Investcorp Credit Management BDC Inc (ICMB) 2020 Q2 法說會逐字稿

Welcome, ladies and gentlemen, to the Investcorp earnings conference call. Your speakers for today's call are Mike Mauer, Chris Jansen and Rocco DelGuercio. (Operator Instructions)

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

Thank you, operator, and thanks to all of you for joining us this afternoon. 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 in 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 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. The quarter, which ended on December 31 marked our first full quarter as part of Investcorp. Our transition into the firm has been as smooth as we could have hoped, and we continue to be encouraged by how positively the market, our counterparties and our peers have reacted to our team joining the broader platform. We saw an almost immediate increase in inquiries, a deepening of our pipeline and a renewal of relationships with many fellow lenders, who we hadn't done much with previously.

Our ongoing work to reposition and diversify the portfolio remains our central focus. We think we're approaching a better balance across industries, and we have made tangible progress in increasing the number of new portfolio companies. We have derisked the portfolio through smaller average position sizes in our new position and through selective sales in the secondary. Our conservative approach has not wavered. We endeavor to be selective about the structures we are willing to lend into to be disciplined about the returns we require for investing your capital and to be thorough in our due diligence process.

Chris will discuss our investment activity during and after the quarter. And then Rocco will walk through our financial results. I'll conclude with some commentary about a few of our investments as well as some housekeeping items. We'll end with Q&A.

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

Thanks, Mike. We invested in 6 portfolio companies this quarter, including 4 new portfolio companies. All of our investments were first lien. We also had 3 full realizations during the quarter. After quarter end, we made 3 investments, adding 2 new portfolio companies. We invested a small amount in a term loan E to 1888 Industrial Services to support the working capital needs of the business as it grows. This new term loan is senior to all of the other debt at the company.

Our yield at cost is approximately 6.9%. As I mentioned last quarter, we made a first lien investment in Horus Infrastructure, which does business as Oilfield Water Logistics. This loan backs the acquisition of the company by InstarAGF.

OWL gathers and disposes of water generated by E&P activity in the Permian Basin. Our yield at cost is approximately 10.2%.

We invested in the first lien loan to Barry Financial, a portfolio company of Pinto America Growth Fund, which backed the recapitalization of the company. Barry is a Houston-based consumer services company, providing a broad range of financial products, primarily to the underbanked Hispanic community. Our yield at cost is roughly 10.8%.

Our third new portfolio company investment is in the first lien credit facilities to Golden Hippo. Golden Hippo is a direct-to-consumer developer and marketer of products within the health and wellness, beauty and pet care markets. The loan supports the transfer of partial ownership to an ESOP. Our yield at cost is approximately 8.5%.

We participated in a new loan to OneSky, a leading provider of private aviation services. This loan supported the growth of the company through the purchase of additional aircraft. Our yield at cost was approximately 10.6%.

Finally, we were also participants in the exit loan for Fusion Connect. Mike will speak more about Fusion and it's restructuring in a few minutes. I'd just like to say that we believe this is a very well-structured loan, and we're also happy to have been able to support the company's exit from bankruptcy. Our yield at cost is roughly 12.6%.

We had 3 full realizations this quarter and no realizations after quarter end. First, our first and second lien loans to Carlton Group were fully paid. The capital structure was refinanced by a traditional bank. Our fully realized IRR on the first lien was 10%, and on the second lien was 16.4%.

Our second lien loan to Lionbridge was also repaid very late in the quarter. Our fully realized IRR was 13.2%. Since quarter end, we have made 2 investments. The first was an additional investment in the first lien loan of RPX. We have received the partial repayment, and we want to rebalance our position. Our yield on this new purchase at cost is approximately 9.0%.

We also invested in 2 new portfolio companies. First, Pixelle Specialty Solutions is the largest specialty paper manufacturer in North America. The company is owned by Lindsay Goldberg. We invested in an incremental first lien loan, which was used to purchase 2 additional mills. Our yield at cost is approximately 9.1%. Second, we invested in Alta Equipment Group. Alta is the largest integrated equipment dealership platform in the United States, offering new, used and rental equipment as well as parts and services. It is being acquired by a stack. Our first lien loan yields approximately 12.2% at cost.

Using the GICS standard as of December 31, our largest industry concentration was professional services at 11.7%, followed by energy, equipment and services at 11.6%, construction and engineering at 10.3%, media at 10.0% and diversified telecommunication services at 5.2%. Our portfolio of companies are in 22 GICS industries as of quarter end.

As of December 31, our portfolio company count was 35 versus 33 at both June 30 and September 30. This count stands today at 37, including our investment activity since quarter end.

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

Thanks, Chris. For the quarter ended December 31, 2019, our net investment income was $3.8 million or $0.27 per share. The fair value of our portfolio was $305 million compared to $302 million at September 30. Our portfolio's net increase in operations for the quarter was approximately $3 million.

Our new investments during the quarter had an average yield of 10.33%. Investments exited during the quarter had an average yield of 10.51% and a realized average IRR of 12.99%. The weighted average yield of our portfolio was 10.41%, a decrease of 3 basis points from September 30.

As of December 31, our portfolio consisted of 35 portfolio companies. 82.6% of our investments were in first lien, 13.8% of our portfolio were in second lien and 3.6% were in unitranche investments. 96.9% of our debt portfolio was invested in floating rate loans and 3.1% in fixed rate investments.

Our average portfolio investment was approximately $8.7 million and our largest portfolio company investment was 1888 Industrial Services at $16.3 million. We were 1.23x levered as of December 31 compared to 1.25x levered as of September 30 and 1.16x levered as of June 30.

Finally, with respect to our liquidity. As of December 31, we had $17.2 million in cash, $8.3 million in restricted cash and $30 million of capacity under our revolving credit facility with UBS. In addition, we had $5.4 million receivable for portfolio companies sold and a payable for $20.1 million for portfolio companies purchases -- purchased. 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. I'd like to update you all on a few of the investments in our portfolio. As you may have seen in our 10-Q, our investment in Fusion Connect's term loan was on nonaccrual as of December 31. The company had been in bankruptcy since June 3. I'm pleased to say that it emerged this January, and we no longer hold any investments on nonaccrual.

As first lien lenders, we receive new loans as well as equity in the company. In the current quarter, as a result of Fusion's restructuring, our realized loss on the original term loan portion will become a -- unrealized loss will become a realized loss. And the fair value of that loan will become the new cost of our combined debt and equity position.

We have a great deal of confidence in Fusion going forward, in connection with the exit of the company from bankruptcy and the refinancing of the DIP loan, we invested a net incremental $4.3 million. Ultimately, our return on Fusion will depend on the value of the shares we receive, but while we wait for that realization, we have 2 loan positions with attractive yields in our books.

I discussed 4L briefly on our last call. Since then, 4L sold its imaging business and planned a restructuring around its Clover Wireless business, which remanufactures and remarkets mobile phones, and now through a small acquisition, tablets and other devices as well.

The proceeds of the Imaging sale were worth approximately $0.30 on the dollar on our loan. The company filed for a prepackaged bankruptcy in December, and they emerged on February 3. Alongside our fellow first-lien lenders, we received a new term loan as well as shares in the reorganized company. We are glad that this process moved efficiently, and we are cautiously optimistic about Clover Wireless' prospects going forward.

AAR or 1888 is our largest position. Our investments include a working capital revolver, term loans put in place during an out-of-court restructuring and additional term loans provided to fund an acquisition. Last quarter, we provided the term loan D to fund a strategic acquisition. This quarter, we've provided a term loan E, which is structurally senior to all of the debt of the company to fund working capital and support its growth. We remain optimistic that the company has made the right strategic and personnel decisions to succeed. We have continued to orient the portfolio towards first lien loans.

In the current market environment, we believe that it isn't prudent to stretch our attachment point too deep into the capital structure. As we target returns materially higher than the average broadly syndicated loans, we continue to focus on club relationships to originate loans with acceptable credit profiles, structures and returns.

Our portfolio repositioning continues to be a successful undertaking. We have increased our portfolio company count to 37 today, and we expect to add additional borrowers this quarter. We have the capital to grow and diversity in the portfolio as we are working hard to do so.

We have guided that our new leverage target will be in the 1.25 to 1.5x context. We are essentially at the low end of that range of 1.23x as of December 31.

As we have previously stated, the adviser will waive the base management fees in excess of 1% over the next quarter on leverage above 1x. We covered our December quarterly dividend with NII. And although we fully earned our incentive fee due to the lookback test, the company waived $336,000. We waived the portion of our management fee associated with base management fees over the 1 -- over 1 turn of leverage.

Our Board of Directors declared a distribution for the quarter ended March 31, 2020, of $0.25 per share, payable on April 2, 2020, to shareholders of record as of March 13, 2020. We have maintained our dividend of $0.25 since March 2017 and are confident that this level is supported by our ability to generate NII without reducing the quality of our investments or changing our focus from secured lending opportunities.

You'll recall that Investcorp made 2 separate commitments to purchase shares of ICMB. First, Investcorp has begun to make open market purchases under a 10b5 program and have bought 90,459 shares through December 31. Secondly, they have committed to purchase shares at NAV. Investcorp has purchased 113,500 shares at NAV through December 31.

Operator, please open the lines for Q&A.

(Operator Instructions) Our first question comes from Paul Johnson from KBW.

First, I just wanted to ask you about your new investment, it's a small investment that you made in Horus, a new energy investment. Can you just talk a little bit about the opportunity that you saw there, either with -- specifically with the company or the sector broadly?

Yes, Paul, this is Chris Jansen. Two things regarding Horus. We've -- the Permian Basin has continued to be the most prolific basin for drilling activity in the U.S. Also, Instar capitalized the company with almost 2/3 equity and they're using it as a growth platform. So the support is there and the leverage is pretty low and it is a lot of upside as drilling continues. And the further technology with more of the horizontal drilling just requires more and more water usage and waste water. And they have a very effective barrier to entry in the form of a couple of pipelines, which are spines, so very defensible in the Permian Basin.

Okay. That's very good detail. Secondly, I wanted to ask about the investments that you made this quarter. I was wondering if you can provide maybe a little bit of context on how the deals were sourced, either via direct or bank partners, club transaction. And if you've started to see some of that progress from Investcorp flow through -- coming through the deal flow and executed transactions at this point?

Yes. We have seen that as we go through in Mike's portion of the statements, we've seen increased activity from club members. Like our peers, we refer them -- to them in the prepared remarks. And also, we have moved way up the pecking order, if you will, not a technical term, went up the pecking order with a lot of the smaller banks that are interested in helping to finance the private equity investments done by the private equity shop here. And also, other peers that they have, we've seen that as well.

With regard to the 20 -- the fourth quarter additions, Barry Financial was a club deal arranged through our long-standing contacts at Jefferies. They continue to be a good source of information and deal flow for us as was OneSky.

With regard to Golden Hippo came to us in a couple of ways. We actually looked at this with 2 separate financing parties, one being -- could not be more disparate, one being a large, I don't want to call the money center banks anymore, but a huge money center leveraged finance bank, which was -- that bid was superseded by a smaller regional bank who we have relations with that's really helpful for us as well.

On Horus Infrastructure, otherwise known as OWL, that came to us through, again, our decades-long relationship with the people who run SunTrust. And we were able to get into a club group there. None of those really have direct causation from our new Investcorp relationships. So we have seen almost half a dozen separate deals from other club members that were -- we've looked at and passed on a couple of them, and we have 3 or 4 in house right now. So we are working hard, but we're only scratching the surface of what we feel all the benefits could be there.

So the only thing I'd add to that is if you think about a lot of our processes they can take anywhere from 4 to 24 weeks from initial dialogue until we actually make an investment. So one that we did not talk about because we're committed to it, we've not been allocated yet and hasn't closed yet is directly a result of the Investcorp platform elevating us that happened over the last week, so we're waiting that, not public yet. There's another one that we expect to commit to over the next 4 to 8 weeks that is a direct result of the platform. So those are 2 direct results. As Chris said, there's a lot of direct results that we have passed on because we passed on 90% of stuff we see. But there's no doubt that the dialogue has gone and is maintaining a lot higher level, not only from volume, but from a quality of deals.

Good. Great. That's very good to hear. My next question has to do with the credit facility. So that's maybe for Rocco or you, Mike. It looks like the credit facility, I believe, expires December this year. You don't have anything drawn on it at this time. Just sort of wondering what your capacity is for debt on the balance sheet as a whole, but probably also more specifically with the facility, if you're willing to continue to draw on that in the meantime? Or if you're looking at other options to manage the leverage in the balance sheet?

Yes. You're very observant, and I thank you for that. The answer is that over 30 years of doing this, whenever we get to 12 months from any type of maturity, we are all over discussions and options. So we have been focused on this for more than 6 months. I would expect that in the next couple of months, you will see us announce that we have entered into new financing that addresses that maturity in December one way or the other. And I think it will be an attractive financing, and it will be on beneficial terms relative to what we have done in the past. And again, that is another benefit, direct benefit of being part of the Investcorp platform.

Okay. Great. And lastly, was just this more of a housekeep question, but the fee waiver this quarter, it's my understanding that was a waiver out of the incentive fee. And I guess, I'm a little bit unclear if that was as a part of the new lookback featuring the new fee structure or if that was a voluntary fee waiver? And if I'm understanding it correctly?

Yes. Paul, its Rocco. So the waiver related to incentive fee is because we have the new investment advisory agreement, we actually had to reset as of September quarter. So what happened was we had earned, whatever is on the statement about $850-something thousand, but if we were to -- took it all, we would actually fail the lookback test. So what we did was we just waived the portion -- we waived the portion of it to get underneath it.

If we would have failed, I could have took it 2 ways. I could have just got rid of not showed as a waiver. But I didn't want to be misleading, and I'd rather have been a little more transparent. If to the extent that we would have failed, it would have been in a situation where even if I waived the whole $800,000, I would have failed. I wouldn't have shown any. You wouldn't have seen away the interest, you would have seen nothing. But because I just waived enough to get -- we waived, and we were able to capture. I figure it's for transparency, we'd show it.

We want to make sure that you understood that we were partially owning -- or earning. And that what we put in our prepared remarks were the piece that we did not earn was because of the new lookback.

Our next question comes from Christopher Nolan from Ladenburg Thalmann.

What are your thoughts in terms of industry concentrations? I mean, seeing energy services is fairly high. I'm just trying to think -- what's your thinking around that, how you manage that?

Yes. Chris, we're pretty much right where -- at the upper end of where we want to be. What we were presented with in the Horus transaction was something that was off the run, meaning, we were showing the transaction at a much more attractive level than other members of the club had seen. And it was really a compelling situation as we know from Instar putting in almost 2/3 equity, number one. Number two, they are focused in the Permian, and they have a solid defensible niche as a leader in the wastewater business there. And more importantly, number three, as all of our work, all of Mike's work with 1888, we had a lot of history on the growth of the Permian and how much attention that's getting. So it really was those 3 things that really -- we had a lot of conversations about this. And those 3 things really made it a compelling investment from our viewpoint.

And Chris, the other thing I'd add to that is, if we think about a core level of exposure to a industry, oilfield services in this area, we're very comfortable that this is a good level. That having been said, I actually think that the number overstates our core exposure, meaning, we've got Liberty in there, and Liberty is an extremely low-risk and you'll see it's rated #1 in our rankings and everything else, or I don't know if we identify it as the #1, but it is. It's overperformed, it's underlevered. And so as we think about exposure to industry, that one is extremely low. And so putting on this as kind of a core industry exposure made sense given Chris's other 3 items he went through.

Right. And then the outlook for PIK income. PIK income increased in the quarter, second consecutive quarter. Should we be seeing PIK income continue to be an elevated portion of revenues? Or any sort of outlook you have for that would be helpful?

Yes. I think over the near term, you should assume that's it's around where you've seen it currently. And there are 2 main components of that. They are PGi, which I think will continue. And the second one is around 1888 and AAR. And on that, what we are doing is we are focused around making sure that we are directing capital into the growth of the company. As you remember, there was an acquisition made. I think it closed effectively July 1 last year. It's been extremely positive to the company. But the flip side of extremely positive is working capital. So we want to make sure that they are not starved for working capital so we're picking income over the near term. And the last piece is the Fusion piece. So that's it.

Got you. Final question, the higher leverage. When do you think you can -- do you anticipate taking it up fully to the 1.5x? And over what period of time?

What we've seen is -- and you guys have seen it. Over the last year, we can drop 0.25 turn of leverage in a matter of weeks when we get repaid by 3 or 4 names. I don't think you're going to see us take it up to 1.6x, 1.7x. I think you will see us take it up to 1.5x, or you may not see it because we get paid down once or twice a quarter by anywhere from 2 to 4 names.

And so we're trying to keep in a range of 1.25x, 1.5x, but that means there's going to be some variance between those numbers.

And I presume that the incremental leverage is likely to be unsecured notes that way, you don't have a mark-to-market issue or anything?

It is a combination of secured and unsecured. We did some incremental notes in the fall around this point, and I addressed earlier that we are looking at options around our other liabilities.

Our next question comes from Robert Dodd from Raymond James.

It looks like a pretty solid quarter. So going back to that leverage and financing question, I mean, when I do look at your credit facility, I mean, the spread is pretty wide by BDC standards. The non-use fee is very high by BDC standards. So can you give us any color given that you're working on that? I mean, just how much could the funding costs on -- between the spread and the non-use, what's your target for how much you can reduce those now that, obviously, you're part of Investcorp and you have a bit more leverage on that front, maybe?

So I hesitate to give specifics because we're not done on anything until we're done, as the saying goes. I would say that as you think about that December 2020 facility that -- as we address that, that the terms would be more in line with what you would expect. Let me leave it at that. And I know that you guys have a lot of visibility across the market. And then, we will have another year on the term loan with UBS as we discussed with them options around that piece that comes due December of 2021.

Got it. And then just on the -- now that you're -- to your point, it takes a little while before you start to see the Investcorp deals flow through because there's there a due -- an extended due diligence process before you actually would close any of them. I mean, on the deals that you see coming through -- potentially coming through that channel, what should we expect on ballpark terms? I mean, the -- this quarter, mainly first lien a little over double-digit incremental yield, is that the kind of -- the same kind of deals and spreads and coupons and first lien structures that we're going to see come through the Investcorp channel as well? Or are they going to differ a little bit?

I think they're going to be similar in yield, and I think the market itself has gotten a bit tighter. So whether or not it's in that channel or out of that channel, we're seeing a little more pressure on spread. So we will see if we maintain the 10.5% plus or minus. And I think that's consistent with what you've heard us say in the last 2 calls. So I don't think that's different because of Investcorp. What is different is that we will see more deals in this $20 million to $80 million EBITDA that are 3 to 6 lenders. Club, true club deals of people looking to say, "Okay, there's going to be 3 to 6 of us doing a deal." And we want to make sure that we get a group that works together on a more consistent basis.

Got it. Got it. I appreciate that. And now, I mean, one, that -- I mean, in your remarks, you said -- I heard you say, Fusion Connect, ultimate recovery, it's going to depend on what you get out of the equity. What -- can you tell us about the -- not necessarily the time frame for realizing that, but as part of the emergence from bankruptcy, the business plan? I mean, what's the time frame of Fusion's plan that you think that basically you agreed to when you put net new money in that before we can expect to see -- before you can gauge whether it's going to pay off the way you hoped for?

Yes. And I think this is consistent with most companies that I've been involved with over 20 years. When they restructure, there's several pieces to it. There's the financial piece and there's the business piece. So the financial piece of the restructuring is done. We've put in the capital. The business piece, they've had a great interim CEO in. They are completing a search to put a permanent person in. There's some other changes that will happen around management. I think some of the people who've left from the management are very positive to that story. I think that you will not start to see any momentum for 6 to 12 months, and it's 2 years to 4 years to get to ultimate view on firm value and everything else. But it will take at least 6 months before you start to see the momentum or the fruits of what has been worked on in the last 6 months.

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

Thanks, everyone. We look forward to talking next quarter.

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