Crescent Capital BDC, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Crescent is an externally managed business development company investing primarily in debt and related equity of middle-market companies. Unless stated otherwise, financial amounts below are in U.S. dollars; figures are rounded.
Financial and portfolio highlights
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Investment income | $46.7m | $26.8m | $86.0m | $53.2m |
| Net investment income | $20.6m; $0.56/share | $15.5m; $0.50/share | $38.1m; $1.09/share | $27.7m; $0.90/share |
| Net increase in net assets from operations | $22.6m; $0.61/share | $(0.9)m; $(0.03)/share | $30.4m; $0.87/share | $15.3m; $0.50/share |
| Net realized and unrealized gains (losses) | $1.4m | $(16.4)m | $(8.5)m | $(12.3)m |
| Operating cash flow | Not provided separately for the quarter | Not provided separately for the quarter | $36.3m | $4.2m |
- Portfolio and NAV: Investments at fair value were $1.581bn at June 30, up from $1.263bn at December 31, 2022, principally reflecting the FCRD acquisition and portfolio activity. Net assets were $725.8m and NAV was $19.58/share, versus $612.5m and $19.83/share at year-end.
- Debt and liquidity: Debt outstanding was $867.1m before deferred financing costs ($859.2m net on the balance sheet), compared with $659.8m at year-end. Cash and restricted cash totaled $21.5m; reported undrawn capacity on revolving and SPV facilities was $314.5m, subject to borrowing-base and other limits. Asset coverage was 183%, versus 192% at year-end. The company reported compliance with debt covenants.
- Dividends: The regular dividend was $0.41/share for each of Q1 and Q2. Distributions payable at quarter-end were $15.2m.
- Portfolio quality and composition: The portfolio comprised 187 companies; 98.6% of debt fair value bore floating rates. Non-accruals rose to 16 investments across eight companies, representing 2.2% of debt at cost and 1.7% at fair value, from 2.0% and 1.2%, respectively, at year-end. Healthcare equipment and services accounted for 28.5% of investment fair value, the largest industry exposure.
Material changes versus comparable periods
- Q2 investment income increased to $46.7m from $26.8m, while net investment income rose to $20.6m from $15.5m. Management attributed higher investment income to rising benchmark rates, organic portfolio growth, and the FCRD acquisition.
- Q2 interest and other debt financing costs increased to $15.3m from $6.6m. For the six months, the combined weighted-average borrowing rate rose to 6.82% from 3.71%; management cited higher debt balances and benchmark rates.
- Q2 operations moved from a $0.9m loss in 2022 to a $22.6m increase in net assets, including a $1.4m net realized and unrealized gain versus a $16.4m loss in the prior-year quarter.
- Six-month portfolio purchases were $67.1m and sales/principal repayments were $82.5m, excluding the $335.0m of investments acquired in the FCRD transaction. Shares outstanding increased from 30.9m at year-end to 37.1m after 6.17m shares were issued for the acquisition.
- Six-month total return was 25.34% based on market value and 2.87% based on NAV; the comparable 2022 figures were negative 6.98% and positive 2.32%, respectively.
Outlook, risks, and unusual items
- Acquisition: Crescent completed its acquisition of First Eagle Alternative Capital BDC on March 9, 2023. It received net assets of $129.5m, including $335.0m of investments and assumed liabilities; consideration included $8.6m cash, 6.17m Crescent shares, and a $22.0m deemed Adviser contribution. The Adviser separately paid $35.0m to FCRD shareholders.
- Subsequent financing: A $50.0m issuance of 7.54% unsecured notes due July 2026 was completed in May; the notes replaced $50.0m of 5.95% notes repaid July 28, 2023. The company also assumed FCRD’s $111.6m of 5.00% notes due May 2026.
- Distribution outlook: On August 3, the Board declared a regular $0.41/share third-quarter dividend and a supplemental $0.08/share dividend. No broader earnings or portfolio guidance is provided in the supplied filing text.
- Rate sensitivity: Management’s static annualized sensitivity analysis estimates a $10.5m increase in net interest income for a 100-basis-point rate rise and a $10.5m decrease for a 100-basis-point fall, before income incentive fees. Floating-rate assets and borrowings mean rate changes can affect both income and financing costs.
- Credit, valuation, and liquidity risks: Management cautions that recession risks, portfolio depreciation, and losses could affect covenant headroom and access to capital. Most investments are Level 3 and valued using significant unobservable inputs; realized values may differ materially from reported fair values. Unfunded portfolio commitments were $176.2m, up from $158.9m at year-end.
- Other disclosures: The company cited continuing uncertainty in financial markets and the banking sector, including the 2023 failures of Silicon Valley Bank and Signature Bank. It reported no material expected effect from ordinary-course legal proceedings and no defaults upon senior securities. Management concluded disclosure controls and internal control over financial reporting were effective as of June 30.
Important facts for investors to verify
- Whether the increase in non-accrual exposure, including the portfolio companies affected and recovery assumptions, has continued after quarter-end.
- How the FCRD assets, assumed liabilities, transaction costs, and new share issuance affect per-share earnings, NAV, and portfolio risk.
- Current debt availability under borrowing-base limits, the cost and maturity profile of borrowings, and asset-coverage and covenant headroom.
- Whether investment income and cash receipts support the regular and supplemental distributions, particularly given PIK income and unfunded commitments.
- The valuation assumptions for Level 3 assets and foreign-currency exposures, and the sensitivity of investment fair values to weaker portfolio-company performance or market yields.
- The market-price return relative to NAV-based performance; the filing reports a substantial difference between six-month market-value and NAV total returns.