Crescent Capital BDC Inc (CCAP) 2021 Q1 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Q1 Crescent Capital BDC Earnings Call. (Operator Instructions)

I would now like to turn the call over to your host, Daniel McMahon. You may begin.

Thanks, Kevin. Good morning, and welcome to Crescent Capital BDC, Inc.'s first quarter ended March 31, 2021 Earnings Conference Call. Please note that Crescent Capital BDC, Inc. 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 during 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 tax performance or market information is not a guarantee of future results.

During this conference call, we may discuss certain non-GAAP measures as defined by SEC Regulation G, such as adjusted net investment income or NII per share. The company believes that adjusted NII per share provides useful information to investors regarding financial performance, because it's one method the company uses to measure its financial condition and results of operations. A reconciliation of adjusted net investment income per share to net investment income per share, the most directly comparable GAAP financial measure can be found in the accompanying slide presentation for this call. In addition, a reconciliation of this measure may also be found in our earnings release.

Yesterday, after the market closed, the company issued its earnings press release for the first quarter ended March 31, 2021, and posted a presentation to the Investor Relations section of its website at www.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 Jason Breaux, Chief Executive Officer of CCAP; and Gerhard Lombard, Chief Financial Officer of CCAP.

And with that, I'd now like to turn it over to Jason.

Thank you, Dan. Hello, everyone, and thank you for joining us. We appreciate your continued interest in CCAP. For our call today, I'll provide a few highlights from this quarter's results, review our investing activity, provide some thoughts on our current positioning, and then turn it over to Gerhard to review our financial results in more detail, before we open the call to Q&A.

So let's begin. Please turn to Slide 6, where you'll see a summary of our results. We reported strong first quarter financial results with adjusted net investment income of $0.46 per share. This quarter, we accrued a capital gains based incentive fee expense related to changes in net realized and unrealized gains and losses. This noncash expense, which was not paid and is not payable, was approximately $0.05 per share for the quarter. Our Q1 net investment income per share, inclusive of the accrued capital gains incentive fee expense was $0.41.

Pausing on the impact of this adjustment for a moment, which is only payable at the end of each fiscal year based on our investment advisory agreement, if we were to hypothetically end the year as of this March 31, the $0.05 per share of cumulative accrued capital gain incentive fee expenses that we had at quarter end would not be paid or payable since the gains must be realized in order for us to be eligible to receive a fee.

Turning back to our results. Our net asset value per share increased for the fourth consecutive quarter, up approximately 1.8% in Q1 to 2024, one of the highest levels since CCAP's inception. Gerhard will walk through the key drivers in more detail, but the increase was primarily driven by a net change in unrealized depreciation specific to certain individual portfolio companies and net unrealized mark-to-market gains related to the tightening of credit spreads relative to the end of the fourth quarter.

Please turn to Slide 4, which highlights our historical NAV trajectory and cumulative dividends since inception. Focusing on the right-hand side of the page, our business has performed well through the pandemic. From a total economic return perspective, which is change in NAV plus dividends paid, we've generated over 14% since the year ended 2019, just prior to the onset of COVID-19. This was driven by growth in our net asset value per share, up 3.8% in that time frame. And the payment of our quarterly base dividends, which cumulatively represent another 10.5%.

Overall, we're pleased with this outcome. And with our total investment portfolio carried at 103% of cost as of quarter end versus 102% as of year-end, we remain comforted by the quality of our portfolio and its performance, particularly given the volatility we've all experienced since March of last year.

Let's now shift gears and turn to Slides 13 and 14 of the presentation, which provides a snapshot of the current portfolio. We ended the quarter with just under $1.1 billion of investments at fair value across 131 portfolio companies with an average investment size of less than 1% of the total portfolio.

Our investment portfolio continues to consist primarily of senior secured first lien and unitranche first lien loans. We are well diversified across 20 industries and lends primarily to private equity-backed companies. 99% of our debt portfolio was in sponsor-backed companies as of year-end, consistent with prior quarters. And 80% of the portfolio at fair value was first lien, up from 78% as of year-end, driven by our Q1 deployment, which I'll touch on shortly.

For the first quarter, our portfolio companies continued to perform well. 118 out of our 120 debt investment portfolio companies, representing 99% of total in debt investments at fair value made full scheduled principal and interest payments, and PIK interest represented approximately 4% of total investment income in Q1. 91% of our debt investment portfolio today is marked above 95 cents on the dollar, and the average mark of the entire debt portfolio is 97.6.

Two more positive credit trends are outlined on Slide 17. Continued strong performance ratings and nonaccrual levels. Our weighted average portfolio grade of 2.1 was unchanged as compared to year-end. And the percentage of risk rated 1 and 2 investments, the highest ratings our portfolio companies can receive, increased modestly to 87.6% of the portfolio at fair value as compared to 87.5% as of year-end. As of quarter end, we had investments in 2 portfolio companies on nonaccrual status, representing 1.7% and 1.3% of our total debt investments at cost and fair value, respectively, unchanged from year-end.

Moving to our investment activity. Please turn to Slide 15. In terms of the broader market backdrop, spreads tightened across the board in Q1 as strong demand in the leveraged loan markets led to pricing and terms in favor of borrowers. All-in yields for new issuers were generally lower than the last few quarters and a larger percentage of new deals were covenant light.

Despite this competitive backdrop with record levels of dry powder in the direct lending market, we continue to benefit from Crescent's long-standing reputation as a reliable partner and ability to offer surety of capital and scaled financing solutions to the sponsor community. This was evidenced by over $1 billion of total deployment across Crescent's private credit platform in Q1.

Sponsors and portfolio company management teams alike are, in our view, exhibiting a strong preference for flexibility of capital, and a long-term partnership approach with firms like ours. CCAP's gross deployment in the first quarter totaled $88.2 million, approximately 90% of which was in unitranche first lien investments. All told, we closed on 6 new investments and 11 follow-ons, totaling $63 million and $13 million, respectively, with the remaining $12 million coming from revolver and delayed draw term loan activity during the quarter. All 6 of the new investments were private equity-backed loans at 600 to 675 basis point spreads, each with the LIBOR floor and OIDs between 1.5% and 2.75%.

In addition, loan-to-value levels remain attractive, averaging approximately 45% for these transactions. The $88 million in gross deployment compares to $77 million in aggregate exits, sales and repayments in the quarter.

It's also worth highlighting that the $63 million CCAP invested in the 6 aforementioned new deals represented only 12% of the over $0.5 billion total check size committed across Crescent, highlighting the breadth of our platform.

For the month of April, we closed on 3 new investments for $31 million and 4 add-ons for $6 million. The new investments are each private equity-backed, first lien or unitranche loans with spreads, LIBOR floors and other characteristics fairly comparable to the aforementioned Q1 investments.

Two more updates before I turn it over to Gerhard. First, as we have previously disclosed, Sun Life has advised us that it intends to purchase up to $10 million of CCAP stock in the secondary market over time pursuant to a 10b5-1 plan, demonstrating its alignment with CCAP stockholders.

We expect that this Sun Life purchase plan will be adopted in this upcoming open trading window, commence purchasing CCAP stock this calendar quarter if such purchases meet the terms of the plan and be in effect for approximately 12 months unless extended or until the aggregate approved purchase amount has been expended. This is in addition to a currently active $1.2 million affiliate purchase program funded by certain officers of CCAP and employees and affiliates of Crescent. The third such plan implemented since our listing, following the cumulative purchase of approximately $4.9 million of CCAP stock pursuant to the first 2 plans.

And finally, our Board has declared a $0.41 per share quarterly cash dividend for the second quarter of 2021, payable on July 15 to stockholders of record after the close of business on June 30.

With that, I'll now turn it over to Gerhard to cover additional details on the quarter. Gerhard?

Thanks, Jason. Our adjusted net investment income per share of $0.46 for the first quarter of 2021 compares to $0.47 and $0.44 per share for the fourth and first quarters of 2020. Our GAAP earnings or net increase in net assets resulting from operations, was $0.76 per share for the first quarter of 2021, which compares to $1.22 per share for the fourth quarter of 2020 and minus $2.84 per share for the first quarter of 2020.

Our first quarter adjusted earnings were driven by strong recurring interest and dividend income generated from our growing portfolio. Our net unrealized gains on investments of $8.3 million or $0.30 per share, primarily reflected the continuing tightening of credit spreads relative to year-end and performance improvements in certain names. At March 31, our stockholders' equity was $570 million resulting in a net asset value per share of $20.24 as compared to $560 million or $19.88 per share at year-end or $466 million or $16.52 per share at March 31, 2020.

The increase in our net asset value during the first quarter was primarily driven by net unrealized gains as highlighted on Slide 10, and we had $0.06 of realized gains per share. Investments at fair value increased by 2.3% in the quarter from $1.034 billion to $1.058 billion, driven by approximately $11 million in net deployment in addition to an increase in net unrealized portfolio appreciation.

Turning to Slide 16. This graph summarizes the weighted average yield on income-producing securities and spread over LIBOR on our floating rate debt investments. As of March 31, 2021, the weighted average yield on our income-producing securities at amortized cost was 7.9% as compared to 8% at year-end.

As highlighted on Slide 8, the weighted average annual yield on the 6 new investments made in Q1, that Jason walked through, was 7.8%, which is particularly attractive given their senior secured nature and the competitive market backdrop to start the year. 98% of our debt investments bear interest at a floating rate and have a weighted average LIBOR floor of approximately 90 basis points, which is well above today's current 3-month LIBOR rate.

Now let's shift to our capitalization and liquidity. I'm on Slide 19. As of March 31, our debt-to-equity ratio was 0.86x, up modestly from 0.85x at the end of the year, with significant cushion to our regulatory asset coverage of 150%.

During the first quarter, we issued $135 million of 4% unsecured notes due 2026, our largest private placement to date. The initial issuance of $50 million closed on February 17, while the issuance of the remaining $85 million closed on May 5.

The unsecured offering, coupled with the redemption of our remaining $16.4 million of InterNotes, which we assumed in connection for the Alcentra acquisition and which bore interest at fixed annual rates ranging from 6.25% to 6.75%, led to an improvement in the maturity profile of our debt capital base.

We now have no near-term maturities with 100% of the principal amount of debt outstanding maturing after June 2023. From a liquidity perspective, as of quarter end, we had $247 million of undrawn capacity, subject to leverage, borrowing base and other restrictions.

As Jason mentioned, our Board of Directors declared a regular second quarter cash dividend of $0.41 per share, which is consistent with the regular quarterly dividend paid in the first quarter.

And with that, I'd like to turn it back to Jason for closing remarks.

Thank you, Gerhard. Overall, we are pleased with our financial results this quarter. Additionally, our credit performance remains strong, and we believe we have built a diverse and defensive portfolio of increasing scale, supported by an increasingly attractive financing profile.

We are optimistic about the economy given the pace of vaccinations and businesses reopening. Our fundamental outlook for the performance of our portfolio companies is positive, and we look forward to leveraging our competitive advantages in the full Crescent platform to continue to deliver attractive risk-adjusted returns for our stockholders. We would like to thank all of you for your confidence and continued support.

And with that operator, please open the line for questions.

(Operator Instructions) Our first question comes from Robert Dodd with Raymond James.

Congrats on the quarter and the year, really. On that topic, now, first question is kind of -- about the Alcentra assets. Now you've owned them, obviously, for slightly more than a year. Obviously, they were in at the end of Q1 of last year, obviously, during that time, we've had COVID. But could you tell us how much of your book is now represented by the Alcentra assets? And have you got any color on kind of how those performed over the last year versus your originated book?

Robert, thanks for the question. Yes, on Alcentra, we did provide kind of a 1-year look back last quarter. And I think as was the case last quarter, this quarter, I think we continue to be pleased with the performance of that portfolio in its totality. We did break out core, noncore buckets last quarter that we had sort of deemed when we underwrote that portfolio. And I would say both of those buckets have continued to perform well and be up relative to respective cost basis. And so I think -- and certainly, some of the appreciation in the portfolio is coming from some of the Alcentra acquired assets.

Okay. Fair enough. And another one on -- I mean the data you gave is very interesting, right? I mean the platform as a whole deployed $1 billion, the BDC accounts are obviously a quite small part of that. That tends to imply, obviously, that there's a lot of available capital in other direct lending middle market Crescent funds. Do you think that available capital elsewhere in the platform is going to -- does that represent a risk, and I don't mean that in a bad way, really, to the BDC being able to reach its leverage targets in the near or medium-term with, presumably, a lot of your activity is going to be allocated elsewhere given available capital?

Yes. Thanks, Robert. I don't view that as an impediment for us. I think we view the benefits of being attached to the platform as really significant in terms of deal flow and the opportunities that we see.

There are certain investments that may fit certain fund parameters and not the BDC's, for instance. So we're conscious of qualifying assets and certain yields and bogeys that we're trying to achieve. So not every investment that is sourced across the platform is appropriate for the BDC. But I think just generally speaking, we think having a $20 billion credit platform with the BDC being able to participate in any of the deals that are sourced across that platform allows us to service our client relationships best and our private equity firms best and ideally continues to sort of translate into more deal flow and larger commitments and larger holds across our investments.

Got it. I appreciate that. Just one more, if I can. On -- as you pointed out, I mean, the markets in Q1, it did become a bit more borrower friendly, very, very competitive, good number of originations from you guys in the quarter. On the repayment side, and I recognize this is even harder to predict. Repayment activity was healthy, should I say, in Q1. What's the outlook on that, so to speak? Do you expect that to remain elevated through, say, the middle of the year? Or do you think a lot of that is now in the rearview mirror, and it goes back to kind of a normal pattern kind of asset light, if you will?

Yes. Thank you. I would say what we saw in the first quarter was certainly significant repayment activity. And that was set against middle market sponsored volume being down 20% quarter-over-quarter, which is seasonably a slower quarter throughout the year.

Our view is that Q2 volumes are picking up, and I think we're very constructive on increased volumes throughout the balance of the year. I think that's going to be driven by growth expectations and prospects as we continue to emerge from the pandemic, significant private equity dry powder, perhaps the potential for capital gains, tax changes that might motivate transactions as with sellers on transactions.

So I do think that, we've seen some of the repayment activity continue in the second quarter, but I think as the supply and demand come more in balance through the balance of the year, that's going to create more opportunities for net deployment growth for our BDC and certainly, the sector. And I think we're -- as we talked about, just a few moments ago, the power of the platform, the relationships with sponsors and management teams that we have, we're quite constructive on our ability to continue to deploy and scale the portfolio over the course of the year.

Our next question comes from Finian O'Shea with Wells Fargo Securities.

Just a follow-up on your dialogue with Robert there. It sounds like you'll be going up market a bit larger holds with your larger capital base. Can you talk about any style drift we should expect? It feels like you fit pretty well into the core middle market category, judging by your senior spreads and your EBITDA levels and so forth. How much of a change should we expect, I suppose, in the year-end and longer term?

Yes. Thanks, Fin. It's Jason. I wouldn't say you should expect any style drift in terms of what we've been doing. I will point out, if you look at sort of historical deployment, we have consciously taken the sort of unitranche composition of the portfolio up as a percentage of the aggregate, and that's been intentional. I think that's where the market is moving in a lot of cases as well. So I do think unitranche will continue to take more share as a percentage of the overall portfolio. But I might also just going to remind everyone that our core focus is kind of in 2 main areas. We spend a lot of time in the lower middle market, which would characterize as businesses that have kind of $10 million to $40 million of EBITDA, and we're operating and investing at the top of the capital structure there. And then when we're underwriting larger companies with more than $50 million of EBITDA, we're oftentimes coming into the unitranche or into second lien junior debt positions in certain cases. First lien and uni will always be the core focus of the BDC. But -- and therefore, our kind of median EBITDA will continue to hover in that lower middle market range. But we will continue to underwrite larger companies as well given our focus in the upper middle market in unis and in second liens.

Okay. Very well. And then just the -- I know you sounded pretty positive on continuing to ramp the portfolio. But the last couple of quarters have obviously were strong for you and most others, there was seemingly a large quantity of quality deal flow. How do you think that -- the presumably -- presumed decline of those conditions happening today translates to your origination for, say, the rest of the year?

Yes. Thanks, Fin. I think you're right. Back half of last year, deployment was strong for us. We saw a lot of high-quality opportunities. And I think what we've really seen more recently is more sort of demand come into the market. I wouldn't say we're necessarily seeing a decline in the quality of opportunities today, but there's certainly more demand for private credit. And as I mentioned a little bit earlier, I do think Q1 certainly was a little bit slower as it's generally the case. And I think we're quite constructive on continuing to see good volumes and high-quality deals.

(Operator Instructions) And I'm not showing any further questions at this time. I'd like to turn the call back over to our host for any closing remarks.

Great. Well, thank you, everyone, for your interest and your time here today in listening to the Q1 earnings, and we look forward to being in touch with you soon.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.