Welcome to Investcorp Credit Management BDC Scheduled Earnings Release of Second Quarter Ended December 31, 2020. Your speakers for today's call are Mike Mauer; Chris Jansen; and Rocco DelGuercio. A question-and-answer session will follow the presentation. I will now turn the call over to your speakers. Gentlemen, you may begin..

Thank you, operator, and thank you to all of you for joining us today. I'm joined by Chris Jansen, my Co-Chief Investment Officer; and Rocco DelGuercio, our CFO. Before we begin, Rocco will give our customary disclaimer regarding information and forward-looking statements.

Rocco?.

Thanks Mike. I would like to remind everyone that today's call is being recorded and that this call is property of Investcorp Credit Management BDC. Any unauthorized broadcast of this call in any form is strictly prohibited. Audio replay of the call will be available by visiting our Investor Relations page on our website at icmbdc.com..

Thanks, Rocco. Activity in the quarter ending December 31 was robust as economic and political uncertainty began to resolve primary loan activity increased. We also began to see straight refinancing, dividend recaps and repricing emerging in the broader market.

We made investments in three new portfolio companies and fully realized investments in four portfolio companies this quarter, one of our new investments was refinancing. Two of our realizations were due to dividend recaps of our portfolio companies. In this type of the market, we are disciplined.

We continue to focus on credit quality on loan structure, and on economics. We have found that by staying nimble, with positions relatively smaller than many of our competitors, we can identify opportunities and avoid mispriced poorly structured loans. Sector selection remains a key tool for avoiding distress in the portfolio.

We have zero investments in the hospitality, restaurant and traditional retail sectors by design. Most of our borrowers have recovered well from the early effects of the pandemic. In addition, we are evaluating any of them that might be eligible for second round PPE.

Our investment activity during the quarter was roughly consistent with the character of our pipeline. We invested in one middle market syndicated loan and three club loans. This is squarely where we want to be investing in the core middle market.

Chris will go into detail about our investments in realizations during the quarter, and then Rocco we'll discuss our financial results. I'll finish with commentary on our leverage, Investcorp’s share repurchases, our dividend and our outlook for the next few months. As always, we'll end with Q&A. With that, I'll turn it over to Chris..

Thanks Mike. We made first lien investments in four portfolio companies this quarter, including three new portfolio companies. We also had full realizations on four investments during the quarter, and one significant partial realization. First, we funded a second draw on the Deluxe Entertainment Services super priority term loan.

As we noted last quarter, the entire facility was repaid in full not long afterwards..

Thanks Chris. For the quarter ending December 31, 2020, our net investment income was $3 million or $0.22 per share. The fair value of our portfolio was $257.7 million compared to $261.3 million at September 30. Our portfolios net increase from operations this quarter was approximately $3.1 million.

Our new debt investments during the quarter had an average yield of 11.8% and realizations and repayments during the quarter also had an average yield of 3.8%. And fully realized investments had an IRR of 34.3%. The unusual high IRR is attributable to Deluxe Entertainment super priority term loans, which is an outlier.

The weighted average yield of our debt portfolio was 9.76% an increase of 61 basis points from September 30. As of December 31, our portfolio consisted of 37 portfolio companies. 87.2% of our investments were first lien, 4.9% of our investments were second lien and 4.4% of our portfolios were in unitranche loans.

The remaining 3.5% is invested in equity, warrants and other positions. 99.6% of our debt portfolio was invested in floating rate investments, and 0.4% in fixed rate investments. The average LIBOR floor on our floating rate investments was 1%. Our average portfolio company investment was approximately $7 million.

Our largest portfolio company investment was PGi at $12.2 million and our largest single investment is Empire Office at 11.7 million. We were 1.43 times levered as of December 31 compared to 1.53 times levered as of September 30. We have two investments on non-accrual as of December 31.

Finally, with respect to our liquidity as of December 31, we have $3.8 million in cash $4.7 million in restricted cash and $16 million capacity under our revolving credit facility UBS. Additional information regarding the composition of our portfolio is included in our Form 10-Q, which was filed yesterday.

With that, I’d like to turn the call back over to Mike..

Thank you, Rocco. Our guidance on leverage remains is a target of 1.25 times to 1.5 times in this environment period. Last quarter, we were above that target at 1.53 times and this quarter, our leverage came down into our target range of 1.43 times. We anticipate that our investment activity will keep us around this target range.

We covered our December quarterly dividend with NII and we expect to cover our current quarter as well. As we committed to do we waive the portion of our management fee associated with base management fees over one times leverage.

Our Board of Directors declared a distribution for the quarter ended December 31, 2020 of $0.15 per share payable on April 1, 2021 to shareholders of record as of March 12. The Board also declared a supplemental distribution of $0.03 per share on those same dates..

Our first question comes from Christopher Nolan. Please state your question..

Deluxe is - Deluxe Entertainment Services is the new investment made in the quarter is one of the new investments made in the quarter is that correct?.

So Chris, there was new money made - invested during the quarter I'll let Chris walk through it but it was part of facilitating the sale of the company. So there was money put in during the quarter to facilitate the sale that was then in the waterfall super priority. But Chris, I don't know if you want to go into more detail..

Yes that, thanks Mike. Chris, that loan was fully paid out. It was senior structurally to our existing exposure. And we got a nice fee for doing that. So it made perfect sense to do that 100% growth..

You invested an exited within the same quarter?.

Yes..

Yes..

Got you.

And then I guess the change in yield up roughly 50 bps any reason particularly for that?.

Yes, if you look at the average of everything that came out, RPX, Northstar, the all subs, the KIK, pixel, et cetera.

The average weighted average yield there was at 7.4% and that was heavily weighted down between 6.5% to 7.5% across four different names, the RPX, Northstar, all subs and KIK those were an average close to 7%, but the overall average coming out with 7.4%, and the three new investments at $17 million, were an average of 10.64%..

Got you.

And Mike can you anticipate that the new investments will continue for in that 10% to 11% yield range and thus the overall yield will continue to go up?.

I would say that the overall we're focusing on 10 plus or minus. And if I was going to give a range, I'd say that it's 9% to 10%, not 10% to 11%. And I hope to outperform not underperform. But I think that 9% to 10% is at the higher end of that closer to 10%. But I think 11% would be too high of an assumption right now.

There will be some but on average..

My final question is on Empire Office, which is a large I guess office furniture dealer in New York City. I know the loan is, has couple years to run out.

But, given the impact that COVID’s had on that office market is, this a credit that we should be keeping an eye on given the size?.

I will pass it over to Chris, but I'd say we have kept a very close eye on it. And we're very happy with management in the way they've managed it. But I'll let Chris obviously, we can't go into details from an NDA, but I'll let Chris talk about it some..

Yes, this is - thanks Chris. This is one where, the owner is the founder actually I think he is the son of the founder. And he's run the company for quite a while. Performance is really consistent with what we had anticipated and honestly involve where personally, I thought this company was going to be.

The revenue has been down the EBITDA has basically been flat. So in my personal view this is as well outperformed, what you would think in general. If you saw a big presence in the New York City market - with office furniture you would be gasping. We knew that would not be the case. However, personally I feel like that they've outperformed.

And they do have operations in Florida as well. So they have diversified a bit. But this is where again, you have the management team. That's an owner that is accustomed to the ups and downs in the office market..

And to Chris’ point he is quickly reacted on the cost front, sorry go ahead, Chris..

No, thank you very much for the detail..

Thanks..

Our next question comes from Paul Johnson. Please state your question..

Good afternoon, I should say. I know I asked last quarter, I just kind of want to ask again to get your thoughts. I'm just curious you said that several of the portfolio companies had been relatively impacted by COVID.

And that's kind of held back appreciation during the last couple of quarters? At the same time, we've seen quite a few BDCs mark their books up fairly meaningfully over the second half of 2020.

Do you - is that still the case with the portfolios at the same kind of pressures on these businesses that are holding it back and any kind of commentary you could share that will be great?.

Yes listen, I'd say I can't comment on how others go through their evaluation. We think that we've done a very thorough and fair evaluation of portfolio. I'd highlight two credits that continue to weigh on us. And COVID related to some degree into a lot. One is 1888 Industrial Services slow recovery.

The oil markets are coming back, service is coming back. We put that B loan on non-accrual in the current quarter. And we are watching it closely and we talked to them at least once a week so we're hands on. The other one on is PGi without PGi you would have seen a nice, I think in line with the market recovery on NAV.

PGi we marked down during the quarter we had seen a recovery from COVID actually COVID benefiting in the second quarter of 2020. We saw a significant slowdown of that benefit in the second half of the year.

And so, we've become a bit more conservative, as we look at that valuation given that we don't have the same tailwinds that we had in the second quarter. And so that's another one that we continue to watch. But hopefully that gives you a little bit of color..

Yes, no that's really good color.

Did you by any chance have those that number off your hand what the markdown was with PGi this quarter?.

I think I do. Think that was $2.8 million. Chris if you can check me on that and I'll follow up if that's different but $2.8 million between the two jobs..

Yes, it’s right Mike $2.8 million correct..

Okay, okay thanks. I appreciate that. And then just - I have been trying to make sure I understand this right. But I understand you explained it Chris, and as well in your prepared remarks, but the Deluxe piece that remains in the portfolio, the non-accrual.

So why I guess is that on non-accrual if the investment repaid? And I guess if I'm understanding it right, the super seniority term loan that you provided was that almost like a can to like a bridge loan to the company?.

So the answer is yes..

Mike, I got this, Mike..

Okay go ahead..

Yes, it was a bridge loan to facilitate the sale of the business. Deluxe no longer has any operating businesses. So when they sold the business, typically, as is typical in these M&A transactions. The sale of the business created the - involved the creation of escrows, which will be released in time subject to, final adjustments.

So that where we carry Deluxe now reflects our valuation of the probability and amount of collecting. I believe there is three or four different escrows involved..

Okay..

So once we received those couple of payments, we’ll no longer have any exposure to Deluxe?.

Okay. Yes, and at this point, it's fairly small piece that remains in the portfolio.

And bigger picture, looking at kind of, I guess obviously, COVID is infected, quite a bit of the - most and everything that we do? How has that affected any of your relationships with partners that you've worked with in the past, is that forced you to change your approach in any way? Are you working with the same partners or maybe even a more defined select list of partners that you've worked with in the past? And is that in any way changed the way that you source business?.

I'll take the first shot and see if Chris wants to add anything, but - word I'd say no, the only thing it's done is in this environment, it ramps up the dialogue, around sourcing, new opportunity.

And we still are partnering in club deals with the same partners that we partnered before plus new partners, but the new partners are people we had a dialogue with before. So if you look at our portfolio, we may partner with somebody two, three times out of the 37 investments. We've never had a concentration of partners.

At the same time, the advisors, boutiques, lawyers, et cetera. We've got a dialogue with - we've got one that we're working on right now with one of those advisors. So I don't think it's really changed the dynamic.

But Chris, I don't know if you want to add anything here?.

Nothing to add..

Okay. And just had actually one last question, I wanted to ask if that's all right. I was hoping to maybe get an idea of one investment in the portfolio. I think it was marked pretty stable quarter-over-quarter, but it's been marked that’s it’s fairly, at a discounted mark, Bioplan.

But could you guys give any kind of update on that company and what exactly that business is?.

Chris, do you want to take that?.

Yes, Bioplan there is not much of an update on Bioplan. The sponsor has been very, very supportive of the deal, but we're under confidentiality. This is another one where, and I'll personalize this a little bit is, personally the company is performing a lot better than I had anticipated. But, the numbers are still down from pre COVID.

The company basically sells testing products for fragrances. So they have shifted their business in their product mix to get away from some of the more contagious types of sprays and stuff like that.

And again, the sponsor is supportive, and the lenders have been very constructive here, and we own the first lien and there is a second lien behind us in addition to an equity sponsor. But that's really all I can say, because of confidentiality..

Sure. Okay well, I appreciate that. Thanks for taking my questions. And thanks for the comments. And have a great day..

Thank you..

Thank you..

Our next question comes from. Please state your question..

First one market competition, any color you can give on kind of leverage spreads and documentation relative to pre COVID levels on - the deal flow that you're seeing?.

Yes, it's an interesting question, because what we're seeing is if you start at the top of firm value for new LBOs, things that are exposed or at risk, because the COVID just aren’t trading. So things that are insulated or COVID beneficiaries have traded.

But what that tends to mean is that what we're seeing is things are trading at a little bit higher multiple than maybe pre COVID. But that's a little bit of the statistical sample that you're dealing from. Because you don't have the same companies being sold. We're seeing similar multiples of leverage that we saw pre COVID.

We're seeing bigger equity checks than we saw pre COVID to get those done. So in two of the new investments we did, it was just shy of 50% equity going in on those. So, leverage similar equity a bit higher, and spreads maybe a little bit tighter. And the other thing is that we are focusing more in this environment in the last six, eight months.

And I’ll call it $10 million EBITDA to $50 million EBITDA and less on the 50 to 150 on the larger the 100 plus EBITDA where we've done a lot historically. I think the competition is more, I think the structural points are more aggressive. And the larger players are trying to take the whole tranches.

So it's an area that we've kind of avoided, and we've been very active in club deals, two to 10 players down in our neighborhood..

Okay, that's helpful. And then just one more if I could on leverage so at 1.43 at the kind of at the upper end of the 1.25 to 1.5 range.

Are you all comfortable running it at that level, this will plan to deleverage a little bit more or how are you thinking about leverage going forward?.

So I’d start saying we’re comfortable where we are. I think on the last call, we were at like 1.53 similar question there. We said listen, I'm not sure if we'll be below 1.5 for the December quarter, we are below it. We continue to look at new investments.

We continue to think that there are two or three portfolio companies that are at a high probability of getting repaid or refinanced. And so, we want to make sure we continue to keep ability to reinvest. So that may mean that, we may go slightly above and come back down, but in the neighborhood we are is an area we're very comfortable right now..

Great, that's it from me. Appreciate the time..

Thank you very much..

At this time, we have no further questions..

Thank you very much. We appreciate it. And we will talk to everyone soon..

This concludes today's conference call. Thank you for attending..