Earnings call: Investcorp Credit Management BDC reports Q2 fiscal 2024 results

Investcorp Credit Management BDC (the “Company”) has reported its financial results for the second quarter of the fiscal year 2024. The Company announced a net investment income of $1.6 million, marking a 3% decrease from the previous quarter.

Additionally, the Company’s net asset value per share fell by 6% to $5.48. Despite the decline, the Company declared a quarterly distribution of $0.12 per share. The resignation of the Chief Financial Officer (CFO), effective March 31, 2024, was also announced during the call.

The Company’s focus remains on portfolio management and risk mitigation, with a strategy aimed at capital preservation and maintaining a stable dividend.

Key Takeaways

• Net investment income for the quarter was $1.6 million, a decrease of 3% from the previous quarter.
• Net asset value per share declined by 6% to $5.48.
• Nonaccrual investments decreased to 4.6% of the portfolio.
• Distribution of $0.12 per share declared for the quarter.
• Gross leverage was 1.7x, and net leverage was 1.51x.
• The Company’s CFO has resigned, effective March 31, 2024.
• Investment strategy focused on portfolio rotation, diversification, and capital preservation.

Company Outlook

• The Company is looking to rotate and diversify its portfolio while focusing on capital preservation.
• Maintaining a stable dividend is a key objective for the Company going forward.

Bearish Highlights

• The Company experienced a decrease in net investment income and a decline in net asset value per share.
• The resignation of the CFO could indicate a period of transition and adjustment for the Company.

Bullish Highlights

• Successful refinancing of Archer Systems’ first lien term loan resulted in a fully realized IRR of approximately 13.2%.
• Evergreen North America acquisitions LLC’s first lien term loan was fully realized with an IRR of approximately 13.3%.

Misses

• The Company’s financial results reflected adjustments to expenses, contributing to the decrease in net investment income.

Q&A highlights

• The Company discussed its investment activity, including the addition of new portfolio companies and secondary purchases.
• The financial results, portfolio composition, and investment strategy were key topics addressed during the Q&A session.

In conclusion, Investcorp Credit Management BDC’s second-quarter fiscal year 2024 results show a slight decrease in performance metrics but also highlight successful investment outcomes and a continued strategy for portfolio optimization and income stability. The Company’s focus on floating rate instruments and first lien investments positions it to potentially benefit from rising interest rates, while the diversification efforts aim to mitigate risk. The departure of the CFO is a notable change in leadership that the Company will need to address in the coming quarter.

InvestingPro Insights

Investcorp Credit Management BDC’s recent financial results have drawn attention to its strategic focus and the challenges it faces. In light of these developments, certain metrics and InvestingPro Tips can provide additional context for investors considering the company’s prospects.

InvestingPro Data highlights include a market capitalization of $49.09 million, reflecting the company’s size within the investment management sector. The P/E ratio stands at -13.58, indicating that the company is currently not profitable. This aligns with the reported net investment income decrease and the net asset value per share decline. Furthermore, the revenue for the last twelve months as of Q2 2024 is $25.75 million, with a modest growth rate of 3.75%, suggesting a relatively stable revenue stream despite the challenges in profitability.

InvestingPro Tips for Investcorp Credit Management BDC reveal that analysts have revised their earnings expectations downwards for the upcoming period, which may be a factor for investors to consider given the recent financial performance. Additionally, while the company pays a significant dividend to shareholders, with a high dividend yield of 18.48%, it’s important to note that the stock price movements have been quite volatile. This volatility, coupled with a valuation that implies a poor free cash flow yield, could be indicative of the risks associated with investing in the company.

For those looking to delve deeper into the company’s financial health and future prospects, there are additional InvestingPro Tips available at https://www.investing.com/pro/ICMB. By using the coupon code PRONEWS24, investors can get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, gaining access to an extensive range of insights and data. There are a total of 6 additional InvestingPro Tips listed for Investcorp Credit Management BDC, providing further valuable information for a comprehensive investment analysis.

The insights from InvestingPro offer a nuanced view of Investcorp Credit Management BDC, complementing the article’s discussion on the company’s strategy and recent financial outcomes. With a focus on maintaining a stable dividend and the challenges of portfolio management and risk mitigation, these additional data points and tips can aid investors in making informed decisions.

Full transcript – Cm Finance Inc (ICMB) Q2 2024:

Operator: Good morning and thank you for joining today’s Investcorp Credit Management BDC Second Quarter Fiscal Year 2024 Earnings Call. It is now my pleasure to turn the floor over to Rocco DelGuercio, CFO.

Rocco DelGuercio: 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: Thanks, Rocco and thank you to everyone for joining us on our second quarter 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 and 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. We announced our revised financial results on Wednesday, for our fiscal second quarter 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 nonaccrual 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. 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 in NAV 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 nonaccruals during this quarter and our positions on nonaccrual declined to 4.6% as a percentage of total sales 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 nonaccruals in the next 12 months. 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. Our gross leverage this quarter was 1.7x and our net leverage 1.51x, both above our guidance of 1.25x to 1.5x. As of February 16, our gross and net leverage were approximately 1.62x and 1.6x. With identified repayments, we expect this to reduce this leverage to approximately 1.5x 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. 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: 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, ’22 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 debt. We continue to be highly selective in looking at new buyout finance. 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 this — to the quarter ended December 31, 2022. We saw a similar trend with primary deal flow picking up during the quarter as 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 back 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% in the same period, repayments totaled approximately $29.2 million from four investments with an IRR of approximately 15.8%. First, we supported the LBO of Alphia by PAI Partner. Alphia is a contract manufacturer premium dry pet food ingredients. We invested in the first-lien term loan and our yield at 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 (NYSE:) Wireless. We purchased Victra in the secondary market an attractive price, a yield at cost of approximately 13.7%. And our team has had a long-standing history with this name, which is what led us to re-underwrite this risk. We also invested in medicated solutions. This was a directly sourced opportunity from BrightStar Capital Partners, and we supported the sponsor and rightsizing the capital structure. [indiscernible] 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 liquid example of an opportunistic, secondary purchase of the credit that we had been tracked. NorthStar is a portfolio company of JF Lehman. This is a large provider of diversified structure and environmental services across the U.S. 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 in Discovery (NASDAQ:) Behavioral Health of Webster Equity Partners portfolio company. This company 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 Visa (NYSE:) 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 we — that happened during this quarter, first 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 of 2020 and remain invested in the preferred equity. Our fully realized IRR on the term loan was approximately 10.8%. We also fully realized our 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 our position in the first lien term loan of SWN, which we have been investing since May of 2024. 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 quarter end, we fully realized our first lien term loan position in Evergreen North America acquisitions LLC, realized IRR was approximately 13.3%. As of December 31, our largest industry concentrations were trading company 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 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: 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 30th. Our net assets were $78.8 million, a decrease of $5 million of the — 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. The average floor on 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 1.7x and a net leverage of 1.51x as of December 31, compared to 1.58x gross and 1.41x 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 credit — 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 on Tuesday. With that said, I would like to turn the call back over to Mike.

Michael Mauer: 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 remain focused on maintaining the quality of the book. Our investment strategy has not wavered as we remain increasingly focused on capital preservation 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. [Operator Instructions]. We are now ready to begin. And our first question comes from Mr. Christopher Nolan with Ladenburg Thalmann.

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

Rocco DelGuercio: Thank you.

Christopher Nolan: 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: Great question, Chris. It’s more the size of the portfolio company. I think the size of the investment, as Mike pointed out and as I may have alluded to as well, is actually a decreasing. So we increased the number of borrowers. And so we’re trying to diversify the portfolio as much as we can.

Christopher Nolan: And then for the portfolio companies, what is the average EBITDA coverage?

Suhail Shaikh: Interest coverage?

Christopher Nolan: Yes, please.

Suhail Shaikh: Interest coverage, we typically, when we are underwriting a new deal, we are targeting interest coverage of at least 2x, Christopher. And that’s — it’s not a rule of thumb, but that’s — 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 2x, it depends on the industry, it depends on the business. And in most cases, it’s north of 2x.

Christopher Nolan: Okay. That’s it for me. Thank you.

Operator: Thank you very much. [Operator Instructions] I don’t see any other questions.

Michael Mauer: Thank you, operator, and thank you, everyone, for your time today.

Operator: This concludes today’s conference call. Thank you, everyone, for attending.

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