Crescent Capital BDC, Inc. (CCAP) Earnings Call Transcript & Summary

Thank you for standing by. My name is Janine, and I will be your lead operator for today's call. At this time, I would like to welcome everyone to the Q4 Crescent Capital BDC, Inc. Earnings Conference Call. [Operator Instructions]. I will now turn the call over to Dan, Head of Minister Relations. Please go ahead.

Good morning, and welcome to Crescent Capital BDC, Inc.'s Fourth Quarter and Year ended December 31, 2024 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 statements. Please also note that past performance or market information is not a guarantee of future results. Yesterday, after the market closed, the company issued its earnings press release for the fourth quarter and year ended December 31, 2024, and posted a presentation to the IR section of its website at www.crescentpdc.com. 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; 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. I'll start today's call by highlighting our fourth quarter results, follow that with some thoughts on our investment approach and touch on our portfolio. In terms of fourth quarter earnings, we reported NII of $0.55 per share, which translates into an annualized NII return on equity of 11%. The $0.55 compares to $0.64 in the prior quarter and $0.61 in the fourth quarter of 2023. This quarter's NII decline was driven by the impact of a lower investment portfolio yield as base rates at the end of 2024 were roughly 100 basis points lower than where they were at the end of 2023. We Additionally, lower levels of nonrecurring income in the fourth quarter impacted this quarter's results, as Gerhard will touch on. We have prioritized base dividend coverage since CCAP's inception, and we note that our NII is well in excess of our base dividend at 131% coverage in the fourth quarter. Our net asset value decreased $0.22 to $19.98 per share in the quarter, driven primarily by changes in unrealized marks. On a year-over-year basis, our NAV per share was down 0.3%. 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 year with approximately $1.6 billion of investments at fair value across a highly diversified portfolio of 185 companies with an average investment size of approximately 0.5% of the total portfolio. Our top 10 largest borrowers represented 15% of the portfolio as we are believers in modulating credit risk through position size, which we believe has served present well in previous credit cycles. We have deliberately maintained an investment portfolio that consists primarily of first lien loans collectively representing 90% of the portfolio at fair value at year-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 and sponsor-backed companies as of year-end. Please turn to Slide 17, which shows the trends in internal performance ratings. Overall, we have been pleased with the fundamental performance of our portfolio. Our weighted average portfolio grade of 2.1 remains stable quarter-over-quarter. On the right-hand side of the slide, you'll see that 1 and 2 rated investments representing names that are performing at or above our underwriting expectations, continue to represent the lion's share or 87% of our portfolio at fair value. The yellow segment of the chart, which represents our 4 and 5 rated investments remains a de minimis portion of our portfolio at less than 1% of fair value. Where we did see an increase quarter-over-quarter was our 3 rated investments. I would stress that our philosophy is to be proactive with our portfolio companies. We don't want to be slow in anticipating challenges or potential obstacles that warrant heightened focus. We do not, for example, wait until there is a covenant breach before moving an investment that may be experiencing headwinds and down the risk rating scale. In Q4, we added seven names to the watch list, collectively marked at 97% of their combined cost basis. We 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 below the industry average. As of year-end, nonaccruals represented 0.9% of total debt investments at fair value and 2.2% of cost, respectively. Moving on to our dividend. We declared a first quarter 2025 regular dividend of $0.42 per share. CCAP has been paying stable or increasing regular quarterly base dividend since its inception in 2015. This dividend is payable on April 15, 2025, to stockholders of record as of March 31. We also announced a series of special dividends. Given the measurement test that we apply to our supplemental dividend, we have not declared a supplemental distribution of our excess NII this quarter. Gerhard will provide additional details on both in the latter part of our prepared remarks. I'd now like to turn it over to Henry to discuss the market, our Q4 investment activity and the portfolio. Henry?

Thanks, Jason. Deal activity continued to pick up in the fourth quarter, driven by a combination of lower borrowing costs due to base rate cuts and an upbeat economic outlook. We are anticipating that LBO volumes and overall deal flow will continue to pick up through the first half of the year and beyond, resulting from a more favorable growth outlook, regulatory environment for M&A and available private equity dry powder, coupled with a growing demand for private equity limited partners for distribution. These are several other factors we are monitoring that we believe will increase the momentum in the LBO activity that we've seen in recent quarters. We continue to believe direct lending delivers a compelling value proposition for our sponsors in the lower and core middle market given the benefits of our expertise, including speed and certainty of execution and flexibility and the ability to serve as a true partner in developing to spoke capital structures. Please turn to Slide 15, where we highlight our recent activity. Gross deployment in the fourth quarter totaled $127 million, as you can see on the left-hand side of the page, of which 98% was in first lien investments. During the quarter, we closed 14 new platform investments totaling $64 million. These new investments were loans to private equity-backed companies with a weighted average spread of approximately 510 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 38%. The remaining $63 million came from incremental investments in our existing portfolio companies. These were a strong source of capital to fund in 2024 as we saw high levels of opportunistic refinancing and accretive M&A add-on opportunities within our existing borrower universe. The $127 million in gross deployment compares to approximately $106 million in aggregate exits, sales and repayments, resulting in net deployment of approximately $21 million for the fourth quarter. Turning back to the broader portfolio. Please look to Slide 16. You can see that the weighted average yield of our income-producing securities at costs came down quarter-over-quarter to 10.9%, primarily due to a reduction in base rates. This metric represented by the dark blue line at the top of the chart includes the impact of income-producing equity investments. As of December 31, 97% of our debt investments at fair value were floating rate with a weighted average floor of 79 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. The weighted average interest coverage of the companies in our investment portfolio at year-end improved to 1.9x and as compared to 1.8x and 1.7x the prior 2 quarters. As a reminder, this calculation is based on the latest annualized base rate each quarter. In terms of managing fixed operating costs, approximately 66% of aggregate revolver capacity was available across the portfolio as of year-end. So our portfolio companies in the aggregate remained well positioned to address fixed charges with operating cash flows and available balance sheet liquidity. Our portfolio continues to benefit from the substantial amount of equity invested in our companies. Most of it is applied by large and well-established private equity firms with whom we have had long-standing relationships and have partnered with in multiple transactions. And we know that the weighted average loan-to-value of the portfolio at time to underwrite is approximately 40%. With that, I will now turn it over to Gerard.

Thanks, Henry, and hello, everyone. As Jason noted, our net investment income per share of $0.55 for the fourth quarter of 2024 compared to $0.64 per share for the prior quarter and $0.61 per share for the fourth quarter of 2023. Total investment income of $46.4 million for the fourth quarter compared to $51.6 million for the prior quarter. Recurring interest income declined from $40.4 million to $37.7 million quarter-over-quarter, reflecting the impact of Fed rate cuts. It's worth noting that all else equal, we expect interest income to decline further in Q1 to reflect the full quarter impact of rate cuts in the fourth quarter. CCAP's nonrecurring investment income, which consists of accelerated amortization, fee income and common stock dividends decreased from $3.3 million to $1.2 million quarter-over-quarter. We had abnormally high levels of onetime prepayment income and accelerated OID from refinancing activity during Q3, as we noted on last quarter's call. Our GAAP earnings per share or net income for the fourth quarter of 2024 was $0.27 as net investment income of $0.55 was offset by $0.28 per share of net unrealized and realized losses. As of December 31, our stockholders' equity was $741 million, resulting in net asset value per share of $19.98. Now let's shift to our capitalization and liquidity. I'm on Slide 19. On last quarter's call, I noted that we were evaluating strategies to extend the maturity dates in our debt capital stack in a measured manner. In December, we amended the terms of our SMBC revolver, decreasing the size of the facility from $385 million to $310 million and pushing out the maturity from October 2026 and to December 2029. Additionally, we priced $115 million of new senior unsecured notes broken down into two tranches, $35 million of senior unsecured notes due February 2028 and $80 million of senior unsecured notes due February 2030. As you can see on the right-hand side of the slide, $297 million or 25% of total committed debt now matures in 2026, a figure that was 58% in the prior quarter. So we're pleased with our progress here. The weighted average stated interest rate on our total borrowings was 6.38% as of year-end, down from 6.59% in the prior quarter due primarily to base rate declines. This does not reflect the borrowing cost on the new unsecured notes, which funded this month. This quarter's positive net deployment brought our debt-to-equity ratio up from 1.15x in the prior quarter to $1.19 billion, which is within our stated target leverage range of 1.1x to 1.3x. With $338 million of undrawn capacity, subject to leverage borrowing base and other restrictions and $39 million in cash and cash equivalents as of year-end, we have sufficient liquidity to fund further investment activity while maintaining a debt-to-equity ratio inside our target range. As Jason noted, for the first quarter of 2025, our Board has declared a regular dividend of $0.42 per share. We've also announced a series of $0.03 $0.05 per share special cash dividends related to undistributed taxable income. The first special dividend will be paid on March 14 for the second and third payable in June and September, respectively. It's worth noting that our existing variable supplemental dividend framework remains in effect as well. Since announcing this framework in mid-2023, CCAP has paid $0.54 per share of cumulative supplementals. CCAP will not pay supplemental for Q4 as the measurement test cap exceeded 50% of this quarter's excess vatable earnings. And with that, I'd like to turn it back to Jason for closing remarks.

Thanks, Gerhard. As we look forward over the remainder of 2025, we believe we're operating in an attractive environment for increased M&A given the significant amount of dry powder on the sidelines, aging private equity portfolios and a regulatory environment more conducive to deal making. Key economic indicators remain relatively healthy. and the market outlook suggests more stability around near-term base rates, which we view as a positive for broader LBO activity. We continue to apply our disciplined credit underwriting with a focus on capital preservation strong free cash flow generation and robust debt service coverage. We believe the growing dispersion of performance and returns across managers will continue to accelerate as rates stay elevated. We believe Crescent and CCAP will continue to be on the right side of this performance dispersion spectrum, and we look forward to delivering on that in quarters to come. As always, we thank you for joining our call today and look forward to connecting with many of you soon. And with that, operator, we can open the line for questions.

[Operator Instructions]. Our first question comes from the line of Mr. Robert Dodd from Raymond James.

I just want to ask a couple of questions about the increase in the related assets, right? So you say you added seven names, and you want to be proactive about it, not week too late. But were there any common themes that drove that? And then any -- if there were any of those starting to become visible any other areas of the portfolio?

Robert, it's Jason. I think the seven new names, I would say they all have company sort of specific challenges. That said, we are paying close attention to potential thematic or industry indicators. I think maybe, Henry, you want to comment on that?

Yes. I'd say there's a handful of themes that we are noticing that we certainly want to provide some additional color on. There's a few subsectors that we found have just been quite a bit more challenged. One of them is third-party logistics. There's just been broader compression in freight rates across the industry as a whole that have created some top line pressures on the companies that deal within that specific subsector, another that we have been keeping a close eye on is packaging. There's been some destocking trends in certain end markets that we're certainly keeping a close eye on, but that's a dynamic that hasn't yet returned to, I'd say, historical norms. And then the last kind of subsector that we're particularly focused on is businesses that are indexed to kind of early-stage med tech, biotech development. Those sectors have been quite a bit more impacted by just what we're seeing in rates as a whole, given access to capital at the end customers there. So I'd say that those 3 are smaller subsectors collectively less than about 4% of the portfolio. that we are certainly keeping a close eye on. The last note that I will leave you with here with the watch list as a whole, what we're noticing more broadly, and this isn't necessarily for the new names that were added to the watch list this quarter is businesses that are indexed to consumers as the end user of the product or service in the event that those companies are on the watch list, they are taking longer to recover than what we've seen traditionally or historically in the watch list overall. So I'd say that those are certainly exhibiting a longer than what we are seeing kind of more broadly across the portfolio.

Got it. I appreciate that color. I mean just kind of following on that. I mean, have you got any preliminary thoughts on exposure or risk from like tariffs or those in government contracting and cost cutting, anything what's your you have a gauge on your relative potential exposure there?

Thanks, Robert. Jason here. It's definitely a topic that we're spending a lot of time thinking about seems to be in the news every day. It's probably a little premature to get into specifics, but if tariffs do become meaningful in reality, I think it certainly has an impact on U.S. companies. We've tried to drill down into our portfolio a bit in terms of thinking about specific exposure. So maybe -- maybe Henry, you want to touch on that as well.

Yes. I'll start with the tariff piece of it. So what we've really looked at are companies where they are sourcing a material portion of the cost of goods sold from for suppliers. And we're looking at this, I'd say, a much more broader basis. So looking at it based on three categorization as a whole. That, given how service-oriented our portfolio is a pretty small percentage of our portfolio, roughly around 12% of fair value today, if you just kind of look at industry categorizations that do procure materials from foreign suppliers. On the second part of your question around Dodge, we also looked at companies that drive a majority of the revenue directly from the government. The primary sector where we have that dynamic present is within software, where there is a government agency that's the end user of that product or service. But that overall in terms of the total of our portfolio is less than 5%. So overall, I'd say on both of those fronts, we're looking at a minority of the portfolio that has -- and I really want to kind of underscore this potential exposure to some of the actions that we're seeing on both the tariff side as well as the broader reduction in overall government agencies.

Got it. I appreciate that color that. One more on spreads. I mean, there has been repricing activity, market spreads are tighter, et cetera. Stable. But how much of the back book in the portfolio, if you will, has not undergone repricing yet? And do you think there's some risk where spreads in what brought our portfolio above the sort of market today, and it's a business that could potentially be price over the next call it, 12 months.

Yes. I'll start off by commenting on, I think the repricing dynamic, we saw it all throughout last year. And in the event that LBO volumes, which I think folks are generally expecting to return to more historical levels. To the extent that, that dynamic does not come to fruition, I think the repricing risk remains heightened because it's really a function of broader anemic deal activity on the new LBO front. So I'd say it's a little bit of a chicken and egg question, where if we do see volumes kind of come back on the new LBO front, I would expect the repricing dynamic to certainly subside from what we've seen last year. However, if we do see kind of sluggish overvalue zone, it's likely that we'll continue to be repricing in the portfolio. So I think it's really just going to be a corollary of what's happening broadly, more broadly with the deals.

I'll jump in there as well, Robert. I think the fundraising environment certainly plays a factor in the repricing dynamic and a lot of the capital being raised that needs to get deployed right away is in the non-traded space on the wealth side. That market is generally seeing flows of $2 billion to $3 billion a month. When you segment that market into sort of managers that are generally targeting the upper mid market, and we would define that as north of a couple of hundred million dollars of EBITDA. We think that's about 90% of the flows that are coming into the market today. So as you think about it and as we think about where the pressure is concentrated, I think it's more concentrated at the upper end of the middle market. Because of those flows and certainly the broadly syndicated loan alternative that issuers have as they -- when they get larger in size.

Our next question comes from the line of Mickey Schleien from Ladenburg.

Yes. A lot of good questions already asked. I was just hoping you could break down at least at a high level, your what drove the realized and unrealized gains and losses for the quarter.

Thanks, Mickey. On the unrealized side, we certainly had some individual movers watch list related. We did have a pickup in nonaccruals as well. So we had some movement in some isolated names. Gerhard, do you have any other color for making on that?

Yes, Mickey. It's a good question. we did look at this kind of heading into the call. There are no significant, I'd say, individually material movers in that unrealized bucket. It's really attributable to some of the comments we made on the prepared remarks, which is a slight increase in the three rated assets. So as we saw the watch-list names, increase. The watch list is what we define 3, 4 and 5 rated from a risk perspective. There's really a migration of about -- I want to say, about $40 million or sp, $40 million increase quarter-over-quarter, that's really what drove the higher unrealized versus individual credit deterioration.

Our last question comes from the line of Paul Johnson from KBW.

On the new nonaccruals this quarter, iLending, Merkle, Mann Lake, are those Crescent Originated investments? Or are those legacy investments from acquisitions?

One of the three was Crescent. The other two were legacy pull.

Okay. And then, I mean, in terms of like the new nonaccruals and maybe kind of talking about the watchlist names, 3-rated investments. The majority of these investments does Crescent have. Are these crescent-led deals where there's a controlling stake that the adviser has in these loans?

Yes. The majority -- this is Henry. The majority of the names that are on the watch list are Crescent originated and they are tranches that we either age into control or both. I think the other side of the question, which is what percentage of these are acquired assets. So roughly just around 20% of the watch list are going to be assets, and I'm putting this on a fair value basis are assets that were acquired through both Alcentra and First Eagle.

Okay. That's helpful. And then just on Mickey's question, I didn't catch it if you said it on the end. But on the realized loss portion. What was the driver this quarter? It looked like a fairly big realized loss was crystallized. Was there anything in there that was exited?

Yes. So the primary driver there was the restructuring of the portfolio company that was a nonaccrual last quarter CECO. So that slipped from unrealized to realized in the quarter. We completed a restructuring there and as a result, incurred a realized loss related to that position. Okay. And then just kind of looking at some of the new investments this quarter, I saw several 475, below 500 basis point spread. Would you say that's kind of where the market is at today where spreads are now kind of pushing below that 500 mark in lower core kind of middle market? Or I mean, was this more of a maybe a phenomenon kind of out of the fourth quarter where a large number of investments were funded at a lower spread.

I'd say it's certainly at least for Q4 specifically, it seems to be the latter, just kind of looking at where we are in Q1, for the quarter as a whole, the weighted average spread of our investments was right around that 5% handle. So we are still seeing deals that come within that band that are within the core lower middle market. We've certainly seen deals that have priced tighter than that. And I think where we are today, we're continuing to hold our pricing discipline in line with where we have been over the last several quarters. But certainly, I think it's indicative, particularly of larger borrowers that are more within that core middle market spectrum of size and also kind of more kind of touch upon a deal size where the tranches are larger and more relevant for some of the new capital that's coming to the space, you'll see us get below that 500 threshold.

Paul, it's Jason. The other thing that I would just add to that is that, when we think about structure, we generally tighten terms and tightened leverage the smaller the issuer is. And so -- most of the time when we're riding in the lower bid market with companies that are $10 million or $20 million of EBITDA, we're not stretching too deep into the capital stack. It looks more like a traditional first lien which for Q4 represented about 20% of deployment. But with the lower leverage in that lower middle market segment, we are certainly seeing transactions getting done in the mid- to high 4s in terms of spread.

Got it. That's very helpful. You also gave some pretty good information in terms of your thoughts on tariffs, exposure, potential exposure there. But I'm also curious, I mean, traditionally, the portfolio for yourself as well as private credit broadly, portfolios have been primarily services business focused and I'm just curious, with all the discussions on tariffs, I mean, does that, in any way, I guess, change the opportunity for more manufacturing type of businesses, CapEx heavy type of businesses. Is there a changing opportunity there at all?

I think -- this is Henry speaking and Jason can chime in if he has other thoughts. But going back to our inception, we've really shied away from businesses that have a heavy kind of fixed charge and CapEx or capital need for the reasons that we are very focused on how much cash flow there is from the underlying portfolio of companies to service our debt service. And whether they -- whether this is -- the materials are procured a broad or domestically, that dynamic really doesn't change in an environment where we have tariffs and where we don't. So I think what you'll continue to see even in this environment is we're going to stick to our knitting in terms of where we're focused, just in terms of how the businesses are capitalized, what their operating models are. And I don't necessarily see us leaning more into domestic businesses that have higher capital needs and heavier CapEx requirements even though more broadly across the macro or the U.S. economy, there may be opportunities there.

Thank you. That concludes our trading action. I will now turn the call back to our CEO, Jason Breaux for closing remarks.

Okay. Well, thank you, everyone, for your continued interest and your questions on CCAP. We look forward to speaking with you all soon.

That concludes our conference call for today. You may now disconnect.