Earnings Call: Q4 2021

Sep 14, 2021

Welcome to the Investcorp BDC Incorporated I'll now turn the call over to your speakers. You may begin. Thank you, operator, and thank you to all of you for joining us on our fiscal year end call today. I'm joined by Chris Jansen, my Co Chief Investment Officer and Rocco Del Versio, our CFO. Before we begin, Rocco will give our customary disclaimer regarding information and forward looking statements. Rocco? Thank you, Michael. 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 icmbbc.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 our latest SEC filings, please visit Investor Relations page on our website. At this time, I'd like to return the call back to our Chairman and CEO, Michael Mauer. Thanks, Russell. The June quarter marks our fiscal year end. We had a very active quarter with both highlights and challenges. We had a lot of activity from our investment standpoint, both in terms of new investments and realizations. Chris will go into detail on a name by name basis. 3 of our 4 new portfolio company investments were in club loans, including one which we co led with a partner. The 4th was a middle market syndicated loan. We continue to believe that the best value lies in the core middle market. It seems to have slowed somewhat. Of course, it's also possible that the summer deals room hit early this year, But we had 2 refinancings announced mid summer and none since. Our pipeline is less focused on refi now And more on new LBOs. While there is still pricing pressure on new deals, the market's frenzy We extended our financing capacity and lowered our costs during the quarter and also during the current quarter. As we discussed last quarter, we repaid our 2023 notes and issued new notes due 2026. This had some one time effects on our earnings this quarter, which Rocco will discuss. More recently, We secured a new credit facility with Capital One, which will go which will eventually replace our borrowings under the UBS facility. Rocco will go into more detail later in the call. One somatic point I would like to make is that we have made great strides towards stabilizing the net asset value. We have reduced volatility by exiting investments As we did with Exela Technologies this quarter, we have received payments on Deluxe over the past year, which have reduced our current fair value to 4% of our original cost. We have also eliminated downside risk to our NAV through our marks specifically on 18/88 and PGI. I know that both of these positions have been of concern to you as well as to us for several years now. Coincidentally, both have reached the point of restructuring at the same time. Negative marks on these two positions over the past quarters have offset and overshadowed our team's great work across the rest of the portfolio. Now with limited downside left, we think the entire portfolio is poised Some examples include 4L, Techniplas and Arcade Biostand, all of which have recovered from the fair value low points and have begun to appreciate as the underlying borrowers performance has improved. Chris will now take you through our investment activity during the June quarter and after quarter end. Rocco will discuss our financial results And I'll finish with commentary on our financing activity or leverage and Investcorp's share purchases, the dividend and our outlook over the next few months. As always, we'll end with Q and A. With that, I'll turn it over to Chris. Thanks, Mike. We invested in 5 new portfolio companies this quarter and one existing portfolio company. We had 6 full debt utilizations across 5 portfolio companies as well. Our first new investment was in a club loan for NWN Corporation. We invested in NWN once before in 2015. The company, which has grown substantially under the ownership of New State Capital, is the leading provider of managed cloud services, solutions and systems. Our yield at cost is approximately 7.7%. Our second new investment was in the 1st lien term loan Innovation in Nutrition and Wellness, or INW. INW, which was purchased by Cornell Partners, formulates and produces a variety of products for the vitamin, mineral and supplement markets. Our yield of cost is approximately 7.4%. Our 3rd new investment was in the 1st lien loan for Lachlan, shown in our financial statements as Veterans Services LLC. Our loan to veteran services is a 1 year bridge facility to support the redevelopment of a former hospital in the Chicago Metropolitan area. Our yield at cost is approximately 17.7%. Our 4th new investment was in the 1st lien loan for WIS International, a portfolio company of Center Lane Partners. WIS provides inventory verification services and merchandising services to customers across various retail industries. Our yield at cost is approximately 9.5%. Finally, our 5th investment was in the 1st lien loan for Lennox Corporation, Corporation, another portfolio company of Central Link Partners. We co led this club deal with our partners at Capital Dynamics. Our loan supported the combination of Lennox, Hampton Forge and Oneida to form the leading tabletop business focused on the better market. Our yield at cost is approximately 9.2%. We also made an additional investment in Barrie Financial Group term loan, which is an existing portfolio company investment. Our yield of cost on this incremental investment is approximately 9.5%. Turning now to our realizations during the quarter. Alpha Equipment refinanced its term loan in early April with the proceeds of the bond offering. Our fully realized IRR was 17.8%. Flow Control amended its credit facilities in April. As part of this amendment, we opted not to roll our term loan C position into the new facility and we will be paid at par. Our fully realized IRR was 9.2%. GEE raised equity in the public markets to repay facilities in full. Our fully realized IROR was 22.8%. AC Products or ACPI refinanced this loan to connection with the acquisition of the company by Platinum Equity. Our fully realized IRR on this investment was 7.9%. We also sold our positions in accelerated term loan and bonds. I will discuss this further in his commentary. Our realized IRR on the term loan was negative 2.6% and the IRR on our position in the bond was a positive 4.9 Since quarter end, we made several additional investments and have one full realization. Our yield of cost is approximately 8.5%. We invested in the 1st lien loan to AgroFresh, a food sciences company whose products prolong the useful life of foods. Our yield of cost is approximately 7.3%. We also invested in incremental term loan and delayed draw facility for Empire Office, one of our existing portfolio companies. Our yielded cost on this incremental investment was approximately 8.9%. We also made an additional investment in Tecnoplas' equity as part of the strategic acquisition of Navigate, which is expected to be highly accretive and complementary to the existing business. Finally, we also invested in an incremental term loan to Golden Hippo, which had repaid a significant amount of debt to facilitate the purchase of additional equity by the ESOP. Our yield of cost is approximately 8.6%. After quarter end, we received the repayment in full of Infrastructure and Energy Alternatives or IEA. The company placed a bond to repay its loan in full. Our realized IRR was approximately 11.8%. We were also repaid on our investment in Hyperion as the company refinanced its first and 2nd lien loans in the broadly syndicated market. Our fully realized IRR was approximately 7.6%. Using the GICS standard as of June 30, our largest industry concentration was professional services at 10.6%, followed by Energy Equipment and Services at 8.3%, Containers and Packaging at 7.6%, construction and engineering at 6.5% and Commercial Services and Supplies at 6%. Our portfolio companies are in 25 GICS industries as of quarter end, including our equity and warrant position. As of June 30, our portfolio count was 36 versus 35 at March 31. I'd now like to turn the call over to Rocco to discuss our financial results. Thanks, Chris. For the quarter ended June 30, 2021, our net investment income was $1,500,000 or $0.11 per share. Normalizing for the redemption of the 2023 note and the write off of capitalized offering expenses for those notes, our NII would have been $2,300,000 or $0.17 per share. The fair value of our portfolio was $245,000,000 compared to $261,000,000 on March 31. Our portfolio's net decrease from operation this quarter was approximately 11,900,000 Our new debt investments during the quarter had an average yield of 10.3%, while realization Repayments during the quarter had an average yield of 12.8% and fully realized investments had an average IRR up 13.9%. The weighted average yield of our debt portfolio was 8.04%, a decrease of 73 basis points from March 31. The majority of this decrease is attributable to the repayment of our loans to GE Group. As of June 30, our portfolio consisted of 36 portfolio companies. 93.7 percent of our investments were 1st lien, 2.5 percent of our investments were 2nd lien and the remaining 3.8 is invested in equity, warrants and other positions. 96.1 percent of our debt portfolio was invested in floating rate instruments and 3.9% in fixed rate investments. Our average LIBOR floor On our debt investments was 1.04%. Our average portfolio investment was approximately $6,800,000 and our largest portfolio company was Barry at $13,000,000 We were 1.7 times levered as of June 30 compared to 1.96 times levered as of March 31, and our net leverage as of June 30 was 1.5 times. We had 4 investments on non accrual and one investment on partial accrual as of June 30. With respect to our liquidity, as of June 30, we had 26 under our revolving credit facility UBS. Finally, on August 23rd, we closed on a new credit facility with Capital One. The new facility has an interest rate of LIBOR plus 2.35% compared to UBS's LIBOR plus 3.15% and 80 basis point savings. It has a 3 year investment period. The new facility will replace the existing UBS credit facility, which is set to mature in early December. More details regarding this facility maybe are available in our recent recently filed 10 ks and our 8 ks filed on August 25. I would also like to note That the December quarter will have one time costs related to these 2 credit facilities until the UBS credit facility rolls off in early December. Additional information regarding the composition of our portfolio included in our Form 10 ks, which was filed yesterday. With that, I'd like to turn the call back over to Mike. Thank you, Rocco. Over the past several months, We have established a new set of leverage facilities to provide us with expanded flexibility and lower cost. In April, we closed on $5,000,000 of new 4.7eighteen notes due 2026. As Rocco noted, there was A one time cost associated with writing off the remaining capitalized offering cost of the 2023 notes, which reduced our NII by approximately $0.06 More recently, we secured a new credit facility with Capital One. Our new facility with Capital One will replace our borrowings with UBF. Our guidance Unleverage remains a target of 1.25x to 1.5x. We have been working to reduce Our leverage over the past 2 quarters, bringing it down from 1.96 in March, which was inflated due to the note refinancing I just described, to 1.72x in June. Today, it stands at approximately 1.68x. We're going to continue to work towards reducing our leverage over the coming quarters. And I'd note that the persistently high leverage is not the typical result of our normal investment activity, but rather a direct consequence of the decrease in our NAV. On that front, I'd like to discuss the decline in our book value. This quarter, we took significant markdowns on 2 portfolio company investments in particular. These were 1888 and PGI. Both have been credit concerns for some time I would like to share more color on each with you all. 1888 has several term loans. We have begun discussions for balance sheet restructuring in recognition that the subordinated Term Loan B will not resume paying interest And that 1888 would benefit from the acquisition of a significant portion of its debt. By restructuring Into an equity interest, we will retain the ability to realize upside value if the company performance recovers. CGI has been on non accrual for several months after it defaulted on interest payments to both the first and second lien loans. Lenders in both tranches have been working together constructively to preserve liquidity and to find a path toward recovering value. I can't go into detail about the restructuring at this point, but we believe our mark appropriately limits further downside risk in our position. We believe that reducing further downside risk to our NAV was an important theme for us this quarter In addition to our marks on 18/88 in PGI, we also sold our holdings in Exela Technologies After a significant increase in the market price of the debt, we exited at a near zero IRR. After holding the positions through remarkable price volatility. This exit reduces uncertainty in the portfolio, especially should Exela ultimately restructure, which we view as a real possibility. As part of 1888 and PGI, we have 2 marks I'm sorry, apart from 18/88 and PGI, we have 2 marks below 50 as of June 30. PSG or Deluxe is in wind down position, which I've discussed in prior quarters. We have marked the position as a sum of the probable future cash receipts. As recoveries are realized, the principal balance is reduced and the market is adjusted based upon our most It's a small position, but I would like to note that we have recovered in excess of 74% on our investment at this time and we expect to recover additional amounts in the future. As of today, the fair value of DSG represents approximately 4% of our original cost. Fusion's 2nd house payback paper is marked at 40 7 this quarter. This is indicative of our underlying challenges facing the business as well as the on sustainable capital structure, which was put on the business during this bankruptcy 2 years ago. I would note that We continue to mark the 1st out loan at par due to its low loan to value and We have a great deal of confidence in the company's management and their vision for the future. In addition to working hard to limit further downside on our NAV, we have a number of positions with asymmetric up We own equity positions in 4L, ASI and Techniplas As well as 1888 Infusion. Tecnipas has begun to see recovery and as Chris noted, made an acquisition, which should be immediately accretive. 4L is stable and is, we believe, positioned for future recovery. ASI continues to perform well. Beyond our current portfolio, we also recently received Expanded Exemptive Relief to co invest with Investcorp's Private Equity Funds, which will allow us to invest in equity of Investcorp's LBOs alongside them. I would like to note, we will never invest in the debt of an Investcorp portfolio company in order to avoid conflicts. However, we are excited about investing alongside our private equity partners and the prospect of creating additional avenues for NAV growth. We did not cover our June quarterly dividend with NII. As Rocco noted, however, one time costs associated with writing off capitalized offering costs from our 2023 notes served to bring our NII per share from $0.17 to $0.11 per share. Except for these one time costs, we more than covered the dividend. We are committed to a disciplined investment approach and we are confident that we have the appropriate capital resources to generate NII to cover the dividend going forward. As we committed to do, we waived a portion of our management fee associated with base management fees over one times leverage. Our Board of Directors declared a distribution for the quarter ended September 30, 2021 of $0.15 per share payable on October 14 to shareholders of record as of September 24. The Board did not declare a supplemental distribution this quarter. We believe the dividend levels should be stable and sustainable and the supplemental distribution approach remains the best way to capture fluctuations in the portfolio's income generation. Investcorp made 2 separate commitments to purchase shares in ICMB. While Investcorp did not make any open market purchases under its 10b5 program or any purchases Of shares at NAV during the June quarter, Investcorp has made purchases to fulfill all of its commitments during the current quarter. In summary, since March 31, we have successfully invested in 7 new portfolio companies Despite a challenging environment for origination, we remain focused on club deals where we find better structural protections, pricing and covenants than are typically in current vintage broadly syndicated transactions. We are also looking at existing portfolio companies for opportunities to make incremental investments. We will manage the portfolio through the cycle and keep our focus on consistent income Generation and Preservation Shareholder Capital. That's the end of our prepared statements. Operator, please open the line for Q and A. Ladies and gentlemen, at this time, we will conduct a question and answer session. We are now ready to begin. Our first question comes from Christopher Nolan. Please state your question. Hey, guys. What's the advance rate in the new Capital One facility, Rocco? The advance rate? Yes. Well, it's I'm sorry. It varies. This is Chris. It varies about the advance rate in total. It should average about where we were With UBS, which is about 60%. It depends upon the portfolio. There are different advance rates for Obviously, different classes of loans and also there's a size factor as well. Understood. 1888, are there sponsor Private equity sponsors associated with that company? There was a sponsor it's Mike. Thanks for the question. Statements talk about net leverage and it sounded like 1.5, it's 1.58, just to be clear for everyone, I want to clarify that. On 18/88, in the initial transaction back in 2014, it was a sponsor. When it was restructured several years ago, that sponsor was removed. They were not it was a fundless sponsor, did not have additional capital to put in. So the lenders stepped into the equity and some of the strategic Sellers continue to participate. At this point, the strategic sellers are helping from an operating standpoint, but not from a capital And that's the Wells family out in the DJ Basin. Great. And I guess a final question on 1888. It's Term B loan, which is non accrual, would just that one be turned into equity or would it be all the exposure We are going I would expect that there is some debt still on it. We are finalizing If it's the term loan B or some other amount, but that has not been finalized at this point. Great. Thank you, sir. Our next question comes from Robert Dodd. Please state your question. Hi, guys. I've got a few. First one is kind of a housekeeping one in the case. Fusion Connect is marked as like partial nonaccrual. Can you explain What that means? I think it's counted fully in your non accrual numbers that you give us, but it's listed as partial. So what's the Distinction there? Yes. So Robert, that pays a 3% cash and I believe 8% PIK. The PIK portion is on non accrual. It is only paying the cash. We're only recognizing the cash portion of it. Got it. Got it. I appreciate that. I mean, one of the questions on Mike, you gave color. I mean, you expect to be able to cover the dividend. I mean, this quarter without the one time costs, yes, it would have been About $0.17 But you also had very high fee income this quarter, the highest I can find in my model for at least 3 plus years. So I mean, are you confident that either fee income is going to stay elevated or without The benefit of extra fee income if the refinancing market has slowed, then you can cover the dividend with just Yes, with normal fee income. With normal Robert, thanks for the question. There's 2 things. 1 is with normal fee income, we to cover the $0.15 and we have donor models out through year end. I think beyond year end, We get a little bit into the guessing of the reinvestment rates and the level of the portfolio, etcetera. Got it. Understood. Beyond year end, it gets more tricky. Then the last one, on 10 year global American teleconferencing, I mean, you emphasized you wanted to eliminate or reduce at least downside NAV risk Going forward. But when I look at your mark on that, there's 5 on the BDCs in there and your mark is substantially lower than anything anybody else has. Is there either something different about your loan? It does look you've got some pick on it, and I don't think other people do it. So I'm not sure if you're necessarily in Exactly the same tranche as others? Or is there something you know about that business as it relates to the mark Being lower than I think the lowest level has 42,000,000 and you've got a 15,000,000 which Barclays being very conservative. So any more color on how that's marked? What's factored into that? Or is that just you wanted take an ultra conservative position on the valuation of that? Robert, I appreciate the way you Tried to word the question because it's sensitive given the non public information. So I think All I'd say is that my expectation is that we do not have any asymmetric information to any other 1st lien lenders, okay. And we have thought that You're focused on the 1st lien. The 2nd lien is effectively $1 or 0 whatever. And that We have felt that it's a very difficult loan and that we wanted to if there is a range, which we believe there is a range for valuations that we went to the conservative end of the range to minimize that to never say eliminate unless you're at 0, then you eliminate, But minimize the downside risk and we have sensed the market shareholder analyst frustration With some of the bits and pieces of marks on the portfolio. So that's a bit of background on the overall portfolio and PGI specific. Got it. And then, I mean, on the net leverage, obviously, things can move around As UBS gets replaced with Cap One, etcetera, you can allocate cash balances differently potentially. The 158, I presume that was quarter end. What's the net leverage today after taking obviously Investcorp bought some stock at NAV, Which obviously gave you a little bit of an NAV per share. But Obviously, that would have a beneficial impact on leverage, all other things being equal. So where do we stand today on that basis? The net, it would be closer to 1.54. Got it. Our next question comes from Paul Johnson. Please state your question. Good afternoon, guys. Thanks Just going off of Rob's last question. I'm just curious going forward, I know you've had a little bit of net growth quarter to date. I mean, how do you guys, I guess, balance any sort of new growth that you have? I mean, are you Planning on drawing more on the new facility or do you have just more visibility into incoming repayments? How do you balance all that with just the level of cash on the balance sheet? Obviously, leverage just running, I think a little bit higher than your previous target of around 1.5 or so, I think, on the high end. Just to clarify, the growth in what were you referring to? Quarter to date, Q3, just The investments that you've made quarter to date? The growth investments. So there is On that, we've got some visibility on some repayments that are coming in and some visibility on some redeployments. We've got some visibility on and de minimis, I wouldn't say it's a lot. So markups because of some notifications of repayments visavis where we have the mark. We don't see any downside to our overall NAV today. We see modest upside. And then I just take this opportunity To reiterate what I talked about earlier, and I don't think it's the next 90 day, I think it's 6 months to 36 months, The strategy of deploying into equity to grow the NAV, which will allow us to grow the asset base. And with Investcorp, we've now spent a year and a half plus getting the enhanced order for exemptive relief To co invest, we will look today, I think we have 4% plus or minus in equities. Think about that. A good portion of that is restructured equities, we'll manage those over time. But Versus that 4% or 10% is the near term to medium term target, and that being that 6 36 months and that may change and they will be a diversified portfolio co investing in Investcorp sponsored deals Right alongside. So another way of growth. Got you. Thanks for that. That was actually going to be my next question On the private equity strategy, which I think makes sense now that you are affiliated with the Investcor platform. So I appreciate it. Those were all my questions and that's all I have today. No, I appreciate it. Listen, I don't know how Familiar all of you are with the Investcorp platform, but private equity sponsor next year will be the 40th anniversary of them being a PE investor and one of the original private equity investors in the 80s always been focused on middle market and continues to be focused So not only do we think that it will be accretive to shareholders to be able to exercise around a co investment strategy, but it is now also starting to help us originate Debt Investments away from Investcorp deals because there are a lot of the market calls on Investcorp At this time, there are no further questions. Thank you very much. We appreciate it, everyone. We will talk to you next quarter.