Investcorp Credit Management BDC, Inc.

Good morning and thank you for joining today's Invescorp Credit Management BDC second quarter fiscal year 2024 earnings call. It is now my pleasure to turn the floor over to Rocco Del Garcia, CFO.

Thank you, operator. I would like to remind everyone that this 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 filing, please visit our Investor Relations page on our website. At this time, I would like to turn the call over to our Chairman and CEO, Michael Malice.

Thanks, Rocco, and thank you to everyone for joining us on our second quarter of fiscal year 2024 earnings call. I'm joined by Suhail Shaikh, my co-CIO and president of the SESCORP Credit Management CDC, and Rocco DelGurcio, our CFO. Before I begin the call, I would first like to address the change in leadership in the news that was announced in our 8K on November 28, 2023. Rocco DelGurcio has decided to resign as the company's CFO, TCO, Treasurer, and Secretary, effective March 31, 2024. We'd like to personally thank Rocco for his partnership and all of his contributions over the eight years with us. We announced our revised financial results on Wednesday, where our fiscal second quarter ended December 31, 2023, to reflect approximately $388,000, or two cents per share, of adjustments relating to the incorrect accrual of certain expenses reported in the company's consolidated financial statements, contained in the press release issued by the company February 12, 2024. On today's call, I will provide an update regarding our performance in the quarter, the market, commentary, and our non-accrual investment, as well as our leverage, the dividend, and our outlook. 2L will walk through our investment activities during the December quarter and after quarter as we will end with Q&A. During the quarter ended December 31, our net investment income was $1.6 million or $0.11 per share. This was a decrease of approximately 3% from the previous quarter's net investment income. Additionally, net asset value per share declined approximately 6% to $5.48 per share from $5.83 per share at the end of the prior quarter. The decline now was largely due to changes in valuations for two investors, Klein Hirsch and American Duck, as well as the restructuring of Arbor Works, which closed on November 6th. We remain highly focused on portfolio management and risk mitigation, especially for our borrowers that are experiencing periods of stress. We did not add any new positions to non-accruals during this quarter, and our position on non-accruals declined to 4.6% as a percentage of total value of the portfolio compared to 10% as of the previous quarter. We continue to make progress rotating our portfolio and expect progress on the remaining non-accruals in the next 12 months. Regarding 1888, The company has entered into a sale agreement, which is expected to close in the next week. We do not expect any changes to the value as a result of this sale. We slightly under-earned our December quarterly dividend, and the company is expected to earn its dividend through the next quarter ending March 31st. We are pleased to announce that on February 8th, 2024, the Board of Directors will declared a distribution for the quarter ended March 31, 2024 of $0.12 per share, as well as a supplemental distribution of $0.03 per share. Both payable on April 5, 2024 to stockholders of record as of March 15. Our growth leverage this quarter was 1.7 times and our net leverage 1.51, both above our guidance of 1.25 to 1.5 times. As of February 16th, our growth and net leverage were approximately 1.62 and 1.6. With identified repayments, we expect this to reduce this leverage to approximately 1.5 during the quarter. I will turn briefly to address the trends in the market. Yield volumes have picked up compared to the previous quarter in this environment. We are focused on reasonable leverage and solid structures. Since quarter-end, our investment pipeline has picked up, primarily driven by add-on financing and refinancing, and to a lesser extent, new LDOs. We are specifically focused on lending to companies that are sponsor-backed at financial companies like Pre-Tax Flow and Recession Resilience. As we look at our borrowers' operating performance, the credit quality of our portfolio continues to remain solid. Our weighted average loan-to-value for our portfolio of debt investments is approximately 50%, an increase from 41% last quarter. We continue rotating and diversifying the portfolio. Our portfolio diversification has improved since the prior year. During the quarter, we had investments in 44 borrowers against 25 industries. which is up from 37 borrowers and 19 industries in the prior year's December quarter. SUHAIL will now walk through our investment activity during the December quarter and after quarter end. With that, I'll turn it over to SUHAIL.

Thank you, Mike. We saw an increase in this quarter's activity compared to the prior quarter, primarily driven by investments in new portfolio companies and to invest to extend opportunistic securities purchases. We're also focused on managing our watch list names, such as Klein-Hirsch, Arbor Worth, and American North. As we rotate the portfolio, we're seeking to invest in credits that are generally larger in size. We have rotated approximately a third of the book within the past year. The weighted average EBITDA of the portfolio went from $55.6 million at the end of December 31, 2022, to $59.9 million at the end of this quarter. In the same period, The rate of average leverage of portfolio companies has increased slightly as we continue to rotate into larger, more stable trends. We continue to be highly selective when looking at new buyouts and ends. Sponsored middle market direct lending new money volume in the quarter ended December 31st was more than 20% higher than the quarter ended September 30th, but still lower when compared to the quarter ended December 31st, 2022. We saw a similar trend with primary deal flow picking up during the quarter compared to the previous quarter. Our pipeline continues to remain robust, and we believe we can continue to execute on our mandate to invest in sponsor-backed core middle market companies, as Mike mentioned. During the quarter ended December 31st, we invested in five new portfolio companies and one existing portfolio company. We also fully realized our position in four portfolio companies.

During the quarter,

Funding for commissions and new investments totaled approximately $19.1 million as cost, with a rated average yield of approximately 13.9%, and the same period of repayments totaled approximately $29.2 million from four investments with an IRR of approximately 13.8%. First, we supported the LDO's Althea by a DAI partner. Althea is a contract manufacturer of premium dry tests We invested in the first main term loan and our yield of cost is approximately 10.7%. We had been invested in LCS through our other funds and were able to re-authorize the risk for the new LCS. Second, we invested in the first main term loan of Victra, also known as LSF9 Atlantis Holdings, LLC. Victra is the largest exclusive independent retailer for Verizon's wireless. We purchased Victra in the secondary market in a tractor price. Our yielded cost is approximately 13.7%, and our team has had a long-standing history with this name, which is what led us to re-underwrite this record. We also invested in embedded peak pollution. This was a directly sourced opportunity from Brightstar Capital Partners, and we supported the sponsor in right-sizing the capital structure. Emerit is one of the largest independent providers of commercial case maintenance. Our yield at cost is approximately 13.7%. We invested in the first intermodal loan of North Star Group Services. This is a good example of an opportunistic secondary process of accredits that we have been tracking. North Star is a portfolio company of J.F. Levy. It is a large provider of diversified infrastructure and environmental services across the U.S. We were previously invested in this thing and were able to re-underwrite the list. Our yielded cost is approximately 10.7%. We made a preferred equity investment at Discovery Behavioral Health, a Webster Equity 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 disorders. Our yielded cost is approximately 20.4%. Lastly, we made a follow-on investment in the incremental equity of Visa Power, listed in our schedule of investments as InvestCorp Transformer Aggregator LT. Visa is one of our equity co-investment positions alongside InvestCorp's North American private equity group. Upon the realizations that happened during this quarter, first, we fully realized the position in the first eight-term of Advanced Solutions International, also known as ASI. We originally invested in the first-team term loan and preferred equity in September of 2020 and remain investors in the preferred equity. Our fully realized IRR on the term loan was approximately 10.8%. We also fully realized our position in the first-team term loan of Cook & Portman, which was repaid as part of an LTO by Platinum Equity. Our fully realized IRR was approximately 8.7%. We also fully realized our position in the first-team term loan of NWM, which we have been invested in since May of 2021. The company was sold during the quarter, and our fully realized IRR was approximately 22.2%. Lastly, our position in the first-day term loan of Archer Systems was refinanced. Our fully realized IRR was approximately 13.2%. After quarter ends, we fully realized our first internalization in Evergreen North America acquisitions LLC. Realized IRR was approximately 13.3%. As of December 31st, our largest industry concentrations were trading company and distributors at 13.6%, commercial services and supply at 9.6%, professional services at 8.8%, containers and packaging at 7%, qualified e-services at 4.3%, and broad lines retail at 4.3%. Our portfolio companies are in 25 GICF industries as of quarter end, including our equity and warm position, which is an increase of one industry from the previous quarter. I would now like to turn the call over to Rocco to discuss that financial problem.

Thanks, Suhail. So the quarter ended December 31, 2023. Our net investment income was $1.58 million, or $0.11 per share, a decrease of approximately 3% from the previous quarter's net investment income of $1.63 million, or $0.11 per share. The fair value of our portfolio was $207.4 million at $223.4 million on September 30. Our net assets were $78.8 million, a decrease of $5 million from the prior quarter. Our portfolio's net decrease in net assets from operations this quarter was approximately $2.9 million. The weighted average yield of our debt portfolio was 11.5%, compared to 11% for the quarter ended September 30th. As of December 31, our portfolio consisted of 44 borrowers. Approximately 85% of our investments were first lien. The remaining 15% 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 on our debt investments was 1%. Our average portfolio company position was approximately $4.7 million. And our largest portfolio company investment is BioPlan at 14.5 million. We had a gross leverage of 1.7 and a net leverage of 1.51 as of December 31 compared to 1.58 gross and 1.41 net respectively for the previous quarter. We respect our liquidity. As of December 31, we had approximately $14.7 million in cash, of which $11.5 million was restricted cash, with $30 million capacity under our evolving credit facility with Capital One. Additional information regarding the composition of our portfolio is included in our Form 10-2, which was filed on Tuesday. With that said, I would like to turn the call back over to Mike.

Thank you, Rocco. As we look towards the second half of our fiscal year, we will continue to work on rotating and diversifying the portfolio. We are optimistic about our pipeline and our ability to split our capital into high-quality investments. Our credit selection remains disciplined and remains focused on maintaining the quality of the book. Our investment strategy is not wavered as we remain increasingly focused on capital preservation and maintaining a stable dividend. That concludes our preparedness 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 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. We are now ready to begin. And our first question comes from Mr. Christopher Nolan with Lattenburg-Talman. Go ahead, please.

Hey, guys. And Rocco, congratulations. Good working with you, and I hope future endeavors are good.

Thank you.

Thank you. Suhail, in the comments you made in terms of the, was it the size of portfolio companies that they're going to increase going forward? or is it the size of the investments the BDC will make, or is it both?

Great question, Chris. It's more the size of the portfolio company. I think the size of the investments, as Mike pointed out, and as I may have alluded to as well, is actually a key thing. So we increase the number of borrowers, and so we're trying to diversify the portfolio as much as we can.

Okay, and then for these The portfolio companies, what is the average EBITDA coverage? Interest coverage? Yes, please.

Yeah, interest coverage, we typically, when we are underwriting a new deal, we're targeting interest coverage at least two times. And that's, you know, it's a part of rule of thumb, but we look at cash flow and the ability for the company to service the debt You know, I mean, we've made the focus on that, obviously, in this market. So, you know, it's two times. It depends on the industry. It depends on the business. In most cases, it's more of two times.

Okay. That's it for me. Thank you. Thank you very much. And, again, if you have any questions, please press 7-PAL. I don't see any other questions.

Thank you, operator, and thank you, everyone, for your time today.

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