Investcorp Credit (ICMB) Earnings Call Transcript

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DATE

Wednesday, August 13, 2025 at 10 a.m. ET

CALL PARTICIPANTS

• Chief Executive Officer — Suhail Shaikh
• Chief Financial Officer & Chief Operating Officer — Andrew Muns

TAKEAWAYS

• Net Investment Income Before Taxes -- $0.8 million, or $0.06 per share, representing a 1% sequential increase and an annualized return on equity of 4.3%.
• Net Asset Value (NAV) Per Share -- Decreased to $5.27 from $5.42 last quarter, mainly due to fair value adjustments and two new nonaccrual designations.
• Portfolio Fair Value -- Reached $204.1 million, up from $192.4 million last quarter.
• Nonaccruals as Percent of Fair Value -- Stable at 1.6%; down from 5% in the comparable period last year.
• Origination Activity -- $19 million in new investments, concentrated in existing portfolio companies, compared to $5.1 million in the previous quarter.
• Realizations -- Proceeds of $9.5 million from three portfolio exits, realizing an IRR of approximately 32.8%.
• Portfolio Composition -- 43 borrowers with 79% in first lien debt and 21% in equity, warrants, and other positions; 98.5% of debt in floating rate instruments.
• Weighted Average Portfolio Yield -- 10.6%, a modest decline from 11% the prior quarter.
• Gross and Net Leverage -- Increased to 1.77x gross and 1.54x net, from 1.53x and 1.37x, respectively, last quarter.
• Stock Repurchase Program -- Board authorized repurchase of up to $5 million of common stock, effective until August 7, 2026, with no minimum required purchases.
• Quarterly Distribution -- Declared $0.12 per share, plus a $0.02 per share supplemental, both payable October 9, 2025, to record holders as of September 18, 2025.
• Liquidity Position -- $17.3 million in cash, including $14.4 million restricted, and $29.5 million available under the Capital One revolver as of quarter end.
• Industry Concentrations -- Largest exposures by fair value in professional services (13.8%), insurance (9.9%), containers and packaging (8.8%), IT services (8.7%), and trading companies and distributors (8%).
• Largest Investment -- $13.6 million fair value in BioPlan, the portfolio's single largest company position.

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RISKS

• CEO Shaikh stated, "the big issue for the vehicle right now is the expense base," noting profitability is constrained until assets under management are scaled to absorb fixed costs.
• Net leverage has increased above management’s targeted high end of 1.5x, with further portfolio growth or contraction to be determined by repayments and new investments, as discussed on the call.
• CFO Muns acknowledged the declared distributions exceeded net income and asset-related changes, due to "spill back" and spillover income rather than purely operating performance.
• Board discussed stabilizing asset quality, but net asset value per share continued to decline on fair value adjustments, including new nonaccrual designations.

SUMMARY

Management announced the appointment of Andrew Muns as CFO, effective July 16, 2025, citing a continued strategic focus on cost control and asset stability. The Board authorized a $5 million share repurchase plan and distributed $0.14 per share in dividends, which included a supplemental reflecting spillover income, not just core operating results. Portfolio origination sharply accelerated, driven mainly by investments in existing companies, while realized exits delivered high IRRs and supported reallocation. Sector allocations remain diverse, with professional services, insurance, and packaging among the largest concentrations by fair value, and leverage metrics increased modestly. The company is monitoring middle market activity for further deployment, but remains cautious on underwriting standards and expenses.

• The new share repurchase authorization allows management discretion and does not obligate any minimum purchases during the program period.
• Repayment activity in the second half, rather than asset sales or strategic exits, was described as the likely primary tool for leverage management.
• Nonaccrual levels remained stable at a multi-quarter low, while broader borrower performance was said to be "largely in line with expectations."
• Management gave no timetable or explicit commitment regarding strategic alternatives to narrow the current stock discount to NAV, despite direct questioning on this front.

INDUSTRY GLOSSARY

• Nonaccrual: Loans where interest income is no longer being accrued due to borrower credit weakness or payment delinquency.
• First Lien Debt: Senior secured loans with the highest repayment priority in the event of borrower default.
• IRR (Internal Rate of Return): A metric expressing the annualized effective compounded return rate on investments, accounting for timing and cash flow magnitude.
• LTV (Loan-to-Value): The ratio of a loan to the value of the collateral backing it, used as a risk assessment tool.

Full Conference Call Transcript

Suhail Shaikh: Good morning, everyone, and thank you for joining our second quarter 2025 earnings call. Firstly, I would like to say that the Board of Directors and I are very pleased that Andrew Muns has accepted the role of CFO of the company, which became effective on July 16, 2025. Andrew was appointed as the COO of the company on March 24, 2025, which led us to expand his role as the CFO. This was a busy quarter for us on several fronts. And while some of the headline results were mixed, we remain focused on executing our strategy and positioning the portfolio for long-term value creation. Turning to our second quarter results.

We reported net investment income before taxes of $0.8 million or $0.06 per share, an increase of 1% from the previous quarter. This represents an annualized return on equity of 4.3%, up approximately 80 basis points sequentially, reflecting stable income generation and continued discipline on both the investing and expense fronts. This trend continues to reflect our broader 2025 theme of steady execution amid an improving yet selective deployment environment. Net assets declined modestly during the quarter, and our net asset value per share decreased to $5.27 per share from $5.42 in the previous quarter, largely driven by fair value adjustments, including two positions being placed on nonaccrual.

Importantly, even though with these additions, our nonaccruals as a percentage of the total portfolio at fair value remained stable at 1.6%, in line with the previous quarter. Notably, this is down meaningfully from 5% in the same period last year, underscoring the continued progress we've made in credit resolution and the effectiveness of our disciplined investing approach. Additionally, the overall portfolio continues to demonstrate resilience, and we continue to benefit from the diversity of industries we are invested in. Performance across our underlying borrowers remains largely in line with expectations.

While the median EBITDA is relatively unchanged at approximately $55 million, the weighted average net leverage declined to approximately 4.8x from 4.9x and the weighted average LTV remained relatively unchanged at approximately 46% from the quarter ended March 31. One of the defining features of the quarter was a pickup in origination activity with $19 million in originations this quarter, up from $5.1 million last quarter. Most of this activity occurred in June and was concentrated in existing portfolio companies. This demonstrates both our conviction in our long-standing sponsor relationships and the continued selectivity in the broader market where new opportunities that meet our underwriting criteria remain limited.

We continue to take a highly selective approach and maintain a rigorous diligence process to ensure that any additions to the portfolio meet our underwriting standards and long-term investment objectives. As we look ahead, we are seeing early signs of renewed momentum in the middle market. Our pipeline is beginning to rebuild in July, and we are cautiously optimistic that this momentum will carry into the second half of the year. Market spreads remained relatively stable throughout the quarter, and we continue to see disciplined pricing across the middle market. While volume has started to pick up, the quality of deal flow continues to vary, and we remain focused on maintaining high underwriting standards.

Our priorities remain centered on resolving legacy credit issues and repositioning the portfolio to support long-term performance. I will now turn to a summary of our investment activity for the quarter. During the quarter ended June, we invested in one new portfolio company and four existing portfolio companies. Fundings for new investments totaled $19 million at cost, as I mentioned earlier. The weighted average yield of debt investments made in the quarter was approximately 9%. In the same period, we fully realized three portfolio companies investments totaling $9.5 million in proceeds with an IRR of approximately 32.8%. First, we invested in the first lien term loan of One Call Medical.

One Call is a tech-enabled provider of managed care solutions that serves workers' compensation and other health markets in the U.S. We are currently invested in the term loan across our other funds on our platform. Our yield at cost is approximately 9.2%. We participated in the refinancing of American Auto Auction, also known as XLerate. XLerate is the second largest player in the used car whole auction market. We invested in the first lien term loan and our yield-at-cost is approximately 9.1% Lastly, we -- as mentioned earlier, we made a number of incremental investments in existing portfolio companies that we were able to opportunistically purchase in the secondary markets.

These include an investment in Integrity Marketing, Asurion and Max U.S. Bidco, also known as Alphia. Our yield-at-cost is approximately 8.5%, 8.9% and 9.2%, respectively, in these investments. Turning to our realizations. We realized our first lien term loan position in XLerate as part of the refinancing that I mentioned and 4L Technologies, both of which were refinanced during the quarter. Our realized IRRs on XLerate and 4L are 20.4% and 19.9%, respectively. We also realized our equity position in RESA Power. We participated in the co-investment of RESA Power alongside Investcorp's North American private equity team a few years ago. Our realized IRR is 64.1%.

I would now like to turn the call over to Andrew to discuss our financial results.

Andrew Muns: Thanks, Suhail. Let me begin by providing you with highlights of our quarterly performance. For the quarter ended June 30, 2025, the fair value of our portfolio was $204.1 million compared to $192.4 million on March 31. Our net assets were $76 million, a decrease of $2.1 million from the prior quarter. Our portfolio's net decrease in net assets from operations this quarter was approximately $434,000 with the remaining $1.7 million due to the distribution of cash dividends to shareholders. The weighted average yield of our portfolio was 10.6%, a slight decrease from 11% in the previous quarter.

As of June 30, our portfolio consisted of 43 borrowers, approximately 79% of our investments were in first lien debt and the remaining 21% was invested in equity, warrants and other positions, 98.5% of our debt portfolio was invested in floating rate instruments and 1.5% in fixed rate instruments. The weighted average spread on our floating rate debt investments was 4.6%, a slight decrease from 4.7% in the prior quarter. The average investment size per portfolio company on a fair market value basis was approximately $4.7 million and our largest portfolio company investment on a fair market value basis remained BioPlan at $13.6 million.

Our largest industry concentrations by fair market value were professional services at 13.8%, insurance at 9.9%, containers and packaging at 8.8%, IT services at 8.7% and trading companies and distributors at 8%. Overall, our portfolio companies are spread among 19 different GICS industries as of quarter end, including our equity and warrant positions. I would like to announce that on August 7, 2025, the Board of Directors authorized the company to repurchase up to $5 million of its shares of common stock pursuant to a new stock repurchase program.

The timing, manner, price and amount of any share repurchases will be determined by the company in its discretion based on the evaluation of economic and market conditions, the company's stock price, applicable legal, contractual and regulatory requirements and other factors. The program is expected to be in effect until August 7, 2026, unless extended or until the aggregate repurchase amount that has been approved by the company's Board of Directors has been extended. The program does not require the company to repurchase any specific number of shares, and the company cannot assure stockholders that any shares will be repurchased under the program, program may be suspended, extended, modified or discontinued at any time.

We are pleased to announce that on August 7, 2025, the Board of Directors declared a distribution for the quarter ended September 30, 2025, of $0.12 per share and a supplemental distribution of $0.02 per share payable in cash on October 9, 2025, to stockholders of record as of September 18, 2025. Gross leverage was 1.77x and net leverage was 1.54x as of June 30 compared to 1.53x gross and 1.37x net, respectively, for the previous quarter. With respect to our liquidity, as of June 30, we had approximately $17.3 million in cash, of which approximately $14.4 million was restricted cash with $29.5 million of capacity under our revolving credit facility with Capital One.

Additional information regarding the composition of our portfolio and quarterly financial results are included in our Form 10-Q. With that, I would like to turn the call back over to Suhail.

Suhail Shaikh: Thank you, Andrew. We remain confident in the strength of our platform and the disciplined approach our team takes in managing the portfolio and cultivating strong origination relationships. As we move through 2025, our priorities continue to be maintaining NAV stability, delivering sustainable net investment income and selectively deploying capital into high-quality opportunities with attractive risk-adjusted returns. With increased activity emerging in the middle market, we believe the second half of the year will represent compelling investment opportunities. Over the past year, we have made meaningful progress in positioning the company for long-term success, and we're optimistic about our ability to create consistent value for our shareholders going forward.

We appreciate your continued support and look forward to updating you on our progress in the quarters ahead. That concludes our prepared remarks. Operator, please open the line up for Q&A.

Operator: [Operator Instructions] We are now ready to begin. Our first question comes from Christopher Nolan, Ladenburg Thalmann.

Christopher Nolan: Andrew, congrats on the promotion.

Andrew Muns: Thank you.

Christopher Nolan: What was the spillover income for the quarter, please?

Andrew Muns: I'll have to look up the exact amount of the spillover income, but you rightly pointed out that, that was the big reason for the distribution to shareholders being in excess of the change in assets from operations. The net income before taxes of $0.06 a share was about $0.04 a share after taxes and negative $0.03 a share after taking into account losses. So the distribution of $0.12 a share with the supplemental of $0.02 is obviously in excess of that. And that, as you pointed out, is related to the spill back.

Christopher Nolan: Okay. On a more broader question, you guys are running with a really high leverage. The profitability is somewhat low and the asset quality is actually pretty good. And I'm just trying to understand what is the strategy to improve returns, please?

Suhail Shaikh: Yes, it's a great question, Chris. And I think if I recall, you probably asked a similar question last quarter as well. I think the big issue for the vehicle right now is the expense base. And as we grow our assets under management for Investcorp's private credit business, we can absorb some of those expenses broadly across a variety of end markets and that's going to improve the profitability of the company. At a high level, that is -- we've mentioned that before, and we continue to focus on that. I think as you rightly pointed out, it's taken us a few quarters to stabilize the book. We feel very, very good about where we are today.

Nonaccruals are down. Income is fairly steady. And we're deploying capital at a decent pace as repayments come in. So we're very cautious about the fact that we are not sort of trying to get that leverage number too much higher than what our stated goal is to be at that 1.5-ish on the high end. So hopefully, that kind of gives you a sense of where we're headed.

Christopher Nolan: And I guess on the leverage ratio, should we expect portfolio contraction in coming quarters to get the leverage ratio back down?

Suhail Shaikh: I think -- well, two things. One, we do expect repayments to pick up in the second half of the year. So that's going to be a natural deleveraging event to the extent we don't find decent assets to replace those with, and we have a line of sight to some assets that we think are going to get refinanced. The market overall, as I stated in my prepared comments, is improving. M&A market is improving. So we do see that -- we do expect a number of positions that are going to get refinanced, and so that's one, and then secondly, we watch the leverage number pretty carefully.

So with respect to deployments, we try to measure our deployments against where we are on the total leverage.

Christopher Nolan: Okay. And I guess final question is, given where the stock is trading, which is somewhere around 50% of NAV, do you guys -- I mean, Monroe Capital recently sold all of its BDC assets to a related entity within the broader Monroe Capital and converted itself to cash and then sold the cash to Horizon, which is another Monroe vehicle. But you ever guys ever considered just wrapping up the BDC, converting it to cash, enabling investors to get an improved return on the stock?

Suhail Shaikh: We think about a lot of things, Christopher. So look, our primary focus is to improve shareholder value, and in order to do that, you've got to start with first, stabilizing the book, making sure that the book is stable. I'm not intimately familiar with the transaction that you're describing. So we will study that, but that's -- I saw the news flash, but I haven't really paid much attention to it to date.

Operator: [Operator Instructions] I don't see any other questions, sir.

Suhail Shaikh: Okay. Thank you, Luke. Thank you, everyone, for dialing in, and we look forward to speaking with you all again at the end of the next quarter. Thank you, Luke.

Andrew Muns: And this concludes today's conference call. Thank you, everyone, for attending.

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