Investcorp Credit Management BDC Inc (ICMB) 2021 Q3 法說會逐字稿

Welcome to the Investcorp Credit Management BDC, Inc. Scheduled Earning Release of Third Quarter Ended March 31, 2021. Your speakers for today's call are Mike Mauer, Chris Jansen and Rocco DelGuercio. (Operator Instructions) I'll now turn the call over to speakers. Please begin.

Thank you, operator, and thank you to all of you for joining us 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 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 would like to turn the call back over to our Chairman and CEO, Michael Mauer.

Thanks, Rocco. This past quarter saw a marked increase in activity in the broader market. Refinancing activity, which began to pick up around year-end, accelerated and drove a large number of transactions. We saw several of the loans in our portfolio get refinanced, both during and after quarter end. As we consider our pipeline, refis and new LBOs are the primary drivers. Within a robust primary market, we continue to see strong competition for deals with most of the pressure coming on pricing at the larger end of the market. We have maintained our credit discipline. We haven't chased deals which have unattractive structures, even when these deals are refinancings of portfolio companies that we are comfortable with. Apart from structural trends, we also see that most deals are pricing higher. We are focused on credit quality and loan structure first. We accept that in this market, spreads are tightening.

Sector selection remains a key tool in our portfolio management decisions. We are avoiding new investments in oil and gas as well as in sectors which were hit hardest by the pandemic, such as retail and hospitality. Many of our borrowers were well positioned to rebound from the effects of COVID on their businesses. We've seen this begin to play out in the numbers with strong second half performance in 2020.

Our investment activity during the quarter continues to be balanced between club loans and middle market syndicated loans. During the quarter, we invested in one of each. And since quarter end, we have invested in 2 additional new portfolio companies.

Chris will go into detail about the investments and realizations during the quarter, and then Rocco will discuss our financial results. I'll finish up with commentary on our financing activity during the quarter, our leverage, Investcorp's share purchases, our dividend and our outlook for the next few months. As always, we'll end with Q&A. With that, I will turn it over to Chris.

Thanks, Mike. We invested in 2 portfolio companies this quarter, both of which were new. We also had 3 full debt realizations and 1 equity realization. Our first investment is in the first-lien term loan for Galaxy brands. Galaxy designs, sources and markets footwear products. Sponsor is Gainline Capital Partners. Our yield on this club loan at cost is 8.5%. A second new investment this quarter was in the first-lien term loan for auto lenders. The company is a vertically integrated auto sales and leasing platform. Our yield to cost is 8.5%.

Now to the realizations. Our first realization this quarter was Allsup's. While this was one of our lower-yielding assets, our entry point was attractive, and we sold our loans over par before they were refinanced. Our fully realized IRR was approximately 12.7%. Our second realization was Limbach. Limbach's credit profile improved dramatically during the time of our investment, and the company refinanced our debt at much lower rates. Our fully realized IRR was approximately 16.1%. Our third realization was Empire Resorts, originally known as Montreign. The bulk of our position was repaid at par a year ago, with a small portion refinanced into a 1-year bridge loan. The bridge loan was repaid and our IRR was 6%. Our fully realized IRR over the entire life of the investment was approximately 10.6%. We also had a realization of our position in Open Mobile warrants. Our combined IRR on all Open Mobile positions for the life of that investment was approximately 11.4%.

Since quarter end, we have made 2 new investments. Our first is in a club loan for MWM Corporation. The company is a leading provider of managed cloud services, solutions and systems. Our yield at cost is approximately 7.7%. Our second recent investment is in the first-lien term loan for Innovations in Nutrition and Wellness, or INW. INW formulates and produces a variety of products for the vitamin, mineral and supplement markets. Our yield at cost is approximately 7.4%.

We also had 2 full realizations since quarter end. First, GEE raised equity in the public markets to repay its debt facilities in full. Our fully realized IRR was 21.3%. Second, Alta Equipment refinanced its term loan in early April with the proceeds of a bond offering. Our fully realized IRR was approximately 16.7%. Using the GICS standard, as of March 31, our largest industry concentration was professional services at 12.4%; followed by energy equipment and services at 10.1%; trading companies and distributors at 9.8%; containers and packaging at 7%; and commercial services and supplies at 6.6%. Our portfolio companies are in 23 GICS industries as of quarter end, including our equity and warrant positions. As of March 31, our portfolio company count was 35 versus 37 at December 31.

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

Thanks, Chris. For the quarter ended March 31, 2021, our net investment income was $1.8 million or $0.13 per share. The fair value of our portfolio was $251.8 million compared to $257.7 million at December 31. Our portfolio's net increase from operations this quarter was approximately $3.7 million.

Our new debt investments during the quarter had an average yield of 8.5%, and realization and repayments during the quarter had an average yield of 11.3%. And fully realized investments had an average IRR of 12.3%. The weighted yield of our debt portfolio was 8.77%, a decrease of 99 basis points from December 31. As of March 31, our portfolio consisted of 35 portfolio companies. 87% of our investments were first lien, 4.6% of our investments were second lien and 4.8% of our portfolio was in unitranche loans. The remaining 3.6% is invested in equity, warrants and other positions. 99.3% of our debt portfolio was invested in floating rate instruments and 0.7% in fixed rate investments.

The average LIBOR floor on our debt investments was 1.07%. Our average portfolio company investment was approximately $7.2 million, and our largest portfolio company investment was GEE at $12 million. We were 1.96x levered as of March 31 compared to 1.43x levered as of December 31. Our leverage was subsequently reduced to 1.5x when our baby bond was fully repaid on December 26. We had 4 investments on non-accrual as of March 31.

Finally, with respect to our liquidity, as of March 31, we had $86.4 million in cash, of which $6.5 million was restricted cash, as well as $20 million capacity under our revolving credit facility with UBS. As I noted, $51.4 million of this cash was earmarked to repay a 2023 note, which occurred on April 26. Additional information regarding 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.

Thank you, Rocco. We were very pleased to place a new bond this quarter. We closed on $65.0 million of new 4.875% notes due 2026, which raised net proceeds of $63.1 million. In April, we used these proceeds to fully redeem our 2023 notes. The net effect is to provide us with additional long-term capital to fund our investing activities as well as lowering the cost of leverage.

Our guidance on leverage remains a target of 1.25x to 1.5x. Last quarter, we were within that target at 1.43x. This quarter, our leverage artificially peaked at quarter end due to the note's placement before normalizing at 1.5x. We anticipate that our normal investment activity will keep us around this range.

I do want to touch on the non-accruals in the portfolio. DSG, formerly known as Deluxe, was on non-accrual last quarter. This position, a small stub from our investment in Deluxe Toronto Ltd, represents our interest in the final wind-down of the company. We have received a number of small paydowns and expect to collect additional funds over the coming quarters.

1888 had several term loans. The Term Loan B is subordinated to the Term Loan A, fees and revolver. With those loans remaining non-accrual, absent a significant change in drilling activity in 1888's market, we do not expect the Term Loan B to resume paying interest. PGI unexpectedly failed to make its interest payment on both its first and second lien loans. We are engaging constructively with our fellow lenders in both tranches as well as the sponsor. For confidentiality reasons, we can't say more on this at this time.

We did not cover our March quarter dividend with it [high up]. However, using our prior quarter spillover income, we more than covered the March dividend. While disappointing, we are committed to the 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've committed to do, we waived the portion of the management fees associated with base management fees over 1 turn [lights]. Our Board of Directors declared a distribution for the quarter ended June 30, 2021 at $15 (sic) [$0.15] per share, payable on July 9, 2021 to shareholders of record as of June 18. The Board did not declare a supplemental dividend distribution this quarter. We believe that this dividend level is stable, and the supplemental distribution approach remains the best way to capture fluctuations in the portfolio's income generation.

Investcorp has made 2 separate commitments to purchase shares in ICMB. Investcorp did not make any open market purchases under the 10b5 program this quarter. To date, 281,775 shares have been purchased since the inception of that program. Secondly, Investcorp has committed to purchase shares at NAV. Investcorp did not make any purchases between December 31 and March 31 and has purchased 227,000 shares to date.

In an increasingly frothy market, we continue to focus our efforts on the core middle market. Especially in club deals, we find that structural protection, pricing and covenants are holding up much better than in the larger, broadly syndicated transaction. Our team is working hard to identify additional investment opportunities to deploy cash we have in the portfolio. As I said last quarter, we want to see the opportunities we are presented with, manage the portfolio through the cycle and keep our focus on consistent income generation and the preservation of shareholder capital.

That's the end of what we have prepared. Operator, please open the line for Q&A.

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

On Premiere Global -- and I understand there's confidentiality. So without going into all the details of what went on, can you give us any color on what's a reasonable time frame to expect either resolution of the asset entirely or the current, whatever they may be, issues going on with the business?

Yes, Robert. Unfortunately, we don't have a time line. It has been a recent event, so everyone is in the beginning stages of discussions. It's not in the later stages. So we do not have a time line at this point on that.

Got it. Another one that stands out kind of is Exela Intermedia. Obviously, it's marked down. It's still on accrual, but it's marked down pretty substantially. So can you give us any color on what your expectations are there? Will it stay on accrual, for starters? And on that mark, is there anything you can tell us about expected or potential outcomes with regard to that asset?

Yes, Robert. On that, we keep watching it closely. We have discussions among some of the lenders. It is one that the company continues to make moves. And they're all public information out there on some of the financings they've done, some of the contracts they've gotten. So they've made several moves in order to keep liquidity, and so they have continued to make payments. We think that we've got it marked at actually a pretty attractive level, and we think that that is indicative from a market perspective. But until we get some guidance that they're not going to make an interest payment, we're going to keep it on accrual.

Okay. Fair enough. And then just in general with, say, beyond those assets, where -- are there any other assets that you're seeing any warning signs in or anything that we should be paying particular attention to, given obviously there are some -- there's still some stress out there in the economy, et cetera?

Yes. No, it's a great question. And I'll just use your question as maybe digress on 2 or 3 things. One is, I think in speaking -- my partner kicked me from 6 feet away under the table here. I think I said $15, not $0.15 for the dividend next quarter, and so that I wanted to highlight. The other thing is -- and when we look forward, the June quarter, I would expect that because of the bond, and we had several investments repay in this strong market, and we had 2 or 3 delay in funding, that the June quarter will not necessarily cover the dividend. But our projections are, with the reinvestment, we should be covering the dividend going forward beyond that.

So I think that's one important thing. The other thing is the asset that we always talk about, and you did not ask about today, so I thank you, but I'll bring it up, 1888. If oil continues to hold in this $60 plus or minus -- it's been $64, $66 the last couple of weeks -- but high $50s, low $60s, we are seeing a fairly slow but constant increase in rigs, especially in the Permian. It's still significantly below where it was pre-COVID, but we are seeing a very nice consistent pickup in that business. So we're not concerned on that one in the current environment.

Our next question comes from Paul Johnson.

I suppose its non-accruals were a big driver of this, but I'm just -- and I know you answered the question a little bit to Robert with around the dividend. But in terms of like the interest income coming off the portfolio, just given yields and spreads and repricings that are taking place in the market, do you expect to be able to bring that level of interest income kind of up from this quarter, $6 million to $7 million kind of range? Or do you have any kind of line of sight on maybe kind of where we run from here?

So new investments, we are assuming because of the environment -- and we're not going to stretch and take on undue risk -- we're assuming are kind of in an 8.5% to 9% average. We also are assuming that from our quarter end, which was around $251 million of invested assets, that we are in the process and we've got a pipeline of deals we're looking at, that we should be closer to a $270 million to $275 million. That would not change our leverage. That's primarily using the additional cash that came from the baby bond. Hopefully, that helps.

Got you. Okay. And then I guess just one kind of broader question. Within your portfolio of all your companies, or even deals that you've looked at, particularly with the businesses that are maybe more labor -- manual labor-intensive, have you seen any signs of inflation pressure throughout the economy or just in middle-market businesses?

Yes, it's Chris. And a good question, Paul. We haven't seen it specifically. We're aware in the lower middle market, there are those pressures with hourly workers. But a number of our businesses that rely on a more skilled worker, they are seeing some wage pressure, but they're seeing pricing coming in. Some of our companies like an IEA, for example, that can drive pricing. And others kind of across the portfolio, we've been surprised by the resiliency on the revenue side as well, save for the discussions we've had on PGi and a couple of others.

And our next question comes from Christopher Nolan.

Mike, what was the driver for the decrease in portfolio yields in the quarter?

Yes. The primary driver of the decrease in portfolio was that we had repayments and they were coming in. They averaged around 11.3%, and our new investments were at about 8.5%.

Great. And then a more strategic question. A month or so ago, there was talk about significantly increasing the capital gains tax. How do you think that affects your company, the BDC Group, given so many deals come from private equity?

Yes. It's a great question. What -- the short answer is I'm not sure it changes it materially other than there's a real motivation by private equity sponsors at the margin to monetize so that they can, to the extent available, avoid the increased tax rate, assuming that the tax rate goes up prospectively, not retrospectively. That having been said, and why I say I don't see it's huge, is there is about $1.5 trillion, depending on who you talk to, of private equity capital that's been raised. And so from a new deal -- forget about deals being refinanced -- new deals, there are significant amount of new deals and a fairly good pipeline of things for us to look at. So I think that you will see some pressure from the $1.5 billion of sourcing new deals, but the capital gains tax definitely is the motivation for monetization at the margin. People aren't going to sell things below where it makes economic sense.

(Operator Instructions) At this time, we have no further questions.

Thank you, everyone. We look forward to talking to you soon.

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