[Audio Gap].

[Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions].

I will now hand the conference over to your speaker, Dan McMahon, Investor Relations. .

Good morning, and welcome to Crescent Capital BDC Inc.'s June 30, 2020, quarterly earnings conference call. Please note that Crescent Capital BDC, Inc. may be referred to as Crescent BDC, CCAP or the company throughout the call..

Before we begin, I would like to remind our listeners that remarks made during the call may contain forward-looking statements. Statements other than statements of historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties.

Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in Crescent BDC's filings with the Securities and Exchange Commission. The company assumes no obligation to update any such forward-looking statement.

Please note that this call is the property of Crescent BDC. Any unauthorized rebroadcast of this call in any form is strictly prohibited..

Yesterday, after the market closed, Crescent BDC issued its earnings press release and posted an earnings presentation for the quarter ended June 30, 2020.

The presentation which is available on the company's website under the Investor Relations section will be referenced throughout today's call and should be reviewed in conjunction with the company's Form 10-Q filed yesterday with the SEC.

Unless otherwise noted, all performance figures mentioned in today's prepared remarks are as of and for the second quarter ended June 30, 2020. As a reminder, this call is being recorded for replay purposes.

Speaking on today's call will be Jason Breaux, Chief Executive Officer of Crescent BDC; and Gerhard Lombard, Chief Financial Officer of Crescent BDC..

With that, I'd now like to turn it over to Jason. .

Thank you, Dan. Good morning, everyone, and thank you for joining us today for our second quarter earnings call. We appreciate your continued interest in Crescent BDC and hope you and your families are safe and healthy. .

I'll begin today's call by briefly discussing our financial highlights for the second quarter, provide some color on our current positioning and touch on a few recent announcements. Gerhard will then discuss our financial results for the second quarter in more detail and review our liquidity profile..

So let's begin. Please turn to Slide 8, where you'll see a summary of our second quarter results. CCAP's net asset value per share increased approximately 10% in Q2 to $18.12.

Gerhard will walk through a NAV bridge in more detail, but the increase was primarily driven by a net change in unrealized appreciation specific to certain individual portfolio companies and net unrealized mark-to-market gains related to the tightening of credit spreads relative to the end of the first quarter.

This quarter's rebound represents a recovery of just over half of the NAV attrition experienced in Q1..

In terms of earnings, we reported $0.46 of after-tax net investment income per share, covering our $0.41 per share second quarter dividend.

Given our second quarter results reflect a full quarter's impact of the economic shutdown related to the COVID-19 pandemic, we're pleased with this quarter's results and our ability to deliver a stable dividend to our shareholders..

Slides 16 and 17 of the presentation provide a snapshot of our portfolio. We manage a diversified $900 million portfolio, consisting of 124 portfolio companies across 20 industries with an average investment size of less than 1% of the portfolio.

On the upper right-hand side of Slide 16, you'll see that 99% of our debt portfolio is in sponsor-backed companies.

This has been particularly beneficial over the past 1.5 quarters as we've navigated the varying degrees of impact and volatility created by COVID-19 across our portfolio in lockstep with the private equity sponsors whose companies we finance. .

The private equity owners of our portfolio companies have focused significant time, resources and capital supporting their companies to best navigate the challenges of operating in a coronavirus-impacted world. As you'd expect, we've maintained a regular and constructive dialogue with our borrowers and private equity backers during this period.

For the quarter, all but 2 of our debt investment portfolio companies, representing 98% of total debt investments at fair value, made full principal and interest payments. PIK interest represented less than 5% of total investment income for the year-to-date period. .

As of quarter-end, our total investment portfolio was carried at 95.5% of cost versus 91.0% at March 31 and 99.6% at year-end 2019. Our portfolio remains highly diversified and invested largely in resilient industries..

On Slide 17, you'll see that in line with last quarter, our top 3 industry exposures are commercial and professional services, health care equipment and services and software and services, representing 21%, 20% and 13% of the portfolio at fair value, respectively.

Our focus on constructing a defensively positioned portfolio has led to modest exposure to cyclical industries impacted the most by recent events. Energy, retailing and transportation cumulatively represent 5.7% of our portfolio's total fair value as of quarter end, with no travel or aviation exposure. .

As of quarter end, investments on nonaccrual status represented 3.9% and 2.4% of our total debt investments at cost and fair value, respectively. We are working closely with each portfolio company and its sponsor to help navigate these difficult times and to maximize the value of our investments..

Turning to our investment activity. In the quarter, we invested $26 million, which consisted of one new unitranche term loan totaling $7 million and $8 million refinancing of an existing portfolio company and $11 million across our existing revolver and delayed-draw term loan or DDTL commitments.

This compares to $60 million in aggregate exits, sales and repayments in the quarter. .

Consistent with the industry, we did see lower than average origination levels in Q2, reflective of lower private equity deal activity. Revolver and DDTL funding requests, all of which we fully funded to date, also slowed materially in the quarter following a very active March. In Q2, we received $12 million of revolver and DDTL repayments. .

We remain focused on actively managing and supporting our current portfolio while continuing to selectively underwrite high-quality new opportunities.

We believe that having a modest leverage profile and ample dry powder will be beneficial for CCAP's return on capital as we are seeing superior terms and new opportunities compared to pre-COVID transactions. .

Today, spreads are generally wider by 100 to 200 basis points and fees or OID are higher by 1% to 2% while leverage and loan-to-value ratios are lower than 6 months ago. Often, call protection is also better.

And this is across a deal pipeline of, by and large, high-quality middle market businesses that have performed well through the current pandemic..

To provide some color on recent activity so far in the third quarter, we closed on 3 new investments and one add-on for an existing investment, totaling about $30 million of committed capital.

These are all private equity-backed, traditional first lien or unitranche loans at 600 to 700 basis point spreads, each with a 1% LIBOR floor and OIDs between 2% and 3% with strong call protection. In addition, leverage levels remain low, with LTV for these transactions averaging 32%. .

It's important to flag that CCAP participated alongside the broader Crescent platform on all 4 investments. .

CCAP benefits from the origination and underwriting capabilities of the broader $28 billion Crescent Capital Group platform. While CCAP committed approximately $30 million of these transactions, the broader Crescent platform committed nearly $250 million in the aggregate.

Looking forward, the deals pipeline remains robust with 1 new investment recently signed up. We're now seeing an attractive pipeline of new investment opportunities given today's market dislocation. .

Before I turn it over to Gerhard, I wanted to touch on a few more updates. First, our Board has declared a $0.41 per share quarterly cash dividend for the third quarter of 2020.

Second, on the heels of Kroll Bond Rating Agency assigning us investment-grade issuer and senior unsecured debt ratings of BBB- in May, we announced on July 30 that we agreed to issue $50 million aggregate principal amount of 5.95% senior unsecured notes due July 2023. .

The notes will intentionally be issued in 2 separate $25 million closings, the first of which occurred on July 30. We expect the second closing to occur on or before October 28, which is beneficial in terms of maximizing net investment income by managing our interest expense.

This financing helps to diversify our funding sources, provides us with a more flexible capital structure and allows us to lower our utilization under our secured revolving facilities. .

As of quarter end, our debt-to-equity ratio was 0.78x, well below our longer-term target of 1.0 to 1.3x. And assuming the full $50 million of proceeds are used to pay down one of our existing credit facilities, our pro forma debt funding mix improves from 92% secured as of March 31 to 83% secured as of June 30.

As we stated in the past, the IG rating and this inaugural unsecured issuance are important initial steps in CCAP's evolution as a public BDC, with the enhanced flexibility particularly beneficial given the attractive investment pipeline..

Finally, the expiration of the first 1/3 of our share lockup occurred on August 3, more than doubling our public float from 5.2 million to 12.9 million shares.

As a reminder, 100% of our pre-listing stockholders other than those Alcentra Capital stockholders who received Crescent BDC shares in connection with the Alcentra acquisition, were subject to a lockup on approximately 23.2 million shares outstanding at the time of our listing on February 3.

The second tranche of locked up shares will become freely tradable on October 30, with the final tranche becoming freely tradable on February 2, 2021..

I will now turn it over to Gerhard to cover additional details on the quarter.

Gerhard?.

Thank you, Jason. I will review our income statement performance and highlights, NAV unrealized and realized activity as well as leverage and liquidity..

Please turn to Slide 9, where you can find our financial highlights. For the second quarter, net investment income was $0.46 per share, exceeding our second quarter dividend of $0.41 per share in comparison to NII of $0.44 per share for the first quarter, also over-earning our dividend. Change in unrealized gains per share net of taxes was $1.59. .

Approximately 62% of the net unrealized gain was attributable to the tightening of credit spreads on performing investments while the remaining 38% was primarily represented by credit-related unrealized gains on 2 investments which had meaningful near-term credit and outlook improvements relative to the first quarter.

Within the 62% related primarily to the tightening of credit spreads, fair value marks on broker quoted positions increased by approximately 4 points quarter-over-quarter while internally marked positions increased by less than 2 points over the same period.

Separate from those 2 categories, approximately 1/3 of spread-related unrealized gains came from our joint venture, which invests in a diversified pool of broadly syndicated first-lien bank loans..

We sold $37 million of liquid loans at cost for total proceeds of $36 million, recognizing $1 million or $0.04 per share in realized losses. These sales enhance our liquidity and positions us favorably to take advantage of current market conditions for capital deployments.

The sold investments generally were syndicated loans with no floors or with below-market spreads that were already targets for rotation out of the portfolio. .

For the second quarter, total investment income was $19.3 million, up from $18.8 million in the previous quarter. Net expenses inclusive of taxes were $6.4 million, down from $7.3 million in the previous quarter primarily due to lower interest rates and other debt financing costs..

Moving to the balance sheet. Please turn to Slide 14, which contains a net asset value per share bridge. Reported net asset value per share at quarter end was $18.12, an increase of $1.60 or 10% compared to the prior quarter. Walking through the components, we added $0.46 per share from net investment income against the dividend of $0.41 per share.

As mentioned before, unrealized depreciation net of taxes was $1.59 per share and the primary driver of the NAV change in Q2.

Investments at fair value increased by 1% in the quarter from $883 million to $895 million as $26 million in gross deployment, coupled with $44 million of unrealized appreciation, was offset by $60 million of principal repayments and sales and $1 million in net realized losses and taxes..

Turning to Slide 18. As of June 30, the weighted average yield on our income-producing securities at amortized cost was 7.9%, unchanged quarter-over-quarter.

As mentioned before, we opportunistically realized a number of lower-yielding liquid investments in the quarter which improved our weighted average floating rate spread, which was offset by the decline in LIBOR.

97% of our debt investments bear interest at a floating rate and had an average LIBOR floor of approximately 81 basis points as of quarter end, well above the 3-month LIBOR of 25 basis points today but below 3-month LIBOR for most of April..

Moving to the right-hand side of our balance sheet. Please turn to Slide 21. Our debt capital base is supported largely by longer-dated financing, with 96% of the principal amount of debt outstanding maturing after July 2023.

From a liquidity perspective, as of quarter end, we had $166 million of undrawn capacity on our credit facilities, subject to leverage, borrowing base and other restrictions.

Pro forma for the $50 million of unsecured notes that Jason touched on, this means we have over $200 million of total undrawn capacity before taking into account any portfolio activity after June 30..

Our reported debt-to-equity ratio was 0.78x as of June 30 compared to 0.92x at March 31. We continue to be in compliance with the terms and covenants of each of our debt agreements. And as a reminder, we obtained stockholder approval for reduced asset coverage in May so we have a significant cushion to our regulatory asset coverage ratio of 150%. .

As Jason mentioned, our Board of Directors declared a regular third quarter cash dividend of $0.41 per share which is consistent with the regular quarterly dividend paid in the second quarter. This third quarter dividend is payable on October 15, 2020, to stockholders of record as of September 30, 2020..

With that, I'd like to turn it back to Jason for closing remarks. .

Thanks, Gerhard. We'd like to thank everyone on the call for your continued interest and time today. .

In closing, broadly speaking, we believe that our portfolio has been resilient in the current economic environment. We continue to work hard to protect our current portfolio of investments. And our more flexible capital structure will allow us to selectively pursue attractive new opportunities to grow our asset base over time..

Operator, please open the line for questions. .

[Operator Instructions] Our first question comes from Robert Dodd of Raymond James. .

Congratulations on the quarter, both earnings and NAV rebound. You highlighted in your prepared -- a couple of questions, by the way. You highlighted in your prepared remarks, Jason, that, I think, some portfolio companies were marked up separate from tighter spreads also driving markups.

So could you give us any color on themes that kind of drove that?.

And then also on Slide 19, if I look at -- your 3 and 4 rated investments went up a couple of hundred basis points.

Anything that you can tell us there on -- I mean it's a small change, but on industries that saw that incremental deterioration from where you thought they would be in March?.

Robert, thank you for the question. This is Jason. On your first question around individual portfolio companies, I wouldn't say there's anything thematic going on there. Those movements pertain to 2 companies in particular.

And while I can't really get into specifics on what's going on at each of those companies, I will say that the companies are Conisus, where we hold preferred equity and common equity; and Black Diamond, where we hold a first-lien term loan. Both of those situations, the business outlook has improved significantly. .

Got it. And then -- yes, go ahead. .

Sure. On your second question around risk ratings, what I would say on that is, as a reminder, risk rating our assets each quarter is subjective, it's qualitative. There's no real guidance to ensure comparability amongst the filers.

And as we look to risk rate our portfolio for June 30, we looked at our investments through multiple lenses, the same way we did in the first quarter.

We wanted to see how the COVID-19 pandemic would impact the portfolio companies and bucketed those impacts into severity and into categories, such as elective procedure deferrals and noncritical medical for health care names, companies relying on large event gatherings, limited or reduced access to customers, very small piece, but energy-related and then any disruption to the supply chain and as we took those risk buckets and overlaid the financial condition of each of those portfolio companies, on top of that, to arrive at a list of companies, which we thought risk was elevated relative to underwrite.

.

While I don't really get into individual drivers of this quarter's change, what I'd say is that we did not see a material change in our internal ratings. The percentage which is 3 or 4 rated went to 22.6%, as you said, from about 20% in the prior quarter.

And the lion's share of the portfolio continues to be 1 or 2 rated, meaning performing in line with or above expectations. Overall, I think the approach that we took in Q1 and we continue to take was a conservative approach in our quarterly risk ratings.

And as I've mentioned in prior remarks, broadly speaking, I think we believe that our portfolio has been resilient in the current economic environment. .

I appreciate that color. I got one more, not related to that. The deployment outlook, pipeline, et cetera, you gave some color in your prepared remarks. I mean one thing, we see 5% of your portfolio right now is in Europe, vast majority is in the U.S.

Are you seeing any opportunities out of the London office? Or if you can give any color about how that -- the pipeline there is rebounding versus the pipeline in the U.S. and if there's any material bifurcation in term and spreads or OID or whatever between, say, Europe and the U.S. and where the opportunities are to deploy capital right now. .

Thanks, Robert. We have a sizable team based in London that originates and underwrites European opportunities. I would characterize the sort of environment as fairly comparable to what we are seeing here in the U.S.

in the sense that volumes of opportunities are picking up, albeit still well below what I would characterize as a more normalized level of volume.

The quality of the flow, I think, is pretty good in the sense that those companies that are actually able to tap private credit right now are generally less impacted or not impacted by the current pandemic. So stable businesses over the last 6 months as well as prior to that.

From a term standpoint, I would say also comparable to here in the States in the sense that economic terms are more favorable now than they were 6 months ago for lenders and leverage and loan-to-value metrics are lower than they were roughly 6 months ago, which is also favorable for lenders. .

Okay. I appreciate that color. Those are my questions. Congratulations on the quarter. .

Thank you. .

I'm showing no further question at this time. I'll turn the conference back over to Jason Breaux for any closing remarks. .

Great. Well, thank you, operator. Thank you, everyone, for your time and interest in Crescent BDC. Know that we continue to be hard at work on the existing portfolio and scaling the vehicle in a measured fashion with good credits. We'll speak with you all soon. .

Ladies and gentlemen, this does conclude today's conference. Thank you for participating. You may all disconnect. Have a great day..