Investcorp Credit Management BDC Q1 2024 Earnings Call Transcript

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Provided by Quartr
November 14, 2023

There are 7 speakers on the call.

Operator

Welcome to

Speaker 1

the Investcorp Credit Management BDC Incorporated Schedules Earnings Release for Q1 Ended September 30, 2023. Your speakers for today's call are Mike Mauer, Suhail Sheikh and Rocco DelGuercio. Operator assistance is available at any time during this conference by pressing 0 pound. A question and answer session will follow the presentation. I would now like to turn the call over to your speakers.

Speaker 1

Please begin.

Speaker 2

Thank you, operator, and thank you for joining us on our Q1 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?

Operator

Thanks, 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 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.

Operator

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.

Speaker 2

Thanks, Rocco. The September quarter marks the Q1 of our fiscal year. We saw primary deal activity in the middle market increase, characterized by acquisition financing and to a lesser extent LBO and refinancings as well as dividend recapitalizations. Since our last call, we saw our pipeline increase at a healthy rate, albeit at a slower pace compared to historical norms. We remain optimistic that deal activity in the primary market will continue to pick up over the next few quarters that we will continue to see compelling investment opportunities.

Speaker 2

Our investment activity during the quarter was characterized by opportunistic investments in the secondary market. Importantly, we invested in 4 new companies and added to our position in 1 existing portfolio of companies. These investments were all in borrowers we are familiar with, have previously invested in or have exposure in our other managed funds across the platform. The weighted average yield of our debt investments made during the quarter was 12.3%, a 20 basis point decrease in the weighted average yield of investments that were made during the quarter ended sixthirty. Additionally, we continue to remain highly selective when it comes to new investments.

Speaker 2

We are select specifically focused on lending into companies that are sponsor backed, have financial covenants, high free cash flow and our recession resilient businesses. As we look at our borrowers' operating performance and the credit quality of our performing portfolio continues to remain stable. Our weighted average interest coverage ratio for our performing debt investments is approximately 2 times and our loan to value ratio is approximately 41%. Looking ahead toward the rest of the fiscal year, our focus is on portfolio management and risk mitigation. We are focused on our non performing investments and reducing this amount.

Speaker 2

We continue to work toward diversifying our investments in new borrowers to reduce our position sizes to an average of 2% to 3% of our total portfolio and to work with our current borrowers that have covenant or liquidity issues in this high interest rate environment. We increased our number of borrowers to 40 from 36 as of sixthirty and the number of GICS Industries across our portfolios to 24 from 21 when compared to the previous quarter ended June 30. During the quarter and post quarter end, we had 2 repayments. As mentioned on our last call, we are also expecting several repayments over the next few quarters. Our dividend coverage is an important consideration when making new investments.

Speaker 2

Suhail will now walk through our investment activity during the September quarter and after quarter end. Rocco will go through our financial results. I'll finish with commentary on our non accrual investments, our leverage, the dividend and our outlook. As always, we'll end with Q and A. With that, I'll turn it over to Sue.

Speaker 3

Thank you, Mike. As Mike mentioned, the quarter's activity was a continuation of executing on opportunistic investments in the secondary market and selectively looking at new buyout financing. Sponsored middle market direct New money volume in the quarter was approximately 36% lower year over year. However, we saw primary deal flow pickup during the quarter and have continued to see it increase post quarter end. Our pipeline remains robust and we believe that we can continue executing on our investment thesis that Blake mentioned.

Speaker 3

During the quarter ended September 30, we invested in 4 new portfolio companies in 1 existing portfolio company. We also fully realized our position in 1 portfolio company. During the quarter, fundings for commitments and new investments totaled approximately $15,500,000 at cost with a weighted average yield of approximately 12.3%. In the same period, repayments totaled approximately $6,800,000 from one investment that I mentioned with an investment IRR of approximately 16.4%. Let me now take you through our investment activity.

Speaker 3

1st, we invested in the 1st lien term loan of Acxiom Global. Acxiom is a leading provider of expert legal talent, offering legal, counseling and representation services. Acxiom is a portfolio company of Premera, a sponsor we know well. We have been an investor in Acxiom for a few years in our other portfolios, and we were able to purchase it at an attractive price. Our yield at cost is approximately 13.9%.

Speaker 3

We also invested in the 1st lien term loan of Congrux. Congrux is a Quest Review or Partners portfolio company and provides mission critical end to end engineering, construction and maintenance services to a diverse customer base in the broadband and other adjacent industries. Our yielded cost is approximately 12 point 2%. This was also a secondary purchase for the portfolio. Congress has in a portfolio company of ours and other funds for several quarters.

Speaker 3

We also made a secondary investment in Maruti Color, also known as LABL or Label. A CD and R portfolio company, Label is a global leader in the prime label manufacturing industry. Our yield at cost is approximately 10.9%. As with Acxiom and Congress, Margic Color or label was also a secondary purchase of a name that we own in other vehicles that we manage. Finally, we also invested in FleetPride, an American Securities Capital Partners backed company.

Speaker 3

FleetPride is a national distributor of Aftermarket Parts for the U. S. Heavy Duty Truck Industry. Our yield unit cost is approximately 10.4%. This is an aim we have been tracking for a while.

Speaker 3

In addition, Given Investcorp's private equity arm used to own the business several years ago, we were able to leverage their expertise to diligence our investment. And then our last investment, which was the addition of our System Position TO AMCP Clean Acquisition Company, also known as PureStar. This is a good example of an opportunistic secondary purchase of a credit that we already own, and we're able to source some paper for an attractive price. PureStar is a portfolio company of Cornell Capital. It is one of the largest commercial laundry providers to the hospitality industry in

Operator

the U.

Speaker 3

S. We invested in the 1st lien term loan. Our yield at cost is approximately 15.2%. During the quarter, We fully realized our position in Fusion's term loan, which was refinanced. We remain investors in Fusion's preferred and common equity.

Speaker 3

Our fully realized IRR was approximately 16.4%, as I mentioned earlier. After quarter end, We invested in 3 new portfolio companies and fully realized our position in 2 portfolio companies. First, we supported the LBO of Althea by PAI Partners. Altia is a contract manufacturer of premium dry pet food ingredients. We invested in the 1st lien term loan and our yield at cost is approximately 10.7%.

Speaker 3

We had been investors in through our other funds and were able to re underwrite the risk for the new LDO. 2nd, we invested in the 1st lien term loan of Victor, also known as LFF9 Atlantis Holdings, LLC. Vitra is the largest We purchased Liqtra in the secondary market at an attractive price. A yield at cost is approximately 13.7%. Our team has had a long standing history with this name.

Speaker 3

We also made a proprietary preferred equity investment in Discovery Behavioral Health, of Webster Equity Partners Portfolio Company. Discovery is one of the largest providers of residential and outpatient treatment for behavioral health services across eating disorders, mental health and substance abuse. Our yielded cost is approximately 20.4%. We fully realize the position in the 1st lien term loan of Advanced Solutions International, also known as ASI. We originally invested in the 1st lien term loan and preferred equity in September 2020 of ASI.

Speaker 3

We remain invested in the preferred equity. Our fully realized IRR on the term loan was approximately 10.8%. We also fully realized the position in the 1st lien term loan of Cook and Boardman, which was repaid as part of LDO by Platinum Equity. Our fully realized IRR was approximately 8.5%. As Mike mentioned, I'd also like to note that The GICS standard was updated in May of this year.

Speaker 3

As such, our industry categorizations for existing portfolio companies have changed in some cases, and our industry ratings have also changed. As of September 30, our largest industry concentrations were Trading Company and Distributors at 17.1 percent, Professional Services at 11.5%, followed by IT Services at 7.5%, software at 6.15% and containers and packaging at 6.1%. Our portfolio companies are 24 GICS Industries as of quarterend, including our equity and warrant positions, which is an increase of 3 industries from the previous quarter. I'd now like to turn the call over to Rocco to discuss our financial results.

Operator

Thanks, Suhail. For the quarter ended September 30, 2023, our net investment income was $1,600,000 or $0.11 per share. The fair value of our portfolio was $223,400,000 compared to $220,100,000 on June 30. Our net assets were $83,800,000 a decrease of $3,900,000 from prior quarter. Our portfolio's decrease from operations this quarter was approximately $1,700,000 Our debt investments made during the quarter had an average yield of 12.3 percent and the realization and repayments during the quarter had an average yield of 14.6% and an average IRR of 16.4%.

Operator

The weighted average yield of our debt portfolio was 11%, a decrease of 150 basis points from June 30. As of September 30, our portfolio consisted of 40 portfolio companies, 89.7% of our investments were 1st lien and the remaining 10.3% is invested in equity, warrants and other positions. 99.7% of our debt portfolio was invested in floating rate instruments and 0.3% in fixed rate investments. The average floor on our debt investments was 1.1%. Our average portfolio company investment was approximately $5,600,000 and the largest portfolio company investment is Bioplan at $13,600,000 We had a gross leverage of 1.58 and a net leverage of 1.41 as of September 30 compared to 1.54 and 1.44 respectively for the previous quarter.

Operator

As of September 30, our non accrual investment as a percentage of fair value was 10.6% compared to 4.1% for the quarter ended June 30. With respect to our liquidity, As of September 30, we had approximately $14,300,000 in cash, of which $14,200,000 was restricted cash with $28,800,000 of capacity under our revolving credit facility with Capital One. Additional information regarding the composition of our portfolio is included in our Form 10 Q, which was filed yesterday. With that, I'd like to turn our call back over to Mike.

Speaker 2

Thank you, Rocco. As mentioned earlier, we continue to remain focused on portfolio management and risk mitigation, especially for our borrowers that are experiencing periods of stress. We added 3 borrowers to non accrual, including 2 investments in ArborWorks, CareerBuilder and Klein Hirsch last out term loan. Since quarter end, There has been continued developments in ArborWorks. While we are bound by confidentiality, the company's operating environment remains challenged and we continue to have an active dialogue with all parties.

Speaker 2

Our career builder continues to pay us the interest, the company's fundamental has been weak for some time. We put the loan on non accrual as we believe there is significant doubt of full recovery of principal. We continue to make progress rotating the portfolio and expect progress on the remaining non accruals over the next 12 months. Our NAV per share declined 4.46% from the previous quarter end. Our gross leverage this quarter was 1.5 above our guidance of 1.25x to 1.5x.

Speaker 2

Our net leverage was 1.41 times, which is within the target range. And as mentioned last quarter, we expect to see our gross and net converge. As of November 6, our growth and net leverage were 1.68x and 1.51x. As We have previously stated the advisor will waive the portion of our management fee associated with base management fees over one times leverage. The company is expected to earn its dividend through the next quarter ended December 31.

Speaker 2

On November 9, 2023, the Board of Directors declared a dividend for the quarter ended December 31, 2023 of $0.12 per share, as well as the supplemental distribution of $0.03 per share, both payable on January 8, 2024 to stockholders of record as of December 14, 2023. It is worth noting that the $0.03 supplemental distribution is related to fiscal year 2023 spillback. As we look to the rest of our fiscal year, we will continue to work on rotating and diversifying the portfolio, all while focusing on mitigating risk in our borrowers experiencing short term periods of stress or volatility. Our investment strategy has not wavered and we continue to remain focused on capital preservation and maintaining a stable dividend. We are optimistic about our pipeline, our ability to deploy capital in high quality investments.

Speaker 2

That concludes our prepared remarks. Operator, please open the line for Q and A.

Speaker 1

Ladies and gentlemen, at this time, we will conduct a question and answer session. Please listen for your name to be announced and be prepared to ask your question when prompted. We are now ready to begin.

Speaker 4

And our first question comes from Mr. Paul Johnson with KBW. Go ahead, sweetie.

Speaker 5

Yes, good afternoon, guys. Thanks for taking my questions. Just a couple from me. But in terms of investments that you made during the quarter, it sounds like there's decent amount of secondary activity. I mean, can you just kind of speak to what you guys are seeing in the secondary market versus what you can receive obviously in the primary market?

Speaker 5

And if that's more of kind of a one time 3Q type of thing or type of purchases is something you probably expect to remain more active with in the future quarters?

Speaker 3

Paul, thank you for the question. This is Suhail. Let me take that in a couple of different ways. So I think the investments that we made are investments that we own and other portfolios that we manage. So while there were secondary opportunities, I think these are investments that we have and we were able to sort of find Active opportunities to pick up additional paper that ICMP benefited from.

Speaker 3

So We always are looking for things in the marketplace to add to our positions to see what we can add Or frankly, in some cases, even sell it. We think there's an opportunity to get out of a position at a healthy rate of return. So that's part 1 of the question. Part 2 is, I think as we mentioned in Subsequent to the quarter end, we had a couple of investments that we made that are brand new investments that are not secondary investments. And those are Althea that I mentioned and Discovery, Behavioral Health.

Speaker 3

Both of those are new investments. Now Altria was one that we had in our portfolio, it's getting refinanced and we re underwrote that risk as part of the new That's part of the new buyout. This company was a brand new investment. So I think it's our pipeline is actually reasonably healthy. But we're being super selective about what to go after, how to sort of tackle.

Speaker 3

And frankly, the credits that we know right now, We'd rather own more of those than go into things where we don't like the structure of the pricing. So hopefully that answers your question.

Speaker 5

Yes, that's very helpful. Thanks for all the detail on that. My next question is just kind of on NII this quarter, 0.11 And so I mean, Mike said that you expect to cover the dividend next quarter, the core dividend. I guess, what do you kind of foresee next year. I mean, do you kind of look at this quarter as sort of a depressed level of NII where you'd expect that to obviously kind of trend back up to the core dividend level or possibly higher.

Speaker 5

What sort of, I guess, levers, I guess, do you have to kind of move NII up from this quarter just being at just a low level?

Speaker 2

Yes, Paul, it's Mike. Thank you for the question. I think it's an area that I know you're focused on the EC Analyst is and we are. There is a couple of key levers that we focus on. 1 and the elephant in the room is Our non accrual levels are high and we need to get those down.

Speaker 2

There are 2 ways to get those down. 1 is to Complete working with the group to convert that back to an accrual status in some way, shape or form. I can't go into any more detail On that given where we are in discussions, so that's we're working with the company and the sponsor. The other one is if And Suhail mentioned this before, there are opportunities to sell that and reinvest it in What we think are good new investments, that's another lever. And then the second area is we've got equity, some of which we've bought and co invested and some of which we've gotten restructured for.

Speaker 2

So that is a function of working with the other lenders, the company, etcetera, to convert those. But those are the levers, the obvious levers and we are really working to and we've said this before, rotate the portfolio and we've done a lot of rotating, but we've got more work to do on that front.

Speaker 5

Thanks for that, Mike. Last question for me. Unless anything's changed, I believe Investcorp still like around a 10% owner of the stock based on the position that they bought several years ago. If I'm just looking back, I mean, NAV is down fairly materially since that time, I mean around 43%. I believe the NAVs decline since that quarter that Investcorp came in to the advisor.

Speaker 5

I mean, I guess, what is, I guess, Investcorp's sort of level of engagement here, how active Are they with the business today versus kind of when they came in? I'm just curious kind of trying to get our thoughts around what they think of performance and what sort of the plan is going forward here?

Speaker 2

So there's 2 or 3 pieces to that answer. And I think a critical one, which Morocco will go back and double check it, but I'm pretty sure Bloomberg has it right. And I could be off by 30 days, but somewhere June 1, give or take 30 days, Investcorp increased its own to 24.9% of the stock. So that was a statement a year and a half plus, I'll call it a year and a half ago, Give or take of commitment to the public BDC to put more money in. The Second thing is, how are they focused on it?

Speaker 2

I will tell you that the CEO has a formal meeting Every scheduled every 30 days, a monthly meeting with Sue L. And I to talk about it. What are we doing? How are we thinking about it? He's focused on it.

Speaker 2

It is a and was initially a critical investment to think about how do we grow the platform and we need to make sure that the public BDC is part of that strategy And that we're doing the right thing by shareholders. So it's got attention. It has gotten additional capital from the initial September of 'nineteen investment. And trust me, we've got ongoing dialogue with our CEO beyond the formal meetings too.

Speaker 5

Thanks for that. Yes, thanks for the correction on the ownership level. That's all for me. Thank you for taking my questions.

Speaker 4

Thank you very much. Our next question comes from Mr. Robert Dodd with Raymond James.

Speaker 6

Just touching on the Nomacor question again, Mike. I mean, I think in your prepared remarks, you made a reference to with progress over the next 12 months. I mean, is that the kind of timeframe we're looking at to resolve or to Get the non accrual level down to something that might be more in line with the industry or can you give us an idea Kind of the time frame we're talking about here.

Speaker 2

Yes. Robert, I would love to say that I have a crystal ball that So this is the quarter where it will be down below the industry average. I will tell you that we have active dialogue On almost every one. I don't want to say every one because even if you look at it, some of those really are not active restructures. They're more in liquidation Some of those are small, but the major ones, we are very focused on.

Speaker 2

We'd like to see those resolved In 6 months, I said 12 months. We don't know because we're not the sole lender and we deal with the group and we have to manage a lot of constituents in that process. But I hope that it's Much sooner than the 12 months.

Speaker 6

Got it. Thank you. On just that on the dividend, The $0.03 supplemental viewpoint, I think you also said that was to do with essentially last year's spillover. So presumptively, That $0.03 the supplemental program will not be continuing. Just want to be clear there with investor expectations, it's just going to be the base dividend going

Operator

Hi, Robert. It's Raffo. Yes, correct. You are correct.

Speaker 6

Got it. Got it. Thank you. And then on I asked you a little bit about this Last quarter, on the revolver with Cap One, we are now it's less than 12 months to the not maturity, but to the reinvestment period expiring. Can you give us an update

Speaker 2

And what's going on there, Chuck? Yes. And I know, as you said, we spoke about it on the last call. This is since this is the Q1 patent After the annual call, we don't have the normal, I'll call it 90 days in between calls. It's a shortened period in between.

Speaker 2

We have been in and we are going to normal course. We haven't tried to accelerate those. There's nothing that's dragging, but we have And ongoing dialogue with them. It's going through what I would call a normal process. We do not anticipate any issues with Capital One as our revolver provider.

Speaker 6

Got it. Thank you.

Speaker 4

Thank you very much. And our last question comes from Christopher Nolan with Ladenburg, Tom. Go ahead please.

Speaker 6

Hi. Any guidance you can give in terms of where you think leverage is going to be, particularly in light of the increase in non accrual? And should we expect a excise dividend and

Speaker 2

excuse me, excise tax in 2024 given the lack of a supplement? Thank you. Rucker, you want to take the excise tax?

Operator

So, yes. So, Yes. So excise tax for sure. A few years back, as some as many of you guys know, a lot of the BDCs, they'll keep the excise distribution and pay the tax on it because it's a cheap form of financing. So we will have an excise tax payment.

Operator

It's kind of been If you look at the financial statements, it's kind of going to be the same one over and over again, the same one that we paid in the past.

Speaker 2

And Chris, on the leverage side, there's 2 pieces. There's the ratio and there's the nominal. So leverage, we would expect to decrease our nominal amount because we have brought our NAV down. And so we continue to focus around the 1.25 percent to 1.5 percent, which means that absolute borrowings will decrease from a target perspective to be in that range. Thank you.

Speaker 4

Thank you very much. And after that, we have no questions in the queue.

Speaker 2

Thank you, everyone. We look forward to the next call in about 90 days. Thank you.

Speaker 6

Thank you, everyone.

Speaker 4

Thank you, everyone. This concludes today's conference call. Thank you for your attendance.

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