Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2020 Crescent Capital BDC Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference may be recorded. I'd now like to hand the conference over to your host today, Dan McMahon, Head of Investor Relations. Please go ahead, sir..

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

Before we begin, I'd 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 CCAP's filings with the Securities and Exchange Commission. The company assumes no obligation to update any such forward-looking statements.

Please note that this call is the property of CCAP. Any unauthorized rebroadcast of this call in any form is strictly prohibited. Yesterday, after the market closed, CCAP issued its earnings press release and posted an earnings presentation for the third quarter ended September 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 third quarter ended September 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 CCAP; and Gerhard Lombard, Chief Financial Officer of CCAP.

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

first, our Board has declared a normal $0.41 per share quarterly cash dividend for the fourth quarter of 2020; second, on October 28, we closed on the second $25 million issuance of unsecured notes initially announced in late July. Recall, we agreed to issue $50 million aggregate principal amount of 5.95% senior unsecured notes due July 2023.

The notes were intentionally issued in 2 separate $25 million closings to manage interest expense. The 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.

And finally, the expiration of the second 1/3 of our share lockup occurred on October 30, increasing CCAP's public float meaningfully from approximately 12.9 million to 20.6 million shares.

As a reminder, 100% of our pre-listing stockholders, other than those Alcentra Capital Corporation stockholders who received CCAP 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 third and final tranche of locked up shares will become freely tradable on February 2, 2021. While we are pleased with the dialogue we've had and continue to have with investors since our public listing in February, in our view, the current stock price does not reflect the true value of the portfolio we have constructed.

We expect that an enhanced float will, over time, contribute to greater average daily trading volume in CCAP stock and allow for a broader universe of relevant institutional investors to more easily transact.

Additionally, we believe that Sun Life's stock purchase commitment and a second Crescent employee 10b5-1 program, which brings total employee commitments to approximately $5 million and began purchasing CCAP shares in mid-October, will create additional demand in the stock.

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 6, where you can find our financial highlights. For the third quarter, net investment income was $0.43 per share, exceeding our third quarter dividend of $0.41 per share.

The change in unrealized gains per share net of taxes was $0.95. Fair value marks on debt investments increased by approximately 2 points, largely attributable to the tightening of credit spreads on performing investments.

Separately, approximately 13% of the change in net unrealized gains came from our joint venture, which invests in a diversified pool of broadly syndicated first lien bank loans and thus benefited from the BSL recovery experience in the third quarter.

For the third quarter, total investment income was $18.7 million, down from $19.3 million in the previous quarter due primarily to a decrease in nonrecurring other income.

The $18.7 million of total investment income was comprised of $16.5 million from interest income, $1.2 million from dividend income and $1 million from other and paid-in-kind income.

Net expenses, inclusive of taxes, were $6.5 million compared to $6.4 million in the previous quarter, primarily due to higher operating costs resulting from the growth in CCAP's aggregate portfolio fair value, offset by a decrease in borrowing costs due to a decrease in LIBOR. Moving to the balance sheet.

Please turn to Slide 9, which contains a net asset value per share bridge. Reported net asset value per share at quarter end was $19.07, an increase of $0.95 or just over 5% compared to the prior quarter. Walking through the components, we added $0.43 per share from net investment income against the dividend of $0.41 per share.

As mentioned before, unrealized depreciation, net of taxes, was $0.95 per share and the primary driver of the NAV change in Q3.

Investments at fair value increased by 7% in the quarter from $895 million to $961 million as $84 million of gross deployment, coupled with $28 million of realized and unrealized net appreciation, was offset by $48 million of principal repayments and sales. Turning to Slide 15.

As of September 30, the weighted average yield reached on our income-producing securities at amortized cost was 7.9%, unchanged quarter-over-quarter, 98% of our debt investments bear interest at a floating rate and had an average LIBOR floor of approximately 81 basis points at quarter end. Moving to the right-hand side of our balance sheet.

Please turn to Slide 18. Our debt capital base is supported largely by longer-dated financing, with over 90% of the principal amount of debt outstanding maturing after June 2023.

From a liquidity perspective, as of quarter end, we had $189.5 million of undrawn capacity across our unsecured notes and SPV Asset and Corporate Revolving Facilities, subject to leverage, borrowing base and other restrictions. Our reported debt-to-equity ratio was 0.79x as of September 30 compared to 0.78x at June 30.

We continue to be in compliance with the terms and covenants of each of our debt arrangements and have a significant cushion to our regulatory asset coverage ratio of 150%.

As Jason mentioned, our Board of Directors declared a regular fourth quarter cash dividend of $0.41 per share, which is consistent with the regular quarterly dividend paid in the third quarter. The dividend is payable on January 15, 2021, to stockholders of record as of December 31, 2020.

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

Thanks, Gerhard. We continue to work hard to protect our current portfolio of investments while selectively pursuing attractive new opportunities. Overall, we are pleased with both our origination activity and financial results this quarter. Looking to the future, our strategy remains the same.

We will continue to focus on deploying capital into attractive opportunities to optimize our portfolio performance and generate a strong recurring earnings stream while focusing on preservation of capital. We are excited about our partnership with Sun Life and the enhanced opportunities that it will provide for our stockholders.

We would like to thank all of you for your confidence and continued support. And with that, operator, please open the line for questions..

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

I have a couple of questions. I guess I'll start off with the easy one first. On the other income, I mean, you mentioned, Gerhard, that obviously it was -- contributed to it coming down, and it was essentially 0 this quarter. Is there anything -- obviously, it can be volatile, it's tough to predict.

Is there anything structurally in the portfolio where we should expect that number to be perpetually lower than some of the numbers we've seen historically? Or is it just a random event this quarter that it happened to be zero?.

Yes. Robert, so nothing structural. I'd say other income on the P&L generally represents nonrecurring nonyield-related revenue, for example, amendment fees, consent fees and structuring fees.

So we did see a large number of COVID-related amendments in the second quarter that drove that large second quarter number, and that trailed off in the third quarter. Having said that, we don't always charge fees on amendments. There are a number of nonmonetary ways that we can enhance the quality of a debt investment.

So tighter or enhanced covenants, better economics in the form of higher spreads and prepayment terms and so on. You are correct, Q3 did have an unusually low level of other income, most likely due to the fact that we proactively identified and entered into amendments during the second quarter.

However, we do expect that future quarters will have some level of other income. It's just hard to predict for a specific quarter, what the level of other income will be, given that this is mostly nonrecurring..

Got it. Got it. So on the Sun Life deal, there was -- obviously, Sun Life is an extremely large platform. And when it was announced, there was talk about them, with Crescent, expanding products.

When or if can we expect -- or would there be any intention to put some of those additional opportunities into the BDC? Obviously, asset back was mentioned, some others. Some might be BBC appropriate, some might not be.

But what could we expect from the portfolio? I mean, obviously, it's not going to change next quarter, but right now, it's, for lack of better term, plain vanilla, first lien unitranche, and that's for the most part.

How could that -- how would you expect that to evolve over time, given the new Sun life relationship?.

Robert, it's Jason. Thanks for the question. We're -- as we discussed on the remarks, we are very excited about the transaction. The $750 million of seed capital can be used to seed new strategies, anchor existing funds as well. I suspect that will play out over the course of time in both areas. As of now, the transaction has obviously not yet closed.

So I'm not sure there's much I can say at this point other than to say that we have grown Crescent over the last 30 years in a methodical way, always sort of focusing on credit, certainly, and on yield and capital preservation. And I think that will continue to remain sort of the core discipline for us.

You mentioned asset base, that certainly could be an area of pursuit. But we're not going too far astray from what we do and what we've done for the last 30 years..

Got it. I appreciate it. If -- one more, if I can. On -- obviously, Sun Life intend to buy stock in the open market, employees are doing the same.

Has the Board -- given where the stock is trading, has the Board contemplated just a traditional buyback program for the BDC, which obviously would -- could be accretive to NAV as well as providing support to the price?.

Yes. I would say we continually evaluate that at the company level. We do believe that when we terminated the original plan back in spring, that was certainly the thing to do. The initial employee plan was not impacted at that point in time. So we continue to feel well aligned with the shareholders.

And obviously, we believe that our broader expense structure should be viewed favorably by investors and the Street, given the waivers in place and the permanent restructure that will take effect later as being one of the best-in-class. We certainly continue to evaluate the option of implementing a company-funded buyback plan in the future..

[Operator Instructions]. There are no further questions. I would now like to turn the call back to Jason Breaux for any further remarks..

Okay. Great. Operator, thank you. Thank you, everyone, for joining CCAP's third quarter earnings call. We appreciate your interest and support greatly and look forward to speaking with you all soon..

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect..