Earnings Labs

Crescent Capital BDC, Inc. (CCAP)

Q3 2022 Earnings Call· Wed, Nov 9, 2022

$13.40

+1.28%

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Transcript

Operator

Operator

Good morning, and welcome to First Eagle Alternative Capital BDC, Inc.'s Earnings Conference Call for its Third Fiscal Quarter ended September 30, 2022. It is my pleasure to turn the call over to Sabrina Rusnak-Carlson of First Eagle Alternative Capital BDC, Inc. Ms. Rusnak-Carlson, you may begin.

Sabrina Rusnak-Carlson

Management

Thank you, operator. Good morning, and thank you for joining us. Joining me on today's call are Chris Flynn, President of First Eagle Alternative Credit; and Jen Wilson, our Chief Accounting Officer and Treasurer. Before we begin, please note that the statements made on this call may constitute forward-looking statements within the meaning of the Securities Act of 1933 as amended. Such statements reflect various assumptions by First Eagle Alternative Capital BDC concerning anticipated results that are not guarantees of future performance and are subject to known and unknown uncertainties and other factors that could cause actual results to differ materially from such statements. The uncertainties and other factors are, in some ways, beyond management's control and include the factors included in the section entitled Risk Factors in our most recent annual report on Form 10-K as updated by our quarterly report on Form 10-Q and our periodic and other filings with the Securities and Exchange Commission. Although we believe that the assumptions on which any forward-looking statements are based on are reasonable, any of those assumptions could prove to be inaccurate. And as a result, the forward-looking statements based on those assumptions also could be incorrect. You should not place undue reliance on these forward-looking statements. First Eagle Alternative Capital BDC undertakes no duty to update any forward-looking statements made herein unless required by law. All forward-looking statements speak only as of the date of this call. Our earnings announcement and 10-Q were released yesterday afternoon, copies of which can be found on our website, along with our Q3 earnings presentation that we may refer to during this call. A webcast replay of this call will be available until November 9, 2023, starting approximately 2 hours after we conclude this morning. To access the replay, please visit our website at www.feacbdc.com. With that, I'll turn the call over to Chris.

Chris Flynn

Management

Thanks, Sabrina. Good morning, and thank you for joining on our earnings call. On today's call, we'll review our third quarter results and share some portfolio highlights, then Jen Wilson will discuss our portfolio on the financial results in more detail. We know folks who are interested in hearing our view on the transaction announcement. I'll address that at the end of the call, but first, let's cover the quarter. The results of the quarter were as expected, we saw some softness in the overall portfolio continued -- given continued softness in the market, but not being outside of expectations. The positive news is this quarter really showed the earnings power of the portfolio once all were implemented. Lower cost of debt, more efficient financing in the Logan joint venture, coupled with rising rates on a floating rate book contributed to $0.13 a share at NII versus our dividend of $0.11. We ended the quarter with net asset value of $5.14 per share, down 3% on a quarter-over-quarter basis. The net decrease was driven primarily by three positions, the Logan joint venture $0.08, Loadmaster $0.07 and Michelin $0.02. As of September 30, FCRD's exposure to Logan's joint venture was 12.5% of our total investments. During the quarter, the Logan JV returned approximately $12.8 million of capital as a result of refinancing due to the issuance of a middle market CLO. Interest income was about $200,000 higher than last quarter. This is the result of a combination of new investments in Q2 and Q3 plus increased yields due to rising benchmark rates. The Logan JV dividend was $2.1 million in the third quarter, representing a 24% increase from the Q1 dividend, which is the last dividend pay before the Logan JV refinance was done. The increase in the dividend income is…

Jen Wilson

Management

Great. Thank you, Chris, and good morning, everyone. First, I'll start off with a few investment and portfolio highlights. Chris previously mentioned, we did have three new investments added to the portfolio at $12.1 million par. However, in addition to that, we also had several follow-on investments and fundings and commitments totaling $12.6 million for a total deployment of $24.7 million par. The blended yield of new investments was 9.1% based on underlying benchmark rates and spreads as of September 30. Additionally, we did have one repayment during the quarter, receiving total proceeds of $3.9 million, and that repayment was made at par. During the quarter, as a result of its financing of its capital structure through the issuance of its middle market CLO, the Logan JV also returned $12.8 million to FCRD. As of September 30, our portfolio was valued at $363.2 million, down from $366.8 million at the end of Q2. It was invested 84.4% in first lien senior secured debt and 12.5% in the Logan JV. As a reminder, the Logan JV is approximately 99% invested in first lien assets. The remaining 3.1% of the BDC's portfolio was held in second lien debt and other non-income producing and equity holdings, including our restructured equity-like second-lien investment in OEM. The weighted average yield on the debt and income-producing portfolio, based on costs and including Logan JV was 8.2% at the end of Q3, which is up from 6.8% at the end of Q2. The increase is attributable to both the rising benchmark reference rates as well as the increase in the Logan JV dividend during the quarter. During Q3, there were no new assets placed on nonaccrual. Total nonaccruals as a percentage of our portfolio at fair value and at costs were 1.9% and 7.5%, respectively. Now I'd…

Chris Flynn

Management

Thanks, Jen. I'd like to take a moment to address the announcement of our entry into a merger agreement with Crescent Capital BDC on October 4. We're pleased with this outcome as we believe it's in the best interest of the FCRD stockholder. Since 2015, as the adviser, we executed on a variety of initiatives to close the valuation gap between the FCRD NAV and its stock price. These initiatives and subsequent portfolio developments did not translate into a narrowing of the trading discount, unfortunately. While that's unfortunate, all the efforts spent in proving the book enabled the Board to run a very efficient process, which results in what we believe to be an extremely compelling offer from Crescent Capital. And both the adviser and the largest shareholder, our interests are aligned with our stockholders, and we alongside with the Board fully support the proposed combination with Crescent Capital BDC. Furthermore, First Eagle Investment Management has signed a support agreement to vote in favor of the transaction. The details around the Board's process can be found in the N-14 filing, which was made public on November 4, 2022. And we look forward to working with Crescent to both close the transaction and assist with the transition of portfolio management. We have spent extensive time with Crescent and believe they are the right partner to manage the BDC going forward. As a reminder, we will not be answering any questions about the transaction. If you have any questions about portfolio results, we'll be happy to take them now. Operator, please open up the line for questions.

Operator

Operator

[Operator Instructions] And our first question comes from Lee Cooperman with Omega Family Office. Your line is open.

Lee Cooperman

Analyst

I feel like George Washington as this is the first time I've ever been first. Anyway, I want to congratulate you on the transaction. I know that this was an outcome that you did not want initially when you went public. But I think all along the way you've represented the best interest of shareholders, and I congratulate you. My only question is, when do you expect the transaction to close?

Chris Flynn

Management

Perfect. Really. Thanks for that. And I'll defer to Sabrina. Sabrina, do you have any time lines that we're able to speak to publicly?

Sabrina Rusnak-Carlson

Management

Yes. I mean I think we've publicly stated that we endeavored by end of year, but likely would slip probably into Q1 2023.

Operator

Operator

And our next question comes from Robert Dodd with Raymond James. Your line is open.

Robert Dodd

Analyst · Raymond James. Your line is open.

Just to echo Lee, congratulations on the transaction laid out. That's not my question, sir. On the portfolio, for the markdowns in particular for Loadmaster and Matilda Jane, which were some of the larger contributors, I mean, is that the result of spread widening being greater one so to speak a actual credit. Any color or you can get any feel like how close that is to the bottom? Or is it still subject to how the economy develops over the next kind of 12 months?

Chris Flynn

Management

Obviously, as the market portfolio, we feel that the number that we put in the Q is an accurate reflection of what we think the recovery is on any position. So this is our best estimate based on the information that we have at hand.

Robert Dodd

Analyst · Raymond James. Your line is open.

Understood with the caveat that is based on the information you have, but has the information, say, the most recent data? Is that -- has that deteriorated from mid in it down so?

Chris Flynn

Management

Insane question, Robert. No changes from my opinion on performance from when we snap the tape at 930 versus where we are today on those tuners.

Operator

Operator

[Operator Instructions] And I'm showing no further questions at this time. I would now like to turn the conference back to Chris Flynn for his closing remarks.

Chris Flynn

Management

Thank you, operator. We appreciate the support of our stockholders and look forward to providing you with an update on the FCRD CCAP transaction when appropriate. Feel free to reach out to Jen Wilson or myself if you have any questions before those. Thank you.

Operator

Operator

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