Investcorp Credit Management BDC Q3 2024 Earnings Call Transcript

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May 15, 2024

There are 6 speakers on the call.

Operator

Good afternoon, and thank you for joining today's Investcorp Credit Management BDC Third Quarter Fiscal Year 2024 Earnings Call. It is now my pleasure to turn the floor over to Peter Settlemeier, CFO.

Speaker 1

Thank you, operator. I would like to remind everyone that today's call is being recorded and that this call is the property of 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.

Speaker 1

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 the CEO of Imvescorp Credit Management BDC, Suhail Shaikh.

Speaker 2

Thanks, Peter, and thank you to everyone for joining us on our Q3 fiscal year 2024 earnings call. I'm joined by Michael Maurer, Chairman of Invescor Credit Management BDC and Peter Sattelmeyer, our CFO. Before we begin our earnings call, I would like to provide a short update on leadership at the company. As of yesterday, I have been appointed as Chief Executive Officer of ICMB effective immediately and will now serve as the sole Chief Investment Officer of the advisor. It is an honor to be named CEO at this time where the current lending environment favors alternative lenders such as business development companies

Operator

and we

Speaker 2

are positioned well to execute our business strategy in the current market. Mike will continue to remain Chairman of the Board of Directors and has been appointed as Vice Chairman of Private Credit at Imbascorp. I look forward to our continued partnership to grow our private credit platform. With that, I will now turn over the call to Mike.

Speaker 3

Thanks, Suhail, and thank you to everyone for joining us on our Q3 fiscal year 2024 earnings call. It's been a pleasure to serve as CEO of ICMB. I'm proud of the lending platform we've built over the years and look forward to supporting Sue Hill, the Board and the investment team as they seek to grow Investcorp's private credit platform. On today's call, I will provide an update regarding our performance in the quarter, the market commentary on our non accrual investments, our leverage, the dividend and our outlook. Suhail will walk through our investment activity during the March quarter and after quarter end.

Speaker 3

Peter will then go through our financial results. And as always, we'll end with Q and A. During the quarter ended March 31, our net investment income was $2,100,000 or $0.14 per share. This was an increase of approximately 32% from the previous quarter's net investment income. Additionally, net asset value per share increased approximately 0.2% to $5.49 per share from $5.48 per share at the end of the prior quarter.

Speaker 3

The increase in NAV was driven by an increase in capital gains. As mentioned last quarter, we continue to 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 accrual this quarter and our positions on non accrual declined to 3.9% as a percentage of the total fair value of the portfolio compared to 4.6% as of the previous quarter. We continue to make progress rotating the portfolio and expect progress on the remaining non accruals over the next 12 months. We partially realized our position in 18/88 as the company was sold during the quarter.

Speaker 3

The majority of the consideration was received in cash at closing. The remainder is deferred non contingent payments spread over the next 24 months. Other than a discount on the receivables due to the delayed payment, there has not been any material adjustment to the prior carrying value. We covered our March quarterly dividend, not including the supplemental dividend with net investment income. We expect the company to earn its dividend through the next quarter end June 30.

Speaker 3

We are pleased to announce that on April 12, 2024, the Board of Directors declared a distribution for the quarter ended June 30, 2024 of $0.12 per share, as well as a supplemental distribution of $0.03 per share, both payable on June 14, 2024 to stockholders of record as of May 26, 2024. Our gross leverage this quarter was 1.52. Our net leverage was 1.36. Gross leverage was slightly above the range the target range and net leverage was squarely in the target range of 1.25 to 1.5. I'll now briefly discuss market trends.

Speaker 3

We saw transaction volumes decline since the previous quarter. However, in this environment, our investment diligence has not wavered and we continue to be focused primarily on lending to companies that have reasonable leverage and are supported by strong middle market sponsors. We also continue to take advantage of attractive opportunities in the secondary. As we look at borrowers operating performance, the credit quality of our portfolio continues to remain solid. Our weighted average loan to value ratio for our performing debt investments is approximately 52%, an increase from 50% last quarter.

Speaker 3

We continue rotating and diversifying the portfolio. Our portfolio diversification has improved since the prior year. During the quarter, we had investments in 40 borrowers across 22 industries, which is up compared to 34 borrowers and 20 industries in the prior year's March quarter. Sue Hill will now walk through our investment activity during the March quarter and after quarter end. With that, I'll turn it back over to Sue Hill.

Speaker 2

Thank you, Mike. Our investment activity in new portfolio companies this quarter declined compared to the previous quarter as we saw broader market activity slowdown. Sponsored middle market direct lending new money volume in quarter ending March 31 was down almost 10% from the quarter ended December 31. This quarter's portfolio activity was largely driven by investments in existing portfolio companies through M and A, add ons and dividend recaps in high performing credits where we maintain a relationship with the sponsors. We are continuing portfolio rotation strategy that we have mentioned over the past year.

Speaker 2

In this timeframe, we have rotated about a third of our portfolio. The weighted average EBITDA of the portfolio went from $42,600,000 as of March 31, 2023 to $63,500,000 this quarter. Over the same period, the weighted average net leverage of the portfolio increased from 3.8 times to 4.6 times as we continue shifting towards larger, more stable credits. As part of this ongoing rotation, we aim to invest generally in larger credits that are backed by sponsors we know. We are also diligently managing our watch list names, including ArborWorks, American Nuts and Klein Hersh.

Speaker 2

During the quarter ended March 31, we invested in 4 existing portfolio companies. Fundings for new investments totaled approximately $8,900,000 at cost with a weighted average yield of approximately 12.49%. In the same period, we fully realized 6 portfolio company investments totaling $21,200,000 in proceeds with an IRR approximately 17.09%. First, we participated in the event to extend of PureStar, which can be found on our SOI as AMCP Clean Acquisition Company. PureStar is the largest pure play commercial laundry provider to the hospitality industry in the U.

Speaker 2

S. PureStar is an example of a proprietary sourced deal from the sponsor. Our yield at cost is approximately 11.2%. We made another investment in the 1st lien term loan of Victor, also known as F9 Atlantis Holdings LLC. As mentioned last quarter, our team has had a long standing history with this name.

Speaker 2

Victra is the largest exclusive independent retailer for Verizon Wireless. We purchased Victor in the secondary market at an attractive price. Our yield at cost is approximately 11.9%. We also upsized our investment in an existing portfolio company, Amerit Fleet Solutions. Amerit is one of the largest independent providers of commercial fleet maintenance.

Speaker 2

We supported the sponsor in rightsizing the capital structure. Our yield at cost is approximately 15.5%. Lastly, we invested in the 1st lien term loan of Accelerate, also known as America's Auto Auction. Accelerate is the nation's 2nd largest independent full service used car auction provider. We purchased Accelerate in the secondary market at an attractive price.

Speaker 2

A yield had cost us approximately 11%. Our team has had a long standing relationship with the same across the platform. Additionally, we had 6 portfolio company realizations during the quarter. First, we fully realized a position in the 1st lien term loan In Evergreen North America Acquisitions LLC, our realized IRR was approximately 13.8%. As Mike mentioned, 1888 was sold during the quarter and we partially realized a full position, which includes the term loan A, the term loan C, the revolver and our equity position.

Speaker 2

The majority of our position was received in cash and the remainder is deferred non contingent payments that we expect to receive over the next 24 months. We also sold our position in the 1st lien term loan of Victra to take advantage of an attractive trade opportunity in the secondary market. Our realized IRR for Victra was approximately 14.8%. Our position in the 1st lien term loan of AHF was also sold during the quarter in a secondary trade. For this trade, our exit IRR was 10.8%.

Speaker 2

Our position in PureStar was refinanced during the quarter as part of the amend to extend transaction. As mentioned earlier, we participated in the new Our realized IRR for the old transaction of ClioServ is approximately 28.2%. Lastly, our position in the 1st lien term loan of a MedEquip was refinanced. We did not participate in the refinancing as the loan was refinanced at a significantly lower rate. We continue to maintain discipline around our investment strategy as evidenced by the straight.

Speaker 2

Our realized IRR was approximately 13.3%. After the quarter end, we invested in 1 new portfolio company and 2 existing portfolio companies. We also realized a position in 1 portfolio company. After the quarter end, we invested in the 1st lien term loan of Crisis Prevention Institute or CPI to support the refinancing of the company's capital structure. CPI provides de escalation training and consulting for human care professionals.

Speaker 2

CPI is a rental group portfolio company. Our yield at cost is approximately 10.3%. We also increased our existing position in the 1st lien term of Multicolor Corp, also known as Label, to take advantage of an attractive price in the secondary market. Our yield at cost is approximately 10.9%. We also participated in the refinancing of an existing portfolio company, NorthStar.

Speaker 2

Our yield at cost there is 10.2%. And lastly, we realized our 1st lien term loan position in Empire Office, which was refinanced during the quarter. We've been invested in Empire Office since April 2019. Our realized IRR was approximately 13.3%. As of March 31, our largest industry concentrations were trading company and distributors at 14 0.6%, commercial services and supplies at 11.6%, professional services at 9.9%, containers and packaging at 7.6%, followed by Internet and direct marketing retail at 4.6% and IT services at 4.5%.

Speaker 2

Our portfolio companies and 22 GICS industries as of quarterend including our equity and one positions which is a decrease of 3 industries from the previous quarter. I would now like to turn the call over to Peter to discuss our financial results.

Speaker 1

Thanks, Suhail. For the quarter ended March 31, 2024, our net investment income was $2,100,000 or $0.014 per share, an increase of approximately 32% from the previous quarter's net investment income of $1,600,000 or $0.11 per share. The fair value of our portfolio was $192,200,000 compared to $207,400,000 on December 31. Our net assets were $79,100,000 an increase of $300,000 from the prior quarter. Our portfolio's net increase in net assets from operations this quarter was approximately $2,400,000 The weighted average yield of our debt portfolio was 12.36% compared to 11.46% for the quarter ended December 31.

Speaker 1

As of March 31, our portfolio consisted of 40 borrowers. Approximately 83.82 percent of our investments were 1st lien and the remaining 16.18% 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. The average floor in our debt investments was 1%. Our average portfolio company position on a F and B basis was approximately 4,800,000 and our largest portfolio company investment on a F and B basis is Bioplan at 14,600,000 dollars We had a gross leverage of 1.52x and a net leverage of 1.36x as of March 31 compared to 1.70x gross and 1.51x net respectively for the previous quarter.

Speaker 1

With respect to our liquidity, as of March 31, we had approximately $12,900,000 in cash, of which approximately $10,200,000 was restricted cash, with $42,500,000 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 would like to turn the call back over to Mike.

Speaker 3

Thank you, Peter. As we look towards the last quarter of our fiscal year, our top priority is focused on capital preservation and maintaining a stable dividend. As Suhail mentioned, we are actively working to rotate and diversify the portfolio into more stable credits. We're confident in our pipeline and our capacity to invest our capital in high quality opportunities. Our approach to credit selection continues to be disciplined and we're committed to maintaining the quality of our portfolio.

Speaker 3

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

Operator

I see our first question comes from Mr. Christopher Nolan with Ladenburg Thalmann. Go ahead please.

Speaker 4

Hi. Suhail, congratulations on your elevation. And Mike, it's good working with you. Look forward to continue working with you. A couple of questions.

Speaker 4

1st, the change in the yields in the portfolio, what was the driver for that please?

Speaker 2

Chris, thank you for the comments. Largely just the market. We're seeing basically, we're seeing spreads start to tighten, and I'm sure you're hearing this from others as well. I mean, the market has gotten competitive. There's generally a lack of deal flow and lack of supply in the marketplace for new platform transactions.

Speaker 2

So we're starting to see some yield compression.

Speaker 4

Okay. And then I guess, Klein Hirsch, which is one of your larger non accruals, any update you can provide on that?

Speaker 2

Not at this moment. We are actively working on the situation. It's a live discussion going on. We believe we are in a pretty good place, but we'll have more to share on that as restructuring gets finalized.

Speaker 4

And then Mike on your comments that you expect that the earnings will cover the dividend in the June quarter, Should we read that as covering the base dividend or the entire base end supplement?

Speaker 3

Yes, Chris, at this point, the base the supplement, I'm not sure that we will cover at this point. We'll see how that plays out.

Speaker 4

Okay. And then final question, and I know it's a little far out, but looking at the 2026 notes, which have a pretty attractive coupon of 4.875%. I know it's early days, but if you were to refinance, it would be probably a much higher coupon. What are your thoughts in terms of your strategy for that? Are still in a wait and see mode?

Speaker 3

We've been talking about it, but we are developing strategy around it. As you've seen, we've brought down our net leverage and our total leverage over time. So that'll be part of our discussions as we get closer and closer to that.

Speaker 4

Okay. Thank you for taking my questions.

Speaker 3

Thank you very much.

Speaker 2

Thank you.

Operator

Thank you very much. Our next question comes from Sean Paul Adams with Raymond James. And again, if you have any questions,

Speaker 5

It looks like 1888 Industrial Services was sold off from the portfolio. Can you touch and provide a little bit more color on kind of the resolution time frame for the other non accruals in the portfolio? Additionally,

Speaker 1

kind of

Speaker 5

talk about the overall health of the credit portfolio looking forward?

Speaker 2

Sure. Mike, why don't I start and please jump in. I think overall health of the portfolio, we're actually pretty pleased with generally all the names. I think you've seen, as I mentioned on the watch list names, ArborWorks, American Nuts and Klein Hirsch, we're actively working on those situations. They're evolving and from where we have those positions marked and where we think the outcome is going to be, we feel pretty good about the portfolio.

Speaker 2

There's nothing imminent, Sean, in the and as far as we can There is nothing I think at this point alarming in the portfolio that we would say is likely to be problems coming down the pike, other than perhaps 1 or 2 situations that are developing real time.

Speaker 3

Yes, I would the only thing that I did expand on there is that the watch list that we talked about, the existing non accruals, I think we have constructive dialogues going on and we have very good lender groups on all those.

Speaker 1

Got it. Thank you for the color. I appreciate it.

Operator

Thank you very much. And again, if you have any questions, I don't see any other questions.

Speaker 3

I'd like to thank everyone and appreciate all of your time. And with that, we will talk to you soon.

Speaker 2

Thank you, everyone.

Operator

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

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Key Takeaways

  • Leadership update: Suhail Shaikh has been named CEO and sole CIO of Investcorp Credit Management BDC, while Michael Maurer transitions to Vice Chairman of Private Credit at Investcorp and remains Chairman of the board.
  • Q3 financials: Net investment income rose 32% sequentially to $2.1 million ($0.14 per share) and NAV per share ticked up to $5.49, driven by capital gains.
  • Portfolio risk management: Non-accruals declined to 3.9% of portfolio fair value with no new additions, and management expects remaining stressed positions to resolve within 12 months while maintaining a 52% weighted average LTV on performing debt.
  • Leverage and dividend: Gross leverage stood at 1.52x (just above target) and net leverage at 1.36x (within target), and the board declared a $0.12 base plus $0.03 supplemental dividend for the June quarter, with the base dividend fully covered by income.
  • Portfolio rotation and yield: The team deployed $8.9 million into existing credits at a 12.5% weighted yield and realized $21.2 million at a 17.1% IRR, continuing its shift toward larger, sponsor-backed loans amidst tighter markets.
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Investcorp Credit Management BDC Q3 2024
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