Investcorp Credit Management BDC, Inc.

Good afternoon, and thank you for joining today's Invescorp Credit Management BDC third quarter fiscal year 2024 earnings call. It is now my pleasure to turn the floor over to Peter Saddleman, CFO.

Thank you, Operator. I would like to remind everyone that today's call is being recorded and that this call is the 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 icmbbc.com. I would also like to call your attention to the safe 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 material 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 would like to turn the call over to the CEO of InvestCorp Credit Management, BDC, Suhail Shaikh.

Thanks, Peter, and thank you to everyone for joining us on our third quarter fiscal year 2024 earnings call. I'm joined by Michael Mowers, Chairman of InvestCorp Credit Management, BDC, and Peter Sattermeyer, our CFO. Before we begin our earnings call, I would like to provide a short update on leadership at the company. As of yesterday, I have been appointed as Chief Executive Officer of ICMB, effective immediately, and will now serve as the sole Chief Investment Officer of the advisors. It is an honor to be named CEO at this time, where the current lending environment favors alternative lenders such as business development companies, and we are positioned well to execute our business strategy in the current market. Mike will continue to remain chairman of the board of directors and has been appointed as vice chairman of private credit at Invesport. I look forward to our continued partnership to grow our private credit platform. With that, I will now turn over the floor to Mike.

Thanks, Sue Hill, and thank you to everyone for joining us on our third quarter fiscal year 2024 earnings call. It's been a pleasure to serve as CEO of ICMB. I'm proud of the lending platform we've built over the years and look forward to supporting Sue Hill, the board, and the investment team as they seek to grow InvestCorp's private credit platforms. On today's call, I will provide an update regarding our performance in the quarter, the market, commentary on our non-accrual investments, our leverage, the dividend, and our outlook. Suhail will walk through our investment activity during the March quarter and after quarter end. Peter will then go through our financial results, and as always, we'll end with Q&A. During the quarter ended March 31st, our net investment income was $2.1 million, or 14 cents per share. This was an increase of approximately 32% from the previous quarter's net investment income. Additionally, net asset value per share increased approximately 0.2% to $5.49 per share from $5.48 per share last at the end of the prior quarter. The increase in NAV was driven by an increase in capital gains. As mentioned last quarter, we continue to 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-accrual this quarter. and our positions on non-approval declined to 3.9% as a percentage of the total fair value of the portfolio, compared to 4.6% as of the previous quarter. We continue to make progress rotating the portfolio and expect progress on the remaining non-approvals over the next 12 months. We partially realized our position in 1888 as the company was sold during the quarter. The majority of the consideration was received in cash at closing. The remainder is deferred non-contingent payments spread over the next 24 months. Other than a discount on the receivables due to the delayed payment, there has not been any material adjustment to the prior carrying value. We covered our March quarterly dividends, not including the supplemental dividends with net investment income. We expect the company to earn its dividend through the next quarter end, June 30th. We are pleased to announce that on April 12th, 2024, the Board of Directors declared a distribution for the quarter ended June 30th, 2024 of $0.12 per share. as well as a supplemental distribution of $0.03 per share, both payable on June 14, 2024, to stockholders of record as of May 26, 2024. Our growth leverage this quarter was 1.52. Our net leverage was 1.36. Growth leverage was slightly above the range, the target range, and net leverage was squarely in the target range of 1.25 to 1.5. I'll now briefly discuss market trends. We saw transaction bonds decline since the previous quarter. However, in this environment, our investment diligence has not wavered, and we continue to be focused primarily on lending to companies that have reasonable leverage and are supported by strong middle market sponsors. We also continue to take advantage of attractive opportunities in the second year. As we look at borrowers' operating performance, the credit quality of our portfolio continues to remain solid. Our weighted average loan-to-value ratio for our performing debt investments is approximately 52%, an increase from 50% 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 40 borrowers across 22 industries, which is up compared to 34 borrowers and 20 industries in the prior year's March quarter. Sioux Hill will now walk through our investment activity during the March quarter and after quarter end. With that, I'll turn it back over to Sioux Hill.

Thank you, Mike. Our investment activity in new portfolio companies this quarter declined compared to the previous quarter as we saw broader market activity slow down. Sponsored middle market direct lending new money volume in the quarter ending March 31st was down almost 10% from the quarter ended December 31st. This quarter's portfolio activity was largely driven by investments in existing portfolio companies through M&A, add-ons, and dividend recaps and high-performing credits, where we maintain a relationship with the sponsors. We've continued to execute our portfolio rotation strategy that we've mentioned over the past year. In this bank ring, we've rotated about a third of our portfolio. The weighted average EBITDA of the portfolio went from $42.6 million as of March 31, 2023, to $63.5 million this quarter. Over the same period, the weighted average net leverage in the portfolio increased from 3.8 times to 4.6 times as we continued shifting towards larger, more stable credits. As part of this ongoing rotation, we aim to invest generally in larger credits that are backed by sponsors we know. We are also diligently managing our watch list names, including Arborworks, American Knots, and Klein Hirsch. During the quarter, and at March 31st, we invested in four existing portfolio companies. Fundings for new investments totaled approximately $8.9 million in cost, with a weighted average yield of approximately 12.49%. In the same period, we fully realized six portfolio company investments, totaling $21.2 million in proceeds with an IRR of approximately 17.09%. First, we participated in the inventory stand of PureStar, which can be found on our SOI as ANCP Clean Acquisition Company. PureStar is the largest pure place commercial laundry provided to the hospitality industry in the U.S. PureStar is an example of a proprietary sole steal from the sponsor. A yielded cost is approximately 11.2%. We made another investment in the first-ling term loan of Victor, also known as LSF9 Atlantis Holdings LLC. As mentioned last quarter, our team has had a long-standing history with this name. Victor is the largest exclusive independent retailer for Verizon Wireless. We purchased Victor in the secondary market at an attractive price. Our yield at cost is approximately 11.9%. We also upsized our investment in an existing portfolio company, Amerit Fleet Solutions. Amerit is one of the largest independent providers of commercial fleet maintenance. We supported the sponsor in right-sizing the capital structure. Our yield at cost is approximately 15.5%. Lastly, we invested in the first lean term loan of Accelerate, also known as America's Auto Auction. Accelerate is the nation's second-largest independent full-service used car auction provider. We purchased Accelerate in the secondary market at an attractive price. Our yield at cost is approximately 11%. Our team has had a long-standing relationship with the team across the platform. Additionally, we had six portfolio company realizations during the quarter. First, we fully realized our position in the first lean term loan in Evergreen North America Acquisitions LLC. Our realized IRR was approximately 13.8%. As Mike mentioned, 1888 was sold during the quarter, and we partially realized our full position, which includes the term loan A, the term loan C, the revolver, and our equity position. The majority of our position was received in cash, and the remainder is deferred non-contingent payments that we expect to receive over the next 24 months. We also sold our position in the first-team term loan of DECRA to take advantage of an attractive trade opportunity in the secondary market. Our realized IRR for VITRA was approximately 14.8%. Our position in the 13-term loan of AHF was also sold during the quarter in a secondary trade. For this trade, our exit IRR was 10.8%. Our position at PureStar was refinanced during the quarter as part of the amend-to-extend transaction. As mentioned earlier, we participated in the new transaction of realized IRR for the old transaction of QSAR was approximately 28.2%. Lastly, our position in the first three-term loan of AmeriQuip was refinanced. We did not participate in the refinancing as the loan was refinanced at a significantly lower rate. We continue to maintain discipline around our investment strategy as evidenced by this grade. Our realized IRR was approximately 13.3%. After the quarter end, we invested in one new portfolio company and two existing portfolio companies. We also realized the position in one portfolio company. After the quarter end, we invested in the first lean term loan of Crisis Prevention Institute, or CPI, to support the refinancing of the company's capital structure. CPI provides de-escalation training and consulting for human care professionals. CPI is a rental group portfolio company. Ideal debt cost is approximately 10.3%. We also increased our existing position in the first lean term loan of Multicolor Corp., also known as Label, to take advantage of an attractive price in the secondary market. Our yielded cost is approximately 10.9%. We also participated in the refinancing of an existing portfolio company, Northstar. Our yielded cost there is 10.2%. And lastly, we realized our first lean term loan position in Empire Office, which has refinanced during the quarter. We've been invested in Empire Office since April 2019. Our realized IRR was approximately 13.3%. As of March 31st, our largest industry concentrations were trading company and distributors at 14.6%, commercial services and supplies at 11.6%, professional services at 9.9%, containers and packaging at 7.6%, followed by Internet and direct marketing retail at 4.6% and IT services at 4.5%. Our portfolio companies are in 22 GICS industries as of quarter end, including our equity in one position, which is a teaching of three industries from the previous quarter. I would now like to turn the call over to Peter to discuss our financial results.

Thanks, Gavail. For the quarter ended March 31, 2024, our net investment income was $2.1 million, or 0.14 cents per share, an increase of approximately 32% from the previous quarter's net investment income of $1.6 million, or 11 cents per share. The fair value of our portfolio was $192.2 million compared to $207.4 million on December 31st. Our net assets were $79.1 million, an increase of $0.3 million from the prior quarter. Our portfolio's net increase in net assets from operations this quarter was approximately $2.4 million. The weighted average yield of our debt portfolio was 12.36% compared to 11.46% for the quarter ended December 31st. As of March 31st, our portfolio consisted of 40 borrowers. Approximately 83.82% of our investments were first liens, and the remaining 16.18% 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 flow on our debt investments was 1%. Our average portfolio company position on an FMV basis was approximately $4.8 million. and our largest portfolio company investment on an FMV basis is BioPlan at $14.6 million. We had a growth leverage of 1.52x and a net leverage of 1.36x as of March 31st, compared to 1.70x growth and 1.51x net, respectively, for the previous quarter. With respect to our liquidity, as of March 31st, we had approximately $12.9 million in cash, of which approximately $10.2 million was restricted cash, with $42.5 million of capacity under our revolving credit facility with Capital One. Additional information regarding the composition of our portfolio is included in our Form 10Q, which was filed yesterday. With that, I would like to turn the call back over to Mike.

Thank you, Peter. As we look towards the last quarter of our fiscal year, our top priority is focused on capital preservation and maintaining a stable dividend. As Suhail mentioned, we are actively working to rotate and diversify the portfolio into more stable credits. We're confident in our pipeline and our capacity to invest our capital in high-quality opportunities. Our approach to credit selection continues to be disciplined, and we're committed to maintaining the quality of our portfolio. 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. I see our first question comes from Mr. Christopher Nolan with Lattenberg Tallman.

Go ahead, please. Hi. Sue Hill, congratulations on your elevation. And Mike, it was good working with you. I look forward to continue working with you. A couple questions. First, the change in the year from the portfolio, what was the driver for that, please?

Chris, thank you for the comments. Largely just the market. Basically, we're seeing spreads start to tighten, and I'm sure you're hearing this from others as well. I mean, the market has gotten competitive. There's generally a lack of flow and lack of supply in the marketplace for new platform transactions, so we're starting to see some yield compression.

Okay. And then I guess, Klein Hirsch, which is one of your larger non-accrual, any update to provide on that?

Not at this moment. We are actively working on the situation. It's a live discussion going on. We believe we're in a pretty good place, but we'll have more to share on that as you know, restructuring at a time like.

And then, Mike, on your comment set, you expect that the earnings will cover the dividend in the June quarter. Should we read that as covering the base dividend or the entire base and supplement?

Yeah, Chris, at this point, the base, the supplement, I'm not sure that we will cover at this point. We'll see how that plays out.

Okay. And the final question, and I know it's a little far out, but You know, looking at the 2026 notes, which have a pretty attractive coupon of 4.875%, I know it's early days, but if you were to refinance, it would be probably a much higher coupon. What are your thoughts in terms of your strategy for that, or are you still in a wait-and-see mode?

We've been talking about it, but we are developing strategy around it. As you've seen, we've brought down our net leverage and our total leverage over time. So that will be part of our discussions as we get closer and closer to that.

Okay. Thank you for taking my questions.

Thank you very much.

Thank you. Thank you very much. Our next question comes from Sean Paul Adams with Raymond James. And if you have any questions, please spread seven pounds.

Go ahead. Hey, guys. Good morning. It looks like 1888 Industrial Services was sold off from the portfolio. Can you touch and provide a little bit more color on kind of the resolution timeframe for the other non-accruals in the portfolio? Sure. Additionally, kind of talking about the overall health of the credit portfolio looking forward.

Sure. Mike, why don't I start and then jump in. I think overall health of the portfolio, we're actually pretty pleased with generally all the names. I think you've seen, as I mentioned on the watch list, names, Arborworks, American Nuts, and Clang-Hirsch. We're actively working on those situations. They're evolving, and from where we have those solutions marked and where we think the outcome is going to be, we feel pretty good about the portfolio. There's nothing imminent, Sean, as far as we can tell in the portfolio. There are one or two names that are developing, but there's nothing, I think, at this point alarming in the portfolio that we would say, problems coming down the bike, other than perhaps one or two situations that are developing real-time.

Yeah, the only thing I'd expand on there is that the watch list that we talked about, the existing non-approvals, I think we have constructive dialogue going on, and we have very good vendor groups on all those, so Got it.

Thank you for the call. I appreciate it.

Thank you very much. And, again, if you have any questions, please press 7-pound, and we will open up your line. I don't see any other questions.

I'd like to thank everyone and appreciate all of your time. And with that, we will talk to you soon.

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