Crescent Capital BDC, Inc.

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 listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star one on your telephone. 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.

Good morning, and welcome to Crescent Capital BDC, Inc.' 's third quarter ended September 30th, 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.crescentpdc.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.

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 six, where you'll see a summary of our results. We reported strong third quarter financial results with adjusted net investment income of 48 cents 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 non-cash 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 22 cents 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 at the 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 PIC 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 non-accrual levels. Our weighted average portfolio grade of 2.1 was unchanged as compared to last quarter, and the percentage of risk-rated one and two 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 non-accrual 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 where approximately 95% was in senior secured first lien or unit launch investments. All told, we closed on 12 new investments and 10 follow-ons, totaling $116 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 unit tranche 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 Alcentric Capital Corp., which, as a reminder, we completed in Q1 of 2020. Please turn to slide 18. As you can 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 30th. 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 stock pursuant to its 10B51 plan, demonstrating its alignment with CCAP stockholders. Sun Life has advised us that it seeks to introduce a second 10B51 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 41 cent 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 5-cent 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.

Thanks, Jason. Our adjusted net investment income per share of 48 cents for the third quarter of 2021 compares with 53 cents for the prior quarter and 43 cents for the third quarter of 2020. Our gap earnings are or net increase in net assets resulting from operations per share for the third quarter of 2021 is 59 cents, 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 activities. 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 four cents per share of growth, as you can see on slide 10. I'd note that the 99 cents 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 one spot 0.95 billion to one spot 1.39 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 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 20. As of September 30, our get-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 plus 235 facility for an L plus 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 41 cents per share, which is consistent with a 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. 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.

Certainly. Ladies and gentlemen, if you have a question at this time, please press star then 1 on your touchtone telephone. If your question has been answered and you'd like to move yourself from the queue, please press the pound key. Our first question comes from the line, Robert Don from Raymond James. Your question, please.

Hi, guys. I have more than one. Again, on the new originations, the weighted average portfolio LIBOR flows about 90 bits. Looks like in Q3 that there may have been some pressure on on that the delta between the the the interest rate and the uh and the spread of it it shrank this quarter can you give us any color is is there incremental pressure on on libel floors versus what you've got average in the portfolio or was that just a a q3 mix uh hey hey robert it's jason thanks for the question um i would say that uh

There has been some pressure on LIBOR, certainly in the syndicated markets more so than in a private lending market. But what we've seen generally is LIBOR floors in our end of the market are, call it 75 BIPs to 100 BIPs, depending on the negotiation. And it's dropped further on the syndicated side down to, call it, 50 BIPs. generally speaking. So I would say a little bit of pressure relative to, you know, historical kind of, uh, uh, seeking, uh, generally seeking and getting 1% force. Okay.

Perfect. Thank you. Uh, another one on, on focusing on the asset side again, I mean, you know, great Americans been a great performer for you. I'm a pain, pain, a lot of differences, obviously widening down. You now have the, the, obviously the investment in white Hawk, which is the same people behind it. Uh, any, uh, color you can use on how fast you expect committed capital to that White Hawk 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.

Yeah. That's a good question, Robert. I think, you know, we are an investor in the White Hawk 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 to giving it 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.

Got it. Thank you. And then just flipping, if I can, to the liability side, congratulations on the new revolver. Improved terms, improved, a little bit more spread for ROE improvements. On the unsecured component of it, it's about a third of your debt stack right now, and I know 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. So two components. 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-all, take them out, and just replace them with something that might be half the coupon? That might be a little generous, but substantially cheaper.

Yeah. Hey, Robert, this is Gerhard. I can take that question. And, you know, you're correct, and we obviously are very focused on our debt capital structure. The secured lines we have in place today, you know, especially with the refinancing we just mentioned on the prepared remarks, allow us to, you know, borrow, you know, very effectively. So we feel very good about our weighted average cost to borrow, which as we continue to kind of ramp the portfolio up, and utilize 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, You know, for the next 12 months, that's probably kind of the easy kind of near-term objective that we are focused on.

Got it. Thank you, and congratulations on a really good quarter.

Thank you. Thank you. Once again, if you have a question, please press star then 1. And this does conclude the question and answer session of today's program. I'd like to hand the program back to Jason Brough for any further remarks.

Okay, 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.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.