Crescent Capital BDC, Inc.
Q4 2020 Earnings Call Transcript

Published: 28 Feb 2021

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Crescent Capital BDC, Inc. Fourth Quarter and Year Ended December 31 Earnings Conference Call. As a reminder, today’s conference call is being recorded. I will now turn the conference over to your host, Mr. Dan McMahon, Vice President, Head of Investor Relations. Sir, you may begin.

[Dan McMahon:]

Thank you. Good morning and welcome to our fourth quarter and year ended December 31, 2020 earnings conference call. Please note that Crescent Capital BDC, Inc. maybe referred to as CCAP, Crescent BDC or the company throughout the call. Before we begin, I would like to remind our listeners that remarks made during the call may contain forward-looking statements. Statements other than statements of historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in CCAP’s filings with the Securities and Exchange Commission. The company assumes no obligation to update any such forward-looking statements.

[Jason Breaux:]

Thank you, Dan. Good morning, everyone and thank you for joining us today. We appreciate your continued interest in CCAP. For those of you who are new to CCAP, our investment strategy is and since inception has been, to focus on providing financing solutions to healthy, resilient middle market companies that are backed by strong partnership oriented private equity sponsors. Today, I will highlight our strong fourth quarter and full year results, review our current positioning, provide an update on our acquisition of Alcentra Capital Corporation, which closed just over a year ago, and touch on a few more announcements. Gerhard will then discuss our financial results in more detail and review our liquidity profile. So let’s begin. Please turn to Slide 5, where you will see a summary of our results. For the fourth quarter, we reported after-tax net investment income of $0.47 per share, which concluded a strong year for CCAP despite the challenging macro backdrop. We are appreciative of how our team managed through the difficult conditions created by the COVID-19 pandemic, and we believe our performance is consistent with Crescent’s nearly 30-year history of managing assets through multiple market cycles. Our net asset value per share increased approximately 4.2% in Q4 to $19.88. Gerhard will walk through the key drivers in more detail, but the increase was primarily driven by a net change in unrealized depreciation, specific to certain individual portfolio companies and net unrealized mark-to-market gains related to the tightening of credit spreads relative to the end of the third quarter. It’s worth noting that NAV is up 2% year-over-year meaning we’ve recovered more than all of the attrition experienced in the first quarter. With our total investment portfolio carried at 102% of cost as of year-end versus 91% of the cost at March 31. We are comforted by the quality of the portfolio and its performance despite the significant challenges the past year presented. Slides 12 and 13 of the presentation provide a snapshot of the portfolio. We ended the year with over $1 billion of investments at fair value across 132 portfolio companies with an average investment size of less than 1% of the total portfolio. Our investment portfolio, which grew approximately 42% year-over-year, consists primarily of senior secured first lien and unitranche first lien loans. We are well diversified across 20 industries and lend primarily to private equity-backed companies. 99% of our debt portfolio was in sponsor-backed companies as of year-end, consistent with prior quarters.

[Gerhard Lombard:]

Thanks, Jason. Our net investment income per share of $0.47 for the fourth quarter of 2020 was higher than both $0.43 for the third quarter of 2020 and $0.41 for the fourth quarter of 2019. Our GAAP earnings per share for the fourth quarter of 2020, was $1.22, which compares to $1.36 for the third quarter of 2020 and $0.45 per share for the fourth quarter of 2019. Our GAAP earnings per share for the fourth quarter of 2020 included $1.24 of net unrealized gains, offset by $0.49 per share of net realized losses. Both figures include the impact of taxes. As Jason mentioned, we closed the year with a very strong fourth quarter that helped drive our full year net investment income per share of $1.80 and along with recovering valuations, our GAAP net income per share of $1.98. Our fourth quarter earnings of $0.47 per share were driven by strong recurring interest and dividend income generated from our growing portfolio. Our net unrealized gains on investments of $34.9 million for the fourth quarter of 2020 primarily reflected the continuing tightening of credit spreads relative to the end of the previous quarter and performance improvements in certain names.

[Jason Breaux:]

Thanks, Gerhard. Despite the many challenges that 2020 brought, we are pleased with the performance of CCAP this past year, and we feel well positioned for 2021 and beyond. Looking to the future, our strategy remains the same. We will continue to focus on effectively deploying capital to optimize our portfolio performance by generating a strong recurring earnings stream, while focusing on preservation of capital. We would like to thank all of you for your confidence and continued support. And with that, operator, please open the line for questions. Thank you.

[Operator:]

Thank you. Our first question comes from Matt Tjaden of Raymond James. Your line is open.

[Matt Tjaden:]

Hey, everyone. Appreciate the time. First question, if I can, on GACP II, so over the last couple of quarters, saw the cost basis shrinking, is the asset winding down? And if so, is there any plans for a similar type of equity investment, given the strong income the asset has generated, just trying to get a sense of kind of forward dividend levels?

[Jason Breaux:]

Yes. Matt, it’s Jason. Thanks for the question. On GACP II, yes, that is a harvesting fund investment. So that’s why you see the capital continuing to decline in that investment. As far as going forward, it is an investment that we sort of look at as somewhat differentiated in the sense that the primary strategy of that investment was to make asset-based or collateral-based loans as opposed to what we typically do here at Crescent, which is providing sponsor-backed cash flow based loans. As far as sort of looking forward, I probably can’t really comment too much on what we are going to do on that front, but we do think that is an interesting asset class from an investment standpoint.

[Matt Tjaden:]

Okay, fair enough. Secondly, congrats on the unsecured issuance, with leverage at 0.85x, I know you mentioned the target of 1.1x to 1.4x. Any commentary you can give on when you kind of expect to hit that target range and anywhere within that range is kind of where you would expect a steady state leverage level to settle?

[Gerhard Lombard:]

Yes. Matt, thanks for the question. This is Gerhard. You’re correct. Our target debt-to-equity ratio is in that 1.1 to 1.4 range, and it is a pretty wide range, dependent really on portfolio performance, market conditions macroeconomic environment and so on. We are obviously well below that level. Look, I think it’s hard to really look forward into the crystal ball here and predict when we’re going to get there. If you look at our historical net deployment over the last couple of quarters and cut out some of the COVID noise and the – maybe the second quarter of last year, our deployment is generally ranged in the, I’d say, from a net standpoint, in the kind of low 50s to $70 million per quarter. And if you forecast that – assume that same deployment level is sustainable, and we think it is, given the pipeline and the market today, we’d probably get to full ramp at some point in the middle of 2022. So the other comment I would make on that is we’re certainly well capitalized for the medium term year given the unsecured offering we closed on. And so we feel very good about our ability to participate in pipeline opportunities and continue to grow the portfolio.

[Matt Tjaden:]

Okay, that’s helpful. And then just last one for me on the pipeline, so it sounds like terms and spreads in the new investments year-to-date are kind of comparable to the prior quarter. Any commentary you can give on where spreads and terms are sitting right now to kind of pre-COVID levels?

[Jason Breaux:]

Yes. Thanks, Matt. It’s Jason. So happy to make some comments on that, I think as we said in the prepared remarks, we are seeing fairly comparable terms in terms of what we are doing to Q4. That said, if you look at the syndicated loan market, certainly, it is tight with first liens for better credits in the 375 to 400 over range second liens in the tight at high-6s to maybe low-8s – or I’m sorry, low-7s, which can result in a pretty tight blended spread of, call it, mid- to high-400s to low-500s, which does, I think, put some pressure on the larger end of the middle market where the broadly syndicated loan market is a potential option. Additionally, I’d say LIBOR floors are anywhere from 0 to 75 bps, I think, in the syndicated market today, which could apply some additional incremental pressure. However, I think it’s been our experience that most direct lenders these days are still holding a line at 1% LIBOR floors. So I would say that the syndicated markets are largely back to pre-COVID levels. That being said, there are sponsors that value certainty of execution, small groups in terms of lender groups, no or limited flex, no need for a rating, no need for syndication or willing to pay a premium for that type of execution over the syndicated markets, which is why we play in the market that we play in and that can be a meaningful opportunity set. Private unit tranches, as a result, I think, are still pricing 100 to 150, 200 basis points north of that broadly syndicated kind of 1L, 2L blend that I mentioned earlier. And I think when you look at the lower middle market, which we typically spend a lot of time in this area, and we sort of define that as kind of $10 million of EBITDA to about $35 million, $40 million of EBITDA. A lot of our origination efforts are in that area. Without the broadly syndicated loan market option available, pricing has held up better. I’d say we’re still probably 25 to 100 basis points higher than pre-COVID levels in terms of spread. Part of that’s due to the lack of the BSL bid as well as, candidly, less competition at that end of the market. That being said, there is plenty of capital and like the BSL market demand for quality deals is high. It is important to be able to speak for sizable commitments in direct lending and be able to grow with portfolio companies as they execute their growth plans, which often involve M&A and certainly being constructive in partnership oriented with sponsors and management teams is important. And so I think a lot of the kind of platform experience and relationships that we have as well as the platform size is really an important differentiator here.

[Matt Tjaden:]

Great. That’s it for me. Appreciate the time.

[Jason Breaux:]

Thanks.

[Operator:]

Thank you. Our next question comes from Robert Dodd of Raymond James. Your line is open.

[Robert Dodd:]

Hi, guys. Apologies. I know Matt just asked a bunch of questions, but I joined late. So I’ve got a couple that you may have already covered. On the debt stack side, obviously, you’ve concluded some unsecured. Some in the – the latest one at 4% looks pretty good for a private placement in this environment. Obviously, the one in July, which was great at the time, but 5.95%, and it is callable with the premium, I mean, how onerous is the make-whole premium on that? And how should we expect unsecured to develop as a part of the liability side? Obviously, a year past IPO, you are shelf eligible now, etcetera, can you give us any more color on that?

[Gerhard Lombard:]

Yes. Robert, this is Gerhard. And thanks. We’re very pleased with the execution on the unsecured deal as well that added $135 million to our capital stack. I think a couple of things. As we scale the portfolio further beyond $1 billion and given the unsecured – secured mix we have, currently, we will actively pursue enhancing our investment-grade credit rating and further improving our ability to access traditional – the traditional DCM channel, which will give us access to lower-priced debt. The $50 million we took on during the summer of last year, you will recall, was intentionally a little shorter dated. It wasn’t a traditional 5-year unsecured offering. And so I think you’re correct. We – it’s unlikely that we would prepay that due to the make-whole payment, but we’re able to – the make-whole expires 6 months prior to maturity at around 2.5 years. And so we will obviously position to look at the market closer to the time. I will maybe just add, from a weighted average cost of debt perspective, that $50 million in the total debt stack does not move the needle that much. As you probably noticed, we have been actively paying down some of the higher-priced Alcentra InterNotes that we acquired back in January of 2020. So we are talking about a couple of basis points in the overall cost of equity and debt as we look at that $50 million and believe it was very helpful to have the additional liquidity in the capital stack because it allowed us to participate and deploy into kind of the tail end of COVID, and there was some really attractive opportunities for us on a risk-return basis that we took advantage of.

[Robert Dodd:]

Got it. Got it. I appreciate that. And if I can have one more, kind of portfolio structure style. I mean, obviously, I think Matt asked about GACP. So I won’t touch on that one. But this seems to be the first quarter I can remember that the portfolio or balance sheet, etcetera, for the JV wasn’t disclosed. It had been – it wasn’t the last Q, for example, it wasn’t in the 10-K. Is that component of the strategy being deemphasized to just put the loans on balance sheet? Or is anything you can say on that front, that JV structures, historically, have generated some pretty decent returns. So is that fading away or can you give us any color on that?

[Gerhard Lombard:]

Yes. I can certainly comment on the disclosure aspect. There was simply – from a GAAP requirement standpoint, we did not have to disclose the kind of the additional footnote language that we had in prior quarters. And so it wasn’t intentionally deemphasized by us from a strategy perspective, it was just being responsive to the GAAP requirement in the financial statement.

[Robert Dodd:]

Okay, understood. Thank you.

[Jason Breaux:]

And Robert, hey, it’s Jason. Just to comment on the JV itself, it has been a helpful driver of incremental yield over the years. I will say, with the significant decline in the LIBOR rate last year, it became less interesting from a yield standpoint. It has been certainly something that we are quite capable of doing and we could ramp up or ramp down because we’ve got that expertise in-house to buy syndicated loans when we want to. But I would say with the meaningful decline in the base rate, that segment of the market has certainly become less interesting than our core mandate, which is the first liens and munis.

[Robert Dodd:]

Okay, thank you.

[Jason Breaux:]

Sure.

[Operator:]

Thank you. I am showing no further questions at this time. I’d like to turn the call back over to Jason Breaux for any closing remarks.

[Jason Breaux:]

Okay, great. Well, thank you, operator. Thank you all for your interest in CCAP and your time today. We look forward to speaking with you all soon.

[Operator:]

Thank you. Ladies and gentlemen, this does conclude today’s conference. Thank you all for participating. You may all disconnect. Have a great day.