Investcorp Credit (ICMB) Earnings Transcript

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DATE

Wednesday, November 13, 2024 at 9:00 a.m. ET

CALL PARTICIPANTS

• Chief Executive Officer — Suhail Shaikh
• Chief Financial Officer — Walter Tsin
• Operator

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TAKEAWAYS

• Net Asset Value -- Increased by $0.34 per share to $5.55, primarily due to higher net investment income, unrealized gains, and solid portfolio credit performance.
• Net Investment Income -- $2.3 million, or $0.16 per share, reflecting a $1 million increase compared to the prior quarter.
• Investment Activity -- $13.1 million deployed across six companies, representing a sequential increase in deployment.
• Origination Volume -- Higher origination volumes this quarter, mainly driven by refinancing deposits.
• Non-Accruals -- Improved to 4.8% of total fair market value from 5.0% in the previous quarter.
• Median Portfolio EBITDA -- Increased to approximately $61 million from approximately $55 million last quarter.
• Portfolio Net Leverage -- Declined to 4.7 times from 5.1 times compared to prior quarter.
• Portfolio Fair Value -- Rose to $190.1 million from $184.6 million at previous quarter-end.
• Distribution Declared -- $0.12 per share, to be paid in cash on January 8, 2025, for holders of record as of December 20, 2025 [ph].
• Weighted Average Debt Yield -- 10.5%, down from 12.3% last quarter because of declining SOFR and tighter spreads.
• Debt Portfolio Composition -- 82.5% in first lien debt; 17.5% in equity, warrants, and other positions.
• Debt Portfolio Rate Mix -- 90% floating rate, 3% fixed rate instruments.
• Top Industry Concentrations -- Professional services (14.6%), containers and packaging (11.7%), commercial services and supplies (10.3%), trading companies and distributors (8.8%), insurance (7.6%), specialty retail (7.2%).
• Largest Portfolio Position -- Bioplan at $17.4 million fair market value.
• Realized IRRs -- Realized IRR on WIS Corporation loan was approximately 12.9%; South Coast Terminals realized IRR was approximately 10.7%.
• New and Follow-on Investments -- First lien/debt investments in Argano (yield approximately 11.5%), Likewize Corporation (yield approximately 11.5%), Integrity Marketing (yield approximately 10%), and Victra (yield approximately 9.8%).
• Crafty Apes Investment -- Invested at approximately a 14.9% yield; management noted ongoing involvement with company performance.
• Portfolio Diversification -- Investments now span 20 GICS industries, down from 23 last quarter.
• Gross and Net Leverage -- Gross leverage at 1.39x and net leverage at 1.26x, both down from prior quarter.
• Liquidity Position -- Approximately $10.1 million in cash (of which approximately $8.3 million is restricted) and approximately $52.5 million available under the credit facility.

SUMMARY

The company reported a sequential rise in both net asset value per share and portfolio fair value, supported by increased investment income and favorable mark-to-market adjustments. Management described higher investment activity this quarter, notably with increased origination volumes and the deployment of capital across new and follow-on opportunities. Within the portfolio, credit metrics improved, as shown by lower non-accruals and net leverage, alongside a higher median EBITDA for portfolio holdings. Key portfolio exits generated realized IRRs above 10% and the weighted average yield of new investments reflected industry pricing dynamics. Distribution levels were maintained with a $0.12 per share cash declaration for the next quarter. Cost management initiatives and technology-led efficiencies were presented as future focus areas for expense reduction.

• CEO Shaikh described the core focus of the investment strategy as targeting companies with $15 million to $75 million of EBITDA, with a majority of deals directly sourced from sponsors or supported by club collaborations.
• The quick reversal of Klein Hersh from non-accrual to accrual status was cited as a principal driver of PIK (payment-in-kind) income for the quarter.
• Weighted average spread on debt investments declined to 4.3%, with average floor at 0.9%, compared to 5% and 1% in the prior quarter, respectively.
• Average portfolio company position stood at $4.2 million fair market value, with shifts in secondary market activity employed to manage deal flow timing and portfolio composition.
• An explicit intent to reduce operating expenses over time was communicated, leveraging both eventual portfolio growth and technology adoption to drive efficiency.

INDUSTRY GLOSSARY

• GICS: Global Industry Classification Standard; an industry taxonomy used to categorize companies by sector and industry group.
• PIK Income: Payment-in-kind income; income received in the form of additional securities rather than cash, often reflecting accrued interest or dividends on debt instruments.
• First Lien Debt: Senior debt secured by a first-priority claim on pledged assets in the event of default.
• Club Deal: A financing transaction where several lenders or investors jointly provide capital, typically on equal terms, to a single borrower.

Full Conference Call Transcript

Suhail Shaikh: Thanks Walt and thank you to everyone for joining us today. I'm pleased to announce that we delivered a strong quarter, reflecting our focus on maintaining a resilient portfolio and capitalizing on selective opportunities in a challenging market environment. Despite economic uncertainties, we are well-positioned to navigate challenges and consistently deliver value to our shareholders. Our net asset value rose by $0.34 per share to $5.55, up from $5.21 as of the quarter ended June 30th, 2024. The increase was primarily driven by higher net investment income, unrealized gain on investments from mark-to-market adjustments, and solid credit performance across our portfolio.

For the quarter, we generated net investment income of $2.3 million or approximately $0.16 per share, reflecting a $1 million increase over the prior quarter. Additionally, we were successful in deploying $13.1 million across six portfolio companies, marking an uptick in activity compared to recent quarters. These achievements reflect the durability of our strategy and our continued focus on credit selection and proactive portfolio management, which remains unwavering even as economic conditions shift. Turning to the broader market environment, new deal flow, particularly in M&A and LBO activity, remain subdued. However, we achieved higher origination volumes this quarter, driven mainly by refinancing deposits.

We also made two secondary investments at attractive prices, allowing us to further diversify our portfolio with favorable terms. Although competition remains intense and high-quality opportunities are scarce, we continue to deploy capital strategically, maintaining our optimal portfolio leverage between 1.25 times and 1.5 times. Our investment pipeline remains robust, and we are optimistic about the opportunities ahead. We prioritize building relationships with high-quality sponsors and investing in companies within defensible industries that demonstrate strong cash flows. We continue to rotate the portfolio towards larger, more stable credits and focus on senior secured investments within the core middle market. Our portfolio companies are performing well with only a small number of challenged positions.

The median EBITDA of our portfolio rose from approximately $55 million last quarter to $61 million this quarter, while the weighted average net leverage declined from 5.1 times to 4.7 times over the same period. Non-accruals as a percentage of total fair market value improved to 4.8% this quarter from 5% last quarter. These outcomes reinforce the durability of our strategy, our focus on credit quality, and our proactive portfolio management as we look forward to a strong remainder of the year. I will now turn to details of our portfolio activity during the quarter. During the quarter ended September 30th, we invested in three new portfolio companies and three existing portfolio companies.

Fundings for new investments totaled approximately $13.1 million at cost, as I mentioned, of which $0.5 million represents the reinstatement of previously recorded paydowns for interest received from Klein Hersh LLC, while it was on non-accrual status. The weighted average yield of debt investments made in the quarter was approximately 10.7%. In the same period, we fully realized two portfolio company investments totaling $13.4 million in proceeds with an IRR of approximately 11.8%. We invested in the first lien term loan of Argano to support the refinancing of the company's capital structure. Argano is a leading provider of mission-critical digital transformation services to corporations. Argano is a Trinity Hunt Partners portfolio company. Our yielded cost is approximately 11.5%.

We also made an investment in the first lien term loan and delayed draw term loan of Likewize Corporation to support the refinancing and Genstar Capital's purchase of the company from Brightstar Capital. Likewize provides technology, device protection and support. Our yielded cost is approximately 11.5%. Finally, we made an investment in the first lien term loan and delayed draw term loan of Integrity Marketing acquisition. Integrity is an insurance broker that distributes and markets life and health insurance products and wealth management solutions. We purchased Integrity in the secondary market. Yield at cost is approximately 10%. We also made a follow-on investment in the first lien term loan of Victra, also known as LSF9 Atlantis Holdings, LLC.

We purchased Victra in the secondary market for a yield at cost of approximately 9.8%. And finally, we made another investment in Crafty Apes. Crafty Apes is a full-service visual effects studio and studio that works with studios across the globe. Our yield at cost is approximately 14.9%. We continue to work with the company's management to provide them with financial flexibility. Lastly, we realized our first lien term loan positions in Retail Services WIS Corporation and South Coast Terminals, both of which were refinanced during the quarter. We've been invested in both of these companies since May and December of 2021, respectively.

Our realized IRR on WIS was approximately 12.9% and our realized IRR on South Coast was approximately 10.7%. As of September 30th, our largest industry concentrations by fair market value were professional services at 14.6%, containers and packaging at 11.7%, commercial services and supplies at 10.3%, trading companies and distributors at 8.8%, followed by insurance at 7.6% and specialty retail at 7.2%. Our portfolio companies are in 20 GICS industries as of the quarter end, including our equity and warrant positions, which is a decrease of three industries from the previous quarter. I would now like to turn the call over to Walt to discuss our financial results.

Walter Tsin: Thanks Suhail. For the quarter ended September 30th, 2024, the fair value of our portfolio was $190.1 million compared to $184.6 million on June 30th. Our net assets were $79.7 million, an increase of $4.9 million from prior quarter. Our portfolio's net increase in net assets from operations this quarter was approximately $6.6 million. The weighted average of our debt portfolio was 10.5%, a decrease from 12.3% in the previous quarter ended June 30th, largely driven by declining SOFR and tighter spreads on new investments. As of September 30th, our portfolio consisted of 45 borrowers. Approximately 82.5% of our investments were in first lien debt and the remaining 17.5% were invested in equity, warrants, and other positions.

90% of our debt portfolio was invested in floating rate instruments and 3% in fixed rate instruments. The weighted average spread on our debt investments was 4.3% and the weighted average floor was 0.9%, a slight decline compared to the previous quarter, which had a weighted average spread of 5% and a weighted average floor of 1%. Our average portfolio company position on a fair market basis was approximately $4.2 million, and our largest position -- portfolio company investments on a fair market basis is Bioplan at $17.4 million.

We are pleased to announce that on November 4th, 2024, the Board of Directors declared a distribution for the quarter ended December 1st, 2024, of $0.12 per share, payable in cash on January 8th, 2025, to stockholders on record as of December 20th, 2025 [ph]. Gross leverage was 1.39x and net leverage was 1.26x as of September 30th compared to 1.42x gross, 1.35x net, respectively, for the previous quarter. With respect to our liquidity, as of September 30th, we had approximately $10.1 million in cash, of which approximately $8.3 million was restricted cash with $52.5 million of capacity under our revolving credit facility with Capital One.

Additional information regarding the composition of portfolio is included in our Form 10-Q, which was filed earlier this week. With that, I would like to turn the call back over to Suhail.

Suhail Shaikh: Thank you, Walt. In closing, we are encouraged by our performance this quarter and are confident in our ability to navigate the complexities of the current environment. Our disciplined approach, strong sponsor relationships and focus on resilient portfolio companies provide a solid foundation for continued success. Thank you all for your support, and we look forward to taking your questions. That concludes our prepared remarks. Luke, please open the line up for Q&A.

Operator: Ladies and gentlemen, at this time, we will conduct a question-and-answer session. [Operator Instructions] Our first question comes from Mr. Christopher Nolan, Ladenburg Thalmann. Go ahead, sir.

Christopher Nolan: Congratulations on a good quarter. Can you clarify -- I didn't hear it as I had overlapping calls. What was the driver of the PIK income for the quarter, please?

Suhail Shaikh: Yes. Hi Chris, thank you. So, a big driver was the reversal of non-accrual to accrual of Klein Hersh. The company continues to perform well. And so that was, as you recall, previous quarter, the last at least three quarters, we've had it on non-accrual. So, that was put back on accrual, and the big portion of that coupon is PIK.

Christopher Nolan: Was there anything else?

Suhail Shaikh: That was the biggest driver, Chris.

Christopher Nolan: Okay. And then I was curious whether or not there are timing issues at play in the quarter here. Last quarter's results tend to be a little -- if I recall, a little bit on the lower side. And just didn't know whether or not any deals, which were normally would have closed last quarter actually spilled over to this quarter?

Suhail Shaikh: Yes. Look, you're absolutely right. There were a couple of the deals that did spill over into this quarter. We've been working on them for a while. And as you know, this is a lumpy business. So, we'll have that trend every now and then because it's hard to sort of plan when some of those transactions are going to close.

Christopher Nolan: [Indiscernible]

Suhail Shaikh: Sorry, go ahead.

Christopher Nolan: No, no. Please continue.

Suhail Shaikh: What we're trying to do in the interim is, as you've noted in the portfolio, we've tried to smooth out some of that activity by purchasing some loans in the secondary market, whether it's to add on to existing positions or something that we find attractive that we know well, leveraging our expertise on some of those names.

Christopher Nolan: Great. I'll back in the queue. thank you.

Suhail Shaikh: Thank you.

Operator: Thank you very much. [Operator Instructions] I'll open the line up for Mr. Nolan again. Go ahead sir.

Christopher Nolan: I'm back. Also, I mean, could you give a little detail in terms of the realized loss and the unrealized gain? I presume some of the unrealized gain was just a true-up, but a little detail would be helpful.

Suhail Shaikh: Sure. So, the realized loss was a function of a couple of names. And unrealized was really -- was a function of Klein Hersh markup and Bioplan markup, so that was the easy. I mean, so both of those have performed well. So, we marked both of those names up. And the realized was Crafty Apes, which happens to be on non-accrual, and we've had to take a realized loss on that piece. There's more to come on that name in the subsequent period. So, we will have some more to talk about. And then we did clean up the portfolio with some smaller trades, but those are the big movers in the portfolio.

Christopher Nolan: And I guess my final question, Suhail, given that you are new into the CEO spot, could you articulate a little bit of your vision in terms of what -- where in the market you want ICMB to source deals and if there's a particular strategy and/or competitive advantage you might have?

Suhail Shaikh: Yes, it's a great question, Christopher. So, what we are trying to do is build a business around what we describe as core middle market. And that's really companies with sort of $15 million to $20 million of EBITDA on the low end to $50 million to $75 million on the upper end. A large portion of those deals are that we look at and what we actually end up investing in are club deals. So, these are -- I'd say, more than 50% of our transactions are coming in directly sourced from sponsors, which is why the portfolio tends to be heavily weighted towards sponsor-backed deals.

And then the rest are opportunistic investments, could be sponsor-backed names in the secondary market and leveraging at times our liquid credit team's analysis on various names, which are less liquid for them, but sort of fit our yield bogeys. That's what we're trying to do. Given we have three other vehicles that we manage besides ICMB, we can actually write decent-sized checks for -- and meaningful checks for sponsors to actually have us be relevant to their solutions. That number of check size will continue to grow as we continue to raise money, which ultimately benefits ICMB.

And as you can tell, over the last 12 to 18 months, we've been steadily increasing the average EBITDA of the portfolio, decreasing the leverage, increasing the ability to do more deals were directly sourced from sponsors. So, that's really our strategy. We expect to have ICMB benefit from a wider portfolio of opportunities that we seek in the marketplace in that core middle market.

Christopher Nolan: Final question. Your expenses tend to be a little bit heavy in terms of as a percentage of revenues. Any plan in terms of improving operating efficiencies? That's it for me.

Suhail Shaikh: Great question. We are taking a very deep dive into just across our portfolios and across our business and specifically for ICMB, ways that we can efficiently manage our expenses. That number is going to come down over time as the rest of the portfolio and our business grows. I mean ICMB is obviously one portion of our strategy. So, that number should come down organically, but also on an inorganic manner, we are looking at ways to use technology more efficiently to lower our expense base.

Operator: Thank you very much. And there are no further questions.

Suhail Shaikh: Great. Thank you, everyone, and we look forward to talking again in a few months. Thank you.

Operator: And this concludes today's conference call. Thank you everyone for attending.

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