Crescent Capital (CCAP) is a mid-sized Business Development Company (BDC) specializing in private credit financing for small and medium-sized enterprises that have reached a stable cash generation phase.
Just as recently as December last year, many investors were bearish on CCAP due primarily to concerns about portfolio quality and high leverage.
However, since the beginning of the year, CCAP has performed respectably, with its share price rising almost 5%.
With the recent release of Q1 2024 earnings, is the stock primed for a substantial rally?
Q1 2024 Performance
CCAP’s Q1 2024 results demonstrated a strong performance that validated the recent share price appreciation. Net investment income per share reached $0.63, a 3% increase from the previous quarter.
This figure marks the highest quarterly total investment income, approximately $50 million, primarily driven by recurring cash generation.
CCAP’s momentum has been strong since Q1 2023, showing consistent growth in net investment income and an expanding NAV base, primarily through retained earnings rather than just dividends.
Key Drivers of Growth
Several factors have driven the increase in net investment income, despite a declining debt-to-equity ratio, which theoretically should constrain income growth by reducing the asset base. Two primary factors stand out:
- Attractive Spread Capture: CCAP has maintained high spreads for over five consecutive quarters, contrary to the general trend in the BDC space. The expanded net asset base and stable high spreads have significantly contributed to net investment income growth.
- Non-Recurring Income: Over the last two quarters, CCAP has benefited from extraordinary items like accelerated amortization, fee income, and common stock dividends, temporarily boosting results by approximately $0.5 million per quarter. Even without these items, net investment income would still show positive growth for Q1 2024.
Portfolio Quality Improvement
The underlying portfolio quality improved in Q1 2024 compared to the previous quarter. The share of well-performing loans increased by 200 basis points, and non-accruals reached their lowest levels since Q1 2023. This positive trend is noteworthy, especially as many BDCs have reported worsening portfolio conditions.
Dividend Increase and Stability
Due to strong fundamental momentum, CCAP announced a $0.1 per share increase in its base dividend. This move reinforces CCAP’s reputation for delivering stable and uninterrupted distributions for 22 consecutive quarters, signaling the sustainability of the current yield.
Good Buy for Income and Growth Investors
Q1 2024 results affirm that CCAP continues to enjoy favorable momentum in its core business metrics. The portfolio is expanding, primarily fueled by retained earnings rather than increased leverage.
The ability to maintain high spreads, despite systematic compression pressures affecting many BDCs, is impressive and contributes to robust net investment income growth.
Additionally, portfolio quality has improved, with a higher share of well-performing investments and reduced non-accruals, enhancing the overall risk profile.
In summary, Crescent Capital remains a solid and defensive buy for BDC investors seeking stable income and steady growth. The company’s performance and strategic improvements underline its potential for continued success in the private credit market.
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