Q4 2023 Crescent Capital BDC Inc Earnings Call
Participants
Dan McMahon; SVP, Head of IR; Crescent Capital BDC, Inc.
Jason Breaux; CEO; Crescent Capital BDC, Inc.
Henry Chung; President; Crescent Capital BDC, Inc.
Gerhard Lombard; CFO; Crescent Capital BDC, Inc.
Robert Dodd; Analyst; Raymond James Financial, Inc.
Paul Johnson; Analyst; Keefe, Bruyette & Woods, Inc.
Presentation
Operator
Good afternoon, ladies and gentlemen, and welcome to the Crescent Capital BDC, Inc. fourth-quarter earnings call. Time all lines are in a listen-only mode. Following the presentation, we will conduct a question if at any time during this call you need assistance, please press star zero for the operator. This call is being recorded on Thursday, February 22nd, 2024, and I would now like to turn the conference over to Dan McMahon. Please go ahead.
Dan McMahon
Good morning, and welcome to Crescent Capital BDC Inc's fourth quarter and year ended December 31st, 2023 earnings conference call. Please note that Crescent Capital BDC, Inc may be referred to as CCap Crescent BDC or the company throughout the call.
Before we begin, I'll start with some important reminders comments made over the course of this conference call and webcast may contain forward looking statements and are subject to risks and uncertainties. The Company's actual results could differ materially from those expressed in such forward-looking statements. For any reason, including those listed in its SEC filings. The Company assumes no obligation to update any such forward-looking statement. Please also note that past performance or market information is not a guarantee of future results.
During this conference call, we may discuss certain non-GAAP measures as defined by SEC Regulation G such as adjusted net investment income or ENI per share. The Company believes that adjusted NII per share provides useful information to investors regarding financial performance because it's one method the Company uses to measure its financial condition and results of operations. A reconciliation of adjusted net investment income per share to net investment income per share, the most directly comparable GAAP financial measure can be found in the accompanying slide presentation for this call. In addition, a reconciliation of this measure may also be found in our earnings release. Yesterday after the market closed, the company issued its earnings press release for the fourth quarter and year ended December 31st, 2023, and posted a presentation to the Investor Relations section of its website at w. w. w. dot Crescent BDC.com. The presentation should be reviewed in conjunction with the Company's Form 10 K filed yesterday with the SEC. As a reminder, this call is being recorded for replay purposes.
Speaking on today's call will be CCAP's Chief Executive Officer, Jason Breaux; Chief Financial Officer, Gerhard Lombard; and Managing Director, Henry Chung, who was recently appointed to serve as President of CCAP.
With that, I'd now like to turn it over to Jason.
Jason Breaux
Thank you, Dan, and hello, everyone, and thank you for joining our earnings call. We appreciate your continued interest in CCAP. I'll provide some fourth quarter and full year highlights touch on our current portfolio and provide some commentary on what we are seeing in the market. I'll then turn it over to Henry to review our recent investment activity and portfolio performance. Gerhard will then review our financial performance for the fourth quarter. Let's begin, please turn to slide 7 the headline is that CCAP had an excellent quarter after the market closed yesterday, we reported net investment income of $0.61 per share for the fourth quarter, corresponding to an annualized NI ROE of 12.4%. The $0.61 per share of NI is up from $0.59 per share in the prior quarter, which culminated in a year of record net investment income of $2.30 per share. These results largely reflect the continued strong credit performance of our portfolio and the earnings benefits of higher market interest rates on our primarily floating rate portfolio. Strength of our earnings and positive valuation momentum in our portfolio also led to growth in our net asset value, which increased 1.7% in the quarter and 1.1% year over year to $20.4 per share. Net income per share was $0.83 in the fourth quarter, corresponding to an annualized ROE of 16.9%.
Please turn to Slides 14 and 15 of the presentation, which highlights certain characteristics of our portfolio. We ended the year with approximately $1.6 billion of investments at fair value across a highly diversified portfolio of 186 companies with an average investment size of approximately 0.5% of the total portfolio. We have deliberately maintained an investment portfolio that consists primarily of senior secured first lien and unitranche first lien loans, collectively representing 89% of the portfolio at fair value at year end, unchanged from the prior quarter. This speaks to our continued focus on maintaining a defensively positioned portfolio with greater downside protection and lower risk of loss compared to portfolios with greater second lien and subordinated debt exposure. We have focused our investing efforts on noncyclical industries with high free cash flow characteristics and remain well diversified across 20 industries. Our investments are almost entirely supported by well-capitalized private equity sponsors with 98% of our debt portfolio in sponsor-backed companies. As of year end, we've been pleased with the fundamental performance of our portfolio, as indicated by our performance ratings and nonaccrual levels, our weighted average portfolio grade of 2.1 remained stable quarter over quarter and on page 18, you will see that the percentage of risk rated one and two investments, the highest ratings our portfolio companies can receive accounted for 87% of the portfolio at fair value. As of year end, we had investments in nine portfolio companies on nonaccrual status, representing 2.0% and 1.9% of our total debt investments at cost and fair value, respectively, really to the market backdrop. Over the past year, we've largely operated in an environment where the ongoing impact of higher interest rates and future rate uncertainty have constrained new LBO activity. These dynamics weighed on the deal environment for most of 2023, as evidenced by U.S. LBO transaction volume, reaching its lowest level in 10 years and down nearly 40% from the trailing 10-year average. However, during the fourth quarter, we did see a meaningful improvement in deal volume relative to the first three quarters of 2023. And the consensus seems to be that this trend is going to continue on the demand side. Private equity dry powder is at record levels. And on the supply side, an increasing number of private companies are looking for potential exit opportunities with many backed by sponsors that may be seeking to monetize longer held investments with motivated sponsor buyers and sponsor sellers we are cautiously optimistic about deal volumes for 2024. Given Crescent's deep relationships with private equity sponsors that span in excess of three decades, we are well positioned to benefit have an increase in LBO activity for the fourth quarter. We are pleased to declare a supplemental dividend of $0.1 per share, one penny higher than last quarter's supplemental dividend payable on March 15th. As a reminder, the supplemental dividends are calculated as 50% of net investment income in excess of our regular $0.41 per share dividend, subject to amendment test. The increased supplemental dividend comes from a record earnings quarter and our maintained focus on aligning ourselves with our shareholders while future supplemental dividend declarations are at the discretion of our Board of Directors. It is our intent and expectation that CCAP. will continue to distribute quarterly supplemental dividends for the foreseeable future. Given base rates are above historical averages, and we have meaningful undistributed taxable income, which is generated by earnings in excess of our dividends. Our Board has also declared a regular dividend of $0.41 per share for the first quarter payable on April 15th, 2024, which represents the 21st consecutive quarter of CCAP., paying a regular dividend of $0.41. Together with the $0.1 supplemental. These distributions correspond to an annualized dividend yield of 10.2% based on fee caps now per share as of December 31st, 2023.
I'd now like to turn it over to Henry to discuss our Q4 investment activity and portfolio commentary. Henry?
Henry Chung
Thanks, Jason. Please turn to Slide 16, where we highlight our recent activity gross deployment in the fourth quarter totaled $89 million. As you can see on the left hand side of the page, 98% of which was in senior secured first lien and unitranche investments. During the quarter, we closed 10 new platform investments totaling $60 million, representing $81 million in commitments, with the remaining $29 million coming from the incremental investments in our existing portfolio companies. The $89 million of gross deployment compares to approximately $87 million in aggregate exits, sales and repayments. New investments during the fourth quarter were loans to private equity backed companies with Silver floors, attractive fees and a weighted average spread of approximately 600 basis points. We continue to have that well-capitalized borrowers with significant equity cushions and the weighted average loan to value of our new investments for the quarter was 36%. We remain highly selective from a credit and risk-adjusted return perspective and maintain a long-term strategic view on capital deployment that it insulated by our orientation to first-lien credit risk and noncyclical industries.
Diving a bit deeper on the latter. I'd like to spend a few minutes on fee caps to most heavily weighted industry exposures, healthcare equipment and services and software and services.
Let's start with Healthcare, which is CCAP's largest industry exposure at approximately 26% of the portfolio at fair value as of year end, we are mindful of our concentration to healthcare providers and view it as important to note that approximately half of our healthcare industry exposure or 13% of the overall portfolio. Our investments in actual providers, these businesses have stable demand drivers that are attractive from a credit perspective. While we are mindful of reimbursement and margin pressures that these businesses may face, particularly in this environment. This particular subsector has performed well with a weighted average risk rating leverage and fixed charge coverage ratios that are in line with the broader CCAP portfolio. We have deemphasized specialties and practice areas that have been most acutely affected by legislative changes, in particular, emergency services. Additionally, we are fully cognizant of the challenges facing health care provider roll-up strategies that are popularized in a zero interest rate environment. And note that we have a de minimus amount of delayed draw commitments to our health care provider portfolio companies. The other half of our healthcare industry exposures and revenue cycle management distributors, medical equipment manufacturers and other service providers that are not generally subject to direct reimbursement from payers with respect to our software investments, which is our second largest industry concentration at 21% of the overall portfolio, our investment focus is providing conventional cash flow-based leveraged financing to mature sponsor-backed companies. We do not lend to pre-cash flow companies or originate annual recurring revenue based loans and our underwriting to software businesses is the same as any other sector whereby this cash flow that the Company needs for a credit.
Let's shift gears Next month marks one year since the closing of our acquisition of First Eagle BDC. When we announced the acquisition, we noted that we had established a successful playbook to onboard monitor and appropriately monetize an acquired BDC portfolio. Given our acquisition of Alcentra in 2020. The remaining investments in the acquired First Eagle portfolio have largely performed expectations to date, with a weighted average risk rating of 2.3, unchanged since the time of acquisition. To date, we have rotated out of 21 investments, representing 27% of the First Eagle portfolio. As a result, the first Eagle portfolio represented 15% of CCAP's total investment portfolio as of year-end first, Eagle's pre 2020 vintage legacy investments, which were a key area of focus during our diligence, accounting for 1.3% of CCAP's combined portfolio at cost and fair value, respectively as of year end. We will note that we acquired this subset of the portfolio at an over 70% discounts first, people's respective cost basis at the time of the acquisition.
Turning back to the broader portfolio, please flip to Slide 17. You can see that the weighted average yield of our income-producing securities at cost remained flat quarter over quarter at 11.9% and is up 110 basis points year over year, driven by the increase in the respective base rates. As of December 31st, 99% of our debt investments at fair value were floating rate with a weighted average floor of 80 basis points, which compares to our 65% floating rate liability structure based on debt drawn with 0% floors. Overall, our investment portfolio continues to perform well with strong year over year weighted average revenue and EBITDA growth. That being said, we have continued to closely monitor the impact of rising borrowing costs on our portfolio companies. The weighted average interest coverage of the companies in our investment portfolio at quarter end held stable at 1.7 times based on the latest annualized base rates. We also continue to closely monitor how our portfolio companies are managing fixed operating costs in this environment. Our analysis demonstrates that our portfolio companies in the aggregate are well positioned to address fixed charges with operating cash flows and available balance sheet liquidity. As of year end, approximately 64% of aggregate revolver capacity was available across the portfolio, unchanged from the prior quarter, and we had not seen an increase in aggregate revolver utilization during the fourth quarter for strength of our portfolio continued to benefit from the substantial amount of equity invested in our companies. Most of it's applied by large and well-established private equity firms with whom we have long-standing relationships and have partnered with in multiple transactions. And we note that the weighted average loan to value in the portfolio at the time of underwrite approximately 41%.
With that, I will now turn it over to Gerhard.
Gerhard Lombard
Thanks, Henry, and hello, everyone. Our net investment income per share of $0.61 for the fourth quarter of 2023 compares to $0.59 per share for the prior quarter and $0.52 per share for the fourth quarter of 2020 to total investment income of $50 million for the fourth quarter. The highest quarterly figure we've reported since inception compares to $48.2 million for the prior quarter, representing an increase of approximately 4%. Importantly, the quality of our income remains very strong. Recurring yield related income accounted for 96% of this quarter's total investment income and fixed income continues to represent a modest portion of our revenue at less than 3% of total investment income, one of the lowest levels in the space, given our focus on market-leading companies with strong margins and a high free cash flow generation.
Our GAAP earnings per share for net income for the fourth quarter of 2023 was $0.83, an increase of 36% from the prior quarter. This was the result of net investment income outpacing the regular and supplemental dividends, coupled with $0.4 per share of net unrealized depreciation, largely a result of spreads tightening. At December 31st, our stockholders' equity was $743 million, resulting in net asset value per share of $20.4 as compared to $730 of $19.70 per share last quarter.
Now let's shift to our capitalization and liquidity. And on Slide 20, we continue to maintain a conservative mindset to both balance sheet liquidity and BDC leverage managing the company with a full economic cycle mentality. While this starts with our underwriting of new investment opportunities, it also applies to how we manage CCAP capitalization and liquidity, managing leverage to the lower end of our targeted range, while ensuring strong balance sheet liquidity affords us the ability to invest in new platform companies even in periods of volatile capital markets when risk-adjusted returns can be particularly attractive.
As of December 31st, our debt-to-equity ratio was 1.15 times, down from 1.18 times in the prior quarter. Our liquidity position remains strong with $330 million of undrawn capacity, subject to leverage borrowing base and other restrictions and $24.5 million in cash and cash equivalents. As of year end, the weighted average stated interest rate on our total borrowings was 7.02% as of year end. And we've highlighted on the right side of the slide that there are no debt maturities until 2026.
Finally, for the first quarter of 2024, our Board declared a $0.41 per share quarterly cash dividend, which will be paid on April 15th, 2024, to stockholders of record as of March 29th, 2024. Additionally, as Jason mentioned, our Board declared a supplemental cash dividend of $0.1 per share, which will be paid on March 15th, 2024 to stockholders of record as of February 29th, 2024.
In terms of our taxable income spillover, we currently estimate that we ended 2023 with approximately $35 million or $0.94 per share from 2023 for distribution to stockholders in future quarters, this level is more than two times our current quarterly base dividend which we believe is very beneficial to the stability of our dividend.
And with that, I'd like to turn it back to Jason for closing remarks.
Jason Breaux
Thanks, Gerard. Before we wrap up I'd like to spend a minute on our public track record. I'm on Slide 5. This month marks the four year anniversary of Seacoast's public listing. A lot has changed in the world since February 2020, the administration in Washington, the global pandemic 11 Fed rate hikes. A lot of change at CAP. to total book value has grown by over 80%. Our investment portfolio has grown by over 70%. Insider ownership of CCAP shares is up over four times since Q4 2019. We progressed on a number of technical fronts as well. Market capitalization has grown by approximately 30% and average daily trading volume has doubled, making it easier for investors to own our stock. What hasn't changed is our focus on maintaining a defensively positioned portfolio that delivers a stable now profile with consistent dividend coverage. Since listing, our NAB per share is up over 3%. The percentage of the portfolio, that's first lien is up from 85.5% to nearly 90%. Nonaccruals are down. Pick interest remains a very low percentage of total investment income, and we've delivered a 37% total economic return per share, measured as change in NAB plus total dividends. We believe our portfolio is diverse and healthy, and we are in excellent financial condition to selectively capitalize on the current investment environment. As always, we appreciate you all joining us today, and we look forward to speaking with you soon.
And with that, operator, we can open the line for questions.
Question and Answer Session
Operator
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question followed by the one on You will hear a three tone prompt acknowledging your request. If you are using a speakerphone, please lift the handset before. Question comes from Robert Dodd from Raymond James. Please go ahead.
Robert Dodd
Hi, everyone. And congratulations on a really nice quarter. And so yes, a few questions I want to start with Jason, in your prepared remarks. I think you said in Q4, the volume was up. We've obviously heard that from others. The consensus was that trends would continue and do you agree with the consensus or do you have a different opinion or any thoughts on what you think about the forward trend and what's in the pipeline, for example, now would be efficient?
Jason Breaux
Hey, Robert, thank you for the question. It's Jason. I would say yes, and I think that the term I used on in the prepared remarks was cautious optimism for 2024. However, what I would look at it, we had a pretty active January and I would say things have slowed down a bit here in February, which is which is interesting. And curious, potential explanations maybe for the slower start to the year, at least what we're seeing right now are some of the recent Fed comments around the time line pushing out for future rate decreases. And certainly the macro uncertainties that are out there around the world as well and the continued challenge of getting to a purchase price equilibrium between buyers and sellers. And I will still say we are we are optimistic that deal flow will increase in 2024. Certainly, maybe it's maybe it's perhaps a bit bit more back-end weighted. But given the combination of a significant amount of private equity dry powder that needs to be put to work and the pressure on sponsors from LPs to return capital. And we are optimistic for volumes over the course of 24.
Robert Dodd
Got it. I appreciate that. And then all the latest kind of I mean, in Q4, I mean, activity had picked up fairly significantly versus the others on 2020. Yet your no weighted average spread on new investments was remarkably stable by amateurs, 600 bps in the fourth quarter was from oh five 19 despite a pickup in activity. Do you think the spreads on the kind of deal, no doing obviously like-for-like sales, but has been that they stabilize here or do you think there's as prospectively more pressure could happen, but right now they're kind of hanging in at this kind of six hundreds.
Jason Breaux
I would say pricing has tightened a bit here over the last six months and maybe a bit more recently. But certainly private credit continues to carry an attractive premium relative to the syndicated market. The tightening in the syndicated market has resulted in the average premium in the private market over BSL rising to over 200 basis points in January, which is a six month high and up from know, a little over 100 basis points a year ago that that spread that 200 basis points, I think will tighten again over time. But because of that tightening in the BSL market that that's really put, I would say, more pressure on the upper mid-market in private credit. So call it a $200 million of EBITDA and larger, which is oftentimes a BSL replacement option versus the tightening that we're seeing in the core and lower mid-market, which is where Crescent spends most of his time this time core midmarket, I would say is sort of 50 to 150 and lower mid-market is 10 to 50. We're seeing a bit of tightening there, but I would say it's not as acute as what the upper band market is currently experiencing. Some the other pressure on the government market besides sort of comping to BSL is the amount of inflows coming in that's chasing that opportunity, particularly from some sizable institutional product, but also from the from the significant capital is coming in on the non-traded BDC side of things from the from the retail market. If I were to characterize pricing today, I would say and for units in the lower mid-market, I'd say we're still in the 550, 575, up to 625 range. In the core mid-market, probably 550, 575. And then in the upper mid-market. I think it's tighter than that, probably [5 and a quarter] to 550 contract pricing.
Robert Dodd
That is incredibly helpful. And thank you. And now, Jason, congratulations on really, really solid quarter.
Jason Breaux
Thank you.
Operator
Thank you. As a reminder, should you have any questions, please press star. One question comes from Paul Johnson from KBW, please.
Paul Johnson
Yes, good afternoon, guys. Thanks for taking my questions. You guys are at the lower end of sort of your target range here on net leverage on your stock, obviously generating a very strong ROE. Do you think going forward this year, kind of in this more uncertain environment, you know, holding back on originations a little bit, maybe even kind of derisking the BDC is something that you would be looking to do for you guys more about just kind of the activity, I guess that you have in front of you and dumb. What's obviously the attractive set of opportunities that you're evaluating?
Jason Breaux
Hey, thanks. Thanks, Paul, for the question. And this is Jason. I would say that we've been operating with a leverage profile that I think is already sort of conservatively minded. We've been operating in an uncertain environment around our rates in the economy. Certainly a year ago. I think the consensus was that we were going to we were going to be in recession in 2023. That obviously didn't happen. But because of sort of that mentality and that caution, we've tried to post acquisition the First Eagle acquisition transaction, we really tried to maintain to slightly delever relative to our target range. So they were operating kind of on the lower half of our target stated debt to equity range. And I think that's a range that the level that we're comfortable with in this environment.
Henry Chung
And Paul, I think this is Henry speaking. One other thing to note here is on the rotation of the First Eagle assets that is still currently in process. So as those assets monetize, we would seek to reinvest those in directly originated loans from the Crescent platform year. So if you look at Q2, the Q4 activity on a net basis, we were up modestly on a quarter-over-quarter basis. But if you look at the overall activity here, on there's a fair amount of realizations just due to the rotation of that book relative to new deployment within the quarter.
Paul Johnson
Got it. That makes sense. And I appreciate the color there that I was just wondering if you could maybe if it's possible, just touch on any sort of fundraising efforts the advisor has outside of the BDC, if it's possible to provide any sort of numbers or targets that you're looking to potentially raise on? And will these assets B, I guess, in line with the CCAP's core strategy?
Jason Breaux
Yes, Paul, it's Jason. Again, thanks for the question. I think I think what I could say is you'll see cap overall our Crescent overall is the $40 billion-plus platform of which $30 billion of that is in private credit. I mean, if you think about CCAP, that's, you know, just under a couple billion of that $30 billion. So we've got some fairly significant affiliated institutional funds that that CCAP sits alongside at Crescent that focus on private credit, whether a lower middle market or core mid-market, U.S. and Europe. And done. And so I think what I could say is that we're regularly in the market with institutional funds focused on private credit and certain segments of private credit. That's nice for us CCAP because as a $1.6 billion portfolio, we can maintain really nice diversification within our portfolio and still be very relevant in the marketplace because as we participate alongside the larger institutional funds that we sit next to and we seek out might commit 10 or $20 million to a given transaction and Crescent as a whole might commit a couple of hundred million dollars to that transaction. So it's certainly an attractive benefit for the BDC to be attached to these larger institutional pools of capital.
Paul Johnson
Thanks for that. And last one for me on you guys. Obviously this quarter as well as for the full year last year, pretty significantly over on the dividend, even with the supplemental framework in place. I'm just curious if the board in addition to the supplementals has been evaluating any sort of potentially specials or if you're just comfortable with the current level of spillover that built-up?
Jason Breaux
It's Jason again, and maybe Gerhard might have something to add here. But I would say that, Tim, we're comfortable with where we are at the moment. We talk about the dividend regularly internally and with our Board. As you know, Paul, having having covered us for some time, we we really since inception, have prioritized earning our dividend and I've never cut our dividend, which are which are two sort of, I would say, key priorities for us going forward at and as we think about on the ongoing environment and what's going to happen to rates. We certainly run sensitivities around that and around the performance of the portfolio. And I would just say we want to be in a position where years from now when when rates are down meaningfully potentially from where they are today, we can we can say that we continue to maintain our our base dividend at $0.41, and it hopefully shared a lot of the upside from the higher base rate environment with our shareholders in the form of the supplemental.
Paul Johnson
Appreciate that makes sense of helpful. Answers and congrats on a very good quarter.
Henry Chung
Thanks, Paul.
Operator
Thank you. There are no further questions. I will turn the call back over closing.
Jason Breaux
Okay. Well, thank you, everyone, for joining the call here today, and we're appreciative of your interest and your time that you've invested in CCAP, and we look forward to further conversations with you all.
Operator
Ladies and gentlemen, this concludes your conference call for today. Thank you for participating, and we ask that you please disconnect your lines.
