Crescent Capital BDC, Inc. Q4 FY2025 Earnings Call

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 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.

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 a 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 of 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.

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.

Your first question comes from the line of Robert Dodd with Raymond James.

I understand you prefer not to discuss this now since you mentioned providing more information next quarter, but you did invite questions regarding what you'll be reviewing with the Board and your long-term position. Are you referring to a conversation about the dividend structure? This seems relevant to the long-term dividend strategies or other strategic initiatives you also mentioned. While I know you'll share more next time, could you at least outline what you meant by that comment?

Go ahead, Henry.

Robert, this is Henry. To begin, our review is concentrated on the long-term durability of earnings and aligning with shareholders. In response to your question about a framework, it involves assessing our fee structure and base dividend level in relation to future earnings expectations. As we mentioned, we will provide more detailed insights on both aspects in the upcoming quarter. Currently, we feel well-positioned for near-term stability, as we are generating more than enough to cover the dividend. Our goal is to proactively adjust to what we anticipate will be a lower interest rate environment, which has implications for us given our predominantly floating rate asset base. Therefore, the key focus areas for this broader review are the two points I have highlighted.

Got it. Very helpful. On another quick question, in January, you mentioned there was another exit and one was sold. Was it sold at the mark or repaid at par? Or can you provide us more details? I mean, we'll see it eventually, but that obviously lowered nonaccruals fairly significantly, I think.

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

Got it. One second. So regarding the future earnings of the business, with base rates decreasing, it seems like you might be a bit optimistic that spreads will widen depending on fund flows and other factors. Can you share your thoughts on that? If spreads do widen, how confident are you that activity levels will remain strong? They've started to pick up a bit, but that's partly because spreads have been tight. Can you help clarify that for us?

I'd say regarding the spreads, we have observed them to be consistent within the range of 475 to 500 basis points over SOFR for our new first lien and tranche investments over the past 3 to 4 quarters. Despite ongoing historical lows in LBO activity, we noticed an uptick towards the end of last quarter and at the beginning of this year. We believe that as deal activity grows, there may be opportunities to capture excess spread in certain areas where there is more price discovery. Overall, it seems that spreads have stabilized for high-quality first lien assets in that 475 to 500 basis points over SOFR range. The year has begun actively, and we're pleased with the deployment we've seen so far. We're closely monitoring how the financing and broader LBO markets respond, but we are optimistic about the pipeline as we move further into the year.

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?

Thank you for the question. The primary factor behind the realized gain was an investment sold during the quarter. We had an investment, MTS, which was formerly on nonaccrual a few years ago, and we were able to realize a gain above our cost basis when that transaction closed in the fourth quarter. Regarding the unrealized losses, the main contributors this quarter were our two investments placed on nonaccrual: Generate and Transportation Insight. The first, Generate, reflects a significant decline in the business outlook, prompting us to adjust our valuation. Transportation Insight is tied to the third-party logistics sector, which continues to face challenges. Thus, this has been a significant factor in our quarter-to-quarter performance.

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.

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 segment of our portfolio, based on the industry breakdown, is 20%. Can you clarify which page you are referring to, Chris?

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

I believe that's... 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, does the firm still plan for any of those maturing investments to reinvest in software or to reduce exposure moving forward?

Absolutely, that's a great question. Regarding software, I want to share a couple of points about the performance of our software investments and directly address your question about our underwriting approach and outlook. So far, the performance of our software portfolio has been quite impressive, with both revenue and EBITDA growth, along with notable deleveraging that aligns with strong fundamental performance. We've been investing in this sector alongside our sponsors for over 15 years. Disintermediation has always been a key aspect of our underwriting strategy from the start. We specifically look for software that plays a critical role in operations, integrates deeply into workflows, offers significant value as a system of record, and functions in highly regulated markets where the cost of failure is substantial. Our focus is on the actual value provided to customers, not just how hard it is to replace the software, but whether customers truly appreciate the product they use and if the retention statistics support that. Our experience indicates that these qualities often lead to stable cash flows from these investments. Therefore, when we encounter new software opportunities that meet these criteria, we will continue to integrate them into our portfolio, as we believe they are strong additions today. Additionally, I want to highlight that for our software investments, we are in a first lien position and are not in equity. This is significant because it provides us with an equity cushion supported by cash contributions from our private equity sponsors. Another important aspect, especially in the current market, is that we do not participate in any ARR loans or structured loans such as PIK DDTLs. We don't solely focus on the enterprise value of underlying software companies; we pay close attention to current cash flows that can service our debt and help us deleverage our capital structure, reducing risk. We still see attractive opportunities in this space, and as the market shakes out, we expect these opportunities to persist. We remain committed to the disciplined approach that has brought us success in this sector historically and believe it will continue to benefit us moving 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.

That concludes today's call. Thank you all for joining, and you may now disconnect.