Investcorp Credit Management BDC, Inc. (NASDAQ: ICMB) is a closed-end, externally managed, non-diversified management investment company that has elected to be regulated as a business development company (BDC) under the Investment Company Act of 1940. The company's primary investment objective is to maximize total return to stockholders in the form of current income and capital appreciation by investing directly in debt and related equity of privately held middle-market companies.

Business Overview and History

ICMB was formed in May 2013 and completed its initial public offering in February 2014, raising approximately $111.5 million in net proceeds. The company sold 7.67 million shares of its common stock at $15 per share during the IPO. Prior to the IPO, the company was known as CM Finance Inc. and was formed through the merger of CM Finance LLC, a Maryland limited liability company that commenced operations in March 2012, with ICMB. As part of this merger, pre-existing CM Finance LLC investors, consisting of funds managed by Cyrus Capital Partners, L.P., received 6 million shares of ICMB common stock and $39.8 million in debt.

In August 2019, Investcorp Credit Management US LLC, a subsidiary of global alternative investment firm Investcorp, acquired a majority ownership interest in ICMB's investment adviser, CM Investment Partners LLC. This transaction, known as the Investcorp Transaction, resulted in the company changing its name from CM Finance Inc. to Investcorp Credit Management BDC, Inc. and entering into a new investment advisory agreement with the Adviser.

ICMB's portfolio primarily consists of middle-market companies in the form of standalone first and second lien loans, unitranche loans, and mezzanine loans. The company may also invest in unsecured debt, bonds, and the equity of portfolio companies through warrants and other instruments. As of September 30, 2024, ICMB's investment portfolio had a fair value of $190.1 million, consisting of 45 portfolio companies across 20 GICS industries.

Throughout its history, ICMB has faced various challenges. In fiscal year 2021, the company reported a net loss of $2.3 million. However, it showed improvement in fiscal year 2023, reporting a net income of $3.2 million. The company has had to navigate changes in its investment adviser and sponsor, as well as economic uncertainties that have impacted its portfolio companies. Despite these challenges, ICMB has maintained its focus on investing directly in debt and related equity of privately held middle-market companies to help these companies fund acquisitions, growth or refinancing.

Business Segments and Investment Strategy

ICMB operates primarily through two main business segments: Senior Secured First Lien Debt Investments and Equity, Warrants and Other Investments.

The Senior Secured First Lien Debt Investments segment represents the largest portion of ICMB's portfolio, accounting for 82.47% of the total portfolio at fair value as of September 30, 2024. This segment consists of standalone first and second lien loans, unitranche loans, and mezzanine loans that ICMB provides to middle-market companies. The weighted average total yield on these debt investments was 9.08% as of September 30, 2024, down from 10.60% as of June 30, 2024, due to a decrease in index and interest rates as well as the repayment of two portfolio companies. ICMB's debt investments are primarily floating rate, with 96.90% of the portfolio bearing interest based on indices such as SOFR as of September 30, 2024.

The Equity, Warrants and Other Investments segment makes up the remaining 17.53% of ICMB's portfolio at fair value as of September 30, 2024. This segment includes the Company's equity stakes, warrants, and other investment types in its portfolio companies. These investments provide ICMB with the opportunity to capture additional upside potential beyond the contractual interest payments from its debt investments.

During the three months ended September 30, 2024, ICMB made $13.10 million in new investments, of which $12.60 million or 96.90% were in first lien debt investments and the remainder were in equity investments. This compares to $15.50 million in new investments made during the three months ended September 30, 2023, of which $15.00 million or 96.77% were in first lien debt investments.

ICMB's investment portfolio is diversified across various industries, with the top three industries by fair value being Professional Services (14.58%), Containers & Packaging (11.71%), and Commercial Services & Supplies (10.34%) as of September 30, 2024. The portfolio is also geographically diverse, with investments primarily located in the U.S. Northeast (33.34%), U.S. West (26.79%), and U.S. Southeast (13.62%) regions.

Overall, ICMB's investment strategy focuses on providing financing solutions to middle-market companies through a combination of senior secured debt investments and selective equity participation. The Company's portfolio continues to perform well, with 81.50% of investments rated either 1 or 2 on ICMB's internal rating scale as of September 30, 2024, indicating investments that are performing at or above expectations.

Financial Performance and Positioning

For the most recent quarter ended September 30, 2024, ICMB reported revenue of $4.67 million and net income of $6.61 million. The company reported a net increase in net assets from operations of approximately $6.6 million, driven by higher net investment income, unrealized gains on investments, and solid credit performance across the portfolio.

ICMB's weighted average total yield on debt investments was approximately 10.5% as of September 30, 2024, down from 12.3% in the previous quarter, reflecting a decline in index and interest rates. The company's portfolio leverage remained within its target range of 1.25x to 1.5x, with gross leverage at 1.39x and net leverage at 1.26x as of the end of the quarter.

The company's non-accrual loans as a percentage of total fair market value improved to 4.8% in the third quarter of 2024, down from 5% in the prior quarter. Additionally, the median EBITDA of ICMB's portfolio companies increased from $55 million to $61 million over the same period, while the weighted average net leverage declined from 5.1x to 4.7x.

These metrics demonstrate ICMB's focus on credit quality and proactive portfolio management, which have enabled the company to navigate the current uncertain market environment. The company's investment pipeline remains robust, and it continues to prioritize building relationships with high-quality sponsors and investing in companies within defensible industries that exhibit strong cash flows.

ICMB reported a strong quarter, with net asset value rising by $0.34 per share to $5.55, up from $5.21 as of the prior quarter. The company generated net investment income of $2.3 million or approximately $0.16 per share, reflecting a $1 million increase over the prior quarter. ICMB invested $13.1 million across six portfolio companies, marking an uptick in activity compared to recent quarters. The company fully realized two portfolio company investments totaling $13.4 million in proceeds with an IRR of approximately 11.8%. The weighted average yield of debt investments made in the quarter was approximately 10.7%.

Capital Structure and Liquidity

As of September 30, 2024, ICMB had $10.1 million in cash, of which $8.3 million was restricted, and $52.5 million of available capacity under its revolving credit facility with Capital One. The company's total debt outstanding stood at $111.0 million, with a weighted average interest rate of 8.34% for the third quarter of 2024.

ICMB's capital structure provides it with ample liquidity to support its investment activities and meet its ongoing obligations. The company's asset coverage ratio, a key metric used to measure a BDC's leverage, was 172.0% as of September 30, 2024, well above the regulatory minimum of 150.0%.

In addition to its revolving credit facility, ICMB has $65.0 million in aggregate principal amount of 4.88% notes due 2026 outstanding, which provide the company with a diversified source of long-term financing.

The company has a $100 million senior secured revolving credit facility with Capital One that expires on January 17, 2029. Borrowings under the facility generally bear interest at a rate per annum equal to SOFR plus 3.10%.

Risks and Challenges

Like other BDCs, ICMB faces several risks and challenges that could impact its financial performance and ability to execute its investment strategy. These include:

1. Interest Rate Risk: As a lender, ICMB is exposed to interest rate fluctuations, which can affect the yield on its debt investments and the cost of its own borrowings.

2. Credit Risk: The company's investment portfolio is concentrated in middle-market companies, which may be more susceptible to economic downturns and financial distress.

3. Regulatory Risk: As a BDC, ICMB must comply with various regulations, including asset coverage requirements and restrictions on its ability to raise debt and equity capital.

4. Competition: ICMB operates in a highly competitive market, which may limit its ability to originate attractive investment opportunities or result in lower yields on its investments.

5. Concentration Risk: A significant portion of ICMB's portfolio is concentrated in certain industries, such as professional services, containers and packaging, and commercial services and supplies, which could expose the company to sector-specific risks.

To mitigate these risks, ICMB employs a disciplined investment process, maintains a diversified portfolio, and focuses on investing in resilient, cash-flow-generating businesses. The company also benefits from the extensive resources and expertise of its investment adviser, Investcorp Credit Management US LLC, which has a proven track record of managing credit investments through various market cycles.

Outlook and Conclusion

Despite the current economic uncertainties, ICMB remains well-positioned to navigate the challenges and continue delivering value to its shareholders. The company's focus on credit quality, proactive portfolio management, and strategic capital deployment have enabled it to maintain a resilient portfolio and capitalize on selective opportunities.

ICMB's experienced management team, strong sponsor relationships, and diversified funding sources provide a solid foundation for the company's continued success. As the middle-market lending landscape evolves, ICMB is poised to leverage its competitive advantages and capitalize on the opportunities that arise, while remaining vigilant in managing the risks inherent to its business.

The company is focused on rotating the portfolio towards larger, more stable credits and senior secured investments within the core middle market. ICMB's portfolio companies are performing well, with only a small number of challenged positions.

Overall, Investcorp Credit Management BDC, Inc. is a well-established and adaptable BDC that has demonstrated its ability to generate consistent returns for its shareholders through various market conditions. With its disciplined investment approach, diversified portfolio, and prudent capital management, ICMB is well-equipped to navigate the complexities of the current environment and create long-term value for its investors.