Investcorp Credit Management BDC, Inc.
Q1 2017 Earnings Call Transcript

Published: 15 May 2017

[Operator:]

[Call starts abruptly] …Finance Third Quarter Earnings Release Conference Call. Your speakers for today’s call are Mike Mauer, Chris Jansen and Rocco DelGuercio. [Operator Instructions] A question-and-answer session will follow the presentation. I’ll now turn the call over to your speakers. Please began.

[Mike Mauer:]

Thank you, Operator. Thank you all for joining us today. I’m joined today by Chris Jansen, my Co-Chief Investment Officer; and Rocco DelGeurcio, our CFO. Before we start, Rocco will give you our customary disclaimer regarding information and forward-looking statements. Rocco?

[Rocco DelGuercio:]

Thanks, Mike. I would like to remind everyone that today’s call is being recorded and that this call is a property of CM Finance, Inc. Any unauthorized broadcast of this call in any form is strictly prohibited. Audio replay of this call will be available by using the telephone numbers provided in our press release announcing this call. 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. We ask that you refer to our most recent 10-Q filing for important factors that may cause actual results to differ materially from these projections. We will not update our forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our website at www.cmfn-inc.com. At this time, I would like to return the call back to our Chairman and CEO, Mike Mauer.

[Mike Mauer:]

Thanks, Rocco. As is past quarters I'll begin today's call with the discussion of the leveraged finance market. Next Chris will walk you through our investment activity during and after the quarter, and then Rocco will review our financial results. I will conclude with some commentary on our portfolio and our outlook. While leveraged finance new issue volumes declined slightly in the first quarter from the fourth quarter of 2016, Its worth remembering that the fourth quarter was most active one since 2014. New issue activity in the broadly syndicated market and the upper end of the middle market continues to be robust and in times sloppy. Borrower friendly terms, covenant life deals and tight spreads are bound. LBO continue to bring new, and in some cases repeat issuers to the market. That said refinancing and reprising activity continues, not only in the larger transaction to but also into the core middle market, we're ahead of it -- affected us well. Any loans which were made in a less aggressive environment for lenders have been refinanced. 2017 is proving to be a challenging time to find opportunities with attractive terms and structures. But our team continues to identify attractive opportunities in the primary and the secondary markets. We continue to be extremely selective in choosing our new investments. Despite the challenges the syndicated market presents we have deep pipeline. Clubbed and direct lending opportunities enables us to focus on appropriate structure and covenant projections for our capital. Secondary investments in loans trading at a discount has allowed us to take advantage of the tightening spread environment we find ourselves in, with shorter remaining average maturities and seasons issuers who are most likely to refinance. We maintain a focus on first and second lien investments and high quality management teams in companies. We are opportunistic about the opportunities in our pipeline and we expect to redeploy the capital we have received from repayments this quarter. I would now like to turn the call over to Chris to discuss our portfolio activity.

[Chris Jansen:]

Thanks Mike. We made seven investments during the quarter including four investments in three new portfolio companies and three different investments in existing portfolio companies. We had one realization during the first quarter. We participated at a new second lien loan for Lionbridge which backed the LBO, the company by H.I.G Capital. Lionbridge provides translation and globalization services to companies worldwide. Our yield at cost is approximately 11.1%. Inter Media is the leading provider of cloud base software solutions for smaller, medium size businesses, we invested in both the first and second lien loans which are placed in connection with the LBO by Madison Dearborn. Our yield at cost was approximately 7.1% on the first lien and 11.2% on the second lien. Our blended yield was approximately 10.5%, I would like to note that we sold our position in the first lien after quarter end for a realized IRR of 21.2% while we continue to hold the second lien loan. We also investment in Immucor’s as first lien loan in the secondary market. Immucor develops, manufactures and sells manual and automated analysis equipment used to test blood for transfusions. TPG is a sponsor. Our yield at cost is approximately 7.2%. We couldn’t build as large a position as we wanted to however, so as the market strengthened in the current quarter, we sold our position for a realized IRR of 26.8%. We made three new investments in existing portfolio companies, these included adding to our position in the first lien loan to Montreign, participating in the new first out revolving credit facility in the out of court [ph] restructuring of U.S. Well Services and participating in an incremental secondary loan for PGI. We fully realized our investments in Land Holdings, this was a club deal, a project financing loan to build the Scarlet Pearl Casino in Biloxi, Mississippi. This loan was repaid at premium of 102 for realized IRR 14.4%. We had expected Land to pay off at some point during the first half of the year and are very pleased on with the return on this investment. Since quarter end we've had four realizations and we made two new investments. I mentioned that we sold our positions in the first lien loan of Immucor and the first lien loan of Inter Media. Both of these were small holdings where we felt we couldn’t build a meaningful position in a disciplined way so we took advantage of market liquidity to exit at attractive returns. We also received pre-payments on our investments in school specialty and telecommunications management. School specialty repaid its exit loan on par. Our fully realized IRR was 10.5%. Telecommunication management repaid its loan this month as Cable ONE acquired the company. Our fully realized IRR was 9.8%. We made two investments each in portfolio companies that we have followed for some time. Our first new investment is in the second lean secured notes of International Wire group. International Wire is a manufacture of copper wire products for a verity of customers in the industrial, automotive, energy, aerospace, medical appliance and communications industries. Our yielded cost is 11.3%. We also participated in the incremental secondly TouchTunes, an interacted music and entertainment company. This loan funds the merger of TouchTunes and PlayNetwork. Our yield of cost is 9.4%. We had 19 portfolio companies as of December 31, and 21 as of March 31. Today we have 19. As of March 31, our largest industry concentration was in business services, at 19.8% of the portfolio at fair value, energy was our second largest sector at 14.2%, followed by gaming at 14%, Telecommunications at 11.4% and Trucking and Leasing at 8.6%. I would now like to turn the call over the Rocco to discuss our financial results.

[Rocco DelGuercio:]

Thanks, Chris. For the quarter, our net investment income was $6 million or $0.44 per share. As of March 31, the fair value of our portfolio was $268.7 million compared to $245.4 million at December 31. Our investment activity accounts for $21 million increase in our portfolio, and we have an additional $3.7 million increase from the net changes in our marks, offset by $1.1 million realized loss from the restructure of U.S. Wealth Services. As of March 31, the weighted average yield of our debt portfolio including amortization was 9.7 compared to 9.8 at December 31. Our debt portfolio was comprised of 100% floating rate. All of our floating rate investments have LIBOR floors, and average floor is 1.06%. Our average portfolio company investment was approximately $12.8 million and our largest portfolio company investment was $29.2 million. As of March 31, 50.4% of our portfolio was in first lien investment and 49.2% of our portfolio was in second lien investments. We did not hold any unsecured investments. Additional information regarding the composition of our portfolio is included in our Form 10-Q, filed yesterday. We were 0.67 times levered as of March 31, compared to 0.70 times levered as of December 31. With respect to our liquidity, as of March 31, we had $5.5 million in cash, $16.7 million in restricted cash and $35.7 million of capacity under our $15 million revolving credit facility with Citi. With that, I’ll turn the call back over to Mike.

[Mike Mauer:]

Thank you, Rocco. We had a broad-based improvement in our markets this quarter. In recognition of the tightening spread in the leverage finance market as well as some specifically improving credits. Our investments in energy and oil field services increased as well driven by improvement in activity in the D.J. Basin which held AAR and continued excellent financial results for KLS [ph]. U.S. Wealth completed its out of court restructuring and as Chris noted we participated in the company's new first out revolver which helped address the company's liquidity needs. We are quite positive on the outlook for all of our energy investments. The aggregate increase in our mark on AAR, KLS and U.S. Wealth services with about $2 million this quarter. The electric remains are nonaccrual, that represents 2.8% of our portfolio at fair value and we remain in active dialogue with the other stake holders in the company. We moved the AAR term B to partial accrual where we accrue interest proportional to the mark on the position. That loan is marked at 50 at quarter end so we're accruing half of its interest rate. Our portfolio yield decreased to 9.7% from 9.8% last quarter due to the repayment of Land Holding which had a coupon of 12%. Our new investments in the quarter ended March 31 had is average yield of 10.5%, an improvement over our average yield on new investments of 10.1% last quarter. Our net deployments were 21 million for the quarter. We anticipate additional pre-payments may come from our existing portfolio, while nothing has been announced the current financing environment has been conducive to a variety of expected and unexpected transactions and refinancing for leverage issuers. We're committed to paying an attractive sustainable dividend to our shareholders, our shareholders, our board of directors previously declared a distribution for the quarter ended March 31, 2017 of $0.25 per share which was paid on April 6th to shareholders of record as of March 17th. Our board declared a $0.25 distribution for the quarter ended June 30, payable on July 6th to the shareholders of record as of June 16th. We believed that our dividend level is consistent with our ability to generate NII without reducing our investment quality by reaching for yield or changing our focus from secured lending opportunities. We fully earned our incentive fee in the March quarter, but waived a portion of that fees to cover the divided that was paid on April 6th. We expect to earn our incentive in the current quarter. Our realization year to date in 2017 continue the outstanding and our realizations have consistently exceeded our average portfolio yield. The average growth IRR on our realization thus far in 2017 is 16.5%. Realizations help boost our NII and also give us the change to diversify as we redeploy our capital into new loans. The value of our portfolio as a whole continues to improve. With net fair value appreciation of 6.4 million over the past two quarters, the team underwrites conservatively focusing on quality management teams, sustainable capital structure, security packages and financial conversance for the protection and preservation of value over the long-term. We focus on protecting against down side risk, but we also think there is additional upside NAV potential to our current portfolio. Operator, please open the lines for Q&A.

[Operator:]

[Operator Instructions] Our first question comes from Ryan Lynch from CBW. Please take your question.

[Ryan Lynch:]

First question, you guys waived a little bit of the incentive fee this quarter, which was completely voluntary, could you just give your thoughts behind the incentive fee waiver and what you guys were thinking about -- is that a policy that you guys are going to potentially keep in place going forward to pay, what earnings do relative to the dividend?

[Mike Mauer:]

Ryan thank you appreciate the question, thanks for being on the call today. As far the waiver, it is something that we look at each quarter with the decision made that we would wave a little to make sure that we -- although it's as rounding error of less than $50,000, it was something that we thought from a shareholder perspective made sense, to the extent that we're in the similar situation this quarter and right now as of today it looks like we will fully earn the incentive fee, we might have even a smaller wave than the current one, if the numbers play out the way we'd expect or we may earn it all. But for the current quarter I'd expect if we're in a similar situation we would do the similar things. It is not a policy that we've adopted and we will review on a quarter-to-quarter, that's kind of the way we would agree to do it.

[Ryan Lynch:]

Okay, fair enough. And if I look at Canada, the outlook for capital deployment, I mean in your prepared remarks you talked about heavy competition increasing reprising's and refinancing's and should increase your guidance prepayments and repayments, and then if I look at your guidance results, so far in the calendar second quarter about basically 10 million of net repayment so far, so given what's already happened quarter-to-date as well as your outlook should we expect the portfolio to shrink a little bit over the next couple of quarters and maybe delever the balance here a little bit or are you guys hoping to maintain this leverage around 0.7x going forward?

[Mike Mauer:]

We are targeting to maintain this leverage. We've got a strong pipeline of opportunities that we're going through I want to caution that opportunities are not delivered in invested deals, but we would expect to continue to deploy capital and not to see continued shrinkage in the portfolio.

[Ryan Lynch:]

Okay, thank you for answering my questions.

[Operator:]

Our next question comes from Oven Low from Oppenheimer Funds. Please state your question.

[Oven Low:]

Can you please talk about Lionbridge technology it looks like a relatively large new investment with a reasonable coupon rate? How do the language and operational capabilities stand now compared to the competitors to attract investment?

[Chris Jansen:]

Lionbridge, is the largest language services provider in the world. It's a very fragmented industry the top 10 providers hold less than 10% of the market, so realistically there are only a small handful of competitors that can provide the translation and localization services to multinational corporations. Lionbridge has a scale that's required to help its customers release their products globally, and they've seen a lot of that with their largest customers that actually increased their usage. And also they work in a number of different languages as their customer's products become increasingly more globalized. Long standing relationships and deepening relationships with Microsoft and Google, kind of bear that out for us. It's a pretty large position for us, we had a detail one-on-one with management, it's got strong sponsorship with like 40% equity check and then in our view it's reasonably low leveraged. So it was an interesting situation for us to get involved with and comfortable with.

[Mike Mauer:]

And it does have a maintenance covenants in it also.

[Oven Low:]

I have another modeling question and I want to ask it slightly differently. So Land Holdings you said that 12% fix rate at paydown my math is about 1.3 million in interest income annually and then you have some new investments in Intermedia Holdings and Lionbridge and which has LIBOR 375 to 975 [ph] and you received 25 million repayment so far and I'm just wondering your outlook for the interest income in like can this second quarter -- how we should think about that?

[Mike Mauer:]

Well let me try to give you some guidance and as we look at pipeline of things coming in these numbers will be affected just mathematically, but at December 31 our average yielded cost was about 9.79, that dropped as a result of the things you just talked about 9.72, very-very small adjustment net. As of today with the investments we've made that 9.72 is 9.77. So we're basically back to where we were in December from a yield perspective on the portfolio. So, going back to one of your earlier questions, our objective is to continue to invest -- on the low side 8% plus or minus on first liens and some other things, on the high side 12%, 13%, targeting something around 10% on an average yield while continuing to maintain about 0.7 -- 0.65 to 0.75 leverage across the portfolio. And to-date we have been able to do that; we're not going to continue to stretch for yield just to have a 10% average yield on the portfolio to extent -- you've seen it over the last year and a half, our yields had been as high, close to 11% on the [indiscernible] have come down under 10%. We think that the risk return is the most important thing. Some of the lower coupons that you've seen in our portfolio things like Immucor were short dated and had discounts associated with them. So we will continue to look at lower short dated coupon to deploy capital and invest cash, but our target continues to be in the neighborhood of where we're currently operating.

[Operator:]

[Operator Instructions] At this time we've another question from Robert Dodd from Raymond James. Please go ahead sir.

[Robert Dodd:]

Just real quick one on AAR, the coupon changed from three months -- I'm sorry, from one month to three months, if I remember right. I mean was that -- just only as a question, with that at the election was some incremental change in the structure?

[Mike Mauer:]

No, that's an optional election that they have and great question, but they can elect from time-to-time whether or not it's one month, three month and that was the election they took and I guess their view on LIBOR over the near to medium term.

[Robert Dodd:]

And then in general, in terms of the overall competition, you are saying obviously as you said -- I mean yes, spreads have tightened structures [indiscernible], can you give us any more color, on where is that coming from? Is this seen as a same people, same lenders you normally see that are just being more aggressive? Or are there new operators in the segment? Obviously moving down moving up, whatever, that are driving this kind of dynamics?

[Mike Mauer:]

Robert thank you, I appreciate it. I say it's my role 80- 20, 80% of the time it is going to be the same people that we see there are at the fringes called 20% of the time there maybe a new competitor. But more importantly to your point is that, the competitors that we have seen, that I have been running into for past 10 years in one from another, have continued to grow. So it's not just the BDCs it's the private funds that they raise, that they invest alongside, et cetera. So there has been money dedicated to the space and that's continued to make it very competitive. From our perspective, we continue to look at the right clubs to participate in, source our deals through whether or not it is our Cyrus relationship or SeaPort [ph] relationship or a lot of the direct sourcing that we have got, we continue to do all of that. On top of which you've all seen that we have got a team here that has a lot of experience, 10 to 20 years among different members of the team that work with Chris and I, and we have continued to watch a lot of names that we liked, but maybe we didn’t participate in, we may not have had the capital at the time because we were fully deployed. We may have seen something and said, you know what, it’s a little bit of the show me, we would like to feel little performance before we invest in something and if there is liquidity. A club member who wants to lighten up or something that has a little bit of secondary liquidity will go into it. And international wires are perfect example of that. That’s an 11% plus something that we looked at the time. we actually liked it at the time, but we were basically fully invested and we passed on it, in over the last couple of months we have been watching and there was one investor who decided for whatever reason to lighten up and we have been waiting to see if something came available and we were able to invest in it. But each of those is very unique and it's not just the new issue but watching a lot of the names in club and broader markets that we have liked and we focused on.

[Robert Dodd:]

If I got one more, I think Chris you have mentioned and I didn’t get the name, et cetera. I think those one of the positions you put on in Q1, then it's also one of the exits in Q2 because you didn’t get a position as large as you wanted. And I think you've got a -- your realized IRR was pretty healthy. So I don’t know if you got it at a discount originally, but could you give us any color? Would that be accelerated amortization at discount at the top line or realized gain in the second quarter or is there anything you -- more you can tell us about that particular situation?

[Rocco DelGuercio:]

It's Rocco. And that would be amortization coming the top line.

[Mike Mauer:]

And the actual investment Robert is Immucor, one of our team members here identified that along the lines of looked at it for a couple of years and we view that as a short term 12 to 18 million kind of hold, when we bought it as it would go up to par with market conditions where they are in the secondary it shot up to par right away. So there was -- it's a low coupon position, so we elected just to sell out versus try to build a position to lower the spread. And the other was the million dollars of first lien and inter media, which help bolster our -- we like the credit, it helped bolster our take on the second lien, increase that and that traded up first of three points. So there is a healthy IRR, it's just that pop up and that’s just annualization of anywhere from a two plus point gain if you will, it in the prior, sorry.

[Operator:]

At this time, we have no further questions.

[Mike Mauer:]

I would like to operator thank you and thank everyone for calling in, we appreciate the time. And look forward to following up. Thank you.

[Operator:]

This concludes today’s conference call. Thank you for attending.