Investcorp Credit Management BDC, Inc. (ICMB) Earnings Call Transcript & Summary

Welcome to the Investcorp Credit Management BDC, Inc. scheduled earnings release of fourth quarter ended June 30. Your speakers for today's call are Mike Mauer, Suhail Shaikh and Rocco DelGuercio. [Operator Instructions] I would now like to turn the call over to your speakers. Please begin.

Thank you, operator, and thank you for joining us on our fourth quarter call today. I'm joined by Suhail Shaikh, my co-CIO and President of Investcorp Credit Management BDC; and Rocco DelGuercio, our CFO. Before we begin, Rocco will give our customary disclaimer regarding information and forward-looking statements. Rocco?

Thank you, Mike. I would like to remind everyone that today's call is being recorded, and that this call is the property of Investcorp Credit Management BDC. Any unauthorized broadcast of this call in any form is strictly prohibited. Audio replay of the call will be available by visiting our Investor Relations page on our website at icmbdc.com. I would also like to take -- 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. Actual results may differ materially from these projections. We will not update forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our Investor Relations page on our website. At this time, I would like to turn the call back over to our Chairman and CEO, Michael Mauer.

Thanks, Rocco. The June quarter marks the last quarter of our fiscal year. New deal activity in the primary markets, especially new LBOs and refinancings remained limited during the quarter. High interest rates have discourage sponsors from doing dividend recaps or acquiring new companies. As a result, our investment activity remained lower this quarter compared to previous periods. However, we expect the slowdown in primary deal activity to pick up the next few quarters, and we continue to see compelling investment opportunities in our pipeline. We made several investments this quarter in the secondary market. These opportunities were primarily borrowers, we are familiar with and have exposure to in our other funds across our platform. During the quarter, we invested in 2 new portfolio companies and 2 existing portfolio companies. The weighted average yield of our debt investments during the quarter decreased 12.5% from 13.4% at 3/31. We remain very focused on portfolio management and risk mitigation. We continue to diversify our investments into new borrowers to reduce our average position sizes and to work with borrowers to have covenant or liquidity issues in the current high interest rate environment. This quarter, we increased our number of borrowers and the number of GICS industries across our portfolio to 21 industries when compared to the previous quarter. As we look at our borrowers' operating performance, the credit quality of our portfolio remains stable. Our weighted average net leverage is relatively unchanged from the quarter ended 3/31 at 3.9x. Additionally, our weighted average loan-to-value ratio for all debt investments is approximately 48%. Looking forward, we expect to continue our theme of risk management and diversification. We are expecting repayments in both the current quarter and the fourth quarter this year, which we expect to deploy -- redeploy across new borrowers in a smaller average size. While we suspect there is pent-up demand for primary issuance, we remain focused on secondary opportunities as well, where we can create positions with shorter maturities, convexity and established track record of operating as levered borrowers. Suhail will now walk through our investment activity during the quarter and after quarter-end. Rocco will go through our financial results. I'll finish with commentary on our nonaccrual investments, our leverage, the dividend and our outlook. As always, we'll end with Q&A. With that, I'll turn it over to Suhail.

Thank you, Mike. As Mike mentioned, this quarter's activity was characterized by secondary opportunities. Market estimates had direct lending volume in this quarter down almost 50% year-over-year. However, we're beginning to see primary deal flow pick up after the summer slowdown. We're being highly selective in this credit environment, whether we are evaluating a primary or a secondary transaction. Our primary focus remains investing in high cash operating -- high cash flow generating businesses with enhanced structural protections and supported by experienced sponsors. During the quarter, we invested in 2 new portfolio companies and 2 existing portfolio companies, as Mike mentioned. We also fully realized our position in 1 of the companies. During the quarter, fundings for commitments and new investments totaled approximately $15.1 million of cost, with a weighted average yield of approximately 15.5%. In the same period, repayments stood at approximately $8.7 million from 1 investment with an IRR of approximately 9.8%. To talk you through the new investments. First, we made an investment in the first-lien term loan of AMCP Clean Acquisition Company, also known as PureStar. This is a good example of an opportunistic secondary purchase of a credit that we have been tracking. PureStar is a portfolio company of Cornell Capital. It is one of the largest commercial monitory providers in the hospitality industry in the U.S. We invested in the first-lien term loan and delayed to our term loan. Our yield at cost is approximately 16.5%. Second, we invested in the first-lien term loan of American Auto Auction Group, also known as XLerate. This is an example of an investment that [ we own ] on another portfolio and we're able to find an attractive opportunity to purchase in the secondary market. Our BrightStar Capital portfolio company accelerate is a full service, used vehicle auction services provider for [ future ] customers. Our yield at cost is approximately 13.6%. Finally, we invested in the priority term loan of Bioplan. Bioplan provides packaging and sampling solutions to the [indiscernible] industry. Our yield at cost is approximately 13.6%. During this quarter, we fully realized our position in auto and marketing, which was refinanced. Our fully realized IRR was approximately 9.8%, as I mentioned before. After quarter end, we invested in 1 new portfolio company and 1 existing portfolio company. First, we invested in the first-lien term loan of Axiom Global. Axiom is a leading and global provider of expertise of talent offering, legal counseling and representation services. Axiom was a portfolio company of Permira. We have been an investor in Axiom for a few years in our other portfolios and similar to XLerate, we've been able to purchase it at an attractive price. Our yield at cost is approximately 10.1%. We also made a follow-on secondary investment in PureStar. Our yield at cost is approximately payments original investment of 16.5%. I'd like to note that the GICS standard was updated in May of this year. As such, our industry categorization for existing portfolio companies has changed in some cases, and our industry ratings have also changed. As of June 30, our largest industry concentrations were the following: trade company and distributors at 16%; professional services at 12.8% followed by IT services at 10.7%. Commercial services and supplies at 6.5% and software at 6.2%. Our portfolio companies are in 21 GICS industries, as Mike mentioned, as of quarter-end, including high equity and warrant positions. I'd now like to turn the call back over to Rocco to discuss our financial results.

Thank you, Suhail. For the year ended June 30, 2023, our net investment income was $9.4 million or $0.66 per share. The fair value of our portfolio was $220.1 million compared to $221.3 million on March 31. Our net assets were $87.7 million, a decrease of 60 basis points from the prior quarter. Our portfolio's net increase from operations this quarter was approximately $2.2 million. Our debt investments made during the quarter had an average yield of 5.5%. Our realizations and repayments during the quarter had an average yield of 11.3%, and our average IRR was 9.8%. The weighted average yield on our debt portfolio was 12.5%, a decrease of 90 basis points from March 31. As of June 30, our portfolio consisted of 36 portfolio companies. 89.2% of our investments were first lien, the remaining 10.8% in invested -- is invested in equity, warrants and other positions. 88.8% of our debt portfolio was invested in floating rate instruments and 0.4% in fixed rate investments. The average for on our debt investments was 1.1%. Our average portfolio investment was approximately $6.1 million, and our largest portfolio company investment is Bioplan at $13 million. We had a gross leverage of 1.54x and a net leverage of 1.44x as of June 30 compared to 1.65x gross and 1.49x net, respectively, for the previous quarter. As of June 30, we had 6 investments on nonaccrual, which included the 3 investments in 1888, the PGi revolver and 2 investments in American Nuts. This is an increase of 2 investments related to American Nuts from the previous quarter. With respect to our liquidity, as of June 30, we had approximately $9.2 million in cash, of which $8.1 million was restricted cash with $28.1 million of capacity under our revolving credit facility with Capital One. Additional information regarding the composition of our portfolio is included in our Form 10 filing, which will be filed later this week. With that, I'd like to turn the call over back to Mike.

Thank you, Rocco. As mentioned earlier, we remain focused on portfolio management and risk mitigation, especially in our borrowers that are experiencing periods of stress. We added 2 new positions on nonaccrual, American Nuts Term Loan A and Term Loan B positions. American Nuts sources procures and distributes nuts, seeds and dried fruits among other products. Their results have been challenged in the recent period. We are currently working with the sponsor and other co-lenders on the path forward. We continue to make progress rotating the portfolio and expected progress on the remaining nonaccruals over the next 12 months. Our NAV remained relatively unchanged, declining by 60 basis points. Our gross leverage was 1.54x, above our guidance of 1.25x to 1.5x. Our net leverage at 1.44x was within the target range. As mentioned last quarter, we expect to see our growth in net leverage converge. As of September 15, our gross and net leverage were 1.51x and 1.50x. As we have previously stated, the adviser will waive the portion of our management fee associated with base management fees over 1 turn of leverage. We covered our June quarterly dividend with NII. The company is expected to earn its dividend through the next quarter ending September 30. On September 14, 2023, the Board of Directors declared a distribution for the quarter ended June 30, 2023, of $0.12 per share as well as a supplemental distribution of $0.03 per share, both payable on November 2, 2023, to shareholders of record as of October 12, 2023. It is worth noting that the $0.03 supplemental distribution is related to fiscal year 2023 spill back. As previously mentioned, we doubled our platform AUM through the acquisition of an SMA and an initial close on our institutional fund, which resulted in the expansion of our investable assets and reduced the average expenses across the fund. Our expanded team has already proved to be meaningful in terms of sourcing and originating and as a result, we expect our pipeline to remain healthy for the remainder of the year. As always, we remain increasingly focused on capital preservation and maintaining a stable dividend. We are continuing our work on rotating and diversifying the portfolio, all while focusing on mitigating risk in our borrowers experiencing short-term stress. As we head into the back half of the year, we remain optimistic about our pipeline and our ability to deploy our capital in high-quality investments. This concludes our prepared remarks. Operator, please open the line for Q&A.

[Operator Instructions] Our first question comes from Paul Johnson with KBW.

Just clarifying your comments on repayments for next quarter or this -- second half of this year, I guess, the -- you said you expect repayments. Do you expect -- is this net repayments that you're talking about above what you're expecting to redeploy? Or is this just repayments that you have kind of line of sight on for the rest of the year, not necessarily net repayments?

No, not net repayments, Paul. Thank you for taking the time today. These are payments that we have line of sight on today that there will be some coming in, but we will be redeploying.

Got you. Okay. And then my second question or possibly a follow-up to that, a little bit broader, but just kind of taking a step back and looking at the quarter, I think, in the context of the space, obviously, this has been a pretty good year for BDC so far kind of despite what we expected earlier in the year. And a lot of BDCs pretty much -- almost every BDC in the sector has benefited quite a bit from the rate hike cycle. . I'm just kind of curious your thoughts on the portfolio this year, in particular. And why, I guess, that hasn't really worked to your benefit quite as much as the rest of the space? And then I guess in addition to that, what are some of the things that you think you could do with the adviser to hopefully help improve performance that you mentioned [ Singer 2 ] in terms of raising new funds and potentially lowering costs, but anything to that end would be helpful?

Yes, Paul. I know it's on your mind, is on our minds every day. How do we continue to advance the platform. And I think that's -- and you hit on it there, that we need to have a broader platform so we can originate more. We're making headway with that. We've done a first close, as you -- we talked about on the last call, of a fund, that fund is bringing in additional money throughout this year. The second thing is we did bring in an SMA. We're in discussions on another. We are targeting an additional fund first close the first quarter of next year. All of that not only spreads cost and you touched on bringing down costs, but I think equally important, it generates more origination and better terms on origination as we have a bigger platform. We really just started getting traction on that earlier this year, and I expect that to continue to pick up. But those are the areas that we are really focused on because I think you've seen a lot of big platforms that have some small funds and they are the beneficiary of it.

And I appreciate that. I mean, I guess -- I mean, at this point, the adviser Investcorp, I think they came in roughly 4 years ago. I mean, do you see it as a case in this point where the equity base has essentially shrunk to a point where scale is just not quite possible with the size of the BDC being about roughly $90 million equity-based BDC, one of the smaller -- smallest market cap BDC space -- BDCs in our coverage at least. I mean do you see that as a, I guess, inhibitor to pulling these levers? Or I mean, what do you expect, I guess, out of this, the growth that you're kind of calling for in the next few years?

I don't think the BDC is an inhibitor. I think that there was a lot of time spent over the first few years, looking at strategic ways to grow it, and those did not happen for a lot of different reasons. I can't go into, but mostly our choice not to execute around a lot of that. And we've been focused over the last 12 months on organic growth. And so the size of the external publicly traded BDC has not been the inhibitor. But going forward, hopefully, it will be one of the beneficiaries.

Our next question comes from Robert Dodd with Raymond James.

First, a housekeeping one, if I can. I mean there was a fairly sizable dividend in the fourth quarter. I mean, was that related to a onetime event? Or is that a new position in, say, preferred equity or something like, i.e., is it going to continue? Or is that a one-off source of income...

That $0.05 that you're, I think, referring to was a onetime event. So we've got the base going forward a $0.12, and we'll have a supplemental to the extent that it makes sense, and we will -- as we have in the past, we give visibility for the next quarter, and we said we expect to cover the dividend for the next quarter.

I appreciate that. I meant the income to the BDC. There was a $690,000 dividend in total investment income for the BDC this quarter. Is that a sustainable number?

Rob, are you talking on the income statement, correct?

Yes. Yes, yes. Correct.

Yes. Mike, He's talking about the [indiscernible] of dividend that we got. I think some of the equity position paid a dividend. I don't think they're -- I think they're one-offs.

Yes, those are one-offs, the dividends coming in. I would not think about those as recurring dividends. We do think that we'll get them episodically, but not on a quarterly basis.

Got it. Got it. I appreciate that color. Then if I can -- I thought you -- obviously, you amended the credit facility, and we spoke about that in last quarter. That amendment does not -- and I apologize for the background noise, hasn't changed the revolving period. So can you give us any color on what you're doing to extend that, obviously, if the revolving period expires August next year. That's part of it. Also, and I do note that in the credit facility amendment, you've now added an advanced rate bucket for broadly syndicated loans. Is it a plan to do more of that within the BDC in terms of more secondary purchases on BSLs? Or is that just...

Robert, this is Suhail. So I'll let Rocco pick up on the credit facility. The short answer is we didn't have an expiration coming due. I think we've amended the credit facility to allow for some financial flexibility in it. With respect to secondary positions, I think we are -- the big picture response is, we're being very selective in this marketplace from a deal flow perspective. As you know, deal flow -- primary deal flow for buyouts is down almost 50% year-on-year. So what we see is, frankly, a lot of that stuff we are passing on. So we're looking at secondary investments where either we know the credit or we can leverage the broader Investcorp platform, our private equity or our liquid credit business to source ideas from. So that's really the theory behind doing some of those investments. And because they are somewhat more liquid than your traditional middle market loans, we can move in and out of those when we have to make room for more primary deals as they come through. So hopefully, that answers your question.

Yes, yes. That answers that question. And then just on -- there's no maturity on the revolving credit facility, but the revolving period now has less than 12 months depends on the...

The term out goes further, the revolver ends.

The revolver -- the Capital One facility ends in 2026.

Right. But the revolving -- the reinvestment period ends in 2024.

And we'll go back and review all that, but we've been working with Capital One ongoing and all those relationships are very healthy. I'll double check that, Robert, and we'll come back...

Yes, no worries. I appreciate it.

Our next question comes from Paul Johnson again with KBW.

Sorry, one more follow-up. During the remarks, you guys said that you expect to cover the distribution, I believe, next quarter. I just want to make sure -- I'm clear -- so are you talking about the full $0.15 distribution? Or are we talking about just simply the base distribution of $0.12?

No, Paul, this is Suhail. It's the base distribution of $0.12. And to the extent there is any spillover or supplemental, that's going to be on top of that.

I see no other questions in the queue. Go ahead.

Thank you. If there's no other questions, we'll talk to everyone next quarter. This was a long gap because of the year-end, but we'll be talking to everyone after the September quarter. Thank you very much.

Thank you.

Thank you, everyone. And this concludes today's conference call. Thank you for attending.