Investcorp Credit Management BDC, Inc.

Welcome to the InvestCorp Credit Management BDC Incorporated Scheduled Earnings Release for First Quarter ended September 30, 2023. Your speakers for today's call are Mike Maurer, Sohail Shaikh, and Rocco Delgarcio. Operator assistance is available at any time during this conference by pressing zero pound. A question and answer session will follow the presentations. I would now like to call over to your speakers.

Please begin. Thank you, Operator, and thank you for joining us on our first quarter call today. I'm joined by Suvel Shaikh, my co-CIO and President of InvestCorp Credit Management, DDC, and Rocco Del Vercio, 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 Investor 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 relation page on our website at icmbdc.com. I would also like to call your attention to the State Harbor Disclosure and 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 filing, please visit our Investor Relations page on our website. At this time, I would like to turn the call back over to our Chairman and CBO, Michael Maurer.

Thanks, Rocco. The September quarter marks the first quarter of our fiscal year. We saw primary deal activity in the middle market increase, characterized by acquisition financing and, to a lesser extent, LBOs and refinancings, as well as dividend recapitalization. Since our last call, we saw our pipeline increase at a healthy rate, albeit at a slower pace compared to historical norms. We remain optimistic that deal activity in the primary market will continue to pick up over the next few quarters and that we will continue to see compelling investment opportunities. Our investment activity during the quarter was characterized by opportunistic investment in the secondary market. Importantly, we invested in four new companies and added to our position in one existing portfolio company. These investments were all in borrowers we are familiar with, have previously invested in, or have exposure in our other managed funds across the platform. The weighted average yield of our debt investments made during the quarter was 12.3%, a 20 basis point decrease in the weighted average yield of investments that were made during the quarter ended 6.30%. Additionally, we continue to remain highly selective when it comes to new investments. We are specifically focused on lending into companies that are sponsor-backed, have financial covenants, high pre-tax lows, and are recession-resilient businesses. As we look at our borrowers' operating performance and the credit quality of our performing portfolio, it continues to remain stable. Our weighted average interest coverage ratio for our performing debt investment is approximately two times, and our loan-to-value ratio is approximately 41%. Looking ahead toward the rest of the fiscal year, our focus is on portfolio management and risk mitigation. We are focused on our non-performing investments and reducing this amount. We continue to work toward diversifying our investments in new borrowers to reduce our position sizes to an average of 2% to 3% of our total portfolio and to work with our current borrowers that have covenant or liquidity issues in this high interest rate environment. We increased our number of borrowers to 40 from 36 as of 6-30 and the number of GICF industries across our portfolios to 24 from 21 when compared to the previous quarter ended June 30th. During the quarter and post-quarter end, we had two repayments. As mentioned on our last call, we are also expecting several repayments over the next few quarters. Our dividend coverage is an important consideration when making new investments. Sue Hill will now walk through our investment activity during the September quarter and after quarter end. Rocco will go through our financial results. I'll finish with commentary on our non-equal investments, our leverage, the dividends, and our outlook. As always, we'll end with Q&A. With that, I'll turn it over to Siva.

Thank you, Mike. As Mike mentioned, the quarter's activity was a continuation of executing on opportunistic investments in the secondary market and selectively looking at new buyouts and answers. Sponsored middle markets recommending new money volume in the quarter was approximately 36% lower year over year. However, we saw primary deal flow pick up during the quarter and have continued to see an increase post-quarter end. Our pipeline remains robust, and we believe that we can continue executing on our investment thesis, as Mike mentioned. During the quarter ended September 30th, we invested in four new portfolio companies and one existing portfolio company. We also fully realized our position in one portfolio company. During the quarter, funding for commitments and new investments totaled approximately $15.5 million at cost. with a weighted average yield of approximately 12.3%. In the same period, repayments totaled approximately $6.8 million from one investment that I mentioned, with an investment IRR of approximately 16.4%. Let me now take you through our investment activity. First, we invested in the first main term loan of Axiom Globals. Axiom is a leading provider of expert legal talent, often legal, counseling, and representation services. Axiom is a portfolio company of Vermeer, a sponsor we know well. We have been invested in Axiom for a few years in our other portfolios, and we were able to purchase it at an attractive price. A yield at cost is approximately 13.9%. We also invested in the first phase down loan of Kongrex. Kongrex is a press-to-for-process portfolio company and provides mission-critical engineering, construction, and maintenance services to a diverse customer base in the broadband and other adjacent industries. Our yielded cost is approximately 12.2%. This was also a secondary purchase for the portfolio. Congress has been a portfolio company of ours in other funds for several quarters. We also made a secondary investment in multicolor, also known as LAPL, or label. A CD&R portfolio company, label, is a global leader in the prime label manufacturing industry. Our yield at cost is approximately 10.9%. As with Axiom and Congress, multi-color or legal, was also a secondary purchase of the name that we own and all the vehicles that we manage. Finally, we also invested in SeedBrite, an American security strapped-to-partners-backed company. SeedBrite is a national distributor of aftermarket parts for the U.S. heavy-duty truck industry. Our yielded cost is approximately 10.4%. This is a name we have been tracking for a while. In addition, given that DeptCorp's private equity arm used to own the business several years ago, they were able to leverage their expertise to diligence our investment. And then our last investment, which was the addition of our existing position to AMCP Main Acquisition Company, also known as DoorStar. This is a good example of an opportunistic secondary purchase of a credit that we already own and we're able to source some paper for an attractive price. USR 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 day in Germany. Our yield at cost was approximately 15.2%. During the quarter, we fully realized our position and fusions term loan. It was refinanced. We remain invested in fusions preferred and common equity. Our fully realized IRR was approximately 16.4%, as I mentioned earlier. After the quarter end, we invested in three new portfolio companies and fully realized our position in two portfolio companies. First, we supported DLB of Althea by PAI Partners. Althea is a contract manufacturer of premium dry pet food ingredients. We invested in the first game term loan, and our yield has cost us approximately 10.7%. We have been invested in Althea through our other funds, and we're able to re-underwrite the risk for the new LDO. Second, we invested in the first game term loan of Victra, also known as LFF9 Atlantis Holdings LLC. Victra is the largest exclusive independent retailer for Verizon Wireless. We purchased Victra in the second year market at an attractive price. The yielded cost is approximately 13.7%. Our team has had a long-standing history with this name. We also made a proprietary preferred equity investment in Discovery Behavioral Health, a Webster Equity Port Partners portfolio company. Discovery is one of the largest providers of residential and outpatient treatment for behavioral health services across eating disorders, mental health, and substance abuse. A view that cost is approximately 20.4%. We fully realize the position as the first in-term loan of Advanced Solutions International, also known as ASI. We originally invested in the first in-term loan and preferred equity in September 2020 of ASI. We remain invested in the preferred equity. Our fully realized IRR on the term loan was approximately 10.8%. We also fully realized the position in the first-game term loan of Cook & Portman, which was repaid as part of the Veldio 5 platinum equity. Our fully realized IRR was approximately 8.5%. To my attention, I'd also like to note that the GICS standard was updated in May of this year. As such, our industry categorizations for existing portfolio companies have changed in some cases, and our industry ratings have also changed. As of September 30th, our largest industry concentrations were trading company and distributors at 17.1%, professional services at 11.5%, followed by IT services at 7.5%, software at 6.15%, and containers and packaging at 6.1%. Our portfolio companies are in 24 GICS industries as of quarter end, including our equity-informed positions, which is an increase of three industries from the previous quarter. I'd now like to turn the call over to Rocco to discuss our financial results.

Thanks, Suhail. So the quarter ended September 30th, 2023. Our net investment income was $1.6 million, or 11 cents per share. The fair value of our portfolio was $223.4 million compared to $220.1 million on June 30th. Our net assets were $83.8 million, a decrease of $3.9 million from prior quarters. A portfolio decrease from operations this quarter was approximately $1.7 million. Our debt investments made during the quarter had an average yield of 12.3%. And the realization and repayments during the quarter had an average yield of 14.6% and an average IRR of 16.4%. The weighted average yield of our debt portfolio was 11%, a decrease of 150 basis points from June 30th. As of September 30th, our portfolio consisted of 40 portfolio companies. 89.7% of our investments were first means, and the remaining 10.3% is invested in equity, warrants, and other positions. 99.7% of our debt portfolio was invested in floating rate instruments, and 0.3% in fixed rate investments. The average floor on our debt investments was 1.1%. Our average portfolio company investment was approximately $5.6 million. And the largest portfolio company investment is Dialplan at $13.6 million. We had a growth leverage of 1.58% and a net leverage of 1.41%. as of September 30th compared to 1.54 and 1.44 respectively for the previous quarter. As of September 30th, our non-equal investment as a percentage of share value was 10.6% compared to 4.1% for the quarter ended June 30th. With respect to our liquidity, as of September 30th, we had approximately $14.3 million in cash of which $14.2 million was restricted cash with $28.8 million of capacity under our revolving credit facility with Capital One. Additional information regarding the composition of our portfolio is included in our Form 10-2, which was filed yesterday. With that, I'd like to turn our call back over to Mike.

Thank you, Rocco. As mentioned earlier, we continue to remain focused on portfolio management and risk mitigation, especially for our borrowers that are experiencing periods of stress. We added three borrowers to Nonacool, including two investments in ArborWorks, CareerBuilder, and KleinHirsch last out term loan. Since quarter end, there's been continued developments in ArborWorks. While we are bound by confidentiality, the company's operating environment remains challenged, and we continue to have an active dialogue with all parties. While CareerBuilder continues to pay its interest, the company's fundamental performance has been weak for some time. We put the loan on a cool as we believe there is significant doubt of full recovery of principal. We continue to make progress rotating the portfolio and expect progress on the remaining non-accruals over the next 12 months. Our NAV per share declined 4.46% from the previous quarter end. Our gross leverage this quarter was 1.58, above our guidance of 1.25 to 1.5 times. our net leverage was 1.41 times, which is within the target range. And as mentioned last quarter, we expect to see our growth and net converge. As of November 6th, our growth and net leverage were 1.68 times and 1.51 times. As we have previously stated, the advisor will waive the portion of our management fee associated with base management fees over one time's leverage. The company is expected to earn its dividend through the next quarter ended December 31. On November 9, 2023, the Board of Directors declared a dividend for the quarter ended December 31, 2023 of $0.12 per share. as well as the supplemental distribution of $0.03 per share, both payable on January 8, 2024, the stockholders of record as of December 14, 2023. It is worth noting that the $0.03 supplemental distribution is related to fiscal year 2023 fillback. As we look to the rest of our fiscal year, we will continue to work on rotating and diversifying the portfolio. all while focusing on mitigating risk in our borrowers experiencing short-term periods of stress or volatility. Our investment strategy has not wavered, and we continue to remain focused on capital preservation and maintaining a stable dividend. We are optimistic about our pipeline, our ability to deploy capital in high-quality investments. 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 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. And our first question comes from Mr. Paul Johnson of KBW.

Go ahead. Yeah, good afternoon, guys. Thanks for taking my questions. Just a couple from me. But in terms of, you know, investments that you made during the quarter, it sounds like there's decent secondary activity. I mean, can you just kind of speak to, you know, what you guys are seeing, you know, in the secondary market versus, you know, what you can receive, obviously, in the primary market. And if that's more of kind of a, you know, one-time, you know, 3Q type of thing or, you know, a secondary type of purchases, you know, or something you probably expect to remain more active with in the future quarters.

Well, thank you for the question. Let me take that in a couple of different ways. So I think... You know, the investments that we made are investments that we own and other portfolios that we manage. So while there were secondary opportunities, I think these are investments that we have and we were able to sort of find attractive opportunities to pick up additional data that ICMD benefited from. So we always are looking for things in the marketplace to add to our positions, to see what we can add, or frankly, in some cases, even sell it. We think there's an opportunity to get out of a position at a healthy rate of return. So that's part one of the question. Part two is, I think, as we mentioned in subsequent to the quarter end, we had a couple of investments that we made that are brand-new investments that are not secondary investments. And those are, you know, Alcia that I mentioned and Discovery. Both of those are new investments. Now, Alcia was one that, you know, we had an output for goods getting refinanced. And we underwrote that risk as part of a new buyout. As part of a new buyout, Discovery was a brand new investment. So I think, you know, our pipeline is actually reasonably healthy. But, you know, we're being super selective about what to go after, how to sort of tackle and trying to get credits that we know right now. We'd rather own more of those than go into things where we don't like the structure or the pricing. So hopefully that answers your question.

Yes, that's very helpful. Thanks for all the detail on that. My next question is just kind of on, you know, NII this quarter, 11 cents. And Mike said that, you know, he expects to cover the dividend next quarter. That's the core dividend. You know, I guess, you know, what do you kind of foresee next year? I mean, do you kind of look at this quarter as sort of a, you know, depressed level of NII where you expect, you know, that to obviously kind of trend back up to – to the quarter-end level or possibly higher, what sort of leverage do you have to kind of move NII up from this quarter, just being at just a low level?

Yeah, Paul, it's Mike. Thank you for the question. I think it's an area that I know you're focused on, the EC analyst is, and we are. There's, you know, a couple of key levers that we focus on. One is, you know, the elephant in the room is our non-ACULA levels are high and we need to get those down. There are two ways to get those down. One is to complete working with the group to convert that back to an ACULA status in some way, shape, or form. I can't go into any more detail on that, given where we are in discussion. So that's working with the company and the sponsor. The other one is if, and Sue Hale mentioned this before, if there are opportunities to sell that and reinvest it in what we think are good new investments, that's another lever. And then the second area is we've got equity, some of which we've bought and co-invested, some of which we've gotten restructured for them. So that, you know, is a function of working with the other lenders, the company, et cetera, to convert those. But those are the levers, the obvious levers, and we are, you know, really working to, and we've said this before, locate the portfolio, and we've done a lot of locating, but we've got more to do on that front.

Thanks for that, Mike. Last question for me. unless anything's changed, I believe InvestCorp is still like around a 10% owner of the stock, you know, based on the position that they bought several years ago. If I'm just looking back, I mean, NAV is down fairly materially since that time. I mean, around 43%, you know, I believe that NAV's declined, you know, since that quarter that InvestCorp came in to the advisor. I mean, I guess, you know, what is, I guess, in Betcorp's sort of, you know, level of engagement here? You know, how active, you know, are they with the business today versus, you know, kind of when they came in? You know, I'm just curious, kind of trying to get, you know, our thoughts around, you know, what they think of performance and, you know, what sort of the plan is going forward here.

So there's two or three pieces to that answer, and I think a critical one, which Rocco will go back and double-check it, but I'm pretty sure Bloomberg has it right. And I could be off by 30 days, but somewhere June 1st, give or take 30 days, and BestCorp increased its own steps. to 24.9% of the stock. So that was a statement a year and a half plus, I'll call it a year and a half ago, give or take, of submitting to the public BDC to put more money in. The second thing is how are they focused on it? I will tell you that the CEO has a formal meeting every scheduled, every 30 days, a monthly meeting with Sula and I to talk about it. What are we doing? How are we thinking about it? He's focused on it. It is a, and was initially a critical investment to think about how do we grow the platform and we need to make sure that, you know, the public BDC is part of that strategy and that we're doing the right thing by shareholders. So, It's got attention. It has gotten additional capital from the initial September of 19 investment. And trust me, we've got ongoing dialogue with our CEO beyond the formal meetings, too.

Thanks for that, Jeff. Thanks for the correction on the ownership level. That's all for me. Thank you for taking my questions. Yep.

Thank you very much. Our next question comes from Mr. Robert Dodd with Raymond James. But again, if you have any questions, please press seven pounds to open up your mind. Go ahead.

Hi, guys. Just touching on the non-actual question again, Mike. I mean, I think in your prepared remarks, you made a reference to progress over the next 12 months. I mean, is that the kind of timeframe we're looking at to resolve or to get the non-accrual level down to something that might be more in line with the industry? Or can you give us an idea of kind of the timeframe we're talking about here?

Yeah, Robert, you know, I would love to say that I have a crystal ball that says this is the quarter where it will be down below the industry average. I will tell you that we have active dialogue on almost every one. I don't want to say every one because even if you look at it, some of those really are not active restructurings. They're more in liquidation, and some of those are small. But the major ones we are very focused on. We'd like to see those resolved in six months. I said 12 months. We don't know because we're not the sole lender. And we deal with a group, and we have to manage a lot of constituents in that process. But I hope that it's much sooner than the 12-month.

Got it. Thank you. Just on the dividend, the $0.03 supplemental, to your point, I think you also said that was to do with essentially last year's spillover. So, presumptively, that $0.03, the supplemental program will not be continuing. Just want to be clear there. With investment expectations, it's just going to be the base dividend going forward. Yeah, correct. You are correct. Got it, got it. Thank you. And then on, I have to talk about this last quarter. On the Movolva, with CAP1, we are now, it's less than 12 months to the, not maturity, but to the reinvestment period. Can you give us an update on what's going on around that?

Yeah, and I know, as you said, we spoke about it on the last call. This is, you know, since this is the first quarter after the annual call, we don't have the normal, I'll call it 90 days in between calls. It's a short period in between. We have been in and we are the normal course. We haven't tried to accelerate those. There's nothing that's dragging, but we have an ongoing dialogue with them. It's going through what I would call a normal process. We do not anticipate any issues with Capital One as our revolver provider.

Got it. Thank you.

Thank you.

Thank you very much. And our last question comes from Christopher Nolan with Leidenberg Home.

Go ahead, please. Hi. Any guidance you can give in terms of where you think leverage is going to be particularly in light of the increase in non-accrual. And should we expect an excise tax in 2024, given the lack of a supplement? Thank you.

Walker, you want to take the excise tax?

Yeah, so excise tax for sure. A few years back, as many of you guys know, a lot of the BDCs, they'll keep the... the excise distribution and pay the tax on it because it's a cheap form of financing. So we will have an excise tax payment. It's kind of been, if you look at the financial statements, it's kind of going to be the same one over and over again. The same one that we've paid in the past.

And Chris, on the leverage side, there's two pieces. There's the ratio and there's the nominal. The leverage we would expect to decrease our nominal amount because we have brought our NAV down And so we continue to focus around the one and a quarter to one and a half, which means that absolute borrowings will decrease from a target perspective to be in that range. Thank you.

Thank you very much. And after that, we have no questions in the queue.

Thank you, everyone. We look forward to the next session. call in about 90 days. Thank you. Thank you.

Thank you, everyone. This concludes today's conference call. Thank you for attending.