Ladies and gentlemen, thank you for standing by, and welcome to Crescent Capital BDC, Inc.'s Second Quarter 2022 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference may be recorded. I would now like to turn the conference over to your speaker host today, Dan McMahon, Head of Investor Relations. Please go ahead.

Good morning, and welcome to Crescent Capital BDC, Inc.'s Second Quarter ended June 30, 2022, Earnings Conference Call. Please note that Crescent Capital BDC, Inc. may be referred to as CCAP, Crescent BDC or the company throughout the call. Before we begin, I'll start with some important reminders. Comments made over the course of this conference call and webcast may contain forward-looking statements and are subject to risks and uncertainties. The company's actual results could differ materially from those expressed in such forward-looking statements for any reason, including those listed in its SEC filings. The company assumes no obligation to update any such forward-looking statements. Please also note that past performance or market information is not a guarantee of future results. During this conference call, we may discuss certain non-GAAP measures as defined by SEC Regulation G, such as adjusted net investment income, or NII, per share. The company believes that adjusted NII per share provides useful information to investors regarding financial performance because it's one method the company uses to measure its financial condition and results of operations. A reconciliation of adjusted net investment income per share to net investment income per share, the most directly comparable GAAP financial measure can be found in the accompanying slide presentation for this call. In addition, a reconciliation of this measure may also be found in our earnings release. Yesterday, after the market closed, the company issued its earnings press release for the second quarter ended June 30, 2022, and posted a presentation to the Investor Relations section of its website at www.crescentbdc.com. The presentation should be reviewed in conjunction with the company's Form 10-Q filed yesterday with the SEC. As a reminder, this call is being recorded for replay purposes. Speaking on today's call will be Jason Breaux, Chief Executive Officer of CCAP; and Gerhard Lombard, Chief Financial Officer of CCAP. With that, I'd now like to turn it over to Jason.

Thank you, Dan. Good morning, everyone. Thank you for joining our earnings call today. We appreciate your continued interest in CCAP. Today, I'll highlight our second quarter results, review our investing activity and current portfolio and then provide some thoughts on the current market backdrop. Gerhard will then review our financial results in more detail. So let's begin. Please turn to Slide 6, where you'll see a summary of our results. We reported adjusted net investment income for the second quarter of $0.41 per share. On a GAAP basis, our second quarter net investment income was $0.50 per share. The difference relates to a $0.09 per share noncash reversal of our capital gains-based incentive fees on net unrealized capital appreciation. Our net asset value per share ended the quarter at $20.69, down just over 2% as compared to the record $21.18 per share, which we reported in the prior quarter. Gerhard will touch on this in more detail, but the lion's share of the decline relates to unrealized losses we took to reflect wider credit spreads in the market as volatility within the leveraged finance and equity markets continued during the second quarter. This volatility has created an increasingly complex operating environment that many companies face in today's economy. However, our continued focus on market-leading companies with strong margins and high free cash flow generation in resilient industries has positioned our portfolio to avoid segments of the economy that are in our view, more negatively impacted by recent inflation and supply chain issues. And while certain of our companies are experiencing some margin pressure from increases in labor and input costs, our portfolio companies have largely been able to maintain solid margins. Our investment philosophy for the past 30-plus years at Crescent has been disciplined credit selection with a focus…

Thanks, Jason, and good morning, everyone. Our adjusted net investment income per share of $0.41 for the second quarter of 2022 compares to $0.42 per share for the prior quarter. Total investment income of $26.8 million for the second quarter compares to $26.4 million for the prior quarter, which includes approximately $2 million of nonrecurring income related to our exit from an investment during Q1. Importantly, interest income, excluding onetime accelerated amortization which represents the recurring component of our total revenues, grew from $21.7 million in Q1 to $22.8 million for the second quarter and was a key driver of quarter-over-quarter total investment income growth. We expect our recurring interest income to continue to increase into the second half of 2022 on the heels of the rate hikes we've seen and may continue to see in the near future. We have yet to see the full quarter benefit from higher market rates that have already occurred in the second quarter as most of our portfolio base rates repriced either monthly or quarterly. The increase in base rates through these resets generally occurred in the latter part of the quarter, which is why our second quarter earnings did not fully benefit from the increase in market rates reflected in our yields at quarter end. Dividend income came in at $2.1 million for the second quarter of 2022 as compared to $2.3 million in the prior quarter, and other income was up modestly quarter-over-quarter from $0.1 million to $0.2 million. Our GAAP earnings per share or net decrease in net assets resulting from operations for the second quarter of 2022 was minus $0.03 per share as compared to $0.52 per share increase from the prior quarter. Our GAAP earnings included net realized and unrealized losses on investments of $0.53 per share. At…

Thanks, Gerhard. We continue to believe that CCAP remains well positioned to navigate the economic and market uncertainty ahead. While we do anticipate further market volatility and the potential for spread widening as the cycle progresses, we feel good about our current portfolio and our ability to lean into attractive opportunities created during periods of dislocation, while, of course, maintaining the same rigorous underwriting standards we've always implemented. I wanted to close by highlighting that based on where CCAP is currently trading and based on our stated regular dividends, CCAP stock is currently yielding nearly 10% on a portfolio of well-performing, primarily first lien and unitranche term loans, which we believe is a compelling relative value in the current environment. We would like to thank all of you for your confidence and continued support. And with that, operator, please open the line for questions.

[Operator Instructions] Our first question coming from the line of Robert Dodd from Raymond James.

Congrats on the quarter. First, the two topics I want to touch on. And Jason, your wind up remarks kind of touch on spreads. Spreads on your originations in Q2 were basically stable with where they've been in Q4, Q1. Is that a function of just the lag, right, the traditional private credit lag? And are you seeing in the market today, spread widening, changes in terms, et cetera, et cetera? I guess [indiscernible] with that is given the lag, do you expect new originations that have the highest spreads in Q3? Or is that more going to be a Q4 thing, et cetera?

Robert, thanks for the question. It's a great question. I think it's largely attributable to the lag, which we've talked about before in terms of the private markets catching up to perhaps what we're seeing more on the liquid side of things. And I would say, over the past months, maybe month and change, spreads in the private markets have widened out in terms of the opportunity set that we're looking at. What was maybe [550/575] deal is looking more like a [625/650] deal. In addition to that, and this is largely because I think the syndicated loan market is shut down, given the volatility in the markets and the time of the year, frankly. We are, I would say, getting potentially better protection and terms than we would have otherwise gotten. I think we're able to tighten up documents a bit. There's more focus on the lender side in current and projected cash flow coverage, certainly. And I think as a result of that focus and the shutdown in the BSL market, we've been able to get better terms with respect to incurrence tests and baskets and EBITDA definitions. So I think that's all moving in a favorable direction from a lender standpoint in real time.

Got it. I appreciate that color. On the next one, I got to ask about credit quality. I mean, you mentioned at the very beginning, certain companies are experiencing margin pressure. And then later on, you said do not observe a, and key word meaningful credit deterioration. So the implication you are seeing some in terms of maybe some at some companies or some more broadly sort of inflation? It's meaningful. It's obviously a significant word. Can you give us any more color on any thematic things you are seeing? I mean there's obviously supply chain and labor, but is that it? And to that point, have you started to see the advantage of private credit, you can pick up the phone and call the companies which are BSL and they can't necessarily do. Have you heard anything incrementally more recently about directions in those trends?

Yes, Robert, I would say nothing to call out specifically by industry or by portfolio company size. I would say, portfolio largely is performing well on the top line across the board, where maybe we saw higher growth rates year-over-year last year on the top line than maybe we're seeing this year, which may not be totally surprising, but I would say top lines are still pretty healthy. On the cost side of things, that is where we do see some pressure in certain segments, certain companies. The wage inflation is real. And I think retention is also a challenge in some instances. That said, the retention challenges are largely at the more entry-level positions within our portfolio companies as opposed to the highly skilled end of things. So yes, there are challenges. Yes, we are facing some wage pressure in some of our portfolio companies. But I think it's -- fortunately, it's -- when it comes to the retention side, it's not -- those aren't extremely difficult positions to refill when the turnover comes.

Got it, got it. I appreciate that color. I mean -- and then just on kind of your thoughts, I mean, M&A activity is lower this year. I mean it was obviously very high last year. It is down a little bit because syndicated markets have been closer, private lending has been gaining share. But I mean looking forward and not Q3, like the next 12 to 18 months, I mean, do you expect kind of a steady recovery there? Or is it just -- it's just too hard to say given the amount of volatility in the market right now? It's really a question about sponsor activity rather than lending activity per se.

Yes. There's certainly a lot of uncertainty with respect to deal flow for the balance of the year. I think much of it is going to depend on the economy and the macroeconomic environments with what the Fed continues to do or stop doing where inflation goes, the Russia conflict, consumer spending, midterm elections. I think if these factors caused the economy to worsen significantly, I think it's likely that deal flow will slow materially as it's going to be hard for buyers and sellers to come together on purchase price. And frankly, financing providers are going to be increasingly conservative when giving leverage REITs. If, however, we are headed down to more soft landing path where the downturn is maybe perhaps moderate, I think we could see private market activity continue to be good from a deal flow standpoint just because of the amount of private equity capital that's still on the sidelines to be deployed. One more thing that I would just say, Robert, is that when it comes to the syndicated market, we do believe, and we're hearing that there's $50-plus billion of transactions that are coming post Labor Day from the banks, which I think could put some continued pressures on that market and pricing in that market as it's going to take some time to absorb that supply that we're hearing is going to come.

[Operator Instructions] Our next question coming from the line of Jordan from Wells Fargo.

Just a question on market dynamics. The syndicated markets are closed, I guess, for now, and direct lenders are filling that gap. So I'm just curious what that's done for kind of your core middle market? Has all that activity up market from direct lenders kind of created a vacuum in the core middle market? Or are you seeing just so much competition there has always been there?

Jordan, it's Jason. Thanks for the question. I think there's a few factors going on to maybe provide some color on to help answer your question. One is the inflows have slowed into not just the syndicated market certainly but also the private markets as well. So there are platforms that have relied heavily on retail for capital raising. And I think that slowed materially. And in addition to that, the institutional accounts, I think, are slowing their pace down in terms of committing less, folks are dealing with the "denominator effect" as well in that regard. So I think the -- from a competitive standpoint, that's a dynamic that I think is playing out. In terms of the overall opportunities that we're seeing, typically, in periods of volatility, particularly when the syndicated markets shut down, that's a good time from an opportunity set standpoint for private credit because those that need to finance are steered toward private credit, even if they could otherwise have the syndicated markets in a healthy environment. So I would say the quality of the deal flow can oftentimes improve in this type of environment for private credit lenders. Now that doesn't mean that everybody is moving upmarket because the other sort of contributing factor to inflows coming down as that whole levels are coming down in the private market, too. So folks that were speaking for several hundred million dollars on the high end are perhaps downsizing their check size, which means larger unitranches are getting filled with more lenders than they used to be in a more robust environment. So kind of a long-winded way of saying that I think that we're going to continue to see opportunities across the middle market. I think perhaps the quality of the opportunities that we'll see might be a little bit higher in a more volatile period. And for us, I think it's incumbent on us to just be super selective in this environment and pick our spots in terms of where we can generate really attractive risk/return investments.

[Operator Instructions] I am showing no further questions at this time. I would now like to turn the call back over to Mr. Jason Breaux for any closing remarks.

Okay. Thank you very much, operator, and thank you all for joining the call. We appreciate your continued interest and support in CCAP, and we look forward to speaking with you soon.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.