Crescent Capital BDC, Inc. (CCAP) Q2 2021 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the Second Quarter 2021 Crescent Capital BDC Earnings Conference Call. [Operator Instructions] I’d now like to hand the call over to Dan McMahon, Head of Investor Relations for CCAP.

Good morning and welcome to Crescent Capital BDC Inc.’s second quarter ended June 30, 2021 earnings conference call. Please note that Crescent Capital BDC Inc. may be referred to a 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 or market information is not a guarantee of future results. During this call, we may discuss certain non-GAAP measures as defined by SEC Regulation G, such as adjusted net investment income or NII per share. The company believes that adjusted NII per share provides useful information to investors regarding financial performance, because it’s one method the company uses to measure its financial condition and results of operations. A reconciliation of adjusted net investment income per share to net investment income per share, the most directly comparable GAAP financial measure can be found in the accompanying slide presentation for this call. In addition, a reconciliation of this measure may also be found in our earnings release. Yesterday, after the market closed, the company issued its earnings press release for the second quarter ended June 30, 2021, and posted a presentation to the Investor Relations section of its website at www.crescentbdc.com. The 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 Jason Breaux, Chief Executive Officer of CCAP and Gerhard Lombard, Chief Financial Officer of CCAP. With that, I’d now like to turn it over to Jason.

Thanks, Dan. Hello, everyone, and thank you for joining us. We appreciate your continued interest in CCAP. For our call today, I’ll provide a few highlights from this quarter’s results, review our investing activity, provide some thoughts on our current portfolio and positioning and then turn it over to Gerhard to review our quarterly financial results in more detail before we open the call to Q&A. So let’s begin. Please turn to Slide 6, where you’ll see a summary of our results. We reported strong second quarter financial results with adjusted net investment income of $0.53 per share. Similar to the prior quarter, we accrued a cap gains incentive fee expense related to changes in net realized and unrealized gains and losses. This non-cash expense, which was not paid and is not payable, was approximately $0.14 per share for the quarter. Our Q2 net investment income per share, inclusive of the accrued capital gains based incentive fee expense, was $0.39, respectively. As a reminder, the capital gains fee is only payable at the end of each fiscal year based on our investment advisory agreement. If we were to hypothetically end the year as of June 30, the $0.19 per share of cumulative accrued capital gains incentive fees that we had at quarter end would not be paid or payable since the gains must be realized in order for us to be eligible to receive the fee. Turning back to our results, our net asset value per share increased for the fifth consecutive quarter, up approximately 3.7% in Q2 to $20.98, the highest value since CCAP’s inception. Gerard will walk through the key drivers in more detail, but the increase this quarter was primarily driven by a net change in unrealized appreciation, specific to certain portfolio companies where we hold equity. Please turn to Slide 4, which highlights our historical NAV trajectory and cumulative dividends since inception. Focusing on the right-hand side of the page, our business has performed well through the pandemic. From a total economic returns perspective, which is change in NAV plus dividends paid, we’ve generated over 20% since the year ended 2019, just prior to the onset of COVID-19. This was driven by growth in our net asset value per share, up 7.6% in that time frame, and the payment of our quarterly base dividends, which cumulatively represent another 12.6%. Overall, we’re pleased with this outcome and with our total investment portfolio carried at 105% of cost as at quarter end versus 103% last quarter, we remain comforted by the quality of our portfolio and its performance, particularly given the volatility we’ve all experienced since March of last year. Let’s now shift gears and turn to Slides 13 and 14 of the presentation, which provide a snapshot of the current portfolio. We ended the quarter with about $1.1 billion of investments at fair value across 130 portfolio companies with an average investment size of less than 1% of the total portfolio. Our investment portfolio continues to consist primarily of senior secured first lien and unitranche first lien loans. We are well diversified across 20 industries and lend primarily to private equity-backed companies. 99% of our debt portfolio was in sponsor-backed companies as of quarter end, consistent with prior quarters, and 80% of the portfolio at fair value was first lien, in line with Q1. For the second quarter, 116 out of our 117 debt investment portfolio companies, representing over 99% of total debt investments at fair value, made full scheduled principal and interest payments, and PIK interest represented just under 4% of total investment income in Q2. 90% of our debt investment portfolio today is marked above $0.95 on the dollar with an average mark of approximately 98%. Two more positive credit trends are outlined on Slide 17, continued strong performance ratings and non-accrual levels. Our weighted average portfolio grade of 2.1 was unchanged as compared to last quarter. And the percentage of risk rated 1 and 2 investments, the highest ratings our portfolio companies can receive, increased modestly to 88.1% of the portfolio at fair value as compared to 87.6% last quarter. As of quarter end, we had investments in two portfolio companies on non-accrual status, representing 1.6% and 1.2% of our total debt investments at cost and fair value, respectively. Moving to our investment activity, please turn to Slide 15. In terms of the broader market backdrop, while we have seen an increase in competition, which has resulted in some pressure on spreads, we continue to see growth in demand for large direct lending solutions. This is positive from our lens, given we continue to benefit from Crescent’s long-standing reputation as a reliable partner and our ability to offer surety of capital and scaled financing solutions to the sponsor community. Sponsors and portfolio company management teams alike are, in our view, exhibiting a strong preference for flexibility of capital and a long-term partnership approach with firms like ours, particularly given our focus on first lien and unitranche solutions. CCAP’s gross deployment in the second quarter totaled $121 million, nearly all of which or approximately 97% was in senior secured first lien or unitranche first lien investments. All told, we closed on 11 new investments and 13 follow-ons, totaling 76 and $32 million, respectively, with the remaining $13 million coming from revolver and delayed draw term loan activity during the quarter. All 11 of the new investments were private equity-backed loans at 475 to 650-basis point spreads, each with the LIBOR floor and OIDs between 1% and 3%. In addition, loan-to-value levels remain attractive, averaging approximately 39% for these transactions. The $121 million in gross deployment compares to $109.6 million in aggregate exits, sales and repayments in the quarter. It’s also worth highlighting that CCAP’s total commitments for the 11 aforementioned new deals represented only 17% of the over $500 million total check size committed to these new deals across Crescent, highlighting the breadth of our platform. Activity in the third quarter has been strong. For the month of July, we closed on 6 new investments totaling $58 million. The new investments are each private equity-backed, first lien or unitranche loans, with spreads, LIBOR floors and other characteristics comparable to the aforementioned Q2 investments. Two more updates before I turn it over to Gerhard. First, Sun Life entered its previously announced stock purchase program in May with CCAP share purchases commencing on June 29. The program will make open market purchases of shares of our common stock in an aggregate amount of up to $10 million and will be in effect for approximately 12 months unless extended or until the aggregate approved purchase amount has been expended. And finally, our Board has declared a $0.41 per share quarterly cash dividend for the third quarter of 2021, payable on October 15 to stockholders of record as of the close of business on September 30. With that, I’ll now turn it over to Gerhard to cover additional details on the quarter. Gerhard?

Thanks, Jason. Our adjusted net investment income per share of $0.53 for the second quarter of 2021 compared to $0.46 for both prior quarter and second quarter of 2020. Our GAAP earnings or net increase in net assets resulting from operations per share for the second quarter of 2021 was $1.16, which compares to $0.76 per share for the first quarter of 2021 and $2 per share for the second quarter of 2020. Our second quarter adjusted earnings were driven by strong recurring interest and dividend income generated from our growing portfolio, in addition to accelerated accretion of OID related to the elevated level of pay-down activity during the quarter. The majority of the $19 million or $0.69 per share of net unrealized gains on investments were driven by mark-to-market appreciation across certain of our common equity positions, largely driven by our equity investment in Conisus, which we acquired in connection with the Alcentra transaction. In July, we fully exited our investment in Conisus at a value consistent with our second quarter mark. At June 30, our stockholders’ equity was $591 million, resulting in a net asset value per share of $20.98, as compared to $570 million or $20.24 per share last quarter, and $510 million or $18.12 per share at June 30, 2020. The increase in our net asset value during the second quarter was primarily driven by net unrealized gains, as highlighted on Slide 10, and we had $0.08 of realized gains per share. Investments at fair value increased 3.5% in the quarter from $1.058 to $1.095 billion, driven by approximately $11 million in net deployment in addition to an increase in net unrealized portfolio appreciation. Turning to Slide 16, this graph summarizes the weighted average yield on income-producing securities and spread over LIBOR on our floating rate debt investments. As of June 30, 2021, the weighted average yield on our income-producing securities at amortized cost was 7.8% as compared to 7.9% in the prior quarter. 99.6% of our debt investments bear interest at floating rates and have a weighted average LIBOR floor of approximately 90 basis points, which is well above today’s current 3-month LIBOR rate. Now let’s shift to our capitalization and liquidity. I’m on Slide 19. As of June 30, our debt-to-equity ratio was 0.87x, up modestly from 0.86x at March 31, resulting in continued significant cushion to our regulatory asset coverage of 150%. On June 21, we amended our SPV Asset Facility with Wells Fargo, which reduced the annual interest rate by 10 basis points and extended the maturity date from March 2025 to June 2026. The maturity profile of our debt capital base continues to remain attractive with no near-term maturities and 100% of the principal amount of debt outstanding maturing after June 2023. From a liquidity perspective, as of quarter end, we had $220 million of undrawn capacity subject to leverage, borrowing base and other restrictions. As Jason mentioned, our Board of Directors declared a regular third quarter cash dividend of $0.41 per share, which is consistent with the regular quarterly dividend paid in the second quarter. And with that, I’d like to turn it back to Jason for closing remarks.

Thanks, Gerhard. Overall, we are pleased with our financial results this quarter. Additionally, our credit performance remains very strong, and we believe we have built a diverse and defensive portfolio of increasing scale, supported by an increasingly attractive financing profile. As noted earlier, the overwhelming majority of our portfolio companies continue to perform well. Most of our borrowers have returned to normalized operating levels. While we are closely monitoring COVID developments, we continue to have a positive outlook for the overall economy in the second half of the year as demand further rebounds. We believe this will continue to drive good results for our borrowers, and we look forward to leveraging our competitive advantages and the full Crescent platform to continue to deliver attractive risk-adjusted returns for our shareholders. We would like to thank all of you for your confidence and continued support. And with that, operator, please open the line for questions.

[Operator Instructions] Our first question comes from the line of Robert Dodd with Raymond James.

Hi, guys. Good morning. Congratulations on the quarter. First, if I can, just a housekeeping one, maybe for Gerhard. The income tax looks like you had a $970,000 income, not excise tax expense this quarter. And then obviously, Southern Technical paid the $1 million dividend and I think that was probably a tax distribution from the Q. So those basically offset. What is – should we expect that Southern Technical will continue to pay those tax distributions, but they’ll be offset by a tax expense? Or is that kind of a one-time thing?

Hi, Robert, this is Gerhard. Thanks for the question. And you are absolutely correct, that is a tax distribution, and so there is a corresponding offset for that dividend on the balance sheet. Look, it’s very difficult to predict how that investment will perform. But I think our expectation is that to the extent that there is taxable income being generated by that portfolio company, there will be – as we’ve seen in this quarter, there will be a tax distribution to help kind of manage that exposure. And the investment continues to perform well in totality.

Got it. I appreciate that, thank you. And then just kind of bigger picture, and I’m not going to carve anything you say here instead. On deployments and repayments over, let’s say, the rest of this year, less so the next month or anything like that, what are your expectations? We’ve been hearing this – I mean, it sounds like the market is very strong, should expect probably good deployments. But repayment activity has also been elevated generally, but more of a mixed messages on that front. So what kind of – what are your expectations through the course of the year maybe thematically? And then ex-Conisus, where you’ve got a nice big repayment there, would you expect the portfolio ex that to be bigger by year-end, same size, smaller? What’s kind of your feel on that?

Hi, Robert, it’s Jason. Thank you for the question. Generally speaking, I think we’re quite constructive on the opportunity set that we’re seeing today. Certainly, volumes in the middle market are up. Sponsored loan volumes are up. Unitranche volumes just hit a record in the second quarter in terms of issuance, which is a big focus of ours. I think sponsors are continuing to see real value in certainty of execution that’s provided with private credit and speed of execution as well. With respect to the repayments, certainly a healthy repayment quarter in Q1, a healthy repayment quarter in Q2. We’ve seen some repayments here in Q3. I do think that a couple of things are going to work to our favor in terms of net overall growth that I’d hope and expect to be higher in the back half of the year. One is the new volumes are higher certainly than a seasonably slower Q1, but our pipeline is very attractive. And as I mentioned on the prepared remarks, deployment in Q3 so far has been good. So that’s sort of the supply demand kind of getting more in line, I think. The other piece is that while we’ve continued to see some spread tightening as a result of some competition in the space, we finally kind of touched pre-COVID levels on the private side at this point. And there is still a premium relative to the syndicated markets, which I think there always will be. But it’s hard for me to imagine first lien spreads getting much tighter than where we are today. I think some of that is really bound by issuance in the syndicated market, where a lot of new issuance more recently has been in B3-rated names. And as we all know, the big buyers in the syndicated market are really the CLOs. At some point, the CLOs are going to reach their fill on B3 exposure. So I think we’ve got a natural kind of feeling, if you will, that I would hope we’d see on the spread side, which certainly will influence and slow down the repayments.

Got it. I really appreciate that color Jason. And kind of tied into that, which is the next question. Your deployments this quarter, LIBOR floors on everything, looking through your portfolio, they are about 100, where there is a floor. OID of 1% to 3%, which looks pretty healthy. So while the spread, you’re commentating here, the spread is extremely competitive, but maybe leveling out here. But some of the other terms look like they have held in quite well. We’ve heard mixed messages from other BDCs about where the LIBOR floors have been coming down, doesn’t seem to be the case anymore. Do you think those other components of the total return of just the spread, are those going to hold up here or do you think that’s the next thing to kind of give on the pricing front?

We haven’t seen it much, Robert. I think our experience has been that the other components of what we’re trying to drive return off of have held up, as you said. I think in some cases, we are seeing pressure on the floors, perhaps down to 75 bps in certain situations. But for the most part, we’re having experience where we’re able to predominantly hold the line at 100 bps on occasion, flex down to 75. But on the upfront, I think those have been consistent with historical experience.

Okay, thank you. And my last question was about monetizing Conisus, but you already answered it. So, congratulations on that front and the quarter as well. Thanks a lot.

Thank you, Robert.

[Operator Instructions] I’m showing no further questions in queue at this time. I’d like to turn the call back to Jason Breaux for closing remarks.

Okay. Thank you, Liz. Once again, I’d like to thank everyone for your time and attention today and your continued support and interest in CCAP. We look forward to speaking with you again next quarter.

This concludes today’s conference call. Thank you for participating. You may now disconnect.