Crescent Capital BDC Inc (CCAP) 2020 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2020 Crescent Capital BDC Earnings Conference Call. (Operator Instructions) Please be advised that today's conference may be recorded. I'd now like to hand the conference over to your host today, Dan McMahon, Head of Investor Relations. Please go ahead, sir.

Good morning, and welcome to Crescent Capital BDC, Inc.'s September 30, 2020, quarterly 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'd like to remind our listeners that remarks made during the call may contain forward-looking statements. Statements other than statements of historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties.

Actual results may differ materially from those in the forward-looking statements as a result of a number of factors including those described from time to time in CCAP's filings with the Securities and Exchange Commission. The company assumes no obligation to update any such forward-looking statements. Please note that this call is the property of CCAP. Any unauthorized rebroadcast of this call in any form is strictly prohibited.

Yesterday, after the market closed, CCAP issued its earnings press release and posted an earnings presentation for the third quarter ended September 30, 2020. The presentation, which is available on the company's website under the Investor Relations section, will be referenced throughout today's call and should be reviewed in conjunction with the company's Form 10-Q filed yesterday with the SEC.

Unless otherwise noted, all performance figures mentioned in today's prepared remarks are as of and for the third quarter ended September 30, 2020. 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. With that, I'd now like to turn it over to Jason.

Thank you, Dan. Good morning, everyone, and thank you for joining us today for our third quarter earnings call. We appreciate your continued interest in CCAP and hope you and your families are safe and healthy. I'll begin today's call by reviewing our results, investment activity and other highlights from the third quarter and finish with a few remarks on the recently announced transaction between Sun Life and our external advisor. Gerhard will then discuss our financial results for the third quarter in more detail.

Let's begin with a few highlights from the quarter, which are summarized on Slide 5. In terms of earnings, we reported $0.43 of after-tax net investment income per share, covering our $0.41 per share third quarter dividend.

CCAP's net asset value per share increased 5.2% in the third quarter to $19.07. Gerhard will walk through the NAV bridge in more detail but the increase was primarily driven by a net change in unrealized depreciation, specific to our first lien and unitranche portfolio companies. Coupled with the 10% NAV increase we reported in Q2, we've now recovered nearly 90% of the NAV attrition experienced in the first quarter.

Our top priority is and always will be protecting the value of our existing investments and getting par back on our loans. With our total investment portfolio carried at 98.5% of cost as of quarter end versus 91% of costs at March 31, we are comforted by the quality of the portfolio and its performance, despite the significant challenges this year has presented.

Slides 13 and 14 of the presentation provide a snapshot of the portfolio. We ended the third quarter with $961 million of investments at fair value across 128 portfolio companies with an average investment size of less than 1% of the total portfolio.

Our investments consist primarily of senior secured first lien and unitranche first lien loans. We are well diversified across 20 industries and lend primarily to private equity-backed companies. 99% of our debt portfolio was in sponsor-backed companies as of September 30, consistent with prior quarters.

In line with last quarter, our 3 largest industry exposures are health care equipment and services, commercial and professional services and software and services, representing 22%, 19% and 14% of the portfolio at fair value, respectively. We like investing in these industries as many of the businesses provide nondiscretionary or essential services, and to date have demonstrated resilient characteristics.

Our focus on constructing a defensively positioned portfolio has led to modest exposure to cyclical industries, including energy, retailing and transportation, which cumulatively represent approximately 5% of the portfolio's fair value as of quarter end, with no travel or aviation exposure.

For the third quarter, 116 out of our 118 debt investment portfolio companies, representing 99% of total debt investments at fair value, made full scheduled principal and interest payments. PIK interest represented approximately 5% of total investment income for the quarter and year-to-date periods.

Let's turn to Slide 16, which provides a snapshot of our investment portfolio performance ratings. Our weighted average portfolio grade of 2.2% improved modestly versus last quarter, and the percentage of risk rated 1 and 2 investments, the best ratings our portfolio companies can receive, increased to 79.4% of the portfolio at fair value as compared to 77.4% last quarter.

As of quarter end, we had investments in 4 portfolio companies on nonaccrual status, representing 3.8% and 2.1% of our total debt investments at cost and fair value, respectively. For the quarter, no new loans were placed on nonaccrual and one investment, Southern Tech, came off of nonaccrual.

Our subordinated position in Southern Tech was realized in September, resulting in a $1.3 million realized gain. And we upgraded our performance rating from a 4 to a 2 on the equity position we hold.

We continue to work closely with the 4 remaining portfolio companies and their sponsors to help maximize the value of our investments and have made progress. Subsequent to quarter end, we successfully restructured our investment in MCS, which as a result will come off of nonaccrual in Q4.

Moving to our investment activity, please turn to Slide 8. Following lower than average origination levels in Q2, activity picked up this quarter with gross deployment totaling $84 million. We closed on 6 new investments and 2 follow-ons, totaling $61 million and $6 million, respectively. With the balance coming from our funding of existing revolver and delayed draw term loan or DDTL commitments. All 6 of the new investments were private equity-backed loans at 600 to 700 basis point spreads, each with a 1% LIBOR floor, and OIDs between 2% and 3%.

In addition, loan-to-value levels remain attractive, averaging 38% for these transactions. The $84 million in gross deployment compares to $48 million in aggregate exits, sales and repayments in the quarter.

Given our modest leverage profile and dry powder, we've been active in our deployment in the fourth quarter as well, underwriting several high-quality new opportunities.

Since October 1, we've closed on 6 new investments and 1 add-on for an existing investment, totaling approximately $60 million of funded capital. These 2 are all private equity-backed with 6 of the 7 traditional first lien or unitranche loans, with spreads, LIBOR floors and other characteristics comparable to the aforementioned Q3 investments. We also made one second lien loan investment.

Looking forward, we continue to see an attractive pipeline of new opportunities. And we'll continue to participate alongside the broader Crescent platform on all new investments that fit within our mandate.

I'd now like to shift gears and provide some color on the recently announced transaction between Sun Life and our external advisor, Crescent Capital Group LP, or Crescent. Please turn to Slide 20. As background, Sun Life is a Toronto, Canada-based financial services firm, known primarily for its global insurance and wealth management capabilities. With nearly $1 trillion in assets under management and operations in 27 markets globally, Sun Life has been acquisitive in scaling its alternative investment platform, SLC Management, in recent years.

As many of you are aware, on October 21, Sun Life and Crescent entered into a definitive agreement pursuant to which Sun life would acquire a 51% economic interest in Crescent, with a put call option to acquire the remaining interest in Crescent in approximately 5 years. Following consummation of the transaction, Crescent will form part of SLC Management.

To us, the most important aspect of this transaction is that it provides for full continuity of our team. The same team that is responsible for the investments and operations of CCAP today will continue to focus on executing the same proven investment strategies and processes as we always have. Upon consummation of the transaction and subject to shareholder approval, Crescent is expected to remain the investment advisor to CCAP, as you can see on Slide 21. And with the exception of a 2-year initial term, all other terms will remain unchanged from our current investment advisory agreement with Crescent. We'll be maintaining the same best-in-class advisory fee structure, efficient cost structure and commitment to a consistent dividend policy.

As summarized on Slide 23, we believe this transaction will enable us to further strengthen our competitive position by: first, providing greater access to scale and resources needed to continue augmenting our global financial sponsor and corporate borrower reach; second, further improving our access to capital markets; and finally, enhancing our institutional relevance and market coverage. We're very excited about the transaction and look forward to the benefits it will bring.

Importantly, Sun Life has already demonstrated its alignment with CCAP stockholders, having advised us that it intends to purchase up to $10 million of CCAP stock in the secondary market over time, following the closing of the transaction, which we expect will occur by the end of this year.

Before I turn it over to Gerhard, I want to touch on a few more quick updates: first, our Board has declared a normal $0.41 per share quarterly cash dividend for the fourth quarter of 2020; second, on October 28, we closed on the second $25 million issuance of unsecured notes initially announced in late July. Recall, we agreed to issue $50 million aggregate principal amount of 5.95% senior unsecured notes due July 2023. The notes were intentionally issued in 2 separate $25 million closings to manage interest expense. The financing helps to diversify our funding sources, provides us with a more flexible capital structure, and allows us to lower our utilization under our secured revolving facilities.

And finally, the expiration of the second 1/3 of our share lockup occurred on October 30, increasing CCAP's public float meaningfully from approximately 12.9 million to 20.6 million shares. As a reminder, 100% of our pre-listing stockholders, other than those Alcentra Capital Corporation stockholders who received CCAP shares in connection with the Alcentra acquisition, were subject to a lockup on approximately 23.2 million shares outstanding at the time of our listing on February 3. The third and final tranche of locked up shares will become freely tradable on February 2, 2021.

While we are pleased with the dialogue we've had and continue to have with investors since our public listing in February, in our view, the current stock price does not reflect the true value of the portfolio we have constructed. We expect that an enhanced float will, over time, contribute to greater average daily trading volume in CCAP stock and allow for a broader universe of relevant institutional investors to more easily transact.

Additionally, we believe that Sun Life's stock purchase commitment and a second Crescent employee 10b5-1 program, which brings total employee commitments to approximately $5 million and began purchasing CCAP shares in mid-October, will create additional demand in the stock.

I will now turn it over to Gerhard to cover additional details on the quarter. Gerhard?

Thank you, Jason. I will review our income statement, performance and highlights, NAV unrealized and realized activity as well as leverage and liquidity. Please turn to Slide 6, where you can find our financial highlights. For the third quarter, net investment income was $0.43 per share, exceeding our third quarter dividend of $0.41 per share. The change in unrealized gains per share net of taxes was $0.95.

Fair value marks on debt investments increased by approximately 2 points, largely attributable to the tightening of credit spreads on performing investments. Separately, approximately 13% of the change in net unrealized gains came from our joint venture, which invests in a diversified pool of broadly syndicated first lien bank loans and thus benefited from the BSL recovery experience in the third quarter.

For the third quarter, total investment income was $18.7 million, down from $19.3 million in the previous quarter due primarily to a decrease in nonrecurring other income. The $18.7 million of total investment income was comprised of $16.5 million from interest income, $1.2 million from dividend income and $1 million from other and paid-in-kind income.

Net expenses, inclusive of taxes, were $6.5 million compared to $6.4 million in the previous quarter, primarily due to higher operating costs resulting from the growth in CCAP's aggregate portfolio fair value, offset by a decrease in borrowing costs due to a decrease in LIBOR.

Moving to the balance sheet. Please turn to Slide 9, which contains a net asset value per share bridge. Reported net asset value per share at quarter end was $19.07, an increase of $0.95 or just over 5% compared to the prior quarter. Walking through the components, we added $0.43 per share from net investment income against the dividend of $0.41 per share. As mentioned before, unrealized depreciation, net of taxes, was $0.95 per share and the primary driver of the NAV change in Q3. Investments at fair value increased by 7% in the quarter from $895 million to $961 million as $84 million of gross deployment, coupled with $28 million of realized and unrealized net appreciation, was offset by $48 million of principal repayments and sales.

Turning to Slide 15. As of September 30, the weighted average yield reached on our income-producing securities at amortized cost was 7.9%, unchanged quarter-over-quarter, 98% of our debt investments bear interest at a floating rate and had an average LIBOR floor of approximately 81 basis points at quarter end.

Moving to the right-hand side of our balance sheet. Please turn to Slide 18. Our debt capital base is supported largely by longer-dated financing, with over 90% of the principal amount of debt outstanding maturing after June 2023. From a liquidity perspective, as of quarter end, we had $189.5 million of undrawn capacity across our unsecured notes and SPV Asset and Corporate Revolving Facilities, subject to leverage, borrowing base and other restrictions.

Our reported debt-to-equity ratio was 0.79x as of September 30 compared to 0.78x at June 30. We continue to be in compliance with the terms and covenants of each of our debt arrangements and have a significant cushion to our regulatory asset coverage ratio of 150%.

As Jason mentioned, our Board of Directors declared a regular fourth quarter cash dividend of $0.41 per share, which is consistent with the regular quarterly dividend paid in the third quarter. The dividend is payable on January 15, 2021, to stockholders of record as of December 31, 2020.

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

Thanks, Gerhard. We continue to work hard to protect our current portfolio of investments while selectively pursuing attractive new opportunities. Overall, we are pleased with both our origination activity and financial results this quarter.

Looking to the future, our strategy remains the same. We will continue to focus on deploying capital into attractive opportunities to optimize our portfolio performance and generate a strong recurring earnings stream while focusing on preservation of capital.

We are excited about our partnership with Sun Life and the enhanced opportunities that it will provide 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 the line of Robert Dodd with Raymond James.

I have a couple of questions. I guess I'll start off with the easy one first. On the other income, I mean, you mentioned, Gerhard, that obviously it was -- contributed to it coming down, and it was essentially 0 this quarter. Is there anything -- obviously, it can be volatile, it's tough to predict. Is there anything structurally in the portfolio where we should expect that number to be perpetually lower than some of the numbers we've seen historically? Or is it just a random event this quarter that it happened to be 0?

Yes. Robert, so nothing structural. I'd say other income on the P&L generally represents nonrecurring nonyield-related revenue, for example, amendment fees, consent fees and structuring fees. So we did see a large number of COVID-related amendments in the second quarter that drove that large second quarter number, and that trailed off in the third quarter.

Having said that, we don't always charge fees on amendments. There are a number of nonmonetary ways that we can enhance the quality of a debt investment. So tighter or enhanced covenants, better economics in the form of higher spreads and prepayment terms and so on. You are correct, Q3 did have an unusually low level of other income, most likely due to the fact that we proactively identified and entered into amendments during the second quarter.

However, we do expect that future quarters will have some level of other income. It's just hard to predict for a specific quarter, what the level of other income will be, given that this is mostly nonrecurring.

Got it. Got it. So on the Sun Life deal, there was -- obviously, Sun Life is an extremely large platform. And when it was announced, there was talk about them, with Crescent, expanding products. When or if can we expect -- or would there be any intention to put some of those additional opportunities into the BDC?

Obviously, asset back was mentioned, some others. Some might be BBC appropriate, some might not be. But what could we expect from the portfolio? I mean, obviously, it's not going to change next quarter, but right now, it's, for lack of better term, plain vanilla, first lien unitranche, and that's for the most part. How could that -- how would you expect that to evolve over time, given the new Sun life relationship?

Robert, it's Jason. Thanks for the question. We're -- as we discussed on the remarks, we are very excited about the transaction. The $750 million of seed capital can be used to seed new strategies, anchor existing funds as well. I suspect that will play out over the course of time in both areas.

As of now, the transaction has obviously not yet closed. So I'm not sure there's much I can say at this point other than to say that we have grown Crescent over the last 30 years in a methodical way, always sort of focusing on credit, certainly, and on yield and capital preservation. And I think that will continue to remain sort of the core discipline for us.

You mentioned asset base, that certainly could be an area of pursuit. But we're not going too far astray from what we do and what we've done for the last 30 years.

Got it. I appreciate it. If -- one more, if I can. On -- obviously, Sun Life intend to buy stock in the open market, employees are doing the same. Has the Board -- given where the stock is trading, has the Board contemplated just a traditional buyback program for the BDC, which obviously would -- could be accretive to NAV as well as providing support to the price?

Yes. I would say we continually evaluate that at the company level. We do believe that when we terminated the original plan back in spring, that was certainly the thing to do. The initial employee plan was not impacted at that point in time. So we continue to feel well aligned with the shareholders. And obviously, we believe that our broader expense structure should be viewed favorably by investors and the Street, given the waivers in place and the permanent restructure that will take effect later as being one of the best-in-class. We certainly continue to evaluate the option of implementing a company-funded buyback plan in the future.

(Operator Instructions) There are no further questions. I would now like to turn the call back to Jason Breaux for any further remarks.

Okay. Great. Operator, thank you. Thank you, everyone, for joining CCAP's third quarter earnings call. We appreciate your interest and support greatly and look forward to speaking with you all soon.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.