BlackRock Capital Investment Corporation
Q1 2017 Earnings Call Transcript

Published: 7 May 2017

[Laurence Paredes:]

Good morning, and welcome to Blackrock Capital Investment Corporation’s First Quarter 2017 Earnings Conference Call. Before we begin our remarks today, I would like to point out that certain comments made during the course of 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 Blackrock Capital Investment Corporation’s actual results may differ from these statements. As you know, Blackrock Capital Investment Corporation has filed with the SEC reports which list some of the factors which may cause Blackrock Capital Investment Corporation’s results to differ materially from these statements. BlackRock Capital Investment Corporation 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, BlackRock Capital Investment Corporation 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, Mike will highlight some of the information contained in the presentation. Presentation can be accessed by going to our website at www.blackrockbkcc.com and clicking the May 2017 Investor Presentation link in the Presentations section of the Investors page. Thank you. I would now like to turn the call over to Mike Zugay, who will provide an overview of the business and first quarter highlights.

[Mike Zugay:]

Thank you, Larry. Good morning and thank you for joining our first quarter earnings call. I would like to start by giving an update on the first quarter’s business and financial highlights, then move to our investment activity during the first quarter. Lastly, I will discuss the underlying portfolio performance before turning it over to Donna to discuss our financial results in more detail. For the first quarter, net investment income was $0.20 per share. Based on the $0.18 per share distribution declared by our Board of Directors, it was approximately 111% distribution coverage. Additionally, net asset value per share modestly increased from $8.21 per share as of year end to $8.22 per share as of March 31, 2017. Our leverage profile remains relatively low by industry standards at 0.56x and we have ample liquidity of over $250 million to support new investment activity. As highlighted in our prior calls, we have been working hard to restructure many of the underperforming legacy investments. In the quarter, we completed a restructuring of U.S. Well Services, an amendment for Advanced Lighting Technologies and wrote off our residual claim in Shoreline Energy. I will discuss each of these in more detail when we discuss the portfolio performance. As a result of these actions, we are pleased to report that as of March 31, 2017, we do not have any investments on non-accrual status. Also, in line with our stated strategy of rotating out of reorg equity securities, we monetized nearly $30 million of non-interest bearing legacy equity investments in the quarter at a slight gain to the prior quarter’s mark. We continue to work to monetize non-interest bearing investments to redeploy proceeds to income-generating assets. The time required to rotate out of reorg equity positions is inherently unpredictable, but we intend to be patient in order to maximize recoveries as demonstrated by the DMS transaction, which I will discuss shortly. As previously announced the company’s investment advisor, in consultation with our Board of Directors, agreed to waive 100% of the income-based incentive fees from March 7, 2017 through December 31, 2018. Based on the current run-rate earnings of the portfolio, we continue to estimate the fee waiver amount to be approximately $0.03 to $0.04 per share per quarter. The $800,000 of income-based incentive fees waived for the partial period from March 7 through March 31, accreted over $0.01 per share of retained value to our stockholders. For March 6, 2015, when BlackRock assumed responsibility for managing the investment activities of the company to the end of the first quarter, our team has deployed nearly $550 million in new investments. As of March 31, 2017, 50% of our current investment portfolio by fair market value is represented by investments deployed by the new advisor. As stated on our previous calls, we continue to deploy capital across three core channels

[Donna Milia:]

Thank you, Mike. I will take a few minutes to review additional financial and portfolio information for the first quarter of 2017. GAAP net investment income was $14.6 million or $0.20 per share for the three months ended March 31, 2017. Relative to distributions declared of $0.18 per share, our NII distribution coverage was 111% for the quarter. Fee income earned on capital structuring, prepayments and administration during the current quarter totaled $600,000 as compared to $2.6 million earned during the preceding quarter and $800,000 earned during the prior year quarter. Excluding fee income, investment income decreased approximately 4% compared to the prior quarter and 16% as compared to this quarter 1 year ago. The decreases were a result of a net reduction in the overall income producing assets over the past 12 months, despite modest increases in the weighted average yield of debt and income producing equity securities compared to Q1 2016. The portion of our portfolio invested in equity securities decreased during the quarter to 16% as of March 31, primarily due to the exit of our prior BMS investment, which removed $19.7 million of equity value, partially offset by the U.S. Well restructuring, which added $14 million of equity value. Our portfolio composition of secured debt at fair market value increased to 67% at quarter end as a result of providing $55 million of debt financing to BMS during the quarter, partially offset by the repayments of Accriva and our prior BMS debt as well as the reduction in the amount of U.S. Well debt due to the restructuring. Unsecured debt remained unchanged at 17%. Total portfolio yield at fair market value decreased 60 basis points sequentially from 11.7% as of last quarter end to 11.1%, primarily a result of U.S. Well restructuring into lower yielding debt in conjunction with the repayment of Accriva, partially offset by the removal of Advanced Lighting from non-accrual status during the quarter. As compared to the full fiscal year 2016, our weighted average cost of debt increased 26 basis points to 4.63% for the three months ended March 31, 2017, primarily driven by the increase in LIBOR rates. On a dollar basis, our first quarter 2017 borrowing costs decreased 1% sequentially and more than 14% as compared to this quarter 1 year ago. Net unrealized depreciation decreased $51.4 million during the current quarter, bringing total balance sheet unrealized depreciation to $40.9 million. During the period, growth of unrealized depreciation of $9.2 million was partially offset by $7.8 million of growth unrealized appreciation due to valuation. Further, there was $52.8 million of unrealized appreciation during the quarter, primarily due to the reversal of previously recognized unrealized depreciation on Shoreline, U.S. Wells and Advanced Lighting. As previously disclosed, until March 6, 2017, our base management fee accrued at an annual rate of 2% of total assets and after March 6, 2017, at an annual rate of 1.75% of total assets excluding cash. Our base management fees declined approximately 7% sequentially, partly due to the lower rate. No incentive management fees based on income were earned in payable for the prorated period until March 6, 2017, as the distributable income amount was reduced below the hurdle by the net realized and unrealized losses in the portfolio for the trailing four quarter period. After March 6, 2017, $800,000 of incentive management fees based on income were earned for the partial quarter. However, as previously disclosed, any such fees earned until December 31, 2018 will be waived. During the quarter, there was no accrual for incentive management fees based on gains due largely to the net unrealized depreciation in the portfolio as of March 31, 2017. A hypothetical liquidation is performed each quarter, resulting in an additional accrual if the amount is positive or a reversal to the exiting accruals if the amount is negative. However, the resulting fee accrual is not due and payable until June 30, if at all. There is currently no balance accrued for incentive management fees based on gains as of the measurement period ending March 31, 2017. With that, I would like to turn the call back to Mike.

[Mike Zugay:]

Thank you, Donna. I would like to thank our team for their dedication and commitment to our ongoing goal of creating long-term shareholder value. We thank you for your participation in today’s call and for your continued support. With that operator, we would like to open the call to questions.

[Operator:]

Thank you. The question-and-answer session will be conducted electronically. [Operator Instructions] We will go first to Jonathan Bock with Wells Fargo Securities.

[Fin O’Shea:]

Hi guys. Fin O’Shea in for Jonathan Bock this morning. Thanks for taking our question and congratulations on what we see as a lot of positive outcomes this quarter and in restructuring, etcetera. First question on one of those names, Bankruptcy Management, can you give a little more color on – you said you are part of the financing solution, on other parties in there, were they in your tranche, ahead or behind. And then the second part to that, what was – given the nature of the interest on that loan, was that considered for the SLP?

[Mike Zugay:]

Hi Fin, this is Mike Zugay here. First of all, I want to apologize for the technical difficulties on the start. We got started a little bit late today, so I apologize for that. But thank you for the question and thanks for calling in and bearing with us through the beginning. So the question on BMS, the only debt in the capital structure is the debt that – is the first lien debt that we are a party to. So as of this moment in time, we are the sole party in the debt capital structure and we did consider putting it in SLP. Unfortunately, there is a minimum EBITDA requirement of $15 million for that vehicle and the EBITDA of the company was slightly below that. So, it is not currently in its existing form a candidate for that vehicle.

[Fin O’Shea:]

Okay. Very well appreciate that. And then a question on first Boston looks like a fairly benign markup on the equity, but you do have a good amount of sub-debt there, I think $28 million, $29 million. Can you give some color if there is anything fundamental there? Is that just a sort of a valuation thing?

[Mike Zugay:]

Yes. It’s a little bit more nuance than just a valuation thing. And without getting into too much details, there was a distribution that would be counted in our fee income on our equity there. So, as a result of that distribution and the accounting behind it, there was a slight markdown to that name, but it was ultimately, I would characterize that as a good thing as the company distributed a dividend to the equityholders.

[Fin O’Shea:]

Okay, awesome, awesome. And just kind of I guess one final global question, obviously, you are sort of in position with your targets, the earnings power you have with the SVP etcetera. What’s – I think I saw in the Q that you don’t have any spillover at this time. Do you have a – or you talked about potentially raising the dividend down the line as this all pans out. But do you have a view on building a certain amount of spillover or should you pay the dividend at sustainable NOI as many describe it?

[Mike Zugay:]

Yes, look I think we would – our goal and objective is to pay the dividend with sustainable NII. If there is a earnings in excess of the dividend, we will make a determination if we should pay the tax on it or have a special dividend. But all of that will be evaluated. It’s not lost I will say. Ultimately, I think it would be a good thing if we are out earning our dividend and have those decisions to make, but we will evaluate all the different options if that – if and when that happens.

[Fin O’Shea:]

Okay, awesome, Mike. Thanks so much again.

[Mike Zugay:]

Thanks, Fin. Appreciate the call.

[Operator:]

[Operator Instructions] And Mr. Paredes, it appears there are no other questions at this time.

[Laurence Paredes:]

Mike?

[Mike Zugay:]

Yes, okay. Well, thank you everybody for the questions. Thanks Fin for the questions. And we will talk to you next quarter. Thank you.

[Operator:]

That does conclude today’s conference. Thank you all for your participation. You may now disconnect.