Investcorp Credit Management BDC, Inc.

Welcome to the InvesCorp Credit Management Scheduled Earning Release of Second Quarter Ended December 31, 2021. Your speakers for today's call are Mike Maurer, Chris Janssen, and Rocco D'Agostio. Operator assistance is available anytime during this conference by pressing star zero. A question and answer session will follow the presentation. I'll now like to turn the call over to your speakers. Please begin.

Thank you, Operator, and thank you all for joining us on our second quarter call today. I'm joined by Chris Jansen, my Co-Chief Investment Officer, and Rocco DelGhertio, our CFO. Before we begin, Rocco will give our customary disclaimer regarding information and forward-looking statements.

Rocco? Thanks, Mike. I would like to remind everyone that today's call is being recorded and that this call is a property of Invescorp Credit Management, BDC. Any unauthorized broadcast 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 Harbor 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.

Thank you, Rocco. Our December quarter was the busiest one in our history. We invested in seven new portfolio companies and made additional investments in seven other portfolio companies. We supported LBO acquisitions and existing portfolio companies, among other uses of proceeds. This diverse set of investments continues to support the portfolio rotation we began earlier this year. As we promised last quarter, We've added to our total count of portfolio companies, decreased concentrations in a number of industries we lend into, and maintained a moderate average position size, all with the goal of increasing the stability of our results. We completed the restructuring of Fusion Connect in January, as well as the conversion of 1888's term loan B into equity. With these restructurings complete, we continue to address significant legacy credit issues in the portfolio. I'll speak more about the details later in the call. It continues to be challenging to maintain price and structure in a highly competitive market environment, but we were successful in deploying our capital at an average yield in excess of 8% during the quarter. Only one of our new investments was covenant light in a market environment, which is increasingly sponsor friendly. Since the real story of the quarter is our new investment activity, I'd like to turn the call over to Chris. After his discussion, Rocco will go through our financial results. I'll finish with commentary on our investments, on non-accrual, the restructurings of 1888 and Fusion Connect, our leverage, the dividend, and our outlook for 2022 as well. And as always, we'll end with Q&A. With that, I'll turn it over to Chris.

Thanks, Mike. We invested in seven new portfolio companies this quarter, as well as seven existing portfolio companies. We had six full realizations as well. Please bear with me as there's a lot to cover this quarter. 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 invested in the first lien loan of Patriot MMG, or Momentum Manufacturing Group, to back the LBO of the company by One Equity Partners. Momentum provides metal machining, welding, bending, and finishing services. Our yield at cost is approximately 6.9%. We also invested in a club financing for ArborWorks. We participated in the revolver term loan and made a small co investment in the equity. Arborworks provides utility clearing, vegetation management and disaster relief services. The transaction supported the LBO the company by new state capital. Our yield at cost is approximately 8.5%. We invested in the revolver and first lien loan, the South Coast terminals. backing its LBO by platform partners. South Coast is a contract manufacturer of specialty chemicals and lubricants. Our yielded cost is approximately 7.5%. We also invested in the revolver, delayed draw term loan, and first lien term loan of Xenon Arc, which provides tech-enabled distribution solutions for specialty chemicals and materials. Peak Rock is a sponsor. Our yield at cost is approximately 7%. We participated in an upsizing of Crafty 8's term loan, joining a club deal and supporting the company as it made an acquisition. Crafty 8 is a visual effects company serving the TV and film production industries. Gem Spring is a sponsor. Our yield at cost is approximately 7.9%. Finally, we made our first equity co-investment alongside InvestCorp's North American Private Equity Group. RESA Power, listed in our schedule of investments as InvestCorp Transformer Aggregator LP, provides field services, power systems, and specialty distribution of related products to utility, power generation, corporate, and government customers. In terms of investments in our existing portfolio companies, we made a small incremental loan to Jexpro to support an acquisition. Our yield of cost is approximately 9%. Our loans to Jexpro were refinanced at the quarter end, which I'll talk about in a moment. We also made a small incremental loan to Fusion Connect to support its liquidity during the restructuring process. Our yield at cost is approximately 12%. As with Dexpro, we refinance this loan after quarter end. Mike will provide additional detail about fusions and structuring later in the call. We made an incremental loan to Easyway, which was a new portfolio company for us last quarter. Easyway is a designer and manufacturer of cushions, covers, umbrellas, and other accessories for the outdoor furniture market. Our yield at cost is approximately 8.9%. Galaxy Universal purchased a number of footwear brands from sequential brands in sequential's bankruptcy auction. Galaxy managed these brands already, and we're pleased to participate in this transformational acquisition. Galaxy's existing term loans are refinanced, and the new first lien loan yields approximately 7.4% of cost. We made an additional investment in the first lien loan to Agrofresh, a food sciences company whose products prolong the useful life of fruits. We had a subscale position and are now comfortable with our hold size. Our yielded cost is approximately 7.2%. We provided an incremental loan to Klein-Hirsch alongside our club partners. Klein-Hirsch's financial performance has been outstanding, and leverage today is below closing leverage. This helps us get comfortable with the fact that the use of proceeds was a dividend to the sponsor, New State Capital. Our yield to cost is approximately 8.3%. Finally, we provided a small incremental loan to ASI to help the company make an acquisition. Our yield to cost is approximately 9.5%. Turning now to our realizations, as I mentioned last quarter, our loan to zero chaos was repaid in full. as the company was acquired by Pro Unlimited. Our fully realized IRR was approximately 11.2%. I mentioned a minute ago that we participated in Galaxy Universal's new financing as the company acquired assets in sequential brand bankruptcy auctions. This new first lien loan refinanced our old loan for a fully realized IRR of approximately 12.8%. We also opportunistically exited our position in Pixel Specialty Solutions in favor of new opportunities that we originated this quarter. Our fully realized IRR was approximately 8.9%. We also received repayment in full for OneSky as the company exited the syndicated loan market in favor of utilizing a EETC financing. Our fully realized IRR was approximately 10.8%. We also sold our position in United Road Services, which was one of our positions with the risk rating of three. Our fully realized IRR was approximately 4.1%. Finally, we fully realized our position in Veterans Services or Lockwood. This was always intended to be a short-term hold, and we were very pleased with the outcome and with our IRR, which was approximately 24.4%. After quarter end, we had both investment and realization in two portfolio companies. First, our loan to Jexpro was fully refinanced with a realized IRR of approximately 10.4%. We took part in the new club financing for the company, which included a new first lien term loan, delayed draw term loan, and a revolver commitment. Our yield of cost on Jexpro's funded revolver is approximately 7.5%, and term loan is approximately 7.4%. We also had realizations and new investments in Fusion Connect. Mike will talk more about the restructuring later in the call. The exit term loan was fully refinanced at the call premium with a realized IRR of 13.4%. We were joint book runners on the new first lien term loan, which has a yield at cost of approximately 9.6%. We also participated in the company's new Series A preferred equity, which has a pick coupon of 12.5% and a yield at cost of approximately 13.1%. Using the GIC standard as of December 31st, our largest industry concentration was commercial services and supplies at 12.5%, followed by internet and direct marketing retail at 8.3%, Energy equipment and services at 7.6%. Professional services at 7.2%. And software at 6.4%. Our portfolio companies are in 23 GICS industries as of quarter end, including our equity and MARA positions. As of December 31st, we had 38 portfolio companies, an increase of two from September 30th. I'd now like to turn the call over to Rocco to discuss our financial results.

Thanks, Chris. So the quarter ended December 31 2021. Our net investment income was $2.1 million or 15 cents per share. The fair value of our portfolio was 269.4 million compared to 245.3 million on September 30. Our portfolios Net increase from operations this quarter was approximately $3.4 million. Our investments in new debt during the quarter had an average yield of 7.8%, while realizations and repayments during the quarter had an average yield of 11.8%, and fully realized investments had an average IRR of 12.8%. The weighted average yield of our debt portfolio was 8.16%, an increase of four basis points from September 30th. As of December 31, our portfolio consisted of 38 portfolio companies. 95.3% of our investments were in first liens, and the remaining 4.7% is invested in equity, warrants, and other positions. 99.5% of our debt portfolio was invested in floating rate instruments and 0.5 in fixed-rate investments. The average LIBOR floor of our debt investment was 1.1%. Our average portfolio company investment was approximately $7.1 million, and our largest portfolio investment was Empire Office at $12.8 million. We had a gross leverage of 1.74 and net leverage of 1.39%. as of December 31st, compared to 1.63 growth and 1.47, respectively, for the previous quarter. As of December 31, we had four investments on non-recrual, which included all three investments in PGI, as well as Deluxe, and one investment on partial accrual, Fusion Take-Back Loan. With respect to our liquidity, as of December 31, we had $36.1 million in cash and of which $19.8 million was restricted cash with no unused capacity under our revolving credit facility with Capital One. 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.

Thank you, Rocco. 1888 has been a difficult investment for us. After a significant period of negotiations, the term Loan B has been fully equitized. This reduces debt at the company by approximately 60% while leaving the lenders and equity holders' interest aligned to crossholders. We also played a major role in the balance sheet restructuring of Fusion Connect. Fusion exited bankruptcy two years ago, but with an unsustainable debt structure driven by the structural demands by certain other lenders. Through this restructuring, we helped the company reduce secure debt by approximately 80%. We were joint lead arranger on the new first lien loan, which refinanced Fusion's exit loan. We also were a backstop party to the company's new money series A preferred equity providing additional income for our shareholders. The take-back loan, which was the bulk of the company's debt, was equitized into Series B equity and will convert to common shares upon the receipt of regulatory approvals, which we anticipate will occur later this year. We also received warrants with multiple strike prices, some of which are immediately in the money. As I stated last quarter, we think that 1888 PGI infusion has limited ability to introduce negative volatility to our NAV at this point. Instead, we think the growing number of equity investments in the portfolio, while small in terms of fair value at this point, has the potential to appreciate over the coming years. Our gross leverage this quarter was 1.74 times. above our guidance of 1.25 to 1.5 times. That said, our net leverage of 1.39 times, which is within the number we managed to. This quarter's especially active investment cycle included unexpected fluctuations in the timing of investments and repayments, including a need to hold cash for closing on deals after quarter end. We expect to see our gross and net leverage generally converge with both around the high end of the target range. As we have previously committed, we waived a portion of our management fee associated with base management fees over one turn of leverage. We covered our December quarterly dividend with NII, looking at our portfolio on a run rate basis. We expect to continue to cover the dividend in March and going forward. Our disciplined investment approach and appropriate capital resources leaves us well positioned to continue to generate sufficient NII. Our board of directors declared a distribution for the quarter ended March 31, 2022 of 15 cents per share payable on March 31 to shareholders of record as of March 11. We believe the dividend level is stable and sustainable and that it represents an attractive yield given the market price of ICMD stock. For the six months ended December 31, we invested in nine new portfolio companies and eight existing portfolio companies. The fourth quarter was our busiest to date, and I am proud of what the team accomplished during what is traditionally a market low. We deployed capital without compromising our principles, focusing on club deals with strong structural protections, pricing, and covenant. We will continue to manage the portfolio with the goal of consistent income generation and preservation of shareholder capital. As we enter 2022, we have visibility into probable repayments as well as several promising deals in the pipeline, which will enable us to continue our portfolio rotation. We expect to continue our focus on optimizing portfolio for yield, diversity, and stability. This concludes our prepared remarks. Operator, please open the line for Q&A.

Ladies and gentlemen, at this time, we will conduct the question and answer session. If you would like to state a question, please press star 1 on your phone now, and you'll be placed into the queue in the order we see. Or press time at 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, to ask a question, please press star 1 now. Our first question comes from Robert Dodd from Raymond James. Please set your question.

Hi, guys. Several questions. I mean, first, on the restructured assets, I mean, Fusion Connect, I mean, just to clarify, I mean, the take-back term loan was marked down in the December quarter, obviously, and then the restructure incurred after that. I mean, can you give us – on that, was – the markdown because of some, you know, new weakness in the business, or was it just a function of that's where the negotiations came out in terms of the restructuring framework?

Yeah, hey, Robert, it's Chris. Hey, Chris. Much more, how are you? Much more of the latter. Sure. You know, the business is stabilizing. The new management team's been in there for a while. So there's no market change in the business.

Yeah, I mean, looking at the new pricing on that, I mean, I think you said 9.6% on the new loan on that. That seems pretty attractive for a business that has had some trouble over the years. So, I mean, can you give us any input on that? I mean, why that's, you know, for something that's gone through, you know, two restructurings in a couple of years, that pricing seems pretty good on the new loan.

Yeah. Basically, the group lenders that are financing that have also financed the Preferred And there were attractive warrants with regard with the pricing too. So it may be a little less, a little lighter on the rate, but the economics of the deal in total, since it was kind of big of a strip, we think we're compelling. Got it. Got it. I appreciate that.

This one, if I can, on leverage, I mean, Mike, I appreciate your comments there, Mike. I mean, the The leverage is pretty high, though. I mean, the net 139, I mean, there's a payable, obviously, so not all that cash is available to pay down, to really net against the leverage. So it is above the high end of the range in terms of kind of adjusted. What time frame should we expect to get down to that, the high end of the range? and if I can then kind of type that as well with a range of 125 to 150 as the target, what kind of market environment would be required for you to decide, say, the low end is more appropriate than the high end, you know, or what kind of functions should we think about about where you would be in the high or low?

So, Robert, I'm glad you asked that because there's been some activity post-quarter end. So if I looked at it, close the business today for identified repayments that we've been told we're getting repaid, I don't know if that's over two weeks or six weeks, and some monetizations that we've done. If I proform at that and I look at, the net cash for payables, we are either slightly above, I think we're slightly below 1.5. I think it's like 1.49, okay? So we're at that level today. How long will it take us to get there? We're kind of there today, the 1.5 net of everything. Understood.

So, yeah.

Okay.

So, the key thing is, you know, we want to operate in this, I'll call it 140 to 150.

and we're going to blip up, and when we see things coming in order to fund in advance of the repayments, that's kind of what we were doing at December quarter end because we had some visibility. Getting down to the 125 as kind of a, I'll call it a target rate, would mean we'd be operating in a 110 to 130 range because of repayments that come in in advance of being at that 125. So, I don't see that in the near term. I see us trying to stay in this 125 to 150 range.

Got it. I'm wondering if I can. The interest expense looked a little higher than I was expecting. Obviously, there were two revolvers functional during the quarter, and one of them, the UBS one's gone now. But were there any one-time expenses? related to the exit of the UBS facility, which obviously is done and dealt with now.

Yeah. Hi, Robert. It's Rocco. So... Hi, Rocco. Because we had the two facilities, because we had the UBS facility through mid-November, we incurred $485,000 in interest, of which 150 of it was breakage fee. Got it. Thank you. Yeah. Mm-hmm.

Appreciate it. Thanks. No worries.

Our next question comes from Christopher Nolan from Landenburg. Please state your question.

Hi. Rocco, you said 150,000 breakage fees, so that's not recurring for the quarter?

Correct.

Okay. And then are you guys assuming any sort of action by the Federal Reserve to increase interest rates? And if so, how many rate hikes are you expecting?

We are expecting rate hikes. You know, we internally, not you and us, but we on our side, you know, debate is per site can be 25 or 50. And, you know, as you know, we've got, I'll call it around figures, 35% fixed rate in our liabilities. Our live work floors are average at about 110, but they're not all there. We've got some at 75. So that will – our assumption is that it's at least six to nine months before we get the benefit of rides in the LIBOR. So we've got fixed on part of the debt. We'll have a little bit of increase, but on the asset side, we're seeing, you know, I'd say stability to a little bit of lift on the LIBOR Plus 525 to 600, where everything was, and we're seeing a little bit of lift to that, not a lot on the spread right now.

Great. And follow-up question, American Telecom Conferencing. There are a lot of movies in the quarter. And did you guys mention that in your prepared remarks? Or if you did, I missed it.

The – Hey, Chris, it's Chris. The mark basically stayed fairly static. The company's making progress on operating the business and maximizing value for the lenders or the stakeholders. Don't anticipate much upward movement at this point. They're just you know, operating the business and trying to maximize profits or restore back to profits, actually.

And, Chris, would you characterize this as a likely restructuring candidate in the coming quarters?

More of a sale in the next 12 to 24 months. Great. Okay. Thank you.

Sure. Thank you, Drew. Thank you.

Our next question comes from Paul Johnson from KBW. Please state your question.

Hey, good afternoon, guys. Thanks for taking my questions. Going back to one of Don's questions just on the leverage, it sounds like you guys have, you know, a decent amount of insight into the quarter in terms of, you know, where repayments are coming in and that sort of thing. But just kind of taking into account where you guys stand today on a gross basis, and then that combined with, you know, your unfunded commitments, I believe they're around $14 million, correct me if I'm wrong there. I mean, how do you guys, you know, coming off of a really active quarter that you had, how do you balance out I guess, your investment activity for the quarter in terms of, you know, your ideal position holding sizes? Do the, you know, level of unfunded commitment that you have today, does that in any way kind of constrict what you would like to hold on the balance sheet or, you know, I guess any insight into how you're kind of balancing that out in today's market?

Yeah, Paul, it's Christian. You know, we're cognizant of, you know, the unfunded commitments. We manage that very carefully to the point where we never have to have that as a primary consideration in what we're doing within the portfolio. We always, it's probably an overstatement, but we always have a small handful of more liquid names in the portfolio that we can cycle out of, you know, at or around the level where we have it marked. Never a guarantee, but that's what we did this current quarter. So bottom line, it doesn't really – the unfunded commitments don't really inhibit our – how we handle the portfolio.

Got it. And how much insight do you have on those unfunded commitments per se of, you know, how much do you think are readily, you know, available to be drawn by your portfolio companies versus, you know, that are subject to milestones and maybe unlikely to be drawn upon?

I'd say more than half, but we mentally always assume they all can be drawn. Sure.

Sure. Okay, and then my last question, just a quick one. Do you guys have any insight into terms of when you might be earning an incentive fee again?

So if I'm monolith, assuming kind of what we're going through now, we're looking at probably September of 23-ish, I would guess.

And for purposes of modeling, when we talk about this, because we do, it's Mike Paul, we assume conservatively that we are kind of run rate of the portfolio at about 1.5, 4.5 to 1.5 times leverage. We then assume that the rate of the unlevered rate is around where it is today. and we do not assume any big pickup in our realized or unrealized gains, those are all things that would accelerate turning on the – and that September would be a September quarter. We would earn it, not turn it on after. Got it. Okay. Got it.

Yep. I understand. All right. That's all for me. Thanks for taking my questions.

Thank you very much.

Once again, ladies and gentlemen, if you would like to ask a question, please press star 1 on your phone now. At this time, we have no further questions.

Thank you very much, everyone. We look forward to talking to you next quarter.

This concludes today's conference call. Thank you for attending. Have a great day.