Investcorp Credit Management BDC, Inc. (NASDAQ:ICMB) Q1 2024 Earnings Call Transcript

Investcorp Credit Management BDC, Inc. (NASDAQ:ICMB) Q1 2024 Earnings Call Transcript November 14, 2023

Operator: Welcome to the Investcorp Credit Management BDC, Inc. Schedules Earnings Release for First Quarter Ended September 30, 2023. Your speakers for today’s call are Mike Mauer, Suhail Shaikh and Rocco DelGuercio. [Operator Instructions] A question-and-answer session will follow the presentation. I would now like to turn our call over to your speakers. Please begin.

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

Rocco DelGuercio: 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 contributed. 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 back over to our Chairman and CEO, Michael Mauer.

A – Mike Mauer: Thanks, Rocco. The September quarter marks the first quarter 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 and that we will continue to see compelling investment opportunities. Our investment activity during the quarter was characterized by opportunistic investments in the secondary market. Importantly, we invested in four new companies and added to our position in one existing portfolio 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 6/30. Additionally, we continue to remain highly selective when it comes to new investments. We are specifically focused on lending into companies that are sponsor backed, have financial covenants, high free cash flow and are 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 2x, 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 nonperforming investments and reducing this amount. We continue to work towards 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 6/30 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 two 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. 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 nonaccrual investments, our leverage, the dividend and our outlook. As always, we’ll end with Q&A. With that, I’ll turn it over to Suhail.

Suhail Shaikh: 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 lending new morning volume in the quarter was approximately 36% lower year-over-year. However, we saw primary deal flow pick up during the quarter and have continued to see an increase post quarter end. Our pipeline remains robust, and we believe that we can continue executing on our investment thesis that Mike mentioned. During the quarter ended September 30, we invested in four new portfolio companies and one existing portfolio company. We also fully realized our position in one portfolio company.

During the quarter, fundings for commitments on new investments totaled approximately $15.5 million at cost, with a weighted average yield of approximately 12.3%. In the same period, repayments totaled approximately $6.8 million from one investment that I mentioned, with an investment IRR of approximately 16.4%. Let me now take you through our investment activity. First, we invested in the first lien term loan of Axiom Global. Axiom is a leading provider of expert legal talent offering legal, counseling and representation services. Axiom is a portfolio company of Permira, a sponsor we know well. We have been an investor in Axiom for a few years in our other portfolios, and we were able to purchase it at an attractive price, a yield at cost is approximately 13.9%.

We also invested in the first lien term loan of Congress. Congress is a first few for partners portfolio company and provides mission-critical engineering, construction and maintenance services to a diverse customer base in the broadband and other adjacent industries. Our yield at cost is approximately 12.2%. This was also a secondary purchase for the portfolio. Congress has been a portfolio company of ours and other funds for several quarters. We also made a secondary investment in Multicolor, also known as LABL or label. A CD&R portfolio company, label is a global leader in the prime label manufacturing industry. Our yield at cost is approximately 10.9%. As with Axiom and Congress, Multicolor or label was also a secondary purchase of a named that we own and other vehicles that we manage.

Finally, we also invested in FleetPride, an American Securities Capital Partners backed company. FleetPride is a national distributor of aftermarket parts for the U.S. heavy-duty truck industry. Our yielded cost is approximately 10.4%. This is a name we have been tracking for a while. 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 existing 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 were 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 the U.S. We invested in the first lien term loan, a yield at cost is approximately 15.2%. During the quarter, we fully realized our position and fusion’s term loan, which was refinanced. We remain investor infusions preferred and common equity. Our fully realized IRR was approximately 16.4%, as I mentioned earlier. After quarter end, we invested in three new portfolio companies and fully realized our position in two portfolio companies. First, we supported the LBO of Alphia by PAI Partners. Alphia is a contract manufacturer of premium drive pet food ingredients. We invested in the first lien term loan and our yield net cost is approximately 10.7%. We have been investors in Alphia through our other funds 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. A yield at cost was approximately 13.7%. Our team has had a longstanding history with this name. We also made a proprietary preferred equity investment in Discovery Behavioral Health, a Western Equity Board 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. A yield at cost is approximately 20.4%. We fully realized our 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 2020 of ASI. We remain investors in the preferred equity. Our fully realized IRR on the term loan was approximately 10.8%. We also fully realized the position in the first lien term loan of Cook & Boardman, which was retailed as part of LBO 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. As such, our industry categorization for existing portfolio companies have changed in some cases and our industry ratings have also changed. As of September 30, our largest industry concentrations both trading company and distributors at 17.1%, professional services at 11.5%, followed by IT services at 7.5%, software at 6.15% and containers & packaging at 6.1%.

Our portfolio companies are 25 — sorry, 24 GICS industries as of quarter end, including our equity and warrant positions, which is an increase of three industries from the previous quarter. I’d now like to turn the call over to Rocco to discuss our financial results.

Rocco DelGuercio: Thanks, Suhail. For the quarter ended September 30, 2023, our net investment income was $1.6 million or $0.11 per share. The fair value of our portfolio was $223.4 million compared to $220.1 million on June 30. Our net assets were $83.8 million, a decrease of $3.9 million from prior quarter. Our portfolio’s decrease from operations this quarter was approximately $1.7 million. Our debt investments made during the quarter had an average yield of 12.3%. And the realization in repayments during the quarter had an average yield of 14.6% and an average IRR of 16.4%. 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 first lien and the remaining 10.3% is invested in equity warrants and other position.

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 $5.6 million, and the largest portfolio company investment in Bioplan at $13.6 million. 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. As of September 30, our nonaccrual investments 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 $14.3 million in cash, of which $14.2 million was restricted cash, with $28.8 million of capacity under our revolving credit facility with Capital One.

Additional information regarding the composition of our portfolio is included in our Form 10-Q, which was filed yesterday. With that, I’d like to turn our call back over to Mike.

Mike Mauer: 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 strength. We added three borrowers on nonaccrual, including two investments in ArborWorks, CareerBuilder and Klein Hersh last out term loan. Since quarter end, there has been continued development in our borrowers. While we are bound by confidentiality, the Company’s operating environment remains challenged and we continue to have an active dialogue with all parties. While CareerBuilder continues to pay its interest, the Company’s fundamental performance has been weak for some time. We put the loan on nonaccrual 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 nonaccruals over the next 12 months. Our NAV per share declined 4.46% from the previous quarter end. Our gross leverage this quarter was 1.58x, above our guidance of 1.25x to 1.5x. Our net leverage was 1.41x, which is within the target range, and as mentioned last quarter, we expect to see our gross in net converge. As of November 6, our gross and net leverage were 1.68x and 1.51x. As we have previously stated, the adviser will waive the portion of our management fee associated with base management fees over 1x leverage. The Company is expected to earn its dividend through the next quarter ended December 31. Our November — 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. That concludes our prepared remarks. Operator, please open the line for Q&A.

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Q&A Session

Operator: Ladies and gentlemen, at this time, we will conduct a question-and-answer session. [Operator Instructions] And our first question comes from Mr. Paul Johnson with KBW.

Paul Johnson: Just a couple for me. But in terms of investments that you made during the quarter, it sounds like there’s a 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? And if that’s more of kind of a onetime 3Q type of thing or a secondary type of purchases, something you probably expect to remain more active with in the future quarters?

Suhail Shaikh: Well, thank you for the question. This is Suhail. Let me take a couple of different ways. So, I think the investments that we made are investments that we own and other portfolios to be managed. So while there are secondary opportunities, they think these investments that we have, and we were able to sort of find attractive opportunities to pick up additional paper than ICMB benefited from. 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 as we think there’s an opportunity to not a position at a healthy rate of return. So that’s part one of the question. Part two is and I think as we’ve 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 Alphia that I mentioned and Discovery Behavioral Health.

Both of those are new investments. Now Alphia was one that we had in our portfolio. It’s getting refinanced. And we underwrote that risk as part of a new buyout. Discovery was a brand new investment. So, I think our pipeline is actually reasonably healthy, but we’re being super selective about what to go after, how to sort of tackle and frankly, 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 of — hopefully, that answers your question.

Paul Johnson: Yes. That’s very helpful. My next question is just kind of on NII this quarter, $0.11. I know 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? 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?

Mike Mauer: Yes, Paul, it’s Mike. Thank you for the question. I think it’s an area that I know you’re focused on the analyst is and we are. There’s a couple of key levers that we focus on one. One is the elephant in the room is our nonaccrual levels are high, and we need to get those down. There are two ways to get those down. One 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 are working with the Company and the sponsor. The other one is if 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-invest in, some of which we’ve gotten restructured for them. So that is a function of working with the other lenders, the Company, et cetera, 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 with the can, but we’ve got more work to do on that front.

Paul Johnson: Last question for me. Unless anything’s changed, I believe, Investcorp is 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 that NAV declined since that quarter that Investcorp came in to the adviser. 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? 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?

Mike Mauer: So, there’s two or three pieces to that answer, and I think a critical one, which Rocco will go back in and double checked, 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 tip to 24.9% of stock. So, that was a statement 1.5 years plus, I’ll call it, 1.5 years 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? I will tell you that the CEO has a formal meeting every — scheduled every 30 days, a monthly meeting with Suhail and I to talk about it, what are we doing? How are we thinking about it? We focused on it. 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 ’19 investment. And trust me, we’ve got ongoing dialogue with our CEO beyond the formal meeting.

Paul Johnson: Thanks for that. Thanks for the direction on the ownership level. That’s all for me. Thanks for taking my questions.

Operator: Our next question comes from Mr. Robert Dodd with Raymond James. [Operator Instructions]

Robert Dodd: Just touching on the nonaccrual question again, Mike. I mean I think in your prepared remarks, you made a reference to progress over the next 12 months. I mean, is that the kind of time frame we’re looking at to resolve, to get the nonaccrual level down to something that might be well in line with the industry? Or can you give us an idea of kind of the time frame you’re talking about?

Mike Mauer: Yes, Robert, I would love to say that I have a crystal ball that says this is the quarter where it will be down below the industry average. I will tell you that we have active dialogue on almost everyone. I don’t want to say everyone because even if you look at it, some of those really are not active restructurings, they’re more in liquidation and some of those are small. But the major ones we are very focused on. We’d like to see those resolved in six 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.

Robert Dodd: Got it. Just that on the dividend, the $0.03 supplemental to your point, 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. I just want to be clear there with investor expectations. It’s just going to be the base dividend going forward.

Rocco DelGuercio: Hi, Robert, it’s Rocco. Yes, correct. Correct.

Robert Dodd: Got it. Got it. And then on — I asked Rocco 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 on what’s going on that front?