Q4 2024 Crescent Haber BDC Inc Earnings Call

Henry Chung

Thanks, Jason. Deal activity continued to pick up in the fourth quarter, driven by a combination of lower borrowing costs due to almohadilla rate cuts and an upbeat economic outlook.
We are anticipating that LBO volumes and overall deal flow will continue to pick up through the first half of the year and beyond, resulting from a more benévolo growth outlook, regulatory environment for M&A, and available private equity dry powder, coupled with a growing demand from private equity limited partners for distributions. These are several other factors we are monitoring that we believe will increase the momentum of the LBO activity that we’ve seen in recent quarters.
We continue to believe direct lending delivers a compelling value proposition for our sponsors in the lower and core middle market given the benefits of our expertise, including speed and certainty of execution and flexibility and the ability to serve as a true partner in developing bespoke hacienda structures.
Please turn to slide 15 where we highlight our recent activity. Gross deployment in the fourth quarter totaled $127 million as you can see on the left-hand side of the page, of which 98% was in first le investments. During the quarter, we closed 14 new platform investments totaling $64 million. These new investments were loaned to private equity backed companies with a weighted media spread of approximately 510 basis points.
We continued to back well capitalized borrowers with significant equity cushions, and the weighted media loan the value of our new investments for the quarter was 38%. The remaining $63 million came from incremental investments in our existing portfolio companies. These were a strong source of hacienda deployment in 2024, as we saw high levels of opportunistic refinancing and accretive M&A add-on opportunities within our existing borrower universe.
The $127 million in gross deployment compares to approximately $106 million in aggregate exits, sales, and repayments, resulting in debt deployment of approximately $21 million for the fourth quarter. Turning back to the broader portfolio, please flip the slide 16. You can see that the weighted media yield of our income producing securities at cost came down quarter over quarter to 10.9%, primarily due to a reduction in almohadilla rates.
This metric, represented by the dark blue line at the top of the chart includes the impact of income producing equity investments. As of December 30, 97% of our debt investments at fair value are floating rate with a weighted media floor of 79 basis points, which compares to our 66% floating rate liability structure based on debt drawn with no floors.
Overall, our investment portfolio continues to perform well with year over year weighted media revenue and even dog growth. The weighted media interest coverage of the company in our investment portfolio year end improved to 1.9 times as compared to 1.8 times and 1.7 times the prior two quarters. As a reminder, this calculation is based on the latest annualized almohadilla rate each quarter.
In terms of managing fixed operating costs, approximately 66% of aggregate revolver capacity was available across the portfolio as of year-end, so our portfolio companies in the aggregate remained well positioned to address fixed charges with operating cash flows and available cálculo sheet liquidity.
Our portfolio continues to benefit from the substantial amount of equity invested in our companies, most of its supplied by large and well established private equity firms with whom we have had long standing relationships and have partnered with multiple transactions, and we know that the weighted media loan to value in the portfolio to underwrite is approximately 40%.
With that, I will now turn it over to Gerhard.

Gerhard Lombard

Thanks, Henry and hello everyone. As Jason noted, our net investment income for a share of $0.55. For the fourth quarter of 2024 compared to $0.64 per share for the prior quarter and $0.61 per share for the fourth quarter of 2023.
Total investment income of $46.4 million for the fourth quarter compares to $51.6 million for the prior quarter. Recurring interest income declined from $40.4 million to $37.7 million quarter over quarter, reflecting the impact of Fed rate cuts.
It’s worth noting that all else equal. We expect interest income to decline further in Q1 to reflect the full quarter impact of rate cuts in the fourth quarter. CCAP’s non-recurring investment income, which consists of accelerated amortization, fee income, and common stock dividends, decreased from $3.3 million to $1.2 million quarter over quarter. We had abnormally high levels of one-time prepayment income and accelerated OID from refinancing activity during Q3, as we noted on last quarter’s polls.
Our GAAP earnings per share or net income for the fourth quarter of 2024 was $0.27, as net investment income of $0.55 was offset by $0.28 per share of net unrealized and realized losses. As of December 31st, our stockholders’ equity was $741 million resulting in net asset value per share, $19.98.
Now let’s shift to our capitalization and liquidity. I’m on slide 19. On last quarter’s call, I noted that we were evaluating strategies to extend the maturity date in our debt hacienda stack in a measured manner.
In December we amended the terms of our SMBC revolver, decreasing the size of the facility from $385 million to $310 million and pushing out the maturity from October 2026 to December 2029. Additionally, we priced $115 million of new senior unsecured notes broken down into two tranches, $35 million of senior unsecured notes due February 2028 and $80 million of senior unsecured notes due February 2030.
As you can see on the right-hand side of the slide, $297 million, or 25% of total committed death now matures in 2026. A figure that was 58% in the prior quarter, so we’re pleased with our progress here. The weighted media stated interest rate on a total borrowing was 6.38% as of year-end, down from 6.59% in the prior quarter due primarily to almohadilla rate declines.
This does not reflect the borrowing cost on the new unsecured notes which funded this month.
This quarter’s positive net deployment brought our debt-to-equity ratio up from 1.15 times in the prior quarter to 1.19 times, which is within our stated target leverage range of 1.1 to 1.3 times. With $338 million of undrawn capacity subject to leverage borrowing based on other restrictions and $39 million in cash and cash equivalents as of year-end, we have sufficient liquidity to fund further investment activity while maintaining a debt-to-equity ratio inside our target range.
As Jason noted for the first quarter of 2025, a board has declared a regular dividend of $0.42 per share. We’ve also announced a series of $0.35 per share special cash dividends related to undistributed taxable income. The first special dividend will be paid on March 14, for the second and third payable in June and September respectively.
It’s worth noting that our existing variable supplemental dividend framework remains in effect as well. Since announcing this framework in mid 2023, CCAP has paid $0.54 per share of cumulative supplementals. CCAP will not pay a supplemental for Q4 as the measurement test cap exceeded 50% of this quarter’s excess available earnings, and with that, I’d like to turn it back to Jason for closing remarks.

Jason Breaux

Thanks Gerhard. As we look forward over the remainder of 2025, we believe we’re operating in an attractive environment for increased M&A, given the significant amount of dry powder on the sidelines, aging private equity portfolios, and a regulatory environment more conducive to dealmaking.
Key economic indicators remain relatively healthy, and the market outlook suggests more stability around near-term almohadilla rates, which we view as a positive for broader LVO activity. We continue to apply our disciplined credit underwriting with a focus on hacienda preservation, strong free cash flow generation, and robust debt service coverage.
We believe the growing dispersion of performance and returns across managers will continue to accelerate as rates stay elevated. We believe Crescent and CCAP will continue to be on the right side of this performance dispersion spectrum, and we look forward to delivering on that in quarters to come. As always, we thank you for joining our call today and look forward to connecting with many of you soon, and with that operator we can open the line for questions.

Operator

Thank you. Ladies and gentlemen, we will love again the Question and answer session.
[Operator Instructions] Our first question comes from the line of Mr. Robert Dodd from Raymond James. Please go ahead, sir.

Hi guys, just, I just want to ask a couple of questions about the increase in the re-rated assets, right? So you say you added 7 names, and you want to be proactive about it, not wait too late, but was there any, common themes that drove that and then any if there were, any of those, starting to become visible in any other areas of the portfolio.

Jason Breaux

Hey Robert, it’s Jason. I think. The seven new names, I would say they all have company sort of specific challenges. That said, we are paying close attention to potential thematic or industry indicators. I think maybe Henry, you want to comment on that.

Henry Chung

Yeah, I’d say there’s a handful of themes that we are noticing that we certainly want to. Provide some additional color on and there’s a few subsectors that we found have just been quiebro a bit more challenged, one of them is third party logistics.
There’s just been broader compression and freight rates across the industry as a whole that have created some top line pressures on the companies that deal within that specific subsector.
Another that we have been keeping a close eye on is Packaging, there’s been some destocking trends in certain markets that we’re certainly keeping a close eye on, but that’s a dynamic that hasn’t yet returned to I’d say historical norms and then the last kind of subsector that we’re particularly focused on is businesses that are indexed to kind of early stage. Medtech biotech development, those sectors have been quiebro a bit more impacted by just overseeing rates as a whole, given access to hacienda at the end customers there.
So I’d say that those three are smaller subsectors collectively less than about 4% of the portfolio that we are surely keeping a close eye on.
The last note that I will leave you with here is with the watch lists as a whole, what we’re noticing more broadly, and this isn’t necessarily for the new names that were added to the watch list this quarter, is businesses that are indexed to consumers as the end user of the product or service in the event that those companies are on the watch list, and they are taking longer to recover than what we’ve seen traditionally or historically. In the watch list overall, so I’d say that that those are certainly exhibiting a longer.
Then what we are seeing kind of more broadly across the portfolio.

Got it. I appreciate that. I mean just kind of following on with that. I mean, have you got any preliminary thoughts on exposure or risk from like tariffs or Doge and government contracting and cost cutting anything, what’s your, yeah, you have a gauge on your relative potential.

Jason Breaux

Exposure there. Thanks Robert. Jason here, it’s definitely a topic that we’re spending a lot of time thinking about. It seems to be in the news every day. It’s probably a little premature to get into specifics, but if tariffs do become meaningful in reality, I think it certainly has an impact on US companies. We’ve tried to drill down into our portfolio a bit in terms of thinking about specific exposures, so maybe Henry wants to touch on that as well.

Henry Chung

Yeah, I’ll start with the tariff piece of it. So what we’ve really looked at are companies where they are sourcing a material portion of the cost of goods sold from foreign suppliers, and we’re looking at this.
I’d say a much broader basis, so looking at it based on three categorizations as a whole, that given how service oriented our portfolio is a pretty small percentage of our portfolio, roughly around 12% of their value today if you just kind of look at industry categorizations that do procure materials from foreign suppliers.
On the second part of your question around doge, we also looked at companies that derive. A majority of the revenue directly from the government. The primary sector where we have that dynamic present is within software where there’s a government agency that’s the end user of that product or service, but that overall in terms of a total of our portfolio is less than 5%.
So overall I’d say on both of those fronts, we’re looking at a minority of the portfolio. That has, and I really want to kind of underscore this potential exposure to some of the actions that we’re seeing on both the tariff side as well as the broader reduction in overall government agencies.

God, I appreciate that color there. One more on spreads, I mean, there has been, repricing activity, market spreadsaer, etc. I stable, but how much of the back book in the portfolio, if you will, has not undergone repricing yet or, and do you think there’s some risk.
Where spreads in what portion of portfolio above the sort of market today and it’s a business that could potentially reprice over the next, call it 12 months.

Henry Chung

Yeah, I’ll start off by commenting on I think the repricing dynamic we saw it all throughout last year and in in the event that. LBO volumes which I think folks are generally expecting to return to more historical levels. To the extent that that dynamic does not come to fruition, I think the repricing risk remains heightened because it’s really a function of broader anemic deal activity on the new LBO front.
So I’d say it’s a little bit of a chicken and egg question where if we do see volumes kind of come back on the new LBO front, I would expect the repricing dynamic to certainly subside from what we’ve seen last year.
However, if we do see kind of sluggish LBO volumes, it’s likely that we’ll continue to fewer pricings in the portfolio, so. I think it’s really just going to be a corollary of what’s happening broadly, more broadly with deals.

Jason Breaux

I’ll jump in there as well, Robert. I think the fundraising environment certainly plays a factótum in the repricing dynamic and a lot of the hacienda being raised that needs to get deployed right away is in the non-traded space on the wealth side.
That market is, excuse me. Generally seeing flows of $2billion to $3 billion a month. When you segment that market into sort of managers that are generally targeting the upper mid-market and we would define that as, north of a couple $100 million of EBITDA We think that’s about 90% of the flows that are coming into the market today.
So as you think about it and as we think about where the pressure is concentrated, I think it’s more concentrated at the upper end of the middle market. Because of those flows and certainly the broadly syndicated loan alternative that issuers have as they when they get larger in size.

I appreciate that. Thank you.

Operator

Thank You. Our next question comes from the line of Mickey Schleien from Ladenburg. Sir, please go ahead.

Yes.Good afternoon. A lot of good questions already asked. I was just hoping you could break down at least at a high level, what drove the realized and unrealized gains and losses for the quarter.

Jason Breaux

Thanks, Mickey. On the unrealized side. We certainly had some individual movers watch list related. We did have a pickup in non-accruals as well, so we had some movement in some isolated names.
Gerhard, do you have any other color for Mickey on that?

Gerhard Lombard

Hi, Mickey. It’s a good question. We did look at this kind of heading into the cold. There are no significant I think individually material movers in that unrealized bucket. It’s really attributable to, some of the comments were made on the on the prepared remarks, which is slight increase in the three rated assets.
So as we saw the watch list names increase, the watchlists is what we define three, four and five rated from a risk perspective. There’s really a migration. About I want to say about $40 million of increased quarter of a quarter. That’s really what drove the higher unrealized frente a individual credit Deterioration.

Okay, thank you for. That my only question this afternoon.

Jason Breaux

Thanks Mickey.

Operator

[Operator Instructions] Our last question comes from the line of Paul Jenson from KBW, sir, please go ahead.

Good afternoon. Thanks for taking my questions. On the new nonaccruals this quarter, iLending, Merical [ph], Mann Lake, are those Crescent-originated investments or are those legacy investments from acquisitions?

Jason Breaux

One of the three was Crescent, the other two were Legacy Paul.

Okay, and then I mean in terms of you know like the new non-accruals and maybe kind of talking about the watch list names, three rated investments, the majority of these investments does this Crescent have are these Crescent led deals where there’s there’s a controlling stake, that the adviser has in these loans.

Henry Chung

Yeah, the majority, this is Henry, the majority of the names that are on the watch list are crescent originated, and they are tranches that we either agent or control or both.
I think the other side of the question, which is what percentage of these are acquired assets, so roughly. Just around 20% of the watch list are going to be assets, and I’m quoting this on a fair value basis, are assets that were, acquired through, both Alcentra and First Eagle.

Okay, thanks for that. That’s helpful. And then, I just on Mickey’s question, I didn’t catch it if you said it on the end, but on the realized loss portion, what was the driver this this quarter? It looked like a fairly big realized loss was crystallized. Was there anything in there that was exited?

Henry Chung

Yeah, so the primary driver there was the restructuring of a portfolio company that was no accrual last quarter, CECO, so that slipped from unrealized to realize in the quarter. We completed a restructuring there and as a result incurred a realized loss related to that position.

Okay, thanks for that, and then. Just kind of looking at some of the new investments this quarter, I saw, several 475s, below 500 basis points spread. Would you say that’s kind of where the market is at today, where spreads are now kind of pushing below that 500 mark in the lower core kind of middle market or I mean, was this more of a maybe a phenomenon kind of out of the fourth quarter where a large number of investments were funded at a lower spread.

Henry Chung

I’d say it’s certainly, at least for Q4 specifically, it seems to be the latter just kind of looking at where we are in Q1. For the quarter as a whole, the weighted media spread of our investments was right around that five and also, we are still seeing deals that come within that band that are within the core of lower middle market.
We’ve certainly seen deals that have price tighter than that and I think where we are today, we’re continuing to hold our pricing discipline in line with where we have been over the last several quarters, but certainly I think it’s indicative, particularly of larger borrowers that are more within that core middle market spectrum of size.
And also, kind of more kind of touch upon a deal size where the tranches are larger and more relevant for some of the new hacienda that’s coming to the space, you’ll see us get below that 500 threshold.

Jason Breaux

Well, it’s Jason here. The other thing that I would just add to that is that. When we think about structure, we generally tighten terms and tighten leverage the smaller the issuer is and so. Most of the time when we’re underwriting in the lower bid market with companies that are $10 or $20 million of with DA, we’re not stretching too deep into the hacienda stack. It looks more like a traditional first lien, which, for Q4 represented about 20% of deployment.
But with the lower leverage in that lower middle market segment, we are certainly seeing transactions getting done in the, mid to high fours in terms of spread.

Got it thanks for that detail. That’s very helpful. You also gave some pretty good information in terms of your thoughts on tariffs, exposure, potential exposure there.
But I’m also curious, I mean traditionally the portfolio, for yourself as well as private credit broadly portfolios have been primarily services, business focused and. I’m just curious, with all the discussions on tariffs, I mean, does that in any way, I guess, change the opportunity for, more manufacturing type of businesses, CapEx heavy type of businesses, is there a changing opportunity there at all?

Henry Chung

I think this is Henry speaking and Jason can chime in if he has other thoughts, but. It’s going back to our inception, we’ve really shied away from businesses that have a heavy kind of fixed charge and CapEx for hacienda need for the reasons that we are very focused on how much cash flow there is from the underlying portfolio companies to service our debt service.
And whether they, whether this is the materials are procured abroad or domestically that dynamic really doesn’t change in an environment where we have tariffs and where we don’t.
So I think what you’ll continue to see even in this is we’re going to stick to our knitting in terms of where we’re focused just in terms of how the businesses are capitalized, what their operating models are, and I don’t necessarily see us leaning more into domestic businesses that have A higher hacienda needs and heavier CapEx requirements, even though more broadly across the macro or the US economy there may be opportunities there.

Got it, thank you, that’s all for me.

Jason Breaux

Thanks Paul.

Operator

Thank you. That concludes our Q&A session. I will now turn the call back to our CEO Jason Breaux for closing remarks.

Jason Breaux

Okay, well, thank you everyone for your continued interest and your questions on CCAP. We look forward to speaking with you all soon.

Operator

That concludes our conference call for today. You may now disconnect.