CCAP - NASDAQ

Good morning, and welcome to Crescent Capital BDC, Inc. Second Quarter Ended June 30, 2025 Earnings Conference Call. Please note that Crescent Capital BDC, Inc. may be referred to as CCAP, Crescent BDC, or the company throughout the call. I'll start with some important reminders. Comments made over the course of this conference call and webcast may contain forward-looking statements and are subject to risks and uncertainties. The company's actual results could differ materially from those expressed in such forward-looking statements for any reason, including those listed in its SEC filings. The company assumes no obligation to update any such forward-looking statements. Please note that past performance or market information is not a guarantee of future results. I'll now turn the call over to Dan McMahon.

Thank you. Yesterday, after the market closed, the company issued its earnings press release for the second quarter ended June 30, 2025, and posted a presentation to the Investor Relations section of its website at www.crescentbdc.com. The presentation should be reviewed in conjunction with the company's Form 10-Q filed yesterday with the SEC. As a reminder, this call is being recorded for replay purposes. Speaking on today's call will be CCAP's Chief Executive Officer, Jason Breaux; President, Henry Chung; and Chief Financial Officer, Gerhard Lombard. With that, I'd now like to turn it over to Jason.

Thank you, Dan. Hello, everyone, and thank you all for joining us. I'll start today's call by summarizing our second quarter results, follow that with some thoughts on the market, and touch on our portfolio. In terms of second-quarter earnings, we reported net investment income of $0.46 per share compared to $0.45 per share in the first quarter. Excluding $0.02 per share of one-time accelerated amortization related to deferred financing costs, NII was $0.48 per share. Importantly, earnings remain in excess of our dividend with 110% base dividend coverage for the quarter. NAV per share was down approximately 0.4% for the quarter, driven primarily by the second of 3 previously announced $0.05 per share special dividends related to spillover income that was paid during the quarter. Now let's discuss what we are seeing in our market and our positioning. Deal activity remained relatively constrained in Q2, given ongoing tariff discussions and regulatory uncertainty. This policy-driven volatility has augmented an already robust pipeline of potential PE exits. Hold times for many private equity-owned assets continue to extend, furthering the pressure from LPs to both deploy dry powder and return capital. During periods of heightened volatility that typically include reductions in overall M&A volume, our deployment benefits from a large and diversified existing portfolio across the Crescent private credit platform. Across the platform, add-ons to existing portfolio companies accounted for approximately half of total investments by count during the second quarter. Additionally, incumbency is an important aspect of our origination efforts, whereby Crescent has demonstrated the ability to remain as lead lender and strong performing credits even after change of sponsor ownership without committing to portable capital structures. From an underwriting perspective, we benefit directly from seeing how these companies fared through the pandemic, wage inflation, and supply chain disruptions over our hold period. From an execution perspective, this knowledge and familiarity with management teams allows us to move quickly and with conviction, and that is something that the sponsors with whom we partner with value greatly. On new opportunities, our private credit platform has maintained lead roles in the majority of our transactions, and we continue to drive stringent documentation. Given our focus on the core and lower middle market, we believe we are able to drive better structural protections than deals in the more competitive upper middle market segment or BSL replacement segment. Now let's shift gears and discuss the investment portfolio. Please turn to Slide 13 and 14. We ended the quarter with just over $1.6 billion of investments at fair value across a highly diversified portfolio of 187 companies with an average investment size of approximately 0.6% of the total portfolio. Our top 10 largest borrowers represented 18% of the portfolio, as we are believers in modulating credit risk through position size. We have consistently maintained an investment portfolio that consists primarily of first lien loans since inception, collectively representing 91% of the portfolio at fair value at quarter end. Additionally, we take comfort in the fact that our portfolio is focused on domestic service-oriented businesses that, in our view, carry lower direct policy risk from tariffs and other recently proposed and implemented government policies. Finally, our investments are almost entirely supported by well-capitalized private equity sponsors, with 99% of our debt portfolio in sponsor-backed companies as of quarter end. We have partnered with our sponsors to invest in well-capitalized borrowers with significant equity capital beneath us. We note that the weighted average loan-to-value in the portfolio at time of underwrite is approximately 39%. Moving on to our dividend. We declared a third-quarter 2025 regular dividend of $0.42 per share. This dividend is payable on October 15, 2025, to stockholders of record as of September 30. Additionally, the third and final previously announced $0.05 per share special dividends related to undistributed taxable income will be paid on September 15 to stockholders of record as of August 29. This marks our 38th consecutive quarter of earning our regular dividend at CCAP, which we have accomplished while maintaining NAV per share within a tight band. Our positioning has and always will be for the long term. Overall, we are pleased with the strength of our portfolio and stable results this quarter. We believe they are representative of CCAP's longer-term track record of delivering a stable NAV profile and an attractive total economic return. To frame the point a bit further, let's look at performance since CCAP's public listing in February 2020, a period that captures the totality of the COVID pandemic, the rise in interest rates beginning in mid-2022, and at least part of the recent tariff volatility. Based on publicly available data, the average public BDC saw its net asset value per share declined by 10.5% from the fourth quarter of 2019 to the first quarter of this year. CCAP's NAV per share increased by 0.6% over the same time frame and 0.3% through Q2. Over this period, we generated a total economic return calculated as change in net asset value plus dividends of 49%, well in excess of the public BDC average. I highlight this longer-term track record as it often feels as if we operate in 90-day earnings vacuums where sentiment can swing wildly, sometimes warranted, sometimes not. We do not believe CCAP's current discount to NAV is warranted, which is why our Board has approved a $20 million stock repurchase program. We believe that opportunistically repurchasing shares at certain levels is an attractive use of excess capital. As we seek to maintain a disciplined capital allocation approach at CCAP, we will balance our repurchase program with other factors such as our existing investment pipeline and leverage levels. With that, I will now turn the call over to Henry. Henry?

Thanks, Jason. Please turn to Slide 15, where we highlight our recent activity. Gross deployment in the second quarter totaled $58 million, as you can see on the left-hand side of the page, of which 99% was in first lien investments. During the quarter, we closed 3 new platform investments totaling $22 million. Even as spreads have tightened, our focus remains on high-quality companies with strong credit profiles. These new investments were loans to private equity-backed companies with a weighted average spread of approximately 480 basis points. Each of these new investments were first lien loans, consistent with our strategy of investing at the top of the capital structure to provide greater downside protection. The remaining $36 million came from incremental investments in our existing portfolio of companies. $58 million in gross deployment compares to approximately $93 million in aggregate exits, sales and repayments, resulting in net realizations of approximately $35 million for the second quarter. Given we are currently operating in our target leverage range, we do not expect to see meaningful increases in net deployment on a quarter-to-quarter basis. However, the Crescent private credit platform remains active with $1.3 billion of capital committed during the second quarter. Turning back to the broader portfolio, please flip to Slide 16. You can see that the weighted average yield of our income-producing securities at cost remained stable quarter-over-quarter at 10.4%. As of June 30, 97% of our debt investments at fair value of floating rate, with a weighted average floor of 78 basis points, compares to our 54% floating rate liability structure based on debt drawn with no floors. Overall, our investment portfolio continues to perform well with year-over-year weighted average revenue and EBITDA growth. The weighted average interest coverage of the companies in our investment portfolio at quarter end improved to 2.1x. As a reminder, this calculation is based on the latest annualized base rate each quarter. Please flip to Slide 17, which shows the trends in internal performance ratings. Overall, we have seen stability in the fundamental performance of our portfolio, resulting in consistency in our risk rating and a weighted average portfolio risk rating of 2.1. On the right-hand side of the slide, you'll see that 1 and 2 rated investments representing names that are performing at or above our underwriting expectations continue to represent the lion's share, or 86% of our portfolio at fair value. It is worth noting that as of quarter-end, as a percentage of total investments at fair value, CCAP's watch list, which we define as 3, 4, and 5 rated investments, was 14%, whereas our nonaccruals at fair value were 2.4%, a nearly 12% gap. This is in contrast to an analysis of our public peers where this gap is approximately 6%. We believe this reflects our philosophy and our culture of being forward-looking in terms of maintaining our watch list. We do not, for example, wait until there is a default for moving something down the risk rating scale. We strive to be transparent about the health of our portfolio with the market, and one of the ways we do so is by taking a preemptive approach towards how we classify our watch list investments. With that, I will now turn it over to Gerhard.

Thanks, Henry, and hello, everyone. Yesterday evening, we reported net investment income of $0.46 per share or $0.48, excluding the one-time accelerated amortization that Jason noted, compared to $0.45 per share in the prior quarter. The increase in net investment income was driven by an increase in the distribution from the Logan joint venture and a stable quarter-over-quarter portfolio yield of 10.4%. Net income per share of $0.41 for the second quarter compared to $0.11 in the prior quarter, driven by a reduction in changes in net realized and unrealized losses on a quarter-over-quarter basis. Turning to the balance sheet. As of June 30, 2025, our investment portfolio at fair value totaled $1.6 billion. Total net assets were $725 million as of June 30, 2025. NAV per share was $19.55, a decrease of $0.07 per share from $19.62 at the end of the first quarter. As Jason noted, this quarter's change in NAV was largely attributable to the $0.05 special dividend paid in June as NII outpaced our regular dividend, offset by modest net unrealized and realized losses per share. Let's shift to our capitalization and liquidity. I'm on Slide 19. At the beginning of April, we rightsized our SPV asset facility from $500 million to $400 million and reduced the spread by 50 basis points from 245 to 195. This facility resizing provides us with sufficient capital to address any potential draws on our unfunded commitments while minimizing interest expense related to excess unfunded capacity. Following the one-time impact of the acceleration of the deferred financing costs, we expect to see the full benefit of the repricing in our future quarterly operating results. Our capital structure reflects our target size and leverage with our current equity base today. And we have ensured that our borrowing capacity is consistent with our investment mandate. This quarter's activity brought our debt-to-equity ratio down modestly from 1.25x in the prior quarter to 1.23x, which is within our stated target leverage range of 1.1x to 1.3x. As you can see on the right side of the slide, approximately 74% of total committed debt now matures in 2028 or later. The weighted average stated interest rate on our total borrowings was 6.09% as of quarter end, compared to 6.36% as of March 31. As Jason noted, for the third quarter of 2025, our Board has declared our regular dividend of $0.42 per share. Additionally, the third and final previously announced $0.05 per share special cash dividend is payable in September. Our existing variable supplemental dividend framework remains in effect as well. CCAP will not pay a Q3 supplemental dividend as the measurement test cap exceeded 50% of this quarter's excess available earnings. And with that, I'd like to turn it back to Jason for closing remarks.

Thanks, Gerhard. So to sum up, CCAP posted stable results in a quarter that, from a macro perspective, was anything but stable. Historically, in periods of market volatility, Crescent's focus on disciplined credit underwriting, capital preservation, strong free cash flow generation, and robust debt service coverage has enabled us to stay on the right side of performance and returns across managers. Earlier, I highlighted CCAP's performance since listing in 2020. We believe Creston and CCAP will continue to be on the right side of this performance dispersion spectrum over the long term, and we look forward to delivering on that in the quarters to come. As always, we thank you for joining our call today and look forward to connecting with many of you soon. And with that, operator, we can open the line for questions.

[Operator Instructions] Your first question comes from the line of Robert Dodd with Raymond James.

Congratulations on essentially the NAV stability this quarter. But just want to focus on credit quality a little bit again. As Henry said, right, so the watch list is up 14%, but I believe it was like 12% or 13% last quarter. So it does seem like it's ticked up just a tiny bit. And also on the internally rated 4s and 5s, which are the lowest categories, that ticked up this quarter as well. So in that, with the 4s and 5s, 3% of the portfolio at fair value, any assets in that category that are not already on nonaccrual? And if there are, what's the risk there of incremental credit deterioration in the portfolio?

Yes, Robert, thanks for the question. This is Henry. I can take a first stab at the responses. With respect to the watch list, more generally, what I would say is that our view, and we alluded to this in prepared remarks, is that we want to be preemptive with how we designate investments on the watch list. So we've always relied on the fundamental operating performance and the near-term outlook to guide us to whether or not we're placing an investment on watch list, and it's not going to be purely driven by if there's a credit event pending. So from that perspective, we just want to make sure that we're both being forward-looking and also being transparent around what the nearest-term outlook looks like for our portfolio companies. With respect to the 4s and 5s, what I would say there is that those are all investments that are certainly most challenged with respect to potential near-term outlook in terms of recovery. However, what I will also say there is that what we have -- what we do want to make sure that we factor in, and this is both in terms of the risk rating as well in terms of the mark is, first, where we think the recovery is going to look like on a near-term basis, just given the existing outlook of the company today. And secondly, even if there is a longer path to recovery, we want to make sure that we're not being too shortsighted around near-term challenges that companies are facing. So what I would say is if you're in that category, it's certainly kind of the largest variant in terms of potential outcomes with respect to ultimate recovery here. But what I will say is that when I look back at our track record at our loss rates and our ability to create recoveries even in situations that are kind of higher risk, I'd say that we certainly have the capabilities and the track record to back that. And what I would also say there is that it's really kind of more of an earlier forward look as opposed to demonstrating a leg down in like further portfolio weakness.

Sorry, Robert, it's Jason. I just want to add 2 points. On the first point on the watch list, I think it's also important to point out that, as a lower and core middle market investor, 3 out of 4 companies in the portfolio have financial covenants. And so that might be high relative to some of our peers who focus on the upper end of the market. And the nice thing about having covenants is it really enables frequency of dialogue and interaction with the management teams and sponsorship. And so I think from an insight standpoint and a dialogue standpoint, we may be in closer contact with folks, given the covenants that we have in place, which might give us more real- time visibility and outlook. The other point that I just wanted to make is that while our nonaccrual rate, I think, is, let's say, generally in line with the broader industry, it is certainly not something we're pleased with. It's not representative of how we think of our portfolio or our underwriting process, or frankly, consistent with our historical metrics, and that's something that we are looking forward to seeing some progress on in terms of bringing that down.

Sort of related. As you said, right, the -- with all the tariffs, et cetera, and those -- the outlook on tariffs seems to change day by day. Have you seen anything -- to your point, you're in contact with a lot of these portfolio companies more frequently than the upper market might be. Have you seen any change in thoughts from portfolio companies about how manageable the tariff exposure is? Obviously, it keeps changing, so they might have to keep changing plans. But any thoughts on how the portfolio companies think they'll be able to manage this volatile period?

Yes. I'd say -- I'd start off by commenting on when we were sharing with the market our initial review of the direct impact to our portfolio at tariffs, it was a relative minority in our book. It was kind of low single digits where we viewed our portfolio as having direct impact. And this was the kind of the highest level of kind of tariffs post-liberation day that we were doing our assessment around. But what we've seen since is we've done a refresh of that and reviewed, and really first to check how close we were in terms of the impact and our assessment around potential tariff impact. And secondly, to determine how the companies -- to your question, how the companies are able to respond. I'd say on the first conclusion from that refresh and analysis, I'd say our analysis still holds. We haven't seen that direct tariff impact population expand in any meaningful way, nor contract. The companies that we thought were going to be impacted directly by tariffs are certainly ones that are still navigating that environment. On the latter point, there's -- I'd say there's a few ways that we've seen companies address the upcoming changes in tariffs. The first is we always look to invest in companies that have high pricing power and the ability to demonstrate the ability to pass through prices. We had a good lens into that in the 2023, 2024 time frame when we saw a pretty marked increase in wage inflation. And given that we invest primarily in services businesses, that's going to typically be the largest component of the cost structure for the vast majority of our borrowers. And being able to see that dynamic play out on the price side with respect to material input costs as well in the context of tariffs, that's certainly the primary lever that we've seen management teams employ in this current environment. On the second side, which is for those that are sourcing directly from, I'd say, kind of higher up the list tariff-impacted geographies, what we've seen management teams do is take a proactive response to looking at alternative sourcing mechanisms. And there's a lot of work that the companies that we invest in that do have some sort of supply chain procurement abroad coming into the U.S. We saw that that's an approach and diligence that was done after the first wave of tariffs during the first Trump presidency, and we're seeing that kind of repositioning happen real time now as well. I think in terms of seeing it play out in the numbers, it's probably going to be back half of this year when we really start to see the benefits of those actions, as well as the impact of the tariffs actually show up in the borrower financials. But I'd say kind of summarize here, first, the direct tariff impact in our portfolio is just a small percentage to begin with. And secondly, given the dialogue, the access that we have to management, we've been able to see them kind of address this upfront, both on the price side as well as on the supply chain side.

One more question, if I can, unrelated to all those issues. So you're operating at basically right back in the middle of your target leverage range. So I think you said you don't expect a lot of net portfolio growth going forward. But would you like -- if market activity does pick up, and obviously, the platform as a whole is still very active, which obviously, in principle, if you get some repayments at the BDC, it gives you relatively quick opportunity to redeploy the capital. But is there anything you'd like to modify in the mix within that, while maintaining kind of midpoint of the leverage range, maybe, would you like to rotate out of any sectors and into different ones or shrink average position sizes, or things like that, all of which can go on while the portfolio isn't net growing. So any thoughts on any repositioning, relatively speaking, that you'd like to do while you're at kind of target leverage?

Yes. That's a great question. I'd say on a couple of points. The first is in terms of rotation from an industry perspective, I'd say we feel good about where we are in terms of our industry focus. We're very focused on investing in high free cash flow generating noncyclical industries with defensible revenue streams. And we've started that positioning from the very beginning of CCAP and continue to maintain that. So I wouldn't say that there's specifically any industry concentrations that we're looking to reduce in the near term or on the other side of that, augment as well. Our focus is always going to be on those industries. I'd say the same for the average position size as well. We have 187 obligors in our portfolio. Average position size is 60 basis points. So we really, from the beginning, have also really sought to maintain a diversified book. And given -- we have the added luxury, if you'll call it that, of being attached to a platform that even though the CCAP on a net basis during the quarter, the portfolio shrink, we've seen $1.3 billion of new deployment come through the platform in just the quarter alone. So we're able to pick our spots in terms of what is accretive to us just from the -- from a pure yield perspective, as well as where we want to be in terms of industry without having to sacrifice diversification at all. So I'd say on that piece, we're in a good position. Where we are focused on rotating is -- and we've mentioned this in prior commentary is the acquired assets. We are a little over halfway through the rotation of the acquired First Eagle assets, and we're almost entirely through the rotation of the Alcentra assets. But that's really, I'd say, where the heaviest focus is in terms of our rotation efforts because we have the ability to reallocate and redeploy those investments into Crescent directly originated opportunities. It's just a matter of rotating the acquired assets at levels that we find attractive.

[Operator Instructions] Your next question comes from the line of Mickey Schleien with Clear Street.

Jason, just one question from me today. I think investors and analysts really appreciate your transparency about the breakdown of your portfolio by the type of security. And I see that less than 2% is in unitranche last-out investments. As you know, that structure can help boost portfolio yields without giving up much control over an investment. So how are you evaluating the opportunity to increase that to help offset potential declines in SOFR?

Mickey, thank you for the question. It's Jason. That segment of the portfolio has always been relatively small for us. And I'd call out a couple of things. First off, I think we've always been in the unitranche segment of the market. In fact, Crescent's heritage is really also as a junior debt lender. So we've historically been quite comfortable lending deeper into a capital stack of middle-market companies. The last out opportunity is not so voluminous, I would say, these days, as direct lending managers have more capital to put to work. And that's certainly the case for Crescent, too. I would say we are opportunistic in those pursuits. Generally, only getting comfortable if it's a very small amount of first-out leverage ahead of us where we feel quite comfortable that we could take control of that first out if needed. But it's often driven by the portfolio company having a banking relationship and wanting to bring a relationship into a first- out piece of a capital structure. But otherwise, it's -- I would just say it's not all that frequent of an opportunity for us today.

Your next question comes from the line of Christopher Nolan with Ladenburg Thalmann.

Just following up on Robert's question from a different angle. Are you -- given the decline in energy prices, and your companies, do you see your companies having increased operating leverage where if energy inputs go down, your profit margins go up and so forth?

Yes. Thanks for the question, Chris. This is Henry. I'd say that fuel input costs are really not a large component of the cost of goods sold for the vast majority of our borrowers. It's something that we really seek to avoid in underwriting where there's a lot of exposure to potential material cost inputs, both on the -- both as a reduction in margins as well as a way to potentially augment margins. So I wouldn't say that that would be necessarily a material driver of operating leverage within our portfolio as a whole. Generally, I would say what you'll see given our service orientation in our portfolio is that the largest component of cost of goods sold in the vast majority of our portfolio companies' cost structures is going to be human capital as opposed to pure kind of fuel input costs. However, I would certainly expect to see some benefit. I just don't expect it to be a material driver of portfolio performance, if that makes sense.

Yes. And then a follow-up question. I see that the balance of second lien loans has gone down year-to-date. I know it's a small part of the portfolio, but is this something which you sort of pop into more cyclically when the economy starts going up and the pricing on second liens are attractive, then we should start seeing those increase incrementally?

Yes. I wouldn't say that the second lien portfolio mix is one that's ever going to be a large component of our portfolio. We've, from the beginning, outlined that the investment mandate of CCAP is really going to be focused on top of capital structure first lien investments. I would say that currently in this market, the relative spread premium that we're seeing in second liens relative to the first lien is tightened quite a bit. So it's difficult from just a pure RV perspective to have conviction around coming in behind 5, 6, sometimes 7 turns of first lien leverage without getting the appropriate risk premium. If that changes, then it's certainly something that we'll look at, but we'll always be selectively deploying the second lien. I don't -- I would never expect it to be a large component of the portfolio given our focus here is to continue to weight our portfolio towards first lien.

I will turn the call back over to Jason Breaux for closing remarks.

Thank you very much, Kate. Thank you all for your time and attention here today. We appreciate having this conversation with you and look forward to speaking with you again soon.