Investcorp Credit Management BDC Inc (ICMB) 2022 Q1 法說會逐字稿

Welcome to the Investcorp Credit Management BDC, Inc. scheduled earnings release for the first quarter ended September 30, 2021. Your speakers for today's call are Mike Mauer, Chris Jansen and Rocco DelGuercio. (Operator Instructions) I would like to now turn the call over to your speakers. Please begin.

Thank you, operator. This is Mike Mauer, and I'd like to thank all of you for joining us on our first quarter call today. I'm joined by Chris Jansen, my Co-Chief Investment Officer; and Rocco DelGuercio, our CFO. Before we begin, Rocco will give you our customary disclaimer regarding information and forward-looking statements. Rocco?

Thanks, Mike. I would like to remind everyone that today's call is being 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. Audio replay of the call will be available by visiting our Investor Relations page on our website at 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. To obtain copies of our latest SEC filings, please visit our Investor Relations page on our website.

At this time, I'd like to turn the call back over to our Chairman and CEO, Michael Mauer.

Thanks, Rocco. September is the first quarter of our fiscal year. As we look out from here, we are optimistic that June 2021 will mark the low point of our NAV. We saw an increase in the marks of many of our positions, an increase in the average yield of the portfolio and an average IRR of over 10% on our realizations. We recognize that there has been more volatility in our portfolio than we or you would like. The team is working hard to continue to find good direct lending opportunities to reduce sector concentrations and diversify the name count further. We added 2 new portfolio companies this quarter and made additional investments into 3 other portfolio companies.

After quarter end, we invested in 2 additional portfolio companies and made one incremental loan to an existing investment. We have found that in a highly competitive environment, some of our best opportunities come from companies, we already know and/or lend to. These deals also tend to have better structures, typical of 1 to 2 years ago when we made our initial investments. Refinancing activity continues to be a major theme. In the near-term, we expect to see re-financing of 3 of our investments, and we expect to take part in the new financing for 2 of those portfolio companies. It's always a challenge to maintain price and structure in a highly competitive market environment. And when we are able to stress the preference, it is to give a bit on the yield in exchange for covenants and better protection for our capital.

Last quarter, we had significant markdowns, specifically on 1888 and PGi. I'll discuss those 2 investments towards the end of today's call. Thematically, one of our goals is to stabilize our net asset value. This quarter, our March were net positive, and we had a single material negative mark infusion connect take back loan. I'll discuss that situation later as well.

Other investments, which have exhibited volatility in the past were stable or positive this quarter, including 4L, Bioplan, Techniplas and ZeroChaos. We continue to gradually increase the number of the industries we invest in to maintain or increase the number of portfolio companies with the goal of improving stability of the portfolio.

Chris will now walk through our investment activities during the September quarter and after quarter end. Rocco will then discuss our financial results. I'll finish with some commentary on our investments on nonaccrual, our leverage, the dividend and our outlook for the balance of the year. As always, we'll end with Q&A.

With that, I'll turn it over to Chris.

Thanks, Mike. We invested in 2 new portfolio companies this quarter and 3 existing portfolio companies. We have 2 full realizations as well. Since our last conference call was so recent, much of what I'm about to cover was discussed on our call in September as well. We invested in the first lien loan to AgroFresh, a food sciences company whose products prolong the useful life of foods. Our yield at cost is approximately 7.3%. We invested in a club loan to Easy Way, a portfolio company of Insight Equity. Easy Way is a designer and manufacturer of cushions, covers, umbrellas and other accessories for the outdoor furniture market. Our yield at cost is approximately 8.5%.

Turning to our existing portfolio companies. We invested in an incremental term loan and delayed draw facility for Empire Office. Our yield at cost on this incremental investment is approximately 8.9%. We also invested in incremental loan to Golden Hippo, which have repaid a significant amount of debt to facilitate the purchase of additional equity via the ESOP. Our yield at cost is approximately 8.6%. We also made an additional investment in Techniplas equity as part of strategic acquisition of Nanogate, which is expected to be highly accretive and complementary to the existing business.

Turning to our realizations, our loans to infrastructure and energy alternatives, or IEA, was repaid. Our realized IRR was 11.8%. We were also repaid on our investment in Hyperion as the company refinanced its first and second lien loans in the broadly syndicated market. Our fully realized IRR was approximately 8.3%. After quarter end, we made 2 new portfolio company investments, made one incremental investment in an existing loan and had one full realization. We invested in the first lien loan of LaserAway, a portfolio company of Ares Management. LaserAway is a leading chain of laser hair removal and skin care boutiques. Our yield at cost is approximately 7.1%.

We also invested in the first lien loan of Momentum Manufacturing Group to back the LBO accompanied by One Equity Partners. Momentum provides metal machining, welding, bending and finishing services for diverse end-markets. Our yield at cost is approximately 6.9%. We also made a small incremental investment in [JexPro’s] first lien term loan to support an acquisition. Our loans to ZeroChaos or Workforce Logiq was repaid in full as the company was acquired by PRO Unlimited. The fully realized IRR was approximately 11.2%.

Using the GICS standard as of September 30, our largest industry concentration was professional services at 10.8%, followed by energy equipment and services at 8.3%, commercial services and supplies at 7.3%. Containers and packaging of 5.8% and trading companies and distributors at 5.6%. Our portfolio companies are in 26 GICS industries as of quarter end, including our equity and warrant positions. As of September 30, we had 36 portfolio companies, unchanged from June 30.

I'd now like to turn the call over to Rocco to discuss our financial results.

Thanks, Chris. For the quarter ended September 30, 2021, our net investment income was $2.5 million or $0.18 per share. The fair value of our portfolio was $245.3 million compared to $245.9 million on June 30. Our portfolio's net increase from operations this quarter was approximately $3.3 million. Our investments in new debt during the quarter had an average yield of 8.5%, while realization and repayments during the quarter had an average yield of 8.7%, and the fully realized investments had an average IRR of 10.4%. The weighted average yield on our debt portfolio was 8.12%, an increase of 8 basis points from June 30.

As of September 30, our portfolio consisted of 36 portfolio companies, 92.8% of our investments were first lien, 2.8% of our investments were second lien and the remaining 4.4% is invested in equity, warrants and public positions. 96.1% of our debt portfolio was invested in floating rate instruments and 3.9% in fixed rate investments. The average LIBOR floor on our debt investment was 1.05%. Our average portfolio company investment was approximately $6.8 million and our largest portfolio company investment was Empire Office at $12.9 million. We had a gross leverage of 1.63x and the net leverage of 1.47x as of September 30 compared to 1.72 gross and 1.58, respectively, for the previous quarter.

As of September 30, we had 5 investments on non-accrual, which include all 3 investments in PGi, 1888 Term Loan B as well as Deluxe and one investment on partial accrual, Fusion take back loan.

With respect to our liquidity, as of September 30, we had $16.3 million in cash, of which $7.7 million was restricted cash as well as $20 million capacity under our revolving credit facility with UBS and $115 million under our Capital One facility, which will be utilized over the next few weeks to retire the UBS term loan and revolver. Additional information regarding the composition of our portfolio is included in our Form 10-Q, which was filed yesterday.

With that, I'd like to turn the call back over to Mike.

Thanks, Rocco. As we discussed last quarter, we extended our financing capacity and lowered our cost of borrowing. We secured a new credit facility with Capital One, which will replace borrowings with UBS this quarter. Between the Capital One facility and the 2026 notes, we feel very comfortable about our leverage capacity. Our guidance on leverage remains a target of 1.25 to 1.5x. We've been working to reduce our leverage over several quarters, bringing it down from an artificially high level of 1.96 in March to 1.63 at September quarter end. There will always be fluctuations due to the timing of investments and repayments, but we expect to continue to see our leverage trend downward. As we committed to do, we waived the portion of our management fee associated with base management fees over 1x leverage.

Last quarter, I discussed the decline in our book value. This was driven by several of our investments on non-accrual, which included 1888, PGi and the take back loan for Fusion, which is on partial accrual. 1888's balance sheet restructuring discussions continue. We still expect that the term loan B will be equitized, leaving us significant upside opportunity as company performance recovers, with no expected downside from our current mark. Restructuring is expected to be completed this quarter. PGi remains on non-accrual. Siris, the former sponsor sold their interest in the company to RSI for a nominal amount. Lenders remain in forbearance as operational turnaround work is underway. To aid in that effort, a portion of the first lien term loan was converted into a super priority revolving facility. Our view of the fair value of our total investment in PGi did not change this quarter, but that value is now allocated across an additional crunch. The revolving facility can be repaid and re-borrowed like a standard revolver.

Fusion's second take back loan was marked down last quarter and again this quarter. The first out loan remains marked at par, and we are not concerned about value through that crunch. For confidentiality reasons, I can't go into much detail about Fusion at this time, but we are closely monitoring the credit and are in regular touch with management and our fellow lenders. At this stage, we think that 1888 PGi and Fusion have limited ability to cause further negative volatility in our NAV. We see upside potential in our equity investments as well as in our loans mark below par. In the current quarter, there will also be from the repayment of ZeroChaos, an NAV recovery, which was marked at 85 at September 30.

We covered our September quarterly dividend with NII.

Looking at our portfolio on a run rate basis, we expect to cover the dividend in December as well and to have fully covered the calendar year. Our disciplined investment approach and appropriate capital resources leave us well-positioned to cover the dividend with NII going forward. Our Board of Directors declared a distribution for the quarter ended December 31, 2021, of $0.15 per share available on January 4, 2022, to shareholders of record as of December 10. We believe the dividend level should be stable and sustainable and that it represents an attractive yield given the market price of ICMB stock.

So far this quarter -- or I'm sorry, so far this calendar year, we have successfully invested in 9 new portfolio companies despite a very competitive environment for originations, and we have done so without compromising our principles. Our pipeline is focused on club deals where we find better structure protection, pricing and covenants. We also expect to find opportunities for incremental investments in existing portfolio companies. We will continue to manage the portfolio with a goal of consistent income generation and preservation of shareholder capital.

That concludes our prepared remarks. Operator, please open the line for Q&A.

(Operator Instructions) And our first question comes from Robert Dodd from Raymond James.

Congratulations on the quarter. I've got a couple of questions. First, going down the P&L. On the dividend income, was that kind of a onetime dividend recap or something like that? It's pretty sizable, especially in context of the size of your overall equity book, which is that big. So basically, is it sustainable and can you give us any color on the source of it this quarter?

Yes. As far as onetime income, other fees, there was probably a little less than $100,000 in the current quarter. And then there were -- that was in the other fees and then nonrecurring, there was probably a little over $200,000. And so when we look at the forecast for the dividend, we're very comfortable that we should continue to cover it this quarter and next quarter.

Sorry, but I meant the dividend income, can you, rather than the dividend to shareholders? The $296,000 into this quarter.

Okay. I'm going to look at Rocco and while he's looking that up.

It's Techniplas, he is talking about Techniplas dividend.

The one time.

Yes, that is the onetime fee. Yes. That's Techniplas, I'm sorry, Robert. I didn't understand. That's the Techniplas that paid the dividend of the equity portion of it paid a dividend. I apologize. I didn't get that.

So yes, when we filter that out, we do still easily cover at the current dividend level without a material change in the portfolio.

Understood. On the fee waiver, obviously, you are waving management fees over 75 basis points on over 1 turn leverage. Do you think it's reasonable for investors to expect that to be continued long term or it is that something that is being evaluated on a quarter-to-quarter basis or should we factor that in as kind of a long-term base plan?

Let me answer that 2 ways. One is there is no plan to change that. So from the way you factor it in, it is something that is revisited on a quarter-to-quarter basis with the Board, but there is no plan to revisit what we're doing at this point.

On the interest expense, right, I mean you have done a lot of work with the (inaudible). If we look at that, take the new structure to say, next quarter or however, how much do you think the new structures in total were saved in quarterly interest expense versus, say, the $186 this quarter of the $109 million last quarter?

All right. So let me put it this way, Robert, our current credit facility is at 355 plus LIBOR and our new one is a 215 plus LIBOR. And then there's also a 35 -- sorry, 235 plus LIBOR. So that and the UBS credit facility will roll off on December 6. And that credit facility is 115 versus if you look at what we have now with UBS is 102 plus 120.

Got it. Got it.

Robert, there's one more thing I'd add just as we're all looking at each other here is that under the current structure, because UBS is a term loan, we've been carrying minimum $10 million to $20 million of cash and paying the full interest under the term loan to have that under the new Capital One we've got more flexibility so that if we have excess cash, we will pay it down, and we will not be paying on borrowed funds there.

I appreciate the color, Mike, I'm not sure the on PGi, Fusion, etc., and 1888 restructuring to be completed this quarter. And I realize you cannot say anything about Fusion, but on PGi, is there anything, and I realize you are not in control, but anything, any color you could give us on, a reasonable time line to expect there?

Yes. I'm not sure. I think that we're all patient. I think it was a big plus to bring RSI on. And is it going to be 6 months to a year, I'd say no. I think that it could be 2 years plus or minus. And if you ask me, my bias would be plus, unless, and this is the big plus wildcard, someone looks at it strategically and convinced, but we've got, I think, a good management team in and the way it's structured with RSI, we've got real upside as they realize more value over time.

So this is Chris, Robert. The other lenders have used RSI before and past performance is not guarantee of future results, whatever that term is, but they had surprisingly good results. In all seriousness again, they had a surprisingly good over-performance on the couple of deals that RSI managed for them. And with the complexity of this business, it's really fit what RSI strengths are. So like Mike said, we're optimistic, but we don't want -- we're optimistic long-term.

And we have not built-in that optimism upside into our valuation. We've done what we think is.

Our next question comes from Paul Johnson from KBW.

I have a high-level question for you guys. I don't know if there's necessarily a right or wrong answer here, but I'm curious to hear from you, how you balance out, I guess, first, I should say, with the goal of obviously achieving greater diversification in the portfolio. How do you guys balance the idea of taking positions and new investments, new companies alongside, obviously, the opportunity to invest in existing businesses in your portfolio. I'd just be curious if you had any preference for one or the other or then just how you balance that out?

Yes, thanks, Paul. This is Chris. It's really a case-by-case basis and I hate to be noncommittal, but you have something like a credit like Golden Hippo, which significantly repaid the first lien debt we're in, when they come back to reload the facility for the ESOP to buy more shares back from the 3 original founders, that is as close to a no-brainer as I've ever encountered. We are mindful of how we've managed the portfolio in the past, and we do make every effort to keep our average hold levels down below the double digits. So sometimes -- we are mindful of it, but there is a comfort with deals or management teams we’re invested with that have, a, run the company and the leverage stayed better longer and b, paid debt down. It will tend to be a little bit higher. If I try to answer your question now, and I apologize, it's a little higher hurdle for a new deal, when we're looking at an older deal where we have a manageable position and ready, to us, manageable is $7 million or less, where we may top up for $2 million or $3 million more.

Sure. Okay. I appreciate that.

And we ended a lot, but hopefully gives you some flavor for how we look at it.

Yes. I understand it's complicated and deal-by-deal basis is probably the best way to say it. My other question was for the adviser, I'm just curious, does the adviser or in any sort of partnership along with ICM in any way, do you guys manage any other assets outside of the BDC or are you in the process of raising any additional capital outside of the BDC?

So there's 2 parts to that, which are, number one, we had been pre-COVID talking about raising a private fund. We are back in those discussions. That should progress during 2022. I'm not sure if the first, those will be in the first half or second half, that's the target to close on a new -- first close on a new private fund during 2022. But I think coincidental with that, not separate from it, but coincidental with it, and it will probably overlap some, I think now it's a week and a half ago, Investcorp had an announcement that they were supplying the capital for an acquisition of an insurance company Shell that owns 44 licenses throughout the United States. They have -- so think about the analogy would be a theme during ramp up. So there's a new insurance company, Investcorp has gone through the process of identifying, hiring CEO, CIO. We've got the Shell, they're capitalizing it. That will start to write premiums during 2022, and it will hopefully create additional assets for us to manage along with the opportunity to raise the private fund. So there is a platform that is building around it.

I appreciate that. And last, just one quick question, but on your leverage target ratio, is that on a gross basis or a net basis?

So I did it both ways. The 1.63 was gross, the 1.47 was net.

And the target of 1.25 to 1.50 is a gross number, and we would expect based upon, a great example, as we said that we have -- we know that there are a few that are supposed to repay, in anticipation of repaying, we are trying to make sure that we deploy. Now if a repayment gets delayed and we have deployed, it’d be a little bit higher until the repayment comes in but being in that 1.25, 1.50 is the target.

And Paul, just to follow-up, Mike said earlier. If you think about the way our credit facility is, we just sit on cash, where in the new credit facility, the net and gross would be the same because that would pay down the credit until I need to borrow on it. So if you look at it that way, too.

And by December, we will be fully into the new facility and out of the UBS facility.

Okay. Got it. So gross basis on the target range, that's what I was looking for.

(Operator Instructions)

Thank you very much.

This concludes today's conference call. Thank you for attending.