Crescent Capital BDC, Inc.
Q1 2021 Earnings Call Transcript

Published: 14 May 2021

[Operator:]

Good day and thank you for standing by. Welcome to the Q1 Crescent Capital BDC Earnings Call. At this time, all participants are in a listen-only mode. I would now like to turn the call over to your host Daniel McMahon. You may begin.

[Daniel McMahon:]

Thanks, Kevin. Good morning and welcome to Crescent Capital BDC Inc.'s first quarter ended March 31, 2021 earnings conference call. Please note that Crescent Capital BDC Inc. may be referred to a CCAP, Crescent BDC, or the company throughout the call. Before we begin, I'll start with some important reminders. Comments made during 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 statements. Please also note that past performance or market information is not a guarantee of future results.

[Jason Breaux:]

Thank you, Dan. Hello everyone and thank you for joining us. We appreciate your continued interest in CCAP. For our call today, I'll provide a few highlights from this quarter's results, review our investing activity, provide some thoughts on our current positioning, and then turn it over to Gerhard to review our financial results in more detail before we open the call to Q&A. So, let's begin. Please turn to Slide 6, where you'll see a summary of our results. We reported strong first quarter financial results with adjusted net investment income of $0.46 per share. This quarter, we accrued a capital gains-based incentive fee expense related to changes in net realized and unrealized gains and losses. This non-cash expense, which was not paid and is not payable, was approximately $0.05 per share for the quarter. Our Q1 net investment income per share inclusive of the accrued capital gains incentive fee expense was $0.41. Pausing on the impact of this adjustment for a moment, which is only payable at the end of each fiscal year based on our investment advisory agreement, if we were to hypothetically end the year as of this March 31, the $0.05 per share of cumulative accrued capital gain incentive fee expenses that we had at quarter-end would not be paid or payable since the gains must be realized in order for us to be eligible to receive the fee.

[Gerhard Lombard:]

Thanks, Jason. Our adjusted net investment income per share of $0.46 for the first quarter of 2021 compares to $0.47 and $0.44 per share for the fourth and first quarters of 2020. Our GAAP earnings or net increase in net assets resulting from operations was $0.76 per share for the first quarter of 2021, which compares to per share for the fourth quarter of 2020, and minus per share for the first quarter of 2020. Our first quarter adjusted earnings were driven by strong recurring interest and dividend income generated from our growing portfolio. Our net unrealized gains on investments of 8.3 million or $0.30 per share primarily reflected the continuing tightening of credit spreads relative to year-end and performance improvements in certain names. At March 31, our stockholder's equity was 570 million resulting in a net asset value per share of $20.24 as compared to 560 million or $19.88 per share at year-end or 466 million or $16.52 per share at March 31, 2020. The increase in our net asset value during the first quarter was primarily driven by net unrealized gains as highlighted on Slide 10, and we had $0.06 of realized gains per share. Investments at fair value increased by 2.3% in the quarter from , driven by approximately 11 million in net deployment in addition to an increase in net unrealized portfolio appreciation.

[Jason Breaux:]

Thank you, Gerhard. Overall, we are pleased with our financial results this quarter. Additionally, our credit performance remains strong and we believe we have built a diverse and defensive portfolio of increasing scale supported by an increasingly attractive financing profile. We are optimistic about the economy given the pace of vaccinations and businesses reopening. Our fundamental outlook for the performance of our portfolio companies is positive and we look forward to leveraging our competitive advantages in the full Crescent platform to continue to deliver attractive risk adjusted returns for our stockholders. We would like to thank all of you for your confidence and continued support.

[Operator:]

Our first question comes from Robert Dodd with Raymond James.

[Robert Dodd:]

Hi guys. Congrats on the quarter, and the year really. On that topic, now, first question is kind of about the Alcentra assets. Now you've owned them, obviously, you're slightly more than a year. Obviously, they were in at the end of Q1 last year. Obviously, during that time we've had COVID, but could you tell us how much of your book is now represented by the Alcentra assets? And you got any color on, kind of how those performed over the last year versus your originated book?

[Jason Breaux:]

Hey Robert. Thanks for the question. Yeah, on Alcentra, we did provide, kind of, a one-year look back last quarter and I think as was the case last quarter, this quarter I think we continue to be pleased with the performance of that portfolio in its totality. We did break out core, non-core buckets last quarter that we had sort of deemed when we underwrote that portfolio and I would say both of those buckets have continued to perform well and be up relative to respective cost basis. And so I think, you know – and certainly some of the appreciation in the portfolio is coming from some of the Alcentra acquired assets.

[Robert Dodd:]

Okay, fair enough. Thank you, on that. And another one, on, I mean the data you gave is very interesting, right, I mean the platform as a whole deployed a billion that the BDC accounts were obviously a quite small part of that. That tends to imply obviously that there's a lot of available capital in other direct lending middle market Crescent funds. Do you think that available capital elsewhere in the platform is going to – does that represent a risk and I don't mean that in a bad way, really, to the BDC being able to reach its leverage targets in the near or medium-term with presumably a lot of your activities going to be allocated elsewhere given available capital?

[Jason Breaux:]

Yeah. Thanks, Robert. I don't view that as an impediment for us. I think we view the benefits of being attached to the platform as really significant in terms of deal flow, and the opportunities that we see. There are certain investments that may fit certain fund parameters and not the BDCs for instance. So, we're conscious of qualifying assets and certain yields and bogeys that we're trying to achieve. So, not every investment that is sourced across the platform is appropriate for the BDC. But I think just generally speaking, we think having a $20 billion credit platform with the BDC being able to participate in any of the deals that are sourced across that platform allows us to service our client relationships best and our private equity firm’s best. And ideally, continues to, sort of translate into more deal flow and larger commitments and larger holds across our investments.

[Robert Dodd:]

Got it. I appreciate that. Just one more if I can, on – as you pointed out, I mean the markets in Q1 they did become a bit more friendly very, very competitive. Good number of originations from you guys in the quarter. On the repayment side, and I recognize this is even harder to predict, repayment activity was healthy should I say in Q1, what's the outlook on that so to speak. Do you expect that to remain elevated through say, you know the middle of the year, or do you think a lot of that is now in the rearview mirror and it goes back to, kind of a normal pattern kind of asset like if you will?

[Jason Breaux:]

Yeah. Thank you. I would say what we saw in the first quarter was certainly significant repayment activity and that was set against middle market sponsored volume being down 20% quarter-over-quarter, which is seasonally a slower quarter throughout the year. Our view is that Q2 volumes are picking up, and I think we're very constructive on increased volumes throughout the balance of the year. I think that's going to be driven by growth expectations and prospects as we continue to emerge from the pandemic, significant private equity dry powder. Perhaps the potential for capital gains tax changes that might motivate transactions, as well as sellers on transactions. So, I do think that we've seen some of the repayment activity continue in the second quarter, but I think as the supply and demand come more in balance through the balance of the year, that's going to create more opportunities for net deployment growth for our BDC and certainly, the sector, and I think we're – as we talked about just a few moments ago that the power of the platform, the relationships with sponsors and management teams that we have were quite constructive on our ability to continue to deploy and scale the portfolio over the course of the year.

[Robert Dodd:]

Got it. Thank you.

[Jason Breaux:]

Thank you.

[Operator:]

Our next question comes from with Wells Fargo Securities.

[Unidentified Analyst:]

Hi, Guys. Just a follow up on your dialogue with Robert there. It sounds like you'll be going up market a bit larger holds with your larger capital base. Can you talk about any style drift we should expect? It feels like you fit pretty well into the core middle market category judging by your senior spreads, and your EBITDA levels and so forth? How much of a change should we expect? I suppose in near-end and longer-term?

[Jason Breaux:]

Yeah, thanks . Jason. I wouldn't say you should expect any style drift in terms of what we've been doing. I will point out if you look at, sort of historical deployment. We have consciously taken the Unitranche composition of the portfolio up as a percentage of the aggregate, and that's been intentional. I think that's where the market is moving in a lot of cases as well. So, I do think Unitranche will continue to take more share as a percentage of the overall portfolio. But I might also just, got to remind everyone that our core focus is in two main areas. We spend a lot of time in the lower middle market, which would characterize as businesses that have, kind of $10 million to $40 million of EBITDA, and we're operating and investing at the top of the capital structure there. And then we’re underwriting larger companies with more than $50 million of EBITDA, we're oftentimes coming into the Unitranche or into second lien junior debt positions in certain cases. First lien and Uni will always be the core focus of the BDC, but – and therefore, our median EBITDA will continue to hover in that lower middle market range, but we will continue to underwrite larger companies as well given our focus in the upper middle market in Unitranche and second liens.

[Unidentified Analyst:]

Ok. Very well. That's helpful. And then just the – I now you sounded pretty positive on continuing to ramp the portfolio. But the last couple of quarters have obviously were strong for you and most others there was seemingly a large quantity of quality deal flow. How do you think that the presumed decline of those conditions happening today translates to your origination for say the rest of the year?

[Jason Breaux:]

Yeah. Thanks, . I think you're right. Back half of last year deployment was strong for us. We saw a lot of high-quality opportunities. And I think what we've really seen more recently is more, sort of demand come into the market. I wouldn't say, we're necessarily seeing a decline in the quality of opportunities today, but there’s certainly more demand for private credit. And as I mentioned a little bit earlier, I do think Q1 certainly was a little bit slower as is generally the case. And I think we're quite constructive on continuing to see good volumes and high-quality deals.

[Unidentified Analyst:]

Sorry, I was on mute. That's all for me. Thank you.

[Jason Breaux:]

Thanks, .

[Operator:]

And I'm not showing any further questions at this time. I like to turn the call back over to our host for any closing remarks.

[Jason Breaux:]

Great. Well thank you everyone for your interest and your time here today in listening to the Q1 earnings. And we look forward to being in touch with you soon.

[Operator:]

Ladies and gentlemen, this concludes today’s presentation. You may now disconnect and have a wonderful day.