Summary
- CCAP yields 10.92%, with one of the highest dividend growth rates in the BDC industry.
- Rising interest rates have ramped up earnings by 25% in 2022.
- It's selling at a much cheaper earnings multiple and P/NAV multiple than the BDC industry averages.
- It has an upcoming acquisition due to close in Q1 '22.
If you're looking for high dividend stocks at a discount, maybe you should take a look at some of the Business Development Companies, known as " BDCs."
BDCs invest in privately held companies, offering retail investors access to a part of the market that's normally the domain of Venture Capital and private equity companies.
We began covering Crescent Capital BDC ( CCAP ) in early 2021. The market has been good to CCAP since then - it has delivered a total return of 18.5%, due to its high yield distributions, vs. 8.17% for the S&P 500:
Company Profile:
CCAP is focused on originating and investing in the debt of private middle-market companies which also are supported by sponsors. A key factor for BDCs is that the companies that they invest in also have sponsorship from Venture Capital and/or private equity companies, who will add further support to them in tough times, such as during the pandemic. Its holdings are 88% in the US, with 8% in Europe, 2% in Australia, and 2% in Canada. Its asset base is 90% 1st Lien and 99% Floating Rate, a positive in the current rising rate environment. 98% of its holdings are co-sponsored.
It has a $1.263B portfolio, comprised of 129 companies, with a median portfolio company EBITDA of $30M:
CCAP's top three industry exposures out of 16 continue to be in Healthcare, at 29%, up from 27% in Q2 '22; Software & Services, at 21%; and Commercial & Professional Services, at 16%.
Floating Rates
Floating rates are beneficial for CCAP, as 98.8% of its investments have floating rates.
Interest income increased by 26.6% in 2022, to $108.5M, vs. $85.7M, for full-year 2021, due to a rise in benchmark rates. CCAP's average yield on its income producing securities has risen from 7.5% in Q4 '21, all the way to 10.8% in Q4 '22, up 44%:
Earnings:
Q4 '22 saw strong double-digit growth in Total Investment Income, up 43.6%, NII, up ~29%, NII/Share, up ~24%, and Adjusted NII/Share, ANII, up ~14%, vs. Q4 '21.
New Business:
In Q4 '22, CCAP invested $45.9M across five existing portfolio companies and several follow-on revolver and delayed draw fundings. There were $71.5M in aggregate exits, sales and repayments. 82% of new fundings were 1st Lien, with 18% in Unitranche 1st Lien. Q4 '22 was its slowest period for new fundings in the last five quarters.
Portfolio Ratings:
Like most other BDCs , CCAP's management rates its holdings on a quarterly basis. The scale is from 1 - the highest, to 4 and 5, the lowest. Tier 4 bottomed out in Q2 '20 during the pandemic lockdowns, at 2.1% of the portfolio, with non-accruals at 2% as of 12/31/22. Upper tiers 1 and 2 have been steady since Q4 '21, at 99%, and finished 2022 at 98%:
Dividends:
At its 2/23/22 $15.02 price, CCAP yielded 10.92%.
Management declared a regular $.41 distribution based on Q4 '22 earnings. CCAP will go ex-dividend on 3/31/23, with a 4/17/23 pay date. CCAP's five-year dividend growth rate is 9.02%, one of the highest in the BDC industry over the past five years.
Net Investment Income/Distribution coverage was a healthy 1.08X in full-year 2022:
CCAP has paid out $10.78/share in dividends since its inception, while maintaining a mostly stable NAV/Share, which was $19.83 as of 12/31/23, vs. $19.90 at inception.
Valuations:
At $15.02, CCAP is selling at a very deep 24.26% discount to its NAV of $19.83, vs. the BDC average premium to NAV of 4%.
Perhaps even more importantly, CCAP is quite undervalued on an earnings basis, with a trailing Price/NII per share of 7.78X, vs. the BDC average of 12.93X. Its EV/EBIT and P/Sales valuations also is lower than average, and its 10.92% dividend yield is in line with the BDC industry average.
Profitability and Leverage:
CCAP's ROA, ROE, and EBIT Margin all improved in 2022, and remained well above BDC averages. Management increased debt/NAV leverage a bit, to 1.07X, which is still more conservative than the 1.26X BDC industry average of 1.26X. Leverage was intentionally delevered a bit in Q4 in anticipation of the upcoming merger with First Eagle BDC ( FCRD ) in Q1 '22.
Debt and Liquidity:
CCAP has $50M in unsecured notes maturing in 2023, with no further maturities until 2026, when its Special Purpose Asset Facility, its Corporate Revolving Facility, and its 2026 Notes all come due:
CCAP had liquidity of ~$231M as of 12/31/22.
Its Assets/Debt ratio of 1.99X was slightly lower at year end 2022. The EBIT/Interest coverage ratio fell from 3.41X to 2.90X due to a 61% rise in interest expense.
Performance:
CCAP has outperformed the BDC industry, the Financial sector, and the S&P 500 by a wide margin so far in 2023, rising over 18%. It also outperformed over the past quarter. It outperformed the Financial sector, and the S&P over the past year on a ~Total Return basis, but somewhat lagged the BDC industry average.
Upcoming Acquisition:
Management is targeting the closing of CCAP's previously-announced merger with First Eagle BDC in Q1 '22. The combined company, which will remain externally managed by Crescent Cap Advisors, LLC, a subsidiary of Crescent Capital Group (“Crescent”), is expected to have approximately $1.6B of investments on a pro forma basis.
FCRD stockholders are expected to receive a combination of (i) Crescent BDC shares valued at 100% of Crescent BDC’s NAV/share at the time of closing of the transaction in an aggregate number equal to FCRD's NAV at closing, up to a maximum of 19.99% of outstanding Crescent BDC shares at the time of the closing. There will be an additional cash payment from Crescent Cap Advisors, LLC of $35M in aggregate, or ~$1.17/share of First Eagle BDC stock.
FCRD's NAV/Share was $5.14, as of 9/30/22, with an investment portfolio of $363.2M across 73 portfolio investments. It earned NII/share of $.32 in Q1-3 '22, vs. $.31/share in Q1-3 '21.
The Boards of Directors of both companies have each unanimously approved this transaction, and CCAP will hold a special meeting of its stockholders on March 7, whereby they'll be asked to adopt the agreement and plan a merger.
Parting Thoughts:
We rate CCAP a buy based upon its continued strong earnings, its attractive, well-covered yield, and the broadening of its asset base when the FCRD merger is closed.
All tables furnished by Hidden Dividend Stocks Plus, unless otherwise noted.
For further details see:
Crescent Capital BDC: 11% Yield, 24% Discount, 25% Earnings Growth From Floating Rates