Earnings Call Transcript - ICMB Q1 2025

Operator, Operator

Good afternoon and thank you for joining today's Investcorp Credit Management BDC Inc. Schedules Earnings Release for the Quarter Ended September 30, 2024. It is now my pleasure to turn the floor over to Walter Tsin, CFO.

Walter Tsin, CFO

Thank you, operator. Welcome everyone to Investcorp Credit Management BDC quarter ended September 30th, 2024 Earnings Call. I'm joined by Suhail Shaikh, President and Chief Executive Officer of the company. I would like to remind everyone that today's call is being recorded and that this call is the 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. I would also like to call your attention to the Safe Harbor disclosure in our press release regarding forward-looking information and remind everyone that today's call may include forward-looking statements and projections. Actual results may differ materially from these projections. We will not update forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our Investor Relations' page on our website. The format for today's call is as follows; Suhail will provide an overall business and portfolio summary, and I will then provide an overview of our results, summarizing the financials followed by a Q&A. At this time, I would like to turn the call over to Suhail.

Suhail Shaikh, CEO

Thanks, Walt, and thank you to everyone for joining us today. I'm pleased to announce that we delivered a strong quarter, reflecting our focus on maintaining a resilient portfolio and capitalizing on selective opportunities in a challenging market environment. Despite economic uncertainties, we are well-positioned to navigate challenges and consistently deliver value to our shareholders. Our net asset value rose by $0.34 per share to $5.55, up from $5.21 as of the quarter ended June 30th, 2024. The increase was primarily driven by higher net investment income, unrealized gain on investments from mark-to-market adjustments, and solid credit performance across our portfolio. For the quarter, we generated net investment income of $2.3 million or approximately $0.16 per share, reflecting a $1 million increase over the prior quarter. Additionally, we were successful in deploying $13.1 million across six portfolio companies, marking an uptick in activity compared to recent quarters. These achievements reflect the durability of our strategy and our continued focus on credit selection and proactive portfolio management, which remains unwavering even as economic conditions shift. Turning to the broader market environment, new deal flow, particularly in M&A and LBO activity, remain subdued. However, we achieved higher origination volumes this quarter, driven mainly by refinancing deposits. We also made two secondary investments at attractive prices, allowing us to further diversify our portfolio with favorable terms. Although competition remains intense and high-quality opportunities are scarce, we continue to deploy capital strategically, maintaining our optimal portfolio leverage between 1.25 times and 1.5 times. Our investment pipeline remains robust, and we are optimistic about the opportunities ahead. We prioritize building relationships with high-quality sponsors and investing in companies within defensible industries that demonstrate strong cash flows. We continue to rotate the portfolio towards larger, more stable credits and focus on senior secured investments within the core middle market. Our portfolio companies are performing well with only a small number of challenged positions. The median EBITDA of our portfolio rose from approximately $55 million last quarter to $61 million this quarter, while the weighted average net leverage declined from 5.1 times to 4.7 times over the same period. Non-accruals as a percentage of total fair market value improved to 4.8% this quarter from 5% last quarter. These outcomes reinforce the durability of our strategy, our focus on credit quality, and our proactive portfolio management as we look forward to a strong remainder of the year. I will now turn to details of our portfolio activity during the quarter. During the quarter ended September 30th, we invested in three new portfolio companies and three existing portfolio companies. Fundings for new investments totaled approximately $13.1 million at cost, as I mentioned, of which $0.5 million represents the reinstatement of previously recorded paydowns for interest received from Klein Hersh LLC while it was on non-accrual status. The weighted average yield of debt investments made in the quarter was approximately 10.7%. In the same period, we fully realized two portfolio company investments totaling $13.4 million in proceeds with an IRR of approximately 11.8%. We invested in the first lien term loan of Argano to support the refinancing of the company's capital structure. Argano is a leading provider of mission-critical digital transformation services to corporations. Argano is a Trinity Hunt Partners portfolio company. Our yielded cost is approximately 11.5%. We also made an investment in the first lien term loan and delayed draw term loan of Likewize Corporation to support the refinancing and Genstar Capital's purchase of the company from Brightstar Capital. Likewize provides technology, device protection and support. Our yielded cost is approximately 11.5%. Finally, we made an investment in the first lien term loan and delayed draw term loan of Integrity Marketing acquisition. Integrity is an insurance broker that distributes and markets life and health insurance products and wealth management solutions. We purchased Integrity in the secondary market. Yield at cost is approximately 10%. We also made a follow-on investment in the first lien term loan of Victra, also known as LSF9 Atlantis Holdings, LLC. We purchased Victra in the secondary market for a yield at cost of approximately 9.8%. And finally, we made another investment in Crafty Apes. Crafty Apes is a full-service visual effects studio and studio that works with studios across the globe. Our yield at cost is approximately 14.9%. We continue to work with the company's management to provide them with financial flexibility. Lastly, we realized our first lien term loan positions in Retail Services WIS Corporation and South Coast Terminals, both of which were refinanced during the quarter. We've been invested in both of these companies since May and December of 2021, respectively. Our realized IRR on WIS was approximately 12.9% and our realized IRR on South Coast was approximately 10.7%. As of September 30th, our largest industry concentrations by fair market value were professional services at 14.6%, containers and packaging at 11.7%, commercial services and supplies at 10.3%, trading companies and distributors at 8.8%, followed by insurance at 7.6% and specialty retail at 7.2%. Our portfolio companies are in 20 GICS industries as of the quarter end, including our equity and warrant positions, which is a decrease of three industries from the previous quarter. I would now like to turn the call over to Walt to discuss our financial results.

Walter Tsin, CFO

Thanks, Suhail. For the quarter ending September 30th, 2024, the fair value of our portfolio was $190.1 million, up from $184.6 million as of June 30th. Our net assets increased to $79.7 million, which is a gain of $4.9 million from the last quarter. We saw a net increase in net assets from operations this quarter of about $6.6 million. The weighted average interest rate of our debt portfolio was 10.5%, down from 12.3% in the previous quarter, mainly due to falling SOFR and tighter spreads on new investments. As of September 30th, our portfolio included 45 borrowers, with around 82.5% of our investments in first lien debt and the remaining 17.5% in equity, warrants, and other positions. Ninety percent of our debt portfolio was allocated to floating rate instruments, while 3% was in fixed rate instruments. The weighted average spread on our debt investments was 4.3%, and the weighted average floor was 0.9%, showing a slight decline from the previous quarter's spread of 5% and floor of 1%. Our average position in portfolio companies, based on fair market value, was approximately $4.2 million, with Bioplan being our largest investment at $17.4 million. We are pleased to share that on November 4th, 2024, the Board of Directors declared a distribution of $0.12 per share for the quarter ending December 1st, 2024, payable in cash on January 8th, 2025, to shareholders of record as of December 20th, 2025. Gross leverage stood at 1.39x and net leverage at 1.26x as of September 30th, compared to 1.42x gross and 1.35x net in the previous quarter. Regarding our liquidity, as of September 30th, we had about $10.1 million in cash, with approximately $8.3 million being restricted cash, and $52.5 million available under our revolving credit facility with Capital One. Additional details about the portfolio composition can be found in our Form 10-Q, filed earlier this week. I would now like to hand the call back to Suhail.

Suhail Shaikh, CEO

Thank you, Walt. In closing, we are encouraged by our performance this quarter and are confident in our ability to navigate the complexities of the current environment. Our disciplined approach, strong sponsor relationships and focus on resilient portfolio companies provide a solid foundation for continued success. Thank you all for your support, and we look forward to taking your questions. That concludes our prepared remarks. Luke, please open the line up for Q&A.

Operator, Operator

Ladies and gentlemen, we will now begin the question-and-answer session. Our first question comes from Mr. Christopher Nolan, Ladenburg Thalmann. Please go ahead.

Christopher Nolan, Analyst

Congratulations on a strong quarter. Could you please clarify what drove the PIK income for the quarter? I missed that due to overlapping calls.

Suhail Shaikh, CEO

Yes. Hi Chris, thank you. So, a big driver was the reversal of non-accrual to accrual of Klein Hersh. The company continues to perform well. And so that was, as you recall, previous quarter, the last at least three quarters, we've had it on non-accrual. So, that was put back on accrual, and the big portion of that coupon is PIK.

Christopher Nolan, Analyst

Was there anything else?

Suhail Shaikh, CEO

That was the biggest driver, Chris.

Christopher Nolan, Analyst

I was wondering if there were any timing issues affecting the quarter. The results from last quarter seemed a bit lower, and I was curious if any deals that typically would have closed last quarter actually extended into this quarter.

Suhail Shaikh, CEO

Yes. Look, you're absolutely right. There were a couple of the deals that did spill over into this quarter. We've been working on them for a while. And as you know, this is a lumpy business. So, we'll have that trend every now and then because it's hard to sort of plan when some of those transactions are going to close.

Christopher Nolan, Analyst

Yes, you're absolutely right. A couple of the deals did spill over into this quarter. We've been working on them for a while. As you know, this is a lumpy business, so we'll experience that trend from time to time because it's difficult to predict when some of those transactions will close.

Suhail Shaikh, CEO

Sorry, go ahead.

Christopher Nolan, Analyst

No, no. Please continue.

Suhail Shaikh, CEO

What we're trying to do in the interim is, as you've noted in the portfolio, we've tried to smooth out some of that activity by purchasing some loans in the secondary market, whether it's to add on to existing positions or something that we find attractive that we know well, leveraging our expertise on some of those names.

Christopher Nolan, Analyst

Great. I'll back in the queue. thank you.

Suhail Shaikh, CEO

Thank you.

Operator, Operator

Thank you very much. I'll open the line up for Mr. Nolan again. Go ahead, sir.

Christopher Nolan, Analyst

I'm back. Also, I mean, could you give a little detail in terms of the realized loss and the unrealized gain? I presume some of the unrealized gain was just a true-up, but a little detail would be helpful.

Suhail Shaikh, CEO

Sure. The realized loss was due to a couple of names, while the unrealized gain came primarily from the markups of Klein Hersh and Bioplan, both of which have performed well. We marked those names up accordingly. The realized loss came from Crafty Apes, which is currently on non-accrual, so we had to take a realized loss there. We expect to provide more updates on that name in the future. Additionally, we made some smaller trades to clean up the portfolio, but those were the significant changes.

Christopher Nolan, Analyst

My final question, Suhail, is regarding your new role as CEO. Could you share your vision for ICMB in terms of where you plan to focus on sourcing deals and any specific strategies or competitive advantages you may have?

Suhail Shaikh, CEO

Yes, that's a great question, Christopher. What we're aiming to do is establish a business focused on the core middle market, which encompasses companies generating between $15 million to $20 million in EBITDA on the low end and $50 million to $75 million on the high end. A significant portion of the deals we consider and ultimately invest in are club deals. In fact, more than 50% of our transactions come directly from sponsors, which is why our portfolio is heavily weighted toward sponsor-backed deals. The remaining investments are opportunistic, potentially involving sponsor-backed names in the secondary market, where we occasionally apply our liquid credit team's analysis on various names that are less liquid but align with our yield targets. We're also in a position to write substantial checks to sponsors, which makes us a relevant partner in their strategies, especially as we continue to raise funds. This check size will keep increasing, benefiting ICMB. Over the past 12 to 18 months, we have steadily enhanced the average EBITDA of our portfolio, reduced leverage, and improved our capacity to pursue more directly sourced deals from sponsors. That really outlines our strategy, and we anticipate that ICMB will gain from a broader array of opportunities in the core middle market.

Christopher Nolan, Analyst

Final question. Your expenses tend to be a little bit heavy in terms of as a percentage of revenues. Any plan in terms of improving operating efficiencies? That's it for me.

Suhail Shaikh, CEO

Great question. We are taking a very deep dive into just across our portfolios and across our business and specifically for ICMB, ways that we can efficiently manage our expenses. That number is going to come down over time as the rest of the portfolio and our business grows. I mean ICMB is obviously one portion of our strategy. So, that number should come down organically, but also on an inorganic manner, we are looking at ways to use technology more efficiently to lower our expense base.

Operator, Operator

Thank you very much. And there are no further questions.

Suhail Shaikh, CEO

Great. Thank you, everyone, and we look forward to talking again in a few months. Thank you.

Operator, Operator

And this concludes today's conference call. Thank you everyone for attending.