BlackRock Capital Investment Corporation
Q1 2021 Earnings Call Transcript

Published: 30 Apr 2021

[Operator:]

Please stand by. Good morning. My name is Lisa, and I will be your conference facilitator today for the BlackRock Capital Investment Corporation First Quarter 2021 Earnings Call. Hosting the call will be James Keenan, Chairman and Interim Chief Executive Officer; Nik Singhal, President of the company; Abby Miller, Chief Financial Officer and Treasurer; Laurence D. Paredes, General Counsel and Corporate Secretary of the company; Marshall Merriman, Head of the Portfolio Management; Jason Mehring, Managing Director and Member of the company’s Investment Committee.

[Laurence Paredes:]

Good morning. And welcome to the first quarter 2021 earnings conference call of BlackRock Capital Investment Corporation or BCIC. Before we begin our remarks today, I would like to point out that certain comments made during this conference call and within corresponding documents contain forward-looking statements subject to risks and uncertainties. Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may and similar expressions. We call to your attention the fact that BCIC’s actual results may differ from these statements. As you know, BCIC has filed with the SEC reports, which lists some of the factors which may cause BCIC’s results to differ materially from these statements. BCIC assumes no duty to and does not undertake to update any forward-looking statements. Additionally, certain information discussed and presented may have been derived from third-party sources and has not been independently verified. Accordingly, BCIC makes no representation or warranty with respect to such information. Please note, we have posted to our website an investor presentation that complements this call. Shortly, Jim will highlight some of the information contained in the presentation. The presentation can be accessed by going to our website at www.blackrockbkcc.com and clicking the April 2021 Investor Presentation link in the Presentations section of the Investors page. I would now like to turn the call over to Jim.

[James Keenan:]

Thank you, Larry. Good morning. And thanks to all of you for joining our first quarter earnings call. I will begin with an update on significant progress we have made toward our strategic goals, as well as a high level view of our first quarter performance and our near-term priorities. Nik Singhal will then give an update on our portfolio activity and status, and Abby Miller will follow with a discussion of our financial results in more detail before we open the call to questions. As we have emphasized in prior calls, one of our strategic priorities has been to rotate out of non-core legacy and other junior capital investments. Through 2020 and the first quarter of 2021, we have made substantial progress on this front. At quarter end, our non-core legacy assets have been reduced to just 8% of our total portfolio, compared to 14% a year ago, with near-term visibility into further exits. Other junior capital exposure, excluding non-core assets is now reduced to 13% of the portfolio from 38% a year ago.

[Nik Singhal:]

As Jim mentioned, we made strong progress in reinvesting our portfolio and existing non-core and other junior investment. During the first quarter, we received $52.6 million in proceeds from reduction in non-core and junior capital investments. This brings our total proceeds from these two buckets to approximately $179 million in the last two quarters. The largest drivers of this first quarter activity were the $39 million full repayment of our investment in First Boston Construction Holding, $6 million in the full exit of our preferred stock in Advantage Insurance and a $4 million return of capital from our equity investment in BCIC SLP. In addition, there were approximately $35 million in repayments from our core holdings. This was primarily driven by opportunistic sales of certain second lien exposures, as well as normal course repayments. With respect to originations, we had gross deployments of $55 million in the quarter, including 11 new and one existing portfolio companies. Consistent with our strategy, lower overall portfolio risk and increased our percentage of first lien investments, 86% of our originations were first lien loans and 14% were second lien loans. Our pipeline of new opportunities remains solid and we are seeing less prepayment activity in the second quarter so far. In the first four weeks of the second quarter, we added four new portfolio companies. All four were first lien loans. As the capital markets remain very robust, we remain committed to our disciplined approach to investing, executing only a small percentage of the opportunities we review. We are primarily co-investing with other funds on BlackRock Private Credit Platform, which enables us to participate in larger transactions without taking on too much concentration risk. And we continue to emphasize transactions where we lead or co-lead negotiation on these firms. The details of our new investments can be found in the earnings release, but some of our more prominent investments include the following. A first lien LIBOR plus 9.25% term loan to World Remit, a leading global money transfer platform that facilitates international transfers online. BlackRock led this investment of which BCIC invested 9.6 million. A first lien LIBOR plus 8.75% term loan and delayed draw term loan to the JobandTalent USA, a digital temporary staffing agency. BlackRock acted as the sole lender in this investment, of which BCIC committed $9.6 million across the two tranches.

[Abby Miller:]

Thank you, Nik. I will take a few minutes to review additional financial results for the first quarter of 2021. GAAP net investment income, NII was $4.2 million or approximately $0.06 per share for the quarter. This was consistent with our expectations giving a portfolio reduction driven by our successful efforts in reducing exposure to junior capital and non-core investments. NII covered 56% of our $7.4 million in stockholder distributions. Total investment income was $10.3 million, down $4.3 million or 29.7% from the fourth quarter of 2020, primarily driven by a decrease in investment portfolio size associated with portfolio derisking. Total expenses decreased $1.2 million or 16.7% from the fourth quarter of 2020, primarily driven by lower base management fees and interest expense quarter-over-quarter. In the first quarter, the company did not incur any incentive fee based on income. As you may recall, in the fourth quarter of 2020, we recorded a $1.3 million incentive fee, which was voluntarily waived by the advisor. Our cumulative and permanent incentive fees waived since March 2017 totaled $29.7 million. Additionally, in the first quarter, there was no accrual for incentive fees based on gains. During the first quarter, net realized and unrealized gains were $12 million, primarily driven by valuation recovery in SVP-Singer, BCIC Senior Loan Partners, St. George, as well as continued general market recovery across the broader portfolio.

[James Keenan:]

Thank you, Abby. In closing, we are pleased with our first quarter performance, which was driven by the ongoing hard work of our entire team and we are excited about the year ahead. We are in good financial shape and are well-positioned to continue to pursue our goal of growing our portfolio toward steady, reliable income and lower NAV volatility. I also want to thank our stockholders for their ongoing patience and support through this portfolio repositioning process. This concludes our prepared remarks. Operator, we would like to open the call for questions.

[Operator:]

Thank you. We will take our first question from Finian O'Shea with Wells Fargo Securities. Please go ahead.

[Finian O'Shea:]

Hi, everyone. Good morning. Jim, first question on the dividend that you expect to make and burn again in the coming quarters, I assume that that would until continuing the incentive fee waiver. So would you remind us on the policy or approach you have to that? And then do you see BlackRock in a position, I think, the dividend is about 9.5% of book, obviously, today’s becoming more competitive and so forth? Do you think the BDC can earn the dividend if and when you achieve the remaining portfolio optimization that would maximize your earnings potential?

[James Keenan:]

Thanks, Finian. Thanks for the questions. Yeah. Obviously, there’s a lot of different variables that come into the deployments and the earnings. Obviously, I think, Q1 was a good example with the 11 new deals that we were able to deploy into and consistent with the strategy of diversifying into more first liens, obviously, spreads, LIBOR, all are things that are going to impact the overall level of earnings that come into that. When we model it out and ultimately communicate that to the market, we expect over the next couple quarters to continue on that kind of pace from a deployment standpoint and then ultimately build toward those levered ratios around that 1.15 to 1.25 type range and we believe that’s consistent with regards to the overall strategy. From a standpoint -- from the dividend, what we are modeling out and continue to work with our Board is as we continue to deploy that and as we think we have the earnings, we -- the advisor has been, obviously, waiving all of the incentive fees to-date and we will continue to work with the Board as we complete the -- and slowly reposition or re-transition the portfolio is when to start to put that back into play when this is all pool repositioning of the overall portfolio. But as of right now, I mean, we are pretty comfortable with regards to where we are deploying the types of spreads, what we are able to earn and just the volume and pace of activity that we see in the market today. But obviously, those will be decisions that the Board will make as we move into the quarters of being fully invested.

[Finian O'Shea:]

Okay. That’s helpful. That’s all for me. Thank you.

[James Keenan:]

Thanks.

[Operator:]

And our last question comes from Melissa Wedel with JP Morgan.

[Melissa Wedel:]

Good morning, everyone. Thanks for taking my questions today. Nik, you referenced some deal activity that’s occurred so far in April. I think you referenced 20 companies that you have deployed capital to. I was wondering if you might be willing to put some size around that for us and give us a sense of how you expect the originations to play out versus your existing repayments, should we expect that to be pretty balanced or be -- continue to be skewed more toward the exits as they did also talk about having visibility into further rotation out of some legacy investments. Thanks.

[Nik Singhal:]

Yeah. Yeah. Thanks. Thank you, Melissa. A very relevant question indeed. So, if you look at Q1 where we deployed $56 million across 11 new portfolio companies and before that Q4 where we actually deployed $62 million. That pace of growth deployment is very, very consistent with our desired pace and we believe we are going to continue to create gross deployments at that pace. In Q2 so far and it’s only 30 days, we mentioned the four new companies, which are all first liens and across those we have deployed $23 million, right? So I wouldn’t necessarily extrapolate it linearly, but that’s pretty much ahead of the pace that we had in the prior two quarters. We think that that pace is sustainable. The last two quarters obviously the gross deployments were more than offset by the repayment activity. Much of this repayment activity was exits we have been trying to create. So these were large junior capital positions, First Boston, Senior Loan Partners, GBFC and then many of the non-core possessions, Advantage Insurance and others. And one thing we mentioned on the call is that our non-core book is down to 8% with near-term visibility into further reductions. And incidentally as we were speaking on the call, our investment in Red Apple, our non-core investment paid off. Our recovery there are at our mark and there’s potential for additional recoveries down the line, which could push recoveries above our mark. So, really great news. That’s going to take our non-core bucket down to 5%. So really most of the desirable exists are now behind us. Additionally, just market driven refinancing activity, we were seeing a lot of it in Q4, some of it in Q1 is not really starting to slow down. So with the great Red Apple news that we just received, we think that our gross deployments would actually start turning into net deployments and which would be accretive to our leverage ratio, as well as NII.

[Melissa Wedel:]

Breaking news. Thank you, guys.

[Operator:]

All right. And that does conclude today’s presentation. Thank you for your participation. You may now disconnect.