Private Credit Demand And Stable Funding Structure Will Support Long-Term Earnings Resilience

Catalysts

About Crescent Capital BDC

Crescent Capital BDC provides sponsor backed private credit solutions to core and lower middle market companies through primarily first lien lending.

What are the underlying business or industry changes driving this perspective?

• Growing demand for private credit in core and lower middle markets, supported by Crescent's $6 billion of platform deployments over the last 12 months, should sustain a robust origination funnel and support net investment income growth.
• Improving leveraged finance and M&A activity as borrowing costs decline is likely to increase LBO and refinancing volumes, enhancing fee income from originations and realizations and supporting earnings resilience.
• Persistent preference among financial sponsors for bespoke, covenant rich direct lending structures instead of broadly syndicated loans allows CCAP to maintain attractive spreads and disciplined leverage, which supports net interest margin and credit quality.
• Ongoing institutional appetite for longer dated BDC debt, as evidenced by CCAP's recent $185 million multi tranche unsecured notes issuance, extends the liability ladder at competitive rates and should stabilize funding costs and earnings.
• Continued shift toward sponsor backed, service oriented domestic businesses with meaningful equity cushions and low portfolio concentration is expected to moderate credit losses over time and help protect NAV and dividend coverage.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Crescent Capital BDC's revenue will decrease by 5.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 20.8% today to 45.9% in 3 years time.
• Analysts expect earnings to reach $66.4 million (and earnings per share of $1.82) by about December 2028, up from $36.0 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 12.3x on those 2028 earnings, down from 15.4x today. This future PE is lower than the current PE for the US Capital Markets industry at 25.2x.
• Analysts expect the number of shares outstanding to decline by 0.19% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.2%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Further deterioration in the small subset of portfolio companies directly exposed to tariffs, or an expansion of tariff sensitive exposure beyond the currently identified 4% of assets, could drive additional realized and unrealized losses that pressure net asset value per share and dilute earnings power over time, weighing on long term total return and potentially on net income.
• A prolonged lower rate environment, combined with ongoing spread compression in the core and lower middle market, could erode loan yields faster than Crescent Capital BDC can offset through leverage, fee income or lower funding costs, ultimately reducing net interest margin and leaving net investment income coverage of the dividend below 100% for a sustained period.
• If competition in private credit continues to intensify and sponsor backed deal volumes do not ramp as expected, the firm may be forced to accept weaker documentation, higher leverage or narrower spreads to maintain deployment levels. This would increase long term credit risk and could lead to higher nonaccruals, lower recovery rates and declining net margins.
• CCAP’s strategy of modestly increasing leverage within a 1.1 to 1.3 times net debt to equity range to grow earnings could amplify the impact of any cyclical downturn in lower middle market borrowers. A broad weakening in portfolio company EBITDA or interest coverage ratios from the current 2.1 times level could translate into outsized credit losses, reduced revenue and thinner earnings.
• The current cushion from spillover income of approximately 1.10 dollars per share and a long record of dividend coverage may encourage reliance on reserves to sustain payouts if market conditions soften. If this buffer is drawn down without a corresponding rebound in portfolio yields or fee income, both net asset value and future earnings resilience could be impaired.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $15.75 for Crescent Capital BDC based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $19.0, and the most bearish reporting a price target of just $14.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $144.5 million, earnings will come to $66.4 million, and it would be trading on a PE ratio of 12.3x, assuming you use a discount rate of 12.2%.
  
• Given the current share price of $14.96, the analyst price target of $15.75 is 5.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.