Crescent Capital BDC Inc
NASDAQ:CCAP
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Crescent Capital BDC Inc
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Good day, everyone, and welcome to the third quarter 2024 Crescent Capital BDC, Inc. Earnings Conference Call. [Operator Instructions] Please note today's call will be recorded -- it is now my pleasure to turn today's conference over to Dan McMahon.
Good morning, and welcome to Crescent Capital BDC, Inc.'s Third Quarter ended September 30, 2024 Earnings Conference Call. Please note that Crescent Capital BDC 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 statements. Please also note that past performance or market information is not a guarantee of future results.
This morning, before the market opened, the company issued its earnings press release for the third quarter ended September 30, 2024, and posted a presentation to the IR section of its website at www.crescentbdc.com. The presentation should be reviewed in conjunction with the company's Form 10-Q filed this morning 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; President, Henry Chung; and Chief Financial Officer, Gerhard Lombard. With that, I'd now like to turn it over to Jason.
Thank you, Dan. Hello, everyone, and thank you all for joining us today. I'll start today's call by highlighting our third quarter results, follow that with some thoughts on our investment approach and touch on our portfolio. This morning, we reported another quarter of solid earnings with continued strong credit performance across the portfolio. Net investment income, or NII, was $0.64 per share, which translates into an annualized NII return on equity of 12.6%. With our earnings again well in excess of the regular dividend, our Board has declared a supplemental dividend for the second quarter of $0.07 per share. When coupled with our previously declared regular dividend of $0.42 per share, this equates to an approximately 10% annualized dividend yield on September 30, 2024 NAV. Our net asset value decreased $0.10 to $20.20 per share in the quarter, driven primarily by net unrealized marks running through the portfolio. Gerhard will touch on this in more detail. On a year-over-year basis, our NAV per share is up 2.5%.
Let's shift gears and discuss the investment portfolio. Please turn to Slides 13 and 14 of the presentation, which highlights certain characteristics of our portfolio. We ended the quarter with approximately $1.6 billion of investments at fair value across a highly diversified portfolio of 183 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 first lien loans, collectively representing 90% of the portfolio at fair value at quarter end, unchanged from the prior quarter. We continue to focus our investing efforts on noncyclical industries and remain well diversified across 20 broad industry categorizations.
Our investments are almost entirely supported by well-capitalized private equity sponsors with 99% of our debt portfolio in sponsor-backed companies as of quarter end. We have been pleased with the fundamental performance of our portfolio as indicated by our stable performance ratings and nonaccrual levels. Our weighted average portfolio grade of 2.1 remained stable quarter-over-quarter. And on Slide 17, you will see that the percentage of risk rated 1 and 2 investments, the highest ratings our portfolio companies can receive, accounted for 90% of the portfolio at fair value, up modestly from 89% in the prior quarter. As we've seen credit dispersion begin to emerge with certain peers experiencing growing levels of watch list and nonaccrual names, we continue to believe that our tenure in the direct lending space, robust investment process and focus on the core and lower middle market will continue to drive strong credit performance for CCAP. We continue to lead the majority of our transactions drive stringent documentation and maintain our underwriting focus on strong cash flow-generating companies. All of this has led to a portfolio today that has nonaccruals well below the industry average. As of quarter end, we had investments in 5 portfolio companies on nonaccrual status, representing 1.7% and 0.9% of our total debt investments at cost and fair value, respectively. I'd now like to turn the call over to Henry to discuss the market, our Q3 investment activity and the portfolio. Henry?
Thanks, Jason. Deal activity continued to pick up in the third quarter, driven by a combination of lower borrowing costs due to spread compression, rate cuts and a strong economy. Most of the activity continued to be driven by refinancings and recapitalizations, which represented almost 50% of overall volume. While we expect fourth quarter deal activity to be relatively steady with Q3, we are anticipating that LBO volumes and overall deal flow will pick up in 2025 as recent and future rate cuts lower borrowing costs, which should continue to increase the momentum in LBO activity that we have seen in recent quarters. In addition, the market reaction to the results from the presidential election suggests optimism around increased deal activity, aided in part by the prospect of less regulation. As we have discussed before, we continue to believe direct lending remains the market of choice for our sponsors in the lower and core middle market, given the benefits of our expertise, including speed, certainty of execution and flexibility and the ability to serve as a true partner in developing bespoke capital structures.
Please turn to Slide 15, where we highlight our recent activity. Gross deployment in the third quarter totaled $73 million, as you can see on the left-hand side of the page, 97% of which was in first lien investments. During the quarter, we closed 6 new platform investments totaling $33 million. These new investments were loans to private equity-backed companies with a weighted average spread of approximately 500 basis points. We continue to back well-capitalized borrowers with significant equity cushions and the weighted average loan to value of our new investments for the quarter was 32%. The remaining $40 million came from incremental investments in our existing portfolio companies. These have been a strong source of capital deployed on a year-to-date basis compared to prior periods as we have continued to see higher levels of opportunistic refinancing and accretive M&A add-on opportunities within our existing borrower universe. The $73 million in gross deployment compares to approximately $92 million in aggregate exits, sales and repayments, resulting in net realizations of approximately $20 million for the quarter. On the realization front, it is also worth noting that in the fourth quarter, we have opportunistically realized an additional 8 acquired First Eagle names for total proceeds of approximately $42 million at a modest premium to our cost basis. Inclusive of these names, we have now rotated 46% of our cost basis in the acquired First Eagle BDC.
Turning back to the broader portfolio, -- please flip to Slide 16. You can see that the weighted average yield of our income-producing securities at cost came down modestly quarter-over-quarter to 11.6%, primarily due to a reduction in base rates and partially driven by a reduction in weighted average spread with the realization of certain higher-yielding assets. As a reminder, this metric represented by the dark blue line at the top of the chart includes the impact of income-producing equity investments. As of September 30, 97% of our debt investments at fair value were floating rate with a weighted average floor of 80 basis points, which compares to our 66% floating rate liability structure based on debt drawn with no floors.
Overall, our investment portfolio continues to perform well with year-over-year weighted average revenue and EBITDA growth. With that being said, even with the recent interest rate cuts, we have continued to monitor the impact of borrowing costs on our portfolio companies. The weighted average interest coverage of the companies in our investment portfolio at quarter end improved to 1.8x as compared to 1.7x for the prior 2 quarters. As a reminder, this calculation is based on the latest annualized base rates each quarter. All else being equal, we expect that interest coverage will continue to improve with further rate cuts. We also continue to closely monitor how our portfolio companies are managing fixed operating costs.
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 expected, we saw another quarter-over-quarter decrease in aggregate revolver utilization with approximately 66% of aggregate revolver capacity available across the portfolio as of quarter end, up from 57% in the prior quarter. It is worth noting that we have continued to see an increase in repricing given tightening spreads. We approach repricing as a re-underwriting exercise where we evaluate the portfolio company has demonstrated a meaningful improvement in creditworthiness since underwrite through growth and deleveraging and that the proposed repricing presents an attractive relative value to new origination opportunities that we are seeing today.
Our portfolio continues to benefit from the substantial amount of equity invested in our companies, most of it supplied by large and well-established private equity firms with whom we have long-standing relationships and have partnered with in multiple transactions. And we know that the weighted average loan-to-value in the portfolio at time of underwrite is approximately 40%. With that, I will now turn it over to Gerhard.
Thanks, Henry, and hello, everyone. Our net investment income per share of $0.64 for the third quarter of 2024 compares to $0.59 per share for both the prior quarter and third quarter of 2023. Total investment income of $51.6 million for the third quarter compares to $49.0 million for the prior quarter, a 5% increase. The primary driver of this increase relates to what we classify as nonrecurring investment income, which consists of accelerated amortization, fee income and common stock dividends. Nonrecurring income increased from $1.8 million to $3.3 million quarter-over-quarter, with elevated prepayment income and accelerated OID from refinancing activity during Q3, driving the lion's share of this uptick. As I've noted in the past, while we expect some level of nonrecurring or transactional investment income each quarter, this quarter's total was meaningfully higher than recent quarters. Importantly, our recurring yield-related investment income increased slightly quarter-over-quarter from $47.1 million to $47.3 million and continues to represent the overwhelming majority of total investment income, contributing 92% of this quarter's total.
I'd like to spend a moment on PIK income this quarter. In looking at our income statement, you'll see that PIK as a percentage of total investment income increased to 8.2% as compared to 4.3% in Q2. Of the 3.9% increase, it's important to note that approximately 3/4 or 3% is due to positive onetime credit events. We recognized back PIK on 2 names that had previously been on nonaccrual and have recently demonstrated strong financial performance. So what we view as more recurring PIK for the quarter was closer to approximately 5%, which continues to compare favorably to the sector. Our GAAP earnings per share or net income for the third quarter of 2024 was $0.41 per share. This was primarily the result of net investment income outpacing the regular and supplemental dividends, offset by $0.22 per share of net unrealized and realized losses. As of September 30, our stockholders' equity was $749 million, resulting in net asset value per share of $20.20.
Now let's shift to our capitalization and liquidity. I'm on Slide 19. This quarter's net realizations brought our debt-to-equity ratio down from 1.18x in the prior quarter to 1.15x, which is below the midpoint of our stated target leverage range of 1.1x to 1.3x. With $317 million of undrawn capacity subject to leverage, borrowing base and other restrictions and $38 million in cash and cash equivalents as of quarter end, we have sufficient liquidity to fund further investment activity while maintaining a debt-to-equity ratio inside our target range. The weighted average stated interest rate on our total borrowings was 6.59% as of quarter end, down from 6.91% in the prior quarter due to base rates. And as we've highlighted on the right-hand side of the slide, there are no debt maturities until 2026. We are evaluating strategies to extend maturity dates in our debt capital stack in a measured manner over the next 12 to 18 months, while still taking advantage of the attractive low fixed rates on our unsecured notes. While we don't have any specific announcements related to our outstanding debt, we remain confident in our ability to continue to capitalize CCAP with a combination of secured and unsecured debt that will appropriately balance flexibility and the cost of capital.
As Jason noted, for the fourth quarter of 2024, our Board has declared a regular dividend of $0.42 per share, which we believe we are well positioned to cover over the longer term. We've also announced a third quarter variable supplemental dividend, which was capped at $0.07 per share given the measurement test calculation. And with that, I'd like to turn it back to Jason for closing remarks.
Thank you, Gerhard. In closing, we are pleased with this quarter's financial results and the performance of our investment portfolio. We've continued to maintain a defensively positioned portfolio that delivers a stable NAV profile with consistent dividend coverage. As we look forward over the remainder of 2024 and into 2025, we remain confident in the continued strong performance of CCAP's portfolio and believe we are on track to continue to deliver attractive risk-adjusted returns to our stockholders. And with that, operator, we can please open the line for questions.
[Operator Instructions] And we'll take our first question from Robert Dodd with Raymond James.
Congrats on the quarter. I appreciate you going through the line items on the unusual part. So I think that if I can kind of nail that down, I'd appreciate it, right? You said the unusual prepay income and et cetera, about $3.3 million, maybe $1.5 million high versus what's kind of semi-regular in that form. And then the back pick seems like that was another $1.5 million that obviously won't recur. So, is that ballpark is about $3 million of nonrecurring income this quarter that shouldn't be kind of factored in going forward with the wildcard, who knows what prepays are actually going to do?
Yes. Robert, this is Garth. Thanks for the question. And then you're right, we kind of partially commented on the prepared remarks. And maybe to expand on that a little bit. I think the backdrop here is that we de-levered during the quarter from 1.18x to 1.15x. So there was kind of a natural increase in prepayment and accelerated OID, which is -- we generally view as nonrecurring fee type income. And then you're absolutely correct. There was some nonrecurring PIK income, which we view as a positive, particularly on 2 names that we had on nonaccrual. And so we've been recognizing some of the back PIK related to that. The only other thing I would say is that there's certainly going to be in our recurring income on those PIK names, I think there will be a slight uptick in the recurring element, if that makes sense. So I'm probably a little bit lower than the $3 million you put out, but I think directionally, your comments are reasonable.
Yes. So they're back on accrual. So the PIK coupon on those will continue and there was just a catch-up, right? So okay, I'll put that out. I appreciate the color there. Thank you. On the First Eagle assets, right? So now you rotated another 4, I think you said in the fourth quarter -- sorry, in the fourth quarter, and you're now at 46% of that cost basis is now gone. I mean, -- should we expect the remaining half? I mean, is that like -- is that a 3-year process? I mean, can you give us any color on how fast do you expect the rest of that portfolio to be rotated? Or is it just going to happen on that same pace as the core CCAP originated portfolio as well because obviously, that churns as well.
Robert, it's Henry. I can comment on that. So with respect to the outlook for the remaining First Eagle assets, -- what I would say is that since we closed the acquisition last year, it's actually been quite an anemic M&A environment. So what we haven't seen as much in that portfolio is what I would term natural runoff, which is vis-a-vis refinancings and sales of the respective portfolio companies. I think just given some of the change in the market backdrop post the election and just some of the broader commentary we've been hearing for the larger part of this year around the uptick in M&A activity, our expectation is that, that will likely accelerate as the sponsors for those companies seek to monetize the assets seek to monetize those investments. We just haven't been able to see that as much since we closed this in March '23 given the broader M&A backdrop. So, I think it's tough to give you definitive timing here, but I would expect that the pace is going to be a bit quicker than what we've seen at least over the last year and a half.
I appreciate that color. That kind of leads into my last question. Obviously, you took this in the opening remarks, 2025 is expected to be more active. I mean, given the bar for 2024 and 2023 is basically laying on the floor. So it's not hard to get over that bar. How active are you expecting 2025? I mean one of your larger competitor this morning basically said, "Hey, we're going to see 2021 levels of activity. I mean, is that optimistic? Because obviously, that would be a very large acceleration from the activity levels we've seen over the last couple of years.
Yes. Robert, it's Jason. Thanks for the question. I don't know if we would be able to necessarily calibrate relative to 2021, what we expect for 2025. Some similar dynamic where you had a challenging year prior in terms of activity. And so there was certainly some pent-up demand from 2020 rolling into 2021. I think we're seeing that here as well, just given the higher rate environment that we've been in for the past couple of years. So, I do think there's optimism around a significant pickup in activity. I think the election results provide incremental tailwind for that and optimism for that. We've continued to see sort of sluggish returns of capital back to LPs and significant dry powder waiting on the sidelines. So I would say we're very constructive on 2025 and the opportunity for deployment. And I do think -- you didn't necessarily ask this, but I do think that, that also helps with some of the dynamics that we've seen this year around pricing and spread compression. We've certainly seen spread compression most acute in the upper middle market as opposed to the lower and core where we generally operate. But it's been tighter across the board. And I do think with a little bit of a correction on supply-demand that should work in our favor in terms of spread stabilization.
And I think to add to that, one dynamic -- or 2 dynamics of 2021 that are different than today. First is we don't have 0% base rates. And secondly, 2021 was a record year for private equity fundraising as well, whereas the latter half of '23 and '24 were much more muted just given slower monetization's across PE as a whole. So those are certainly 2 counterweights when we think about the outlook. We certainly do expect quite a bit more activity than what we've seen over the last 18 months -- 18 to 24 months. But I do think in many ways, to 2021 was a bit of a special confluence of factors that drove that level of activity, but we'll see.
And I'll just add one more thing to that. I agree with everything Henry said. I would just say that on the fundraising side of things, while it has been certainly more challenging in certain segments of the market, we have absolutely observed significant capital being raised in the wealth channel in the form of nontraded BDCs, primarily. Those commitments are coming in on a monthly basis, fully funded with significant pressure to deploy capital as a result of those monthly subscriptions. So yes, fundraising, certainly not a record year on the institutional side, but there is pressure in the upper mid-market to put capital to work, particularly from the tailwinds from wealth.
[Operator Instructions] We'll take our next question from Paul Johnson with KBW.
You guys have completed two, I would say, pretty successful acquisitions in the BDC space since going public. I would just kind of ask what are-- is there goals for potentially more acquisitions in the future? Or do you guys have, I guess, other priorities, things that you'd like to accomplish first over this next year? I mean, how do you, I guess, balance that with what could be a very active year, albeit potentially lower spreads, lower return environment. Just curious if those opportunities are out there, if that's still something you consider or if there's, again, other things you'd like to accomplish first?
Thanks, Paul. It's Jason. I appreciate the question. We think a lot about how to grow our platform at Crescent and how to grow our BDC platform. We've historically operated Crescent and CCAP in a way, I think that proves out measured growth. We would certainly like to continue to grow CCAP and would explore a variety of paths to doing that, certainly open to the prospect of additional M&A, open the prospect of more organic growth as well. But that's -- I think we've always looked at our business in a way where we want to make sure that we are doing right by our investors and not growing for the sake of growth. That's the case for our BDCs. That's the case for our institutional product. And so as we think about Crescent today, $40-plus billion of AUM, $30-plus billion of private credit AUM. The CCAP platform benefits significantly from being a part of Crescent, where CCAP on average, I think, historically has probably invested at about 10% of average total Crescent check size on a historical basis. So that really allows us to be well diversified in our portfolio mitigate risk through that diversification while still staying relevant to our sponsor and portfolio company clients by being able to speak for size across the book -- across the platform.
So again, we would love to continue to grow CCAP. We would certainly look at additional M&A opportunities. I think, in fact, we view ourselves as fiduciaries and we would have to look at future opportunities. Those don't always come all that regularly, but we'll look at them. But importantly, we don't need to grow for the sake of growth, and we certainly benefit by being attached to the larger Crescent platform.
Appreciate that. And could you just tell us the depreciation this quarter looked like a bigger part of it was driven kind of from the controlled investments this quarter and the markdowns, the unrealized markdowns. Can you just tell us where that's coming from? Is that related to any of the legacy merger assets?
Paul, it's Gerhard. I can take that. And if you want to do a deeper dive on the credits, let us know. But I think there were primarily four names that I think kind of drove most of the unrealized loss in the portfolio. I think you're correct, a portion of that came from a control investments in the Logan JV, which, as you know, is a levered investment. And so there's just more kind of rate sensitivity there that impacts the mark on that equity position. And then there were three other names on our nonaccrual list, largely. I think 2 of them were nonaccrual assets and the other one was a markdown quarter-over-quarter. So it was really 4 individual names that drove the kind of the unrealized you're seeing this quarter.
And last one for me. Can you explain -- so the supplemental dividend, $0.07 this quarter, down a little bit from the prior quarter. What exactly was the mechanism that capped the supplemental dividend at $0.07 for next quarter?
Yes, this is Gerhard. I can take that as well. There's a cap that limits the reduction in NAV as a function of both the supplemental and unrealized changes in marks to no greater than $0.15 as measured over a 2-quarter period. And so essentially, the combination of the unrealized change in fair value and the supplemental cannot exceed $0.15. And so the supplemental as a result is capped at $0.07 this quarter. Otherwise, purely based on the NII overrun, it would be a higher number.
[Operator Instructions] There are no further questions in queue at this time. I will turn the program to our speakers for any additional or closing remarks.
Thank you, operator. Thank you all for joining us here today for our Q3 earnings call. We appreciate your time and your support of CCAP, and we look forward to speaking with you all soon.
This does conclude today's program. Thank you for your participation, and you may now disconnect.