Investcorp Credit Management BDC Q2 2024 Earnings Report

Investcorp Credit Management BDC EPS Results

• Actual EPS: $0.14
• Consensus EPS: $0.12
• Beat/Miss: Beat by +$0.02
• One Year Ago EPS: N/A

Investcorp Credit Management BDC Revenue Results

• Actual Revenue: $6.24 million
• Expected Revenue: $5.94 million
• Beat/Miss: Beat by +$300.00 thousand
• YoY Revenue Growth: N/A

Investcorp Credit Management BDC Announcement Details

• Quarter: Q2 2024
• Date: 2/12/2024
• Time: N/A
• Conference Call Date: N/A
• Conference Call Time: N/A

Investcorp Credit Management BDC (NASDAQ:ICMB) Inc. (NASDAQ: ICMB) is a closed-end, non-diversified management investment company that provides investors exposure to private credit markets through direct lending strategies. As a business development company, ICMB focuses on originating, structuring and managing tailored financing solutions for U.S. middle-market corporations. The company’s portfolio includes senior secured loans, second-lien debt, subordinated debt and equity co-investments, with an emphasis on risk-adjusted returns and capital preservation.

The company is externally managed by Investcorp Credit Management US LLC, part of the Investcorp group, a global alternative investment firm founded in 1982. Leveraging Investcorp’s extensive credit platform and research capabilities, ICMB’s investment team sources opportunities across diverse sectors including business services, healthcare, technology, industrials and consumer markets. Through proprietary sourcing networks and rigorous due diligence, ICMB seeks to deliver attractive yield while maintaining a focus on downside protection and portfolio diversification.

Launched in 2018 and headquartered in New York City, ICMB primarily serves borrowers and investors within the United States. The company’s lending activities span sponsor-backed and corporate-backed transactions, providing flexible capital solutions such as cash-flow loans, acquisition financings and growth capital. ICMB’s capital base supports long-term partnerships with borrowers, enabling structural innovations tailored to individual company needs.

Under the oversight of Investcorp’s experienced credit professionals, the management team combines sector expertise, credit structuring skills and active portfolio monitoring. This integrated approach seeks to generate consistent income distributions for shareholders while navigating the complexities of the private credit market. As part of the broader Investcorp platform, ICMB benefits from global resources, proprietary deal flow and a track record of alternative asset management.

Investcorp Credit Management BDC Q2 2024 Earnings Call Transcript

Key Takeaways

• CFO Rocco DelGuercio announced his resignation effective March 31, 2024, signaling a leadership change that may affect the company’s strategic continuity.
• Net investment income fell 3% to $1.58 million ($0.11 per share) and NAV per share declined 6% to $5.48, driven by valuation adjustments on two investments and a portfolio restructuring.
• Non-accrual investments improved, dropping to 4.6% of the portfolio from 10% last quarter, with no new non-accruals added and an expected resolution of remaining stressed credits within 12 months.
• Leverage remained above target, with gross leverage at 1.7x and net leverage at 1.51x vs. the 1.25–1.5x guidance, though identified repayments could reduce leverage to ~1.5x this quarter.
• The Board declared a combined $0.15 per share distribution ($0.12 quarterly plus $0.03 supplemental) payable April 5, reflecting management’s commitment to maintaining a stable dividend.

Presentation

[Operator]

Good morning and thank you for joining today's Investcorp Credit Management BDC Q2 fiscal year 2024 Earnings Call. It is now my pleasure to turn the floor over to Rocco DelGuercio, CFO.

[Rocco DelGuercio, CFO at Investcorp Credit Management BDC]

Thank you, operator. I would like to remind everyone that this 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. 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 over to our Chairman and CEO, Michael Mauer.

[Michael Mauer, Chairman and CEO at Investcorp Credit Management BDC]

Thanks, Rocco, and thank you to everyone for joining us on our Q2 fiscal year 2024 earnings call. I'm joined by Suhail Shaikh, my Co-CIO and president of Investcorp Credit Management BDC, and Rocco DelGuercio, our CFO. Before I begin the call, I would first like to address a change in leadership in the news that was announced in our 8-K on November 28, 2023. Rocco DelGuercio has decided to resign as the company's CFO, CCO, treasurer, and secretary, effective March 31, 2024. We'd like to personally thank Rocco for his partnership and all his contributions over his eight years with us.

[Michael Mauer, Chairman and CEO at Investcorp Credit Management BDC]

We announced our revised financial results on Wednesday for our fiscal Q2 ended December 31, 2023, to reflect approximately $388,000 or $0.02 per share of adjustments relating to the incorrect accrual of certain expenses reported in the company's consolidated financial statements contained in the press release issued by the company February 12, 2024. On today's call, I will provide an update regarding our performance in the quarter, the market commentary, and our non-accrual investments, as well as our leverage, the dividend, and our outlook. Suhail will walk through our investment activity during the December quarter and after quarter end. Rocco will then go through our financial results, and as always, we will end with Q&A. During the quarter ended December 31, our net investment income was $1.6 million or $0.11 per share. This was a decrease of approximately 3% from the previous quarter's net investment income.

[Michael Mauer, Chairman and CEO at Investcorp Credit Management BDC]

Additionally, net asset value per share declined approximately 6% to $5.48 per share from $5.83 per share at the end of the prior quarter. The decline now was largely due to changes in valuations for two investments, Klein Hersh and American Nuts, as well as the restructuring of ArborWorks, which closed on November 6. We remain highly focused on portfolio management and risk mitigation, especially for our borrowers that are experiencing periods of stress. We did not add any new positions to non-accruals during this quarter, and our positions on non-accrual declined to 4.6% as a percentage of total fair value of the portfolio compared to 10% as of the previous quarter. We continue to rotate I'm sorry, we continue to make progress rotating our portfolio and expect progress on the remaining non-accruals in the next 12 months.

[Michael Mauer, Chairman and CEO at Investcorp Credit Management BDC]

Regarding 1888, the company has entered into a sale agreement, which is expected to close in the next week. We do not expect any changes to the value as a result of this sale. We slightly under-earned our December quarterly dividend, and the company is expected to earn its dividend through the next quarter ending March 31. We are pleased to announce that on February 8, 2024, the board of directors declared a distribution for the quarter ended March 31, 2024, of $0.12 per share, as well as a supplemental distribution of $0.03 per share, both payable on April 5, 2024, to stockholders of record as of March 15, 2024. Our gross leverage this quarter was 1.7x and our net leverage 1.51x, both above our guidance of 1.25x to 1.5x.

[Michael Mauer, Chairman and CEO at Investcorp Credit Management BDC]

As of February 16, our gross and net leverage were approximately 1.62 and 1.6. With identified repayments, we expect this to reduce this leverage to approximately 1.5 during the quarter. I will turn briefly to address the trends in market. Yield volumes have picked up compared to the previous quarter in this environment. We are focused on reasonable leverage and solid structures. Since quarter end, our investment pipeline has picked up, primarily driven by add-on financings, refinancings, and to a lesser extent, new LBOs. We are specifically focused on lending into companies that are sponsor-backed, have financial covenants, high free cash flow, and recession resilience. As we look at our borrowers' operating performance, the credit quality of our portfolio continues to remain solid. Our weighted average loan-to-value for our portfolio of debt investments is approximately 50%, an increase from 41% last quarter. We continue rotating and diversifying the portfolio.

[Michael Mauer, Chairman and CEO at Investcorp Credit Management BDC]

Our portfolio diversification has improved since prior year. During the quarter, we had investments in 44 borrowers against 25 industries, which is up from 37 borrowers and 19 industries in the prior year's December quarter. Suhail will now walk through our investment activity during the December quarter and after quarter end. With that, I'll turn it over to Suhail.

[Suhail Shaikh, President and Co-Chief Investment Officer at Investcorp Credit Management BDC]

Excuse me. Thank you, Mike. We saw an increase in this quarter's activity compared to the prior quarter, primarily driven by investments in new portfolio companies and to a lesser extent opportunistic secondary purchases. We are also focused on managing our watchlist names such as Klein Hersh, ArborWorks, and American Nuts. As we rotate the portfolio, we're seeking to invest in credits that are generally larger in size. We have rotated approximately a third of the book within the past year. The weighted average EBITDA of the portfolio went from $55.6 million at the end of December 31, 2022, to $59.9 million at the end of this quarter. In the same period, the weighted average leverage of the portfolio companies has increased slightly as we continue to rotate into larger, more stable credits. We continue to be highly selective in looking at new buyout financing.

[Suhail Shaikh, President and Co-Chief Investment Officer at Investcorp Credit Management BDC]

Sponsored middle market direct lending, new money volume in the quarter ended December 31, was more than 20% higher than the quarter ended September 30, but still lower when compared to the quarter ended December 31, 2022. We saw a similar trend with primary deal flow picking up during the quarter compared to the previous quarter. Our pipeline continues to remain robust, and we believe we can continue to execute on our mandate to invest in sponsor-backed core middle market companies, as Mike mentioned. During the quarter ended December 31, we invested in five new portfolio companies and one existing portfolio company. We also fully realized our position in four portfolio companies. During the quarter, fundings for commitments and new investments totaled approximately $19.1 million at cost, with a weighted average yield of approximately 13.9%.

[Suhail Shaikh, President and Co-Chief Investment Officer at Investcorp Credit Management BDC]

In the same period, repayments totaled approximately $29.2 million from four investments with an IRR of approximately 13.8%. First, we supported the LBO of Alphia by PAI Partners. Alphia is a contract manufacturer of premium dry pet food ingredients. We invested in the first lien term loan, and our yield at cost is approximately 10.7%. We had been investors in Alphia through our other fund and were able to re-underwrite the risk for the new LBO. Second, we invested in the first lien term loan of Victra, also known as LSF9 Atlantis Holdings, LLC. Victra is the largest exclusive independent retailer for Verizon wireless. We purchased Victra in the secondary market at an attractive price. Our yield at cost is approximately 13.7%, and our team has had a longstanding history with this name, which is what led us to re-underwrite this risk. We also invested in Amerit Fleet Solutions.

[Suhail Shaikh, President and Co-Chief Investment Officer at Investcorp Credit Management BDC]

This was a directly sourced opportunity from Brightstar Capital Partners, and we supported the sponsor in right-sizing the capital structure. Amerit is one of the largest independent providers of commercial fleet maintenance. Our yield at cost is approximately 13.7%. We invested in the first-lien term loan of NorthStar Group Services. This is a good example of an opportunistic secondary purchase of a credit that we had been tracking. NorthStar is a portfolio company of J.F. Lehman. It is a large provider of diversified infrastructure and environmental services across the US. We were previously invested in this name and were able to re-underwrite the risk. Our yield at cost is approximately 10.7%. We made a preferred equity investment at Discovery Behavioral Health, a Webster Equity Partners portfolio company.

[Suhail Shaikh, President and Co-Chief Investment Officer at Investcorp Credit Management BDC]

Discovery is one of the largest providers of residential and outpatient treatment for behavioral health services across eating disorders, mental health, and substance abuse disorder. Our yield at cost is approximately 20.4%. Lastly, we made a follow-on investment in the incremental equity of RESA Power, listed in our schedule of investments as Investcorp Transformer Aggregator, LP. RESA is one of our equity co-investment positions alongside Investcorp's North American Private Equity Group. On the realizations that happened during this quarter, first, we fully realized a position in the first lien term loan of Advanced Solutions International, also known as ASI. We originally invested in the first lien term loan and preferred equity in September of 2020 and remained investors in the preferred equity. Our fully realized IRR on the term loan was approximately 10.8%.

[Suhail Shaikh, President and Co-Chief Investment Officer at Investcorp Credit Management BDC]

We also fully realized a position in the first lien term loan of Cook & Boardman, which was repaid as part of an LBO by Platinum Equity. Our fully realized IRR was approximately 8.7%. We also fully realized a position in the first lien term loan of NWN, which we have been invested in since May of 2021. The company was sold during the quarter, and our fully realized IRR was approximately 22.2%. Lastly, our position in the first lien term loan of Archer Systems was refinanced. Our fully realized IRR was approximately 13.2%. After this quarter end, we fully realized our first lien term loan position in Evergreen North America Industrial Services. Realized IRR was approximately 13.3%.

[Suhail Shaikh, President and Co-Chief Investment Officer at Investcorp Credit Management BDC]

As of December 31, our largest industry concentrations were Trading Companies and Distributors at 13.6%, Commercial Services and Supplies at 9.6%, Professional Services at 8.8%, Containers and Packaging at 7%, followed by IT Services at 4.3%, and Broadline Retail at 4.3%. Our portfolio companies are in 25 GICS industries as of quarter end, including our equity and warrant positions, which is an increase of one industry from the previous quarter. I would now like to turn the call over to Rocco to discuss our financial results.

[Rocco DelGuercio, CFO at Investcorp Credit Management BDC]

Thanks, Suhail. For the quarter ended December 31, 2023, our net investment income was $1.58 million or $0.11 per share, a decrease of approximately 3% from the previous quarter's net investment income of $1.63 million or $0.11 per share. The fair value of our portfolio was $207.4 million compared to $223.4 million on September 30. Our net assets were $78.8 million, a decrease of $5 million from the prior quarter. Our portfolio's net decrease in net assets from operations this quarter was approximately $2.9 million. The weighted average yield of our debt portfolio was 11.5% compared to 11% for the quarter ended September 30. As of December 31, our portfolio consisted of 44 borrowers. Approximately 85% of our investments were first lien. The remaining 15% is invested in equity, warrants, and other positions. 99.6% of our debt portfolio was invested in floating-rate instruments and 0.4% in fixed-rate investments.

[Rocco DelGuercio, CFO at Investcorp Credit Management BDC]

The average floor in our debt investments was 1%. Our average portfolio company position was approximately $4.7 million, and our largest portfolio company investment is Bioplan at $14.5 million. We had a gross leverage of 1.7 and a net leverage of 1.51 as of December 31 compared to 1.58 gross and 1.41 net, respectively, for the previous quarter. With respect to our liquidity, as of December 31, we had approximately $14.7 million in cash, of which $11.5 million was restricted cash, with $30 million capacity under our revolving credit facility with Capital One. Additional information regarding the composition of our portfolio is included in our Form 10Q, which was filed on Tuesday. With that said, I would like to turn the call back over to Mike.

[Michael Mauer, Chairman and CEO at Investcorp Credit Management BDC]

Thank you, Rocco. As we look towards the second half of our fiscal year, we will continue to work on rotating and diversifying the portfolio. We are optimistic about our pipeline and our ability to deploy our capital in new high-quality investments. Our credit selection remains disciplined, and we remain focused on maintaining the quality of the book. Our investment strategy has not wavered, as we remain increasingly focused on capital preservation and maintaining a stable dividend. That concludes our prepared remarks. Operator, please open the line for Q&A.

[Operator]

Ladies and gentlemen, at this time, we will conduct the question-and-answer session. If you would like to state a question, please press the 7-pound on your phone now, and you will be placed in the queue in the order received. Or press 7-pound at any time again to remove yourself from the queue. Please listen for your name to be announced and be prepared to ask your question when prompted. We are now ready to begin. Our first question comes from Mr. Christopher Nolan with Ladenburg Thalmann. Go ahead, please.

[Christopher Nolan, Senior VP at Landenburg Thalmann]

Hey, guys. Rocco, congratulations. Good working with you, and I hope future endeavors are good.

[Rocco DelGuercio, CFO at Investcorp Credit Management BDC]

Thank you. Thank you.

[Christopher Nolan, Senior VP at Landenburg Thalmann]

Suhail, in the comments that you made in terms of the was it the size of portfolio companies that are going to increase going forward, or is it the size of the investments the BDC will make, or is it both?

[Suhail Shaikh, President and Co-Chief Investment Officer at Investcorp Credit Management BDC]

Great question. Chris, it's more the size of the portfolio companies. I think the size of the investment, as Mike pointed out and as I may have alluded to as well, is actually decreasing. So we increased the number of borrowers, and so we're trying to diversify the portfolio as much as we can.

[Christopher Nolan, Senior VP at Landenburg Thalmann]

Okay. And then for the portfolio companies, where do you see average EBITDA coverage?

[Suhail Shaikh, President and Co-Chief Investment Officer at Investcorp Credit Management BDC]

Interest coverage?

[Christopher Nolan, Senior VP at Landenburg Thalmann]

Yes, please.

[Suhail Shaikh, President and Co-Chief Investment Officer at Investcorp Credit Management BDC]

Yeah. Interest coverage, we typically, when we are underwriting a new deal, we're targeting interest coverage of at least 2 times, Christopher. And that's it's a sort of rule of thumb, but that's a we look at cash flow and the ability for the company to service the debt. I mean, we're laser-focused on that, obviously, in this market. So it's 2 times. It depends on the industry. It depends on the business. And in most cases, it's north of 2 times.

[Christopher Nolan, Senior VP at Landenburg Thalmann]

Okay. That's it for me. Thank you.

[Operator]

Thank you very much. Again, if you have any questions, please press seven-pound. I don't see any other questions.

[Michael Mauer, Chairman and CEO at Investcorp Credit Management BDC]

Thank you, Operator, and thank you, everyone, for your time today.

[Operator]

All right. This concludes today's conference call. Thank you, everyone, for attending.

Participants

Executives

• Michael Mauer, Chairman and CEO
• Rocco DelGuercio, CFO
• Suhail Shaikh, President and Co-Chief Investment Officer

Analysts

• Christopher Nolan, Senior VP at Landenburg Thalmann