Investcorp Credit Management BDC, Inc.

Welcome to the InvestCorp Credit Management, BDC, Incorporated Schedules Earnings Release for Second Quarter, ended December 31, 2022. Your speakers for today's call are Mike Maurer, Chris Jansen, Suheil Shaikh, and Rocco DelGhercio. Operator assistance is available at any time during this conference by pressing zero pound. A question and answer session will follow the presentation. I would now like to turn the call over to your speakers.

Thank you, Operator, and thank you for joining us on our first quarter call today. I'm joined by Chris Jansen, Rocco del Garcia, my CFO, and Suhail Shaikh. I would also like to welcome Suhail Shaikh as my new co-CIO. 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 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 return the call back to our Chairman and CEO, Michael Maurer.

Thank you, Rocco. First, I would like to address a change in leadership. After 11 years as my co-CIO, Chris Jansen is taking on an advisory role and will retire later this year. I want to personally thank Chris for his partnership and all his contributions. We are pleased that Suhail Shaikh has joined us as co-CIO. Suhail was most recently at Alcentra, where he led their U.S. private credit business and has over a decade of private credit experience, including seven years as a partner at Solar, now SLR. He also brings three team members with him. We believe the addition of Suhail and his team's expertise will enhance the origination and investment platform.

Thank you, Mike. I'm pleased to join the private credit team at Invescorp at such pivotal time. My team and I are excited to be a part of Invescorp's growth and look forward to contributing our resources, pursuing new opportunities, and continuing to build our Invescorp's private credit business. Alongside Mike, whom I've known for over 25 years in the industry, as a former colleague at J.P. Morgan and a market participant. It will also be great to reconnect with some of you from my days at El Centro Capital Corp.

Thank you, Suhail. The December quarter marks the second quarter of our fiscal year. Macro factors persisted as a strong influence on the private markets. We continue to see a slowdown in new issuance activity, particularly LBO issuances, but this appears to be gradually gaining pace in the beginning of 2023. Refinancing activity has also been light, which we believe is likely due to higher credit spreads. We expect leverage in the deals we invest in to remain modest with the relatively lender-friendly documentation of 2022 continuing in 2023. Deal flow remained modest during the quarter, and we were extremely selective when investing in new opportunities. We invested in one new portfolio company during the quarter and after quarter end and added opportunistically to one existing portfolio company after quarter end. Our debt investments during the quarter had an average yield of 10.6%. We remain highly focused on sector selection, portfolio management, and risk mitigation. As we have stated before, we primarily invest in first lien loans that are supported by experienced sponsors and have significant equity cushions. Our average loan-to-value ratio for our performing loans is approximately 50%. This is especially beneficial in times of economic uncertainty. While we acknowledge that some of our borrowers may experience volatility over the life of our investment, we continue to maintain a systematic portfolio management process It has allowed us to proactively identify areas of concern and to work directly with our fellow lenders to understand and alleviate any issues. As we have said many times, our main goal is to preserve capital and maintain a stable dividend. Chris will now walk through our investment activity during the December quarter and after quarter end. Rocco will go through our financial results. I'll finish with commentary on our NAD, non-accrual investments, our leverage, the dividend, platform update, and our outlook for the rest of 2023. As always, we'll end with Q&A. With that, I'll turn it over to Chris.

Thanks, Mike. We invested in one new portfolio company and fully realized our position in one portfolio company this past quarter. We invested in the club financing for Flatworld Solutions to support the acquisition of the company by Boeing Capital. Flatworld is a business process outsourcing company that provides technology and outsourcing services to a variety of end markets. We invested in the revolver, the first mean term loan, and common equity of the company. Our yield at cost is approximately 10.6%. We fully realized our position in Barrie Financial, which was acquired by Dollar Express Inc. Our position was refinanced as part of that transaction, and our fully realized IRR was approximately 11.4%. After quarter end, we invested in one new portfolio company, added to our position in one current portfolio company, and had one realization. We invested in the first lean term loan of Sandvine. is a leading provider of active network intelligence and security solutions for network operators and enterprises globally. Our yield at cost is approximately 11.8%. We opportunistically added on to our position in LaserAway. LaserAway is a leading chain of laser hair removal and non-invasive aesthetic dermatology. Our yield at cost is approximately 10.5%. We fully realized our position in Liberty Oilfield Services as our debt was refinanced. Our fully realized IRR was approximately 11.3%. Using the GIC standard as of December 31st, our largest industry concentration was trading companies and distributors at 15.4%, professional services at 14.0%, followed by IT services at 10.6%, Internet and direct marketing retailers at 8.0%, commercial services and supplies at 6.6%, and chemicals at 6.2%. Our portfolio companies are in 19 GIX industries as of quarter end, including our equity and large divisions. I'd now like to turn the call over to Rocco to discuss our financial results.

Thanks, Chris. For the quarter ending December 31, our net investment income was $2.3 million or 16 cents per share, which is relatively unchanged from the prior quarter. The fair value of our portfolio was $228.6 million compared to $239.2 million on September 30. Our net assets decreased by $1.5 million or 1.65% from the prior quarter. Our portfolio's net increase from operation this quarter was approximately $600,000. Our debt investment income during the quarter had an average yield of 10.6%. We had one realization repayment during the quarter, which had an average yield of 11.3%, and the fully realized investment of 11.4%. The weighted average yield of our debt portfolio was 10.7%, a decrease of 12 basis points from September 30th. As of December 31, our portfolio consisted of 37 portfolio companies. 91.2% of our investments were first lien, and the remaining 8.8% 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. The average floor of our debt investment was 1.04%, and our average portfolio company investment was approximately $6.2 million, and the largest portfolio company investment is Fusion at $12.8 million. We had a gross leverage of 1.55 and a net leverage of 1.46 as of December 31, compared to 1.64 gross and 1.56 net, respectively, for the previous quarter. As of December 31, we had eight investments on Nanopole, which included all three PGIs, three investments in 1888, Deluxe, and our investment in the first lien of Bioplan. With respect to our liquidity, as of December 31, we had approximately $8.4 million in cash, of which $7.9 million was restricted cash, with $36.6 million 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 we filed yesterday. With that, I'd like to turn the call back over to Mike.

Thank you, Rocco. I would first like to address the NAV decline during the quarter. Part of the decline was attributable to a decrease in our marks for Fusion Series A Preferred Equity, Klein Hersh, and CareerBuilder. As mentioned previously, our methodology for valuing all of our debt investments are to take into account changes in credit metrics during the quarter, any change in the perceived credit risk, and we adjust our yield return expectations accordingly. This can sometimes result in a decline in our fair value, which is exactly what happened during the quarter for a few of our names in the portfolio. We added one position on non-accrual this quarter, which was file plan, However, we are unable to discuss the situation in further detail due to confidentiality reasons. Our gross leverage this quarter was 1.55 times above our guidance of one and a quarter to one and a half times. Our net leverage was 1.46, which is within the target range. As mentioned last quarter, we expect to see our growth to net leverage generally converged. As of February 9th, our growth in net leverage were 1.46 and 1.44. As we have previously stated, the advisor will waive the portion of our management fee associated with base management fees over one turn of leverage. We covered our December dividend with NII. The company expects to earn its dividend through the next quarter ending March 31st. On February 2nd, our board of directors declared a distribution for the quarter-ended March 31 of $0.13 per share and a supplemental distribution of $0.02 per share, both payable on March 30, 2023 to shareholders of record as of March 10, 2023. I would also like to highlight a few additional platform developments. We closed on an SMA and had an initial close on our institutional fund. This doubles our platform AUM since last quarter, increasing our dialogue and reducing average expenses across the fund. As we head into 2023, we remain optimistic in our ability to deploy capital in high-quality senior secured structures and middle market companies at an attractive rate. Our current pipeline is robust and we are seeing significant deal flow, especially in new LBOs. We believe that Suvail and his team's expertise will only elevate our underwriting and searching capabilities, which will be additive to our platform. Our ultimate goal has not wavered and is, as always, focused on capital preservation and maintaining a stable dividend. That concludes our prepared remarks. Operator, please open the line for Q&A.

Ladies and gentlemen, at this time, we will conduct a question and answer session. If you would like to state a question, please press 7-pound on your phone now, and you will be placed in the queue in the order received. Or press 7-pound at any time again to remove yourself from the queue. Please listen for your name to be announced, and be prepared to ask your question when prompted.

You're now ready to begin.

Our first question comes from Sean Paul Adams with Raymond James. Go ahead. Hey, guys. In relation to your deal flow, it looked like you guys were averaging at least, you know, four, five, or six new investments each quarter for last year. I just wanted to comment on, you know, the underlying reasons behind the deal flow for this quarter and kind of the outlook for the rest of 2023.

Yeah, thanks, Sean. I'd say that the fourth quarter slowed down for a couple of reasons. One was on our side. we sat back, we wanted to reassess the portfolio. At the same time, we saw, at least I'm not sure what you've seen away from us, but we saw a slow, slow down a bit in the fourth quarter. We saw that pick up over the last few weeks. I'd expect that we'll be back to a normal, I'll call it four to eight as a broad forecast. But that's also subject to refinancings, roll-offs, et cetera, of the existing portfolio. We want to stay in this one and a quarter, one and a half range. We're at the top end of that right now. And so to the extent that things are not paying off as quickly, we won't be making as many new investments. I think part of the slowdown on things paying off is that we saw previous portfolio investments refinance in an environment where we had low base rates and spreads were, you know, I'll call them normal. Spreads have widened a little bit, and so there's not as much incentive for people to refinance also.

Gotcha. Thank you. And as far as... You guys were ahead of the industry median for the last quarter, but with your current NAV decline for the quarter, you guys are well above the projected median for the fourth quarter ended. Do you guys have any underlying ideas about if there's going to be continued NAV decline, you know, given the, you know, base rates, and is it more related to, you know, credit or just the underlying portfolio?

I'd say that two things. One is we had just remark based upon where we saw rates and underlying portfolio. There was a couple of episodic things that I did mention, but as of today, we don't see any other changes as of today to the now.

Gotcha. Thank you. I appreciate it. Thank you very much, Mr. Adams. Our next question comes from Mr. Christopher Nolan with Go ahead, please. Hi, thanks for taking my call. BioPlan, the fair value seems to increase modestly quarter over quarter. Can you just give a little reasoning behind that?

Yeah, we go through our detail on everything we know that is, you know, confidential from the details, Chris. So, I can't go into that, but we get all of the feeds from the company and, you know, agents. And we go through and value it based upon our expected value. We expect that to complete a restructuring during this quarter. And then, you know, we'll have updates after that.

Great. And then as a follow-up, interesting, excuse me, there are lower yields and slightly lower asset values in the quarter. Was the flattish interest income due to timing issues or something?

Yeah, it's a good point. You have two or three things working there. You've got a file plan that did, you mentioned, that went on non-accrual, so that affected the overall average slightly. You had one of our larger positions vary that was an attractive investment for us that was above the average yield, and that came off during the fourth calendar quarter. And then there's also a bit of a lag as far as us benefiting from the increase in SOFR during the quarter because of the three-month contracts.

Great. And finally, Chris, thanks for your service, and I hope Green Pasture is going forward for you. And welcome to the new team.

Thank you. Long, straight Green Pasture.

Thank you very much, Mr. Nolan. And our next question comes from Mr. Paul Johnson. Again, if you have any questions, please press 7-pound on your phone. Mr. Johnson, go ahead, please.

Thanks for taking my questions. In terms of, you know, the recent changes and, you know, the talk of, you know, growing the platform and, you know, maybe potential scale that could come out of that, I was wondering if there's anything you could share, you know, if you could quantify that at all in terms of, you know, how that might actually, you know, alleviate some of the expenses at the BDC, you know, particularly for, like, G&A. just because, you know, for you guys, I think you've historically run a little bit higher in this sector in terms of G&A expenses just because of the overall decline in size of the DEC. But anything you share there would be great.

Yeah, I'd just say that, and I'll pass it over to Rocco, I'd just say that from an AUM, and that's really, you know, the basis in which we think about spreading expenses, During this quarter, so it's kind of mid-quarter, if this quarter won't be a full benefit, we're going to double the AUM between the separately managed account and the first close on the small institutional fund. We're targeting to grow that institutional fund throughout the year, and we're targeting to have another fund close during the year. But, Rocco, I'll let you comment.

Yeah. The expenses on the public funds definitely are going to come down. To Mike's point, it's going to kind of be a look back, so I'll take a look at the AUM at the end of the quarter and kind of look back. I can't really tell you how much it is right now, but they definitely are going to come down. I'm not quite sure if I answered your question, Paul.

There's no doubt directly they're going to come down, and we are working to continue to build that platform out.

Yeah, that's good to know. Hopefully you continue to do so. And then a lot of VDCs this quarter have, you know, provided, you know, just general and some, you know, more specific assessments of their portfolio, just, you know, kind of going into the year, obviously, you know, kind of with the expectation that we're, you know, potentially headed into a recession, you know, in terms of, you know, whether that be just overall credit quality or interest coverage, that sort of thing. I was wondering if you have or, you know, again, with the changes you may be releasing, if you intend to do so and provide those results with just kind of the overall performance of the portfolio. Yeah.

Yeah, we intend to continue looking at those from our ratings of 1 through 5, and 4 and 5 are the ones where we see the most credit risk and whether or not it's, you know, non-accrual or not. And so those, I think, are the way that we are approaching it. I'm not sure. We'll take a look at the way others are doing it, but we're not planning on starting additional metrics.

Got it. Okay. Yep.

Thank you, Paul.

Thank you very much, Mr. Johnson. And I don't see any other questions.

None on the queue. Well, I'd like to thank everyone.

We look forward to talking to you after the March quarter end and following up in the meantime. Thank you very much.

Thank you, everyone. And this concludes today's conference call. Thank you again.