CCAP - NASDAQ

Good morning, and welcome to the Crescent Capital BDC, Inc. Third Quarter Ended September 30, 2025, Earnings Conference Call. After the speakers' remarks, there will be a question and answer session. 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 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 also 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 with some thoughts on the market, touching on our portfolio, and our forward earnings outlook. In terms of third quarter earnings, we reported net investment income of $0.46 per share, unchanged from the prior quarter, translating into an annualized NII yield of 9.5%. Earnings continue to remain in excess of our dividend with 110% base dividend coverage for the quarter. Net asset value was $19.28 per share as of September 30, compared to $19.55 per share as of June 30. The quarter-over-quarter decline was primarily due to unrealized and realized losses stemming from certain portfolio companies that have demonstrated weakened operating outlooks due to tariffs. Let me now discuss what we are seeing in our market and our positioning. With respect to the macroeconomic environment, the U.S. economy has largely remained resilient. While we have been seeing signs of some slowing momentum amid mixed labor and economic data, we believe that the Federal Reserve's recent rate cuts combined with greater clarity on tariff policies may lead to near-term growth in LDL activity. On new investment opportunities, our private credit platform continues to maintain lead roles in the majority of our transactions. Given our focus on the core and lower middle markets, we believe we drive better structural protections than deals in the more competitive upper middle market or BSL replacement segment. Our segment focus provides us with the opportunity to lead our transactions and drive the documentation. We are focused on strong cash flow generation, tight EBITDA definitions, as well as enhanced monitoring rights, which allow us to be proactive versus reactive as we think about our approach to portfolio management. While we have no exposure to first brands and Tricolor, these recent bankruptcies highlight governance issues that we seek to avoid by working with well-established private equity sponsors. We've established our private credit business by partnering closely with our long-standing sponsor relationships to uphold strong governance and oversight across our portfolio companies. Let's shift gears and discuss the investment portfolio. Please turn to Slide 13 and 14. We ended the quarter with approximately $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 16% of the portfolio as we are believers in modulating credit risk to position size. We have maintained an investment portfolio that consists primarily of first lien loans since inception, collectively representing 90% of the portfolio at fair value at quarter end. Additionally, we have positioned our portfolio to focus on domestic service-oriented businesses and, in our view, mitigate concentrated risks associated with tariffs, shifts in government spending, and other policy changes. Finally, our investments are 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 the time of underwriting is approximately 40%. Moving on to our dividend. For the fourth quarter, our Board declared a regular dividend of $0.42 per share, which represents a 9.12% annualized dividend yield based on NAV and today's closing stock price, respectively. This dividend is payable on January 15, 2026, to stockholders of record as of December 31. This marks our thirty-ninth consecutive quarter of earning our regular dividend at CCAP. Before I turn it over to Henry, I'd like to take a moment to discuss our outlook for CCAP's earnings potential and base dividend in light of recent rate cuts and potential further easing in 2026. Looking ahead, we anticipate that a lower base rate environment may gradually reduce portfolio yields and place some pressure on net investment income. Given the largely floating rate nature of direct lending portfolios, we believe several factors position CCAP well to address base rate-driven earnings headwinds. To start, in 2025, our net investment income once again exceeded our base dividend with 110% coverage. On the liability side, approximately half of our borrowings are also floating rate, allowing funding costs to adjust downward to preserve our net interest margin. We have several additional levers that may help offset potential earnings pressure on lower base rates and support future growth. First, we ended the quarter with net debt to equity of 1.20x, below the upper end of our 1.3 times target range. This provides us with flexibility to leverage Crescent's attractive origination pipeline and enhance earnings through prudent portfolio growth. Crescent's private credit platform has been active with over $6 billion of capital committed to new and add-on investments on a trailing twelve-month basis, including over $1.7 billion during the third quarter. Being associated with Crescent's private credit platform provides ample opportunity for CCAP to reinvest in attractive private credit investment opportunities. Second, a more accommodative rate environment should serve as a tailwind for new deal activity. Lower borrowing costs are expected to support renewed M&A refinancing volumes, creating opportunities for attractive reinvestment and additional fee income. We are optimistic that over time, we may see higher levels of non-interest-related income as compared to this third quarter, driven by a pickup in origination and structuring fees on new investments, as well as accelerated amortizations on realizations. Third, our spillover income remains a meaningful source of earnings support. At approximately $1.1 per share, this balance provides a cushion as we navigate the current rate outlook. And finally, we have a demonstrated record of alignment with shareholders. Since inception, each of our portfolio ramping initiatives, both when we established CCAP in 2015 and listed CCAP in 2020, were supported by our fee structure during the respective ramps. Additionally, we have committed substantial advisor support for accretive non-dilutive growth opportunities, including our two public acquisitions. As I noted last quarter, our positioning has and always will be for the long term. And today, we are comfortable with our dividend level. 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 $74 million, as you can see on the left-hand side of the page. During the quarter, we closed seven new platform investments totaling $51 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 530 basis points. The remaining $22 million came from incremental investments in our existing portfolio companies. The $74 million in gross deployment compares to approximately $80 million in aggregate exits, sales, and repayments, resulting in net realizations of approximately $12 million for the third quarter. Our portfolio activity resulted in net realizations during the quarter due to several commitments to new portfolio companies that slipped into the fourth 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 at fair value were floating rate, with a weighted average floor of 77 basis points. The weighted average interest coverage of the companies in our investment portfolio at quarter end remained stable at 2.1 times, demonstrating durability and strength within the earnings at our underlying portfolio companies. As a reminder, this calculation is based on the latest annualized base rates 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 ratings and a weighted average portfolio risk rating of 2.1. On the right-hand side of the slide, you'll see that one and two-rated investments, representing names that are performing at or above our underwriting expectations, increased modestly from 86% to 87% quarter over quarter, continuing to represent the lion's share of our portfolio at fair value. As a percentage of those investments at fair value, non-accruals improved from 2.4% as of June 30 to 1.6% as of September 30, driven by a change of control and recapitalization, as well as the sale of an investment that has previously been on non-accrual. This was partially offset by two new non-accrual investments during the quarter. The overall portfolio continues to demonstrate resilient business fundamentals, supported by the fact that the vast majority of our borrowers experienced steady revenue and EBITDA growth year over year. We have seen weakness in certain watch list investments that are facing operating challenges resulting from tariff impacts. Two of these investments, one which exports goods to the U.S. from Europe, the other which sources a meaningful percentage of its inventory from overseas, negatively impacted NAV this quarter, collectively accounting for $0.15 per share in unrealized losses. As a reminder, in May, we highlighted that our initial tariff analysis identified 4% of our portfolio may face direct operating impact from tariff policies. We do not believe this exposure has increased in any meaningful way since our initial review, and outside of the select portfolio companies highlighted, the portfolio impact from tariffs remains muted. We continue to monitor closely for potential adverse impact in the portfolio stemming from trade policy and believe our aggregate risk is manageable, particularly as the portfolio further diversifies. More broadly speaking, we have continued to take a preemptive and rigorous approach to our watch list, recognizing that there are a variety of approaches to how managers think about these categorizations. It's worth noting that as of the end of the third quarter, as a percent of total investments at fair value, CCAP's watch list, which we define as three, four, and five-rated investments, was 13% as compared to non-accruals of 1.6%, so a gap of over 11%. Based on an analysis of our public peers, this gap is approximately 5%. We do not wait until there is default for moving an investment down the risk 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, which is in line with the prior quarter. Net income for the third quarter was $0.19 per share, compared to $0.41 in the prior quarter. The quarter-over-quarter change primarily reflects higher net realized and unrealized losses. The tariff-impacted investments that Henry noted accounted for the majority of the change in realized and unrealized losses during the quarter. While these items impacted results this quarter, they represent isolated credit events within an otherwise stable and well-diversified portfolio. Turning to the balance sheet. As of September 30, 2025, our investment portfolio at fair value totaled $1.6 billion, consistent with the prior quarter. Total net assets were $714 million, and NAV per share was $19.28, a decrease from $19.55 at the end of the second quarter. Let's shift to our capitalization and liquidity. I'm on Slide 19. In light of the continued tightening in credit spreads, we're actively pursuing opportunities to optimize the pricing, tenure, and diversification of our financing sources, leveraging more constructive dynamics in the private placement market. In October, we priced $185 million of new senior unsecured notes broken down into three tranches. First, $67.5 million due February 2029, second, $67.5 million due February 2031, and third, $50 million due May 2029. The notes will be issued in two closings. The first and second tranches totaling $135 million will be issued on February 26, and the third tranche will be issued in May 2026. The proceeds from these respective issuances will be used to repay the majority of our existing debt maturing in 2026. Pro forma for this activity, over 90% of total committed debt now matures in 2028 or later. So we're pleased with our progress here. The weighted average stated interest rate on our total borrowings was 5.99% as of quarter end, down from 6.09% in the prior quarter, due primarily to a 50 basis point spread reduction in our SPV asset facility, which we rightsized during the second quarter and discussed on last quarter's call. Our quarter-end debt to equity ratio was 1.23 times, or 1.20x on a net basis, unchanged from the prior quarter, within our stated target range of 1.1 times to 1.3 times. With $240 million of undrawn capacity subject to leverage, borrowing base, and other restrictions, and $28 million of cash and cash equivalents as of quarter end, we have sufficient liquidity to selectively fund further investment activity while maintaining a debt to equity ratio inside our target range. The third and final previously announced $0.05 per share special cash dividend related to undistributed taxable income was paid in September. As Jason noted, for 2025, our Board has declared our regular dividend of $0.42 per share. While our existing variable supplemental dividend framework remains in effect, CCAP will not pay a Q4 supplemental dividend as the measurement 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.

Thank you, Gerhard. In closing, as we enter the last two months of the year and look towards 2026, we believe CCAP remains well-positioned with respect to our experienced investment team, high-quality, diversified portfolio, and strong capital structure. We remain optimistic about the long-term prospects of the company given our positioning as a leader in the core and lower middle market with access to the breadth and resources of the broader Crescent platform. And we are focused on continuing to deliver a stable NAV profile and attractive total economic return in excess of the public BDC space. Thank you all for joining us today and for your interest in CCAP. I'll now turn the call over to the operator for Q&A.

We will now open for questions. Your first question comes from the line of Robert Dodd with Raymond James. Please go ahead.

Hi, thanks for all the color on kind of the earnings outlook and the dividend question. So, I mean, digging into that, I mean, as you said, spillover about $1.10. So you have that as a cushion if necessary. But, I mean, obviously, that eats away NAV if you dip into that. I mean, what do you think between your liability side, sort of the leverage activity fees, etcetera, what do you think the probability is that you have enough levers to actually keep NII coverage as a dividend at 100% or more? Or do you think spillover is going to be necessary consumed during 2026?

Hey, Robert. Jason here. Thanks for the question. We certainly think that the levers will be available to us on a go-forward basis here. I think for the immediate near term, we do believe that we are going to cover our base dividend with NII. I think we are certainly going to be tactical about how we think about generating incremental NII to support our base dividend. And as noted on the call, we've got an availability to certainly increase the size of the portfolio. We do think that there is the potential for increased non-interest-related income that can be driven from a pickup in activity relative to a more subdued line item for non-interest-related income. And then lastly, as noted, I think we've always tried to do the right thing and support CCAP and support our shareholders. And so between all of those levers, we're focused on covering the dividend.

Thank you for that. So I'll just give him some notes. On the couple of assets that got marked down, the tariff question to Henry's point, I don't think that the tariff exposure has increased, but has the ability of the exposed companies to handle the tariffs deteriorated because the exposure doesn't seem to have gone up, but some of them have been marked down fairly significantly on a tariff issue that's, I want to say, been known about all year because it hasn't. But, you know, it wasn't a new surprise this quarter. Is there something that's changed in the ability to cope on specific tariffs or anything like that?

Yes. Robert, this is Henry. I'll take that. The short answer is, in aggregate, no. Nothing has changed there. We've actually been, on a broader portfolio perspective, pleased with how management teams have responded with respect to either enacting price increases, repositioning supply chains, or exercising customer power that they have over their suppliers to be able to address potential pressures from tariffs. We highlighted the two names that we saw pronounced reduction in near-term operating outlooks because while overall in the portfolio we certainly seen resilience, those two companies, at least in the near-term outlooks, are going to have to have a longer road in terms of being able to exercise all those levers to get back to what I would say is more historical levels of profitability. So in order to summarize that, I would say that for the broader portfolio, it's certainly the case that we have seen management teams and sponsors able to respond proactively to the actions, outside of specific portfolio companies where our view is that that outlook is going to be longer term.

Got it. Got it. Thank you for that. One more, if I can. You focus, obviously, on core loan middle market, you know, middle market is what it used to be. But the tone this quarter from other BDCs seems to be that the competition in the core and lower market has heated up to the spreads, etcetera, has heated up at kind of an accelerated rate as we go through as we've gone through this year. Can you give us an economy? What do you think is the state of the market? You're still covenants, but are they as tight as they were? The spreads aren't necessarily where they were. Obviously, everybody's seen spread compression, but to some degree, has it exceeded your expectations for what you normally see in your core market? And when do you think that changes if it does?

Robert, Jason here. Thanks. I would say we've certainly all seen spread compression this year across the middle market, whether it's lower, core, or upper. It's certainly been exacerbated in the upper where you're really competing with the broadly syndicated loan market. And quite frankly, you can get single B type spreads in that market in the 300s. Where we're operating, I would say not a significantly notable pickup in increased competition from actual new competitors. I think there's certainly competition for deals because of lower volumes, certainly in the first half of the year. And so that has resulted in some spread compression in our end of the market as opposed to new entrants. What I would say is that I think that we're still seeing transactions, high-quality private transactions in the lower and core in the S plus 450 to 500 range versus what you might see in the upper mid in the low 400 range. And importantly, different leverage structures. Right? So in the upper mid market, you might see deals getting done at the low 400 at one or two turns more leverage than what you might see in the lower and core. So from a risk-adjusted standpoint, we like where we're investing. I do think from a spread standpoint, we have some optimism that with the demonstrated rate cuts by the Fed, we are seeing increased pipeline activity, increased dialogue. And so now we've said this before, but we do have some optimism around a real pickup in activity in 2026.

Just to add to that, across the platform, as you know, Robert, CCAP is a small part of Crescent's broader private credit platform. We've been actually quite active with a lot of activity coming in recent quarters. We've adjusted around $6 billion total over the last twelve months that have been deployed across private credit here. That's where we're picking our spots. Certainly being competitive on the rate side, but we are not really willing to compromise on how these businesses are capitalized and our corresponding documentation that goes with it. So, with that, you know, there's I think there's a strong case here for in the near term, expecting that opportunity set to be larger over the next twelve months than it was over the prior twelve months. Which I think kind of feeds to your original question as well, which is thinking about levers here to continue to drive attractive reinvestment and consistent investment income here.

Got it. Thank you.

Thank you. Your next question comes from the line of Mickey Schleien with Clear Street. Please go ahead.

Yes. Good afternoon, everyone. Sticking to the issue of spreads, looking at page eight of your presentation, it was, I'd say, gratifying to see that spreads on your new investments increased quarter to quarter. Could you help us understand what drove that increase?

Yeah. So thanks for the question. This is Henry. We've actually been able to, I'd say, over the last five quarters here, kind of hold the origination spreads at around that 500 basis points over so far. Baseline. It's gonna be a mix of incremental activity from our existing portfolio, a strong source of our origination on a quarter-to-quarter basis, add-ons at the existing portfolio companies, as well as just opportunities that we're seeing within our specific market segments that kind of tie closer to that $4.75 to $5.25 over so per band. So as you kind of think about where we play in the market as well as add-ons being a large, you know, can it be anywhere from a third to a half of our origination on a quarter-to-quarter basis. Those two dynamics are certainly providing us the ability to maintain spreads here even in this market.

So would it be reasonable to say that the spread expansion quarter to quarter did not include taking on excessive risk?

Yes. I would absolutely agree with that. We're very conscious to stay within our lane in terms of where we're underwriting with respect to security. So we haven't deviated from this focus on top of the capital structure. Everything we do historically and today remains sponsored by portfolio companies, and we're not it's never been our ethos to stretch for yield by either taking on leverage beyond what we think is prudent or expanding to company types that are outside of our comfort zone.

I understand. That's helpful. Staying with the presentation, but switching to Page 15. New equity investments represented 20% of this quarter's new investments. Could you describe what those new equity investments were? And what did you see that made them interesting to you?

Yeah. So those new equity investments are actually tied to restructurings of portfolio companies where we recapitalize part of the capital structure into both the debt and equity component. So when you think about the breakdown there, the majority of what you'll see on that page is tied to the recapitalization and change of control that we did with two portfolio companies during the quarter.

Okay. So I guess it's new in sort of quotation marks. Another question on investing. I noticed your investment in Family Dollar, which is interesting. What is your thesis there? We're getting such mixed messages on the health of the consumer, particularly at the low end of the spectrum. So wanted to understand what your thinking is there.

Yes. That loan was actually done with an equity investment that we have in an asset-based lender called White Hawk. This is a group that we've been investing in and alongside going back to 2017, across multiple vintages. Historically, they were called Great American Capital Partners. And selectively, we have participated in co-investment opportunities alongside them from time to time. So if you kind of look back at our history, some notable that would fall down a category in the past include Amyris as well as BJ Services, and Family Dollar is one of the more recent ones that we've done with them. You think about the investment thesis there, given that their focus is on asset-based lending, that is an asset-based loan where the primary collateral there is not the ongoing operations of the business. So we're not underwriting necessarily consumer demand for that specific type of retailer, but more so the hard assets that underpin the loan there. So it's something that we've done in spots historically over the last eight years or so. Never a large percentage of the portfolio, but that investment would be part of that categorization.

Okay. That's interesting. We've seen other BDCs do really well in that space. Just one final question, if I can. It's more of a, I guess, a philosophical question. It's a small position. Referring to I don't know if it's CECO or SACO. I don't know. How do you pronounce it? It's valued above par, but it's on non-accrual, which is unusual. What is the valuation reflecting there? And just philosophically, if you could explain the approach.

Yeah. So CECO is a third-party logistics provider. That company we actually restructured at the beginning or in the first half of the year, and the valuation that you see reflects its position in the capital structure as the priority revolver. As far as the accrual status of the loan goes, what that reflects is just the ultimate view here in terms of recovering the initial cost basis in that loan. CECO, in particular, is operating in one of, I would say, the hardest-hit subsectors that we've seen, which is party logistics, following the Liberation Day announcements. And as a result, there's a fair amount of near-term operating uncertainty with the business, just in terms of operating performance given some of the revenue headwinds that it's seeing both on the rate as well as the volume side. So as a result, we made that determination just based on the latest near-term outlook that we had. To the extent that changes here, it's something that we'll reevaluate. We really want to make sure that we're conservative in terms of factoring in the near-term outlook, especially for businesses that are kind of at the front lines of potential macro headwinds like a business like CECO. So that's what you'll see as far as that particular line item goes.

Thank you for that. That's helpful. Those are all my questions this afternoon. Thank you for your time.

Thank you. Your next question comes from the line of Christopher Nolan with Weidenberg Thalmann. Please go ahead.

Hi, thanks for taking my questions. Are there any non-recurring items in earnings this quarter?

Non-recurring items. Yes. Hi. I'll take that question. Certainly, in the revenue top line, I think Jason mentioned this earlier in the response to your question. Our sort of fee income is running a little bit lower than sort of the, I would say, maybe at a third, about one third of sort of the historical run rate. We only have about any of fee income, sort of non-interest fee income in revenues this quarter. But other than that, there's nothing that I would call out that's material from a non-recurring perspective. The sort of core interest income, meaning sort of cash income, PIC income, the amortization of OID, unused fees, and what we view sort of the distribution recurring distribution from the 97% of total top-line revenue. So nothing out of the ordinary or non-recurring that I would call out there.

Great. And then following up on the earlier how you guys are holding the line in terms of yields on new investments. Are you seeing more PIC or OID as components of the overall weighted yield for these deals?

This is Henry. I can comment on that. Now within our deals, the PIC component is something that we just deemphasized from the beginning. So I think a short answer on PIC is no. We've certainly seen deals out there where there's more PIC either in the form of PIC that can be toggled or just PIC premium that's added on the coupon at the beginning in order to deliver yields in excess of market. But as far as what we're originating, PIC is not a material component of the spreads underwrite for this quarter and just overall in terms of where we invest. On the OID side, I would say that OIDs generally have been tightening. You know, about a year ago, OIDs were probably kind of in the one and a half to a point of the original deal, and now that's probably 25 basis points tight of where we've seen. So that component along with just market pricing as a whole has tightened a bit. But OID is always kind of one of our upfront deal considerations that we consider as we're thinking about our investments here, and like spreads, we've seen some modest tightening there.

And I guess the final question is, it's more broad-based in terms of the lower middle market and middle market sectors. Sure, tariffs have been a headwind, but energy costs have gone down as well. And given the lower interest rates, do you think this is going to help company EBITDA multiples on deals that you're going to see or not? What's your thoughts on this?

Yeah. I think in the near term, it can potentially be a tailwind on both of those fronts. What we're seeing across our portfolio just in terms of free cash generation despite some of the tariff headwinds is that with lower borrowing costs, interest coverages are the highest we've seen in really two years since the prior rate hiking cycle began. And with the higher interest coverages kind of across the board, you have the ability potentially for borrowers to be able to service a larger quantum of debt, which allows buyers to justify larger purchase multiples. While we haven't seen that dynamic in a broad-based fashion yet, a lot of the multiples and businesses that we've seen trade in this market have really been amongst kind of the highest quality assets that have been out there. We can certainly see that being a potential tailwind coming in the coming quarters here as we see broader M&A volumes increase.

Great. Thank you.

There are no further questions at this time. I will now turn the call back over to Jason Breaux for closing remarks.

Okay. Thank you, operator. Thank you all for your time and attention here today and your support of CCAP. We appreciate it, and we look forward to speaking with you all again soon.