Crescent Capital BDC, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Crescent is an externally managed business development company investing primarily in private middle-market debt and related equity. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Investment income | $48.2 | $29.0 | $134.2 | $82.1 |
| Net investment income | $21.7; $0.59/share | $16.0; $0.52/share | $59.8; $1.68/share | $43.6; $1.41/share |
| Net increase in net assets from operations | $22.6; $0.61/share | $(2.4); $(0.08)/share | $53.0; $1.49/share | $12.9; $0.42/share |
- For Q3, interest income rose to $44.6 from $27.2, and dividend income to $3.2 from $1.6. Management attributes higher investment income to increased benchmark rates, the FCRD acquisition, portfolio growth, and higher portfolio-company distributions.
- Net investment income increased, but debt financing costs also rose: $15.4 in Q3 versus $8.7, and $43.0 for nine months versus $20.7. Nine-month weighted-average borrowing cost was 6.96%, compared with 4.15% in 2022; period-end weighted-average debt cost was 7.01%.
- Net realized and unrealized investment and currency results were a gain of $1.0 in Q3, versus a loss of $17.7 in Q3 2022; for nine months, they were a loss of $7.5 versus a loss of $30.0.
- At September 30, total assets were $1,624.5, debt carrying value net of financing costs was $856.7, and net assets were $730.3. NAV was $19.70/share, down from $19.83 at December 31, 2022.
- Investments at fair value totaled $1,564.8, compared with $1,263.0 at year-end. The portfolio was 98.6% floating-rate debt at fair value; health care equipment and services and software and services were the largest industry exposures, at 27.4% and 20.8% of investment fair value.
- Level 3 investments were $1,461.4, a substantial portion of portfolio fair value; private-investment valuations rely significantly on unobservable inputs.
- Nine-month operating cash flow was $57.7, compared with cash used of $13.9 in 2022. Ending cash, cash equivalents and restricted cash totaled $22.8, including $16.8 restricted cash.
Material changes and capital structure
- The March 9, 2023 FCRD acquisition added $335.0 of investments at fair value and $129.5 of net assets. Crescent issued 6.17 million shares and paid approximately $8.6 in cash; the Adviser contributed $35.0 in cash, of which $22.0 was recorded as a deemed contribution. The acquired company’s $111.6 of 5.00% notes due 2026 were assumed. The transaction increased outstanding shares from 30.89 million at year-end to 37.06 million.
- Debt drawn increased to $864.3 from $659.8 at December 31, 2022. The company reported $317.3 of available capacity across its SPV and corporate revolving facilities, subject to borrowing-base and other limitations. Asset coverage was 184% at September 30; the company reported compliance with debt covenants and asset-coverage requirements.
- Unfunded portfolio-company commitments were $157.4, down from $158.9 at year-end. Management said cash and available facility capacity exceeded these commitments.
- Sixteen investments across nine portfolio companies were on non-accrual, representing 2.3% of debt investments at cost and 1.8% at fair value. At year-end 2022, six investments across four companies were on non-accrual, representing 2.0% at cost and 1.2% at fair value.
Distributions, outlook, and risks
- The regular quarterly dividend was $0.41/share; a $0.08 supplemental dividend was also declared for Q3. On November 2, the Board declared a $0.41 regular dividend payable January 16, 2024 and a $0.09 supplemental dividend payable December 15, 2023. The supplemental amount is based on a portion of net investment income above the regular dividend, subject to measurement tests.
- The filing provides no quantified earnings or portfolio guidance. Management notes results can vary with investment activity, economic conditions, benchmark rates, financing costs, and market opportunities; interim results are not necessarily indicative of full-year results.
- Management identifies risks from rising rates and potential recession, credit deterioration and defaults, illiquidity and fair-value uncertainty, leverage and borrowing costs, foreign-currency exposure, and the ability to meet covenants. A hypothetical 100-basis-point rate move was estimated to change annualized net interest income by $10.4, excluding income incentive fees; actual results could differ.
- Other items to monitor include $2.9 of paid-in-kind interest income for the first nine months, commitments that could require future funding, and the reliance on valuation estimates for illiquid investments. Management reported effective disclosure controls and internal control over financial reporting, with no material control changes during the quarter.
Important facts for investors to verify
- Whether the higher investment income and NII per share persist as benchmark rates and portfolio yields change, while financing costs remain elevated.
- Developments in the 16 non-accrual investments, including recoveries, valuation changes, and any additional loans placed on non-accrual.
- Borrowing-base availability, covenant headroom, asset coverage, debt maturities, and the cost of refinancing.
- How the FCRD-acquired portfolio performs and how acquisition-related share issuance affects per-share income and NAV.
- Whether cash generation supports the regular and supplemental distributions, particularly given the $157.4 of unfunded commitments and the portfolio’s valuation and credit risks.