Crescent Capital: Hefty 12% Yield Plus Big Discount To NAV

The BDC sector, like other high yield asset classes such as REITs (VNQ), have seen a broad decline over the past 12 months. However, contrary to what some may believe from price action alone, many BDCs have materially grown their income over this time frame, giving value investors plenty to like.

This brings me to Crescent Capital BDC (NASDAQ:CCAP), which I last covered here in January, highlighting its material discount to NAV. The stock has underperformed the market since then, and in this article, I discuss why that makes CCAP an appealing high income play at present.

Why CCAP?

CCAP is an externally managed BDC that has $1.26 billion in total investments that are spread across 129 portfolio companies across 18 different industries. Its management takes a conservative approach toward portfolio composition, as it's primarily invested in first lien senior secured and unitranche first lien investments.

CCAP has a solid track record of shareholder returns. This includes having kept a rather steady NAV per share since inception in 2015, all while delivering plenty of cash dividends back to shareholders over this timeframe. As shown below, CCAP shareholders who bought at IPO have gotten more than half of their investment back through dividends since 2015.

Moreover, 99% of CCAP's debt investments are floating rate, enabling CCAP to reap the benefits from the current higher interest rate environment. It's also well diversified, with the average position size representing just 0.8% of portfolio total. As shown below, CCAP primarily invests in growing and defensive segments such as healthcare, software, and business services.

Meanwhile, CCAP has demonstrated steady results, as its NAV per share declined by just 1.6% sequentially over the past 2 reported quarters. Notably, this was driven by unrealized losses due to widening credit spread amidst economy volatility rather than actual realized losses.

Investments on non-accrual remain low, at just 1.2% of portfolio fair value. Importantly, CCAP's high dividend yield is well-protected by a 1.27x NII to dividend coverage ratio (based on $0.52 NII per share in the last reported quarter).

Looking ahead, CCAP should benefit from the recent volatility in regional banks, as they have now become capital constrained. This should result in less lending capacity from regional banks, allowing BDCs like CCAP to step up. Unlike regional banks, BDCs have a permanent equity base and don't have fickle deposit bases that can be withdrawn at a moment's notice. Notably, fellow BDC Ares Capital's (ARCC) management recently released the following comment in their earnings call regarding the pullback in regional banks and how that benefits BDCs:

We believe that the banks remain constrained on new activity due to concerns regarding both capital and liquidity and which we believe makes our broad range of flexible capital solutions even more valuable.

We feel that the current environment is similar to a number of prior periods of market dislocation that have improved the opportunity set for direct lenders. The current illustration of these dynamics is highlighted by the fact that 95% of the first quarter LBO financing new issuance was completed by private capital providers, a market traditionally weighted towards the broadly syndicated channel.

Looking ahead to Q2 results, I would expect to see growth in CCAP's portfolio considering the above comments and its strong balance sheet with a debt to equity ratio of 1.08x. CCAP could also see meaningful growth from its acquisition of First Eagle BDC, which management expects to see financial synergies and benefits.

Lastly, CCAP trades at a material discount to net asset value at the current price of $13.61, with a price to book ratio of 0.78x. Analysts have a consensus Strong Buy rating with an average price target of $17.50, which combined with the 11.9% dividend yield could result in very strong double-digit total returns over the near term.

Investor Takeaway

In summary, Crescent Capital BDC represents an appealing investment opportunity for income-seeking investors due to its high dividend yield and sizeable discount to net asset value. Moreover, the company should benefit from the pullback in regional banks and its recent acquisition of First Eagle BDC should result in material synergies and growth opportunities over the near term.

All these factors point towards potentially strong total returns ahead for CCAP. With the stock currently trading near its 52-week low, now could be an opportune time to initiate a position in this BDC for income and growth investors alike.

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