Crescent Capital BDC, Inc. (NASDAQ:CCAP) Q1 2024 Earnings Call Transcript

Crescent Capital BDC, Inc. (NASDAQ:CCAP) Q1 2024 Earnings Call Transcript May 9, 2024

Crescent Capital BDC, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, everyone and welcome to today’s Crescent Capital BDC, Inc. First Quarter Earnings Call. [Operator Instructions]. Please note this call is being recorded. And it is now my pleasure to turn today’s call over to Dan McMahon, Investor Relations. Please go ahead.

Dan McMahon: Good morning. And welcome to Crescent Capital BDC Inc.’s First Quarter ended March 31, 2024, Earnings Conference Call. Please note that Crescent Capital BDC, Inc. may be referred to as CCAP, Crescent BDC or the company throughout the call. Before we begin, I’ll start with some important reminders. Comments made over the course of this conference call and webcast may contain forward-looking statements and are subject to risks and uncertainties. The company’s actual results could differ materially from those expressed in such forward-looking statements for any reason, including those listed in its SEC filings. The company assumes no obligation to update any such forward-looking statements. Please also note that past performance and market information is not a guarantee of future results.

Yesterday after the market closed, the company issued its earnings press release for the first quarter ended March 31, 2024, and posted a presentation to the IR section of its website at crescentbdc.com. Presentation should be reviewed in conjunction with the company’s Form 10-Q filed yesterday with the SEC. As a reminder, this call is being recorded for replay purposes. Speaking on today’s call will be CCAP’s Chief Executive Officer, Jason Breaux; President, Henry Chung; and Chief Financial Officer, Gerhard Lombard. With that, I’d now like to turn it over to Jason.

Jason Breaux: Thank you, Dan. Hello, everyone, and thank you all for joining us today. We’re very pleased to report another record quarter of earnings with continued strong credit performance across the portfolio. Net investment income, or NII, was $0.63 per share, up $0.02 from last quarter. Our NII has increased in each of the past 5 quarters, resulting in record NII for the fifth consecutive quarter. This quarter’s earnings translated into an annualized NII return on equity of 12.6%. With our earnings well in excess of the regular dividend, our Board has declared a supplemental dividend for the first quarter of $0.11 per share which, when coupled with our previously declared regular dividend of $0.41 per share, equates to a 10.3% annualized dividend yield on March 31, 2024, NAV.

We’ve demonstrated meaningful earnings in excess of our base dividend over the last several quarters. In response, we implemented a supplemental dividend policy in the first quarter of 2023 to share additional earnings upside with our stockholders in the form of increased distributions. This was in light of our view that earning the base dividend has always been a key part of the CCAP’s story. We’ve never cut it and we paid the current base dividend of $0.41 for 22 consecutive quarters. Refecting confidence in both the sustainability of CCAP’s NII and the continued strong credit performance of our portfolio, we are pleased to announce that our Board recently approved a $0.01 increase in our regular dividend, increasing the second quarter regular dividend to $0.42 per share.

What underpins this increase in our base dividend is our conviction in CCAP’s longer-term earnings power. Having reviewed firsthand the impact of a higher rate environment on our portfolio and the origination opportunities in our private credit pipeline, we are bullish on CCAP’s longer-term ability to continue its track record of earning its regular dividend. We also note that we have benefited from managing and monitoring the loans that we acquired from First Eagle BDC for over a year now and believe that the earnings from the current assets as well as the loans that we expect to rotate into will continue to be attractive for CCAP’s longer-term earnings profile. The strength of our earnings and the positive valuation momentum in our portfolio also led to growth in our net asset value, which increased 1.2% in the quarter and 4.6% year-over-year to $20.28 per share, which is the highest it has been since June 2022.

Net income per share was $0.76 in the first quarter corresponding to an annual ROE of 15.2%. Let’s shift gears. Please turn to Slides 13 and 14 of the presentation, which highlights certain characteristics of our portfolio. We ended the quarter with approximately $1.6 billion of investments at fair value across a highly diversified portfolio of 183 companies with an average investment size of approximately 0.5% of the total portfolio. We have deliberately maintained investment portfolio that consists primarily of senior secured first lien and unitranche first lien loans, collectively representing 90% of the portfolio at fair value at quarter end, up modestly from the prior quarter. This speaks to our continued focus on maintaining a defensively positioned portfolio with greater downside protection and lower risk of loss compared to portfolios with greater second lien and subordinated debt exposure.

We have focused our investing efforts on noncyclical industries with high free cash flow characteristics and remain well diversified across 20 broad industry categorizations. Our investments are almost entirely supported by well-capitalized private equity sponsors with 98% of our debt portfolio in sponsor-backed companies as of quarter end. We’ve been pleased with the fundamental performance of our portfolio, as indicated by our performance ratings and nonaccrual levels. Our weighted average portfolio grade of 2.1 remained stable quarter-over-quarter. And on Slide 17, you will see that the percentage of risk rated 1 and 2 investments, the highest ratings our portfolio companies can receive accounted for 89% of the portfolio at fair value, an improvement from 87% at year-end.

As of quarter end, we had investments in 7 portfolio companies on nonaccrual stats, representing 1.6% and 0.9% of our total debt investment at cost and fair value, respectively. This compares to 9 portfolio companies on nonaccrual status, representing 2.0% of total debt investments at cost as of year-end. As our position in Matilda Jane, a First Eagle name, was realized above our acquired cost basis and Integra was removed from nonaccrual status. As previously noted, we are pleased to declare a supplemental dividend of $0.11 per share for the first quarter, payable on June 17th. Our Board has also declared a regular dividend of $0.42 per share for the second quarter payable on July 15, 2024. I’d now like to turn it over to Henry to discuss the market, our Q1 investment activity and the portfolio.

Henry?

Henry Chung: Thanks, Jason. In terms of the market, first quarter direct lending volume was down nearly 30% from the fourth quarter, driven primarily by lower LBO and M&A activity. The majority of activity came from refinancings, which represented 36% of overall activity in the first quarter, much of which was in the upper middle market for broadly syndicated loan arrangers and upper mid-market focused direct lenders competed for transactions. March LBO volumes, however, were at their highest level since November and almost double February’s total. As a result of this momentum, a stable economy, a strong private credit market and a significant backlog of transactions that [indiscernible], we are optimistic that we will see a pickup in LBO volume through the remainder of the year.

And while the syndicated markets are open, we believe the direct lending market remains a market of choice for sponsors in the lower and core middle market given the benefits of the direct lending expertise offered by managers like Crescent, including speed uncertainty of execution and flexibility around the ability to craft bespoke capital structures. Please turn to Slide 15 where we highlight our recent activity. As you can see on the left-hand side of the page, gross deployment in the first quarter totaled $74 million, 95% of which was in senior secured first lien and unitranche investments. During the quarter, we closed 7 new platform investments totaling $43 million, with the remaining $31 million coming from incremental investments in our existing portfolio companies.

Incremental investments as a percentage of overall activity was elevated in Q1 compared to recent quarters as we’ve seen higher levels of opportunistic refinancing and add-on opportunities within our existing borrower universe. This provides an ongoing opportunity set for us to make incremental investments in existing well-performing companies seeking to grow via the pursuit of accretive M&A. $74 million in gross deployment compares to approximately $98 million in aggregate exits, sales and repayments. The new investments during the first quarter were loans to private equity-backed companies with sulfur floors, attractive fees and a weighted average spread of approximately 600 basis points. We continue to back well-capitalized borrowers with significant equity cushions and the weighted average loan to value of our new investments for the quarter was 40%.

Turning back to the broader portfolio. Please flip to Slide 16. You can see that the weighted average yield of our income-producing securities at cost remained flat quarter-over-quarter at 12.3% and is up 50 basis points year-over-year. It is worth noting that for the first time, this metric represented by the dark blue line at the top of the chart includes the impact of income producing equity investments. This includes dividends from the Logan joint venture as well as our partnership interest in GACP II and WhiteHawk. Prior period yield figures have been retroactively updated for consistency. We believe that this update provides a more comprehensive view of expected near-term investment income from CCAP’s portfolio. As of December 31st, 98% of our debt investments at fair value were floating rate with a weighted average floor of 80 basis points, which compares to our 65% floating rate liability structure based on debt drawn with 0% floors.

Overall, our investment portfolio continues to perform well with strong year-over-year weighted average revenue and EBITDA growth. That being said, we have continued to closely monitor the impact of rising borrowing costs on our portfolio companies. The weighted average interest coverage of the companies in our investment portfolio at quarter end improved from 1.7x at year-end to 1.8x as of quarter end. As a reminder, this calculation is based on the latest annualized base rate as of each respective quarter. We also continue to closely monitor how our portfolio companies are managing fixed charges. Our analysis demonstrates that our portfolio companies in the aggregate are well positioned to address fixed charges with operating cash flows and available balance sheet liquidity.

As expected, we saw a modest increase in aggregate revolver utilization during the first quarter with approximately 56% of aggregate revolver capacity available across the portfolio as of quarter end, which is more than ample in our view. The strength of our portfolio continues to benefit from the substantial amount of equity invested in our companies, most of it is applied by large and well-established private equity firms with whom we have long-standing relationships and have partnered with in multiple transactions and we note that the weighted average loan-to-value in the portfolio at timeline right is approximately 41%. With that, I will now turn it over to Gerhard.

Gerhard Lombard: Thanks, Henry, and hello, everyone. Our net investment income per share of $0.63 for the first quarter of 2024 compares to $0.61 per share for the prior quarter and $0.54 per share for the first quarter of 2023. Total investment income of $50.4 million for the first quarter, the highest quarterly figure we’ve reported since inception compared to $50.0 million for the prior quarter. Recurring yield related income was flat quarter-over-quarter at $47.8 million and accounted for approximately 95% of this quarter’s total investment income. PIK income continues to represent a modest portion of our revenue at 3% of total investment income, which compares favorably to the BDC peer group. We remain highly sensitive to PIK income, particularly in a higher for longer rate environment.

What we consider nonrecurring investment income, which consists primarily of accelerated amortization, fee income and common stock dividends increased approximately $0.5 million quarter-over-quarter from $2.1 million to $2.6 million, driven primarily by 2 large realizations and increase in structuring fees. While we expect some level of nonrecurring or transactional investment income each quarter, our nonrecurring investment income over the last 2 quarters was unusually high, exceeding $2 million in each of those 2 quarters. Our GAAP earnings per share or net income for the first quarter of 2024 was $0.76. This was primarily the result of net investment income outpacing the regular and supplemental dividends coupled with $0.13 per share of net unrealized depreciation.

As of March 31st, our stockholders’ equity was $752 million, resulting in net asset value per share of $20.28 as compared to $743 million or $20.04 per share last quarter. Now let’s shift to our capitalization and liquidity. I’m on Slide 19. We continue to maintain a conservative mindset to both balance sheet liquidity and BDC leverage, maintaining the company with a full economic cycle mentality. While this starts with our underwriting of new investment opportunities, it also applies to how we manage CCAP’s capitalization and liquidity. As of March 31, our debt-to-equity ratio was 1.11x, down from 1.15x in the prior quarter. Our liquidity position remains strong with $344 million of undrawn capacity subject to leverage, borrowing base and other restrictions and $32 million in cash and cash equivalents as of quarter end.

The weighted average stated interest rate on our total borrowings was 6.97% as of quarter end. And as we’ve highlighted on the right-hand side of the slide, there are no debt maturities until 2026. As Jason noted, for the second quarter of 2024, our board increased our regular dividend to $0.42 per share, which we are well positioned to cover over the longer term. As a point of clarification, we will continue to declare and pay quarterly supplemental dividends subject to approval by the Board to enhance stockholder distributions. With that, I’d like to turn it back to Jason for closing remarks.

Jason Breaux: Thanks, Gerhard. In closing, we are pleased with this quarter’s strong financial results and the performance of our investment portfolio. We’ve continued to maintain a defensively positioned portfolio that delivers a stable NAV profile with consistent dividend coverage and the announced increase in our base dividend, highlights our conviction in CCAP’s long-term earnings power. As we look forward over the remainder of 2024, we remain confident in the continued strong performance of CCAP’s portfolio and believe we are on track to deliver attractive risk-adjusted returns to our stockholders. Finally, in just over a month on June 11th, we will be hosting our inaugural Analyst and Investor Day. We look forward to speaking with many of you then. And with that, operator, we can open the line for questions.

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Q&A Session

Operator: [Operator Instructions] And our first question comes from Paul Johnson with KBW.

Paul Johnson: A good quarter. Weighted average yield this quarter was obviously pretty stable as was the spread. I was just kind of wondering if you could kind of speak to that in the market in your portfolio and kind of what you’re seeing in the market?

Jason Breaux: Paul, it’s Jason. Thanks for the question. I think we’re pretty pleased with where we’ve been able to price new opportunities in this environment, Henry talked a little bit about the competition that we’re seeing here in ’24 four deals. We’ve certainly had lower volumes, which has driven pricing tighter as well as the presence of the BSL market, again, which has certainly been active here in ’24. That’s largely been focused on the upper mid-market, where they’re competing with some of the larger private credit arrangers in deals that generally we would characterize it as in excess of $1 billion in deal size. I think if I were it, to sort of think about pricing over the last couple of quarters, in the upper mid-market, I would say that on the uni side, pricing has come down generally 25 to 50 basis points, probably from a 525 type spread to 500 and even in some cases, 475.

And then in the core and lower middle market, which is where we, at Crescent, generally focus, I’d say pricing over the same period of time is probably come in about 25 bps from 575 to a 550 deal or from a 550 deal to a 525 deal.

Paul Johnson: That’s really good color. And then kind of just on the marks for the quarter, NAV is up nicely. Just was that just kind of general portfolio kind of marks broadly across your book? Or is that anything specific driving that like [indiscernible] resolutions or anything like that?

Gerhard Lombard: Yes. This is Gerhard. I can take that. There’s nothing individually material. We’d really link that increase in March to what Jason said a minute ago, which is a tightening of spreads.

Jason Breaux: Got it. And then last one for me. Just on your comment on the nonrecurring incoming a little bit higher over the last 2 quarters by about $2 million or so. I guess just kind of how should we think about that going forward, would you expect that to basically not to really — basically not get another $2 million or so kind of going forward? And is that kind of nonrecurring income? Is that factored into your kind of weighted average yield calculation for the quarter?

Gerhard Lombard: Yes. Thanks. I’ll maybe take those in reverse the second part. We generally do not include the nonrecurring income in our yield calculation. So that would be the yield calculation recurring income only, including OID. Regarding the first part of your question, it is obviously difficult to project nonrecurring income because the 2 highest drivers are accelerated OID and transactional fee income. And it’s just an inherent level of uncertainty or volatility in those numbers quarter-over-quarter. I will say that 95-plus percent of our total revenue is recurring. Our historical range of nonrecurring has been between about $500,000 and over $2 million, which you heard in the prepared remarks, so while we don’t provide forward-looking guidance on NII, as we look at Q2 today, while we expect some level of nonrecurring income, we don’t believe it will be quite as high as in Q1 of ’24 and Q4 of last year.

Operator: [Operator Instructions] At this time, I’m currently showing no questions in the queue. I’ll now turn it back over to management for any closing remarks.

Jason Breaux: Thanks very much, everyone. We appreciate your time and attention and support of CCAP. We look forward to speaking with you next quarter and also at the Analyst and Investor Day in the interim. Thank you.

Operator: This does conclude today’s program. Thank you for your participation. You may now disconnect.