Investcorp Credit Management BDC, Inc. (NASDAQ:ICMB) Q3 2022 Earnings Call Transcript

Investcorp Credit Management BDC, Inc. (NASDAQ:ICMB) Q3 2022 Earnings Call Transcript November 15, 2022

Investcorp Credit Management BDC, Inc. reports earnings inline with expectations. Reported EPS is $0.16 EPS, expectations were $0.16.

Operator: Welcome to the Investcorp Credit Management BDC, Inc., Schedules Earnings Release of First Quarter ended September 30, 2022. Your speakers for today’s call are Mike Mauer, Chris Jansen and Rocco DelGuercio. A question-and-answer session will follow the presentation. I would like to now turn the call over to your speakers. Please begin.

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Michael Mauer : Thank you, operator, and thank you for joining us on our first quarter call today. I’m joined by Chris Jansen, my Co-Chief Investment Officer; and Rocco DelGuercio, our CFO. Before we begin, Rocco will give our customary disclaimer regarding information and forward-looking statements. Rocco?

Rocco DelGuercio : Thank you, 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 to our Chairman and CEO, Michael Mauer.

Michael Mauer : Thank you, Rocco. This September quarter marks the first quarter of our first fiscal year. Macro factors continue to be dominant influence on the private debt markets. We continue to see the Fed tight monetary policy further driven by prolonged inflationary pressures. Interest rates increased further and credit spreads have continued to widen in the middle market. Equity markets have been notably volatile as well. Despite the slowdown in the U.S. economy and broader market volatility, the credit quality of our portfolio remains stable and overall underlying portfolio companies operating performance has been generally steady. We believe we are well positioned to benefit from further increases in interest rates.

The primary market saw a slowing new issuance activity toward the end of the quarter and the pace of refinancing activity in the broader market that significantly slowed as well. This naturally leads to fewer new investments. For context, we made four new investments during the quarter. Over the prior four quarters, we averaged 6.5 new investments per quarter. The investments we made during the quarter were concentrated on club deals where we typically find more favorable structural protections and pricing. All of our new investments were sponsor-backed and none were coming in light. This quarter, we were successful in deploying our new capital at an average yield of 10%. We remain highly selective when investing in new opportunities and system in our investment process.

As always, we are committed to investing in structures with higher yields, stronger covenant protection and lower closing leverage multiple. Given the macro environment, we have become increasingly focused on sector selection, and lending to industries with resilient end markets that have recession-resistant and countercyclical attributes. In addition to becoming incrementally more selective on new deals, we also continue to be diligent in our portfolio management and risk mitigation. Chris will now walk through our investment activity during the September quarter and after quarter end. Rocco will go through the financial results. I’ll finish with commentary on our NAV, nonaccrual investments, our leverage, the dividend and our outlook for 2023.

As always, we’ll end with Q&A. With that, I’ll turn it over to Chris.

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Chris Jansen: Thanks, Mike. We invested in four new portfolio companies and fully realized our positions in two portfolio companies this quarter. First, we invested in the club financing for LLC to support the acquisition of the company by JMC Investment. is a designer and manufacturer of add-on equipment for OEMs and in the construction, waste, long care and snow removal markets.Our yield at cost is approximately 10.9%. We also invested in the revolver, term loan and common equity of Archer Systems and the acquisition of the company by Fortress Investment Group. Archer is an outsourced provider of administrative services focused on providing mass tort settlement services. Our yield to cost is approximately 9.9%. We invested in Evergreen North American Industrial Services, a portfolio company of the Sterling Group.

We invested in the revolver and term loan. Evergreen is a provider of industrial cleaning and related specialty cleaning services. Our yield at cost is approximately 9.5%. We also invested in the club financing of PVI Holdings, Inc. to support the LBO of the company by middle ground capital. PVI Holdings is a leading flow control distributor focused on MRO applications in diverse end markets. Our yield at cost on PVI is approximately 9.7%. We also fully realized our position in Lennox as the company made a substantial acquisition and refinance its debt. Our fully realized IRR was approximately 12.5%. Lastly, we fully realized our position in Oilfield Water Logistics, which was acquired by pilot Water Solutions. Our position was refinanced as part of that transaction.

Our fully realized IRR was approximately 9.7%. After quarter end, we invested in one new portfolio company and have had no realizations. We invested in the club financing for Flat World Solutions to support the acquisition of the company by Boeing Capital. Flat World is a business process outsourcing company that provides technology and outsourcing services to a variety of end markets. We invested in the revolver, first lien term loan and common equity. Our yield at cost is approximately 10.6%. Using the GICS standard as of September 30, our largest industry concentration in the portfolio was professional services at 13.7%, followed by IT services at 9.5%, Internet and direct marketing retail at 8.5%, trading company and distributors at 8.2% and commercial services and supplies at 6.4%.

Our portfolio of companies are in 22 GICS industries as of quarter end, including our equity and warrant positions, which is an increase of 2% from the previous quarter. As of September 30, we had 37 portfolio companies, also an increase of two from June 30. I’d now like to turn the call over to Rocco to discuss our financial results.

Q&A Session

Rocco DelGuercio : Thanks, Chris. For the quarter ended September 30, 2022, our net investment income was $2.3 million or $0.16 per share. The fair value of our portfolio was $239.2 million compared to $233.7 million on June 30. Our portfolio’s net increase from operations this quarter was approximately $1.7 million. Our debt investments during the quarter had an average yield of 10%, while realizations and repayments during the quarter had an average yield of 10.6% and fully realized investments had an average IRR of 11.6%. The weighted average yield of our debt portfolio was 11.9%, an increase of 190 basis points from June 30, approximately 64% of the change is a result of the increase in LIBOR SOFR. As of September 30, our portfolio consisted of 37 portfolio companies.

91.8% of our investments were first lien, and the remaining 8.2% is invested in equity, warrants and other positions. 99.6% of our debt portfolio was invested in floating rate instruments and — excuse me, and 0.4% in fixed rate investments. The average floor on our debt investments was 1.04%. Our average portfolio company investment was approximately $6.5 million, and our largest portfolio company is Fusion at $14 million. We had a gross leverage of 1.64 times and a net leverage of 1.56 times as of September 30 compared to 1.57 times gross and 1.48 times net respectively, for the previous quarter. As of September 30, we had seven investments on nonaccrual, which included all three PGI, three investments in 1888 and one investment in Deluxe.

With respect to our liquidity, as of September 30, we had $7.4 million in cash, of which $6.5 million was restricted cash with $25.5 million of capacity under our revolving credit facility with Capital One. 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.

Michael Mauer : Thank you, Rocco. First, I would like to address the NAV decline in the quarter. Last quarter, we expected the current quarter NAV to recover modestly. There were two primary reasons that we haven’t seen this recovery materialize as expected. First, we saw the spread tightening that had occurred in the beginning of the previous quarter reversed itself in September. From September 1 to the 31, the trailing 4-week average spread from B- to BB widened by 34 basis points. Second, we saw a significant downward move in the equity market. Public equity comp are the most significant driver of our evaluation of and as a result of the decline in the public equities we did not see the recovery in our valuation that we had expected as of early September.

Part of our current quarter NAV decline was attributable to a decrease in the marks 4 Arcade Bioplan, ArborWorks and career building. On Bioplan, we are unable to discuss the situation due to confidentiality reasons. On ArborWorks experience — ArborWorks experienced some volatility during the quarter due to a decline in disaster recovery business as a result of a historically low year in terms of buyer acreage burn, in the region that ArborWorks serves. We underwrote the investment expecting some lumpiness of the results and are comfortable with the business over the long term. As discussed in the previous quarter, CareerBuilder’s underlying business has been experiencing challenges that some time. CareerBuilder sold a small segment business work tariff, a benefits administration technology provider in late October.