Earnings Call Transcript - CCAP Q2 2025

Operator, Operator

Good morning, and welcome to Crescent Capital BDC, Inc. Second Quarter Ended June 30, 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 note that past performance or market information is not a guarantee of future results. I'll now turn the call over to Dan McMahon.

Daniel McMahon, President

Thank you. Yesterday, after the market closed, the company issued its earnings press release for the second quarter ended June 30, 2025, and posted a presentation to the Investor Relations section of its website at www.crescentbdc.com. The presentation should be reviewed in conjunction with the company's Form 10-Q 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.

Jason A. Breaux, CEO

Thank you, Dan. Hello, everyone, and thank you all for joining us. I'll start today's call by summarizing our second quarter results, follow that with some thoughts on the market, and touch on our portfolio. In terms of second-quarter earnings, we reported net investment income of $0.46 per share compared to $0.45 per share in the first quarter. Excluding $0.02 per share of one-time accelerated amortization related to deferred financing costs, NII was $0.48 per share. Importantly, earnings remain in excess of our dividend with 110% base dividend coverage for the quarter. NAV per share was down approximately 0.4% for the quarter, driven primarily by the second of three previously announced $0.05 per share special dividends related to spillover income that was paid during the quarter. Now let's discuss what we are seeing in our market and our positioning. Deal activity remained relatively constrained in Q2, given ongoing tariff discussions and regulatory uncertainty. This policy-driven volatility has augmented an already robust pipeline of potential private equity exits. Hold times for many private equity-owned assets continue to extend, furthering the pressure from limited partners to both deploy dry powder and return capital. During periods of heightened volatility that typically include reductions in overall M&A volume, our deployment benefits from a large and diversified existing portfolio across the Crescent private credit platform. Across the platform, add-ons to existing portfolio companies accounted for approximately half of total investments by count during the second quarter. Additionally, incumbency is an important aspect of our origination efforts, whereby Crescent has demonstrated the ability to remain as lead lender and strong performing credits even after a change of sponsor ownership without committing to portable capital structures. From an underwriting perspective, we benefit directly from seeing how these companies fared through the pandemic, wage inflation, and supply chain disruptions over our hold period. From an execution perspective, this knowledge and familiarity with management teams allows us to move quickly and with conviction, and that is something that the sponsors with whom we partner value greatly. On new opportunities, our private credit platform has maintained lead roles in the majority of our transactions, and we continue to drive stringent documentation. Given our focus on the core and lower middle market, we believe we are able to drive better structural protections than deals in the more competitive upper middle market segment or BSL replacement segment. Now let's shift gears and discuss the investment portfolio. Please turn to Slide 13 and 14. We ended the quarter with just over $1.6 billion of investments at fair value across a highly diversified portfolio of 187 companies with an average investment size of approximately 0.6% of the total portfolio. Our top 10 largest borrowers represented 18% of the portfolio, as we are believers in modulating credit risk through position size. We have consistently maintained an investment portfolio that consists primarily of first lien loans since inception, collectively representing 91% of the portfolio at fair value at quarter end. Additionally, we take comfort in the fact that our portfolio is focused on domestic service-oriented businesses that, in our view, carry lower direct policy risk from tariffs and other recently proposed and implemented government policies. Finally, our investments are almost entirely supported by well-capitalized private equity sponsors, with 99% of our debt portfolio in sponsor-backed companies as of quarter end. We have partnered with our sponsors to invest in well-capitalized borrowers with significant equity capital beneath us. We note that the weighted average loan-to-value in the portfolio at the time of underwriting is approximately 39%. Moving on to our dividend. We declared a third-quarter 2025 regular dividend of $0.42 per share. This dividend is payable on October 15, 2025, to stockholders of record as of September 30. Additionally, the third and final previously announced $0.05 per share special dividends related to undistributed taxable income will be paid on September 15 to stockholders of record as of August 29. This marks our 38th consecutive quarter of earning our regular dividend at CCAP, which we have accomplished while maintaining NAV per share within a tight band. Our positioning has and always will be for the long term. Overall, we are pleased with the strength of our portfolio and stable results this quarter. We believe they are representative of CCAP's longer-term track record of delivering a stable NAV profile and an attractive total economic return. To frame the point a bit further, let's look at performance since CCAP's public listing in February 2020, a period that captures the totality of the COVID pandemic, the rise in interest rates beginning in mid-2022, and at least part of the recent tariff volatility. Based on publicly available data, the average public BDC saw its net asset value per share decline by 10.5% from the fourth quarter of 2019 to the first quarter of this year. CCAP's NAV per share increased by 0.6% over the same time frame and 0.3% through Q2. Over this period, we generated a total economic return calculated as change in net asset value plus dividends of 49%, well in excess of the public BDC average. I highlight this longer-term track record as it often feels as if we operate in 90-day earnings vacuums where sentiment can swing wildly, sometimes warranted, sometimes not. We do not believe CCAP's current discount to NAV is warranted, which is why our Board has approved a $20 million stock repurchase program. We believe that opportunistically repurchasing shares at certain levels is an attractive use of excess capital. As we seek to maintain a disciplined capital allocation approach at CCAP, we will balance our repurchase program with other factors such as our existing investment pipeline and leverage levels. With that, I will now turn the call over to Henry.

Henry Sahn Chung, President

Thanks, Jason. Please turn to Slide 15, where we highlight our recent activity. Gross deployment in the second quarter totaled $58 million, as you can see on the left-hand side of the page, of which 99% was in first lien investments. During the quarter, we closed three new platform investments totaling $22 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 480 basis points. Each of these new investments were first lien loans, consistent with our strategy of investing at the top of the capital structure to provide greater downside protection. The remaining $36 million came from incremental investments in our existing portfolio of companies. $58 million in gross deployment compares to approximately $93 million in aggregate exits, sales, and repayments, resulting in net realizations of approximately $35 million for the second quarter. Given we are currently operating in our target leverage range, we do not expect to see meaningful increases in net deployment on a quarter-to-quarter basis. However, the Crescent private credit platform remains active with $1.3 billion of capital committed during the second quarter. Turning back to the broader portfolio, please flip to Slide 16. You can see that the weighted average yield of our income-producing securities at cost remained stable quarter-over-quarter at 10.4%. As of June 30, 97% of our debt investments at fair value are floating rate, with a weighted average floor of 78 basis points, compared to our 54% floating rate liability structure based on debt drawn with no floors. Overall, our investment portfolio continues to perform well with year-over-year weighted average revenue and EBITDA growth. The weighted average interest coverage of the companies in our investment portfolio at quarter end improved to 2.1x. As a reminder, this calculation is based on the latest annualized base rate 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 rating 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 continue to represent the lion's share, or 86% of our portfolio at fair value. It is worth noting that as of quarter-end, as a percentage of total investments at fair value, CCAP's watch list, which we define as 3, 4, and 5 rated investments, was 14%, whereas our nonaccruals at fair value were 2.4%, a nearly 12% gap. This is in contrast to an analysis of our public peers where this gap is approximately 6%. We believe this reflects our philosophy and our culture of being forward-looking in terms of maintaining our watch list. We do not, for example, wait until there is a default for moving something down the risk rating scale. We strive to be transparent about the health of our portfolio with the market, and one of the ways we do so is by taking a preemptive approach towards how we classify our watch list investments. With that, I will now turn it over to Gerhard.

Gerhard Pieter Lombard, CFO

Thanks, Henry, and hello, everyone. Yesterday evening, we reported net investment income of $0.46 per share or $0.48, excluding the one-time accelerated amortization that Jason noted, compared to $0.45 per share in the prior quarter. The increase in net investment income was driven by an increase in the distribution from the Logan joint venture and a stable quarter-over-quarter portfolio yield of 10.4%. Net income per share of $0.41 for the second quarter compared to $0.11 in the prior quarter, driven by a reduction in changes in net realized and unrealized losses on a quarter-over-quarter basis. Turning to the balance sheet. As of June 30, 2025, our investment portfolio at fair value totaled $1.6 billion. Total net assets were $725 million as of June 30, 2025. NAV per share was $19.55, a decrease of $0.07 per share from $19.62 at the end of the first quarter. As Jason noted, this quarter's change in NAV was largely attributable to the $0.05 special dividend paid in June as NII outpaced our regular dividend, offset by modest net unrealized and realized losses per share. Let's shift to our capitalization and liquidity. I'm on Slide 19. At the beginning of April, we rightsized our SPV asset facility from $500 million to $400 million and reduced the spread by 50 basis points from 245 to 195. This facility resizing provides us with sufficient capital to address any potential draws on our unfunded commitments while minimizing interest expense related to excess unfunded capacity. Following the one-time impact of the acceleration of the deferred financing costs, we expect to see the full benefit of the repricing in our future quarterly operating results. Our capital structure reflects our target size and leverage with our current equity base today. And we have ensured that our borrowing capacity is consistent with our investment mandate. This quarter's activity brought our debt-to-equity ratio down modestly from 1.25x in the prior quarter to 1.23x, which is within our stated target leverage range of 1.1x to 1.3x. As you can see on the right side of the slide, approximately 74% of total committed debt now matures in 2028 or later. The weighted average stated interest rate on our total borrowings was 6.09% as of quarter end, compared to 6.36% as of March 31. As Jason noted, for the third quarter of 2025, our Board has declared our regular dividend of $0.42 per share. Additionally, the third and final previously announced $0.05 per share special cash dividend is payable in September. Our existing variable supplemental dividend framework remains in effect as well. CCAP will not pay a Q3 supplemental dividend as the measurement test cap exceeded 50% of this quarter's excess available earnings. And with that, I'd like to turn it back to Jason for closing remarks.

Jason A. Breaux, CEO

Thanks, Gerhard. So to sum up, CCAP posted stable results in a quarter that, from a macro perspective, was anything but stable. Historically, in periods of market volatility, Crescent's focus on disciplined credit underwriting, capital preservation, strong free cash flow generation, and robust debt service coverage has enabled us to stay on the right side of performance and returns across managers. Earlier, I highlighted CCAP's performance since listing in 2020. We believe Crescent and CCAP will continue to be on the right side of this performance dispersion spectrum over the long term, and we look forward to delivering on that in the quarters to come. As always, we thank you for joining our call today and look forward to connecting with many of you soon. And with that, operator, we can open the line for questions.

Operator, Operator

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

Robert James Dodd, Analyst

Congratulations on essentially the NAV stability this quarter. But just want to focus on credit quality a little bit again. As Henry said, right, so the watch list is up 14%, but I believe it was like 12% or 13% last quarter. So it does seem like it's ticked up just a tiny bit. And also on the internally rated 4s and 5s, which are the lowest categories, that ticked up this quarter as well. So in that, with the 4s and 5s, 3% of the portfolio at fair value, any assets in that category that are not already on nonaccrual? And if there are, what's the risk there of incremental credit deterioration in the portfolio?

Henry Sahn Chung, President

Yes, Robert, thanks for the question. This is Henry. I can start addressing your queries. Regarding the watch list, our approach has always been proactive when designating investments. We evaluate the fundamental operating performance and the near-term outlook to decide whether to place an investment on the watch list, rather than solely reacting to any pending credit events. Our goal is to be forward-looking and transparent about the near-term outlook for our portfolio companies. Concerning the 4s and 5s, these investments are certainly facing the most challenges regarding their potential near-term recovery. However, we need to consider two factors: first, our expectations for recovery based on the current outlook for the company, and second, ensuring we don't overlook long-term recovery paths due to short-term hurdles faced by these companies. If an investment falls into this category, it represents a significant variation in potential recovery outcomes. That said, reflecting on our track record, including our loss rates and recovery abilities even in higher-risk situations, I believe we have the capabilities to support our investments effectively. It's more about looking forward rather than suggesting any further decline in portfolio health.

Jason A. Breaux, CEO

Sorry, Robert, it's Jason. I just want to add two points. On the first point on the watch list, I think it's also important to point out that, as a lower and core middle market investor, three out of four companies in the portfolio have financial covenants. And so that might be high relative to some of our peers who focus on the upper end of the market. And the nice thing about having covenants is it really enables frequency of dialogue and interaction with the management teams and sponsorship. And so I think from an insight standpoint and a dialogue standpoint, we may be in closer contact with folks, given the covenants that we have in place, which might give us more real-time visibility and outlook. The other point that I just wanted to make is that while our nonaccrual rate, I think, is, let's say, generally in line with the broader industry, it is certainly not something we're pleased with. It's not representative of how we think of our portfolio or our underwriting process, or frankly, consistent with our historical metrics, and that's something that we are looking forward to seeing some progress on in terms of bringing that down.

Robert James Dodd, Analyst

Sort of related. As you mentioned, the situation with the tariffs is quite fluid and seems to change daily. Have you observed any shifts in the perspectives of portfolio companies regarding how they plan to manage their tariff exposure? Given that the circumstances are constantly evolving, they might need to adjust their plans frequently. What insights do you have on how these companies believe they can navigate this unpredictable period?

Jason A. Breaux, CEO

Yes. I would begin by discussing our initial review of the direct impact of tariffs on our portfolio, which was relatively minor, representing low single digits. This assessment focused on the most significant tariff levels post-liberation day. Since then, we've revisited our analysis to gauge both the accuracy of our initial assessment and how the companies are responding. Our latest analysis confirms that the direct impact from tariffs has not meaningfully broadened or contracted; the companies we identified as directly affected are still navigating this environment. Regarding how these companies are addressing the impending tariff changes, there are a couple of strategies we've observed. First, we prioritize investing in companies with strong pricing power, which allows them to pass on costs effectively. This was particularly evident in 2023 and 2024, during a period of significant wage inflation affecting our primary investment focus in service businesses, where labor costs typically represent a large portion of the cost structure. This dynamic has helped management teams manage material input costs in the context of tariffs. Furthermore, for companies sourcing from regions severely impacted by tariffs, management teams are proactively exploring alternative sourcing options. We've noticed similar diligence and adjustments in response to tariff challenges that took place after the first wave of tariffs during the previous administration, and we are witnessing ongoing repositioning in real-time. As for the financial implications, we expect to see the effects of these strategies and the impact of tariffs reflected in borrower financials in the latter half of this year. To summarize, the direct tariff impact on our portfolio is relatively small, and thanks to our ongoing dialogue and access to management, we’ve observed proactive measures being taken in response to both pricing and supply chain challenges.

Robert James Dodd, Analyst

I have one more question that is unrelated to the previous topics. You are currently operating within your target leverage range. Although you mentioned that you do not foresee significant net portfolio growth moving forward, if market activity increases, could you consider making adjustments in your portfolio mix? For instance, would you contemplate rotating out of certain sectors or reducing the average position sizes while still maintaining a balance within the target leverage range? I'm interested in any thoughts you have on potential repositioning, even if the overall portfolio does not grow.

Henry Sahn Chung, President

Yes, that's a great question. I’d like to address a few points. Firstly, regarding industry rotation, we feel confident about our current industry focus. We are committed to investing in high free cash flow generating noncyclical industries with stable revenue streams. This has been our strategy since the inception of CCAP, and we plan to continue it. Therefore, we don't have specific industry concentrations we aim to reduce or increase in the near term. Our focus remains on those industries. The same applies to the average position size. We have 187 obligors in our portfolio, with an average position size of 60 basis points, reflecting our long-standing goal of maintaining a diversified book. Additionally, despite a net portfolio shrink during the quarter, we have seen $1.3 billion in new deployment from the platform just this quarter. This allows us to choose investments that enhance our yield without sacrificing diversification. In terms of rotation, our focus is primarily on the acquired assets. We are slightly over halfway through the rotation of the acquired First Eagle assets and are almost done with the Alcentra assets. This area is where our rotation efforts are concentrated, as we can reallocate and redeploy those investments into opportunities directly originated by Crescent, depending on market conditions.

Operator, Operator

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

Mickey Max Schleien, Analyst

Jason, just one question from me today. I think investors and analysts really appreciate your transparency about the breakdown of your portfolio by the type of security. And I see that less than 2% is in unitranche last-out investments. As you know, that structure can help boost portfolio yields without giving up much control over an investment. So how are you evaluating the opportunity to increase that to help offset potential declines in SOFR?

Jason A. Breaux, CEO

Thank you for the question, Mickey. It’s Jason. That part of our portfolio has always been relatively small for us. I want to highlight a couple of points. First, we have traditionally been active in the unitranche segment of the market, and Crescent has a background as a junior debt lender. We have typically been comfortable lending deeper into the capital stack of middle-market companies. Currently, the last-out opportunities are not as abundant since direct lending managers have more capital to deploy, and that's true for Crescent as well. We do approach these opportunities opportunistically, usually only if it's a small amount of first-out leverage ahead of us. We need to feel confident that we could take control of that first-out if necessary. Typically, these situations arise when the portfolio company has a banking relationship and wants to include that relationship in a first-out piece of the capital structure. Overall, I would say that such opportunities are not very frequent for us at this time.

Operator, Operator

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

Christopher Nolan, Analyst

Just following up on Robert's question from a different angle. Are you seeing your companies having increased operating leverage with the decline in energy prices, where lower energy inputs could lead to improved profit margins?

Henry Sahn Chung, President

Yes, thank you for the question, Chris. This is Henry. I would say that fuel input costs are not a significant part of the cost of goods sold for most of our borrowers. We aim to avoid situations in underwriting where there is considerable exposure to major cost inputs, which can reduce margins or potentially improve them. Therefore, I wouldn't consider this a major factor influencing operating leverage across our portfolio. Generally, in our service-oriented portfolio, the largest cost component for most of our companies is human capital rather than fuel input costs. However, I do expect some benefit from the decline in energy prices, though I don't see it as a major driver of portfolio performance.

Christopher Nolan, Analyst

Yes. And then a follow-up question. I see that the balance of second lien loans has gone down year-to-date. I know it's a small part of the portfolio, but is this something which you sort of pop into more cyclically when the economy starts going up and the pricing on second liens are attractive, then we should start seeing those increase incrementally?

Henry Sahn Chung, President

I wouldn't say that the second lien portfolio mix will ever be a significant part of our portfolio. From the outset, we've made it clear that CCAP's investment strategy primarily focuses on first lien investments at the top of the capital structure. Currently, in this market, the spread premium for second liens compared to first liens has tightened considerably. As a result, it is challenging to feel confident about investing behind five, six, or seven turns of first lien leverage without receiving an adequate risk premium. If the situation changes, we will certainly consider it, but we'll continue to deploy second lien investments selectively. However, I do not expect it to become a major part of the portfolio, as our focus remains on prioritizing first lien investments.

Operator, Operator

I will turn the call back over to Jason Breaux for closing remarks.

Jason A. Breaux, CEO

Thank you very much, Kate. Thank you all for your time and attention here today. We appreciate having this conversation with you and look forward to speaking with you again soon.

Operator, Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.