthorized broadcast of this call in any form is strictly prohibited. Available by visiting our investor relations page on our website, icmbdc.com. 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. We will not update forward-looking statements unless required by law. For current copies of the latest SEC filings, please visit our investor relations page on our website.

The format for today's call is as follows: Suhail will provide an overall business and portfolio summary, and then I will provide an overall view 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 (President and CEO)

Thank you, Walter, and thank you to everyone for joining us today to discuss our results for the fourth quarter and full year twenty-twenty-four earnings. I'm proud of the team's efforts during fiscal year twenty-twenty-four and in the portfolio. We successfully executed our portfolio rotation strategy, which we've been discussing over the past year, resulting in the rotation of about a third of our portfolio into larger, more stable credits. This strategic shift has positioned us well for the future. Despite the challenging market environment, marked by low new deal activity and intense competition for quality credit investments, the team was able to deploy approximately $56 million of capital by leveraging our proprietary relationships with sponsors and club partners. We've been able to source attractive opportunities for both new, refinancing, and secondary investments.

Notably, our disciplined approach has paid off as our investments are non-accrual as a percentage of fair market value declined significantly from 10.6% at the end of our first fiscal quarter to 5% in the current fiscal quarter. Stability and resilience of our portfolio. During our fiscal year ended June thirtieth, twenty-twenty-four, ICMB generated net investment income of $6.6 billion, or $0.46 per share. This was a decrease of approximately 30% from the prior year's net investment income, largely driven by market spreads tightening and shifting in, into larger, more stable credits, which on average have a lower spread. The weighted average spread declined from approximately 6.2% as of June thirtieth, twenty-twenty-three, to 5% as of the end of the current quarter.

Net asset value per share declined approximately 14% to $5.21 per share from $6.09 per share last year. In terms of our fourth quarter results, we generated net investment income of $1.2 million, or approximately nine cents. NAV per share declined approximately 5% from the previous quarter. The decline in NAV was driven by two factors. First, the decline was driven by mark-to-market adjustments on a few equity positions, while all but one of our credit positions remained relatively stable quarter over quarter. Second, the timing of several refinancings and the ramp-up of new deals were back-end loaded during the quarter, affecting overall NII. Despite these factors, our credit portfolio continues to show stability and resilience as the underlying performance of our borrowers has improved over the past quarter.

The median EBITDA of the portfolio increased from approximately $47 million last quarter to $55 million in the current quarter, and our weighted average loan-to-value ratio of our performing debt investments is approximately 58%, an increase from 48% last quarter. Over the same period, the weighted average of the portfolio increased from 4.2 to 5.1 as we continue shifting towards larger credits that are backed by sponsors that we know. The market remains highly competitive, with all lenders experiencing some level of spread compression. We saw a number of refinancings occur in our portfolio, especially over the last two quarters, primarily consisting of legacy portfolio companies. Competition for new investment continues to be intense, partly due to LBO and M&A volumes remaining below average levels.

Our team remains disciplined, originating new investments to offset the repayments and maintain leverage in our targeted range. While new deals remain competitive, we are committed to maintaining strong structural protections in our documentation and capital structures. During the quarter ended June thirtieth, we invested in two new portfolio companies and three existing portfolio companies. Fundings for new investments totaled approximately $70 million at cost, with a weighted average yield of approximately 10.2%. In the same period, we fully realized three portfolio company investments totaling $22.1 million in proceeds with an IRR of approximately 11.3%. First, we invested in the first lien term loan of Crisis Prevention Institute, or CPI, to support the refinancing of the company's capital structure. CPI provides de-escalation training and consulting for human care professionals. CPI is a wonderful portfolio company.

Our yield at cost is approximately 10.4%. We increased our existing position in the first lien term loan of Multi-Color Corp, also known as NAPL or NAPE, to take advantage of an attractive price in the secondary market. Our yield at cost is approximately 11%. We also participated in the refinancing of an existing portfolio company, Northstar. Our yield at cost is 10.4%, and the realized investment was 12.8%. We made an investment in the first lien term loan, B-10 of Asurion. Asurion is the leading provider of device insurance, warranty, and support services for cell phones, consumer electronics, and home appliances. We purchased Asurion in the secondary market at an attractive price. Our yield at cost is approximately 9.8%.

We also made a small follow-on equity co-investment in an Investcorp North America private equity portfolio company listed on our SOI as Pegasus Aggregator Holdings, LP. Lastly, we realized our first lien term loan positions with Empire Office and Aubrey, both of which refinanced during the quarter. We have been invested in both these companies since March and June of 2019, respectively. Our realized IRR on Empire was approximately 10.5%, and our realized IRR on Aubrey was approximately 11.8%. After the quarter end, our net investment activity remains at a healthy pace, which we will discuss in the next quarter.

As of June thirtieth, our largest industry concentrations by fair market value were commercial services and supplies at 13.5%, professional services at 11.2%, trading company and distributors at 9.1%, containers and packaging at 7.3%, followed by food products at 4.8%, and entertainment at 4.8%. Our portfolio companies are in twenty-three GICS industries as of quarter end, including our equity and warrant positions, which is an increase of one industry from the previous quarter. I would now like to turn the call back over to Walt to discuss our financial results.

Walter Tsin (CFO)

Thank you, Suhail. For the quarter ended June 30, 2024, the fair value of our portfolio was $184.6 million, compared to $182.2 million on March 31. Our net assets are $75 million, a decrease of $4.1 billion from the prior quarter. The portfolio's net decrease in net assets from operations this quarter was approximately $3.5 million. The weighted average yield of our debt portfolio was 12.33%, a decrease from the 12.36% in the previous quarter ended March 31. As of June 30, our portfolio consisted of 41 borrowers. Approximately 85% of our investments were in first lien, and the remaining 15% were invested in equity, warrants, and other positions. 97% of our debt portfolio was invested in floating rate instruments, and 3% invested in fixed rate instruments.

The weighted average spread on our debt investments is 5%, and the weighted average floor is 1%. Our average portfolio company position on a fair market value basis was approximately $4.6 million, and our largest portfolio investment on a fair market value basis is Bioplan with $13.5 million. We are pleased to announce that on September eighteenth, 2024, the board of directors have declared a distribution for the quarter ended September thirtieth, 2024, of $0.12 per share. It's payable on November sixth, 2024, to the stockholders of record as of October sixteenth. We've had a gross leverage of 1.42x and net leverage of 1.35x as of June thirtieth, compared to 1.42x gross and 1.36x net, respectively, the previous quarter.

With respect to our liquidity, as of June thirtieth, we had approximately $5.1 million in cash, of which approximately $4.9 million was restricted cash, with $57 million of capacity under our revolving credit with Capital One. Additional information regarding the composition of our portfolio is included on our Form 10-K, which was filed earlier this week. I would also like to address the change of our independent auditor. As a part of our ongoing commitment to best practices and compliance, we have engaged KPMG as our new independent auditor. We want to assure all stockholders this is a change not related to any issues with our financial statements or accounting practices, but simply a reflection of our deliberate review of service providers to ensure that we are receiving the best possible expertise and support.

We are happy to address any questions on the matter at the end of the prepared remarks, and with that, I'd like to turn the call over back to Gail.

Suhail Shaikh (President and CEO)

Thank you, Walt. This year, we've been successful in rotating and diversifying the portfolio into more stable credits. As we look towards our next fiscal year, we're excited about our pipeline and our capacity to continually invest in high-quality opportunities. As always, our top priority has and will continue to be focused on capital preservation and maintaining a stable dividend. That concludes our prepared remarks. Luke, please open the line up for Q&A.

Operator (participant)

Ladies and gentlemen, at this time, we will conduct the question-and-answer session. If you would like to state a question, please press seven pound on your phone now and you will be placed in the queue in the order received, or press seven pound again at any time to remove yourself from the queue... Please listen for your name to be announced and be prepared to ask your question when prompted. We are now ready to begin. Our first question comes from Mr. Chris Nolan at the Ladenburg Thalmann. Go ahead, sir.

Christopher Nolan (Managing Director)

Hi. Well, congratulations on the step up to the new role. The lower yields on the new investments, is that should be used as a good proxy for where the direction of investment yields going forward?

Suhail Shaikh (President and CEO)

Hi, Chris. This is Suhail. I think the way we should think about those is, you know, it's market reflection. We're seeing spreads come in for new deals, probably 50-75 basis points across the board. I mean, we can, you know, our liabilities should also be following that at some point. So we think that the market is, you know, it's tightening. I mean, there's a lot more capital available, not enough deals and supply. So my guess is, where it is today is what we should continue to see for the rest of the year. Don't have a crystal ball beyond that just yet, but we do expect volumes to pick up and deals flow to pick up.

And, you know, just given our own pipeline of activity, so we think at some point we're gonna be, you know, might see some spread widening or some action in the way we look at that. I hope I did way of answering your question I-

Christopher Nolan (Managing Director)

What would be the catalyst for the spread widening? Would it be lower funding costs using the facility, or would be a more attractive investment for more attractive-

Suhail Shaikh (President and CEO)

I think both the above. Yeah. Yeah, both the above.

Christopher Nolan (Managing Director)

Okay, so we should expect a lower funding cost from the rate change by the Fed to impact your facility, but also you expect better days for lenders ahead?

Suhail Shaikh (President and CEO)

Correct.

Christopher Nolan (Managing Director)

Okay. That's it for me. Thank you very much.

Suhail Shaikh (President and CEO)

Thank you.

Operator (participant)

Thank you very much. Again, if you have any questions, please press seven pound on your phone, and we will open up your line. Again, that's seven pound. I don't see any other questions, Suhail.

Suhail Shaikh (President and CEO)

Thank you, Luke. Thank you, everyone, for participating in the call. We look forward to announcing our next quarter's earnings, and I look forward to talking again next quarter. Thank you again. Thank you, Luke.

Operator (participant)

Thank you, everyone. You're welcome. This concludes today's conference call. Thank you, everyone, for attending.