11%-Yielding Crescent Capital: Undervalued BDC With Upside Potential (NASDAQ:CCAP)

BDCs is a well-known asset class among income investors for high yields, and while larger players like Ares Capital (ARCC) and Owl Rock Capital (ORCC) get most of the attention, I also see value in smaller and underfollowed names for which it doesn’t take as many deals to move the needle.

Such I find the case to be with Crescent Capital BDC (NASDAQ:CCAP), whose share price remains well below its 52-week high of $18.52. In this article, I highlight what makes CCAP a potentially solid choice for income investors, so let’s get started.

Why CCAP?

Crescent Capital is an externally-managed BDC that’s been publicly traded since 2015. Notably, the external manager charges a 1.25% base fee, which is lower than the 1.5% charged by industry juggernaut Ares Capital.

CCAP has an investment portfolio worth $1.3 billion at fair value, spread across 136 different portfolio companies. Its average portfolio company has annual EBITDA of $30 million, sitting right in between the $10 to $50 million range for U.S. middle market companies.

CCAP is also unique in the BDC space in that it has international exposure for added diversification. Investments in the U.S. represent 89% of portfolio fair value, with the rest coming from Europe at 7%, and Canada and Australia each being 2% of the portfolio. As shown below, CCAP has done a fairly good job of NAV preservation while returning over half of its initial IPO value to shareholders in the form of dividends.

CCAP maintains a conservative investment structure with 89% exposure to first lien debt. It also invests primarily in defensive industries, which comprise 86% of the portfolio value. As shown below, Healthcare, Software, and Business Services represent CCAP’s top 3 sectors, comprising well over half of the portfolio.

Meanwhile, CCAP has benefitted from higher interest rates, as 99% of its debt investments are floating rate. As shown below, weighted average yield on income producing securities has risen by 190 basis points YoY to 9.5%.

This helped to drive NII per share growth of 15.6% YoY to $0.52 during the third quarter. Importantly, this well-covers CCAP’s $0.41 regular quarterly dividend with a 79% payout ratio. Plus, CCAP also paid a special $0.05 per share dividend during 3 out of the past 4 quarters.

The portfolio also remains overall healthy, with just 1.3% of investments at fair value being on non-accrual. While NAV per share did decline by $0.53 sequentially to $20.16, this was driven primarily by $0.51 per share in unrealized depreciation due to widening credit spreads in a rising rate environment.

Looking forward, management continues to see the ability in its private equity partners to provide financial support for portfolio companies for long-term value creation. It’s also well positioned from a balance sheet standpoint, with a debt to equity ratio of 1.1x, sitting well below the 2.0x statutory limit. The CFO highlighted the strong liquidity profile as well as the line of sight on near-term debt maturities during the last conference call:

We have a low level of debt maturities over the next few years with no maturities this year and $150 million maturity related to our 5.95% unsecured notes in July of 2023. After that, there are no remaining maturities until 2026. From a liquidity perspective as of quarter end, we had $197 million of undrawn capacity subject to leverage borrowing base and other restrictions, and $22 million in cash and cash equivalents. Additional expected proceeds from the continued wind down our joint venture will provide for some incremental liquidity.

Lastly, I find CCAP to be attractively priced at $15, which equates to a 26% discount to book value of $20.16 per share. As shown below, this sits at the low end of CCAP’s trading range over the past 2 years. Analysts have a consensus Strong Buy rating on the stock with an average price target of $17.67, which translates to a potential one-year 29% total return including dividends.

Investor Takeaway

Crescent Capital is an attractively priced BDC trading at a substantial 26% discount to its NAV/share. It has a well-diversified portfolio and is unique in that it also has international exposure. Meanwhile, CCAP is benefiting from higher interest rates, and maintains a strong balance sheet. As such, income investors may want to take a look at this high-yielding BDC for potentially strong returns.