CRESCENT CAPITAL BDC, INC. The information contained in this section should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. This discussion also should be read in conjunction with the "Cautionary Statement Regarding Forward Looking Statements" set forth on page 1 of this Quarterly Report on Form 10-Q. In this report, "we," "us," "our" and "Company" refer toCrescent Capital BDC, Inc. and its consolidated subsidiaries.
OVERVIEW
We are a specialty finance company focused on lending to middle-market companies. We were incorporated under the laws of theState of Delaware onFebruary 5, 2015 and onJanuary 30, 2020 , we changed our state of incorporation from theState of Delaware to theState of Maryland . We were listed and began trading on theNASDAQ stock exchange onFebruary 3, 2020 . We have elected to be treated as a business development company ("BDC") under the Investment Company Act of 1940, as amended ("1940 Act"). In addition, we have elected to be treated forU.S. federal income tax purposes as a regulated investment company (a "RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). As such, we are required to comply with various regulatory requirements, such as the requirement to invest at least 70% of our assets in "qualifying assets," source of income limitations, asset diversification requirements, and the requirement to distribute annually at least 90% of our taxable income and tax-exempt interest. We are managed byCrescent Cap Advisors, LLC (the "Adviser"), an investment adviser that is registered with theSEC under the 1940 Act.CCAP Administration, LLC (the "Administrator"), provides the administrative services necessary for us to operate. Our management consists of investment and administrative professionals from the Adviser and Administrator along with our Board. The Adviser directs and executes our investment operations and capital raising activities subject to oversight from the Board, which sets our broad policies. The Board has delegated investment management of our investment assets to the Adviser. The Board consists of five directors, four of whom are independent. Our investment objective is to maximize the total return to our stockholders in the form of current income and capital appreciation through debt and related equity investments. We invest primarily in secured debt (including first lien, unitranche first lien and second-lien debt) and unsecured debt (including mezzanine and subordinated debt), as well as related equity securities of privateU.S. middle-market companies. We may purchase interests in loans or make debt investments, either (i) directly from our target companies as primary market or private credit investments (i.e., private credit transactions), or (ii) primary or secondary market bank loan or high yield transactions in the broadly syndicated "over-the-counter" market (i.e., broadly syndicated loans and bonds). Although our focus is to invest in less liquid private credit transactions, we may from time to time invest in more liquid broadly syndicated loans to complement our private credit transactions. "First lien" investments are senior loans on a lien basis to other liabilities in the issuer's capital structure that have the benefit of a first-priority security interest in assets of the issuer. The security interest ranks above the security interest of any second-lien lenders in those assets. "Unitranche first lien" investments are loans that may extend deeper in a company's capital structure than traditional first lien debt and may provide for a waterfall of cash flow priority among different lenders in the unitranche loan. In certain instances, we may find another lender to provide the "first out" portion of such loan and retain the "last out" portion of such loan, in which case, the "first out" portion of the loan would generally receive priority with respect to payment of principal, interest and any other amounts due thereunder over the "last out" portion that we would continue to hold. In exchange for the greater risk of loss, the "last out" portion earns a higher interest rate. "Second lien" investments are loans with a second priority lien on all existing and future assets of the portfolio company. The security interest ranks below the security interests of any first lien and unitranche first lien lenders in those assets.
"Unsecured debt" investments are loans that generally rank senior to a borrower's equity securities and junior in right of payment to such borrower's other senior indebtedness.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in 74 -------------------------------------------------------------------------------- determining such estimates could cause actual results to differ materially. The critical accounting policies should be read in connection with our risk factors as disclosed herein. For a description of our critical accounting policies, see Note 2 "Significant Accounting Policies" to our consolidated financial statements included in this report. We consider the most significant accounting policies to be those related to our Valuation of Portfolio Investments, Revenue Recognition, Non-Accrual Investments, Distribution Policy, and Income Taxes.
COMPONENTS OF OPERATIONS
Investments
We expect our investment activity to vary substantially from period to period depending on many factors, the general economic environment, the amount of capital we have available to us, the level of merger and acquisition activity for middle-market companies, including the amount of debt and equity capital available to such companies and the competitive environment for the type of investments we make. In addition, as part of our risk strategy on investments, we may reduce certain levels of investments through partial sales or syndication to additional investors. We may not invest in any assets other than "qualifying assets" specified in the 1940 Act, unless, at the time the investments are made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). Qualifying assets include investments in "eligible portfolio companies." Pursuant to rules adopted by theSEC , "eligible portfolio companies" include certain companies that do not have any securities listed on a national securities exchange and public companies whose securities are listed on a national securities exchange but whose market capitalization is less than$250 million .
The Investment Adviser
Our investment activities are managed by the Adviser, which is responsible for originating prospective investments, conducting research and due diligence investigations on potential investments, analyzing investment opportunities, negotiating and structuring our investments and monitoring our investments and portfolio companies on an ongoing basis. The Adviser has entered into a resource sharing agreement withCrescent Capital Group LP ("Crescent"), pursuant to which Crescent provides the Adviser with experienced investment professionals (including the members of the Adviser's investment committee) and access to Crescent's resources so as to enable the Adviser to fulfill its obligations under the Investment Advisory Agreement. Through the resource sharing agreement, the Adviser intends to capitalize on the deal origination, credit underwriting, due diligence, investment structuring, execution, portfolio management and monitoring experience of Crescent's investment professionals. OnJanuary 5, 2021 , Sun Life Financial Inc. (together with its subsidiaries and joint ventures, "Sun Life") acquired a majority interest in Crescent (the "Sun Life Transaction"). There were no changes to our investment objective, strategies and process or to the Crescent team responsible for the investment operations as a result of the Sun Life Transaction.
Revenues
We generate revenue primarily in the form of interest income on debt investments, capital gains and distributions, if any, on equity securities that we may acquire in portfolio companies. Certain investments may have contractual PIK interest or dividends. PIK represents accrued interest or accumulated dividends that are added to the loan principal of the investment on the respective interest or dividend payment dates rather than being paid in cash and generally becomes due at maturity or upon being called by the issuer. PIK is recorded as interest or dividend income, as applicable. We also generate revenue in the form of commitment or origination fees. Loan origination fees, original issue discount and market discount or premium are capitalized, and we accrete or amortize such amounts into income over the life of the loan using the effective yield method. Dividend income from common equity securities is recorded on the record date for private portfolio companies or on the ex-dividend date for publicly-traded portfolio companies. Dividend income from preferred equity securities is recorded on an accrual basis to the extent that such amounts are payable by the portfolio company and are expected to be collected. We may receive other income, which may include income such as consent, waiver, amendment, underwriting, and arranger fees associated with our investment activities as well as any fees for managerial assistance services rendered to the portfolio companies. Such fees are recognized as income when earned or the services are rendered. Expenses
Our primary operating expenses include the payment of management fees and incentive fees to the Adviser under the Investment Advisory Agreement, as amended, our allocable portion of overhead expenses under the administration agreement with
75
--------------------------------------------------------------------------------
our Administrator (the "Administration Agreement"), operating costs associated
with our sub-administration agreement and other operating costs described below.
The management and incentive fees compensate the Adviser for its work in
identifying, evaluating, negotiating, closing and monitoring our investments. We
bear all other out-of-pocket costs and expenses of our operations and
transactions, including:
•
the cost of calculating our net asset value, including the cost of any third-party valuation services;
•
fidelity bond, directors' and officers' liability insurance and other insurance premiums;
•
fees and expenses associated with independent audits and outside legal costs;
•
independent directors' fees and expenses;
•
administration fees and expenses, if any, payable under the Administration Agreement (including payments based upon our allocable portion of the Administrator's overhead in performing its obligations under the Administration Agreement, rent and the allocable portion of the cost of certain professional services provided to us, including but not limited to, our accounting professionals, our legal counsel and compliance professionals);
•
•
the cost of effecting sales and repurchases of shares of our common stock and other securities;
•
fees payable to third parties relating to making investments, including out-of-pocket fees and expenses associated with performing due diligence and reviews of prospective investments;
•
out-of-pocket fees and expenses associated with marketing efforts;
•
federal and state registration fees and any stock exchange listing fees;
•
brokerage commissions;
•
costs associated with our reporting and compliance obligations under the 1940
Act and other applicable
•
debt service and other costs of borrowings or other financing arrangements; and
•
all other expenses reasonably incurred by us in connection with making investments and administering our business.
We expect our general and administrative expenses to be relatively stable or decline as a percentage of total assets during periods of asset growth and to increase during periods of asset declines.
Leverage
Our financing facilities allow us to borrow money and lever our investment portfolio, subject to the limitations of the 1940 Act, with the objective of increasing our yield. This is known as "leverage" and could increase or decrease returns to our stockholders. The use of leverage involves significant risks. In accordance with applicableSEC staff guidance and interpretations, effectiveMay 5, 2020 with shareholder approval, we, as a BDC, are permitted to borrow amounts such that our asset coverage ratio is at least 150% after such borrowing (if certain requirements are met), rather than 200%, as previously required. Short-term credits necessary for the settlement of securities transactions and arrangements with respect to securities lending will not be considered borrowings for these purposes. The amount of leverage that we employ depends on our Adviser's and our Board's assessment of market conditions and other factors at the time of any proposed borrowing.
PORTFOLIO INVESTMENT ACTIVITY
We seek to create a broad and diversified portfolio that generally includes senior secured first lien, unitranche, senior secured second lien, unsecured loans and minority equity securities ofU.S. middle market companies. The size of our individual investments varies proportionately with the size of our capital base. We generally invest in securities that have been rated below investment grade by independent rating agencies or that would be rated below investment grade if they were rated. These securities have speculative characteristics with respect to the issuer's capacity to pay interest and repay principal. In addition, many of our debt investments have floating interest rates that reset on a periodic basis and typically do not fully pay down principal prior to maturity. 76 --------------------------------------------------------------------------------
Our portfolio at fair value was comprised of the following:
($ in millions) As of June 30, 2022 As of December 31, 2021 Investment Type Fair Value Percentage Fair Value Percentage Senior Secured First Lien$ 335.3 26.1 %$ 329.9 26.0 % Unitranche First Lien 782.9 60.8 731.0 57.5 Unitranche First Lien - Last Out 14.0 1.1 13.7 1.1 Senior Secured Second Lien 59.9 4.7 72.7 5.7 Unsecured Debt 3.8 0.3 5.6 0.4 Equity & Other 51.4 4.0 59.5 4.7 LLC/LP Equity Interests 38.0 3.0 58.0 4.6 Total investments$ 1,285.3 100.0 % $
1,270.4 100.0 %
The following table shows our investment activity by investment type:
($ in millions) For the three months ended
For the six months ended
June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021
New investments at cost:
Senior Secured First Lien $ 34.9 $ 55.8 $ 44.3 $ 64.6
Unitranche First Lien 68.5 61.6 118.5 138.1
Unitranche First Lien - Last
Out 4.0 - 4.0 -
Senior Secured Second Lien - - - -
Unsecured Debt - 0.4 - 2.3
Equity & Other 3.1 1.0 3.1 2.0
LLC/LP Equity Interests 1.9 2.2 2.4 2.2
Total $ 112.4 $ 121.0 $ 172.3 $ 209.2
Proceeds from investments sold
or repaid:
Senior Secured First Lien $ 20.7 $ 51.9 $ 37.5 $ 72.3
Unitranche First Lien 55.1 36.8 58.9 62.8
Unitranche First Lien - Last
Out 1.6 - 3.9 -
Senior Secured Second Lien - 16.6 9.3 41.5
Unsecured Debt - - 1.9 -
Equity & Other 0.1 3.6 14.0 7.7
LLC/LP Equity Interests 19.6 0.7 20.9 2.5
Total $ 97.1 $ 109.6 $ 146.4 $ 186.8
Net increase (decrease) in
portfolio $ 15.3 $ 11.4 $ 25.9 $ 22.4
The following table presents certain selected information regarding our
investment portfolio:
As of As of
June 30, 2022 December 31, 2021
Weighted average yield on income producing 8.3 % 7.5 %
securities (at cost) (1)
Percentage of debt bearing a floating rate (at 98.7 % 98.5 %
fair value)
Percentage of debt bearing a fixed rate (at 1.3 % 1.5 %
fair value)
Number of portfolio companies 137 134
(1)
Yield excludes investments on non-accrual status.
The following table shows the amortized cost of our performing and non-accrual debt and income producing debt securities.
($ in millions) As of June 30, 2022 As of December 31, 2021
% of Fair % of Fair
Cost % of Cost Fair Value Value Cost % of Cost Fair Value Value
Performing $ 1,193.2 98.7 % $ 1,182.7 98.9 % $ 1,129.6 98.4 % $ 1,138.7 98.8 %
Non-Accrual 16.0 1.3 % 13.1 1.1 % 18.9 1.6 % 14.1 1.2 %
Total $ 1,209.2 100.0 % $ 1,195.8 100.0 % $ 1,148.5 100.0 % $ 1,152.8 100.0 %
Loans are generally placed on non-accrual status when there is reasonable doubt
that principal or interest will be collected in full. Non-accrual loans are
restored to accrual status when past due principal and interest is paid current
and, in management's
77
--------------------------------------------------------------------------------
judgment, are likely to remain current. Management may determine to not place a
loan on non-accrual status if the loan has sufficient collateral value and is in
the process of collection.
As of June 30, 2022 , we had six investments across three portfolio companies on
non-accrual status, which represented 1.3% and 1.1% of the total debt
investments at cost and fair value, respectively. As of December 31, 2021 , we
had five investments across three portfolio companies on non-accrual status,
which represented 1.6% and 1.2% of the total debt investments at cost and fair
value, respectively. The remaining debt investments were performing and current
on their interest payments as of June 30, 2022 and December 31, 2021 .
The Adviser monitors our portfolio companies on an ongoing basis. The Adviser
monitors the financial trends of each portfolio company to determine if it is
meeting its business plans and to assess the appropriate course of action for
each company. The Adviser has a number of methods of evaluating and monitoring
the performance and fair value of our investments, which may include the
following:
•
assessment of success of the portfolio company in adhering to its business plan and compliance with covenants;
•
review of monthly and quarterly financial statements and financial projections for portfolio companies.
•
contact with portfolio company management and, if appropriate, the financial or strategic sponsor, to discuss financial position, requirements and accomplishments;
•
comparisons to other companies in the industry; and
•
attendance and participation in board meetings.
As part of the monitoring process, the Adviser regularly assesses the risk profile of each of our investments and, on a quarterly basis, grades each investment on a risk scale of 1 to 5. Risk assessment is not standardized in our industry and our risk assessment may not be comparable to ones used by our competitors. Our assessment is based on the following categories:
1.
Involves the least amount of risk relative to cost or amortized cost. Investment performance is above expectations since origination or acquisition. Trends and risk factors are generally favorable, which may include financial performance or a potential exit.
2.
Involves a level of risk that is similar to the risk at the time of origination or acquisition. The investment is generally performing as expected, and the risks around our ability to ultimately recoup the cost of the investment are neutral to favorable relative to the time of origination or acquisition. New investments are generally assigned a rating of 2 at origination or acquisition.
3.
Indicates an investment performing below expectations where the risks around our ability to ultimately recoup the cost of the investment have increased since origination or acquisition. For debt investments, borrowers are more likely than not in compliance with debt covenants and loan payments are generally not past due. An investment rating of 3 requires closer monitoring.
4.
Indicates an investment performing materially below expectations where the risks around our ability to ultimately recoup the cost of the investment have increased materially since origination or acquisition. For debt investments, borrowers may be out of compliance with debt covenants and loan payments may be past due (but generally not more than 180 days past due). Non-accrual status is strongly considered for debt investments rated 4.
5.
Indicates an investment performing substantially below expectations where the
risks around our ability to ultimately recoup the cost of the investment have
substantially increased since origination or acquisition. We do not expect to
recover our initial cost basis from investments rated 5. Debt investments with
an investment rating of 5 are generally in payment and/or covenant default and
are on non-accrual status.
78
--------------------------------------------------------------------------------
The following table shows the composition of our portfolio on the 1 to 5
investment performance rating scale. Investment performance ratings are accurate
only as of those dates and may change due to subsequent developments relating to
a portfolio company's business or financial condition, market conditions or
developments, and other factors.
($ in millions) As of June 30, 2022 As of
Investments at Percentage of Investments at Percentage of
Investment Performance
Rating Fair Value Total Portfolio Fair Value Total Portfolio
1 - - % - - %
2 1,148.5 89.4 1,155.8 91.0
3 123.7 9.6 100.5 7.9
4 9.0 0.7 14.1 1.1
5 4.1 0.3 - -
Total 1,285.3 100.0 % 1,270.4 100.0 %
RESULTS OF OPERATIONS
Summary Statement of Operations
(in $ millions) For the three months ended June
30, For the six months ended
2022 2021 2022 2021
Total investment income $ 26.7 $ 23.8 $ 53.2 $ 44.4
Total net expenses 11.2 12.8 25.5 22.0
Net investment income $ 15.5 $ 11.0 $ 27.7 $ 22.4
Net realized gain (loss) on investments
and forward
contracts (1.8 ) 2.6 6.8 4.4
Net unrealized appreciation
(depreciation) on investments,
forward contracts and foreign
transactions (14.6 ) 19.2 (19.1 ) 27.6
Net realized and unrealized gains
(losses) $ (16.4 ) $ 21.8 $ (12.3 ) $ 32.0
Benefit/(Provision) for taxes on
realized and unrealized
appreciation (depreciation) on
investments 0.0 (0.2 ) (0.1 ) (0.3 )
Net increase (decrease) in net assets
resulting from
operations $ (0.9 ) $ 32.6 $ 15.3 $ 54.1
Investment Income
(in $ millions) For the three months ended June 30, For the six months ended June 30,
2022 2021 2022 2021
Interest from investments $ 24.4 $ 21.5 $ 48.5 $ 40.8
Dividend Income 2.1 2.1 4.4 3.3
Other Income 0.2 0.2 0.3 0.3
Total investment income $ 26.7 $ 23.8 $ 53.2 $ 44.4
Interest income, which includes amortization of upfront fees, increased from
$21.5 million for the three months ended June 30, 2021 to $24.4 million for the
three months ended June 30, 2022 , due to an expansion of the income-producing
investment portfolio and a rise in benchmark rates. Included in interest from
investments for the three months ended June 30, 2022 and 2021 are $1.5 million
and $2.3 million of accelerated accretion of OID related to paydown activity,
respectively.
Dividend income was $2.1 million for both three month periods presented. Other
income, which includes consent, waiver, amendment, agency, underwriting and
arranger fees associated with our investment activities, was $0.2 million for
both three month periods presented.
Interest income, which includes amortization of upfront fees, increased from
$40.8 million , for the six months ended June 30, 2021 , to $48.5 million for the
six months ended June 30, 2022 , due to an expansion of the income-producing
investment portfolio and a rise in benchmark rates. Included in interest from
investments for the six months ended June 30, 2022 and 2021 are $1.8 million and
$3.1 million of accelerated accretion of OID related to paydown activity,
respectively.
Dividend income increased from $3.3 million for the six months ended June 30,
2021 to $4.4 million for the three months ended June 30, 2022 due to one-time
dividend distributions from two portfolio companies. Other income which includes
consent, waiver,
79
--------------------------------------------------------------------------------
amendment, agency, underwriting and arranger fees associated with our investment
activities was
Expenses
(in $ millions) For the three months ended June 30, For the six months ended June 30,
2022 2021 2022 2021
Interest and other debt financing costs $ 6.6 $ 4.6 $ 12.0 $ 8.8
Management fees 4.1 3.3 8.1 6.6
Income based incentive fees 2.6 2.6 5.3 4.9
Capital gains based incentive fees (2.9 ) 3.8 (2.1 ) 5.4
Professional fees 0.3 0.5 0.7 1.0
Directors' fees 0.1 0.1 0.2 0.2
Other general and administrative expenses 0.6 0.7 1.4 1.4
Total expenses $ 11.4 $ 15.6 $ 25.6 $ 28.3
Management fee waiver (0.1 ) (1.3 ) (0.1 ) (2.6 )
Income based incentive fees waiver (0.4 ) (2.6 ) (0.4 ) (4.9 )
Net expenses $ 10.9 $ 11.7 $ 25.1 $ 20.8 Income and excise taxes
0.3 1.1 0.4 1.2
Total $ 11.2 $ 12.8 $ 25.5 $ 22.0
Interest and other debt financing costs
Interest and other debt financing costs include interest, amortization of deferred financing costs including upfront commitment fees and unused fees on our credit facilities. For the three months endedJune 30, 2022 and 2021 interest and other debt financing costs were$6.6 million and$4.6 million , respectively. For the six months endedJune 30, 2022 and 2021 interest and other debt financing costs were$12.0 million and$8.8 million , respectively. The increase for both periods was due to a higher weighted average debt outstanding and higher weighted average cost of debt related to a rise in benchmark rates.
Base Management Fees
For the three months endedJune 30, 2022 and 2021, we incurred management fees of$4.1 million and$3.3 million , respectively, which are net of waived amounts of$0.1 million and$1.3 million , respectively. For the six months endedJune 30, 2022 and 2021, we incurred management fees of$8.1 million and$6.6 million , respectively, which are net of waived amounts of$0.1 million and$2.6 million , respectively. The increase in net management fees was driven by growing assets under management and the expiration of the management fee waiver onJuly 31, 2021 . Incentive Fees For the three months endedJune 30, 2022 and 2021, we incurred income based incentive fees of$2.6 million and$2.6 million , of which$0.4 million and$2.6 million , respectively, were waived. For the six months endedJune 30, 2022 and 2021, we incurred income based incentive fees of$5.3 million and$4.9 million , of which$0.4 million and$4.9 million , respectively, were waived. The increase in net incentive fees was driven by growing investment income and the expiration of the income based incentive fee waiver onJuly 31, 2021 . For the three months endedJune 30, 2022 and 2021 we (reversed) accrued$(2.9) million and$3.8 million , respectively, of capital gains based incentive fees. For the six months endedJune 30, 2022 and 2021 we (reversed) accrued$(2.1) million and$5.4 million , respectively, of capital gains based incentive fees. As ofJune 30, 2022 andDecember 31, 2021 ,$4.2 million and$6.3 million , respectively, was accrued and unpaid. The fluctuation in accumulated incentive fees on cumulative unrealized capital appreciation was attributable to the inception to date performance of the investment portfolio.
Professional Fees and Other General and Administrative Expenses
Professional fees generally include expenses from independent auditors, tax
advisors, legal counsel and third party valuation agents. Other general and
administrative expenses generally include overhead and staffing costs allocated
from the Administrator, insurance premiums, sub-administration expenses and
miscellaneous administrative costs associated with our operations and investment
activity.
80
--------------------------------------------------------------------------------
For the three months ended June 30, 2022 and 2021, professional fees were $0.3
million and $0.5 million , respectively. For the six months ended June 30, 2022
and 2021, professional fees were $0.7 million and $1.0 million , respectively.
For the three months ended June 30, 2022 and 2021, other general and
administrative expenses were $0.6 million and $0.7 million , respectively. For
the six months ended June 30, 2022 and 2021, other general and administrative
expenses were $1.4 million and $1.4 million , respectively.
Income and Excise Taxes
For the three months endedJune 30, 2022 and 2021, we expensed income and excise taxes of$0.3 million and$1.1 million . For the six months endedJune 30, 2022 and 2021, we expensed income and excise taxes of$0.4 million and$1.2 million . The increase in the comparative periods' income and excise tax was attributable to taxes due on allocated taxable income from an equity investment held in a blocker. Net Investment Income
For the three months ended
For the three months endedJune 30, 2022 and 2021, net investment income excluding capital gains incentive fees ("Adjusted Net Investment Income"), was$12.7 million or$0.41 per share and$14.8 million or$0.53 per share, respectively. For the six months endedJune 30, 2022 and 2021, Adjusted Net Investment Income was$25.6 million or$0.83 per share and$27.8 million or$0.99 per share, respectively. The decrease in the per share Adjusted Net Investment Income was due to the expiration of management fee and income based incentive fee waivers onJuly 31, 2021 . The following table provides a reconciliation of net investment income (the most comparableU.S. GAAP measure) to Adjusted Net Investment Income for the periods presented: (in $ millions) For the three months ended June 30, For the six months ended June 30, 2022 2021 2022 2021 Amount Per Share Amount Per Share Amount Per Share Amount Per Share GAAP net investment income$ 15.5 $ 0.50 $ 11.0 $ 0.39 $ 27.7 $ 0.90 $ 22.4 $ 0.80 Capital gains based incentive fee (2.8 ) (0.09 ) 3.8 0.14 (2.1 ) (0.07 ) 5.4 0.19 Adjusted Net Investment Income$ 12.7 $ 0.41 $ 14.8 $ 0.53 $ 25.6 $ 0.83 $ 27.8 $ 0.99 On a supplemental basis, we are disclosing Adjusted Net Investment Income and per share Adjusted Net Investment Income, each of which is a financial measure that is calculated and presented on a basis of methodology other than in accordance withU.S. GAAP ("non-GAAP"). Adjusted Net Investment Income represents net investment income, excluding capital gains incentive fees. We use this non-GAAP financial measure internally to analyze and evaluate financial results and performance and believe that this non-GAAP financial measure is useful to investors as an additional tool to evaluate ongoing results and trends without giving effect to capital gains incentive fees. The Investment Advisory Agreement provides that a capital gains-based incentive fee is determined and paid annually with respect to realized capital gains (but not unrealized capital appreciation) to the extent such realized capital gains exceed realized capital losses and unrealized capital depreciation on a cumulative basis. We believe that Adjusted Net Investment Income is a useful performance measure because it reflects the net investment income produced on the Company's investments during a period without giving effect to any changes in the value of such investments and any related capital gains incentive fees between periods. The presentation of Adjusted Net Investment Income is not intended to be a substitute for financial results prepared in accordance with GAAP and should not be considered in isolation. 81 --------------------------------------------------------------------------------
Net Realized and Unrealized Gains and Losses
We value our portfolio investments quarterly and any changes in fair value are
recorded as unrealized appreciation (depreciation) on investments. Net realized
gains (losses) and net unrealized appreciation (depreciation) on our investment
portfolio were comprised of the following:
($ in millions) For the three months ended For the six months ended
June 30, June 30,
2022 2021 2022 2021
Realized losses on non-controlled and
non-affiliated investments $ - $ (0.1 ) $ - $ (0.1 )
Realized gains on non-controlled and
non-affiliated investments - 2.6 1.3 4.4
Realized losses on non-controlled and
affiliated investments - - - -
Realized gains on non-controlled and
affiliated investments - - 7.1 -
Realized losses on controlled investments (1.7 ) - (1.7 ) -
Realized gains on controlled investments - - - -
Realized losses on foreign currency forwards - - - -
Realized gains on foreign currency forwards - - - -
Realized losses on foreign currency
transactions (0.1 ) 0.1 (0.1 ) 0.3
Realized gains on foreign currency
transactions - - 0.2 (0.2 )
Net realized gains (losses) on investments $ (1.8 ) $ 2.6 $ 6.8 $ 4.4
Change in unrealized depreciation on
non-controlled and non-affiliated
investments (22.6 ) (7.1 ) (27.0 ) (10.0 )
Change in unrealized appreciation on
non-controlled and non-affiliated
investments 4.5 9.8 8.0 20.3
Change in unrealized depreciation on foreign
currency translation 0.2 - 0.2 -
Change in unrealized appreciation on foreign
currency translation - - - -
Change in unrealized depreciation on
non-controlled and affiliated investments (2.2 ) - (4.8 ) (1.6 )
Change in unrealized appreciation on
non-controlled and affiliated investments 0.7 16.1 0.3 17.3
Change in unrealized depreciation on
controlled and affiliated investments (0.9 ) - (1.6 ) -
Change in unrealized appreciation on
controlled and affiliated investments 0.2 0.6 0.2 1.2
Change in unrealized depreciation on foreign
currency forwards - 1.0 - 0.7
Change in unrealized appreciation on foreign
currency forwards 5.5 (1.2 ) 5.6 (0.3 )
Net unrealized appreciation (depreciation)
on investments (14.6 ) 19.2 (19.1 ) 27.6
Net realized and unrealized gains (losses)
on investments and asset acquisition (16.4 ) 21.8 (12.3 ) 32.0
Hedging
We may, but are not required to, enter into interest rate, foreign exchange or
other derivative agreements to hedge interest rate, currency, credit or other
risks. Generally, we do not intend to enter into any such derivative agreements
for speculative purposes. Any derivative agreements entered into for speculative
purposes are not expected to be material to our business or results of
operations. These hedging activities, which are in compliance with applicable
legal and regulatory requirements, may include the use of various instruments,
including futures, options and forward contracts. We bear the costs incurred in
connection with entering into, administering and settling any such derivative
contracts. There can be no assurance any hedging strategy we employ will be
successful.
During the six months ended
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The primary uses of our cash and cash equivalents are for (1) investments in
portfolio companies and other investments; (2) the cost of operations (including
paying the Adviser); (3) debt service, repayment, and other financing costs; and
(4) cash distributions to the holders of our common stock. We expect to generate
additional liquidity from (1) future offerings of securities, (2) future
borrowings and (3) cash flows from operations, including investment sales and
repayments as well as income earned on investments.
82
--------------------------------------------------------------------------------
As of
As ofJune 30, 2022 , we were in compliance with our asset coverage requirements under the 1940 Act. In addition, we were in compliance with all the financial covenant requirements of our credit facilities as ofJune 30, 2022 . However, any increase in realized losses or unrealized depreciation of our investment portfolio or significant reductions in our net asset value as a result of the effects of the COVID-19 pandemic, the rising rate environment and the potential for a recession increase the risk of breaching the relevant covenants requirements. Any breach of these requirements may adversely affect the access to sufficient debt and equity capital.
Capital Share Activity
There were no equity issuances of our common stock during the six months endedJune 30, 2022 . During the year endedDecember 31, 2021 , we issued 2,720,000 shares of our common stock for total proceeds of$58.0 million in connection with the equity offering onNovember 18, 2021 . Debt ($ in millions) June 30, 2022 Aggregate Principal Amount Drawn Amount Carrying Weighted Average Weighted Average Committed Amount Available (1) Value(2) Debt Outstanding Interest Rate SPV Asset Facility$ 350.0 $ 225.2 $ 124.8 $ 225.2 $ 246.0 4.63 % SMBC Corporate 350.0 247.3 102.7 247.3 218.4 3.43 % Revolving Facility 2023 Unsecured Notes 50.0 50.0 - 50.0 50.0 6.50 % 2026 Unsecured Notes 135.0 135.0 - 135.0 135.0 4.21 % Total Debt$ 885.0 $ 657.5 $ 227.5 $ 657.5 $ 649.4 4.23 % ($ in millions) December 31, 2021 Aggregate Principal Amount Drawn Amount Carrying Weighted Average Weighted Average Committed Amount Available (1)
Value(2) Debt Outstanding Interest Rate
SPV Asset Facility
269.8 2.53 %
SMBC Corporate 300.0 203.4 96.6 203.4 25.0 2.39 %
Revolving Facility
2023 Unsecured Notes 50.0 50.0 - 50.0 50.0 6.50 %
2026 Unsecured Notes 135.0 135.0 - 135.0 99.7 4.21 %
Ally Corporate - - - - 83.2 0.00 %
Revolving Facility
InterNotes® - - - - 3.0 0.00 %
Total Debt $ 835.0 $ 637.9 $ 197.1 $ 637.9 $ 530.7 3.15 %
(1)The amount available is subject to any limitations related to the respective debt facilities' borrowing bases and foreign currency translation adjustments.
(2)
Amount presented excludes netting of deferred financing costs.
SPV Asset Facility
OnMarch 28, 2016 ,Crescent Capital BDC Funding, LLC ("CCAP SPV"), a wholly owned subsidiary of CCAP, entered into a loan and security agreement, as amended from time to time (the "SPV Asset Facility"), with us as the collateral manager, seller and equity holder, CCAP SPV as the borrower, the banks and other financial institutions from time to time party thereto as lenders, andWells Fargo Bank, National Association ("Wells Fargo"), as administrative agent, collateral agent, and lender. We consolidate CCAP SPV in our consolidated financial statements and no gain or loss is recognized from the transfer of assets to and from CCAP SPV. The maximum commitment amount under the SPV Asset Facility is$350.0 million , and may be increased with the consent of Wells Fargo or reduced upon our request. Proceeds of the advances under the SPV Asset Facility may be used to acquire portfolio investments, to make distributions to us in accordance with the SPV Asset Facility, and to pay related expenses. The maturity date is the earlier of (a) the date the borrower voluntarily reduces the commitments to zero, (b)June 22, 2026 and (c) the date upon which Wells Fargo declares the obligations due and payable after the occurrence of an Event of Default. Borrowings under the SPV Asset 83 -------------------------------------------------------------------------------- Facility bear interest at LIBOR plus a margin with no LIBOR floor. The margin is between 1.65% and 2.10% as determined by the proportion of liquid and illiquid loans pledged to the SPV Asset Facility. We pay unused facility fees of 0.50% per annum on committed but undrawn amounts under the SPV Asset Facility. The unused facility fee rate may vary based on the utilization. The SPV Asset Facility includes customary covenants, including certain limitations on the incurrence of additional indebtedness and liens, as well as usual and customary events of default for revolving credit facilities of this nature. The facility size is subject to availability under the borrowing base, which is based on the amount of CCAP SPV's assets from time to time, and satisfaction of certain conditions, including an asset coverage test and certain concentration limits.
SMBC Corporate Revolving Facility
OnOctober 27, 2021 , we entered into a senior secured revolving credit agreement, as amended from time to time, withSumitomo Mitsui Banking Corporation , as Administrative Agent, Collateral Agent and Lender (the "SMBC Corporate Revolving Facility"). The maximum principal amount of the SMBC Corporate Revolving Facility is$350.0 million , subject to availability under the borrowing base. Borrowings under the SMBC Corporate Revolving Facility bear interest at LIBOR or adjusted SOFR plus 1.875% or 2.000%, subject to certain provisions in the SMBC Corporate Revolving Facility agreement, with no benchmark rate floor. We pay unused facility fees of 0.375% per annum on committed but undrawn amounts under the SMBC Corporate Revolving Facility. Any amounts borrowed under the SMBC Corporate Revolving Facility, and all accrued and unpaid interest, will be due and payable, onOctober 27, 2026 .
Ally Corporate Revolving Facility
OnAugust 20, 2019 , we entered into the "Ally Corporate Revolving Facility" withAlly Bank , as Administrative Agent and Arranger. The maximum principal amount of the Ally Corporate Revolving Facility was$200.0 million , subject to availability under the borrowing base. Borrowings under the Ally Corporate Revolving Facility bore interest at LIBOR plus a 2.35% margin with no LIBOR floor.
We terminated the Ally Corporate Revolving Facility concurrent with the closing
of the SMBC Corporate Revolving Facility, on
2023 Unsecured Notes
OnJuly 30, 2020 , we completed a private offering of$50.0 million aggregate principal amount of 5.95% senior unsecured notes dueJuly 30, 2023 (the "2023 Unsecured Notes"). The 2023 Unsecured Notes were issued in two$25.0 million issuances onJuly 30, 2020 andOctober 28, 2020 . The 2023 Unsecured Notes will mature onJuly 30, 2023 and may be redeemed in whole or in part, at the Company's option, any time on or afterJanuary 30, 2023 at par plus accrued interest or any time prior toJanuary 30, 2023 at par plus a "make-whole" premium and accrued interest. Interest on the 2023 Unsecured Notes is due and payable semiannually in arrears onJanuary 30th andJuly 30th of each year. 2026 Unsecured Notes
On
The 2026 Unsecured Notes will mature onFebruary 17, 2026 and may be redeemed in whole or in part, at our option, at any time or from time to time at par plus a "make-whole" premium, if applicable. Interest on the 2026 Unsecured Notes is due and payable semiannually in arrears onFebruary 17th andAugust 17th of each year. InterNotes® OnJanuary 31, 2020 , in connection with the Alcentra Acquisition, we assumed direct unsecured fixed interest rate obligations or "InterNotes®". The InterNotes® bore interest at fixed interest rates ranging between 6.25% and 6.75% and offered a variety of maturities ranging betweenFebruary 15, 2021 andApril 15, 2022 . We redeemed or paid down the remaining$16.4 million of InterNotes® during the first quarter of 2021. 84 -------------------------------------------------------------------------------- The summary of costs incurred in connection with the SPV Asset Facility, SMBC Corporate Revolving Facility, Ally Corporate Revolving Facility, 2023 Unsecured Notes, 2026 Unsecured Notes and InterNotes® is presented below: ($ in millions) For the three months ended For the six months ended June 30, June 30, 2022 2021 2022 2021 Borrowing interest expense $ 6.0 $ 3.9$ 10.7 $ 7.5 Unused facility fees 0.2 0.3 0.5 0.5 Amortization of financing costs 0.4 0.4 0.8 0.8
Total interest and credit facility $ 6.6 $ 4.6
$ 12.0 $ 8.8 expenses Weighted average outstanding 660.0 505.1 649.4 496.0 balance To the extent we determine that additional capital would allow us to take advantage of additional investment opportunities, if the market for debt financing presents attractively priced opportunities, or if our Board otherwise determines that leveraging our portfolio would be in our best interest and the best interests of our stockholders, we may enter into new debt financing opportunities in addition to our existing debt. The pricing and other terms of any such opportunities would depend upon market conditions and the performance of our business, among other factors. In accordance with applicableSEC staff guidance and interpretations, effectiveMay 5, 2020 with shareholder approval, we, as a BDC, are permitted to borrow amounts such that our asset coverage ratio is at least 150% after such borrowing (if certain requirements are met), rather than 200%, as previously required. Short-term credits necessary for the settlement of securities transactions and arrangements with respect to securities lending will not be considered borrowings for these purposes. The amount of leverage that we employ depends on our Adviser's and our Board's assessment of market conditions and other factors at the time of any proposed borrowing. As ofJune 30, 2022 andDecember 31, 2021 , our asset coverage ratio was 196% and 201%, respectively. We may also refinance or repay any of our indebtedness at any time based on our financial condition and market conditions. See Note 6. Debt to our consolidated financial statements for more detail on the debt facilities.
OFF BALANCE SHEET ARRANGEMENTS
Our investment portfolio may contain investments that are in the form of lines of credit or unfunded commitments which require us to provide funding when requested by portfolio companies in accordance with the terms of the underlying agreements. Unfunded commitments to provide funds to portfolio companies are not reflected on our Consolidated Statements of Assets and Liabilities. These commitments are subject to the same underwriting and ongoing portfolio maintenance as are the on-balance sheet financial instruments that we hold. Since these commitments may expire without being drawn, the total commitment amount does not necessarily represent future cash requirements. As ofJune 30, 2022 andDecember 31, 2021 , we had aggregate unfunded commitments totaling$197.4 million and$195.6 million , respectively.
RECENT DEVELOPMENTS
On
85--------------------------------------------------------------------------------
© Edgar Online, source
