CCAP - NASDAQ

Good morning, and welcome to Crescent Capital BDC, Inc.'s Fourth Quarter and Year Ended December 31, 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 also note that past performance or market information is not 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 fourth quarter and year ended December 31, 2025, and posted a presentation to the IR section of its website at www.crescentbdc.com. The presentation should be reviewed in conjunction with the company's Form 10-K 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 results and outlook and follow that with some commentary on the current market environment. In terms of fourth quarter earnings, we reported net investment income of $0.45 per share as compared to $0.46 for the prior quarter. Once again, our earnings over-earned the quarterly dividend. Consistent with our dividend policy and fourth quarter earnings, our Board declared a quarterly cash dividend of $0.42 per share for the first quarter of 2026, payable on April 15, 2026, to stockholders of record as of March 31, 2026. Net asset value was $19.10 per share as of December 31, compared to $19.28 per share as of September 30. This decline reflects unrealized losses stemming from certain portfolio companies. While NAV per share has declined over the past several quarters, reflecting market volatility and certain credit-specific marks during 2025, we believe it is important to view our performance over a longer horizon. The broader portfolio remains fundamentally healthy with stable credit metrics, strong sponsor support and performance in line with our underwriting expectations. Since inception, CCAP has maintained one of the more stable NAV profiles across the public BDC sector, supported by our disciplined underwriting, diversified positioning and a focus on senior secured sponsor-backed companies, which we have maintained throughout our history. Capital preservation remains core to our strategy, and we are actively managing the portfolio to maintain consistent long-term NAV stability. I'd now like to touch on our outlook for CCAP's earnings power and dividend sustainability. First, while lower base rates have impacted yields across the space, CCAP remains well positioned today. For the fourth quarter, net investment income covered our base dividend by 107%. We ended the year with net debt-to-equity of 1.20x, below the 1.30x upper end of our target range, preserving flexibility to prudently grow the portfolio and deploy capital through Crescent's origination platform. Crescent's private credit platform has been active with over $6.5 billion of capital committed in 2025, including over $1.7 billion during the fourth quarter. Our existing portfolio remains one of our most active origination channels with add-ons representing over half of our transactions over the same period. We are also encouraged by the recent increase in transaction activity in Q4 and early 2026. As origination and refinancing volumes normalize, structuring fees and accelerated amortization income can serve as incremental contributors to earnings. In addition, our spillover income of approximately $1.16 per share, which is nearly 3x our base dividend continues to provide meaningful support as we navigate the current rate transition. All of that said, we fully recognize the earnings headwinds facing the entire BDC space related to forward base rate expectations. As such, we and our Board are actively reviewing a range of options to ensure CCAP is positioned to deliver durable earnings and attractive returns across market cycles, and we expect to provide a more fulsome update on our plans and any actions stemming from that review in May when we report next quarter's results. We look forward to updating you further next quarter. Let me now shift gears and discuss what we are seeing in our market. We are operating in an increasingly competitive private credit market. Capital formation across direct lending strategies has remained strong with a growing number of lenders competing for high-quality sponsor-backed transactions. This has resulted in tighter spreads and evolving deal structures, particularly in the broadly syndicated and upper end of the middle market. This environment, maintaining underwriting discipline and strong structural protections remains essential. Within private equity, the past 3 years have been characterized by subdued exit activity with sponsors favoring recapitalizations and dividend transactions over traditional M&A to generate liquidity in a muted market. This has created a backlog of portfolio companies awaiting monetization. As rate pressures ease and financing markets stabilize, we are seeing sponsors selectively reengage in the M&A market to deliver liquidity to their limited partners. At the same time, elevated redemption activity in the perpetual nontraded BDC space may potentially contribute to a more balanced supply-demand dynamic. Overall, we continue to view the long-term outlook for private credit favorably. Disciplined underwriting, thoughtful selectivity and active portfolio management remain essential to driving strong performance. With that, I'll turn it over to Henry to provide additional detail on our portfolio and recent investment activity. Henry?

Thanks, Jason. Please turn to Slides 13 and 14. We ended the year with approximately $1.6 billion of investments at fair value across a highly diversified portfolio of 184 companies with an average investment size of approximately 0.6% of the total portfolio. We believe disciplined position sizing is one of the most effective tools for managing idiosyncratic credit risk. Broad diversification across industries, end markets, sponsors and issuers help limit concentration risk and support durable performance across market cycles. Since inception, our portfolio has consisted primarily of first lien loans representing 91% of the portfolio at fair value at year-end. Our investments are supported by well-capitalized experienced private equity sponsors with 99% of our debt portfolio in sponsor-backed companies as of year-end. At origination, the weighted average loan-to-value of the portfolio is approximately 40%, underscoring the meaningful equity buffer beneath us. We believe conservatively capitalizing the portfolio companies is a key driver of downside protection and recovery potential across cycles. It is also worth noting that 71% of our portfolio includes covenants, far higher than in the upper middle market or broadly syndicated loan market. We view covenants as an important risk management tool, providing earlier visibility into potential issues and a structured framework to engage early with sponsors if performance softens. In terms of software and services, we have been investing in the sector for over 15 years, applying a consistent underwriting approach throughout. Our focus has always been on durable cash flow generating businesses that deliver mission-critical enterprise embedded software with high switching costs, where the cost of failure or disruption is prohibitively high for customers. This long-standing discipline has guided how we underwrite technology risk across multiple innovation cycles, and we believe our approach is inherently defensive against AI-driven disintermediation risk. Today, software and services represent approximately 20% of our portfolio, and we continue to apply the same cash flow-based underwriting principles that have guided us for decades. Consistent with this approach, we do not invest in any annual recurring revenue or ARR loans. Please turn to Slide 15, where we highlight our recent activity. Gross deployment in the fourth quarter totaled $71 million, as you can see on the left-hand side of the page. During the quarter, we closed 5 new platform investments totaling $29 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 490 basis points, with Crescent serving as lead or agent on all the new platform investments. The remaining $42 million came from incremental investments in our existing portfolio companies. The $71 million in gross deployment compares to approximately $78 million in aggregate exits, sales and repayments, resulting in net realization of approximately $7 million for the fourth quarter. Turning back to the broader portfolio, please flip to Slide 16. The weighted average yield on our income-producing securities at cost decreased 40 basis points quarter-over-quarter, ending the year at 10%. This decline was primarily driven by lower base rates following the recent rate cuts. Importantly, we remain disciplined in our deployment approach, prioritizing credit quality, structural protections and long-term risk-adjusted returns over maximizing headline yield. The weighted average interest coverage of the companies in our investment portfolio at year-end improved to 2.2x, demonstrating durability and strength within the earnings and 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 1 and 2 rated investments, representing names that are performing at or above our underwriting expectations, decreased from 87% to 86% quarter-over-quarter, continuing to represent the lion's share of our portfolio at fair value. As a percentage of debt investments at cost and fair value, nonaccruals increased from 3.3% and 1.6% as of September 30 to 4.1% and 2% as of December 31, driven by the addition of 2 new nonaccrual investments during the fourth quarter. It is worth noting that in January, one nonaccrual investment restructured and another was fully realized via a sale, which decreased pro forma nonaccruals to 1.4% and 3.2% of debt investments at fair value at cost. Given our highly diversified portfolio and acquired assets, we continue to have a nonaccrual rate that is higher than our long-term average. We are actively managing these portfolio investments and note that these are driven by idiosyncratic company-specific issues. The broader portfolio remains healthy, and we continue to observe demonstrable growth across the majority of our portfolio companies. With that, I will now turn it over to Gerhard.

Thanks, Henry, and hello, everyone. For the fourth quarter ending December 31, 2025, we reported net investment income of $0.45 per share as compared to $0.46 for the prior quarter. This decrease was largely driven by lower interest income due to lower reference rates. Turning to the balance sheet. As of December 31, 2025, our investment portfolio at fair value totaled $1.6 billion, consistent with the prior quarter. Total net assets were $706 million and NAV per share was $19.10, a decrease from $19.28 at the end of the third quarter due primarily to net unrealized depreciation in the portfolio. Let's shift to our capitalization and liquidity on Slide 19. As a reminder, in October, we proactively priced $185 million of senior unsecured notes structured across 3 tranches with a delayed draw feature. We intentionally incorporated the delayed funding feature to align proceeds with our 2026 maturity schedule, allowing us to efficiently address our unsecured maturities while minimizing negative carry. The first 2 tranches totaling $135 million closed on February 17. The final $50 million tranche will fund in May in advance of additional 2026 maturities. Pro forma for this activity, over 90% of our committed debt now matures in 2028 or later, meaningfully extending our maturity profile and enhancing balance sheet flexibility. We remain in active dialogue with our underwriting partners regarding additional unsecured issuance as we continue to thoughtfully manage our maturity ladder and optimize our capital structure over time. The weighted average stated interest rate on our total borrowings was 5.83% as of year-end, down from 5.99% quarter-over-quarter due to lower base rates. Our quarter end debt-to-equity ratio was 1.25x or 1.2x net of balance sheet cash, up from the prior quarter, but within our stated target range of 1.1x to 1.3x. With $242 million of undrawn capacity subject to leverage, borrowing base and other restrictions and over $30 million of cash and cash equivalents as of year-end, we have sufficient liquidity to selectively further fund investment activity while maintaining a debt-to-equity ratio inside our target range. As Jason noted, for the first quarter of 2026, our Board has declared our regular dividend of $0.42 per share. And with that, I'd like to turn it back to Jason for closing remarks.

Thank you, Gerhard. In closing, while 2025 presented a more dynamic environment across both rates and credit markets, we believe CCAP enters 2026 from a position of strength. Our portfolio remains highly diversified and predominantly first lien, supported by experienced sponsors and meaningful equity cushions. We have maintained prudent leverage, enhanced the duration of our liabilities and preserved liquidity to navigate a range of market conditions. At the same time, our Board and management team are thoughtfully evaluating additional steps to further strengthen our earnings profile and long-term return framework in alignment with shareholder interest. Private credit continues to offer compelling opportunities for disciplined lenders with scale and selectivity. Crescent has been investing in private credit and delivering consistent returns to our investors across multiple cycles over the past 30 years. CCAP's focus remains clear: protect capital, enhance sustainable earnings power and deliver attractive risk-adjusted returns for shareholders over the long term. We appreciate your continued support and look forward to updating you next quarter. Operator, please open the line for questions.

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

On -- I know you don't really want to talk about this because you said you give us more information next quarter, but you opened the door to questions about exactly what you'll be reviewing with the Board and long-term position, et cetera. I mean, is this -- are you talking about like a discussion of like dividend structure? Because it's obviously in context of long-term dividend or more strategic kind of initiatives as you also mentioned in context of like an -- so I know you will next time, but can you give us like a skeleton to hang some thoughts on at least about what kind of things you mean when you made that comment?

Go ahead, Henry.

Robert, this is Henry. Just -- I think I could start off by providing that our review here is really focused on long-term earnings durability and creating a proper alignment with shareholders. What that includes with respect to your question about a skeleton here is it includes an evaluation of our fee structure as well as our base dividend level relative to forward earnings expectations. As we alluded to, we'll plan to have more detailed commentary on both going forward in the following quarter here. But what I will say is that we believe that we're positioned well currently for near-term stability. We're operating from a position of strength today by over-earning the dividend. And what we really want to do here is proactively adapt to what we are potentially expecting to be a lower rate environment, which obviously has implications for us as a predominantly floating rate asset base. And as a result, in terms of kind of the key focus areas, those are the 2 that I would point you to as we just think about this broader review.

Got it. Very helpful. On the -- one other quick one and then another [ one ]. On -- in January, you said there was another [ call ] exit and one was sold. Was it sold at the mark or repaid at par? Or can you give us -- I mean, we'll see it eventually, but -- and that obviously lowered nonaccruals fairly significantly, I think.

Yes. The investment was realized at close to the mark.

Got it. One second. On the -- so then talking about like the kind of the future earnings of the business. I mean, yes, base rates coming down. It sounded like you might be a little bit optimistic that maybe spreads will widen depending on fund flows and other things. Can you give us more thoughts there? I mean, if spreads do widen, how optimistic are you that the activity levels stay robust? Because they've started to pick up a little bit, but partly that's because spreads have been tight. I mean, can you kind of reconcile that thought for us?

Yes. I'd say on the latter point, so we -- the spreads, and you could see this in terms of where we've been originating new investments, have largely been consistent within that 475 basis points to 500 basis points over SOFR context for new first lien and new tranche investments, I'd say for the better part of the last 3 to 4 quarters. And in conjunction with that stability here, we've certainly seen, despite that we're still at historical lows in terms of LBO activity, that activity really start to creep up towards the end of last quarter and also at the beginning of this year. We certainly think that as deal activity continues, there is potential for opportunity to capture -- potentially capture excess spread here in certain pockets where we're seeing a little bit more, I would say, price discovery. But more broadly, I would say that in the near term, the expectation here is, it does look like spreads have stabilized for high-quality assets that are first lien in that kind of 475 basis points to 500 basis points over SOFR context. In terms of just broader LBO activity as a whole, the year did start off quite active, and we were pleased with how we were seeing deployment to the beginning of the year. I think just given more broadly what's going on, we're watching closely how the financing markets react here as well as the broader LBO markets react. But I would say that we certainly had an optimistic start in terms of the pipeline to the year.

Your next question comes from the line of Mickey Schleien with Clear Street.

Yes. Just a couple of questions from me. Could you give us a little bit more color on the main drivers of the realized gain during the quarter and the unrealized losses?

Mickey, thanks for the question. The main driver of realized gain was an investment that was sold during the quarter. We had an investment that was previously on nonaccrual several years ago, MTS that we ended up realizing above our cost basis. So that transaction closed during the fourth quarter. In terms of the unrealized losses, the largest driver this quarter were related to our 2 investments that we placed on nonaccrual this quarter [ Generate ] and Transportation Insight. The former relates to an investment that the outlook for the business has fundamentally -- or has certainly degraded. And as a result, we market accordingly. And then Transportation Insight is an investment that we've spoken about the sector in the past, but is indexed to the third-party logistics sector, and we continue to see challenges in that space. So that's been the other large driver on a quarter-to-quarter basis.

I understand. And if you could just repeat the pro forma nonaccruals as of the activity in January? I didn't get a chance to write it down quickly enough.

Yes. It's approximately 100 basis points on cost of nonaccruals that we are expecting to come out of the portfolio. So it's on a pro forma basis, 1.4% of fair value and 3.2% of cost.

Terrific. And lastly, at a high level, can you give us some background on the rationale for rotating proceeds from portfolio repayments into new investments instead of taking advantage of deep discount to NAV that the stock is offering?

Yes. I think I want to remind you that the current buyback program does remain in place, and we have been buying back shares in the market. When we announced our repurchase program last year, one of the key considerations with respect to our buyback program is weighing the buybacks in relation to what we're seeing in the investment pipeline. As stated at that time, our goal here with CCAP is to make investments in private credit investments that provide durable long-term income for shareholders. And how we think about deploying excess capital here as we get reinvestments is weighing that against our pipeline and determining the relative attractiveness of new deals that we have on our investment pipeline relative to just simply creating or simply providing incremental ROE vis-a-vis share repurchases. And I think what we've seen with just the quality of the investments in the pipeline today is that there's still a lot of benefit in terms of being able to provide that durable income by reinvesting proceeds. So as a result, we're taking a balanced approach here where we're still continuing to execute on our buyback plan that we initially announced here, but we are maintaining the overall asset base and continuing to invest in new investments as they come through the pipeline.

Okay. I understand. And lastly, you've noted that you may be examining the dividend policy down the road. But as we sit today, is the supplemental dividend policy still in place?

Yes, that's correct. The supplemental dividend is still in place. As a reminder, we do have a measurement test that is put in place with respect to the supplemental dividend. And as a result of that measurement test this quarter, there will not be a supplemental dividend that is paid related to Q4 earnings, but that construct remains in place.

And the constraint is probably related to declines in NAV. Is that correct?

That's correct. It's a 2-quarter look back with respect to NAV on the supplemental measurement test.

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

Henry, in your comments, you indicated that software and services is 20% of the portfolio. On Page 14, it says 15%. Did you just misspeak? Or was there a change in exposure there?

The software and services as a total of our portfolio just based on the industry breakdown is -- it's 20%. Is there -- was there a specific -- or sorry, which page are you referring to, Chris?

I believe Page 14 of the deck. I'm looking at the...

I believe that's...

I might be looking upper right-hand. [ Don't know ]. It could be -- there's another section that has a similar color. So it could be my mistake.

Yes. I'm looking at our stats here, and it's 20% on Page 14.

Okay. No problem. On this...

15% is commercial and professional services.

Got it. They're shaded sort of similarly. Okay. On the topic of software and services, is the plan -- is -- does the firm still intend for any of those maturing investments to reinvest into software or to lower the exposure going forward?

Yes. It's a good question. With respect to software -- there's a couple of comments that I ought to make just with respect to, first, the performance of our software investments. And then second to your -- more directly to your question, the underwriting approach and the outlook. What we've seen within our software portfolio to date is that the performance has been quite strong. We're seeing both revenue and EBITDA growth across our portfolio within software as well as demonstrable deleveraging that has coincided with strong fundamental performance there. As you think about how we underwrite software, and we made this comment earlier, but this is a sector that we've been investing alongside our sponsors for over 15 years. Disintermediation has been a critical component of our underwriting thesis from the very beginning of investing in this space. And what we really do look for here is software that demonstrates mission-critical system rules, deep workflow integration, demonstrating a system of record type value proposition as well as software that operates in highly regulated end markets where there is just a high cost of failure. We also really do focus here on the actual value proposition that's being provided to customers, not so much whether or not it's just difficult for the software to be replaced, but do the customers actually like the product they're using? And are we seeing supporting trends in those software investments via -- vis-a-vis the retention stats? Our experience has demonstrated that these attributes tend to provide durable cash flows in these investments. And as a result, to the extent that we do see new software investments that exhibit these characteristics, we will continue to find a home for these in our portfolio. And we think that they certainly provide good credits to add to our portfolio today. A couple of other notes I'll make here with respect to software is when you think about our software investments, we are in a first lien position, and we are not the equity. And why that's important is we have an equity cushion beneath us that's supported by cash contributions from our private equity sponsors. And the other piece that I note here is -- and I think this is particularly of importance to us just in the market that we're in today is we do not do any ARR loans. We don't do structured loans as PIK DDTLs. So we're not just focused on the enterprise value of the underlying software companies. We're also focused on the current cash flows, what's available to service our debt and in situations that may require and what's available to delever our capital structure and reduce our risk. So we continue to think that there is attractive opportunities here. And with the shakeout that's happening in the broader marketplace, there will continue to be so. But we want to really articulate here that the focus and what's allowed us to have success investing in the space historically, we will continue to maintain that discipline. And it's one that served us well historically and one that we think will continue to serve us well going forward.

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

Okay. Operator, thank you. Once again, everyone, we appreciate your time today and your interest in CCAP, and we look forward to providing you with another update for our first quarter earnings in May. Thanks all.