Crescent Capital BDC, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparisons are primarily with FY2021. Crescent is a publicly traded business development company (BDC) lending mainly to U.S. middle-market companies and electing regulated investment company (RIC) tax treatment. Amounts below are U.S. dollars unless noted.
Business context and portfolio
The Company seeks current income and capital appreciation through secured and unsecured debt and related equity investments. At year-end, investments totaled $1.263 billion fair value across 129 portfolio companies, compared with $1.270 billion across 134 companies a year earlier. Unitranche first-lien loans were 65.2% of portfolio fair value; 98.8% of debt investments were floating rate. Health care equipment and services (28.7%) and software and services (21.3%) were the largest industry exposures.
Financial performance and position
| Metric | FY2022 / Dec. 31, 2022 | FY2021 / Dec. 31, 2021 |
|---|---|---|
| Total investment income | $116.7 million | $94.0 million |
| Net investment income (NII) | $59.7 million; $1.93/share | $47.6 million; $1.67/share |
| Adjusted NII, excluding capital-gains incentive fees (non-GAAP) | $53.4 million; $1.73/share | $53.9 million; $1.89/share |
| Net realized and unrealized investment gains (losses) | $(43.4) million | $37.4 million |
| Increase in net assets from operations | $15.5 million; $0.50/share | $83.6 million; $2.94/share |
| Net assets / NAV per share | $612.5 million / $19.83 | $652.3 million / $21.12 |
| Debt principal outstanding | $659.8 million | $637.9 million |
| Cash and restricted cash | $17.1 million | $23.5 million |
| Undrawn facility capacity | $225.2 million | $197.1 million |
| Asset coverage ratio | 192% | 201% |
Interest income rose to $108.5 million from $85.7 million, principally due to higher benchmark rates. Weighted-average portfolio yield at cost, excluding non-accrual investments, increased to 10.8% from 7.5%. However, debt financing costs rose to $31.9 million from $19.8 million; the weighted-average cost of debt at year-end was 6.23%, versus 3.15% a year earlier. The filing reports net cash provided by operating activities of $28.0 million, versus net cash used of $157.7 million in 2021; investment purchases and repayments were substantial in both years.
Year-end investment fair value was $28.5 million below cost, versus $25.5 million above cost in 2021. The 2022 unrealized depreciation was the principal reason operating results and NAV weakened. The stock closed 2022 at $12.78, a 35.6% discount to year-end NAV; the filing reports a $14.49 price on February 21, 2023, a 26.9% discount.
Material changes versus FY2021
- Higher floating-rate income lifted reported NII, but Adjusted NII per share declined 8.5%, from $1.89 to $1.73. Management attributes the decrease partly to the expiration of broad management- and income-incentive-fee waivers in July 2021.
- Portfolio investment fair value declined slightly, while new investments at cost fell to $308.0 million from $647.4 million. Proceeds from sales and repayments were $277.6 million, versus $461.3 million.
- Non-accrual debt increased to 2.0% of debt investments at cost and 1.2% at fair value, from 1.6% and 1.2%, respectively. Six investments across four companies were on non-accrual, compared with five investments across three companies.
- Asset coverage fell from 201% to 192%, while debt outstanding increased. Year-end liquidity nevertheless exceeded unfunded commitments, according to management.
- Quarterly regular dividends remained $0.41 per share. FY2022 financial highlights report $1.79 per share of distributions declared, including special distributions declared in 2021 and payable during 2022; confirm the relevant declaration and payment periods when assessing coverage.
Outlook, risks, and unusual items
The filing provides no quantified earnings or portfolio guidance. Management highlights an uncertain macroeconomic backdrop, including inflation, rising rates, potential recession, market volatility and geopolitical risks. Rising rates can increase portfolio income, but also raise portfolio-company debt service costs and the Company’s own funding costs. A hypothetical 100-basis-point increase in base rates was estimated to raise annual net interest income by $7.7 million before income incentive fees, assuming the year-end balance sheet remained constant.
The pending FCRD acquisition, announced October 3, 2022, remained subject to FCRD stockholder approval, regulatory approvals and other closing conditions. The agreement contemplated stock consideration capped at 19.99% of CCAP shares outstanding on the agreement date, potential cash consideration, and $35 million of adviser-funded cash consideration to FCRD stockholders. Sun Life separately committed to purchase $20 million of combined-company shares over time after closing. CCAP had recorded $3.8 million of acquisition costs at year-end. The filing anticipated a late first-quarter 2023 closing but gave no assurance it would occur; FCRD’s stockholder meeting was scheduled for March 7, 2023.
Other significant risks include leverage and covenant constraints, illiquid Level 3 valuations, borrower defaults and refinancing risk, foreign-currency exposure, non-cash PIK and original issue discount income, and dependence on the Adviser and Crescent. The adviser’s income-incentive-fee waiver, limited to cases where NII excluding the GAAP incentive-fee effect falls short of the regular declared dividend, was extended through December 31, 2023. The Company reported compliance with asset coverage and credit-facility covenants at year-end. Its $50 million 5.95% unsecured notes mature July 30, 2023. The SMBC revolving facility was increased from $350 million to $385 million in January 2023; the Board declared a $0.41-per-share dividend in February 2023.
The financial statements received an unqualified audit opinion from Ernst & Young LLP. The auditor was not engaged to audit internal control over financial reporting; management concluded disclosure controls and internal controls over financial reporting were effective at December 31, 2022. The filing reports no material legal proceedings expected to affect results.
Key facts investors should verify
- Whether FCRD closed, the final exchange ratio and consideration, integration results, and the actual cost savings or synergies achieved.
- Performance and recovery prospects for the six non-accrual investments, and whether non-accrual exposure or risk-rating 3 and 4 investments increased after year-end.
- Whether recurring cash NII supports the $0.41 quarterly dividend, considering the decline in Adjusted NII per share and accrued, non-cash income.
- Refinancing or repayment of the $50 million notes due July 2023, borrowing-base availability, covenant headroom and the effect of higher funding costs on asset coverage.
- Fair-value assumptions and realized outcomes for Level 3 investments: $1.168 billion of investments were Level 3 at year-end, using significant unobservable inputs.
- Subsequent portfolio, liquidity and share-price developments; the reported 2022 year-end market discount to NAV was substantial.