Crescent Capital BDC, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; balance-sheet comparisons are to December 31, 2023. Crescent is an externally managed BDC investing primarily in middle-market private-company debt and related equity. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context and portfolio
- Portfolio investments had a fair value of $1.563 billion, down from $1.582 billion at year-end. The portfolio remained concentrated in unitranche first-lien loans (62.7% of fair value); 89.3% of investments were in the United States.
- Health care equipment and services represented 26.6% of portfolio fair value, software and services 20.9%, and commercial and professional services 13.0%.
- 97.5% of debt investments at fair value bore floating rates. The weighted-average yield on income-producing securities at cost was 12.3%.
Financial performance and condition
| Metric | Q1 2024 | Q1 2023 or prior date |
|---|---|---|
| Total investment income | $50.4 million | $39.3 million |
| Net investment income | $23.3 million; $0.63 per share | $17.5 million; $0.54 per share |
| Net realized and unrealized gains | $4.3 million | Loss of $9.9 million |
| Net increase in net assets from operations | $28.0 million; $0.76 per share | $7.8 million; $0.24 per share |
| Net investment income / investment income | 46.3% | 44.5% |
| Net asset value per share | $20.28 | $20.04 at December 31, 2023 |
| Net assets | $751.7 million | $742.6 million at December 31, 2023 |
| Debt, gross principal drawn | $838.0 million | $851.9 million at December 31, 2023 |
| Cash and cash equivalents, including restricted cash | $31.9 million | $24.5 million at December 31, 2023 |
- Reported debt on the balance sheet was $831.4 million, net of deferred financing costs. Total undrawn capacity on the SPV and SMBC revolving facilities was $343.6 million, subject to borrowing-base and other restrictions. Unrestricted cash and cash equivalents were $6.7 million; $25.2 million was restricted.
- Operating cash flow was $39.5 million, compared with $16.0 million in Q1 2023. Cash from investment sales and principal repayments was $98.4 million, versus $73.9 million of investment purchases. Financing cash outflow was $31.9 million, including $18.9 million of distributions paid.
- The company declared distributions of $0.51 per share for the quarter: a regular $0.41 and supplemental $0.10. Distributions payable at quarter-end were $15.2 million.
- Asset coverage was 189% at March 31, 2024; Crescent reported compliance with its debt covenants and BDC asset-coverage requirements. Aggregate unfunded portfolio commitments were $171.0 million.
Changes versus comparable periods
- Investment income rose 28% year over year, primarily because of higher benchmark rates; investment interest income increased to $46.2 million from $35.9 million. Other income included $0.9 million of one-time amendment and arranger fees, versus none reported in Q1 2023.
- Net investment income increased 33%. Interest and other debt financing costs rose to $15.6 million from $12.4 million, reflecting higher average debt and borrowing costs. The average borrowing rate increased to 7.29% from 6.73%; average debt outstanding rose to $858.6 million from $735.2 million.
- Investment valuation results improved: Q1 2024 net realized and unrealized gains were $4.3 million, compared with losses of $9.9 million in Q1 2023. Q1 2024 included $1.4 million of realized gains on foreign-currency forwards.
- Compared with year-end, non-accrual investments declined to 13 positions across seven companies, from 17 positions across nine companies. They represented 1.6% of debt-investment cost and 0.9% of fair value, versus 2.0% and 1.9%, respectively.
- Quarterly investment purchases and repayments were both higher than in Q1 2023; the net portfolio contracted by $24.5 million. Year-over-year comparisons are affected by the FCRD acquisition, completed in March 2023, and its issuance of 6.17 million shares.
Outlook, risks and notable items
- The filing provides no earnings or investment-volume guidance. Management notes that investment activity depends on market conditions, available capital, middle-market deal activity and competition. The filing cautions that quarterly results may not indicate full-year results.
- For Q2 2024, the Board declared a regular dividend of $0.42 per share and a supplemental dividend of $0.11 per share, payable in June and July 2024. The supplemental amount is based on a portion of net investment income above the regular dividend, subject to specified tests.
- Interest-rate exposure is material: company analysis estimates annualized net interest income would increase $10.1 million for a 100-basis-point rate increase and decrease $10.1 million for a 100-basis-point decrease, before incentive-fee effects and other changes. Borrowings under the SPV and SMBC facilities are also variable-rate.
- Valuation risk is significant: $1.503 billion of investments were Level 3, measured using significant unobservable inputs; an additional $48.1 million was valued using NAV as a practical expedient. Actual proceeds in a forced sale could differ materially from reported fair values.
- Portfolio risks include borrower defaults, illiquidity, PIK income that may not be collected in cash, leverage, foreign-currency exposure and sensitivity to credit-market, economic and interest-rate changes. Non-qualifying assets were 16.9% of fair value; BDC rules generally require qualifying assets to represent at least 70% of total assets at acquisition.
- Crescent reported no material expected impact from ordinary-course legal proceedings, no senior-security defaults, and effective disclosure controls and internal control over financial reporting as of March 31, 2024. No material control changes were reported during the quarter.
Important facts for investors to verify
- Whether portfolio credit quality and the reported improvement in non-accrual investments persist, including the collectability of PIK and other accrued income.
- Borrowing-base availability, covenant headroom and the effect of rate movements on net investment income, financing costs and asset coverage.
- Key Level 3 valuation assumptions, borrower performance and potential differences between reported fair values and realizable sale proceeds.
- Ability to meet $171.0 million of unfunded commitments and declared distributions while maintaining liquidity; facility availability is conditional.
- Dividend coverage and sustainability: Q1 net investment income was $0.63 per share against $0.51 per share of declared regular and supplemental distributions.
- How the 2023 FCRD acquisition affects comparisons, including portfolio composition, debt and per-share results.