Investcorp Credit Management BDC Inc (ICMB) 2021 Q4 法說會逐字稿

Welcome to the Investcorp Credit Management BDC, Incorporated scheduled earning release of fourth quarter ended June 30th, 2021. Your speakers for today's call are Mike Mauer, Chris Jansen and Rocco DelGuercio. (Operator Instructions) A question-and-answer session will follow the presentation.

I'll now turn the call over to your speakers. You may begin.

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

Thank you, Michael. 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 our latest SEC filings, please visit our Investor Relations page on our website.

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

Thanks, Rocco. The June quarter marks our fiscal year-end. We had a very active quarter with both highlights and challenges. We had a lot of activity from our investment standpoint, both in terms of new investments and realizations.

Chris will go into detail on a name by name basis. 3 of our 4 new portfolio company investments were in club loans, including one, which we co-led with a partner. The fourth was a middle market syndicated loan. We continue to believe that the best value lies in the core middle market.

We also see the relevance of thoughtful structuring and covenants. The pace of refinancing activity in the broader market seems to have slowed somewhat. Of course, it's also possible that the summer doldrums hit early this year, but we had 2 refinancings announced mid-summer and none since.

Our pipeline is less focused on refis now and more on new LBOs. While there is still pricing pressure on new deals, the market's frenzy feeling, we saw 4 or 5 months ago seems to have abated somewhat. We extended our financing capacity and lowered our costs during the quarter and also during the current quarter.

As we discussed last quarter, we repaid our 2023 notes and issued new notes due 2026. This had some onetime effects on our earnings this quarter, which Rocco will discuss. More recently, we secured a new credit facility with Capital One, which will go -- which will eventually replace our borrowings under the UBS facility.

Rocco will go into more detail later in the call. One thematic point I would like to make is that we have made great strides towards stabilizing the net asset value. We have reduced volatility by exiting investments as we did with Exela Technologies this quarter, we have received payments on Deluxe over the past year, which have reduced our current fair value to 4% of our original cost.

We have also substantially eliminated downside risk to our NAV through our marks specifically on 1888 and PGI. I know that both of these positions have been of concern to you as well as to us for several years now. Coincidentally both have reached the point of restructuring at the same time.

Negative marks on these 2 positions over the past quarters have offset and overshadowed our team's great work across the rest of the portfolio. Now with limited downside left, we think the entire portfolio is poised to rebound. Some examples include 4L, Techniplas and Arcade Bioplan, all of which have recovered from the fair value low points and have begun to appreciate as the underlying borrowers' performance has improved.

Chris will now take you through our investment activity during the June quarter and after quarter end. Rocco will discuss our financial results, and I'll finish with commentary on our financing activity, our leverage and Investcorp's share purchases, the dividend and our outlook over the next few months. As always, we'll end with Q&A.

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

Thanks, Mike. We invested in 5 new portfolio companies this quarter and one existing portfolio company. We had 6 full debt realizations across 5 portfolio companies as well. Our first new investment was in a club loan for NWN Corporation. We invested in NWN once before in 2015. The company, which has grown substantially under the ownership of New State Capital is a leading provider of managed cloud services, solutions and systems.

Our yield at cost is approximately 7.7%. Our second new investment was in the first lien term loan for Innovations in Nutrition and Wellness or INW. INW, which was purchased by Cornell Partners, formulates and produces a variety of products for the vitamin, mineral and supplement markets. Our yield at cost is approximately 7.4%.

Our third new investment was in the first lien loan for Lockwood shown in our financial statements as Veterans Services LLC. Our loans to Veteran Services is a 1 year bridge facility to support the redevelopment of a former hospital in the Chicago metropolitan area. Our yield at cost is approximately 17.7%.

Our fourth new investment was in the first lien loan for WIS international, a portfolio company of Centre Lane Partners. WIS provides inventory verification services and merchandising services to customers across various retail industries. Our yield at cost is approximately 9.5%.

Finally, our fifth investment was in the first lien loan for Lenox Corporation, another portfolio company of Central Lane Partners. We co-led this club deal with our partners at Capital Dynamics. Our loan supported the combination of Lenox, Hampton Forge and Oneida to form the leading table-top business focused on the better market. Our yield at cost is approximately 9.2%.

We also made an additional investment in Barry Financial Group term loan, which is an existing portfolio company investment. Our yield at cost on this incremental investment is approximately 9.5%.

Turning now to our realizations during the quarter. Alta Equipment refinanced its term loan in early April with the proceeds of a bond offering. Our fully realized IRR was 17.8%. Flow control amended its credit facilities in April. As part of this amendment, we opted not to roll our term loan C position into the new facility, and we were repaid at par.

Our fully realized IRR was 9.2%. GEE raised equity in the public markets to repay its debt facilities in full. Our fully realized IRR was 22.8%. ACProducts or ACPI, refinanced its loan in connection with the acquisition of the company by Platinum Equity. Our fully realized IRR on this investment was 7.9%. We also sold our positions in accelerated term loan and bonds. Mike will discuss this further in his commentary.

Our realized IRR on the term loan was negative 2.6%, and the IRR on our position in the bond was a positive 4.9%. Since quarter-end, we made several additional investments and had one full realization. We invested in a club loans through 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%.

We invested in the first lien loan to AgroFresh, a food sciences company whose product prolonged the useful life of fruits. Our yield at cost is approximately 7.3%. We also invested in incremental term loan and delayed draw facility for Empire Office, one of our existing portfolio companies. Our yield at cost on this incremental investment is approximately 8.9%.

We also made an additional investment in Techniplas' equity as part of the strategic acquisition of Nanogate, which is expected to be highly accretive and complementary to the existing business. Finally, we also invested in an incremental term loan to Golden Hippo, which had repaid a significant amount of debt to facilitate the purchase of additional equity by the ESA. Our yield at cost is approximately 8.6%.

After quarter-end, we received the repayment in full of infrastructure and energy alternatives or IEA. The company placed the bond to repay its loan in full. Our realized IRR was approximately 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 7.6%.

Using the GICS standard as of June 30th, our largest industry concentration was professional services at 10.6% followed by energy equipment and services at 8.3%, containers and packaging at 7.6%, construction and engineering at 6.5% and commercial services and supplies at 6%. Our portfolio of companies are in 25 GICS industries as of quarter-end, including our equity and warrant position. As of June 30th, our portfolio count was 36 versus 35 at March 31st.

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

Thanks, Chris. For the quarter ended June 30th, 2021, our net investment income was $1.5 million or $0.11 per share. Normalizing for the redemption of the 2023 notes and the write-off of capitalized offering expenses for those notes, our NII would have been $2.3 million or $0.17 per share.

The fair value of our portfolio was $245 million compared to $251 million on March 31. Our portfolio's net decrease from operations this quarter was approximately $11.9 million. Our new debt investments during the quarter had an average yield of 10.3%, while realization, repayment during the quarter had an average yield of 12.8% and fully realized investments at an average IRR of 13.9%.

The weighted average yield of our debt portfolio was 8.04%, a decrease of 73 basis points from March 31. The majority of this decrease is attributable to the repayment of our loans to GEE Group. As of June 30th, our portfolio consisted of 36 portfolio companies. 93.7% of our investments were first lien, 2.5% of our investments were second lien and the remaining $3.8 million is invested in equity, warrants and other positions.

96.1% of our debt portfolio was invested in floating rate instruments and 3.9% in fixed rate investments. Our average LIBOR floor on our debt investments was 1.04%. Our average portfolio investment was approximately $6.8 million, and our largest portfolio company was Barry at $13 million.

We were 1.7x levered as of June 30th compared to 1.96x levered as of March 31, and our net leverage as of June 30th was 1.5x. We had 4 investments on nonaccrual and one investment on partial accrual as of June 30th. With respect to our liquidity, as of June 30th, we had 26, excuse me, we had $12.6 million in cash, of which $6.8 million was restricted cash as well as $20 million capacity under our revolving credit facility at UBS.

Finally, on August 23rd, we closed on a new credit facility with Capital One. The new facility has an interest rate of LIBOR plus 2.35% compared to UBS' LIBOR plus 3.15% and 80 basis point savings. It has a 3-year investment period. The new facility will replace the existing UBS credit facility, which is set to mature in early December.

More details regarding this facility may be are available in our recently filed 10-K and our 8-K filed on August 25th. I would also like to note that the December quarter will have onetime costs related to the 2 credit facilities until the UBS credit facility rolls off in early December. Additional information regarding the composition of our portfolio included in our Form 10-K, which was filed yesterday.

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

Thank you, Rocco. Over the past several months, we have established a new set of leverage facilities to provide us with expanded flexibility and lower cost. In April, we closed on $65 million of new 4 7/8% notes due 2026. As Rocco noted, there was a onetime cost associated with writing off the remaining capitalized offering cost of the 2023 notes, which reduced our NII by approximately $0.06.

More recently, we secured a new credit facility with Capital One. Our new facility with Capital One will replace our borrowings with UBS. Our guidance on leverage remains a target of 1.25x, 1.5x. We have been working to reduce our leverage over the past 2 quarters, bringing it down from 1.96 in March, which was inflated due to the note refinancing I just described to 1.72x in June.

Today, it stands at approximately 1.68x. We're going to continue to work toward reducing our leverage over the coming quarters, and I'd note that the persistently high leverage is not the typical result of our normal investment activity, but rather a direct consequence of the decrease in our NAV.

On that front, I'd like to discuss the decline in our book value. This quarter, we took significant markdowns on 2 portfolio company investments in particular. These were 1888 and PGI. Both have been credit concerns for some time and both were already a nonaccrual. While for confidentiality reasons, I cannot discuss many of the details of these companies. I would like to share more color on each with you all.

1888 has several term loans. We have begun discussions for a balance sheet restructuring and recognition that the subordinated Term Loan B will not resume paying interest and that 1888 would benefit from the equitization of a significant portion of its debt. By restructuring into an equity interest, we will retain the ability to realize upside value if the company performance recovers.

PGI has been on nonaccrual for several months, after defaulted on interest payments to both the first and second lien loans. Lenders in both tranches have been working together constructively to preserve liquidity and define a path toward recovering value.

I can't go into detail about the restructuring at this point, but we believe our mark appropriately limits further downside risk in our position. We believe that reducing further downside risk to our NAV was an important theme for us this quarter. In addition to our marks on 1888 and PGI, we also sold our holdings in Exela Technologies after a significant increase in the market price of the debt. We exited at a near 0 IRR, after holding the positions through remarkable price volatility.

This exit reduces uncertainty in the portfolio, especially should Exela ultimately restructure, which we view as a real possibility. As part of 1888 and PGI, we have 2 marks, I'm sorry, apart from 1888 and PGI we have 2 marks below 50 as of June 30th. DSG or Deluxe is in wind down position, which I have discussed in prior quarters.

We have market position as a sum of the probable future cash receipts. As recoveries are realized, the principal balances reduced and the mark is adjusted based upon our most recent view of remaining sources of value.

It's a small position, but I would like to note that we have recovered in excess of 74% on our investment at this time, and we expect to recover additional amounts in the future. As of today, the fair value of DSG represents approximately 4% of our original cost. Fusion's second take-back paper is marked at 47 this quarter. This is indicative of our underlying challenges facing the business as well as the unsustainable capital structure, which was putting on the business during this bankruptcy 2 years ago.

I would note that we continue to mark the first out loan at par due to its low loan-to-value, and we have a great deal of confidence in the company's management and their vision for the future. In addition to working hard to limit further downside on our NAV, we have a number of positions with asymmetric upside potential.

We own equity positions in 4L, ASI and Techniplas as well as 1888 and Fusion. Techniplas has begun to see recovery. And as Chris noted, made an acquisition, which should be immediately accretive. 4L is stable and is, we believe, positioned for future recovery. ASI continues to perform well.

Beyond our current portfolio, we also recently received expanded exemptive relief to co-invest with Investcorp's private equity funds, which will allow us to invest in equity of Investcorp's LBOs alongside them. I would like to note we will never invest in the debt of an Investcorp portfolio company in order to avoid conflict.

However, we are excited about investing alongside our private equity partners and the prospect of creating additional avenues for NAV growth. We did not cover our June quarterly dividend with NII. As Rocco noted, however, onetime costs associated with writing off capitalized offering costs from our 2023 notes served to bring our NII per share from $0.17 to $0.11 per share.

Except for these onetime costs, we more than cover the dividend. We are committed to a disciplined investment approach, and we are confident that we have the appropriate capital resources to generate NII to cover the dividend going forward. As we committed to do, we waived the portion of our management fee associated with base management fees over 1x leverage.

Our Board of Directors declared a distribution for the quarter ended September 30th, 2021, of $0.15 per share payable on October 14th to shareholders of record as of September 24th. The Board did not declare a supplemental distribution this quarter, we believe the dividend level should be stable and sustainable and the supplemental distribution approach remains the best way to capture fluctuations in the portfolio of income generation.

Investcorp made 2 separate commitments to purchase shares in ICMB. While Investcorp did not make any open market purchases under its 10b5 program or any purchases of shares at NAV during the June quarter. Investcorp has made purchases to fulfil all of its commitments during the current quarter.

In summary, since March 31st, we have successfully invested in 7 new portfolio companies despite a challenging environment for origination. We remain focused on club deals where we find better structural protections, pricing and covenants then our typically in current vintage broadly syndicated transactions.

We are also looking at existing portfolio companies for opportunities to make incremental investments. We will manage the portfolio through the cycle and keep our focus on consistent income generation and preservation of shareholder capital. That's the end of our prepared statements.

Operator, please open the line for Q&A.

(Operator Instructions) Our first question comes from Christopher Nolan.

What's the advance rate in the new Capital One facility, Rocco?

The advance rate?

Yes.

Well, I'm sorry.

It varies, Chris. It varies the advance rate in total.

Hello?

Okay, sorry. It should average about where we were with UBS, which is about 60%. It depends upon the portfolio, there are different advance rates for, obviously, different classes of loans and also there's a size factor as well.

Understood. 1888, are the sponsored private equity sponsors associated with that company?

There was a sponsor. It's Mike. Before I answer that, I did want to clarify one thing. I think earlier Rocco going through his statements talked about net leverage, and it sounded like 1.5 to 1.58, just to be clear for everyone. I want to clarify that. On 1888, in the initial transaction back in 2014, it was a sponsor, when it was restructured several years ago, that sponsor was removed. They were not -- it was a fundless sponsor did not have additional capital to put in so the lenders stepped into the equity and some of these strategic sellers continue to participate. At this point, the strategic sellers are helping from an operating standpoint, but not from a capital standpoint. That's the Wells family out in the DJ Basin.

Great. And I guess a final question on 1888. It's a Term B loan, which is nonaccrual. Would just that one be turn into equity or would all the exposure turn into equity?

We are going -- I would expect that there is some debt still on it. We are finalizing, if it's the term loan B or some other amount, but that has not been finalized at this point.

Our next question comes from Robert Dodd.

I've got a few. First one is kind of a housekeeping one. In the case Fusion Connect is marked like partial nonaccrual. Can you explain what that means? I think it counted fully in your nonaccrual numbers that you give us, but it's lifted as partial. So what's the distinction there?

Yes. So Robert, that pays -- it's a 3% cash and I believe 8% PIK. The PIK portion is on nonaccrual. It is only paying the cash. We're only recognizing the cash portion of it.

Got it. Got it. I appreciate that. And then one of the questions on, Mike, you gave color, I mean you expect to be able to cover the dividend. I mean, this quarter, without the onetime costs, yes, it would have been $0.17, but you also had very high fee income this quarter, the highest I can find in my model for at least 3 plus years. So I mean you're confident that either fee income is going to stay elevated or without the benefit of extra fee income if the refinancing market has slowed then you can cover the dividend with just -- with normal fee income?

With normal, Robert. Few things. One is with normal fee income we expect to cover the $0.15. And we have done our models out through year-end. I think beyond year-end, we get a little bit into the guessing of the reinvestment rates and the level of the portfolio, et cetera.

Got it. Got it. Understood. Beyond the year-end it gets more tricky. And then the last one, on 10-year global on American Teleconferencing. I mean you emphasized you wanted to eliminate or reduce at least downside NAV risk going forward. But when I look at your mark on that, there's 5 other BDCs in there and your mark is substantially lower than anything anybody else has. Is there either something different about your loan? It does look -- you've got some pick on it. And I don't think other people do. So I'm not sure if you're necessarily in it exactly the same tranche as others? Or is there something you know about that business as it relates to the mark being lower than -- I think the lowest that has at 42. You've got a 15, which imply has been very conservative. So any more color on how that's marked? What's factored into that? Or is that just you wanted to take an ultraconservative position on the valuation of that?

Robert, I appreciate the way you've tried to word the question because it's sensitive given the non-public information. So I think all I'd say is that my expectation is that we do not have any asymmetric information to any other first lien lenders, okay? And we have thought that you're focused on the first lien. The second lien is effectively $1 or 0, whatever. And that we have felt that it's a very difficult loan and that we wanted to, if there is a range, which we believe there is a range for valuations that we went to the conservative end of the range to minimize, I can never say eliminate unless you're at 0, then you eliminate, but minimize the downside risk. And we have sensed the market shareholder analyst frustration with some of the bits and pieces of marks on the portfolio. So that's a bit of background on the overall portfolio and PGI specific.

Got it. Got it. And then, I mean, on the net leverage, and obviously, things can move around as UBS gets replaced with Cap One, et cetera, you can allocate cash balances differently, potentially. The 158, I presume that was quarter end, what's the debt leverage today after taking obviously Investcorp bought some stock NAV, which obviously gave you a little bit of a NAV, at NAV per share, but obviously that would have a beneficial impact on leverage, all other things being equal. So where do we stem today on that basis?

And that it would be closer to 1.54.

Our next question comes from Paul Johnson.

Just going on for Rob's last question. I'm just curious, going forward, I know you've had a little bit of that growth quarter to date. I mean, how do you guys, I guess, balance any sort of new growth that you have? I mean, are you planning on drawing more on the new facility? Or do you have just more visibility into incoming repayments? How do you balance all that, which is the level of cash on the balance sheet? Obviously, leverage just running, I think, a little bit higher than your previous target of around 1.5% or so, I think, on the high end.

Just to clarify, the growth in what were you referring to?

Quarter-to-date, third quarter, just the investments that you've made quarter-to-date.

The gross investments. So there is -- on that, we've got some visibility on some repayments that are coming in and some visibility on some redeployments. We've got some visibility on -- and de minimis I wouldn't say it's a lot. It's a mark ups because of some notifications of repayment vis-a-vis where we have the mark. We don't see any downside to our overall NAV today. We see modest upside. And then I'd just take this opportunity to reiterate what I talked about earlier. And I don't think it's the next 90 day.

I think it's 6 months to 36 months, the strategy of deploying into equity to grow the NAV, which will allow us to grow the asset base. And with Investcorp, we've now spent 1.5 years plus getting the enhanced order for exemptive relief to co-invest. We will look today, I think we have 4% plus or minus in equities. Think about that a good portion of that is restructured equities. We'll manage those over time. But versus that 4% or 10% is the near-term to medium-term target and that being that 6 to 36 months, and that may change, and they will be a diversified portfolio, co-investing in Investcorp sponsored deals right alongside. So another way of growth.

Got you. That was actually going to be my next question was on the private equity strategy, which I think makes sense now that you are affiliated with the Investcorp platform. So I appreciate it. Those are all my questions, and that's all I have today.

No, I appreciate it. Listen, I don't know how familiar all of you are with the Investcorp platform. But the private equity sponsored next year will be the 40th anniversary of them being a PE investor and one of the original private equity investors in the 80s always been focused on middle market and continues to be focused on middle market. So not only do we think that it will be accretive to shareholders to be able to exercise around a co-investment strategy, but it is now also starting to help us originate debt investments away from Investcorp deals because there are a lot of the market calls on Investcorp to lend to their PE deals. That's helping our partnerships on non Investcorp deals. Any other questions?

(Operator Instructions) At this time there are no further questions.

Thank you very much. We appreciate it everyone. We will talk to you next quarter.

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