Investcorp Credit (ICMB) Earnings Call Transcript

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DATE

March 26, 2025, at 10 a.m. ET

CALL PARTICIPANTS

• Chief Executive Officer — Suhail Shaikh
• Chief Operating Officer — Andrew Muns
• Chief Financial Officer — Walter Tsin

TAKEAWAYS

• Net Investment Income -- $0.8 million, or $0.06 per share, a decline from $0.16 per share in the previous quarter due to lower investment yields and mark-to-market fluctuations.
• Net Asset Value (NAV) Per Share -- Decreased by $0.16 to $5.39, mainly reflecting spread compression and volatility in broader markets.
• Portfolio Fair Value -- $191.6 million, a slight increase from $190.1 million in the preceding quarter.
• Net Assets -- $77.6 million, down by $2.3 million from the prior period.
• Weighted Average Debt Portfolio Yield -- 10.4%, marginally lower from 10.5% in the prior quarter.
• New Investment Activity -- $9.9 million in two new and two existing portfolio companies, with debt investment yields ranging from 9.5% to 20% across individual deals.
• Realized Investments -- $7.6 million fully realized from two portfolio companies; realized IRRs were 17.2%, 17.3%, and 15.4% for the individual exits.
• Portfolio Composition -- 81.2% first lien debt holdings, 18.8% in equity, warrants, and other instruments, with 96.4% of debt in floating rate format.
• Industry Concentrations -- Largest exposures by fair value are professional services at 14.4%, containers and packaging at 10.5%, trading companies and distributors at 8.6%, insurance at 7.8%, and three sectors at 7.1% each.
• Leverage -- Gross leverage of 1.5x, and net leverage of 1.42x, both increased from 1.39x and 1.26x, respectively, in the prior quarter.
• Dividend Declaration -- Board approved a distribution of $0.12 per share for the next period, payable May 16, 2025, to stockholders of record as of April 25, 2025.
• Tariff Exposure -- Approximately 30% of the investment portfolio identified as potentially subject to moderate effects of tariffs on a direct or indirect basis.
• Cash and Liquidity -- $12.1 million in cash on hand (of which $11.3 million is restricted), and $41.5 million of undrawn capacity under the Capital One revolving credit facility.
• Repricing of Credit Facility -- Borrowing cost spread was lowered from 310 basis points to 250 basis points as disclosed in an 8‑Q filing.
• Non-Accrual Rate -- Management noted a decrease in the non-accrual rate on a fair market value basis compared to the previous quarter.
• Covenant Appeals -- Increased from 70% to 77% over the reported quarter, highlighting more engagement with lenders.
• Fiscal Year Change -- The company shifted its fiscal year-end from June to December as confirmed during the Q&A segment.

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RISKS

• CEO Shaikh stated that approximately "30% of our portfolio may experience moderate effects from tariffs on either a direct or indirect basis," suggesting material exposure to potential trade policy changes.
• Net investment income did not fully cover the quarterly dividend, necessitating use of "accumulated spillover income from previous periods" to partially offset the shortfall.
• Management directly cited persistent "due to refinancing and repricing activity amid heightened competition among lenders, and strong demand for quality assets," contributing to lower yields and net asset value decline.
• The portfolio's non-income-generating assets rose to "about 18% or so," which CEO Shaikh acknowledged "puts pressure on the ability to earn income," and could impact future dividend sustainability.

SUMMARY

Investcorp Credit Management BDC (NASDAQ:ICMB) reported lower net investment income and a decline in net asset value per share, which management attributed to reduced investment yields and mark-to-market movements from a competitive, and volatile lending environment. Management addressed the sizeable tariff risk to the portfolio, and stated that mitigation actions are being incorporated into both portfolio management and new underwriting. The Board declared a $0.12 per share dividend for the subsequent quarter, despite earnings not fully covering the payout, with management relying on spillover income to supplement the distribution.

• The Chief Executive Officer clarified that the recent quarter's apparent drop in PIK income was a normalization following a prior non-accrual reversal, not a new negative trend.
• Chief Financial Officer Tsin disclosed that the weighted average spread on debt investments is 4.3%, with a floor of 0.9%, unchanged sequentially.
• The company emphasized a strategic pivot toward sectors perceived as more resilient, referencing a recent investment in the data center sector, and ongoing attention to credit quality improvements.
• Management confirmed no change to the dividend at this time, but noted that "we'll take it up to the Board and decide if it makes sense for us to reevaluate the dividend. No such decision has been made to date."
• The fiscal year-end was officially transitioned to December, which affected 10-KT filing disclosures and future reporting cadence.

INDUSTRY GLOSSARY

• First Lien Debt: Senior-most secured debt in a borrower's capital structure, holding claim priority ahead of all other creditors in event of default or bankruptcy.
• PIK Income: "Payment-In-Kind" income received as additional securities rather than cash, typically associated with non-cash interest accruals on certain loan products.
• Non-Accrual Rate: The percentage of portfolio investments not currently generating income due to payment default or restructuring status.
• Covenant Appeal: A formal request by a borrower for relaxation or modification of loan covenants, often due to financial stress or changing business circumstances.

Full Conference Call Transcript

Suhail Shaikh: Thanks, Walt, and thank you to everyone for joining us today. Before I discuss the market environment and portfolio activity, it gives me great pleasure to announce that we've appointed Andrew Muns, Managing Director of the Advisor and a senior member of the investment team as Investcorp Credit Management BDC's Chief Operating Officer. Andrew has been with the firm for several years and has been a key member of the team. It brings a vast experience, and I'm excited to have him join the executive team of the company. For the quarter ending December 31, 2024, we reported net investment income of $0.8 million or $0.06 a share compared to $0.16 per share in the prior quarter.

Consequently, our net asset value per share decreased by $0.16 per share to $5.39 compared to $5.55 as of September 30, 2024. The decline in net was primarily driven by lower investment yields and mark-to-market fluctuations reflecting broader market volatility and a tightening spread environment. As we close out 2024, we have built continued spread compression, especially, towards the end of December, largely due to refinancing and repricing activity amid heightened competition among lenders and strong demand for quality assets. Post election market optimism, raised expectations for a resurgence in M&A activity. However, the risk of tariff wars and change in fiscal policies is creating uncertainty leading to adapting all of M&A activity.

Despite economic uncertainties, we remain well-positioned to navigate challenges and consistently deliver value to our shareholders. We believe our portfolio is well positioned to further shifting economic environment. We have estimated that approximately 30% of our portfolio may experience moderate effects from tariffs on either a direct or indirect basis. However, we believe being the affected company is a well-positioned to navigate these challenges through a range of mitigation strategies, including the ability to pass through price increases to end customers, diversifying or switching suppliers, and optimizing their supply chain. We are working with our underlying portfolio companies and sponsor partners to understand these risks further.

Additionally, we are factoring in tariff risks when evaluating new investment opportunities to ensure the resilience and long-term stability of our portfolio. Heightened market volatility has led us to strategically target investments in critical sectors and defensive industry. A notable example is our recent investment in the data center sector. We're also encouraged by improvement in our portfolio's credit quality, evidenced by lower non-accrual rate measured on a fair market value basis compared to the prior quarter. The median EBITDA of our portfolio remains relatively flat with approximately $61.76 (ph) million at the end of the quarter compared to previous quarter, while weighted average net leverage increased slightly from 4.8 to 5 times over the same period.

The percentage of covenant appeals increased from 70% in the previous quarter to 77% in the prior quarter. These outcomes reinforce the durability of our strategy, our focus on credit quality, and our proactive portfolio management as we look forward to the remainder of the year. Additionally, although, our net investment is partially covered as debt dividend this quarter, accumulated spillover income from previous periods will partially offset the shortfall. We remain committed to delivering consistent returns to our shareholders while navigating the current earnings environment. I will now turn to details of our portfolio activity during the quarter. During the quarter ended December 31, we invested in two new portfolio companies and two existing portfolio companies.

Fundings for new investments totaled approximately $9.9 million in cost. The weighted average yield of debt investments made in the quarter was approximately 11.8%. In the same period, we fully realized two portfolio company investments totaling $7.6 million in proceeds with an IRR of approximately 17.2%. First, we participated in the refinancing of Uniguest, (ph) which is an existing portfolio company in our other funds. Uniguest is a global leader in digital engagement software solutions across a number of end markets and is an Atlantic Street Capital portfolio company. Our yield at cost is approximately 9.9%.

We made an investment in the first lien term loan of [indiscernible] listed on our SOI as KNS Midco Corp to support an add-on acquisition and recapitalization of the business. [indiscernible] is also an existing portfolio company in our other funds. The company operates in the health, wellness and nutrition space. Our yield at cost is approximately 9.5%. Turning to our existing portfolio companies. We made an investment in the term loan and preferred equity of Techniplas. Techniplas is an automated components manufacturer that specializes in designing and producing engineered plastic parts and components. Our yielded cost for the term loan is approximately 20%. We also made another investment in Crafty Apes.

Crafty Apes is a full service visual effect studio with offices across the globe. Our yield at cost is approximately 14.5%. Lastly, we realized a first lien term loan position in Amerit, which was refinanced during the quarter in our bridge loan and Crafty Apes. Our realized IRR on the merit was approximately 17.3% and our realized IRR on Crafty Apes was approximately 15.4%. As of December 31, our largest industry concentrations by fair market value were: professional services at 14.4%, containers and packaging at 10.5%, trading companies and distributors at 8.6%, insurance at 7.8% and IT services, diversified consumer services and specialty retail at 7.1% each.

Our portfolio companies are in 19 GICS industries as of the quarter end, including our equity and warrant positions. I would now like to turn the call over to Walt to discuss our financial results.

Walter Tsin: Thanks, Suhail. For the quarter ended December 31, 2024, the fair value of our portfolio was $191.6 million compared to $190.1 million at September 30. Our net assets were $77.6 million, a decline of $2.3 million from the prior quarter. Our portfolio's net decrease in net assets from operations this quarter was approximately negative $0.6 million. The weighted average yield of our debt portfolio was 10.4%, a slight decrease from 10.5% in the previous quarter ended September 30. As of December 31, our portfolio consisted of 43 borrowers. Approximately 81.2% of our investments were in first lien debt and the remaining 18.8% were invested in equity, warrants and other positions.

96.4% of our debt portfolio was invested in floating rate instruments and 3.6% in fixed rate instruments. The weighted average spread on our debt investments was 4.3% and the weighted average floor was 0.9%, which is unchanged compared to the previous quarter. Our average portfolio issuer on a fair market value basis was approximately $4.5 million and our largest portfolio company investment on a fair market value basis is BioPlan at $15.4 million. We are pleased to announce that on March 20, 2025, the Board of Directors declared a distribution for the quarter ended March 31, 2025, of $0.12 per share, which is payable in cash on May 16, 2025, to stockholders of record as of April 25, 2025.

Gross leverage was 1.5x and net leverage was 1.42x as of December 31 compared to 1.39x gross and 1.26x net, respectively, for the previous quarter. With respect to our liquidity, as of December 31, we had approximately $12.1 million in cash, of which approximately $11.3 million was restricted cash with $41.5 million of capacity under our revolving credit facility with Capital One. As disclosed in the 8-Q filed on November 20, 2024, we repriced the Capital One revolving credit facility during the quarter, bringing the borrowing cost spread base rate from 310 bps to 250 bps. Additional information regarding the composition of our portfolio is included in our Form 10-KT.

With that, I would like to turn the call back over to Suhail.

Suhail Shaikh: Thank you, Walt. As we move into 2025, we remain highly focused on executing our strategy with a focus towards capital preservation and NAV stability. We believe that our disciplined investment approach, combined with our strategic focus on critical sectors positions us well to navigate the evolving market landscape and drive long-term value to our shareholders. Thank you for your continued support, and we look forward to taking your questions.

Operator: Ladies and gentlemen, at this time, we will conduct a question-and-answer session. [Operator Instructions] We are now ready to begin. And our first question comes from Mr. Christopher Nolan with Ladenburg Thalmann. Go ahead, sir.

Christopher Nolan: Hey. How are you doing? The increased leverage -- well, let me back up. What was the cause for the drop in PIK income quarter-over-quarter, please?

Suhail Shaikh: So actually, the increase in PIK income for the September quarter, Christopher, was really driven by reversing the non-accrual for one of the portfolio companies, Klein Hersh, that actually drove PIK income higher than usual in the September quarter. So it looks like it's a drop in the December quarter, but actually it was fairly consistent. So that's the big reason why it sort of pops up and jumps out and looks like PIK income has come down.

Christopher Nolan: Got it. And then I guess my question is on the sustainability of the dividend because you, like a lot of other BDCs, are experiencing lower yields. But also you, unlike a lot of BDCs, have a much higher leverage ratio. And in my view, that leverage ratio gives you a lot of flexibility to manage earnings and sustain the dividend. And what are your comments on that, please?

Suhail Shaikh: Yeah. No, great question. Look, we're constantly evaluating that. It's -- our portfolio is running at about 18% or so. It's the portfolios in non-income generating assets that puts pressure on the ability to earn income. We will continue to monitor that, Christopher, and we'll take it up to the Board and decide if it makes sense for us to reevaluate the dividend. No such decision has been made to date. But I think your observation is the right one.

Christopher Nolan: Okay. And I guess going forward, is the -- I saw in the 10-Q where you are, I believe, changing over to a calendar fiscal year, is that correct?

Suhail Shaikh: Yes, we did. We already did, which is why the 10 -- it's actually a 10-KT (ph) that we filed. We didn't file a 10-Q this past quarter. So we've changed the fiscal year and from June to December, which is why if you look at the 10-KT, you'll see the comparatives are usually more than what's required in the filings.

Christopher Nolan: Okay. So next quarter will be first quarter...

Suhail Shaikh: Correct. Fourth quarter, exactly. Yes.

Christopher Nolan: Got you. I guess the final question would be, where do you see the trend for your investment yield over the next quarter or 2?

Suhail Shaikh: I suspect it's going to be similar. We don't see any anything on the horizon where we think spreads are going to widen. In fact, spreads have that and as you rightly pointed out, and that's -- we're operating in the same market as all our competitors. So investment yield ought to remain in a similar ZIP code. That's sort of 10.5% plus or minus. Unless something -- there's a shock to the economy, there's a leg down or something where spreads start to widen up, liquidity dries up in the marketplace. Based on what we’re seeing right now, we don’t foresee any of that.

The only thing that we’re watching very carefully is potential impact of tariffs on our portfolio, in the M&A market, talking to our sponsor partners. That’s something that only time will tell how that manifests itself into spreads in the marketplace.

Christopher Nolan: Okay. That's it for me. Thanks for taking my questions.

Suhail Shaikh: Sure. Thank you.

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

Suhail Shaikh: Great. Thank you, everyone, and thank you again for taking time, and we look forward to seeing you at the end of the March quarter’s discussion. Thank you. Luke, we can end the call.

Operator: Thank you very much. This concludes today's conference call. Thank you, everyone for attending.

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