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spk03: InvestCorp Credit Management, BDC, Inc. scheduled earnings release of first quarter ended September 30th, 2021. Your speakers for today's call are Mike Maurer, Chris Janssen, and Rocco D'Aguirre. Operator assistance is available at any time during this conference by pressing star zero. The question and answer session will follow the presentation. I would like to now turn the call over to your speakers. Please begin.
spk02: Thank you, operator. This is Mike Maurer, and I'd like to thank all of you for joining us on our first quarter call today. I'm joined by Chris Jansen, my co-chief investment officer, and Rocco DelGhercio, our CFO. Before we begin, Rocco will give you our customary disclaimer regarding information in forward-looking states. Rocco?
spk01: Thanks, Mike. I would like to remind everyone that today's call is being recorded and that this call is the property of InvestCorp Credit Management, BDC. Any unauthorized bar test of this call in any form is strictly prohibited. Audio replay of the call will be available by visiting our investor relations page on our website at icmbdc.com. I would also like to call your attention to the State's Harvard disclosure in our press release regarding forward-looking information and remind everyone that today's call may include forward-looking statements and projections. Actual results may differ materially from these projections. We will not update forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our investor relations page on our website. At this time, I'd like to turn the call back over to our Chairman and CEO, Michael Maurer. Thanks, Rocco.
spk02: September is the first quarter of our fiscal year. As we look out from here, we are optimistic that June 2021 will mark the low point of our NAP. We saw an increase in the marks of many of our positions, an increase in the average yield of the portfolio and an average IRR of over 10% on our realizations. We recognize that there has been more volatility in our portfolio than we or you would like. The team is working hard to continue to find good direct lending opportunities to reduce sector concentrations and diversify the name count further. We added two new portfolio companies this quarter. and made additional investments into three other portfolio companies. After quarter end, we invested in two additional portfolio companies and made one incremental loan to an existing investment. We have found that in a highly competitive environment, some of our best opportunities come from companies we already know and or when to. These deals also trend to have better structures typical of one to two years ago when we made our initial investments. Refinancing activity continues to be a major theme. In the near term, we expect to see refinancings of three of our investments, and we expect to take part in the new financings for two of those portfolio companies. It's always a challenge to maintain price and structure in a highly competitive market environment, and when we are able to express a preference, It is to give a bet on the yield in exchange for covenants and better protection for our capital. Last quarter, we had significant markdowns, specifically on 1888 and CGI. I'll discuss those two investments toward the end of today's call. Thematically, one of our goals is to stabilize our net asset value. This quarter, our marks were net positive, and we had a single material negative mark Infusion Connect's take-back loan. I'll discuss that situation later as well. Other investments which have exhibited volatility in the past were stable or positive this quarter, including 4L, BioPlan, Technifox, and Zero Chaos. We continue to gradually increase the number of industries we invest in and to maintain or increase the number of portfolio companies with the goal of improving the stability of the portfolio. Chris will now walk through our investment activity during the September quarter and after quarter end. Rocco will then discuss our financial results. I'll finish with some commentary on our investments, on non-accrual, our leverage, the dividend, and our outlook for the balance of the year. As always, we'll end with Q&A. With that, I'll turn it over to Chris.
spk04: Thanks, Mike. We invested in two new portfolio companies this quarter and three existing portfolio companies. We had two full realizations as well. Since our last conference call was so recent, much of what I'm about to cover was discussed on our call in September as well. We invested in the first lean loan to AgroFresh, a food sciences company whose products prolong the useful life of fruits. Our yield at cost is approximately 7.3%. we invested in a club loan to Easyway, a portfolio company of Insight Equity. Easyway is a designer and manufacturer of cushions, covers, umbrellas, and other accessories for the outdoor furniture market. Our yield at cost is approximately 8.5%. Turning to our existing portfolio companies, we invested in an incremental term loan and delayed draw facility for Empire Office. Our yield at cost on this incremental investment is approximately 8.9%. We also invested in an incremental loan to Golden Hippo, which has repaid a significant amount of debt to facilitate the purchase of additional equity by the ESOP. Our yield at cost is approximately 8.6%. We also made an additional investment in Technoplas's equity as part of strategic acquisition of Nanogate, which is expected to be highly accretive and complementary to the existing business. Turning to our realizations, our loan to Infrastructure and Energy Alternatives, or IEA, was repaid. Our realized IRR was 11.8%. We were also repaid on our investment in Hyperion as the company refinanced its first and second lien loans in the broadly syndicated market. Our fully realized IRR was approximately 8.3%. After quarter-end, we made two new portfolio company investments, made one incremental investment in an existing loan, and had one full realization. We invested in the first lien loan of LaserAway, a portfolio company of Aries Management. LaserAway is a leading chain of laser hair removal and skin care boutiques. Our yield at cost is approximately 7.1%. We also invested in the first lien loan of Momentum Manufacturing Group to back the LBO as a company by one equity partnership. Momentum provides metal machining, welding, bending, and finishing services for diverse end markets. Our yielded cost is approximately 6.9%. We also made a small incremental investment in Jexpro's first lien term loan to support an acquisition. Our loan to Zero Chaos, or Workforce Logic, was repaid in full, as the company was acquired by Pearl Unlimited. A fully realized IRR was approximately 11.2%. Using the GIC standard as of September 30th, our largest industry concentration was professional services at 10.8%, followed by energy equipment and services at 8.3%, commercial service and supplies at 7.3%, containers and packaging at 5.8%, and trading companies and distributors at 5.6%. Our portfolio companies are in 26 GIX industries as of quarter end, including our equity and warrant positions. As of September 30th, we had 36 portfolio companies unchanged from June 30th. I'd now like to turn the call over to Rocco to discuss our financial results.
spk01: Thanks, Chris. So the quarter ended September 30th, 2021. Our net investment income was $2.5 million or 18 cents per share. The fair value of our portfolio was $245.3 million compared to $245.9 million on June 30th. Our portfolio's net increase from operation this quarter was approximately $3.3 million. Our investments in new debt during the quarter had an average yield of 8.5%, while realization and repayments during the quarter had an average yield of 8.7%, and the fully realized investments had an average IRR of 10.4%. The weighted average yield on our debt portfolio was 8.12%, an increase of eight basis points from June 30th. As of September 30th, our portfolio consisted of 36 portfolio companies. 92.8% of our investments were first lien, 2.8% of our investments were second lien, and the remaining 4.4% is invested in equity, warrants, and public positions. 96.1% of our debt portfolio was invested in floating rate instruments, and 3.9% in fixed rate investments. The average liable floor on our debt investment was 1.05%. Our average portfolio company investment was approximately $6.8 million, and our largest portfolio company investment was Empire Office at $12.9 million. We had a gross leverage of 1.63 times and the net leverage of 1.47 times as of September 30th compared to 1.72 growth and 1.58 respectively for the previous quarter. As of September 30th, we had five investments on non-recrual, which include all three investments in PGI, 1888 term loan B, as well as deluxe and one investment on partial accrual fusion take-back loan. With respect to our liquidity, As of September 30th, we had $16.3 million in cash, of which $7.7 million was restricted cash, as well as $20 million capacity under our revolving credit facility, UBS, and $116 million under our Capital One facility, which will be utilized over the next few weeks to retire the UBS term loan and revolver. Additional information regarding the composition of our portfolio is included in our Form 10-Q, which was filed yesterday. With that, I'd like to turn the call back over to Mike.
spk02: Thanks, Rocco. As we discussed last quarter, we extended our financing capacity and lowered our cost of borrowing. We secured a new credit facility with Capital One, which will replace borrowings with UBF this quarter. Between the Capital One facility and the 2026 notes, we feel very comfortable about our leverage capacity. Our guidance on leverage remains a target of one and a quarter to one and a half times. We've been working to reduce our leverage over several quarters, bringing it down from an artificially high level of 1.96 in March to 1.63 at September quarter end. There will always be fluctuations due to the timing of investments and repayments, but we expect to continue to see our leverage trend downward. As we committed to do, we waived the portion of our management fee associated with base management fees over one-time leverage. Last quarter, I discussed the decline in our books ad. This was driven by several of our investments on non-recrual, which included 1888, CGI, and the take-back loan for fusion, which is on partial accrual. 1888 balance sheet restructuring discussions continue. We still expect that the terminal B will be equitized, leaving us significant upside opportunity as company performance recovers, with no expected downside from our current mark. Restructuring is expected to be completed this quarter. PGI remains a non-approval. Cirrus, the former sponsor, sold their interest in the company to RSI for a nominal amount. Lenders remain in forbearance as operational turnaround work is underway. To aid in that effort, a portion of the first lien term loan was converted into a super priority revolving facility. Our view of the fair value of our total investment in PGI did not change this quarter. but that value is now allocated across an additional tranche. The revolving facility can be repaid and reborrowed like a standard revolver. Fusion's second out take-back loan was marked down last quarter and again this quarter. The first out loan remains marked apart, and we are not concerned about value through that tranche. For confidentiality reasons, I can't go into much detail about Fusion at this time. but we're closely monitoring the credit and are in regular touch with management and our fellow lenders. At this stage, we think that 1888 PGI and Fusion have limited ability to cause further negative volatility in our NAVs. We see upside potential in our equity investments as well as in our loans marked below par. In the current quarter, there will also be from the repayment of Zero Chaos, a NAV recovery, which was marked at 85 at September 30th. We covered our September quarterly dividend with NII. Looking at our portfolio on a run rate basis, we expect to cover the dividend in December as well, and to have fully covered the calendar year. Our disciplined investment approach and appropriate capital resources leave us well positioned to cover the dividend with NII going forward. Our board of directors declared a distribution for the quarter ended December 31, 2021 of 15 cents per share, payable on January 4, 2022 to shareholders of record as of December 10. We believe the dividend levels should be stable and sustainable. and that it represents an attractive yield given the market price of ICMB stock. So far this quarter, I'm sorry, so far this calendar year, we have successfully invested in nine new portfolio companies despite a very competitive environment for originations, and we have done so without compromising our principles. Our pipeline is focused on club deals. where we find better structure protections, pricing, and covenants. We also expect to find opportunities for incremental investment in existing portfolio companies. We will continue to manage the portfolio with a goal of consistent income generation and preservation of shareholder capital. That concludes our prepared remarks. Operator, please open the line for Q&A.
spk03: Ladies and gentlemen, at this time we will conduct the question and answer session. If you would like to ask a question, please press star one on your phone now, and you will be placed in the queue when you are received, or press pound any time to remove yourself from the queue. Please listen for your name to be announced, and be prepared to ask your question when prompted. Once again, if you would like to ask a question, please press star one on your phone now. And our first question comes from Robert Dodd from Raymond James. Please go ahead, Robert.
spk05: Hi, guys, and congratulations on the quarter. I've got a couple of questions. First, kind of going down the pier now, on the dividend income, was that kind of a one-time dividend recap or something like that? I mean, it's pretty sizable, especially in context of the size of your overall equity book, which isn't that big. So basically, I mean, is it sustainable, and can you give us any kind of on-the-source information
spk02: Yeah, as far as one-time income, other fees, there was probably a little less than $100,000 in the current quarter. And then there were, that was in the other fees. And then non-recurring, there was probably a little over $200,000. And so when we looked at, you know, the forecast for the dividend, we're very comfortable that we should continue to cover it this quarter and next quarter.
spk05: Sorry, I meant the dividend income to you rather than the dividend to shareholders, the $296,000 in dividend income this quarter.
spk02: I'm sorry. Okay. I'm going to look at Russell, and while he's looking that up, we'll... Oh, no, I'm...
spk01: It's TechNPLUS. He's talking about TechNPLUS dividend. Oh, the one-time. Yeah, that is the one-time fee. Yeah, that's TechNPLUS. I'm sorry, Robert. I didn't understand. That's the TechNPLUS fee. That's pay the dividend of the equity portion of it, pay the dividend. I apologize. I didn't even get that.
spk05: No, no, no. Yeah.
spk02: So, yes, and when we filter that out, we do still easily cover at the current dividend level without a material change in the portfolio.
spk05: Understood. On the fee waiver, I mean, obviously, you know, waiving management fees over 75 basis points on over one turn of leverage. Do you think it's reasonable for investors to expect that to be continued long term, or is that something that is being evaluated now? on a, you know, quarter-to-quarter basis, or should we factor that in as kind of a long-term base plan?
spk02: Let me answer that two ways. One is there is no plan to change that, so from the way you factor it in. It is something that is revisited on a quarter-to-quarter basis with the board, but there is no plan to revisit what we're doing at this point.
spk05: Got it. I appreciate that. On the interest expense, I mean, you've done a lot of work with the new revolver, et cetera, et cetera. If we look at that, take the new structures and say next quarter or however, how much do you think the new – structures in total will save in quarterly interest expense versus, say, the 186 this quarter or the 19 last quarter.
spk01: All right. So let me put it this way, maybe, Robert. Maybe I can say it different. Our current credit facility is at 355 plus LIBOR, and our new one is at 215 plus LIBOR.
spk05: And then there's also a 35.
spk01: I'm sorry, 235 plus 5. So that and the UBS credit facility will roll off on December 6th. And that credit facility is 115 versus if you look at what we have now where UBS is 102 plus 120.
spk05: Got it. Got it.
spk02: I think that's it.
spk05: I think that's it.
spk02: Yeah, Robert, there's one more thing I'd add, just as we're all looking at each other here, is that under the current structure, because UBS is a term loan, we've been carrying minimum $10 to $20 million of cash and paying the full interest under the term loan to have that. Under the new Capital One, we've got more flexibility so that if we have excess cash, we will pay it down and we will not be paying unborrowed funds there.
spk05: Got it. Got it. Appreciate that. Okay. Then just like the – I appreciate the color of my – on PGI fusion, et cetera, and, you know, 1888 restructuring to be completed this quarter. And I realize you can't say anything about fusion. But on PGI, is there anything – and I realize you're not in control, but anything, any color you could give us on kind of a reasonable timeline to kind of expect there?
spk02: Yeah, I'm not sure. I think that we're all patient. I think it was a big plus to bring RSI on. And, you know, is it going to be six months to a year? I'd say no. I think that it could be, you know, two years plus or minus. And if you ask me, my bias would be plus. Unless, and this is, you know, the big plus wild card, someone looks at it strategically and comes in. But we've got, I think, a good management team in. And the way it's structured with RSI, we've got real upside as they realize more value over time.
spk04: Yeah, Robert, this is Chris, Robert. Other lenders have used RSI before, and, you know, past performance is not guarantee of future results, whatever that term is, but they had surprisingly good results. To be in all seriousness again, they had a surprisingly good overperformance on the couple deals that RSI managed for them. And with the complexity of this business, it really fit what RSI strengths are. So we're, like Mike said, you know, we're optimistic, but we don't want, we're optimistic long term.
spk02: And we have not built in that optimism upside into our evaluation. We've done, you know, what we think is.
spk05: Yeah, yeah, yeah. Appreciate it. Thank you.
spk03: Our next question comes from Paul Johnson from KCW. Please go ahead, Paul.
spk00: Hey, good morning, guys. Thanks for taking my questions. I had sort of a high-level question for you guys. I don't know if there's necessarily a right or wrong answer here, but I'd be curious to hear from you. How do you balance out, I guess, first I should say, with the goal of obviously achieving greater diversification in the portfolio, how do you guys balance the idea of taking positions in new investments, new companies, alongside, obviously, the opportunity to invest in existing businesses in your portfolio. I'd just be curious if you had any preference for one or the other or in just how you balance that out.
spk04: Yeah, thanks, Paul. This is Chris. It's really a case-by-case basis, and I hate to be you know, non-committal, but you have something like a credit like Golden Hippo, which significantly repaid the first lien debt we're in. When they come back to, you know, reload the facility for the ESOP to buy more shares back from the three original founders, that is as close to, you know, a no-brainer as I've ever, you know, encountered. We are mindful of, you know, how we've managed the portfolio in the past, and we do make every effort to keep our average hold levels down below the double digits. So sometimes we are mindful of it, but there is a comfort with, you know, deals or management teams we're invested with that have, A, run the company in a leveraged state better, longer and be paid that down. It'll tend to be a little bit higher. If I try to answer your question now, and I apologize, it's a little higher hurdle for a new deal when we're looking at an older deal where we have a manageable position and already to us manageable is, you know, 7 million or less, where we may top up for, you know, two or three more.
spk00: Sure. Okay. Yeah, I appreciate that.
spk04: Neanderthal pop will hopefully give you some flavor for how we look at it.
spk00: Yeah, I understand it's complicated, and a deal-by-deal basis is probably the best way to say it. My other question was for the advisor. I'm just curious, does the advisor or in any sort of partnership along with – ICM in any way. Do you guys manage any other assets outside of the BDC, or are you in the process of raising any additional capital outside of the BDC?
spk02: So there's two parts to that, which are, number one, we had been, you know, pre-COVID talking about raising a private fund. We are back in those discussions. That should progress during 2022. I'm not sure if the first close will be in the first half or second half. That's the target to close on a new, first close on a new private fund during 2022. But I think coincidental with that, not separate from it, but coincidental with it, and it will probably overlap some, I think now it's a week and a half ago. InvestCorp had an announcement that they were supplying the capital for an acquisition of an insurance company shell that owns 44 licenses throughout the United States. They have, so think about the analogy would be a theme during ramp up. So there's a new insurance company. InvestCorp has gone through the process of identifying, hiring CEOs, CIO. We've got the shell. They're capitalizing it. That will start to rate premiums during 2022, and it will hopefully create additional assets for us to manage along with the opportunity to raise a private fund. So there is a platform that is building around it.
spk00: Great. Thanks for that. That's very good color, and I appreciate that. And last, just one quick question, but on your leverage target ratio, was that – is that on a gross basis or a net basis?
spk01: So I – so it was – I did it both ways. The 163 – was gross. The 147 was net, Paul.
spk02: And the target of 125 to 150 is a gross number. And, you know, we would expect to base fund. You know, a great example is we said that we know that there are a few that are supposed to repay. In anticipation of repaying, we are trying to make sure that we deploy a Now, if a repayment gets delayed and we have deployed, it would be a little bit higher until the repayment comes in. But, you know, being in that, you know, 125, 150 is the target.
spk01: And, Paul, just to follow what Mike said earlier, if you think about the way our credit facility is, we just sit on cash where in the new credit facility, the net and gross would be the same because I would pay down the credit until I need to borrow on it. So if you kind of look at it that way, too.
spk02: And by December 1, we will be fully into the new credit. facility and out of the UBS facility.
spk00: Okay, got it. So gross basis on the target rate. That's what I was looking for. Appreciate it, guys. Thanks for taking my question.
spk03: Thank you. Once again, if you would like to ask a question, please press star 1 on your phone now. And gentlemen, at this time, there appears to be no further questions.
spk02: Thank you very much.
spk03: This concludes today's conference call. Thank you for attending.
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