Investcorp Credit Management BDC, Inc.

Welcome to the Invescor Credit Management DDC, Inc. Schedule's earnings release for third quarter ended March 31st, 2023. Your speakers for today's call are Mike Maurer, Suhail Shaikh, and Rocco Del Grazio. 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 like to now turn the call over to your speakers. Please begin.

Thank you, Operator, and thank you for joining us on our third quarter call today. I'm joined by Sue Hilschaik, my co-CIO, and Rocco Del Garcia, 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 the property of InvestCorp 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. March quarter marks the third quarter of our fiscal year. In the beginning of 2023, there continued to be limited new issuance and refinancing opportunities driven by broader market uncertainty and high interest rates. In the second half of the March quarter, we saw the level of activity pick up slightly. The collapse of Silicon Valley Bank and Signature Bank led to a broadly accepted credit contraction for middle market banks, which will further increase our opportunities. We saw our deal flow pick up after a slow December quarter, primarily driven by secondary opportunities across all industries. Especially during periods of market volatility, we actively focus on opportunities in both existing portfolio companies across our platform as well as in sectors we are familiar with. During the quarter, we invest in one new portfolio company and three existing portfolio companies. We have typically found that in a highly competitive market environment, our best opportunities come from companies we already lend to as these tend to have known performance and better structures. The investments we made during the quarter and after quarter end were all sponsor-backed. Even in a competitive environment, we remain optimistic about our pipeline and believe our portfolio is well-positioned to benefit from any further increase in interest rates. The weighted average yield of our debt investments during the quarter increased approximately 25% to 13.4% from 10.7% at 1231. Although our pipeline is robust, we continue to be very selective when investing in new credits. We remain focused on investing in high free cash flow and recession-resistant businesses. the credit quality of our current portfolio remains stable. Despite a challenging market environment, the weighted average EBITDA of our debt investments improved quarter over quarter. This is supported by the substantial amount of equity cushion in our portfolio companies, provided by well-established middle market sponsors. Our weighted average loan-to-value ratio for all debt investments is approximately 50%. We are proud of the continued improvement in the credit quality of our portfolio. Sue Hale will now walk through our investment activity during the March quarter and after quarter end. Rocco will go through the financial results. I'll finish with commentary on our non-accrual investments, our leverage, the dividend, and our outlook for the rest of 2023. As always, we'll end with Q&A. With that, I'll turn it over to Sue Hale.

Thanks, Mike. As Mike mentioned, we've been seeing a steady flow of new opportunities. These typically fall in two main categories, add-ons or secondary purchases of existing portfolio investments and opportunistic secondary purchases and refinancings of new companies. We're beginning to see some new sponsored platform transactions, but the volume is typically below our historical experience. We invested in one new portfolio company and three existing portfolio companies this quarter. We also fully realized our position in two portfolio companies. During the quarter, fundings for commitments and new investments totaled approximately $11.1 million. In the same period, repayments totaled approximately the same amount of $11 million. We invested in Standby, a portfolio company of Francisco Partners. We have been an investor in Sandbine and our other funds for over four years. The company is a leading provider of active network intelligence and security solutions for network operators and enterprises globally. We invested in the first lean term loan. Our yields at cost is approximately 11.8%. We opportunistically added to our position in two existing portfolio companies. First, we invested in the first main term loan of LaserAway. LaserAway is a leading chain of laser hair removal and non-invasive aesthetic dermatology centers. Our yield at cost is 11.3%. Second, we invested in the priority term loan of BioPlan. BioPlan provides packaging and sampling solutions to the beauty and fragrance industry. Our yield at cost It's approximately 15.8%. We also participated in a small equity rate for Technoplast, one of our existing portfolio companies. Technoplast is a global manufacturer of plastic components for automotive industry. As mentioned above, we fully realized our position in limiting oil field services, which was refinanced. Our fully realized IRR was approximately 11.3%. We also fully realized the position Agrofresh, which was repaid as part of our take-private transaction by P& Schwartz Partners. Our fully realized IRR was approximately 10%. After quarter ends, we invested in two new portfolio companies. First, we invested in the first thing term known as PureStar, also known as AMCP, Clean Acquisition Company. This is a good example of an opportunistic secondary purchase of a credit that we had been tracking. Pure Star is a portfolio company of Cornell Capital. It is one of the largest commercial laundry providers to the hospitality industry in the U.S. We invested in the first lien term loan and delayed draw term loan. Our yield has passed 15.7%. We invested in the first lien term loan of American Auto Auction Group, formerly known as Accelerator. This is another example of an investment that we own in other portfolios and we're able to find an attractive opportunity to purchase in the secondary market. A bright star capital portfolio company, Accelerate, or American Auto Auction Group, is a fully serviced used vehicle auction services provider for ECP customers. Our yield and cost is 13.3%. Using the GIFT standards as of March 31st, our largest industry concentrations were trading company and distributors at 15.9%, professional services at 14%, followed by IT services at 10.8%. Commercial services and supplies are at 6.5%, and software remain at 6.2%. Our portfolio companies are in 26 industries as of quarter end, including our equity and warrant positions. I'd now like to turn the call over to Rocco to discuss our financial results.

Thanks, Suhail. So the quarter ended March 31, 2023. Our net investment income was $2.5 million, or 18 tenths per share. The fair value of our portfolio was $221.3 million compared to $228.6 million on December 31. Our net assets were $88.2 million, a decrease of 3.6% from prior quarter. Our portfolio's net decrease from operations this quarter was approximately $1.1 million. Our debt investments made during the quarter had an average yield of 12.8%. Our realizations and repayments during the quarter had an average yield of 11.9% and our average IRR was 10.7%. As Mike mentioned, the weighted average yield on our debt portfolio increased 270 basis points to 13.4% as of December 31. As of March 31, our portfolio consisted of 35 portfolio companies, 90.6% of our investments were in first lien and the remaining 9.4% is invested in equity warrants and other positions. 99.6% of our debt portfolio was invested in floating rate instruments and 0.4% in fixed rate investments. The average floor of our debt investment was 1.1%. Our average portfolio company investment was approximately $6.3 million and our largest portfolio company investment is Fusion at $12.5 million. We had a gross leverage of 1.65 and a net leverage of 1.49 as of March 31 compared to 1.55 growth and 1.46 net respectively for the previous quarter. As of March 31st, we had four investments on Nautical, which included PGI Revolver and three investments in 1888. This is a decrease of four investments from the previous quarter. With respect to our liquidity, as of March 31, we had approximately 14.1 million in cash, of which 11.2 million was restricted cash with 33.1 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, which was filed yesterday. With that, I'd like to turn the call back over to Mike.

Thank you, Rocco. As mentioned last quarter, we acquired an SMA and had an initial close on our institutional fund. This doubled our platform AUM, expanding our level of investable assets and reducing average expenses across the funds. We also have an opportunity to grow the platform throughout the year. We believe that the scale and experience of our expanded team and platform positions us to be more meaningful to the market in terms of sourcing and origination. I would like to also address that we have made significant headway in completing our portfolio rotation initiative. The number of portfolio companies on Nanakulo were reduced from eight in the previous quarter to four investments in the current quarter, those four investments across two companies. First, on Deluxe. we have recovered 8.9% of our principal and received principal and interest representing 106% of our cost on that position to date. We believe future recoveries are likely to be minimal at this stage and have decided to write off the remaining position. For PGI, all remaining value is expected to be recovered in the priority revolver, which remains on non-recrual. We have written off our positions in the first lien and second lien loans and are not expecting to realize any recovery on those. And as such, those were written off. BioPlan successfully completed a balance sheet restructuring during the quarter. We currently hold positions in the take-back term loan, priority term loan, and the common equity. The two loan positions are on accrual, and we're excited about the company's prospects going forward. In summary, we expect significant progress on the remaining non-approvals over the next 12 months. Our NAV declined 3.6% this quarter. Equity positions represented a majority, or 2.3 million, of this decline. While this is disappointing, we believe that we will see a bounce back in the coming quarters. We had three portfolio companies which declined in value by half a million dollars or more. First, we marked down our investment in ArborWorks. Arbor Roads is a vegetation management company providing services to utility companies. Their results have been challenged by weather patterns in California, their largest market. We reduced the mark in our equity positions and technical costs due to increased margin pressures and low production volumes in the auto industry. We also marked down our equity position infusion through the changes in model inputs related to market conditions. Our gross leverage this quarter was 1.65, above our guidance of 1.25 to 1.5 times. Our net leverage was 1.49 times, which is within the target range. As mentioned last quarter, we expect to see our gross and net leverage generally converge. As of May 15th, our gross and net leverage were 1.59 times and 1.56 times. 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 March quarterly dividend with NII. Companies expected to earn its dividend through the next quarter ending June 30th. On May 4th, 2023, the Board of Directors declared a distribution for the quarter ended June 30th, 2023 of 13 cents per share payable on July 7, 2023, to stockholders of record as of June 16, and a supplemental distribution of $0.05 per share, payable on July 7, 2023, to stockholders of record as of June 16, 2023. As we continue into the second half of 2023, we remain very optimistic about our team's ability to deploy capital in high-quality credit. Our growing platform will allow us to be more meaningful as a club partner. It gives us expanded reach and origination and brings new and valuable relationships with private equity sponsors. Our growth will provide you, our investors, an increasingly diverse portfolio as we have access to a larger set of opportunities in the market. Our goal has not wavered. and is, as always, focused on capital preservation and maintaining a stable dividend. This concludes our prepared remarks. Operator, please open the line for Q&A.

Thank you, ladies and gentlemen. At this time, we will conduct the 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 on your phone 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. We are now ready to begin. Our first question is from Chris Nolan. I'm opening the line now. Go ahead, please.

Hey, guys. Congratulations on improving the non-recruits in the quarter. On Deluxe, did I hear you correctly that there was an 89% recovery?

I believe it's 80.9% recovery on cost, excluding the interest, including the interest, it was 106% of our invested capital.

Okay, great. Okay, then. And the comments that you guys participated in an equity raise for one of your portfolio companies, would that be a rights offering?

It was a rights offering. We participated so we were not diluted down. It was less than half a million dollars.

Okay. I guess on that note, given that you're focused on sponsored deals, again, Has there been conversations from your sponsors where if they have to raise equity for their portfolio companies, you know, they want you to participate? What are your thoughts around that?

Chris, this is Suhail. The short answer is no. I mean, I think in a couple of situations we're looking at sponsors come to us with a preferred equity investment opportunity. so that they don't have to refinance the existing capital structures. But as an equity co-invest, if that's what you're looking for, no, they haven't been asked to participate in any equity co-invest with outside sponsors.

Now, just to clarify, in initial investment, we have looked at small equity co-invest, and you'll see them in our portfolio, but that's rare, you know, few and far between, and that's not our option.

And I got a final question on leverage. Given the uncertain economic times, is the intent to maintain leverage in your target area, which is less than 1.4 to 1.5 times?

The answer is yes. As we continue to look at new opportunities, as we, you know, reinvest money coming back in, we're not looking to invest incremental capital, but reinvestment, are all you know never say 100 but are principally lower risk more equity better covenants so we're improving the quality of the portfolio and maintaining a consistent leverage against that that's great thank you chris thank you very much our next

Question is Mr. Robert Budd. I'm opening the line now. Okay, thank you.

On this question, on issue 159 now in May on language, what kind of time frame do you expect to get back down to, you know, in the target range of 1.4 to 1.5?

I'd expect at quarter end that we're back in that range. That's the expectation. If you look at 1231, net leverage was 146. At 331, it was 149. We'd expect to be somewhere around there on a net leverage at 630.

Got it. Thank you.

Then on the credit facility, I mean, in the opening remarks where you talked about, you know, disruptions in the banks and granted capital, one is exactly a regional. But have you started having any conversations with them about amending the facility? I mean, it doesn't mature until 2026. But the evolving period, the reinvestment period ends next year. So any preliminary discussions that have occurred on that one?

We've continued to have that active dialogue with Capital One, all positive. There's been no indications that they are starting to pull back on the credit. that they want to commit to us or the sector. But, yes, we have ongoing dialogue with them.

Got it. Thank you. And then one last one, if I can. I'll follow it up with this question again. Technifash. I mean, you said you participated in the rights issue, put in less than a million bucks, but then it got written down, obviously, during the quarter because of margin pressures, et cetera, that you talked about. So, I mean, yes, you did want to be diluted, but at the same time, you're putting more capital into one of your larger write-downs this quarter. So could you give us any more thoughts on the capital purpose beyond non-dilution, which may or may not be beneficial to shareholders?

Yeah, I make a couple observations. Number one is kind of from our cost basis of that equity we're averaging down. That having been said, we don't want to keep putting more money in if we don't think this will recover. We think they are a critical supplier to Tier 1 OEMs, to top platforms. I think we've all seen the inventory constrained, especially from the foreign production, and they've been hurt by that. The forecast is that that's starting to normalize, but I, you know, personally and anecdotally, I've not seen that fully normalized. We expect this to recover over the next 12 to 24 months and did not want to see that over a small investment hurting our existing investment.

Got it. Thank you.

Thank you very much, Robert.

If you'd like to ask a question, please press 7-pound on your phone. Again, at 7-pound if you'd like to ask a question. Our next question is from Paul Johnson.

All right, Paul.

Good afternoon, guys. Thanks for taking my question. Yeah, I only had one today, but I want to get a sense. I mean, it sounds like you guys have obviously made some investments in the platform, you know, since InvestCorp came on, possibly raised some funds along the way. Is there something you need to get a sense of, like, how many people, I guess, at InvestCorp today, including yourselves, you know, are working directly on the BGC?

Well, the direct team on the BDC is about 12 people. Then indirectly, there's another 30 people in InvestCorp credit, which expands to other liquid and separate accounts that we leverage off of research funds. and flow and relationships. And then there is the middle market private equity team that we interact with constantly from a standpoint of, I'll call it, club origination, networking, and other deal flow opportunities. So it's a broad base that we work within at Invescorp.

Got it. Thanks for that. And then I guess, you know, just with the leverage, you know, obviously it sounds like it's kind of a focus to get that down further back in the line with the target range. But among all the other funds that you have access to with InvexCorp, I mean, has the, you know, I guess maintenance of leverage been, you know, any kind of a constraining factor for you guys in terms of participating on deals?

No, it has not.

Okay, I think that's all for me.

Thank you very much, Paul. We appreciate it.

If you'd like, there are no more questions at this time.

Thank you very much, operator, and thank you, everyone, for dialing in.