Crescent Capital: Strong Fundamentals And Higher Interest Rates Should Lead To Higher Valuation

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Crescent Capital BDC has shown strong earnings growth, with net investment income and total investment income increasing quarter-over-quarter.The company has also demonstrated healthy NAV growth, out-...

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DNY59 Previous Write-Up I last covered Crescent Capital BDC back in January in an article titled: Forget Bonds, Boost Your Income With This Near Double-Digit Yield. I mean who doesn't like getting a high-yield that's well-covered?","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4135":"资产管理与托管银行","ARCC":"阿瑞斯","CSWC":"西南资本","BXSL":"Blackstone Secured Lending Fund","LU2360032135.SGD":"ALLSPRING GLOBAL EQUITY ENHANCED INCOME \"A\" (SGDHDG) INC","LU2125154935.USD":"ALLSPRING (LUX) WF GLOBAL EQUITY ENHANCED INCOME \"I\" (USD) INC","BK4585":"ETF&股票定投概念","CION":"CION INVT CORP","LU2125154778.USD":"ALLSPRING GLOBAL EQUITY ENHANCED INCOME \"A\" (USD) INC","BK4588":"碎股"},"translate_title":"新月资本：强劲的基本面和较高的利率应该会导致更高的估值","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"ARCC":1,"BXSL":1,"CION":1,"CSWC":1},"content_text":"Crescent Capital BDC has shown strong earnings growth, with net investment income and total investment income increasing quarter-over-quarter.The company has also demonstrated healthy NAV growth, out-earning its dividend and seeing a 1.7% increase in NAV quarter-over-quarter.Despite its performance, Crescent Capital still trades at a 15% discount to NAV, presenting a buying opportunity for income investors.Yielding nearly 10%, Crescent Capital had average dividend coverage of 122% during the fiscal year.If rates do remain higher, CCAP could see a further risk in non-accruals the reliance on PIK income from portfolio companies, possibly impacting their financials going forward.   DNY59 Previous Write-Up I last covered Crescent Capital BDC back in January in an article titled: Forget Bonds, Boost Your Income With This Near Double-Digit Yield. I mean who doesn't like getting a high-yield that's well-covered? Since my last thesis the share price has appreciated nicely growing from $16.43 to over $17, where it currently trades. My portfolio holdings include the likes of Ares Capital (ARCC), Capital Southwest (CSWC), and Blackstone Secured Lending (BXSL), all 3 BDCs that have seen some nice capital appreciation in the past year. Crescent Capital jumped on my radar as it reminded me a bit of their largest peer, Ares Capital. Like ARCC, they are externally-managed making it one reason the company may be a bit more fiscally conservative. But as a conservative investor myself, I enjoyed this metric about CCAP. I also liked their balance sheet with well-laddered debt maturities. Furthermore, the BDC showed strong growth in net investment income through the first 3 quarters, something else that was very impressive. But most importantly, the stock still traded at a significant discount to its NAV price, presenting a great buying opportunity for income-focused investors in my opinion. Strong Earnings Growth While many BDCs have seen their share prices appreciate in the past year with investors seeking higher yields, some like Crescent Capital still trade at an attractive price. One reason in my opinion is the BDC doesn't have a substantial track record like ARCC or CSWC as they only went public in 2020, shortly before the pandemic. But despite this, the company has navigated higher interest rates with precision, growing net investment income in every quarter. During Q4 earnings back in February, the company reported Nll of $0.61. This was nearly a 3.4% increase quarter-over-quarter from the $0.59 in Q3. Author creation Total investment income also increased quarter over-quarter, growing from $48.2 million to nearly $50 million over the same period. Both grew roughly 13% and 27% respectively from the 1st quarter. So, despite the challenging economic backdrop that has made it harder for both lenders & borrowers, CCAP managed to grow both Nll & Tll by double-digits. Author creation The strong growth in Nll corresponded to an annualized ROE of 12.4%. And this allowed the BDC to bring in a record $2.30 in net investment income for the year. So, while the market may not be sure what to make of CCAP currently, the company showed not only resilience, but strong credit quality within their portfolio to wrap up the fiscal year. This was also largely due to the fact that they have a predominantly floating rate portfolio of 99%. And while some may worry about when interest rates decline how the sector will fare, I think most will continue to perform exceptionally as rates will likely decline gradually. Furthermore, when interest rates do eventually decline in the near future, this should spark new deals amongst buyers & sellers within the market, positively impacting the BDC and its peers going forward. And as the BDC continues on its path towards growth, I expect them to capture some of this as the macro environment sentiment turns positive. Moreover, during the fourth quarter they deployed $89 million worth of capital in investments, mostly in senior-secured, first-lien, and unitranche loans. Additionally, they made $60 million worth of new investments across 10 platforms, all of which had a weighted-average spread of 600 basis points. So in lieu of the economic backdrop, the BDC has been able to find attractive investments to grow the portfolio. They ended the quarter with 186 companies across 20 industries. This totaled approximately $1.6 billion of investments at fair value and 89% in first-lien, senior-secured loans. CCAP investor presentation Healthy NAV Growth Crescent Capital also impressively grew their NAV, this growing 1.7% quarter-over-quarter, and 1.1% year-over-year. And as I previously mentioned the BDC's Nll growth, this, along with out-earning the dividend allowed them to see some healthy NAV growth for the year. This is in comparison to peers, CION Investment Corp (CION) and Ares Capital, who saw their NAVs increase by $0.43 & $0.25 quarter-over-quarter respectively. CCAP investor presentation Strong Dividend Coverage Even with a supplemental declared for 3 out of 4 quarters, CCAP still managed to out-earn the dividend with their healthy Nll growth through the fiscal year. The company paid out total dividends of $0.49, $0.50, and $0.51 in the last three quarters, to include supplementals. Moreover, this still gave them average dividend coverage of 122% for the full-year. Furthermore, CCAP appears to be more shareholder-friendly than its peer Ares Capital. Some may say CCAP operates more like an internally-managed BDC by the way it rewards its shareholders. I enjoy this about the BDC, fiscally conservative, but still rewards shareholders with occasional supplemental dividends. Most may know internally-managed BDCs typically are more shareholder-friendly as they are not required to pay out extra capital in fees for the services of an external manager. In turn, aligning more with shareholders, and allowing them to pay out extra capital in the form of special & supplemental dividends. Deleveraging If healthy Nll & NAV growth wasn't enough, the BDC also managed to deleverage its balance sheet with a net-debt-to equity ratio of 1.15x. This was down from 1.23x in Q1. This declined quarter-over-quarter from 1.18x as well, putting the company in a strong position financially to take advantage of expected lower interest rates, and continue making accretive investments. Furthermore, their debt maturities are well-laddered, with no debt due until 2026. The $135 million due in February '26 has a weighted-average interest rates of 4.00% while their May and June amount had average interest rates of 5.00% and 7.54% respectively. But by then I suspect interest rates will be lower than current levels, allowing the BDC to refinance at lower rates. They also increased their cash position from $22.8 million in Q3 to $24.5 million and had $330 million in undrawn capacity. CCAP investor presentation Still Trades At A Discount Despite the share price appreciation over the past year, Crescent Capital still trades at roughly a 15% discount to NAV. This is slightly lower than the near 18%, 3-year discount, but as seen by the chart, CCAP's share price is up double-digits on the year. Moreover, if interest rates do remain higher for much longer, with its predominantly floating rate portfolio, they will likely continue to see some upside as they grow Nll & NAV in the coming quarters. Data by YCharts And if so, Wall Street's price target is likely to continue shifting to the right, similar to what happened since the end of Q3 earnings, up by $0.20 in the last 5 months. Moreover, investors not only get potential upside, but get paid a well-covered dividend yielding nearly 10% who is likely to continue paying supplemental dividends as well for the foreseeable future as evidenced by their strong financials. Seeking Alpha Risks CCAP's portfolio has shown tremendous resilience, thanks in part to their large focus on the Healthcare Equipment & Services Industry. This along with their PIK income has allowed them to generate higher returns for shareholders. Some investors worry about BDCs who structure PIK income into their deals with portfolio companies. Even though this allow for higher returns, if the economy experiences a sudden downturn, this could cause portfolio companies to rely more on PIK income instead of hard cash. However, this only accounted for a modest 3% of CCAP's total investment income. But this is still considered risky for some investors. Another risk is non-accruals. At quarter's end, Crescent Capital had 9 portfolio companies on non-accrual status, accounting for 2.0% and 1.9% of total investments at cost & fair value. If inflation continues to run hot, this could prompt the FED to increase short-term interest rates, although that scenario is unlikely. And this is something investors should keep an eye on in the coming quarters. Bottom Line Crescent Capital has performed well despite a challenging environment, growing their net investment & total investment income in every single quarter during the fiscal year. This is a testament to not only their management team, but the company's credit quality as well. Additionally, they continue out-earn their dividend with average coverage of 122%, resulting in healthy NAV growth year-over-year.  Moreover, despite a double-digit share price increase in the past year, the BDC still trades at a 15% discount to its NAV. And if interest rates remain higher for longer, I expect CCAP to continue out-earning, resulting in NAV growth and an increase in share price. With no debt maturing for roughly 2 years, and them likely to continue to reward shareholders with supplemental dividends for the foreseeable future, I continue to rate Crescent Capital BDC a buy.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2428315284"}