Crescent Capital BDC: high yield and discount, special dividends
If you’re looking for high yield at a discount, you might want to take a look at Crescent Capital BDC (NASDAQ: CCAP). It is a business development company, a “BDC”.
BDCs invest in private companies, offering retail investors access to a part of the market that is normally the domain of venture capital and private equity firms.
We started hedging CCAP in January 2021. Since then we’ve had a pretty good run, with a total return of 26.91%, with an ~even split between distributions and price gains.
More recently, however, CCAP has lagged the BDC industry and the market over the past year, half year and month. However, it has outperformed the market so far in 2022:
CCAP focuses on the creation and investment in debt of middle-market private companies that are also backed by sponsors. This gives CCAP some insulation in tough times, like the pandemic, since these sponsors typically offer support to these companies. His holdings are mainly in the United States, with 6% in Europe and 3% in Canada.
Its asset base is 85% 1st Lien and 99% Floating Rate, an advantage in the current rising rate environment. It has a $1.27 billion portfolio, made up of 134 companies, with a median portfolio company EBITDA of $29 million.
CCAP’s top 10 holdings represent 18% of its portfolio, with the next 11-25 representing 21%, leaving the rest at 56%, in addition to an LLC/LP investment entity at 5%.
The portfolio appears diversified and remains oriented towards services. As of 12/31/21, healthcare is still the top industry, at 30%, compared to 22% in Q3 20. Software and services increased from 14% to 19%, followed by 16% in commercial services and professionals, compared to 19%.
Consumer services are at 7%, down from 11%, diversified financials at 5%, down from 7%, while insurance is at 4%, replacing biotechnology. There are 12 other industries at 19%, compared to 23%.
Like most other BDCs, CCAP’s management values its holdings on a quarterly basis. The scale goes from 1 – the highest, to 4 and 5, the lowest. Tier 4 bottomed in Q2 ’20, during the pandemic shutdowns, at 2.1% of the portfolio, with non-accruals improving to 1.2% as of 12/31/21. Upper Levels 1 and 2 increased from 89% to 91% in Q4 2021:
CCAP recorded good revenue growth in the fourth quarter of 2021, at 19%, and for the full year 2021, at ~22%. The increase is mainly due to an increase in interest income on investments. Total expenses increased, including income and excise taxes, totaling $46.4M in 2021 and $27.2M in 2020, due to higher interest and other financing costs per borrowing, the weighted average outstanding debt resulting from the growth of the Company’s investment portfolio, as well as accrued liabilities and incentive fees based on unpaid capital gains.
NII/Share was down -5% in Q4 2021 and -4.5% for the full year 2021. Realized gains, which are lumpy, due to timing issues, were up around 98 % in Q4 21 and by 303% in 2021. Unrealized capital gains decreased in Q4 2021 and full year 2021. However, net asset value/share increased by 6.24% in 2021 to reach $21.12, from $19.88 in 2020.
CCAP issued 2.7 million shares in November 2021 for total proceeds of approximately $58 million.
Here is a breakdown of CCAP’s net asset value/stock gain in 2021:
CCAP is liquidating its CBDC Senior Loan Fund, a joint venture with Masterland, which began operations in 2019.
The joint venture, which was invested in a pool of approximately $300 million in senior syndicated loans, has run its course, and management currently expects to liquidate the entity completely by the end of summer 2022. Proceeds from this will provide the CCAP with additional dry powder.
New financing and investments:
Q4 ’21 was by far that of CCAP most active quarter to date for new investments. CCAP invested $279.7 million in 17 new portfolio companies, 14 existing portfolio companies, and several follow-on and deferred drawdown financings. For this period, the Company recorded $151.7 million in cumulative outflows, sales and refunds.
Management has already declared 3 special quarterly dividends of $0.05 for 2022:
Like the other BDCs we cover in our articles, CCAP has a very attractive dividend yield. Including the special quarterly dividends of $0.05, the CCAP returns 10.42%. The next ex-dividend date for the regular $0.41 dividend is ~6/29/22, with a payout date ~7/15/22. The $0.05 special is ex-dividend earlier, 6/2/22.
A positive attribute in favor of CCSI is that it has one of the best 5-year dividend growth rates in BDC’s industry, at 8.36%.
NII/Distribution coverage fell in 2021 to 1.02x, from 1.10x in 2020. However, CCAP also had approximately $0.43/share in accrued unpaid distributions as of 12/31/21.
Profitability and leverage:
CCAP’s ROA and ROE declined slightly in 2021, and its EBIT margin fell from 85.46% to 71.72%. Management has increased leverage in order to grow the portfolio and is aiming for a leverage range of 1.1x to 1.4x, leaving them room to increase it further in 2022.
Increased leverage is not necessarily a bad thing in the BDC industry – it can give management more flexibility to fund new investments. The trick is being able to handle it properly.
CCAP’s asset-to-liability ratio was a bit lower in 2021, at 2.07X, and its EBIT-to-interest coverage was also lower, at 3.41x from 4.22x in 2020.
Debt & Liquidity:
As of 12/31/21, CCAP had $23.5 million in cash and cash equivalents and restricted cash and $197.0 million of unused capacity on its credit facilities.
In October, CCAP entered into a new senior secured revolving credit facility with SMBC, increasing it by $100 million, to $300 million from the previous facility, while swapping a LIBOR + 2.35% facility for a LIBOR facility plus 1.875% and bringing the maturity from August 2024 to October 2026.
CCAP’s first debt maturity is 7/30/23, when $50 million in 2023 unsecured notes mature. There is a 3 year gap after that – its remaining debt is not due until 2026:
At its closing price on 04/20/22 of $17.66, CCAP was selling at a 16.38% discount to net asset value per share, much less than BDC’s 17% industry average premium to net asset value.
CCAP also looks much cheaper on a price/NII basis, at 10.57x compared to the BDC industry average of 15.30X. Meanwhile, its dividend yield is 10.42%, well above the industry average of 8.11%.
CCAP’s incentive fee waivers were set to expire at the end of 2022. Its management fee waivers already expired on 7/31/21. However, the CCAP advisor will continue to be supportive through 2022, supporting its dividend.
On February 22, 2021, the advisor has informed the board of directors of his intention to voluntarily waive incentive awards to the extent that the net investment income is less than the dividend declared in whole dollars.
The waiver is effective upon the expiration of the current waivers on July 31, 2021 and will continue until December 31, 2022. Once the Advisor begins earning incentive commissions on income, the Advisor will voluntarily waive incentive commissions on income attributable to investment income accrued by the Company as a result of its investments in GACP II and WhiteHawk III Onshore Fund LP.” (Q2 ’21 10-Q)
For the years ended December 31, 2021, CCAP incurred management fees of $14.1 million, of which $3.3 million were waived, and $9.8 million in revenue-based incentive fees, of which 7, $5 million was cancelled. The increase in net management fees is attributable to the growth in assets under management and the expiry of the management fee waiver on July 31, 2021.
These gross costs were $30.2 million in 2021.
With the addition of its special quarterly dividends for 2022, CCAP is expected to achieve dividend growth of approximately 6% in 2022. As previously reported, CCAP’s 5-year dividend growth rate is over 8%, which is much better than BDC’s industry average negative 5-year growth rate of approximately -1.25%.
Here you have a BDC with a strong dividend growth rate, yielding over 10%, a supportive advisor, selling at a 16% discount to NAV.
We rate CCAP as a BUY, as did Wells Fargo and B of A Securities in January and March 2022. Wells Fargo rated CCAP Overweight, and B of A rated it as a BUY. At $17.66, CCAP is about 12% below the consensus price target of $20.00.
All charts by Hidden Dividend Stocks Plus, except where noted.