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Crescent Capital BDC Inc. Â (CCAP)
Q4Â 2020 Earnings Call
Feb 25, 2021, 12:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the Crescent Capital BDC, Inc. fourth quarter and year ended December 31 earnings conference call. [Operator instructions] As a reminder, today's conference call is being recorded. I will now turn the conference over to your host, Mr.
Dan McMahon, vice president, head of investor relations. Sir, you may begin.
Jason Breaux -- Vice President and Head of Investor Relations
Thank you, Dan. Good morning, everyone, and thank you for joining us today. We appreciate your continued interest in CCAP. For those of you who are new to CCAP, our investment strategy is and since inception has been, to focus on providing financing solutions to healthy, resilient middle market companies that are backed by strong partnership oriented private equity sponsors.
Today, I'll highlight our strong fourth quarter and full-year results, review our current positioning, provide an update on our acquisition of Alcentra Capital Corporation, which closed just over a year ago, and touch on a few more announcements. Gerhard will then discuss our financial results in more detail and review our liquidity profile. So let's begin. Please turn to Slide 5, where you'll see a summary of our results.
For the fourth quarter, we reported after-tax net investment income of $0.47 per share, which concluded a strong year for CCAP despite the challenging macro backdrop. We are appreciative of how our team managed through the difficult conditions created by the COVID-19 pandemic, and we believe our performance is consistent with Crescent's nearly 30-year history of managing assets through multiple market cycles. Our net asset value per share increased approximately 4.2% in Q4 to $19.88. Gerhard will walk through the key drivers in more detail, but the increase was primarily driven by a net change in unrealized depreciation, specific to certain individual portfolio companies and net unrealized mark-to-market gains related to the tightening of credit spreads relative to the end of the third quarter.
It's worth noting that NAV is up 2% year over year, meaning we've recovered more than all of the attrition experienced in the first quarter. With our total investment portfolio carried at 102% of cost as of year end versus 91% of the cost at March 31. We are comforted by the quality of the portfolio and its performance despite the significant challenges the past year presented. Slides 12 and 13 of the presentation provide a snapshot of the portfolio.
We ended the year with over $1 billion of investments at fair value across 132 portfolio companies with an average investment size of less than 1% of the total portfolio. Our investment portfolio, which grew approximately 42% year over year, consists 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 year end, consistent with prior quarters.
For the fourth quarter, our portfolio companies generally continued to perform well. 119 out of our 120 debt investment portfolio companies, representing 99% of total debt investments at fair value, made full scheduled principal and interest payments. This compares to 116 out of 118 in the prior quarter. PIK interest represented less than 5% of total investment income for the quarter and year-to-date periods, and our investment in NMSC Holdings, or NAPA Management, moved back to cash pay from PIK in Q4.
Two additional positive credit trends are outlined on Slide 16, improved internal performance ratings and declining nonaccruals. Our weighted average portfolio grade of 2.1 improved modestly over last quarter, and the percentage of risk rated 1 and 2 investments, the highest ratings our portfolio companies can receive, increased to 87.5% of the portfolio at fair value as compared to 79.4% last quarter. As of year end, we had investments in two portfolio companies on nonaccrual status, representing 1.7% and 1.3% of our total in debt investments at cost and fair value, an improvement from 3.8% and 2.1% from the prior quarter. During the fourth quarter, no new loans were placed on nonaccrual and two investments, systems maintenance services and MCS came off of nonaccrual following restructurings.
Moving to our investment activity. Please turn to Slide 14. In conjunction with the economic and capital markets recovery during the back half of the year, Crescent's scaled direct origination platform allowed us to see a large set of opportunities in the financing market, which led to a record $124 million in gross deployment in the fourth quarter, the largest origination level for CCAP in any quarter since our inception. We closed on nine new investments and five follow-ons, totaling $101 million and $6 million, respectively, with the remaining $17 million coming from revolver and delayed draw term loan activity during the quarter.
All nine of the new investments were private equity-backed loans at 575 to 850 basis point spreads, each with a 1% LIBOR floor and OIDs between 1.75% and 3%. In addition, loan-to-value levels remain attractive, averaging below 40% for these transactions. The $124 million in gross deployment compares to $77 million in aggregate exits, sales and repayments in the quarter. During periods of volatility, like we experienced in 2020, we believe Crescent's reputation as a reliable partner and ability to offer surety of capital and scaled financing solutions to the sponsor community are critical competitive advantages, particularly as nonbank lenders continue to become the financial backbone of the private debt markets in the United States.
It's worth highlighting that the $101 million CCAP invested in the nine aforementioned new deals, represents only 9% of the $1.1 billion total check size committed to these deals across the full Crescent platform. We're off to an active start in 2021 from a deployment perspective, underwriting several high-quality new opportunities. Since January 1, we've closed on four new investments for $39 million and four add-ons for $9 million. The new investments are all private equity-backed unitranche loans with spreads, LIBOR floors and other characteristics fairly comparable to the aforementioned Q4 investments.
Looking forward, we continue to see an attractive pipeline of new opportunities, and we'll continue to participate alongside the broader crescent platform on all new investments that fit within our mandate. We remain optimistic that the continued firming economic conditions and healthy amounts of sponsor capital they provide a supportive backdrop for stronger deal activity throughout the year. Shifting gears. I'd now like to spend a minute on our acquisition of Alcentra Capital Corp., which we completed just over a year ago now.
Please turn to Slide 17. When we announced the transaction in the summer of 2019, I noted that through the merger, CCAP would enhance its asset diversification while still staying true to our core strategy of maintaining a high-quality, senior secured, first lien focused portfolio, among other benefits. As you can see on the slide, performance of the acquired portfolio has been strong, generating a 25% IRR with a healthy level of realization activity to date. At the time of announcement, CCAP's investment portfolio was $625 million at fair value across 91 investments and was pro forma for Alcentra, 73% first lien.
As of the year ended 2020, our investment portfolio eclipsed $1 billion for the first time. Diversification has never been stronger with 132 portfolio companies and an average investment size of less than 1% of our total portfolio as I previously noted, and the percentage of the combined portfolio and first liens has improved as well. We continue to believe that this transaction served as an important step in our continued growth trajectory as a scaled BDC, ultimately demonstrating our ability to underwrite and obtain approval for a strategic and accretive pool of assets. I'd now like to cover a few more updates before I turn it over to Gerhard.
First, we thought it would be helpful to provide everyone with an update on our fee waiver. As a reminder, since CCAP's inception in 2015, we have been operating with fee waivers in place, highlighted by a 75 basis point management fee that was applicable prior to our exchange listing. Although our management fee is 1.25%, and our incentive fee is 17.5%. Our advisor agreed for six quarters post listing to preserve our industry-low 75 basis point management fee and to charge no income based incentive fee.
While this current waiver is set to expire on July 31 this year, our advisor has notified our Board of Directors of its intent to voluntarily waive income-based incentive fees to the extent our net investment income falls short of the declared dividend. We expect that this new incentive fee waiver will become effective upon the expiration of the current waiver on July 31 and continue through the end of 2022. Sitting here today, we would expect net investment income to trail our regular dividend level beginning in Q4 without the introduction of this new waiver. Importantly, over time, we believe we can support the dividend from an earnings standpoint without the need for waivers.
The key factor to help us drive continued earnings growth is ramping our portfolio to our target leverage level, while maintaining our focus on credit quality. While we remain pleased with the quality of our portfolio, the economic climate for much of 2020 presented challenges to our goal of progressing to scale on the portfolio. Deployment levels in the first half of the year and into the summer months lagged our historical pace as transaction activity slowed materially, and we took a cautious approach to investing. While it will take additional time for us to fully scale the portfolio to our target leverage level, we want to ensure that we remain aligned with the interest of our stockholders as we continue to grow by obtaining our advisors' commitment to this incremental income based incentive fee waiver.
Next, on January 5, Crescent, parent of the advisor to CCAP and Sun Life consummated the previously announced transaction, whereby Sun Life acquired a majority economic ownership interest in Crescent. Crescent is now a part of SLC Management, Sun Life's alternative investment management platform. As a reminder, the same team that was responsible for the investments and operations of CCAP prior to the close of the transaction, continues to focus on executing the same proven investment strategies and processes as we always have. As we have previously disclosed, Sun Life has advised us that it intends to purchase up to $10 million of CCAP's stock in the secondary market over time, demonstrating its alignment with CCAP stockholders.
Such repurchases are expected to be made pursuant to a 10b5-1 plan, and we expect to announce the implementation of such plan prior to the time that shares of such common stock are purchased thereunder. Third, last week, we announced that we agreed to issue $135 million in aggregate principal amount of 4% senior unsecured notes due February 2026. The notes will intentionally be issued in two separate closings. The initial issuance of $50 million of notes closed on February '17, and we expect the second closing for the remaining $85 million to occur on or before May 17, which is beneficial in terms of managing our interest expense as we continue to deploy capital over the next several months.
This financing helps to further diversify our funding sources, provides us with a more flexible capital structure and allows us to lower our utilization under our secured revolving facilities. As of year end, our debt-to-equity ratio was 0.85 times, well below our longer-term target range of 1.1 times to 1.4 times. So the enhanced flexibility this issuance affords us is particularly beneficial as we continue to deploy capital into an attractive and increasingly robust investment pipeline. Two more quick items before I turn it over to Gerhard.
The expiration of the third and final tranche of our share lockup occurred on February 2, increasing CCAP's public float from approximately 20.6 million to all 28.2 million shares outstanding. And finally, our Board has declared a normal $0.41 per share quarterly cash dividend for the first quarter of 2021. I will now turn it over to Gerhard to cover additional details on the quarter. Gerhard?
Gerhard Lombard -- Chief Financial Officer
Thanks, Jason. Our net investment income per share of $0.47 for the fourth quarter of 2020 was higher than both $0.43 for the third quarter of 2020 and $0.41 for the fourth quarter of 2019. Our GAAP earnings per share for the fourth quarter of 2020 was $1.22, which compares to $1.36 for the third quarter of 2020 and $0.45 per share for the fourth quarter of 2019. Our GAAP earnings per share for the fourth quarter of 2020 included $1.24 of net unrealized gains, offset by $0.49 per share of net realized losses.
Both figures include the impact of taxes. As Jason mentioned, we closed the year with a very strong fourth quarter that helped drive our full-year net investment income per share of $1.80 and along with recovering valuations, our GAAP net income per share of $1.98. Our fourth-quarter earnings of $0.47 per share were driven by strong recurring interest and dividend income generated from our growing portfolio. Our net unrealized gains on investments of $34.9 million for the fourth quarter of 2020, primarily reflected the continuing tightening of credit spreads relative to the end of the previous quarter and performance improvements in certain names.
At December 31, our stockholders' equity was $560 million, resulting in a net asset value per share of $19.88 as compared to $537 million or $19.07 per share at September 30, 2020, and $407 million or $19.50 at December 31, 2019. The increase in our net asset value during the fourth quarter of 2020 was primarily driven by the net unrealized gains, as highlighted on Slide 9. Investments at fair value increased by 7.6% in the quarter from $961 million to just over $1 billion. As $124 million in gross deployment, coupled with $21 million of realized and unrealized net appreciation was offset by $77 million of principal repayments and sales.
Turning to Slide 15. This graph summarizes the weighted average yield on income-producing securities and spread over LIBOR of our floating rate debt investments. As of December 31, 2020, the weighted average yield on our income-producing securities at amortized cost was 8% as compared to 7.9% and 8.1%, respectively, at September 30, 2020, and December 31, 2019. 98% of our debt investments bear interest at a floating rate 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 December 31, our debt-to-equity ratio was 0.85 times, up from 0.79 times at the end of the third quarter. We continue to be in compliance with the terms and covenants of each of our debt arrangements and have a significant cushion to our regulatory asset coverage of 150%.
Our debt capital base is supported largely by longer-dated financing, with 100% of the principal amount of debt outstanding maturing after June 23 when factoring in the repayment of our remaining InterNotes, which we expect to be redeemed next month. From a liquidity perspective, as of quarter end, we had $140 million of undrawn capacity across our SPV, asset and corporate revolving facilities, subject to leverage, borrowing base and other restrictions. To recap a busy capital activity year for us during 2020, we upsized our SPV Asset Facility with Wells Fargo, obtained an investment-grade rating and subsequently completed an inaugural unsecured notes offering in July. Jason touched on our second unsecured deal, which closed last week, assuming the full $135 million in proceeds are used to partially pay down one of our outstanding secured credit facilities and fully refinance us out of the remaining outstanding InterNotes.
Our pro forma debt funding mix improved from 8% unsecured as of March 31, our first quarter as a public BDC, to 39% unsecured as of year-end 2020. Our board of directors declared a regular first quarter cash dividend of $0.41 per share, which is consistent with the regular quarterly dividend paid in the fourth quarter. The dividend will be paid on April 15, 2021, to stockholders of record as of March 31, 2021. And with that, I'd like to turn it back to Jason for closing remarks.
Jason Breaux -- Vice President and Head of Investor Relations
Thanks, Gerhard. Despite the many challenges that 2020 brought, we're pleased with the performance of CCAP this past year, and we feel well positioned for 2021 and beyond. Looking to the future, our strategy remains the same. We will continue to focus on effectively deploying capital to optimize our portfolio performance by generating a strong recurring earnings stream, while focusing on preservation of capital.
We would like to thank all of you for your confidence and continued support. And with that, operator, please open the line for questions.
Questions & Answers:
Operator
Thank you. [Operator instructions] Our first question comes from Matt Tjaden of Raymond James. Your line is open.
Matt Tjaden -- Raymond James -- Analyst
Hey everyone. Appreciate the time. First question, if I can, on GACP II. So over the last couple of quarters, saw the cost basis shrinking.
Is the asset winding down? And if so, is there any plans for a similar type of equity investment, given the strong income the asset has generated? Just trying to get a sense of kind of forward dividend levels.
Jason Breaux -- Vice President and Head of Investor Relations
Yes. Matt, it's Jason. Thanks for the question. On GACP II, yes, that is a harvesting fund investment.
So that's why you see the capital continuing to decline in that investment. As far as going forward, it is an investment that we sort of look at as somewhat differentiated in the sense that the primary strategy of that investment was to make asset-based or collateral-based loans as opposed to what we typically do here at Crescent, which is providing sponsor-backed cash flow based loans. As far as sort of looking forward, I probably can't really comment too much on what we're going to do on that front. But we do think that is an interesting asset class from an investment standpoint.
Matt Tjaden -- Raymond James -- Analyst
OK. Fair enough. Secondly, congrats on the unsecured issuance. With leverage at 0.85 times, I know you mentioned the target of 1.1 times to 1.4 times.
Any commentary you can give on when you kind of expect to hit that target range and anywhere within that range is kind of where you would expect a steady state leverage level to settle?
Gerhard Lombard -- Chief Financial Officer
Yes. Matt. Thanks for the question. This is Gerhard.
You're correct. Our target debt-to-equity ratio is in that 1.1 times to 1.4 times range, and it is a pretty wide range, dependent really on portfolio performance, market conditions, macroeconomic environment and so on. We're obviously well below that level. Look, I think it's hard to really look forward into the crystal ball here and predict when we're going to get there.
If you look at our historical net deployment over the last couple of quarters and cut out some of the COVID noise and the -- maybe the second quarter of last year, our deployment is generally ranged in the, I'd say, from a net standpoint, in the kind of low 50s to $70 million per quarter. And if you forecast that -- assume that same deployment level is sustainable, and we think it is, given the pipeline and the market today, we'd probably get to full ramp at some point in the middle of 2022. So the other comment I would make on that is we're certainly well capitalized for the medium-term year given the unsecured offering we closed on. And so we feel very good about our ability to participate in pipeline opportunities and continue to grow the portfolio.
Matt Tjaden -- Raymond James -- Analyst
OK. That's helpful. And then just last one for me on the pipeline. So it sounds like terms and spreads in the new investments year to date are kind of comparable to the prior quarter.
Any commentary you can give on where spreads and terms are sitting right now to kind of pre-COVID levels?
Jason Breaux -- Vice President and Head of Investor Relations
Yes. Thanks, Matt. It's Jason. So happy to make some comments on that.
I think as we said in the prepared remarks, we are seeing fairly comparable terms in terms of what we are doing to Q4. That said, if you look at the syndicated loan market, certainly, it is tight with first liens for better credits in the 375 to 400 over range second liens in the tight at high-6s to maybe low-8s -- or I'm sorry, low-7s, which can result in a pretty tight blended spread of, call it, mid- to high-400s to low-500s, which does, I think, put some pressure on the larger end of the middle market where the broadly syndicated loan market is a potential option. Additionally, I'd say LIBOR floors are anywhere from zero to 75 bps, I think, in the syndicated market today, which could apply some additional incremental pressure. However, I think it's been our experience that most direct lenders these days are still holding a line at 1% LIBOR floors.
So I would say that the syndicated markets are largely back to pre-COVID levels. That being said, there are sponsors that value certainty of execution, small groups in terms of lender groups, no or limited flex, no need for a rating, no need for syndication or willing to pay a premium for that type of execution over the syndicated markets, which is why we play in the market that we play in and that can be a meaningful opportunity set. Private unit tranches, as a result, I think, are still pricing 100 to 150, 200 basis points north of that broadly syndicated kind of 1L, 2L blend that I mentioned earlier. And I think when you look at the lower middle market, which we typically spend a lot of time in this area, and we sort of define that as kind of $10 million of EBITDA to about $35 million, $40 million of EBITDA.
A lot of our origination efforts are in that area. Without the broadly syndicated loan market option available, pricing has held up better. I'd say we're still probably 25 to 100 basis points higher than pre-COVID levels in terms of spread. Part of that's due to the lack of the BSL bid as well as, candidly, less competition at that end of the market.
That being said, there is plenty of capital and like the BSL market demand for quality deals is high. It is important to be able to speak for sizable commitments in direct lending and be able to grow with portfolio companies as they execute their growth plans, which often involve M&A and certainly being constructive in partnership oriented with sponsors and management teams is important. And so I think a lot of the kind of platform experience and relationships that we have as well as the platform size is really an important differentiator here.
Matt Tjaden -- Raymond James -- Analyst
Great. That's it for me. Appreciate the time. Thanks.
Operator
Thank you. Our next question comes from Robert Dodd of Raymond James. Your line is open.
Robert Dodd -- Raymond James -- Analyst
Hi, guys. Apologies. I know Matt just asked a bunch of questions, but I joined late. So I've got a couple that you may have already covered.
On the debt stack side, obviously, you've concluded some unsecured. Some in the -- the latest one at 4% looks pretty good for a private placement in this environment. Obviously, the one in July, which was great at the time, but 5.95%, and it is callable with the premium, I mean, how onerous is the make-whole premium on that? And how should we expect unsecured to develop as a part of the liability side? Obviously, a year past IPO, you're shelf eligible now, etc. Can you give us any more color on that?
Gerhard Lombard -- Chief Financial Officer
Yes. Robert, this is Gerhard. And thanks. We're very pleased with the execution on the unsecured deal as well that added $135 million to our capital stack.
I think a couple of things. As we scale the portfolio further beyond $1 billion and given the unsecured -- secured mix we have, currently, we will actively pursue enhancing our investment-grade credit rating and further improving our ability to access traditional -- the traditional DCM channel, which will give us access to lower-priced debt. The $50 million we took on during the summer of last year, you'll recall, was intentionally a little shorter dated. It wasn't a traditional five-year unsecured offering.
And so I think you're correct. We -- it's unlikely that we would prepay that due to the make-whole payment, but we're able to -- the make-whole expires six months prior to maturity at around two and a half years. And so we will obviously position to look at the market closer to the time. I will maybe just add, from a weighted average cost of debt perspective, that $50 million in the total debt stack does not move the needle that much.
As you probably noticed, we have been actively paying down some of the higher-priced Alcentra InterNotes that we acquired back in January of 2020. So we're talking about a couple of basis points in the overall cost of equity and debt as we look at that $50 million and believe it was very helpful to have the additional liquidity in the capital stack because it allowed us to participate and deploy into kind of the tail end of COVID, and there was some really attractive opportunities for us on a risk-return basis that we took advantage of.
Robert Dodd -- Raymond James -- Analyst
Got it. Got it. I appreciate that. And if I can have one more, kind of portfolio structure style.
I mean, obviously, I think Matt asked about GACP. So I won't touch on that one. But this seems to be the first quarter I can remember that the portfolio or balance sheet, etc., for the JV wasn't disclosed. It had been -- it wasn't the last Q, for example, it wasn't in the 10-K.
Is that component of the strategy being deemphasized to just put the loans on balance sheet? Or is anything you can say on that front, that JV structures, historically, have generated some pretty decent returns. So is that fading away? Or can you give us any color on that?
Gerhard Lombard -- Chief Financial Officer
Yes. I can certainly comment on the disclosure aspect. There was simply -- from a GAAP requirement standpoint, we did not have to disclose the kind of the additional footnote language that we had in prior quarters. And so it wasn't intentionally deemphasized by us from a strategy perspective, it was just being responsive to the GAAP requirement in the financial statement.
Robert Dodd -- Raymond James -- Analyst
Understood. Thank you.
Jason Breaux -- Vice President and Head of Investor Relations
And Robert, it's Jason. Just to comment on the JV itself. It has been a helpful driver of incremental yield over the years. I will say, with the significant decline in the LIBOR rate last year, it became less interesting from a yield standpoint.
It has been certainly something that we're quite capable of doing, and we could ramp up or ramp down because we've got that expertise in-house to buy syndicated loans when we want to. But I would say with the meaningful decline in the base rate, that segment of the market has certainly become less interesting than our core mandate, which is the first liens and munis.
Robert Dodd -- Raymond James -- Analyst
Thank you.
Operator
[Operator instructions] I'm showing no further questions at this time. I'd like to turn the call back over to Jason Breaux for any closing remarks.
Jason Breaux -- Vice President and Head of Investor Relations
OK. Great. Well, thank you, operator. Thank you all for your interest in CCAP and your time today.
We look forward to speaking with you all soon.
Operator
[Operator signoff]
Duration: 37 minutes
Call participants:
Jason Breaux -- Vice President and Head of Investor Relations
Gerhard Lombard -- Chief Financial Officer
Matt Tjaden -- Raymond James -- Analyst
Robert Dodd -- Raymond James -- Analyst
