Crescent Capital BDC, Inc. (CCAP) Q4 2021 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the Fourth Quarter and Full Year 2021 Crescent Capital BDC, Inc. Earnings Conference Call. [Operator Instructions] Please be advised today's conference may be recorded. [Operator Instructions] I'd now like to hand the conference over to your host today, Dan McMahon, Head of Investor Relations. Please go ahead.

Good morning, and welcome to Crescent Capital BDC Inc.'s fourth quarter and year ended December 31, 2021, earnings conference call. Please note that Crescent Capital BDC, Inc. may be referred to as CCAP, Crescent BDC or the company throughout today's 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 not a guarantee of future results. During this conference 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 fourth quarter and year ended December 31, 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-K 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.

Thank you, Dan. Good morning, everyone, and thank you for joining our earnings call today. We appreciate your continued interest in CCAP. I'll provide some fourth quarter and full year highlights, review our investing activity, provide some color on our current portfolio and positioning and then turn it over to Gerhard to review our financial results in more detail. So let's begin. Please turn to Slide 6, where you'll see a summary of our results. We reported strong financial results for the fourth quarter and full year. We generated adjusted net investment income of $0.43 per share for the quarter and $1.89 per share for the full year. Our financial results reflect the strongest quarterly and annual origination activity since our inception with $280 million of new investments for the fourth quarter and $647 million for the year. Similar to the last three quarters, we accrued a capital gains-based incentive fee expense related to changes in net realized and unrealized gains and losses. This noncash expense was less than $0.01 per share for the quarter. On a GAAP basis, our fourth quarter net investment income per share, inclusive of the accrued capital gains-based incentive fee expense was $0.42 and $1.67 for the full year. As a reminder, the capital gains expense is only payable at the end of each fiscal year end based on our investment advisory agreement. And as of the fiscal year ended December 31, 2021, no capital gains, incentive fees were payable. Turning back to our results. Our net asset value per share increased 6.2% for the year. When you combine this NAV growth with our dividends paid during 2021, we generated a 14.7% total economic return for our stockholders for the year. Let's now shift gears and turn to Slides 13 and 14 of the presentation, which provides a snapshot of the current portfolio. We ended the year with our largest portfolio since inception with nearly $1.3 billion of investments at fair value across 134 portfolio companies with an average investment size of less than 1% of the total portfolio. Our investment portfolio consists primarily of senior secured first lien and unitranche loans, collectively representing 85% of the portfolio at fair value as of year-end. And we remain well diversified across 18 industries and continue to lend almost exclusively to private equity-backed companies, with 99% of our debt portfolio in sponsor-backed companies as of year-end. We believe our focus on market-leading companies with strong margins and high free cash flow generation in resilient industries has positioned our portfolio to avoid segments of the economy that are, in our view, more negatively impacted by recent inflation and supply chain issues. As a result, we have seen last 12-month revenue and EBITDA growth in the majority of our portfolio companies across all of the primary sectors that we invest in. For the fourth quarter, 121 out of our 123 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 approximately 3% of total investment income for the year. 94% of our debt investment portfolio today is marked above $0.95 on the dollar, with an average mark of approximately 99%. Two more positive credit trends are outlined on Slide 17, continued strong performance ratings and nonaccrual 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 to 91.0% of the portfolio at fair value as compared to 89.4% last quarter. As of year-end, we had investments in three portfolio companies on nonaccrual 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 back to Slide 15. Focusing on the left-hand side of the page, we had our most active quarter to date with $280 million in gross deployment. The vast majority or 89% of activity was in senior secured first lien and unitranche investments. All told, we closed on 17 new and 14 follow-on investments totaling $177 million and $47 million, respectively, with the remaining $56 million coming from revolver and delayed draw term loan activity. All 17 of the new investments were private equity-backed loans with LIBOR floors between 50 and 100 basis points, OIDs between 1.75% and 2.5% and a weighted average spread of approximately 600 basis points. In addition, loan-to-value levels remain attractive, averaging roughly 40% for these transactions. The $280 million in gross deployment compares to $152 million in aggregate exits, sales and repayments in the quarter. It's also worth highlighting that CCAP's total commitments for the 17 aforementioned new deals represented about 12% of the nearly $2 billion check size committed to those new deals across Crescent, highlighting the breadth of our platform. On the right-hand side of the page, you'll see that over the course of the year, our net investment activity has led to unitranche first lien becoming a more prominent percentage of our total portfolio. This increase from 42% to 59% is by design as it allows us to offer even greater surety of execution to the sponsor community and enables us to enhance our yield opportunity while remaining at the top of the capital stack. A few more updates before I turn it over to Gerhard. First, in November, we completed our first follow-on public equity offering since listing, ultimately issuing 2.7 million shares inclusive of the greenshoe for approximately $58 million in total proceeds. Given the active deployment backdrop I previously highlighted, we believe and continue to believe that it was prudent to gain additional investing capacity to further grow our portfolio over time. Importantly, the offering has also enhanced our stock's liquidity, with average daily trading volume improving meaningfully since the closing, allowing for a broader universe of investors. We also believe that additional size and scale will generate opportunities for us to further optimize CCAP's cost of capital over time and cost synergies are available via the ability to spread fixed operating expenses across a wider asset base. As outlined at the time of announcement, our investment adviser continued its history of stockholder alignment via its supplemental payment to cover the discount to NAV and payment of the underwriters' fee. Second, we've begun the process of winding down CBDC Senior Loan Fund, a joint venture with Masterland, which commenced operations in 2019. The joint venture, which was invested in an approximately $300 million pool of first lien broadly syndicated loans, has run its course, and we currently expect to fully wind down the entity by the end of the summer. Proceeds from the monetization activity will provide us with additional dry powder capital which we expect to redeploy into directly originated higher-spread Crescent private credit opportunities. Finally, for the first quarter of 2022, our Board declared a $0.41 per share quarterly cash dividend, which will be paid on April 15, 2022, to stockholders of record as of March 31, 2022. Additionally, the second in a series of four previously declared $0.05 per share special cash dividend will be paid on March 15, 2022, to stockholders of record as of March 4, 2022. As a reminder, the series of special dividends serves to enhance our capital efficiency by eliminating some of the excise tax drag on our spillover income which provides for a modest ROE uplift on an annualized basis. With that, I'll now turn it over to Gerhard to cover additional details on the quarter. Gerhard?

Thanks, Jason, and good morning, everyone. Our adjusted net investment income per share of $0.43 for the fourth quarter of 2021 compares to $0.48 for the prior quarter and $0.47 for the fourth quarter of 2020. Our GAAP earnings per share or net increase in net assets resulting from operations for the fourth quarter of 2021 was $0.44, which compares to $0.59 per share for the third quarter of 2021 and $1.22 per share for the fourth quarter of 2020. . Total investment income of $24.1 million for the fourth quarter compares to $25.5 million for the prior quarter. The decrease primarily relates to lower levels of discount amortization in Q4 as a component of interest income when compared with the prior quarter. We recognized $3.9 million of accelerated OID last quarter versus $1.1 million this quarter in Q4. Dividend income was also down approximately $0.5 million quarter-over-quarter due to a tax distribution from a portfolio company in Q3. Importantly, interest income, excluding accelerated amortization, which represents recurring yield-related revenue, grew from $19 million in Q3 to $21 million for the fourth quarter. At December 31, our stockholders' equity was $652 million, resulting in a net asset value per share of $21.12 as compared to $596 million or $21.16 per share last quarter and $560 million or $19.88 per share at December 31, 2020. The increase in our total net asset value during the fourth quarter was primarily driven by the equity offering that Jason discussed. On a per share basis, the $0.05 special dividend paid in December was the primary driver of the 0.2% NAV decline in Q4. Net realized and unrealized gains on investments were relatively immaterial for Q4. 2021 was our most active year ever, which helped drive our total portfolio at fair value at the end of the year to nearly $1.3 billion, an increase of 23% from the end of 2020. This growth was fueled by $186.1 million in net deployment, coupled with approximately $37 million in net realized and unrealized gains in investments. Turning to Slide 16. This graph summarizes the weighted average yield on income-producing securities and the spread over LIBOR on our floating rate debt investments. As of December 31, 2021, the weighted average yield on our income-producing securities at amortized cost was 7.5% as compared to 7.6% in the prior quarter and 8% at December 31, 2020. Given that 98.5% of our debt investments bear interest at a floating rate and have a weighted average LIBOR floor of approximately 85 basis points, a rising interest rate environment provides an earnings tailwind for our business once we reach our average floors. We expect the CCAP's stockholders will be fairly well insulated against negative development in net interest income up to our average floors because of the existing incentive fee waiver that is focused on the preservation of the $0.41 per share dividend. To give an illustrative example of the impact once we reach our floors, assuming our balance sheet remains constant as of Q4 2021, for the first 100 basis point increase in rates, we would expect an increase of approximately $0.15 in annual net interest income after the impact of income-based incentive fees. Under the same approach, a 200 basis point increase would result in approximately $0.34 per share of annual net interest income lift. Now let's shift to our capitalization and liquidity. I'm on Slide 19. As of December 31, our debt-to-equity ratio was 0.98x, up from 0.94x at September 30 as net investment activity during the quarter allowed us to deploy and lever up the proceeds of our November equity offering. In October, we entered into a new senior secured revolving credit facility with SMBC, upsizing by $100 million to $300 million as compared to the prior facility, while simultaneously swapping out a L plus 235 facility for a L plus 187.5 facility and resetting the maturity from August 2024 to October 2026. The refinancing coupled with a higher utilization on our revolving credit lines allowed us to lower the weighted average interest rate on total borrowings from 3.26% at the end of 2020 to 3.15% as of December 31, 2021. We expect that the weighted average interest rate will decline further as we lever up to grow the investment portfolio. As you can see on the right-hand side of the slide, we are well positioned for a rising rate environment with long-dated maturities on our attractively priced floating rate facilities. Our first maturity is $50 million of unsecured notes maturing in July 2023 and which can be repaid without penalty early in 2023. Beyond that, there are no remaining term maturities until 2026. From a liquidity perspective, as of year-end, we had $197 million of undrawn capacity subject to leverage, borrowing base and other restrictions and $24 million in cash and cash equivalents. Expected proceeds from the wind down of our JV, as Jason mentioned, will provide for some incremental liquidity. Our Board of Directors declared a fourth quarter cash dividend of $0.41 per share which is consistent with the regular quarterly dividend paid in the fourth quarter, augmented by the second of four special cash dividends Jason walked through. And with that, I'd like to turn it back to Jason for closing remarks.

Thanks, Gerhard. In closing, we believe 2021 was an excellent year for CCAP, capped off by record deployment in the fourth quarter. The strong position of the company is reflected in our adjusted net investment income per share, outpacing the dividend each quarter this year and our declaration of a series of special dividends resulting from our over earn. Our credit performance remains strong. We believe we have built a diverse and defensive portfolio of increasing scale, and we continue to focus on investing in high-quality sectors with a selective approach to financial sponsors and management teams. We're constructive on the opportunity set ahead of us, and are frankly excited at the prospect of return to a more normalized post-COVID environment and seeing many of you in person this year. 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 Robert Dodd with Raymond James.

So a few questions. First, on the SLF, the wind down plan. I mean looking at the return on invested capital on the SLF was under 8, right? So lower than just straight lending, right? So two components. Would you expect to wind down to be accretive to earnings? And then secondarily, sort of somewhat related, are there any plans - should we have expectations that there would be a new loan fund at some point, different part or maybe a slightly different strategy? Or is this just kind of the end of that approach within the BDC vehicle?

Robert, it's Jason. Thank you for the question on the joint venture. I think to your first question there, I would say that the answer is, yes, it ought to be accretive once redeployed into the private credit opportunities that we originate here at Crescent relative to the exposure that was in the joint venture, which was primarily broadly syndicated first lien loan. On your second point or your second question, I would say at the moment, I don't anticipate sort of a subsequent kind of unconsolidated joint venture at this point.

I appreciate that. Then another, not a new fund at the BDC, but obviously, the Crescent platform has recently raised a very large - well, a large private credit fund, I think, $6 billion targeted AUM, 4x the size of the previous when you've done that. Is that targeting the same kind of assets that go into the BDC? Or is it targeting a different segment of the market? And could you give us any color on if that's - if it is targeted in the same market, how - what potential impact that could, if any, there could be on the BDC potentially seeing more opportunities, increasing the number of names in the portfolio or anything like that?

Yes. Thanks, Robert. Thank you for calling that out. We did raise some meaningful institutional pools of capital and what we call our Crescent direct lending strategy, which is really a core strategy here at Crescent focused on what we call the lower middle market. Those are companies that we define as roughly $10 million to about $35 million or $40 million of EBITDA. It's a market that, as you might expect, is highly fragmented from a sponsor coverage standpoint, given that we're calling on lots and lots of mid-market sponsors for those opportunities. But it's a core Crescent strategy that's been in place really since about 2012. The BDC with exemptive relief to co-invest across the platform, participates in opportunities that are sourced by all of our strategies, but certainly, Crescent direct lending is a big feeder into the opportunity set that the BDC takes advantage of. From a sizing standpoint, I would say I view this as a big positive for the platform and for the prospects for the BDC as we've seen tremendous capital getting raised in the private markets, both on the private equity and the private credit side. It's important to continue to grow and have meaningful scale in the marketplace and be relevant in the marketplace, which we believe that we are. And while there has been certainly competition, I would say the competition is more muted in the lower end of the middle market than in the upper end, and there's certainly less competition from the syndicated markets as a result of that. But we've clearly seen with all the capital getting raised, share being taken away as well from the syndicated markets into the private market. So I think all in all, we're very pleased and constructive on the fundraise and the future prospects for the BDC going forward.

Got it. I appreciate that. A couple more if I can. On the - and then on the call, Integra and I know - I don't think you want to disclose much about private companies, but some of it is out in the press, right? I mean it was targeted to get acquired, that fell through. It sounds like it's back on. Is there anything post quarter that you can tell us about what's going on there with that business?

Yes. Thank you for asking, Robert. I can't really comment on that situation specifically. I will say that we did place that Integra second lien on nonaccrual in the fourth quarter. It is a small position for us. It represents less than half of 1% of fair value. But at this point, there's not much more that I can say specifically on that name.

Okay. Final one, I promise. I mean you obviously did execute a follow-on in November. I mean the stock - there is more liquidity now, but the valuation has been impact. I mean, there's a lot of other moving parts that go into valuations, obviously. And so it stops now trading at a relatively meaningful discount to book. I mean, has the Board discussed any plans to - anything that could be done to maybe add incremental value beyond just investing, which obviously is core competency. But it might seem kind of productive to ask given that you just raised equity, but has a buyback been considered, even a modest one, anything like that?

Thanks, Robert. We talk with the Board regularly about all kinds of topics, including this and certainly the value of our stock price. I think we certainly view our stock price as cheap relative to where we think it should be. I would - I can't comment on any plans for a buyback program. I will recall that Sun Life, our parent implemented a buyback plan, and there's some disclosure on that in the 10-K around shares owned as of year-end. But I would say that we are certainly in regular discussions with our Board about those types of topics.

[Operator Instructions] We have a question from the line of Derek Hewett with Bank of America.

Could you remind me what your target leverage range is? And then also, will that change now that you're kind of collapsing that joint venture?

Derek, this is Gerhard. I can take that question. Our target leverage, when we think about that more as a range than as a kind of a point estimate, but it's 1.1x to about 1.4x. We closed the year at 0.9x levered. So we're relatively still underlevered relative to that target range. But as to where we land in that range, I think a function of the kind of the macroeconomic backdrop, the portfolio composition. By that, I mean we lean senior secured with kind of a strong first lien focus. And so I think looking at the portfolio today, we probably would feel comfortable at kind of the higher end of the range versus the lower. The second part of your question, the additional liquidity that would be made available as that senior loan fund unwinds would be redeployed with leverage into other opportunities. And I don't think it changes the target leverage, but certainly, given that, that is currently an unlevered investment as we redeploy the capital, it would be - it will translate into - it's currently $40 million of committed capital on our balance sheet, and that would become 40 plus whatever times x depending on that - the target leverage on top of that.

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, operator. Thank you all for joining the call. We appreciate your continued interest in CCAP and your support, and we look forward to speaking with you soon.

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