BlackRock Capital Investment Corporation
Q1 2018 Earnings Call Transcript

Published: 3 May 2018

[Operator:]

Good morning. My name is Aaron. And I will be your conference facilitator today for the BlackRock Capital Investment Corporation First Quarter 2018 Earnings Call. Hosting the call will be Chairman and Interim Chief Executive Officer, James Keenan; Interim Chief Financial Officer and Treasurer, Michael Pungello; General Counsel and Corporate Secretary of the company, Laurence D. Paredes; Marshall Merriman, Head of Portfolio Management for BlackRock's U.S. Private Capital Group; Jason Mehring Chairman of the U.S. Private Capital Group's Investment Committee; and Nik Singhal, Head of Investor Relations and Business Strategy. Lines have been placed on mute. After the speakers complete their update, they will open the line for a question-and-answer session. [Operator Instructions] Thank you. Mr. Paredes, you may begin the conference.

[Laurence Paredes:]

Good morning and welcome to BlackRock Capital Investment Corporation's first quarter 2018 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 contains 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 lists 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 representations or warranties with respect to such information. Please note we posted to our website an Investor Presentation that complements this call. Shortly, Jim 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 2018 Investor Presentations link in the Presentations section of the Investors page. On April 30, we announced that our board of directors appointed Chairman, Jim Keenan, to serve as Interim Chief Executive Officer, succeeding Mike Zugay, who resigned on April 27 for personal reasons. Jim has been primarily responsible for overseeing our investment team for BlackRock since BlackRock assumed the investment management agreement with the company in 2015 and has served as our Chairman since 2017. He also serves as Chief Investment Officer and Co-Head of Global Credit at BlackRock. I would now like to turn the call over to Jim, who will provide an overview of the business and first quarter highlights.

[James Keenan:]

Thank you, Larry. Good morning and thank you for joining our first quarter earnings call. I will provide you with the business and performance highlights, and an update on our investment activity during the first quarter, as well as the underlying portfolio performance before turning it over to Mike Pungello, our Interim CFO, to discuss our financial results in a bit more detail. First, as we announced earlier this week, Mike Zugay has resigned from his role as CEO of the company for personal reasons. We'd like to thank Mike for his contributions. On April 30, our board of directors appointed me as the Interim CEO. And as mentioned by Larry, I have been with BlackRock for 14 years and my engagement with the company precedes BlackRock's acquisition of assets of the company's former advisor in March of 2015. I've been Chairman of the company since 2017. And as the CIO and co-head of BlackRock's Global Credit Business I have had direct oversight of the company's investment team and business strategy. BlackRock is strongly committed to the company and our team that advises it. I'm pleased today to be joined by senior team members, many of whom you will recognize from previous calls. Jason Mehring and Marsh Merriman have been senior members of our investment team since 2005. Jason and Marsh now serve as Chairman and Vice Chairman respectively of the U.S. Private Capital Group's Investment Committee for the company's advisor. Turning now to the performance for the first quarter, net investment income was $0.16 per share. Based on the $0.18 per share distribution declared by our board of directors, there was approximately 88% distribution coverage for the quarter. As we shall discuss later, we had significant net deployments during the quarter. However, a time-lag between repayments in the prior quarter and subsequent redeployment contributed to a reduction in NII this quarter. Net asset value per share decreased from $7.83 per share last quarter to $7.65 per share as of December 31 or a 2.3% quarter-over-quarter decrease. The decline was in large part due to incremental markdowns on certain legacy positions. We will cover this in more detail in the portfolio overview section. Our leverage increased to 0.56 times, up from the 0.32 times prior quarter driven by net deployments. We also have ample liquidity of $228 million to support new investment activity and have had no debt maturing until 2022. Under our existing share repurchase program, we repurchased nearly 800,000 shares during the first quarter at an average price of $5.98. As discussed on prior calls, our three core channels for deployment continue to be our portfolio company investment in BCIC Senior Loan Partners, our first lien joint venture with Windward Capital; two, our portfolio company investment in Gordon Brothers Finance Company; and lastly, three, investments in high quality junior capital opportunities. Both Senior Loan Partners and Gordon Brothers Finance Company have underlying investments in diversified pools of primarily first lien loans that generate attractive risk-adjusted returns, yielding 11% or higher on our investments in each of these two entities. Senior Loan Partners added four new investments and three add-ons to its portfolio during the first quarter. We upsized our equity commitment to Senior Loan Partners from $85 million to $113 million on April 16, with our joint venture partner upsizing their commitment on a pro rata manner. This program is an important part of our business strategy and underlying investment portfolio is performing very well. Turning to the company's investment activity during the quarter, we made new investments of approximately $145 million, which was partially offset by repayments and other exists, totaling approximately $17 million. For a net, $127 million increase in our portfolio due to this investment activity. Our deployments and repayments are detailed in our first quarter earnings release. We also increased our net investment in Gordon Brothers Finance Company by approximately $28 million. We also invested in two new portfolio companies St. George Warehousing and Zest Acquisition Corp., which reflect our disciplined approach to credit selection in today's market. Subsequent to quarter end, we sold down $32 million of St. George at par, bringing our hold size to approximately $40 million. Further repayment activity is expected in the second quarter of this year. Our team, however, benefits from the size and scale of the broader BlackRock platform, and we are seeing a robust amount of deal flow in 2018. With repayment and deployment activity this quarter, we now have 31 companies in our portfolio at a fair market value of approximately $870 million. The weighted average yield of income producing securities at fair market value was 11.3%, as of March 31, which is up approximately 50 basis points from last quarter. From March 6, 2016, when BlackRock assumed responsibility for managing the investment activities of the company, to the end of the first quarter, the BlackRock team has deployed over $800 million into new investments. As of March 31, approximately 60% of our current investment portfolio by fair market value is represented by investments deployed by BlackRock. As of March 31, we have no investments on non-accrual status. Our legacy MBS Group Holdings debt, which was a non-accrual in the prior quarter, was exited pursuant to a change of control and recapitalization of the company, we described in last quarter's call. The other previous non-accrual SVP Mezzanine Debt was extinguished pursuant to an out-of-court restructuring of the capital structure. After this restructuring, we own a portion of the equity in SVP as well as a contingent claim. We continue to have volatility in the fair market value of our portfolio due to certain legacy investments, which primarily drove the negative $11.4 million change in fair market value versus last quarter. SVP, Hunter Defense, AGY and Westmoreland represented the majority of the decreases in valuations this quarter in dollar terms. Westmoreland is a credit that bears special attention given the macro forces at work for coal producers. The negative movements this quarter were only partially offset by increases in valuations, of which Red Apple and U.S., well, were two of the positive movers. Given the equity and equity-like nature of these investments, they are highly sensitive to movements in EBITDA, and these businesses experienced varying degrees of underlying improvement that contributed to the increases in valuations. Our strategy continues to be diligently maximize recoveries on our restructured legacy assets, and to monetize reorg equities and redeploy into interest earning investment. With that, I'd like to turn the call over to Mike Pungello for some additional details regarding our financial results.

[Michael Pungello:]

Thank you, Jim. I will take a few minutes to review additional financial and portfolio information for the first quarter of 2018. GAAP net investment income, NII was $11.6 million, or $0.16 per share for the three months ended March 31, 2018. Relative to distribution declared of $0.18 per share, our NII distribution coverage was 88% for the quarter. Total investment income was $20.8 million for the quarter, as compared to $24.9 million during the prior year quarter. Excluding fee income, total investment income decreased by approximately 18%, primarily attributable to a decrease in the average investment portfolio. This decrease was partially offset by higher rate environment and higher dividend income. Fee income earned on capital structuring, commitments and administration during the current quarter totaled $0.9 million as compared to $0.6 million during the prior year quarter. Under our share repurchase program during the first quarter of 2018, we repurchased 799,803 of our shares for $4.8 million at an average price of $5.98 per share, including brokerage commissions. As of March 31, 2018, there were no non-accrual investment positions as compared to non-accrual investment positions of 4% of our total debt investments at fair market value and 15.5% in amortized cost at December 31, 2017. Our average internal investment rating at fair market value at March 31, 2018, was 1.24 as compared to 1.35 at December 31, 2017. Net realized loss was $76.6 million, as a result of restructurings or write-offs of our investment in two legacy positions, MBS Group Holdings, Inc. and SVP Worldwide Limited. Net unrealized depreciation decreased $64.1 million, primarily due to the reversal of previously recognized depreciation of $76.3 million after the restructurings or write-off mentioned above, offset partially by $12.2 million net decrease in valuation of our investments. As previously disclosed, we announced a waiver of incentive management fees based on income from March 7, 2017 to December 31, 2018. For the quarter ended March 31, 2018, the $1.7 million of incentive management fee based on income earned by our investment advisor have been waived accordingly. Through March 31, 2018, we have waived the total of $9.7 million of incentive management fees under this waiver agreement. During the quarter, there was no accrual for incentive management fees based on gains. On February 15, 2018, the company repaid the remaining $55 million in aggregate principal amount of its 5.5% unsecured convertible senior notes due 2018 upon their maturity, and currently has no debt maturing until 2022. I am confident in the strength of our balance sheet and our ability to continue to grow our investment base due to our strong liquidity position. At March 31, 2018, we had $1.6 million in cash and cash equivalents, and $226 million of availability under our credit facility based upon our March 31, 2018 borrowing base calculation, subject to leverage restrictions, resulting in approximately $228 million of availability for portfolio company investments. With that, I would like to turn the call back to Jim.

[James Keenan:]

Thank you, Mike. In closing, I'd like to thank a moment to recognize our team and thank them for their continued hard word even through the current transition. I'd also like to thank you for your continued support. With that, this concludes our prepared remarks. Operator, would you open it up for questions.

[Operator:]

Thank you very much, sir. [Operator Instructions] And we'll go first to Jonathan Bock with Wells Fargo.

[Finian Patrick O'shea:]

Hi, guys. Fin O'shea in for Jonathan this morning. Thanks for taking our question. I appreciate the color on Westmoreland, just looking for a little more there. I think I saw the issuer raised doubts as to if it could survive [as growing] [ph] concern, given the December 18 debt. Can you kind of give some color on your seniority versus, say, the enterprise value of that company as you see it?

[Marshall Merriman:]

Hi, Sean. This is Marsh Merriman. I appreciate your time and your question this morning. But we all know the media narratives around coal in the U.S. and specifically around coal-fired power plants. And as you have pointed out, the parent here has publically announced that it's considering its strategic alternatives. I can tell you that we are actively involved in managing our holding here. There is not a whole lot more we can tell you about it right now in terms of the details. We are a senior lender at the MLP level, secured by the assets of the MLP. So obviously that has some effect on how we think about our credit here. But beyond that, given the state of play at the parent, there is not much more I can say.

[Finian Patrick O'shea:]

Very well, it makes sense. And then just one more on the restructurings, I think this is favorable for shareholders, given it relieves the VC on ICTI levels, which is of course ultimately taxable. And there is a company by losses, given the marks, but why not sooner - why didn't this happen sooner? I think these names were at very distressed levels, spitting out very high levels of income. Just any color on that would be appreciated.

[James Keenan:]

Thanks, Sean. And thanks for the question. This is Jim Keenan here. I think with regards to all of our positions here, not just Westmoreland, but all the non-interest bearing equity that we have, I mean as outlined, we continue to try to work through and ultimately exit while protecting the recovery values and redeploy all of those securities into interest bearing assets. That's obviously one of the key core strategies that we've had to maximize value. And all of those investments we hope to exit, and then ultimately reinvest back into either the Senior Loan strategy, Gordon Brothers Finance or into new opportunities across junior capital.

[Finian Patrick O'shea:]

Okay, very well. Thank you so much.

[Operator:]

[Operator Instructions] And with no further questions in queue, I'd like to turn the call back over to management for any additional or closing remarks.

[James Keenan:]

Great. This is Jim Keenan and I just like to thank everybody again for all your participation and support across this. We're incredibly excited about as we continue to progress on the BKCC and the investment activity that we see today. So thank you very much.

[Operator:]

Ladies and gentlemen, it does conclude today's conference. We thank you for your participation. You may now disconnect.