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Crescent Capital BDC, Inc. (NASDAQ:CCAP)
Q3 2021 Earnings Call
Nov 11, 2021, 12:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Thank you for standing by, and welcome to the Crescent Capital BDC third quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator instructions] As a reminder, today's program may be recorded.

I would now like to introduce your host for today's program, Dan McMahon, head of investor relations. Please go ahead.

Dan McMahon -- Head of Investor Relations

Good morning, and welcome to Crescent Capital BDC Inc.'s third quarter ended September 30, 2021, earnings conference call. Please note that Crescent Capital BDC, Inc. may be referred to as 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 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 third quarter ended September 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.

Jason Breaux -- Chief Executive Officer

Thank you, Dan. Good morning, 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 touch on a few more updates before turning it over to Gerhard to review our quarterly 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 third quarter financial results with adjusted net investment income of $0.48 per share. Similar to the prior two quarters, we accrued a capital gains-based incentive fee expense related to changes in net realized and unrealized gains and losses.

This noncash expense, which was not paid and is not payable, was approximately $0.03 per share for the quarter. Our Q3 net investment income per share, inclusive of the accrued capital gains-based incentive fee expense was $0.45, respectively. As a reminder, the capital gains expense 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 September 30, the $0.22 per share of cumulative accrued capital gains incentive fee expenses 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 sixth consecutive quarter, up approximately 1% in Q3 to $21.16, the highest value since CCAP's inception. Gerhard 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, coupled with our net investment income outpacing the dividend per share. Since our listing in early 2020, prior to the onset of COVID, NAV per share has grown 8.5%. And from a total economic return perspective, which is change in NAV plus cumulative dividends paid, we've generated 23.2%.

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 over $1.1 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 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.

100% of our debt portfolio was in sponsor-backed companies as of quarter-end and 84% of the portfolio at fair value was first lien as compared to 80% in Q2, driven by our origination activity in the quarter, as outlined on Slide 15, which I'll touch on shortly. For the third quarter, 120 out of our 121 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 1% of total investment income in Q3. 93% of our debt investment portfolio today is marked above $0.95 on the dollar, with an average mark of approximately $0.98.

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 89.4% of the portfolio at fair value as compared to 88.1% last quarter. As of quarter-end, we had investments in two portfolio companies on nonaccrual status, representing 1.5% and 1.1% 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 an active quarter with $158.5 million in gross deployment. Nearly all of the activity or approximately 95% was in senior secured first-lien or unitranche investments. All told, we closed on 12 new investments and 10 follow-ons, totaling $116 million and $16 million, respectively, with the remaining $27 million coming from revolver and delayed draw term loan activity. All 12 of the new investments were private equity-backed loans at 500 to 675 basis point spreads and OIDs between 1% and 2.75%.

In addition, loan-to-value levels remain attractive, averaging approximately 41% for these transactions. The $158.5 million in gross deployment compares to $122.8 million in aggregate exits, sales, and repayments in the quarter. It's also worth highlighting that CCAP's total commitments for the 12 aforementioned new deals represented only 14% of the approximately $1.2 billion total check size committed to these deals across Crescent, highlighting the scale of our platform. Activity thus far in the quarter has been strong.

For the month of October, we closed on six new and four follow-on investments totaling $49 million and $15 million, respectively. The six new investments are each private equity-backed, first-lien, or unitranche loans, with spreads and other characteristics comparable to the aforementioned Q3 investments. As we sit here today, our origination pipeline for the remainder of Q4 is robust. Coupled with an expectation for a slowdown in prepayment activity, we think Q4 may end up being the strongest net deployment quarter of the year, driving continued investment portfolio growth and a further increase in our debt-to-equity profile as we approach the lower end of our target range.

A few more updates before I turn it over to Gerhard. First, a quick update on our acquisition of Alcentra Capital Corp, which as a reminder, we completed in Q1 of 2020. Please turn to Slide 18. As you could see on this slide, performance of the acquired portfolio has been strong, generating a 28% IRR with a healthy level of realization activity through September 30.

Almost all or 97% of our cost basis in the acquired assets has been realized and the approximately $84 million in remaining fair value translates to about 7% of CCAP's total investment portfolio as of quarter-end. Overall, we are pleased with this outcome thus far, which has been accretive to CCAP and our stockholders. Second, in mid-October, Sun Life completed its stock purchase program, having acquired 10 million of CCAP's stock pursuant to a 10b5-1 plan, demonstrating its alignment with CCAP stockholders. Sun Life has advised us that it seeks to introduce a second 10b5-1 plan of comparable size to the first plan.

We believe that our stock's current discount represents a particularly compelling opportunity to acquire shares in what we view as an increasingly well-diversified, defensively constructed, first-lien-focused BDC that has committed to ensuring 100% dividend coverage via incentive waivers on an as-needed basis through 2022. Finally, for the fourth quarter of 2021, our board declared a $0.41 per share quarterly cash dividend payable on January 17, 2022, to stockholders of record as of the close of business on December 31. Our board has also approved a series of four consecutive quarterly special cash dividends of $0.05 per share beginning this quarter. As we've historically over earned our base dividend, our spillover income has grown to approximately $0.48 per share as of quarter-end.

The payment of approximately half of this balance in the form 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. The first special cash dividend is payable on December 15 to stockholders of record as of the close of business on December 3. And the second, third and fourth $0.05 specials will be paid on the 15th of March, June, and September '22, respectively. The record dates for these payments have been disclosed in our 10-Q and earnings release.

And again, all of these have already been approved by our board of directors. With that, I'll now turn it over to Gerhard to cover additional details on the quarter. Gerhard?

Gerhard Lombard -- Chief Financial Officer

Thanks, Jason. Our adjusted net investment income per share of $0.48 for the third quarter of 2021 compares with $0.53 for the prior quarter and $0.43 for the third quarter of 2020. Our GAAP earnings or net increase in net assets resulting from operations per share for the third quarter of 2021 was $0.59, which compares to $1.16 for the second quarter of 2021 and $1.36 for the third quarter of 2020. Our third quarter adjusted earnings were driven by strong recurring interest and dividend income from our growing portfolio, in addition to accelerated accretion of OID related to an elevated level of paydown activity.

At September 30, our stockholders' equity was $596 million, resulting in a net asset value per share of $21.16, increasing from $591 million or $20.98 per share last quarter, and $537 million or $19.07 per share at September 30, 2020. The increase in our net asset value during the third quarter was the result of the continued over earn of the dividend, coupled with overall appreciation in our investment portfolio. Net investment income outpaced our base dividend, contributing an additional $0.04 per share growth as you can see on Slide 10. I'd note that the $0.99 net realized gain per share in the middle of the page relates primarily to a sizable monetization out of our equity investment in Kinesis.

As you may recall, Kinesis, a provider of strategic medical communication services to the biopharmaceutical industry, was the largest driver of mark-to-market unrealized depreciation in our portfolio last quarter. So, this quarter's realization also resulted in a reversal of that previously unrealized mark. Investments at fair value increased 4% in the quarter from $1.095 billion to $1.139 billion, driven by approximately $36 million in net deployment. Turning to Slide 16, this graph summarizes the weighted average yield on income-producing securities and spread over LIBOR of our floating rate debt securities.

As of September 30, 2021, the weighted average yield on our income-producing securities at amortized cost was 7.6% as compared to 7.8% in the prior quarter. 99.7% of our debt investments, their interest at a floating rate, have a weighted average LIBOR floor of approximately 90 basis points, which is well above today's current three-month LIBOR rate. Now let's shift to our capitalization and liquidity. I'm on Slide 20.

As of September 30, our debt-to-equity ratio was 0.94 times, up from 0.87 times at June 30, resulting in a continued significant cushion to our regulatory asset coverage of 150%. On October 27, 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 an L+235 facility for an L+187.5 facility, and extending the maturity from August 2024 to October 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 $173.1 million of undrawn capacity subject to leverage, borrowing base, and other restrictions.

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 third quarter. This will be augmented by the series of special dividends that Jason walked through earlier. And with that, I'd like to turn it back to Jason for closing remarks.

Jason Breaux -- Chief Executive Officer

Thank you, Gerhard. Overall, we are pleased with our financial results this quarter. Additionally, our credit performance remains 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 and we maintain our positive outlook for the overall economy for the remainder of the year as demand further rebounds. As previously noted, we're constructive on the deployment pipeline in the coming months, which will allow us 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.

Questions & Answers:


Operator

Certainly. [Operator instructions] Our first question comes from the line Robert Dodd from Raymond James. Your question, please.

Robert Dodd -- Raymond James -- Analyst

Hi, guys. I have more than one. And again, on the new originations this quarter, I mean, I think you have said the weighted average portfolio LIBOR floor is about 90 bps. Looks like in Q3, there may have been some pressure on that, the delta between the interest rate and the spread of, actually, it shrank this quarter.

Can you give us any color or is there incremental pressure on LIBOR floors versus what you've got average in the portfolio? Or was that just a Q3 mix?

Jason Breaux -- Chief Executive Officer

Hey, Robert, it's Jason. Thanks for the question. I would say that there has been some pressure on LIBOR, certainly in the syndicated markets, more so than in private lending market. But what we've seen generally is LIBOR floors and our end of the market are, call it, 75 bps to 100 bps, depending on the negotiation, and it's dropped further on the syndicated side down to, call it, 50 bps, generally speaking.

So, I would say a little bit of pressure relative to historical kind of seeking -- generally seeking and getting 1% for us.

Robert Dodd -- Raymond James -- Analyst

OK. Perfect. Thank you. Another on -- focusing on the asset side again.

I mean, Great American has been a great performer for you, paying a lot of dividends. It's obviously winding down. You now have the -- obviously, the investment in WhiteHawk, which is the same people behind it. Any color you can give us on how fast you expect committed capital to that WhiteHawk vehicle to maybe ramp up to GACP-type levels? Or when that vehicle could start paying dividends? And I realize you're not in control of the dividend on that side.

Jason Breaux -- Chief Executive Officer

Yeah. That's a good question, Robert. I think we are an investor in the WhiteHawk Fund just as we were in the Great American Fund. I would have expected sort of deployment comparable to our deployment out of the Great American Fund II, given it's the same team and the same strategy.

And if I had to sort of guess, I think that deployment to kind of fully called deployment is probably about a year and a half to two years.

Robert Dodd -- Raymond James -- Analyst

Got it. Thank you. And then just flipping if I can, to the liability side. Congratulations on the new revolver, improved terms and improved -- hidden there, but more spread for ROE improvement.

On the unsecured component of it, it's about a third of your debt stack right now, and I know I'm actually -- heard about this before. The two notes that you have currently are probably well above where you could borrow if you tapped the institutional market today. Is there -- sorry, two components, one, are there plans to take up unsecured above kind of the one-third? And has there been any contemplation on the 2023s to maybe pay the make-whole, take them out, and just replace them with something that might be half the coupon, that might be a little generous, but substantially cheaper?

Gerhard Lombard -- Chief Financial Officer

Yeah. Hi, Robert. This is Gerhard. I can take that question.

And you're correct, and we obviously are very focused on our debt capital structure. The secured lines we have in place today, especially with the refinancing we just mentioned on the prepared remarks, allow us to borrow very effectively. So, we feel very good about our weighted average cost to borrow, which as we continue to kind of ramp the portfolio and utilize the secured lines a little more, we expect our weighted average cost to kind of dip below 3%, which we feel good about. Circling back to your question about unsecured, you're correct, especially those 2023 notes, we're keeping an eye on those.

We are able to prepay those without penalty in January of 2023. And so, as we think about our capital structure planning for the next 12 months, that's probably the -- kind of the -- kind of easy, kind of near-term objective that we are focused on.

Robert Dodd -- Raymond James -- Analyst

Got it. Thank you and congratulations on a very good quarter.

Jason Breaux -- Chief Executive Officer

Thank you.

Operator

Thank you. [Operator instructions] And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Jason Breaux for any further remarks.

Jason Breaux -- Chief Executive Officer

OK. Thanks, Jonathan. Thank you for your time and interest in CCAP. As always, we appreciate it, and we look forward to speaking with you next quarter.

Operator

[Operator signoff]

Duration: 25 minutes

Call participants:

Dan McMahon -- Head of Investor Relations

Jason Breaux -- Chief Executive Officer

Gerhard Lombard -- Chief Financial Officer

Robert Dodd -- Raymond James -- Analyst

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