Crescent Capital BDC Inc (CCAP) 2020 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the first quarter 2020 Crescent BDC, Inc. earnings conference call. (Operator Instructions). Please be advised that today's conference is being recorded. (Operator Instructions). I would now like to hand the conference over to your speaker today, Dan McMahon. Thank you. Please go ahead, sir.

Good morning and welcome to Crescent Capital BDC, Inc.'s March 31, 2020 quarterly earnings conference call. Please note that Crescent Capital BDC, Inc. may be referred to as Crescent BDC, CCAP or the Company throughout the call.

Before we begin I would like to remind our listeners that remarks made during the call may contain forward-looking statements. Statements other than statements of historical fact 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 Crescent BDC'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 Crescent BDC. Any unauthorized rebroadcast of this call in any form is strictly prohibited.

Yesterday, after the market closed, Crescent BDC issued its earnings press release and posted an earnings presentation for the first quarter ended March 31, 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 first quarter ended March 31, 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 Crescent BDC, and Gerhard Lombard, Chief Financial Officer of Crescent BDC. 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 first earnings call as a publicly traded company. I would like to take a moment to welcome all of the shareholders and the equity research community who are dialed in. We look forward to working together and maintaining an active dialogue with each of you as we enter this new chapter of Crescent BDC's evolution.

We want to start by recognizing this very challenging time and we send our best wishes to those most impacted by the COVID-19 pandemic, particularly those who have suffered from the virus and the essential individuals on the front lines who are dedicated to the health and safety of our country. Fortunately, our employees are safe and healthy and we have implemented our business continuity procedures and remote working arrangements successfully.

I'll begin by providing a brief introduction on Crescent Capital, our firm's investment strategy and the roadmap to CCAP's listing on February 3. I'll then provide some color on our current positioning in light of the market volatility we all experienced in Q1 and touch on a few recent announcements. Gerhard will then review details related to our acquisition of Alcentra Capital, discuss our financial results for the first quarter and review our liquidity profile. So, let's begin.

Crescent BDC is part of the Crescent Capital Group platform, an independent, employee owned alternative credit manager with over 180 employees, including 80 investment professionals across the US and Europe, with over $27 billion in assets under management.

For nearly 30 years Crescent Capital Group has been investing in senior secured loans, high-yield bonds, mezzanine debt and distressed debt securities through our private and public credit strategies. We are one of the oldest private credit managers with a track record dating back to 1992. Our team has invested roughly $20 billion in private credit transactions since the Firm's inception.

We have differentiated ourselves by strategically growing our asset base across multiple economic and business cycles to be more effective and relevant to our clients, including our investors as well as the private equity community whose companies we finance.

Crescent Capital Group seeks to deliver attractive returns with less volatility, lower default rates and higher recoveries than the market average. Our disciplined investment approach based on current income and principal preservation, our proprietary research platform and our origination capabilities have resulted in many long-standing investor and sponsor relationships.

To give you a sense, we've reviewed over 10,000 private equity transactions and provided debt financing to over 200 unique private equity sponsors, many of which are repeat clients.

Turning back to Crescent BDC, Crescent BDC is externally managed by an affiliate of Crescent Capital Group, providing it with broad access to Crescent Capital's private credit expertise and scaled investment platform. Crescent BDC has exemptive relief from the SEC to co-invest alongside Crescent Capital's private credit strategies, thus providing it with access to a large variety of opportunities based on Crescent Capital's long-established private credit origination and underwriting capabilities.

Since its launch as a private vehicle in 2015, Crescent BDC has grown by raising primarily committed institutional capital and deploying that capital into attractive opportunities. Our portfolio was further augmented on January 31 with the closing of the Alcentra Capital acquisition, which served as the catalyst for our February 3 listing on NASDAQ.

As part of the listing we introduced a number of shareholder friendly initiatives to further align ourselves with our investor base. We've implemented a compelling fee structure including a permanent reduction in the management fee to 1.25% and an increased hurdle rate of 7% on a 17.5% incentive fee. In addition, we are providing 18 months of base management fee waivers of 50 basis points, reducing our effective management fee rate to 75 basis points with full income incentive fee waivers.

Turning to the quarter, our interest in the public markets preceded the most dramatic economic period since the global financial crisis, resulting in liquid credit markets and the BDC sector experiencing their worst quarter in over a decade.

Please turn to slide 3 where you'll see a summary of our first-quarter results. CCAP's net asset value per share declined 15% in Q1 to $16.52. Gerhard will walk through our NAV bridge in more detail, but the primary driver of this quarter's decrease was unrealized depreciation in our portfolio. In terms of earnings, we reported $0.44 of after-tax net investment income per share, covering our $0.41 per share first-quarter dividend.

Slide 11 of the presentation provides a snapshot of our portfolio. We manage a diversified $883 million portfolio consisting of 127 portfolio companies across 21 industries. CCAP's access to the broader Crescent platform has been extremely beneficial during this period of dislocation given the deep bench of talent and collective experience managing private credit portfolios through numerous cycles.

The breadth of the team and our reputation as a trusted partner have allowed us to maintain an active, recurring dialogue with the sponsors and management teams of our portfolio companies to develop action plans to navigate through this rapidly changing landscape.

On the upper right hand side of the slide you'll see that 99% of our debt portfolio is in sponsored backed companies, as we generally believe that private equity sponsors can provide operational and financial support to strengthen their portfolio of companies for long-term value creation.

For the quarter, all but three of our debt investment portfolio companies, representing 98% of total investments at fair value, made full principal and interest payments. As of quarter end our total investment portfolio was carried at 91% of cost versus 100.3% of cost at December 31.

While we were not immune to the consequences of COVID-19 in terms of mark-to-market volatility in Q1, we do feel well situated as our portfolio is highly diversified and invested largely in defensive industries.

On slide 12 you'll see that our top three industry exposures, commercial and professional services, healthcare equipment and services, and software and services, represent 21%, 20% and 14% of the portfolio at fair value, respectively.

Our focus on constructing a defensively positioned portfolio has led to relatively modest exposure to cyclical industries impacted the most by recent events. Energy, retailing and transportation cumulatively represent 5% of our portfolio's total fair value as of quarter end with no travel or aviation exposure.

We aim to invest primarily in first lien opportunities, which accounted for roughly 80% of total portfolio fair value as of March 31. Activity in the first quarter reflected this approach as 93% of gross deployment was in first lien positions, as you will see on slide 6.

In total, excluding assets acquired in the Alcentra Capital acquisition, we invested $117 million in Q1. The components consisted of seven new investments totaling $67 million, three add-on investments totaling $5 million, and $45 million of total fundings across our existing revolver, delayed draw and LLC/LP commitments.

While we did experience an increased level of funding requests from certain of our borrowers in March, activity has since slowed materially and we fully funded all contractual requests to date. In Q1 we had $74 million in aggregate exits, sales and repayments.

I'll now spend a minute on several recent corporate announcements before turning it over to Gerhard. First, we declared our normal $0.41 per share quarterly cash dividend for the second quarter of 2020. Second, yesterday Kroll bond rating agency assigned CCAP a rating of BBB- with a stable outlook. This represents an important milestone for CCAP as we seek to further optimize our capital structure over the coming months.

We continue to monitor the debt capital markets and would like to issue new unsecured notes now that we are investment grade rated. Doing so will provide for a more flexible capital structure and allow us to lower our utilization under our secured facilities. Part of the strategic rationale for listing CCAP was improved access to the capital markets for growth and financing, and obtaining unsecured financing fits squarely within that framework.

Third, at our annual meeting on May 4, our stockholders approved the application of the 150% minimum asset coverage ratio following our Board of Directors' unanimous approval in March. As a result, CCAP's minimum asset coverage ratio is now 150%. This improves our financial flexibility, allows us to operate with an increased cushion to the regulatory limit, and aligns us with the public peer group. Given the NAV decline during the first quarter, our ending debt to equity ratio was 0.92x. Over time we expect to operate within a range of 1.0x to 1.3x.

Finally, on April 9, we terminated our stock repurchase program after the close of trading. We believe it was judicious to take this action in order to preserve our financial flexibility and liquidity in the near term. To be clear, Crescent Capital's employee stock purchase program has not been impacted. On a combined basis these programs had purchased 280,000 shares of common stock as of Monday's close.

Looking ahead, we remain focused on actively managing and supporting our current portfolio, underwriting high-quality new opportunities, and optimizing our capital structure.

We believe that size, scale, portfolio diversification and strong underwriting and selectivity matter now more than ever, and that we are well situated to weather the near-term volatility and capitalize on dislocation by continuing to partner with and provide committed capital to quality companies.

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

Thank you, Jason. I'll start by providing a brief summary of the Alcentra Capital Corp. acquisition and then review our financial results for the first quarter. As a reminder, we closed the acquisition on Alcentra on January 31, 2020. While the first-quarter balance sheet includes the net assets acquired in the transaction, CCAP's financial results for the quarter exclude Alcentra's results for the month of January before the acquisition closed.

Net assets acquired as part of the transaction exceeded consideration paid in the form of cash and stock by $3.5 million, before transaction expenses of $7.3 million resulting in a $3.8 million net loss from acquisition or $0.14 per share disclosed in our consolidated statement of operations.

It's worth noting that our advisor demonstrated meaningful alignment with stockholders by contributing approximately $23 million in the form of transaction support in January. This is in addition to a $10 million investment in CCAP stock since the BDC's launch in 2015. The transaction added a diversified pool of $196 million in invested assets to our portfolio, representing an increase of approximately 27% over our December 31, 2019 portfolio of $727 million.

Turning to slide 4, where you can find our financial highlights. For the first quarter, net investment income was $0.44 per share, exceeding our first-quarter dividend of $0.41 per share. Net unrealized losses per share net of taxes was $3.14. These losses largely reflect the macroeconomic impact of COVID-19 on the fair value of our portfolio during Q1.

40% of total net unrealized depreciation was attributable to broker quoted positions in our portfolio that were directly impacted by the dislocation in the syndicated markets towards the end of Q1. Approximately 30% of total net unrealized depreciation was attributable to the widening of credit spreads on performing investments.

Our internal risk weightings, as you'll see on slide 14, have been impacted by the economic shutdown as well. As of quarter end, 19% of our investment portfolio at fair value was rated 3, meaning that while a borrower's loan payments are generally not past due and, more likely than not, the borrower will remain in compliance with debt covenants, their risk has somewhat increased since our initial investment. This compares to 7% of the portfolio being 3 rated at year end, as we believe it was prudent to properly reflect the recent economic uncertainty in our portfolio monitoring process.

Turning back to results, for the first quarter total investment income was $18.8 million, up from $14.7 million in the prior quarter, primarily due to an increase in the size of our portfolio which is largely related to the Alcentra acquisition. Interest and dividend income was $18.4 million, up from $14.6 million from the previous quarter, again primarily due to the Alcentra acquisition.

Net expenses inclusive of taxes were $7.3 million, up from $6.4 million in the previous quarter, primarily due to an increase in interest and other debt financing costs resulting from an increase in the weighted average debt outstanding and, again, largely due to the Alcentra acquisition. The weighted average interest rate on average debt outstanding decreased from 4.4% in the prior quarter to 4.0% in Q1 as benchmark rates declined.

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 $16.52, a decrease of $2.98 or 15% compared to the prior quarter. Walking through the components, we added $0.44 per share from net investment income against a dividend of $0.41 per share. The aforementioned unrealized mark-to-market depreciation, net of taxes, of $3.14 per share was the primary driver of the NAV change in Q1.

Investments at fair value increased by 23% in the quarter to $883 million as the acquisition of Alcentra's $196 million investment portfolio, coupled with $44 million of net deployments, offset the mark-to-market unrealized depreciation which flowed through our portfolio.

As of March 31, weighted average total yield on our debt investments at amortized cost was 7.8% as compared to 8.2% at December 31. While spreads on the underlying investments increased quarter over quarter, the decline in LIBOR resulted in a lower weighted average yield. 96% of our debt investments were floating rate and had an average LIBOR floor of approximately 79 basis points as of quarter end, below three-month LIBOR of 1.5% at March 31.

While the floors will be beneficial in future quarters, assuming the recent decline in LIBOR remains unchanged, the Q1 change in LIBOR did result in an approximately 40 basis point reduction in our total weighted average yield at amortized cost quarter over quarter.

Moving to the right hand side of our balance sheet, please turn to slide 16. In March we entered into an amendment to our SPV asset facility. The amendment increased the total facility size by $100 million to $350 million and extended the final maturity date to 2025. Our total liquidity is supported largely by longer dated financing with over 90% of the principal amount of debt outstanding maturing in either 2024 or 2025.

In connection with the Alcentra acquisition, we assumed $50 million of internotes of which we redeemed $17 million in March and another $17 million in April subsequent to quarter end as we continue to focus on capital structure optimization.

From a liquidity perspective, as of quarter end we had $157 million of undrawn capacity on our SPV asset and corporate revolving facilities subject to leverage, borrowing base and other restrictions. This compares to $72 million of unfunded commitments available to be drawn based on contractual requirements and the underlying agreements with our portfolio companies.

Our delayed draw term loan commitments generally have incurrence tests in place which limit the amount of total leverage our portfolio companies can take on. As such, while we do expect some usage over the coming months, we do not expect the entirety of these commitments to be called upon.

Our debt to equity ratio was 0.92x as of March 31 compared to 0.74x at year end and we are in compliance with the terms and covenants of each of our debt agreements. Importantly, we recently obtained stockholder approval for reduced asset coverage, so we have sufficient cushion from a regulatory perspective.

As Jason mentioned, this morning we 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. This second-quarter dividend is payable on July 15, 2020 to stockholders of record as of June 30, 2020. With that, I'd like to turn it back to Jason for closing remarks.

Thanks, Gerhard. In closing, while the current market environment is certainly challenging, we remain optimistic with regards to Crescent BDC today. As discussed, we've built a defensively positioned portfolio and benefit from the Crescent platform and highly seasoned team who have collectively managed portfolios through multiple cycles.

We'd like to thank everyone on the call for your continued interest and time today. Operator, please open the line for questions.

(Operator Instructions). Robert Dodd, Raymond James.

I apologize, I was muted. Thank you for that. On liquidity first, and then I'll get into the portfolio, of the remaining balances available in principal on the SPV and the revolver, how much of that is actually available given the current borrowing base?

So, we had $157 million of capacity on our combined credit facilities as of March 31, being the difference between $583 million total combined facilities and $426 million drawn under those facilities on the balance sheet. Substantially all of that $157 million of capacity was available to us as of March 31 given the collateral in the portfolio and the advance rates available to us against that collateral.

And keep in mind that we were subject to a 200% asset coverage limit as of March 31, so we would not have drawn the full amount available to us. But subsequent to quarter end, as we remarked earlier, our asset coverage threshold reduced from 200% to 150%. So, the short answer to your question is the full $157 million was available.

Got it, thank you. Thank you for that complete answer. On to the portfolio, you mentioned three portfolio companies did make their P&I payments at the end of March. Can you give us any color on who those were? Or were they in the obvious sectors? I mean, obviously energy, retail, travel, etc., it's only a small piece of your portfolio. But (inaudible) small number of companies didn't. Or were there any surprises in terms of the guys that didn't make the payments in being not necessarily expected industries?

Let me comment on that, but before I do that specifically on the companies, I would just say more broadly we have roughly, call it, a couple handfuls of portfolio companies out of about 115 or so debt issuers reach out toward the end of Q1 for some form of amendment or relief that wasn't completely innocuous or technical in nature; i.e., covenant relief, PIK interest, etc.

Three concessions were made. Of the three, one went to full PIK and we actually placed it on nonaccrual. One is currently in default and we are negotiating an amendment with that company. And one paid partial cash and partial PIK in order to preserve some liquidity.

The one that went to PIK and nonaccrual is a marketing services company that had some challenges before the COVID-19 pandemic hit. The sponsor actually infused additional equity recently. And the lenders agreed to PIK for an extended period of time to give the company breathing room to effectuate an operational turnaround.

The one currently in default is an oilfield services company that, as you can imagine, faces a tough (multiple speakers) with the decline in oil prices. And the last that paid cash interest and PIK interest has reasonable liquidity today. It's in the healthcare services space. But depending on the duration of shelter-in-place protocols, could certainly be negatively impacted further. And I would say geographically their main operations are in the tri-state area, which could be under extended lockdown procedures.

Got it, got it. I really appreciate the color on that. Also, the more expansive version of this question obviously -- you mentioned a sponsor in one of those cases being willing to put in more equity. How have the conversations gone over the last -- I guess we're two months into this now -- in terms of both, obviously, your contact with the borrowers but also the sponsors. What would you say is the level of willingness to support that you're hearing from the sponsors, particularly obviously the ones where there's more stress?

I think generally and broadly speaking there's been -- people have kind of locked arms and really fully acknowledged that the crisis that we are currently in needs to be addressed as a group and we are fully focused on supporting and protecting our interests and our portfolio companies. And I think generally speaking private equity sponsors are as well.

It is our expectation that when relief is sought from the lenders in some form -- in some capacity, whether it's covenants, capital, interest modifications, that the equity will also be contributing to the support. And that historically has been our experience thus far. So, I would say, generally speaking, it has been a very regular dialogue and a very constructive dialogue amongst equity and the lenders.

Got it, got it. Thank you on that one. And one more if I can. Gerhard, in your prepared remarks you talked about 40% of the unrealized losses being broker quoted, 30% widening spreads. That still leaves 30% left over. So, what was the -- obviously there is the potential there for just credit marks.

How much of that 30% left over, if you can, what -- could you say was credit? How concentrated is that within the portfolio? Any color you can give us on -- I mean obviously you gave us the level 3 assets as well, right? Or not level 3 assets, level 3 risk rating assets. But any more color on the remaining 30% of the marks?

Yes, I'm happy to provide some color there and I think you touched on it. When we calculated the 40% broker quoted and the 30% related to spreads, we carved out of that analysis the 3 rated or higher assets. So, maybe just as a reminder that risk weighting the assets each quarter is obviously a subjective, qualitative process. There is no real guidance to ensure comparability between SEC filers.

But our risk rated 3 or higher assets increased from 7.5% at the end of Q4 to about 20.5% this quarter and 18.8% of that 20.5%, which is everything that is 3, 4 or 5 rated, is in the 3 rated category. So Robert, that's really where the remainder of the 30% -- of the remaining 30% of unrealized losses is situated. And the majority of that is related to spreads as well.

The true, call it, distressed or credit impacted portion of our portfolio, if you look at our non-accrual disclosure, is relatively small. Nonaccruals were 1.8% of the portfolio at quarter end concentrated in four names.

Maybe I could just add to what Gerhard was just saying, Robert. As we looked to risk rate our portfolio for March 31, we looked at our investments through multiple lenses. We wanted to see how the COVID-19 pandemic would impact our portfolio companies and bucketed those impacts by severity and into several categories, such as elective procedure deferrals and noncritical medical for our healthcare names, companies reliant on large event gatherings, limited or reduced access to customers, a very small piece of this but energy-related names, and then disruption somewhere along the supply chain.

And we took those risk buckets and overlaid the financial condition of each of our portfolio companies to arrive at a list of those companies which we thought risk was elevated relative to underwrite. I think we took what we believed to be a conservative approach in that risk weighting assessment. That said, if the current COVID-19 pandemic forces us to maintain shelter-in-place protocols for multiple additional months, it will most certainly continue to negatively impact the portfolio.

Got it, I really appreciate that extra color. Thank you, guys.

(Operator Instructions). This concludes our Q&A session. At this time we'd like to turn the call back over to Jason Breaux for closing remarks. Please go ahead.

Okay, thank you. Thank you, ladies and gentlemen, for joining today's call. We appreciate your time and interest in CCAP, particularly in these challenging times, and we look forward to staying in touch. Please feel free to reach out to us with any additional follow-up questions and we look forward to speaking again soon.

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