Crescent Capital BDC, Inc. quarterly report, Q3 FY2022

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Crescent Capital BDC, Inc. — Q3 2022 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2022. Crescent is an externally managed business development company (BDC) investing mainly in secured debt and related equity of middle-market companies. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions unless noted.

Financial performance and condition

  • Investment income: Q3 total investment income was $29.0 million, up from $25.5 million a year earlier; nine-month income was $82.1 million versus $69.8 million. Management attributed higher interest income to portfolio growth and rising benchmark rates.
  • Net investment income (NII): Q3 NII was $16.0 million, or $0.52 per share, versus $12.7 million, or $0.45, in Q3 2021. Nine-month NII was $43.6 million, or $1.41 per share, versus $35.1 million, or $1.25. Excluding capital-gains incentive-fee accruals, the company’s non-GAAP adjusted NII was $0.42 per share in Q3 and $1.24 for nine months, down from $0.48 and $1.47, respectively, largely reflecting reduced fee waivers.
  • Net results and portfolio marks: Q3 operations produced a $2.4 million decrease in net assets, or a loss of $0.08 per share, compared with a $16.7 million increase in Q3 2021. Nine-month results were a $12.9 million increase versus $70.8 million. Net realized and unrealized investment and currency gains (losses) were $(17.7) million for Q3 and $(30.0) million for nine months; the prior-year nine-month period included a $27.5 million realized gain on an affiliated investment.
  • Portfolio and NAV: Investments at fair value totaled $1.293 billion, versus $1.270 billion at December 31, 2021. Net assets were $622.6 million, down from $652.3 million, and NAV per share declined to $20.16 from $21.12. Healthcare equipment and services was 28.6% of portfolio fair value; software and services was 20.5%. About 98.7% of debt investments at fair value bore floating rates.
  • Credit quality: Six positions across four portfolio companies were on non-accrual, equal to 2.0% of debt investments at cost and 1.3% at fair value, compared with 1.6% and 1.2% at year-end 2021. Investments rated 3 on the company’s risk scale rose to 10.3% of portfolio fair value from 7.9%.
  • Cash flow and liquidity: Nine-month operating cash flow was $(13.9) million, compared with $(43.9) million in 2021; financing cash flow was $12.5 million. Cash and restricted cash totaled $22.2 million. The company reported $193.0 million of undrawn facility capacity, subject to borrowing-base and other restrictions, and aggregate unfunded portfolio commitments of $193.4 million.
  • Debt and leverage: Debt carrying value, net of deferred financing costs, was $686.1 million; gross principal drawn was $692.0 million, against $885.0 million of commitments. Weighted-average debt cost was 5.31%, up from 3.15% at year-end 2021. Asset coverage was 189%, down from 201%; the company reported compliance with debt covenants and BDC asset-coverage requirements.
  • Expenses and margins: Q3 interest and other debt financing costs rose to $8.7 million from $5.7 million; nine-month costs rose to $20.7 million from $14.5 million, reflecting higher borrowing and rates. Crescent is an investment company; conventional operating margin is not reported.

Material changes, outlook, and risks

  • Q3 investment income and GAAP NII increased year over year, but investment valuation losses drove a quarterly operating loss. The nine-month comparison is also affected by substantial realized gains in 2021.
  • The Adviser extended through December 31, 2023 its voluntary waiver of income incentive fees to the extent qualifying NII falls short of the regular declared dividend. Quarterly regular dividends were $0.41 per share; the Board declared another $0.41 dividend on November 4, 2022, payable January 17, 2023. No earnings or NAV guidance was provided.
  • On October 3, 2022, Crescent agreed to acquire First Eagle Alternative Capital BDC (FCRD), subject to FCRD shareholder, regulatory, and other closing conditions. Consideration is based on closing NAV, with stock issuance capped at 19.99% of Crescent shares outstanding as of October 3 and potential cash consideration; Crescent’s Adviser separately committed $35 million for FCRD shareholders. Sun Life also committed to purchase $20 million of the combined company’s common stock over time after closing. Management expected completion in late Q4 2022 or early Q1 2023, but stated there was no assurance the deal would close. Crescent had incurred $1.5 million of acquisition costs by quarter-end.
  • Key stated risks include rising rates increasing both portfolio-company debt service and Crescent’s funding costs; recession, inflation, credit-market stress, defaults, and valuation uncertainty; foreign-exchange exposure; and the possibility that illiquid Level 3 investments realize less than reported fair value. Management also cautioned that a fall in NAV or greater losses could increase covenant-breach risk.
  • The filing reports effective disclosure controls and internal control over financial reporting as of September 30, 2022, and no material changes in internal control during the quarter. Routine legal proceedings were not expected to materially affect the company.

Most important facts for investors to verify

  • Whether portfolio marks, non-accruals, and risk-rating migration worsen, particularly given the predominance of Level 3 valuations.
  • How quickly higher floating-rate asset income translates into cash NII after higher borrowing costs, fee waivers, and incentive fees.
  • Whether the $0.41 quarterly dividend remains supported by recurring cash income, rather than GAAP NII affected by non-cash items or fee reversals.
  • Actual usable borrowing capacity after borrowing-base tests, unfunded commitments, and the 2023 unsecured-note maturity.
  • FCRD deal closing conditions, final exchange ratio and cash component, dilution and NAV effects, integration costs, and realization of expected synergies.
  • Reconcile reported cash flows, portfolio purchases and repayments, and the company’s ability to fund commitments while maintaining asset coverage and covenants.