Crescent Capital BDC, Inc.

Good morning, and welcome to Crescent Capital BDC, Inc.' 's first quarter and March 31, 2026 earnings conference call. Please note that Crescent Capital BDC, Inc. may be referred to as CCAP, Crescent BDC, or the company throughout the call. 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. I'll now turn the call over to Dan McMahon.

Thank you. Yesterday, after the market closed, the company issued its earnings press release for the first quarter ended March 31st, 2026, 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 CCAP's Chief Executive Officer Jason Breaux, Chief Financial Officer Gerhard Lombard, and President Henry Chung. With that, I'd now like to turn it over to Jason.

Thank you, Dan, and good morning, everyone. Before turning to our results, I want to frame the quarter in the context of the broader market environment. We are operating in an environment characterized by elevated geopolitical uncertainty, mixed consumer sentiment, and persistent inflationary pressures, which have contributed to a more volatile backdrop for credit markets. Within private credit, we are seeing pockets of pressure. At the same time, we believe the broader narrative around the asset class has become somewhat overstated, with distinct issues often grouped together in a way that can exaggerate the perception of risk. While factors such as credit stress in select sectors, valuation scrutiny, evolving risks within software, and refinancing pressures are all part of the current dialogue, these dynamics are not uniform across portfolios or issuers. Against this backdrop, a small number of credit specific developments within CCAS portfolio drove a more challenging quarter. This reflects the continuation of recent quarters where NAV has declined, driven by both market conditions and pressure in certain watch list investments. These issues are concentrated and are being actively managed, and Henry will provide further detail. Importantly, We have deliberately constructed the CCAP portfolio over the past decade with a focus on first lien investments, non-cyclical industries, and strong sponsor backing, with the expectation that we would eventually operate in a more challenging credit environment. This approach is informed by Crescent's more than 35-year track record of investing in credit across multiple market cycles. As a result, while performance has reflected increased recent variability We believe the portfolio is well positioned to navigate these conditions over the long term. At the same time, the current market is creating a more attractive opportunity set with widening spreads, stronger structures, and reduced competition for new investments. In particular, we are seeing a pullback in activity from certain lenders who are more reliant on retail and non-traded BDC capital. Turning to earnings, We generated $0.38 per share of net investment income, or NII, for the quarter, down from $0.45 in the prior quarter, primarily driven by an increase in non-accruals and a reduction in base rates. However, we voluntarily waived $0.04 of incentive fees to ensure full dividend coverage for the quarter. As a result, reported NII of $0.42 per share reflects the $0.04 per share incentive fee waiver. As we previewed on our last earnings call and in partnership with our board, we've implemented a broader set of structural changes to position CCAP for more consistent earnings and attractive returns across market cycles. On fees, we are permanently reducing the base management fee from 1.25% to 1% and the incentive fee from 17.5% to 15%, effective April 1, 2026. At the time of our listing in 2020, our fee structure was among the most competitive in the BDC sector. Over time, as the market evolved, our fees became more in line with the broader peer group. The changes we announced today bring CCAP's fee structure back towards the most competitive end of the peer group. In conjunction with the fee reductions, we are resetting the quarterly base dividend from 42 cents to 34 cents per share. We believe this new base dividend reflects a conservative level relative to our near-term earnings outlook. Our board has also approved three special dividends of three cents per share to be paid quarterly over the course of calendar year 2026. These special dividends are meant to address our current spillover balance. Taken together, this framework separates core earnings power from the return of previously earned income and provides us with greater flexibility as we actively manage the portfolio. Finally, I'd like to touch on the recently completed transaction between Sun Life and our external advisor, Crescent Capital. In March, Sun Life acquired the remaining equity interest in Crescent, making it a wholly owned subsidiary of SLC Management, Sun Life's alternatives platform. This further strengthens alignment with a well-capitalized, long-term institutional partner. Sun Life is a long-term holder of approximately 6% of CCAP's shares outstanding, holds approximately $72 million of CCAP's unsecured notes, and has invested or committed over $1.5 billion across Crescent's strategies since 2021, underscoring its significant and ongoing economic commitment to the platform. With that, I'll turn it over to Gerhard.

Thanks, Jason. I wanted to start by bridging the change in NII compared to the prior quarter. The decline from the prior quarter was primarily driven by approximately $0.04 per share from new non-accruals, $0.02 per share from lower base rates, and approximately $0.01 per share from lower one-time fee income and deployment planning. This was partially offset by higher dividend income. On slide 10, we provide a graphical analysis of NAV changes during the quarter. Net asset value declined quarter over quarter to $18.27 per share from $19.10 per share, driven by a combination of broader mark-to-market movements and credit-specific depreciation across the portfolio. The impact of credit spread widening and changes in market multiples was the most significant driver of the change this quarter, accounting for approximately 65% of the overall reduction, while the remaining 35% was attributable to credit-specific factors. We believe the market-driven portion of the markdown primarily reflects a broader repricing of risk rather than underlying fundamental deterioration. Turning to the balance sheet, our investment portfolio totaled approximately $1.6 billion at fair value. We ended the quarter with net leverage of 1.32 times, modestly above our target range of 1.1 times to 1.3 times, driven by the timing of realizations that were pushed out of the quarter. We expect that leverage will return to our target range as those realizations occur. We continue to maintain a strong liquidity position with approximately 206 million of available capacity and 27 million of cash and cash equivalents at quarter end. Importantly, we have sufficient availability under our ABL facilities, including a 100 million upsize to our SPV facility, which we expect to close before the upcoming June quarter end. Part of the upsize will be used to refinance our upcoming May unsecured maturities. For the second quarter of 2026, our Board declared a regular dividend of $0.34 per share payable on July 15 to stockholders of record as of June 30. Additionally, the first $0.03 per share special dividend is payable on June 15 to stockholders of record as of May 31. While our existing variable supplemental dividend framework remains in effect, CCAP will not pay a Q1 supplemental dividend based on this quarter's NII. With that, I'll turn it over to Henry.

Thanks, Gerhard. At a high level, the portfolio remains well positioned with the majority of companies continuing to perform as evidenced by year-over-year EBITDA growth supported by strong sponsor backing and resilient business models. Approximately 86% of investments are rated one or two unchanged quarter over quarter, representing performance at or above our underwriting expectations, with a weighted average portfolio risk rating of 2.1 that has also remained stable. Weighted average interest coverage improved modestly to 2.2 times, demonstrating continued resilience in underlying earnings. In addition, our software exposure continues to perform in line with expectations, with no new additions to the watch list during the quarter. Also, it's worth noting that we do not have any exposure to ARR loans. Turning to our non-accruals, as a percentage of debt investments, non-accruals increased to 5.7% of cost and 3.6% of fair value, up from 4.1% and 2% in the prior quarter, respectively, reflecting the addition of five new non-accruals during the quarter. Our five new non-accruals this quarter were concentrated across four healthcare investments. We know that the drivers of stress are distinct across each investment, ranging from deferrable healthcare consumer spending, persistent unfavorable labor dynamics, and execution-related operational challenges. We do not observe the stress in these investments as indicative of broader stress within healthcare. From a portfolio management perspective, these investments have been on our watch list for over five quarters on average, and we have been actively working with the management teams and sponsors over that period. Importantly, the Crescent platform has meaningful control or influence in each situation through agency roles or position size. Our experience managing through prior economic cycles gives us confidence in our ability to actively manage these situations and drive recovery outcomes. Taking a step back, all 13 of CCAP's non-accruals are first lien positions, which we believe is an important factor supporting our ultimate recoveries. Six were acquired through the first legal portfolio, which we understood acquisition to include a number of legacy challenges and more limited lender control. Importantly, while elevated relative to historical levels, these remain concentrated in a portfolio of almost 200 portfolio companies that are not indicative of broader portfolio deterioration. We've also taken a proactive and conservative approach to evaluation of our watch list, marking assets to levels we believe appropriately reflect current conditions and expected recovery values, rather than deferring these adjustments over time. Please turn to slide 15, where we highlight our recent activity. In this environment, we continue to focus on non-typical, sponsor-backed businesses and are seeing higher spreads and increased add-on activity. Gross deployment in the first quarter totaled 115 million, including 57 million across 14 new platform investments. These investments were made at a weighted average spread of approximately 500 basis points, with Crescent serving as leader agent on 93% of these transactions. The remaining 58 million was invested in existing portfolio companies. This compares to approximately 93 million in aggregate exits, sales, and repayments during the quarter. resulting in net deployment of approximately $22 million. The broader Crescent platform remained highly active with over $2.6 billion of private credit capital commitments in the first quarter and over $7.5 billion on an LTM basis, providing a strong pipeline of opportunities. While we are not expecting significant net portfolio growth in the near term, we are actively rotating the portfolio while selectively deploying capital into attractive opportunities originated through the Crescent platform. We are taking a conservative approach to new investments through smaller position sizing and increased diversification. As a quarter end, CCAT's average investment size was approximately 0.6% of the portfolio. With that, I'll turn it over to Jason.

Thank you, Henry. In closing, this quarter reflects a continuation of challenging trends in certain segments of the portfolio, which we are actively managing. We've taken proactive steps to strengthen the durability of our earnings profile and enhance shareholder value, including reducing management and incentive fees and resetting our base dividend. Against that backdrop, CCAP benefits from being part of the broader Crescent platform, which is well positioned and is seeing an increasingly attractive opportunity set. We appreciate your continued support and look forward to updating you next quarter. Operator, please open the line for questions.

We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Robert Dodd with Raymond James. Your line is open. Please go ahead.

First, I want to say congrats or whatever the right word for it is on the free adjustment and getting back into kind of the leading group in the space in terms of structure on that. Then on the kind of focus on the non-recruits and obviously Phil kind of addressed it. I mean, it's been a theme obviously with your portfolio this quarter, a few others over the last couple of quarters in terms of healthcare. And there's disparate issues between all of those things. But I mean, when do you, How comfortable are you now that you have your hands around the issues for the specific assets or just kind of the healthcare themes in general? I mean, there are multiple different ones, but they've been affecting a lot of portfolio companies in yours and just elsewhere as well. So, I mean, are there still developments progressing in healthcare that are kind of like, catching you and others kind of by surprise, flat footed, whichever way you want it. I mean, yes, they've been on the watch list for a while, but it seems to have accelerated in terms of the problems recently.

Hi, Robert. This is Henry. I'll take that. I think your observation is absolutely correct that we noticed the same across the space as well, that there's select healthcare names that have been Joseph Baeta, Supt of Schools, Certainly popping up on not a cruel list some just more broadly, I think, in terms of the observation that we're seeing in our portfolio it's not broad based within healthcare there's certain pockets within healthcare that. Joseph Baeta, Supt of Schools, I say are certainly starting to demonstrate stress and you know we've had them on the watch list and i've been watching them closely and we alluded to that in our prepared more marks around. um being or having a close eye in terms of how the different drivers have developed but i think as we take a step back here and we look at the different drivers um these while these are all classified as healthcare they're quite different in terms of this model in terms of what specifically was impacting these businesses whether it's a labor cost issue whether it's a execution-related misstep by the sponsor, whether it's a reimbursement dynamic. It's difficult to say that this is really something that we're seeing that's broad-based within the space or within the portfolio as well. I look at these as four distinct drivers in terms of what's creating operating pressure at the businesses. So looking forward, as I think about the health care in our portfolio, we certainly are continuing to keep a close eye in terms of how these pressures are potentially surfacing within our portfolio. But I would say, by and large, as we think about how we capture them in our watch list, as well as in our non-accruals, we certainly do feel like we have a good handle in terms of where to keep our focus on today. Fully recognizing that we're in an environment where on a quarter-to-quarter basis, there can certainly be volatility in terms of just how these actual businesses perform on a quarter-to-quarter basis.

Got it. Thank you. Just kind of a crystal ball, how much of these issues have been If it's been exacerbated by inflation, wage inflation, etc. I mean, is there a risk that given the latest inflation from the other day, could things deteriorate further from here? I mean, I think in your prepared remarks, I think you said you mark the assets now rather than dribbling things in. which is a good thing. So congrats on doing that. But I mean, what's the confidence that that is it, so to speak, and things couldn't get worse, driven more by, in this context, more by macro factors? Is that still a meaningful threat to these businesses?

Yeah, I think that's something that, has pressured these businesses for the better part of the last two years now. And in particular, on the wage inflation side, you know, it's been sticky. We've certainly seen the clip at which wage increases have demonstrated within these cost structures as slowing down, but they're still elevated to where they were in 2023. Just and that We haven't seen a reversal of those trends. And to be honest, we don't expect to see a reversal in the trends. And we factor that into how we value the assets and how we've determined the accrual status of these assets. So when I think about how we're positioned here, we're not necessarily waiting for better outcomes with respect to wages to think about how we mark the positions and just the accrual status. We want to make sure that we're being conservative here and I would say that what we how we've kind of thought about value and how we've thought about our watches today reflects that.

Your next question comes from the line of Christopher Nolan with Landenberg Thalman. Your line is open. Please go ahead.

Hi, thanks for taking my questions. And I echo Robert's congratulations on restructuring on the fee. Turning continue on the non accruals. I presume they're all sponsored companies. Were they different sponsors? And because they're not accruing, I presume the sponsor is not getting any dividends or anything. From these investments, is that correct assumption?

Yeah, that's correct on on both fronts. These are all sponsored backed companies. There's and then the second piece as well as it's customary. uh as a business well in advance of um typically when we determine non-cruel status um that any dividends or management fees for the sponsors are shut off because those outflows of cash are subordinated to our debt service great and then given that overwhelmingly your business seems to be focused on sponsored providing debt to sponsored companies

And given, I mean, from my chair, seeing deteriorating asset quality across BDCs in general, but that must mean that the private equity sector must be under stress. And going forward, doesn't this create a greater risk to your business model since these sponsors would have less capacity to support these problematic businesses? Just because if private credit's getting cold, private equities getting pneumonia.

Hey, Chris. It's Jason. Thanks for that question. I think it's a really good observation and something that we've seen through cycles. I would agree with you. Certainly, if you're seeing elevated credit quality stress in BDCs, that means that sponsors are also experiencing challenges in their portfolios i i would say um hopefully you know in in most cases if we've done our jobs we've picked credits uh that that sponsors are going to try to continue to support i do think that there will be some continued triage taking place across sponsor-backed portfolios And certainly with some of these non-accruals, we will end up owning these. But, you know, Crescent's philosophy has always been around trying to pick the good credits, the credits where we think risk of impairment is minimal and we are going to get our money back, which means there will be value down into the equity. But I agree with you. These are more challenged times. Sponsors are holding on to assets longer. than they ever have because the exit environment is also increasingly challenging. And we went from zero base rates to something greater than zero base rates over the last several years. So I think there's a confluence of events that have driven some of these challenges. But our hope and our objectives always have been to try to pick the right credits that we're not going to lose money on.

Great. If I can ask one more. The Sun America tie up, will that in any way enable you guys to get lower cost funding, debt funding going forward?

Sun Life, I think you're referencing, Chris, which we entered into an agreement with Sun Life five years ago where Crescent sold a majority stake to Sun Life. As I mentioned on the prepared remarks, the remaining minority interest of Crescent was purchased by Sun Life. That was all negotiated, prearranged five years ago as an option for Sun Life. They've been a terrific capital partner for us, very supportive. I think I mentioned some of the figures in the prepared remarks. They own equity in CCAP. They own unsecured debt in CCAP. They're actually quite a dominant player in the private placement market, debt private placement market. They've also supported us across a number of our… Hello?

Are you there? Yeah, yeah, cut out. Now you answered my question. Thank you for taking my questions.

Okay. Thank you.

There are no further questions at this time. I will now turn the call back to Jason Breaux for closing remarks.

Okay. Thank you, Operator, and thank you all for joining our Q1 earnings call. We continue to believe that This portfolio is well positioned over the long term, and we are excited to demonstrate alignment with our shareholders through our fee structure changes, and we look forward to continuing our dialogue with you next quarter.

This concludes today's call. Thank you for attending. You may now disconnect.