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spk01: Ladies and gentlemen, thank you for standing by, and welcome to the Crescent Capital BDC Inc. fourth quarter and year-ended December 31st earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question at that time, please press star then 1 on your touch-tone telephone. 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 and Head of Investor Relations. Sir, you may begin.
spk04: Thank you. Good morning, and welcome to our fourth quarter and year-ended December 31st, 2020 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 would like to remind our listeners that remarks made during the call may contain forward-looking statements. Statements other than statements of historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in CCAP's filings with Securities and Exchange Commission. The company assumes no obligation to update any such forward-looking statements. Yesterday, after the market closed, CCAP issued its earnings press release and posted an earnings presentation for the fourth quarter and year-ended 2020. The presentation, which is available on the company's website under the investor relations section, will be referenced throughout today's call and 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.
spk07: 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 Alcentric 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 five, where you'll see a summary of our results. For the fourth quarter, we reported after-tax net investment income of 47 cents per share, which concluded a strong year for CCAP despite the challenging macro backdrop. We're 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 1988. Gerhard will walk through the key drivers in more detail, but the increase was primarily driven by a net change in unrealized appreciation 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 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 unit launch 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 continue 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. Pick 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 PIC in Q4. Two additional positive credit trends are outlined on slide 16. Improved internal performance ratings and declining non-accruals. Our weighted average portfolio grade of 2.1 improved modestly over last quarter, and the percentage of risk-rated one and two 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 non-accrual 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 non-accrual and two investments, Systems Maintenance Services and MCS, came off of non-accrual 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 scale financing solutions to the sponsor community are critical competitive advantages, particularly as non-bank 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 Unitronch 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 will 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 may provide a supportive backdrop for stronger deal activities 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, amongst other benefits. As you can see on the slide, performance of the acquired portfolio has been strong, generating a 25% IRR, 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 lean. 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 in 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 31st 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 continues 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 interests of our stockholders as we continue to grow by obtaining our advisor's commitment to this incremental income-based incentive fee waiver. Next, on January 5th, 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 stock in the secondary market over time, demonstrating its alignment with CCAP stockholders. Such repurchases are expected to be made pursuant to a 10 plan, and we expect to announce the implementation of such plan prior to the time that shares of such common stock are purchased thereunder. 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 17th, and we expect the second closing for the remaining $85 million to occur on or before May 17th. 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, well below our longer-term target range of 1.1 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 2nd, 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?
spk06: Thanks, Jason. Our net investment income per share of 47 cents for the fourth quarter of 2020 was higher than both 43 cents for the third quarter of 2020 and 41 cents for the fourth quarter of 2019. Our gap earnings per share for the fourth quarter of 2020 was $1.22, which compares to $1.36 for the third quarter of 2020 and 45 cents per share for the fourth quarter of 2019. Our gap earnings per share for the fourth quarter of 2020 included $1.24 of net unrealized gains, offset by 49 cents 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 gap net income per share of $1.98. Our fourth quarter earnings of 47 cents 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 nine. 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 percent, 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 three-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 internodes, 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 STD 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 internodes. 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 41 cents per share, which is consistent with a 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.
spk07: 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. Thank you.
spk01: Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star then 1 on your touchtone telephone. Again, to ask a question, please press star then 1. One moment, please, for our first question. Our first question comes from Matt Jaden of Raymond James. Your line is open.
spk05: Hey, everyone. Appreciate the time. First question, if I can, on GACP2. So over the last couple quarters saw the cost basis shrinking significantly. 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.
spk07: Yeah, hey, Matt, it's Jason. Thanks for the question. On GACP2, yes, that is a harvesting fund investment. So that's why you see the – 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.
spk05: Okay, fair enough. Secondly, congrats on the unsecured issuance. With leverage at 0.85, I know you mentioned the target of 1.1 to 1.4. 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, you know, a steady state leverage level to settle?
spk06: Yeah. Hey, Matt, thanks for the question. This is Gerhard. You're correct. Our target debt-to-equity ratio is in that 1.5%. 1 to 1.4 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, you know, 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 in the market today, we'd probably get to full ramp at some point in the middle of 2022. So, You know, the other comment I would make on that is we're certainly well capitalized, you know, 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.
spk05: Okay, that's helpful. And then just last one for me on the pipeline. So it sounds like terms and spreads are 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?
spk07: Yeah, 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 2020. That said, you know, if you look at the syndicated loan market, certainly it is tight with first liens for better credits in the, you know, 375 to 400 over range, second liens in the tightest high sixes to maybe low eights, I'm sorry, low sevens, which, you know, can result in a pretty tight blended spread of call it, you know, mid to high 400s to 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 0 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, you know, 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, you know, 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, 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&As. and certainly being constructive and partnership-oriented with sponsors and management teams is important. And so I think, you know, 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.
spk05: Great. That's it for me. I appreciate the time.
spk01: Thanks. Thank you. Our next question comes from Robert Dodd of Raymond James. Your line is open.
spk02: Hi, guys. Apologies, I know Matt just asked a bunch of questions, but I joined late.
spk03: So I've got a couple that you may have already covered. On the debt stack side, obviously, you know, you've completed some unsecureds. I mean, 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 595, and it is callable. with a premium. I mean, how likely, how odorous is, is the make whole premium on that? And how should we expect unsecured to develop as, um, as a, as a part of the liability side? Obviously you're, you're, you're a year past IPO, you're shelf eligible now, et cetera. Can you give us any more color on that?
spk06: Yeah. Hey Robert, this is Gerhard. Um, And thanks. We're very pleased with the execution on the unsecured deal as well. That added $135 million to our capital stack. You know, I think a couple of things. You know, as we scale the portfolio further beyond a billion dollars and given the unsecured mix we have currently, you know, we will actively pursue, you know, enhancing our investment grade credit rating and, you know, further, you know, improving our ability to access traditional DCM channel, which will give us access to lower price debt. The $50 million we took on during the summer of last year, you'll recall, was intentionally, you know, a little shorter dated. It wasn't a traditional five-year unsecured offering. And so I think you're correct. It's unlikely that we would – prepay that due to the make-goal payment, but we're able to – the make-goal expires six months prior to maturity at around two and a half years. And so we will, you know, obviously position to, you know, 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 Elcentra internodes 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.
spk03: 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, the, the first quarter I can remember the portfolio balance sheet, et cetera, for the JV wasn't disclosed. Um, it had been, it wasn't the last queue, for example, it wasn't in, in the 10 K is that component of the strategy being de-emphasized to, to just put the loans on balance sheet or anything you can say on, on, on that front, that's JV structures historically have generated some pretty, pretty decent returns. Um, so is, is that fading away or, Paul, can you give us any comment on that?
spk06: Yeah, I can certainly comment on the disclosure aspect. There was simply, from a gap requirement standpoint, we did not have to disclose kind of the additional footnote language that we had in prior quarters, and so it wasn't intentionally de-emphasized by us from a strategy perspective. It was just being responsive to the gap requirement in the financial places.
spk03: Understood. Thank you.
spk07: Robert, hey, 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 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 unis.
spk01: Okay. Thank you.
spk07: Sure.
spk01: Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star then one on your touchtone telephone. One moment, please. I'm showing no further questions at this time. I'd like to turn the call back over to Jason Rowe for any closing remarks.
spk07: Okay, great. Thank you, operator. Thank you all for your interest in CCAP and your time today. We look forward to speaking with you all soon.
spk01: Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may all disconnect.
spk07: Have a great day.
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