Crescent Capital BDC, Inc. — Q1 2023 Form 10-Q
Period: Three months ended March 31, 2023; balance-sheet comparisons are with December 31, 2022. Financial statements are unaudited. Crescent is an externally managed BDC investing primarily in middle-market debt and related equity.
Financial performance and position
| Metric | Q1 2023 / March 31, 2023 | Comparable period / prior year-end |
|---|---|---|
| Investment income | $39.3 million | $26.4 million in Q1 2022 |
| Net investment income | $17.5 million; $0.54 per share | $12.1 million; $0.39 per share in Q1 2022 |
| Net increase in net assets from operations | $7.8 million; $0.24 per share | $16.2 million; $0.52 per share in Q1 2022 |
| Net realized and unrealized investment and FX gains (losses) | $(9.9) million | $4.1 million gain in Q1 2022 |
| Operating cash flow | $16.0 million | $11.2 million in Q1 2022 |
| Investments at fair value | $1,566.0 million | $1,263.0 million at December 31, 2022 |
| Total assets / total liabilities | $1,631.1 million / $912.7 million | $1,302.9 million / $690.3 million at December 31, 2022 |
| Net assets / NAV per share | $718.4 million / $19.38 | $612.5 million / $19.83 at December 31, 2022 |
| Debt | $884.3 million drawn principal; $875.8 million carrying value net of financing costs | $659.8 million drawn principal at December 31, 2022 |
| Cash and restricted cash | $34.5 million | $17.1 million at December 31, 2022 |
- Investment income rose about 49% year over year, primarily from higher benchmark rates and a larger income-producing portfolio. Net investment income increased about 44%.
- Interest and other debt financing costs more than doubled to $12.4 million from $5.5 million, reflecting higher average debt and borrowing costs. The weighted-average borrowing rate was 6.73%, versus 3.43% in Q1 2022.
- Net unrealized depreciation, including foreign-currency effects, was approximately $10.2 million. This more than offset the period’s $17.5 million of net investment income in the decline in operating results versus Q1 2022.
- The filing does not present a conventional operating margin. Relevant BDC measures include net investment income and portfolio yield: weighted-average yield on income-producing securities at cost was 11.4%, up from 10.8% at year-end.
- Financing activities provided $1.4 million of cash, compared with $16.5 million used in Q1 2022. Cash, cash equivalents and restricted cash ended the quarter at $34.5 million.
Material changes and notable transactions
- On March 9, 2023, Crescent completed its acquisition of First Eagle Alternative Capital BDC (FCRD). It issued 6,174,187 shares and paid approximately $8.6 million cash; the Adviser separately paid $35.0 million to FCRD shareholders. Crescent recorded a $22.0 million deemed contribution from the Adviser. The acquisition was accounted for as an asset acquisition, with no goodwill.
- The acquisition added $335.0 million of investments at fair value and $206.8 million of assumed debt, including $111.6 million of FCRD 5.00% notes due 2026. Former Crescent and FCRD shareholders owned approximately 83% and 17% of the combined company, respectively.
- Gross drawn debt increased by $224.5 million from year-end, reflecting the acquisition and borrowing activity. Crescent reported $297.3 million of available capacity under its facilities, subject to borrowing-base and other limitations.
- Net asset value per share declined from $19.83 at year-end to $19.38. The financial highlights attribute $0.28 per share to the acquisition’s effect and report $0.41 per share of distributions declared.
- Portfolio fair value increased to $1.566 billion, with 187 portfolio companies versus 129 at year-end. Health care equipment and services represented 28.1% of fair value; software and services represented 18.6%.
Outlook, risks and other disclosures
- No quantitative earnings or investment guidance is provided. Management says quarterly results may vary and are not necessarily indicative of full-year results.
- Liquidity included $34.5 million of cash and restricted cash and $297.3 million of facility availability. Unfunded portfolio commitments were $159.6 million, slightly above $158.9 million at year-end; management stated cash and available facility capacity exceeded these commitments.
- Crescent reported compliance with debt covenants and asset-coverage requirements. Asset coverage was 181%, down from 192% at year-end. Management cautioned that portfolio losses, unrealized depreciation, rising rates or recession could increase the risk of covenant breaches and restrict access to capital.
- Interest-rate exposure is significant: 98.6% of debt investments at fair value bore floating rates. The filing estimates that a 100-basis-point increase in rates would raise annualized net interest income by $10.3 million, while a 100-basis-point decrease would reduce it by the same amount, before income incentive fees and assuming the balance sheet remains constant.
- Non-accruals increased to 16 investments across eight companies, representing 2.7% of debt investments at cost and 2.0% at fair value. At year-end, six investments across four companies were on non-accrual, representing 2.0% at cost and 1.2% at fair value. Excluding acquired FCRD assets, Crescent reported eight non-accrual investments across four companies.
- Valuation uncertainty is material: most portfolio investments are privately held and valued using significant unobservable inputs. Fair value may differ from realizable sale proceeds. Portfolio risks also include borrower defaults, illiquidity, PIK income, leverage, benchmark-rate changes and foreign-currency exposure.
- The Adviser’s income-incentive-fee waiver, subject to its terms, was extended through December 31, 2023. A regular $0.41 per-share dividend was declared for payment July 17, 2023. On May 9, Crescent completed a $50.0 million private offering of 7.54% unsecured notes due July 2026, intended to refinance the $50.0 million notes due July 2023.
- FCRD-related merger litigation was resolved and dismissed with prejudice on April 26, 2023. The company reported effective disclosure controls and internal control over financial reporting as of March 31, 2023.
Most important facts for investors to verify
- Whether the increase in non-accrual investments and the deterioration in portfolio fair values persist, especially among acquired FCRD positions.
- How much of the higher net investment income reflects sustainable portfolio growth versus elevated floating benchmarks, and how future rate changes affect income and funding costs.
- Debt refinancing terms and costs, facility availability under borrowing-base tests, covenant headroom, and the trajectory of asset coverage.
- Whether portfolio cash collections and operating cash flows support distributions and unfunded commitments; note that some reported income is PIK rather than cash received.
- Acquisition integration, valuation assumptions for acquired assets and liabilities, and the effect of the share issuance on per-share NAV and earnings.