Crescent Capital BDC, Inc. — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. Crescent is an externally managed business development company (BDC) and regulated investment company (RIC) that lends primarily to U.S. middle-market companies. Its audited financial statements received an unqualified opinion; management reported effective disclosure controls and internal control over financial reporting.
Financial performance and position
| Metric | 2023 | 2022 |
|---|---|---|
| Investment income | $184.1 million | $116.7 million |
| Net investment income (NII) | $82.5 million; $2.30 per share | $59.7 million; $1.93 per share |
| Net realized investment and currency gains (losses) | ($12.9) million | $4.9 million |
| Net unrealized appreciation (depreciation) | $13.2 million | ($48.3) million |
| Net increase in assets from operations | $83.8 million; $2.33 per share | $15.5 million; $0.50 per share |
| Operating cash flow | $92.3 million | $28.0 million |
Investment income rose 58%, reflecting higher benchmark rates, the FCRD acquisition and portfolio growth. Interest income increased to $169.8 million from $108.5 million; dividend income increased to $13.3 million from $7.7 million. Interest and other debt financing costs rose to $58.7 million from $31.9 million. The filing reports total net expenses of $101.6 million, including taxes, versus $57.0 million. NII was approximately 44.8% of investment income, compared with 51.2% in 2022.
Portfolio fair value was $1.582 billion, up from $1.263 billion, and the portfolio expanded from 129 to 186 companies. Unitranche first-lien investments represented 61.5% of fair value; 98.7% of debt investments were floating-rate. Weighted-average yield on income-producing securities at cost was 11.9%, versus 10.8% in 2022. Investments on non-accrual increased to 17 across nine companies, or 1.9% of debt fair value, from six investments across four companies, or 1.2%; non-accrual exposure was 2.0% of debt cost in both years. No investments were assigned the worst risk grade (5).
At year-end, total assets were $1.627 billion, net assets were $742.6 million and NAV was $20.04 per share, compared with $612.5 million and $19.83 per share in 2022. Debt was $851.9 million in principal ($844.8 million carrying value), up from $659.8 million. Asset coverage was 186%, down from 192%. Cash, cash equivalents and restricted cash totaled $24.5 million, including $7.8 million of cash and cash equivalents and $16.7 million restricted. Undrawn facility capacity was $329.7 million, subject to borrowing-base and other limits; the filing says available capacity and cash exceeded unfunded commitments of $175.0 million. The company reported compliance with asset coverage and credit-facility covenants at year-end.
Cash distributions declared for 2023 totaled $1.81 per share: four regular quarterly dividends of $0.41 and supplemental dividends of $0.08 and $0.09. NII of $2.30 per share exceeded declared distributions. The Board subsequently declared a $0.41 regular and $0.10 supplemental dividend for the first quarter of 2024.
Material changes versus 2022
- The March 9, 2023 FCRD acquisition added $335.0 million of investments at fair value and expanded the company’s portfolio. Crescent issued 6,174,187 shares; the Adviser also paid $35.0 million in cash consideration and recorded a $22.0 million deemed contribution. Existing CCAP holders owned approximately 83% of the combined company at closing.
- New investments at cost were $200.7 million, excluding acquired FCRD assets, versus $308.0 million in 2022; investment sales and repayments were $231.2 million versus $277.6 million. The portfolio’s net decrease from these activities was $30.5 million, before the acquisition.
- Higher income was partly offset by sharply higher financing costs and fees. Average debt outstanding increased to $837.0 million from $673.5 million; average borrowing cost was 7.02% versus 4.73% in 2022. Income-based incentive fees rose to $17.5 million from $11.2 million.
- Net realized losses of $12.9 million replaced 2022 net realized gains of $4.9 million, while unrealized results improved by $61.5 million, from depreciation of $48.3 million to appreciation of $13.2 million. Overall net realized and unrealized results were $0.3 million versus a $43.4 million loss.
- Year-end share price was $17.38 against NAV of $20.04. On February 20, 2024, the reported price was $16.39, an 18.2% discount to year-end NAV.
Outlook, risks and unusual items
The filing provides no formal earnings or investment guidance. Management noted that the Federal Reserve paused rate increases in December 2023 and that rate cuts might be warranted in 2024, but emphasized uncertainty. The portfolio and borrowing facilities are largely floating-rate: the company estimated that a 100-basis-point rate increase would raise annualized net interest income by $10.5 million before income incentive fees, while a 100-basis-point decrease would reduce it by the same amount, all else equal.
Key risks include borrower defaults and refinancing difficulty, inflation and interest-rate effects on portfolio companies, illiquid investments and valuation uncertainty, leverage and covenant constraints, access to capital, and the potential for reduced dividends. Most investments are valued using Level 3 inputs; the Adviser is the valuation designee, with Board oversight. PIK and original issue discount income may be recognized before cash is received and may increase tax-distribution needs or incentive fees. The Adviser’s fees are based partly on gross assets and accrued income, creating potential conflicts. The Adviser’s voluntary NII-based incentive-fee waiver was extended through December 31, 2023; no continuation beyond that date is stated here.
The company disclosed $175.0 million of unfunded portfolio commitments and noted that amounts may be drawn subject to contractual conditions. It reported ordinary-course lawsuits, but did not expect them to materially affect the business or results. The company said it had experienced no material cybersecurity incident to date, while warning that future incidents could have material effects.
Important facts for investors to verify
- Whether the increase in non-accrual investments, including the underlying borrowers’ payment status and collateral recovery prospects, continues or worsens.
- How much of the reported portfolio value depends on unobservable valuation inputs, and how subsequent realizations compare with year-end marks.
- Whether portfolio cash earnings and dividend coverage remain adequate as rates and borrowing costs change, including after the incentive-fee waiver ended.
- Available borrowing capacity after borrowing-base limits, facility covenants, unfunded commitments and upcoming debt maturities are considered.
- The performance and integration of acquired FCRD assets, and the effect of acquisition-related leverage, shares and adviser support on per-share results.
- The sustainability and tax character of distributions, including whether any future payments include return of capital or non-cash income.