Investcorp Credit Management BDC, Inc.

Q3 2022 Earnings Conference Call


spk00: Welcome to the InvestCorp Credit Management BDC Schedule Earnings release for third quarter ended March 31st, 2022. Your speakers for today's call are Mike Maurer, Chris Jansen, and Rocco Dalgertio. Operative 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 call over to our speakers. You may begin.
spk04: Thank you, Operator, and thank you for joining us on our third quarter call today. I'm joined by Chris Jansen, my Co-Chief Investment Officer, and Rocco D'Aversio, our CFO. Before we begin, Rocco will give our customary disclaimer regarding the information and forward-looking statements. Rocco?
spk02: Thanks, Mike. I would like to remind everyone that today's call is being recorded and that this call is a property of Invesco 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 I would also like to call your attention to take part of the 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 Maller. Thank you, Rocco.
spk04: I'd like to start by updating InvestCorp's ownership stake in ICMB. On Thursday, May 5th, Invescorp entered into a stock purchase agreement to purchase 2,165,000 shares at the March 31 NAV from Cyrus. Cyrus was an original feed capital investor in the predecessor private fund and the anchor investor in ICMB. Cyrus has been invested in ICMB for over 10 years between the predecessor fund and and the existing BDC. This position has created significant overhang in the stock as Cyrus was an unnatural long-term holder with in excess of a 20% position. InvestCorp's intention in buying the stock was multiple. This demonstrates continued commitment to ICMB. and conviction in the underlying value of the investment at NAV. It also reduces the overhang on the stock and allows all shareholders to see this commitment and benefit from the reduced overhang. This past quarter, we saw the broader market face significant volatility and a slowdown in the number of transactions in the loan market driven by geopolitical events. The majority of transactions we saw were either LBOs or refinancings. We have typically found that in a highly competitive market environment, our best opportunities come from companies we already lend to as these deals tend to have better structures. As we continue to see strong competition for deals, we see pressure coming from both tighter pricing and higher closing multiples. However, we remain focused on credit quality and are selective about the structures we are willing to lend into and thorough in our due diligence process. This quarter, we were successful in deploying our capital at an average yield of 8.25%. We made two new investments and invested in three of our existing portfolio companies, none of which were covenant-linked. in a sponsor-friendly market environment. We also continue to execute under the plan to co-invest in equity positions with InvestCorp's North America Private Equity Group with more momentum in the pipeline under that plan. We continue to focus on the portfolio rotation that we began earlier this year while maintaining our credit discipline. This past quarter, we opportunistically sold out of positions in the portfolio in favor of new opportunities with higher yields and better loan structures. Our investment activity during the quarter continues to be balanced between club loans and middle market lightly syndicated loans. We have also further reduced our exposure to energy equipment and services, which represents 5.4% of the portfolio compared to a year ago at 10.1%. Additionally, we continue to make progress with legacy credit issues in the portfolio. We completed the restructuring of Fusion Connect in January. I'll speak more about that later in the call. Chris will now walk you through our investment activity during the March quarter and after quarter ends. After his discussion, Rocco will go through our financial results. I'll finish with commentary on the restructuring of Fusion Connect and our non-accrual investments, our leverage, the dividend, and our outlook for the rest of 2022. As always, we'll end with Q&A. With that, I'll turn it over to Chris.
spk03: Thanks, Mike. We invested in two new portfolio companies this quarter, as well as three existing portfolio companies. We fully realize our positions in five portfolio companies and also refinance our position in Dexpro and fully realize our position in the Fusion exit loan. We invested in the first lien loan of AHF Products, which supported the LBO by PaceLine Equity Partners. AHF Products is the leading producer of hard surface and solid wood flooring in North America. Our yield at cost is approximately 7.4%. We made our second equity co-investment alongside Invescorp's North American Private Equity Group. S&S Truck Parts, LLC, listed in our schedule investments as Pegasus Aggregator, is one of the largest suppliers of new aftermarket parts for medium and heavy-duty vehicles. In terms of investments in current portfolio companies, our existing loan to Jexpro was refinanced in January as part of a larger transaction which backed several acquisitions. Our yield at cost on Jexpro's funded revolver is approximately 7.5%, and term loan and delay draws approximately 7.4%. We also made an additional investment in the equity of Technoplas to support an asset purchase of a molded product facility sold by Lyle Industries. As part of Fusion's restructuring process, we were a joint lead arranger 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%. Mike will provide additional detail about Fusion's restructuring later in the call. Turning now to our realizations, our loan to Jexpro was repaid in full as the company refinanced in January. A fully realized IRR was approximately 10.4%. Our second realization was Profract Services. Profract completed the acquisition of STS International in March, and we were refinanced out of our position. A fully realized IRR was approximately 9.9%. We also received repayment in full for Fusion's exit loan. as the position was refinanced through the broader restructuring of the company. Our fully realized IRR was approximately 14.1%. We exited several investments opportunistically this quarter in order to reduce our leverage and rotate into higher-yielding credits. We fully realized our position in Verigy with an IRR of approximately 9.7%. Qualtech with an IRR of approximately 8.7%, Flow Control with an IRR of approximately 8.1%, and Galaxy with an IRR of approximately 7.2%. After quarter end, we invested in one new portfolio company, one existing portfolio company, and had two realizations in existing portfolio companies. First, the new JEXPRO loans made in the first quarter were repaid in April as the company merged with Lawson Products. Our fully realized IRR in the term loan was approximately 19.7%. Although we're pleased with the return on the revolver and the delayed draw, the IRRs are not meaningful given the short holding period. We invested in the club financing for American Nuts. which supported the refinancing of the company and the acquisition of DSD Merchandisers. American Nuts provides procurement, processing, and packaging services of nuts, seeds, and dry fruits. The acquisition of DSD Merchandisers creates a fully vertically integrated business. Our yield at cost is approximately 9.9%. Lastly, we fully realize our position in Klein Hersh, as the company simultaneously refinanced its loans and converted to an ESOP. Our fully realized IRR was approximately 11.8%. We also invested in the new transaction. Our yield to cost is approximately 9.2%. Using the GIC standard as of March 31st, our largest industry concentration was trading companies and distributors at 9.5%, followed by IT services at 9.2%, internet and direct marketing retail at 9.0%, professional services at 7.8%, and household durables at 7.1%. Our portfolio companies are in 20 GICS industries as of quarter end, including our equity and warrant positions. As of March 31st, we had 35 portfolio companies, a decrease of three from December 31st.
spk05: I'd now like to turn the call over to Rocco to discuss our financial results. Thanks, Chris.
spk02: So the quarter ended March 31, 2022. Our net investment income was $1.8 million, or 12 cents per share. The fair value of our portfolio was $242 million compared to $269.4 million on December 31. Our portfolio's net decrease from operations this quarter was approximately $63,000. Our investments in debt purchase during the quarter had an average yield of 8.25%. while realizations and repayments during the quarter had an average yield of 8.59% and fully realized investments had an average IRR of 9.56%. The weighted average yield of our debt portfolio was 8.14%, a decrease of two basis points from December 31. As of March 31, our portfolio consisted of 35 portfolio companies. 91.8% of our investments were first lien. The remaining 8.2% is invested in equity, warrants, and other positions. 91.3% of our portfolio was invested in floating rate instruments and 0.5% in fixed rate investments. The average score on our debt investments was 1.04%. Our average portfolio company investment was approximately $6.9 million and our largest portfolio company is Fusion at $13.4 million. We had a gross leverage of 1.71 times and net leverage of 1.63 times as of March 31 compared to 1.74 gross and 1.39 net respectively for the previous quarter. Our net leverage adjusted for open sales and open purchases was 1.41 times as of March 31 compared to 1.61 times for the previous quarter. As of March 31, we had six investments on monocle, which included all three investments in TGI as well as Deluxe and two investments in 1888. With respect to our liquidity, as of March 31, we had $7.6 million in cash, of which $4.7 million was restricted cash, with $7.3 million of 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.
spk05: Thank you, Rocco.
spk04: We are proud of the progress that we have made repositioning the portfolio, and we continue to remain selective in our new investments. We continue to focus on adding club deals that were originated through the team's relationships, as well as add-on investments and refinancings of existing portfolio companies. We remain focused on the credit quality of our deals, including comprehensive evaluation of loan credit and documentation and downside protection. Fusion completed its restructuring in January. We were jointly the rangers on the new first lien loan. We refinanced Fusion's exit loan. We were also a backstop party to the company's new money Series A preferred equity. By virtue of our backstop commitment, as well as investment in the Series A preferred equity, we received warrants with a fair value of $636,000. The take-back loan, which was the bulk of the company's debt, was equitized into Series B equity, and we will convert to common shares upon the receipt of regulatory approvals. which we anticipate will occur later this year. We also received out-of-the-money warrants. The restructuring significantly delevered Fusion's balance sheet and positions the company to execute on its growth initiatives. Our gross leverage this quarter was 1.71 times, above our guidance of 1.25 to 1.5 times, and three basis points lower than last quarter. Our net leverage was 1.63 times. Due to the timing of investments and repayments, our leverage remained above the target range. As mentioned last quarter, we expect to see our gross and net leverage generally converge with both around the high end of our target range. As of May 2nd, our gross leverage was 1.48 and our net leverage 1.45 times at the high end of our target range. As we have previously stated, the advisor will waive the portion of our management fee associated with base management fees over one term of leverage. We did not cover our March quarterly dividend with NII. Through the fiscal year end to date, the company has earned its dividend and is expected to earn its dividend through the fiscal year ending June 30, 2022. Our board of directors declared a distribution for the quarter ended March 31, 2022 of 15 cents per share, payable on July 8 to shareholders of record as of June 17. We believe the dividend level is stable and sustainable and that it represents an attractive yield given the market price of ICMD stock. As mentioned earlier, we continue to remain selective on our new investments and our portfolio repositioning strategy. We are focused on improving industry concentration and diversification and managing our average position size, all which help manage risk. Our investment strategy has not wavered. We are focused on investing in primarily first lien loans, preserving capital and maintaining a stable dividend while creating upside to the NAV through our existing and new equity investments. As we enter the last quarter of our fiscal year, we expect to continue executing on our strategy and expand the diversity and stability of our portfolio.
spk05: That concludes our prepared remarks.
spk04: Operator, please open the line for Q&A.
spk00: Ladies and gentlemen, after this time, we will conduct a 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 received. Or press comment any time to remove yourself from the queue. Once again, to ask a question, please press star 1 on your phone now.
spk05: Our first question comes from Paul Johnson with KBW.
spk08: Your line is open.
spk01: Yeah, good afternoon, guys. Thanks for taking my questions. The first question is just kind of about the market and the investment pipeline that you're looking to build, I guess, you know, with just kind of the advent of the Unitranche and the growth of that product and direct lenders and what they have to offer to the market. Is that pushed out in any way, I guess, kind of the more traditional club deals and affected any sort of the syndicated-like deals that you guys participate in?
spk04: Thanks, Paul. It's Mike. Before I answer your question, Rocco just hit me that I misspoke earlier in the call. The The distribution that the Board of Directors declared is for the June 30 quarter ended, not March 31. I just wanted to correct that. And coming back to your question, we are seeing actually a reasonable pipeline of deals to look at. The emergence of the Unitron that you're talking about, and I'll use some names generically, but, you know, you know, Blackstone, KKR, Apollo, these large multibillion-dollar direct lending vehicles, they tend to focus on a lot larger deals than we focus on. The deals we're focused on are typically, on the low side, $40 million to $60 million tranche, up to a couple hundred million. My experience in running into and talking to a lot of former colleagues at some of those places are that probably around the upper end of that range I just gave is where they get interested. So deals that are $100 million, $150 million, it's almost hard for them to do them when you look at their allocation policy across all the vehicles. And so they are very focused on the middle market that is probably 50 to 200 million of EBITDA. And so those tranches, by definition, are 200 to 500 million. It really is not affecting us at this point. and we are still seeing many club deals and less of the lightly syndicated from the regional banks, but very good flow from partners in the club arena. Got that.
spk01: Got it. Appreciate that. My other question, just on the net marks for the BEC this quarter, just a little bit of – right down in the quarter, 1.9 million or so. Is that related to more marked markets, spread widening, or is there any sort of credit deterioration, specific credit deterioration that's baked into that?
spk03: Yeah, hey, Paul. It's Chris Jansen. It's all due to a little bit of spread widening from the beginning of the first quarter from 1231 to 331. anecdotally, spreads are coming back in. From a performance perspective, the numbers we've seen in the fourth quarter and early in the first quarter of this year have been surprisingly healthy. We haven't really seen any pockets of resistance or downward pressure from an operating viewpoint. It's just been either spread widening or in the case of Technoplus, which is our equity, a large equity position for us. It's just been the market comps have gone down by almost two full turns. Nothing to do with the operating either of Technoplus or really anything within the portfolio.
spk05: Got it. Appreciate that.
spk01: I also have a question on the dividend level. I know that you mentioned in your prepared remarks that the board and the company believes it's a sustainable level where it is today. Just given the gap from NII this quarter to the dividend, I'm just hoping you can maybe talk about the levers that you have to pull in order to get NII, you know, back within that dividend range and, you know, anything that I guess would help improve that? I mean, is it rates? Is it, you know, refinancing or just anything, any sort of color you can have on that would be great.
spk04: Sure, Paul. And just I'm glad you asked that because probably a little more color around We came in at $0.12. The dividend is $0.15. That gap of three, two-thirds of that gap is the excise tax that is a one time in the quarter. So if it weren't for the excise tax, we would have been at $0.14. We are in the leverage while the headline continues up in this one step. And this quarter was we had a bunch of sales that hadn't settled and things like that. We would have been below $0.15. And in the target range, if the receivables had been cashed from a net perspective or that cash we had, we would have paid down the Capital One facility. So, running the portfolio around the level that we are gets us to that $0.15, rising rate environment. will help all things being equal. That having been said, I think people, including yourself, who've followed us for a while, watched us over the last four to six years move from what was a 60% first lien to today a 90% first lien. But given the inflation and the outlook, I think we would expect to stay in this 80% to 90% first lien at least. uh, range because, uh, we've got rising rates, but we also have rising risks around the inflation in companies.
spk01: Got it. Appreciate that. My last question, if I can, um, it's just on the, uh, the, the large holders selling out or partially selling out this quarter, um, Cyrus partners. I'm just curious if you have, um, as far as was that a partner that was, you know, contributing, I guess, assets in any way, or, you know, was there any sort of relationship there prior to the sale of their position? And I also ask if you are in dialogue with them in any way or any of your other large shareholders on, you know, potentially further exits of those large insiders positions.
spk04: So let me start with the last part. I'm not aware of any near-term exit by any existing shareholder today, Cyrus or anyone else. I can't speak for what their plans are from a liquidity, from a, you know, appreciation, et cetera. But I'm not aware of any. I do talk to our shareholders. Cyrus has been a great partner for a very long time. Dating back to the predecessor fund, it's well over 10 years that Cyrus was involved in this from seeding the original private fund. And there has been a view for a while that they wanted to get some liquidity. So, this was creating overhang. And it was an opportunity for us to show conviction around the NAV value and to relieve some of that overhang.
spk05: Got it. Appreciate it. That's all I have today. Thanks for taking my questions. Thank you, Paul.
spk08: As a reminder, if you do have a question, please press star 1 on your touchdown keypad. And our next question comes from Robert Dodd from Raymond James. Your line is open.
spk07: Hi, guys. Just following up on that last part of Paul's question. I mean, if the goal – perhaps you can give some color on this. If the goal was, you know, for the manager to kind of give investors comfort of their belief in NAV, wouldn't it have made more sense for the manager to tender for $15 million of stock for all investors rather than take out one particular investor? Because obviously – If you believe in NAV, give the opportunity for everybody to sell to the manager rather than concentrate the financial benefit there to one investor.
spk04: Yeah, Robert, thank you for the follow-up. If that were the only objective, I would agree, but having a 25% shareholder who'd been in for 10 years had another objective alongside and parallel, and we were trying to solve for several items at the same time. So that was the road we chose.
spk07: Okay, understood. In your prepared remarks, Mike, you mentioned a comment about making progress on some of the non-approvals. Obviously, I mean, the names are the same, but can you give us any more color on What progress has been made? Obviously, you've talked on five quarters, it's a long-term process, multi-year in many cases, but can you give us an update there?
spk04: Yeah, and listen, there's a lot of names we've rotated out of, and maybe it's a great point that on our next call, we should just highlight over the last 12 to 18 months how we have actually rotated and give you some granularity around that. But, you know, a couple of names that that we have spent time around to let Chris talk. And these are all still work in progress, but lots of momentum on bringing in advisors, bringing in management, shifting strategies. Technoplast, we equitized the debt. We went into the equity with Jordan, who was a third party coming into the situation, putting fresh cash in. There's been small tag-on acquisitions made. There's been facilities shut down. There's a new CEO in. It's actually performing quite well. The comps are weak because of what's going on in the auto industry globally, but the company is performing quite well, and we feel very, very good about that. Fusion new management is installed. There's a lot of activity going on. looking at whether or not it's, you know, small acquisitions that need to round out the product suite in order to make it an attractive strategic alternative for others, or whether or not there are some businesses that did not make sense, and those are being addressed, but new management, and we have recapitalized that to reduce the debt and put in preferred equity. So that's another major one when you look at it. I'll let Chris talk to PGI.
spk03: Yeah, PGI is the new owner in there has been doing a great job at, you know, actually managing the business and preserving whatever value is there. It's hard to be too optimistic on that being a large increase from where we are right now. But we feel rock solid about the valuation we have on it now and We are looking for that to increase a bit, but not make up close to anywhere, the losses, unfortunately. Okay.
spk07: I appreciate that. Thank you.
spk04: And, Robert, I just appreciate, you know, all the questions, and Paul also around, you know, and we knew that when Invescorp did the purchase, it would have questions. And I just want to reiterate, that's at the InvestCorp level. We know they own the manager, but it's not the manager and it's not the BDC.
spk07: 100% understood. Last one, if I can, on the dividend. You said you expect to earn the dividend for the fiscal year. Just to clarify, is that before or after tax? Are you going to earn the dividend with the excise tax payment or excluding that?
spk05: Hey, Paul, it's Rocco. Yeah, with the excise tax payment. Got it. Thank you. Thank you.
spk08: And we have a question from Christopher Nolan from Leidenberg-Dalman. Your line is open.
spk06: Yeah, hi. Most of my questions have been asked. On 1888, and excuse me if you answered this, it seems like you have a non-accrual PIC loan, but then you have an accruing cash loan. And just trying to get a clarification around that.
spk04: Yeah, it's priority. The first priority is expected to be able to pay the interest and the principal there. The non-accruing PIC is where we have a question right now as we go through our evaluations on whether or not that will be realized, and we'll continue to evaluate that on an ongoing basis. Great. That's it for me. Thank you.
spk05: Okay.
spk08: Thank you. And we have no further questions in queue at this time.
spk04: Thank you, everyone. We appreciate the time and look forward to talking after the next quarter. Thank you.
spk08: This concludes today's conference call. Thank you for attending.

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