Crescent Capital BDC, Inc. (CCAP) Earnings Call Transcript

Good morning and welcome to Crescent Capital BDC, Inc.'s second quarter ended June 30, 2026 Earnings Conference Call. Please note that Crescent Capital BDC Inc. may be referred to as CCAP, Crescent BDC, or the Company throughout the call. I'll start with some important reminders. Comments made over the course of this conference call and webcast may contain forward-looking statements and are subject to risks and uncertainties. The company's actual results could differ materially from those expressed in such forward-looking statements for any reason, including those listed in its SEC filings. The company assumes no obligation to update any such forward-looking statements. Please also note that past performance or market information is not a guarantee of future results. I'll now turn the call over to Dan McMahon.

Thank you. Yesterday after the market closed, the company issued its earnings press release for the second quarter ended June 30, 2026, and posted a presentation to the investor relations section of its website at www.crescentbdc.com. The presentation should be reviewed in conjunction with the company's Form 10-Q filed yesterday with the SEC. As a reminder, this call is being recorded for replay purposes. Speaking on today's call will be CCAP's Chief Executive Officer Jason Breaux, Chief Financial Officer Gerhard Lombard, and President Henry Chung. With that, I'd now like to turn it over to Jason.

Thank you, Dan, and good morning, everyone. I'll begin by summarizing our second quarter results, discussing our key priorities with respect to CCAP and commenting on current market conditions. For the second quarter, we reported net investment income of $0.36 per share, which was down from $0.38 per share in the prior quarter, excluding the impact of a one-time incentive fee waiver. Our earnings exceeded our $0.34 base dividend. We also paid the first of our three previously announced special dividends of $0.03 per share during the quarter. Our net asset value was $17.82 per share as of June 30. This was down from $18.27 in the prior quarter. A reduction in net asset value was primarily driven by unrealized losses associated with non-accrual investments that we are actively managing. CCAP remains an important part of the Crescent private credit platform, and our 2 near-term priorities are rotating our watch list investments and deleveraging our portfolio to within our target range. We established a fee and dividend framework last quarter that provides us the flexibility to prioritize these initiatives, ensuring strong alignment between Crescent and our shareholders through this process. Our reduced management and incentive fees, together with our revised dividend framework, became effective as of April 1. We believe these actions enhance CCAP's long-term earnings power, support sustainable shareholder returns, and position the company with one of the most competitive fee structures in the public BDC sector. Our fee structure also represents a continued meaningful economic contribution by Crescent. That alignment extends to our parent Sun Life, which has been a long-term holder of approximately 6% of CCAP's outstanding shares and has invested or committed more than $1.5 billion across Crescent's strategies since 2021. This significant and ongoing investment reflects confidence in Crescent's platform and our strategy. As demonstrated by our results during the quarter, we intentionally set the base dividend at a conservative level relative to our earnings, reflecting both our commitment to consistently earning our base dividend and a potentially volatile market outlook. Turning to the broader private credit market, sponsor-backed M&A activity continues to be below historical averages. However, competitive dynamics have improved, particularly in the upper mid-market. Ongoing redemptions and slower capital formation in the non-traded retail BDC market have improved lending conditions by reducing competitive pressure. We've started to see this drive better terms in the core and lower middle market as well, where Crescent primarily invests. We remain optimistic that the availability of private equity dry powder and sponsors looking to return capital to investors will provide a favorable opportunity set in the long term. During the second quarter, the broader Crescent platform committed more than $2.5 billion across private credit transactions and more than $8.7 billion over the last 12 months, reflecting the strength of our origination capabilities and providing CCAP with continued access to a deep pipeline of high-quality investment opportunities. Given our near-term deleveraging priority, we are intentionally balancing selected new investments with preserving financial flexibility and prudently managing leverage for CCAP. With that, I'll turn it over to Gerhard to discuss our quarterly financial results in greater detail.

Thanks, Jason, and hello, everyone. Net investment income was $0.36 per share during the second quarter compared to reported NII of $0.42 per share in the first quarter. As Jason noted, excluding the $0.04 per share one-time incentive fee waiver recognized in the first quarter, NII declined from $0.38 per share to $0.36 per share. Compared to the first quarter, total investment income declined by approximately $1.6 million. The quarter-over-quarter decline was primarily driven by lower dividend income and lower realization activity, which resulted in reduced accelerated amortization and prepayment fee income. Dividend income was $1.2 million during the second quarter, down approximately $1.8 million quarter-over-quarter, primarily reflecting a decline in the distribution from the Logan JV as the vehicle continues to amortize and de-lever as discussed in prior quarters. Lower LBO activity resulted in accelerated amortization and prepayment fee income of approximately $0.4 million during the quarter, compared with an average of approximately $0.8 million over the past year. These reductions were partially offset by higher interest income resulting from positive net deployment during the first half of the year and recent restructurings of non-accrual investments, as well as the benefit of our lower management and incentive fees, which are now fully embedded in our operating results. Turning to the balance sheet, as of June 30, 2026, our investment portfolio totaled approximately $1.6 billion in fair value. Total net assets were $656 million, and NAV per share was $17.82. On Slide 10, we provide a graphical analysis of the quarter-over-quarter change in NAV. It's important to distinguish between two separate drivers. First, we completed three restructurings during the quarter. These resulted in $0.48 per share of realized losses, which were directly offset by the reversal of previously recognized unrealized losses that were crystallized through the restructuring process. In other words, these restructurings had a minimal net impact on NAV. Separately, we recognized $0.47 per share of unrealized losses, primarily reflecting continued operating pressure across a subset of our non-accrual investments, partially offset by $0.03 per share of realized gains. NAV was also reduced by the $0.03 per share special dividend paid during the quarter. Let's shift to our capitalization and liquidity. I'm on Slide 19. Our debt-to-equity ratio increased to 1.42x or 1.37x net of balance sheet cash reflecting the decline in net asset value together with positive net deployment during the quarter. While leverage ended the quarter above our long-term target range, we continued to maintain a strong liquidity position with approximately $200 million of available borrowing capacity and $36 million of cash and cash equivalents on the balance sheet at quarter end. We have visibility into several portfolio realizations in the near term, which, all else equal, we expect will reduce leverage to within our target net leverage range during the second half of the year. We repaid $162 million of maturing fixed-rate debt during the quarter and bolstered the balance sheet with incremental access to liquidity. We upsized our SPV asset facility by $100 million to $500 million and our SMBC corporate facility by $25 million to $335 million, further enhancing our available liquidity. We also funded the previously committed $50 million tranche of our Series 2025A fixed-rate unsecured notes due May 2029. These three capital sources represent $175 million in the aggregate versus the $162 million repaid across the maturing FCRX unsecured notes and the maturing 2023A unsecured notes. As a result, our unsecured debt maturity profile has been extended to 2028 and beyond, providing us with meaningful financial flexibility. Our Board declared a regular third quarter dividend of $0.34 per share. We will also pay the second of our previously announced $0.03 per share special dividends on September 15th. While our existing supplemental dividend framework remains in effect, CCAP will not pay a supplemental dividend for the quarter based on the terms of that framework. With that, I'll turn it over to Henry to discuss underlying credit trends, our portfolio management efforts and investment activities.

Thanks, Gerhard. We ended the quarter with approximately $1.6 billion of investments at fair value across a highly diversified portfolio of 192 portfolio companies with an average investment size of approximately 0.5% of the total portfolio and 91% of the portfolio invested in senior first lien loans. The broader portfolio continued to perform generally in line with our underlying expectations. The majority of our portfolio companies continue to demonstrate resilient operating performance and year-over-year EBITDA growth. Approximately 85% of investments were remained rated 1 or 2 with a weighted average portfolio risk rating of 2.1. Weighted average interest coverage remained stable at 2.2x, reflecting continued resilience across the broader portfolio. I want to acknowledge that NAV has now declined for several consecutive quarters. That pressure has been concentrated in a limited set of challenged credits. I will provide additional details on where we are seeing pressure and the actions we are taking. Our watch list increased modestly from 14% to 15% quarter-over-quarter. While the majority of our watch list investments do not have a near-term credit event, we continue to closely monitor businesses that are indexed to deferrable consumer spending, which represents an outsized proportion of our watch list relative to the broader portfolio. With respect to our largest industry categories, our healthcare investments continue to demonstrate stability outside of a select few investments that are managing company-specific issues. Additionally, our software and services investments also continue to deliver stable operating results amid AI-related market volatility. We have also continued to focus on rotating a legacy First Eagle portfolio, which continues to represent an outsized contributor to our watch list. A longer-term rotation thesis was a key area of diligence and factored into our investment rationale when completing the acquisition. We have continued to make progress on this front. During the quarter, we restructured one legacy First Eagle investment and we also exited another acquired investment at par. As of June 30th, the acquired portfolio has been reduced from over 70 to 27 investments, representing approximately 7% of CCAP's portfolio at fair value. Looking ahead, we expect realizations to continue as we focus our efforts on improving portfolio quality through the rotation. We had no new non-accruals during the quarter and completed three restructurings, resulting in non-accruals declining from 5.7% to 4.8% of debt investments at cost. As we manage our watch list, we want to reiterate that we consistently take a long-term approach to portfolio management that has been guided by the tenure and experience Crescent has investing in sponsor-backed private capital structures. Our experience has informed us that these workout situations rarely resolve within a single quarter and the most expedient realization is not necessarily the approach that maximizes value. As operating performance, enterprise values and recovery expectations evolve, we proactively reflect those developments through our valuations. Our quarterly marks reflect current conditions. We ultimately judge these investments based on their final realization outcomes. Moving to investment activity, given our current leverage profile, we intentionally moderated our hold sizes on platform originated investments during the quarter. Gross deployment during the second quarter totaled $57 million, including $28 million across three new platform investments. These investments were made at weighted average spreads of approximately 550 basis points. The remaining $29 million represented follow-on investments in existing portfolio companies. Aggregate exits, sales, and repayments totaled approximately $36 million, resulting in net deployment of approximately $21 million for the quarter. We believe this combination of active portfolio management and disciplined deployment aligns with our focus on demonstrating stability across our portfolio. With that, I'll turn the call back to Jason.

Thank you, Henry. Before we open the call for questions, I'd like to leave you with a few closing thoughts. Active portfolio management and strong alignment between ourselves and our investors remain foundational for our approach to managing CCAP. We acknowledge that the portfolio rotation, particularly as it relates to the legacy acquired assets, remains ongoing. We've also taken a number of important steps to further strengthen CCAP's positioning, including implementing a best-in-class fee structure, developing a revised dividend framework, and proactively managing our balance sheet. We are confident that our platform provides us with the right capabilities to deliver an experience to our investors that is consistent with our 30-plus year history investing in private credit. We believe consistent execution is the best path to narrowing that valuation gap. On behalf of the entire Crescent team, I'd like to thank our shareholders for their continued support and confidence. Operator, we'd now be happy to take your questions.

[Operator Instructions] Your first question comes from the line of Robert Dodd with Raymond James.

Just want to dig into a couple of bits on obviously the NAV trend. And as you said, I mean, it's been down 8 consecutive quarters now and I recognize your point that like turnarounds don't happen overnight, etc. They can take some time, but there's a difference between the turnaround and workout process and whether the fair value was set where it should have been. In fact, the eventual outcome of a turnaround into the fair value quicker than appears to be the case. I mean, is that the issue that the turnarounds are not progressing how you'd like, and that's driving the, kind of, revising your expectations downward each quarter? Or is it they are occurring as planned and it's just, you know, the fair value is keeping up with that rather than being more forward-looking. Can you give us any, it was obviously, 8 consecutive quarters, we'd expect a random chance you might have an up quarter in there. And so kind of how close are we to the bottom, so to speak, on NAV, on factoring in full expected outcomes on these assets?

Robert. This is Henry. I can start off by taking that. I think the first dynamic is what you just alluded to, which is I completely agree with your observation around the longer-term trend that we've seen, and it's consistent with what you said, which is these don't happen, these watch list investments don't fully resolve and realize within a quarter or even within a year or 2, for instance. And what we're focused on as we're thinking through the watch list is making sure that we're focused on long-term value and recovery maximization, not necessarily just getting them off of the watch list and out of the portfolio as quickly as possible. So that's going to inform our positioning and our thoughts with respect to just the rotation thesis, especially as it relates to investments that are on our watch list. I would say that with respect to the valuations, on a quarter-to-quarter basis, we need to reflect what the nearest term operating performance of these portfolio companies are as well as the nearest term outlooks. And as you can imagine, an investment that is on the watch list in particular might have the most variance in both of those inputs on the quarter-to-quarter basis. Our goal and what we commit to is reflecting those in real time and providing the best current view that we have on the respective watch list investments. So when I think about making sure that we factor in every relevant input, those can change. And those tend to change most dramatically for an investment that is on watch list or non-accrual as in comparison to just an investment that may be stable and performing to expectations. So I think that's certainly a dynamic that we're observing here as it relates to changes in unrealized losses on a quarter-over-quarter basis. The last point I'll make is just with respect to the watch list in aggregate. As of this quarter, we were at 15%, which is about 1.5 percentage points higher than where we've been over the last 3 years on average. As you know, and as we've alluded to in prior quarters, we like to be proactive with respect to how we designate investments on the watch list. And as a result, you haven't seen our watch list necessarily balloon sharply over -- on a quarter-over-quarter basis. And that's because we want to be upfront with what we're designating on the watch list and how we're approaching these investments. So, to summarize here, I think it's certainly a component of just the longer dated time it takes to rotate and realize watch list investments, as well as our approach of making sure that we factor in the latest relevant inputs as we're thinking about marking these investments appropriately on a quarter-to-quarter basis.

Okay. I appreciate that color. Moving on to a different topic, if I can. Obviously, you've got repayments. I think Gerhard said you should be in the target leverage range in the second half. So some net portfolio declines in size probably. Can you give us any color on what you expect to do? Obviously, you moved it to more granular, smaller average positions, et cetera, et cetera, as you rotated over time from acquired assets, et cetera. I mean, do you think there's going to be any change there? Any further increase in that or what's the view of once you get to target leverage, if the market's more active, how do you expect to respond to that? Because typically when originating, if the market's active in originations, it's also active in repayments, right? So.