Crescent Capital BDC, Inc. (CCAP) Q1 2022 Earnings Call Transcript

Crescent Capital BDC, Inc. (CCAP 0.06%)
Q1 2022 Earnings Call
May 10, 2022, 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 Q1 2022 Crescent Capital BDC earnings conference call. [Operator instructions] As a reminder today's conference call is being recorded. I would now like to turn the conference to your host, Mr. Dan McMahon.

Sir, you may begin.

Dan McMahon -- Vice President and Head of Investor Relations

Good morning, and welcome to Crescent Capital BDC, Inc.'s first quarter ended March 31, 2022, 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 first quarter ended March 31, 2022, 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 our earnings call today. We appreciate your continued interest in CCAP. I'll provide some first quarter 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 first quarter financial results with adjusted net investment income of $0.42 per share. Similar to the last four 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 $0.03 per share for the quarter. On a GAAP basis, our first quarter net investment income per share, inclusive of the accrued capital gains-based incentive fee expense was $0.39. Our net asset value per share reached its highest level since CCAP's inception, ending the quarter at $21.18, representing approximately 5% year-over-year growth. When you combine this NAV growth with cumulative dividends paid over the past 12 months, we've generated a 13.2% total economic return for our shareholders.

Let's turn to Slides 13 and 14 of the presentation, which provides a snapshot of the current portfolio. We ended the quarter with our largest portfolio since inception with nearly $1.3 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 consists primarily of senior secured first lien and unitranche first lien loans, collectively representing 86% of the portfolio at fair value. And we remain well diversified across 18 industries and continue to lend almost exclusively to private equity-backed companies with 98% of our debt portfolio and sponsor-backed companies as of quarter-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 the primary sectors we invest in. For the first quarter, 128 out of our 130 debt investment portfolio companies, representing over 98% of total debt investments at fair value made full scheduled principal and interest payments. 92% 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 year-end the percentage of risk rated one and two investments, the highest ratings our portfolio companies can receive remains healthy at 90% of the portfolio at fair value. As of quarter-end, we had investments in three portfolio companies on nonaccrual status, representing 1.4% and 1.1% of our total debt investments at cost and fair value, respectively, as compared to 1.6% and 1.2% at year-end.

Moving to our investment activity. Please turn back to Slide 15. After a record finish to 2021, market transaction activity was as we expected, slower to start the year, given the uncertainty created by the geopolitical backdrop and more aggressive signaling from the Federal Reserve. As a result, gross deployment in the first quarter was $60 million, as you can see on the left-hand side of the page, all of which was in senior secured first lien and unitranche investments.

All told, we closed on two new and five follow-on investments totaling $32 million and $5 million, respectively, with the remaining $23 million coming from revolver and delayed draw term loan activity. Both of the new investments were private equity-backed loans with floors of 75 and 100 basis points, OIDs of 1.75% and two and a half percent and a weighted average spread of approximately 575 basis points. In addition, loan-to-value levels remain attractive, averaging roughly 42% for the transactions. The $60 million in gross deployment compares to approximately $50 million in aggregate exits, sales and repayments in the quarter.

It's also worth highlighting that CCAP's total commitment for the two aforementioned new deals represented about 12% of the over $300 million total check size committed across Crescent accounts to those deals. During periods of heightened volatility like we saw in the first quarter, Crescent's fast sourcing capabilities and deep sponsor relationships forged over our 30-plus year operating history serve as key competitive advantages and allow us to be highly selective on transactions. Given our focus on preservation of capital and recognition of the asymmetric downside risk and credit investing, we will continue to pass on opportunities that don't meet our rigorous standards on terms. We generally view credit selection as binary regardless of pricing.

Shifting to the right-hand side of the page, you'll see that over the past several quarters, our net investment activity has led to unitranche first lien becoming a more prominent percentage of our total portfolio. This increase from 45% a year ago to 61% today 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. We expect this trend will continue particularly given the wind down of CBDC senior loan fund, our joint venture that I touched on last quarter. Proceeds from the monetization activity will provide us with additional dry powder, which we expect to redeploy into directly originated higher spread Crescent private credit investment opportunities.

To date, we've sold roughly 90% of the approximately $300 million pool of first lien broadly syndicated loans within the joint venture. Upon monetizing the remaining 10% and formally winding down the entity, which we still believe is on track for the end of this summer, we will receive our share of the proceeds, which were marked at $39.4 million as of quarter-end. A few more items before I turn it over to Gerhard. First, I'd like to highlight the effects that we believe a tightening monetary cycle would have on us.

As of quarter-end, 98.8% of our debt investments were floating rate with a weighted average floor of 83 basis points, which compares to our 71% floating rate liability structure with no floors. We believe this positions us well to have our net interest income benefit from rising rates. As of quarter-end, holding all else equal and after considering the impact of income-based incentive fees, we calculated that a 100 basis point increase in short-term rates could increase our annual earnings by approximately $0.19 per share, while a 200 basis point increase could increase our annual earnings by approximately $0.38 per share. In terms of the impact of rising rates on our debt investments, we believe we've constructed a highly diversified and defensive portfolio.

And sitting here today, credit metrics remain strong. Our debt investments ended the quarter with weighted average interest coverage of 2.74 times. Holding all else equal, short-term base rates would need to rise roughly 300 basis points before aggregate interest coverage would dip below two times. I'd also note that the breadth of our team and our reputation as a trusted partner have historically allowed us to maintain active recurring dialogues with sponsors and management teams of our portfolio companies.

Over the course of Crescent's history, we've developed action plans alongside both constituents to navigate through periods of heightened volatility. We believe it's another one of our competitive advantages. Finally, for the second quarter of 2022, our board declared a $0.41 per share quarterly cash dividend, which will be paid on July 15, 2022, to stockholders of record as of June 30, 2022. Additionally, the third in a series of four previously declared $0.05 per share special cash dividends will be paid on June 15, 2022, to stockholders of record as of June 3, 2022.

So with that, I'll turn the call over to Gerhard to cover some more details on the first quarter. Gerhard?

Gerhard Lombard -- Chief Financial Officer

Thanks, Jason, and good morning, everyone. Our adjusted net investment income per share of $0.42 for the first quarter of 2022 was in line with the $0.43 for the prior quarter. Total investment income of $26.4 million for the first quarter compares to $24.1 million for the prior quarter. Interest income, excluding one-time accelerated amortization, which represents the more recurring component of our revenues, grew from $20.8 million in Q4, $21.7 million for the first quarter and was a key driver of quarter-over-quarter total investment income growth.

We benefited from a full quarter of interest income generation from the investments originated during our record fourth quarter, which was largely back weighted in November and December. Additionally, we had a sizable monetization from our investments in battery solutions and the previously unaccrued PIK income recognized at exit. Dividend income increased to $2.3 million for the first quarter of 2022 from $1.8 million in the prior quarter. The increase was due to a dividend distribution from our equity investment in Southern Technical Institute, or STI, provider of educational and training services in a variety of medical and technical areas.

Our GAAP earnings per share or net increase in net assets resulting from operations for the first quarter of 2022 was $0.52, which compares to $0.44 per share for the prior quarter. Our GAAP earnings included net realized and unrealized gains on investments of $0.13 per share, offset by our second $0.05 per share special dividend. On March 31, our stockholders' equity was $654 million, resulting in a net -- record net asset value per share of $21.18 as compared to $652 million or $21.12 per share last quarter and $570 million or $20.24 per share at March 31, 2021. Despite a lower deployment backdrop for the first quarter, as Jason discussed, our total investment portfolio at fair value of $1.3 billion as of March 31, 2022, was the largest it's ever been and represents a 21.8% year-over-year increase.

This growth was primarily fueled by $185.6 million in net deployment coupled with net realized and unrealized gains on investments. Turning to Slide 16. This graph summarizes the weighted average yield on income-producing securities and spread over LIBOR of our floating rate debt investments. As of March 31, 2022, the weighted average yield on our income-producing securities at amortized cost was 7.5%, unchanged from the prior quarter.

As Jason mentioned, we remain well positioned to benefit from a rising rate environment. Following the Fed's 50 basis point rate hike announced last Wednesday, we are now comfortably passed the interest rate floors for certain of our investments. As such, we expect to see our weighted average yield increase next quarter. Now, let's shift to our capitalization and liquidity.

I'm on Slide 19. As of March 31, our debt-to-equity ratio was 0.97 times virtually flat with 0.98 times at year-end. In March, we amended our senior secured revolving credit facility with SMBC and upsizing by $50 million to $350 million. The weighted average stated interest rate on our total borrowings was 3.46% as of quarter-end.

We expect that near term, all deployment activity will be financed by our attractively priced secured facilities. As you can see on the right-hand side of the slide, we have a low level of debt maturities over the next two years with no maturities in 2022 and one $150 million maturity from our most expensive unsecured notes in July 2023, which can be redeemed at par plus security interest on January 30, 2023, without penalty. After that, there are no remaining term maturities until 2026. From a liquidity perspective, as of quarter-end, we had $249 million of undrawn capacity subject to leverage, borrowing base and other restrictions and $18 million in cash and cash equivalents.

Expected proceeds from the wind down of our JV, as Jason mentioned, will provide for some incremental liquidity. On May 3, our board of directors declared a second quarterly cash dividend of $0.41 per share which is consistent with the regular quarterly dividend paid in prior quarters, augmented by the third of fourth special cash dividends Jason walked through. And with that, I'd like to turn it back to Jason for closing remarks.

Jason Breaux -- Chief Executive Officer

Thanks, Gerhard. In closing, we've entered an operating environment, which has changed meaningfully over the past few months. Inflation, rising rates and geopolitical factors have begun to create headwinds for the economy that may persist for some time. However, similar to CCAP's positioning before heading into the uncertainty of COVID-19 during the first quarter of 2020, we continue to be invested in high-quality, strong free cash flow generating companies in primarily noncyclical industries.

On the liability side, we've continued to enhance our liquidity profile and made further improvements this quarter with the upside of our SMBC facility. Given our modest leverage and ample liquidity profile, we feel well situated to lean into attractive opportunities created by market dislocation while, of course, maintaining the same rigorous underwriting standards we've always implemented. We would like to thank all of you for your confidence and your 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, guys. Good morning and appreciate you taking my questions. Jason, I wanted to start off a little high level and ask what's your outlook for the private credit default environment at year-end '22 versus maybe six months ago?

Jason Breaux -- Chief Executive Officer

Hey, Matt. Thanks for joining, and thanks for the question. I think it's probably -- it's early to predict something like that. There are certainly counterbalancing factors at play here with respect to how we think about the default environment.

Today, it's still quite low. We think our portfolio remains quite healthy. As we talked about in the prepared remarks, I think the discipline that we try to exercise on the private side in terms of underwriting to meaningful equity cushions and strong interest and leverage metrics puts our portfolio in a good position here today. As we look forward, there is certainly some uncertainty in the marketplace on the macro side.

We'll see what happens with the Fed's ability to tame inflation and whether we'll see a softer landing or a harder landing that might destroy more demand. So I think it's early to tell how things are going to play out. But what I would say here today is that we feel quite good about the health of the portfolio, and we're constructive on the new deal environment without compromising any of our underwriting discipline.

Matt Tjaden -- Raymond James -- Analyst

Fair enough, if I could maybe follow up a little bit on that. Given the kind of uncertain economic outlook, anything you can tell us on expectations for net fundings for the remainder of 2022?

Jason Breaux -- Chief Executive Officer

It's another good question, Matt. I think if you look back historically over the last few years, CCAP's net deployment is roughly $40 million to $50 million a quarter probably on average. As we all saw in the first quarter, deployment is -- and activity is definitely lighter seasonally. But in addition to that, I would say, we saw sort of a slowdown from a busy Q4 with deals getting closed at the last week of the year as well as early stages of Omicron peaking sort of around year-end, which probably pushed out some deal launches and office openings.

As we look forward, there is a tremendous amount of private equity dry powder that still needs to get deployed. And what I would say is that the pipeline of activity that we've seen has picked up and it is picking up in a healthy way and has done so for the last several weeks. We feel good about the opportunities that we're seeing here today. What I would say is some of the fringier opportunities maybe more cuspy in terms of industry or adjustments to cash flow might not get done in an environment like this, but that's not really our focus.

Our focus is really on the higher quality deals. And I think our view is that we will still continue to see those here over the course of the next couple of quarters. The other thing I'd mention is that -- sorry, Matt, the other thing I'd mention is that with rising base rates and certainly, spreads on the rise, at least in the liquid markets, opportunistic refinancing activity should be slowing. That's our view.

So from a net standpoint, you might sort of factor that in as well.

Matt Tjaden -- Raymond James -- Analyst

Got it. Fair enough. Last one for me, just more housekeeping one than anything. The dividend income line, $2.3 million.

Any sense you can give us on how much of that we should interpret as nonrecurring? And then as a follow-up to that, the SLF, obviously didn't pay a dividend this quarter. Should we be expecting one maybe in 2Q or 3Q from the resolution?

Gerhard Lombard -- Chief Financial Officer

Yeah. This is Gerhard. I can take that question. Thank you.

We generally expect to have, I think, some level of income that is not kind of core cash pay interest just given the level of diversification of the portfolio. And that could be in the form of dividends, accelerated OID, PIK or fee income. And while we continue that there'll be some level of continuing income from these sources, the -- obviously, the core portfolio has increased fairly meaningfully by about 22% year over year. So the current cash income behind the additional fee and dividend income is also increasing.

Circling back to your question on the joint venture dividend, you're correct. I think as we mentioned in prior remarks, that structure is unwinding, and so there will be a liquidating distribution that may take the form of multiple distributions as that portfolio fully winds down, we repay the debt. So you're correct. I think that depending on timing -- the timing of the wind down there, that could be a second quarter or third quarter event.

And then certainly, we expect some level of continuing dividend income from our equity positions. STI, in particular, which you called out, has performed well to date and it continues to be a healthy portfolio company.

Matt Tjaden -- Raymond James -- Analyst

Got it. That's it for me. I appreciate the time.

Operator

Thank you. [Operator instructions] Our next question comes from Derek Hewett of Bank of America. Your line is open.

Derek Hewett -- Bank of America Merrill Lynch -- Analyst

Good morning, everyone. In terms of the potential earnings accretion disclosed, given rising rates in the prepared remarks, did that figure include the incentive fee as well or do we need to make that adjustment?

Gerhard Lombard -- Chief Financial Officer

Derek, this is Gerhard. Yeah, you're correct. In the prepared remarks that includes the impact of the incentive fee, and there's also a disclosure in the 10-Q, obviously, on the MD&A section, which does not include that net impact. But Jason's prepared remarks included the impact of the fee.

Derek Hewett -- Bank of America Merrill Lynch -- Analyst

OK, great. And then just given rising rates, how far would rates need to rise before your portfolio companies cash flow would start to get a little bit stretched? And maybe could you talk about it in terms of maybe the run rate of -- or the base case for top-line growth and then maybe under a static revenue case as well?

Jason Breaux -- Chief Executive Officer

Derek, that's a really good question. We have run lots of sensitivities around the very questions that you're asking. I know that we pointed to interest coverage on the prepared remarks. I don't have the specific metrics by portfolio company here with me at the moment.

That's something that we can follow up on.

Derek Hewett -- Bank of America Merrill Lynch -- Analyst

OK, great. Thank you.

Jason Breaux -- Chief Executive Officer

Thank you.

Operator

Thank you. 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 -- Chief Executive Officer

OK. Thanks, operator. Thank you, everyone for joining our call here today for the first quarter results. We appreciate your continued interest and support, and we look forward to speaking with you soon.

Operator

[Operator signoff]

Duration: 28 minutes

Call participants:

Dan McMahon -- Vice President and Head of Investor Relations

Jason Breaux -- Chief Executive Officer

Gerhard Lombard -- Chief Financial Officer

Matt Tjaden -- Raymond James -- Analyst

Derek Hewett -- Bank of America Merrill Lynch -- Analyst

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