BlackRock Capital Investment Corporation
Q2 2018 Earnings Call Transcript

Published: 2 Aug 2018

[Operator:]

Good morning. My name is Derrick. And I will be your conference facilitator today for the BlackRock Capital Investment Corporation Second 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 [technical difficulty] 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 call.

[Larry Paredes:]

Good morning and welcome to BlackRock Capital Investment Corporation's second 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 warranty 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 August 2018 Investor Presentations link in the Presentations section of the Investors page. I would now like to turn the call over to Jim, who will provide an overview of the business and second quarter highlights.

[Jim Keenan:]

Thank you, Larry. Good morning and thank you for joining our second quarter earnings call. I will provide you with the business and performance highlights, and then update on our investment activity during the second quarter. [Technical difficulty] underlying portfolio performance before turning it over to Mike Pungello, our Interim CFO to discuss our financial results in a bit more detail. For the second 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 90% distribution coverage for the quarter. We deployed $61 million in two new and four existing portfolio companies. However significant repayment activity drove a net repayment of $91 million for the portfolio. Net asset value per share decreased from $7.65 per share last quarter to $7.50 per share as of June 30, or 1.2% quarter-over-quarter. This decline was in large part due to incremental mark downs on certain legacy positions. We will cover in more detail in our portfolio overview discussion. Our leverage decreased to [technical difficulty] 0.4 [ph] down from 0.56 times prior quarter driven by the [technical difficulty] payments. We do have ample liquidity of $280 million to support our new investment activity and have no debt maturing until 2022. Under our existing share repurchase program, we repurchased nearly 1.3 million shares during the quarter at an average price of $6.21. As discussed on prior calls, our three [technical difficulty] for deployment continue to be one; the portfolio company investment in BCIC Senior Partners, our first lien joint venture with Windward Capital. Two; our portfolio company investment in Gordon Brothers Finance Company and three; investments in high quality junior capital opportunities. Both Senior Loan Partners and Gordon Brothers Finance Company have underlying investments in diversified pools are primarily first lien loans at attractive risk adjust returns. Yielding [technical difficulty] higher on our investments in each of these two entities. Senior Loan Partners three new investments and three add ons to its portfolio in the second quarter. As previously announced, we upsized our equity commitment to Senior Loan Partners from $85 million to $113 million in April. Joint venture partner upsizing their commitment in a pro rata manner. Additionally, subsequent to the quarter end loan partners refinance and upsized it's credit facility from $200 million to $270 million, providing it with a total investment capacity of over $400 million. Senior Loan Partners is an important part of our business strategy and is underlying investment portfolio continues to perform very well. Turning to the company's investment activity during the quarter. We made new investments of approximately $1 million which were offset by repayments - exits [ph] totaling approximately $152 million for a net $91 million decrease in our portfolio due to this investment activity. Our deployments and repayments are detailed in our second quarter earnings release. We increased our net investment in Senior Loan Partners by $18 million. We also invested in two new portfolios companies Northstar Financial Services and Pharmalogic, which reflect our disciplined approach to credit selection in this market. With the repayment and deployment activity this quarter, we now have 29 companies in our portfolio at a fair market value of approximately $776 million. The weighted average yield of income producing securities at fair market value was 11.5% as of June 30, which is up 22 basis points from last quarter. From March 6, 2017 when BlackRock assumed the responsibility for managing the investment activities of the company to the end of second quarter, the BlackRock team has deployed $860 million into new investments of $290 million has been exited with the realized IRR of 13.8%. As of June 30, approximately 64% of our current investment portfolio by fair market value is represented by investments deployed by BlackRock. As of June 30, we had one investment on non-accrual status. AGY preferred stock representing 0.1% of our debt and preferred stock investments at a fair market value. We continue to have volatility in the fair market value of our portfolio due to certain legacy investments which primarily drove the negative $6.6 million change in portfolio marks versus last quarter. The decrease in valuations was driven by [ph] AGY preferred stock and Wes Moreland [ph] loan partially offset by increases in [technical difficulty] in US Well and Vertellus equity [technical difficulty]. US Well announced a pending merger with publicly traded SPAC or SPAC. As we pointed out last quarter Wes Moreland [ph] continues to be a credit that bears special attention in the macro forces at work for call producers. [Technical difficulty] equity like nature of these four investments they are sensitive to movements in EBITDA and these [technical difficulty] experiences varying degrees of underlying improvement or decline that contributed to the changes in valuations. We continue with our strategy to rebuild our portfolio at stable pool of income producing assets. To accomplish this goal, we remain diligent and enhancing recoveries on the restructured assets. Monetizing reorg equities and redeploying into interest earning investments. Apart from the portfolio mark activities, we had net realized gains of $4 million, arising from $6 million from the exit of relatively small equity position in ECI. Offset by [technical difficulty] realized loss on SVP worldwide [technical difficulty] contingent claim. As of June 30, we have no fair market value exposure to SVP. Before turning the call over to Mike Pungello for some additional details regarding our financial results. I would like to add that we are very excited about the closing of Tennenbaum Capital Partners acquisition by BlackRock which bolsters BlackRock's position the leading global credit manager. Over to you Mike.

[Mike Pungello:]

Thank you, Jimmy. I'll take a few minutes to review additional, financial and portfolio information for the second quarter of 2018. GAAP net investment income, NII was $11.5 million or $0.16 per share for the three months ended June 30, 2018. Relative to the distribution declared of $0.18 per share our NII distribution coverage was 90% for the quarter. Total investment income for the three months ended June 30, 2018 decreased $3.9 million or 15.6% as compared to the three months ended June 30, 2017. Excluding fee income, total investment income decreased by approximately 14.4%. Primarily attributable to a decrease of 14.2% and average investment portfolio for the quarter ended June 30, 2018 at amortized cost as compared to the quarter ended June 30, 2017. The decrease in portfolio size is primarily due to the dispositions during the second half of 2017 and in 2018. The impact of which was partially offset by a higher rate environment and higher dividend income in 2018. As of June 30, 2018 there was one non-accrual investment position representing approximately 0.1% and 1.8% of total debt and preferred stock investment at fair value and cost respectively. As [ph] to non-accrual investment positions of approximately 3.6% and 14.3% of total debt and preferred stock investments at fair value and cost respectively at December 31, 2017. Our average internal investment rate at fair market value at June 30, 2018 was 1.23 as compared to 1.24 at the prior quarter end. Total expenses decreased $1.6 million or 14.1% for the three months ended June 30, 2018 from the comparable period in 2017 primarily due to a decrease in base management fees and interest expenses. As previously disclosed we announced the waiver of incentive management based on income from March 7, 2017 to December 31, 2018. For the quarter ended June 30, 2018 $1.9 million of incentive management fees based on income earned by our investment advisor have been waived. Through June 30, 2018 we've waived a total of $11.6 million of incentive management fees based on income on accumulative basis. During the quarter the non-accrual for incentive management fee is based on gain. Net realized gain was $3.9 million primarily resulting from a gain on the sale of ECI Cayman Holdings partially offset by a loss relating to our investment in SVP Worldwide Limited. Net unrealized depreciation increased $9.5 million before taxes primarily due to an increase realized depreciation on certain legacy investments as well as the reversal of previously recognized depreciation upon disposition. For the three months ended June 30, 2018 unrealized [technical difficulty] consolidated taxable subsidiary resulted in a deferred tax liability of $1.8 million. During the second quarter of 2018, we [technical difficulty] 1,268,684 of our shares with $7.9 million average price of $6.21 per share including brokerage commission. At June 30, 2018 we are in a very strong liquidity position to grow our investment base. We had approximately $280 million of availability portfolio company investments between availability under our credit facility and cash and cash equivalents. With that I would like to turn the call back to Jim.

[Jim Keenan:]

Thank you Mike. In closing, I would like to take a moment to recognize our team and thank you for their continued hard work even through the current transition. I would also like to thank all of you for your continued support. This concludes our prepared remarks. Operator, we can open the line for questions.

[Operator:]

[Operator Instructions] and we'll take our first question from Fin O'shea with Wells Fargo Securities. Please go ahead.

[Fin O'shea:]

Just to start in the losses, to start with the bad stuff. Both of these were pretty severe drops Wes Moreland [ph] I know we talked about last year. You were comfortable with your [technical difficulty] there. Did I guess in both of these were there big negative turns in them? Or just I guess just give us some color on that front?

[Marsh Merriman:]

Good morning, Fin. This is Marsh Merriman. Thanks for your time this morning just a couple of things, with respect to Oxford. As is evident from the news coming out in the public filings from the various constituencies, various parties are involved in discussions here regarding the issues in play, as that moves forward. I think the market forward perceives that there are certainly macro issues at play with the company given the nature of the discussions and the public disclosure that's already out there, we're not at liberty to discuss status or predict an outcome there. With respect to AGY, this is a business that's subject to inter-year lumpiness so on a quarter-by-quarter basis the equity value just tends to see some visibility beyond that, there's not a lot of detail we can give you.

[Fin O'shea:]

So is maybe something interim on that front. All move [technical difficulty] to I think you gave some kudos to the TCP acquisition by your managers [technical difficulty] block. Can you give any color on how the two BDCs respectively will co-exist assuming there are probably similar mandates. You sitting in different parts of the platform and focusing on [technical difficulty].

[Jim Keenan:]

Thanks Fin, this is Jim. And obviously we're very excited about the closing of TCP acquisition yesterday of the advisor. I would say, we're excited to obviously bring them onto the platform they've got a great track record both within their own BDC, but on the breadth of their platform. I would say, we are working closely with them to optimize the scale and scope in the breadth of the platform on a combined effort. I think the benefit of the combined team is, we believe much of what they've done and great track record they've had, is very complementary to our existing business and the nature of the investments, so the type of deal that we've done. So on a combined effort at the advisor, I think we'll be able to provide better, broader, [technical difficulty] efforts better quality underwrites and similarly, I think that will lead to better outcomes for what we could do in both BDC's, but specifically in BKCC we're excited about expansion there.

[Fin O'shea:]

So are there, thank you for [technical difficulty]. Are there any structural bylaws let's say a that mandate shared allocation? Do you have similar mandates or are you able to keep things separate for the time being? I know for example SEC [ph] has few sets of - they give you a few options in terms of how you can in case, sorry go ahead.

[Jim Keenan:]

No absolutely, I'll actually turn it over to Larry Paredes to let him run through that. But I think that is really will be able to provide benefits and scale to the platform. So I'll turn it over to Larry.

[Larry Paredes:]

Thanks Jim. So we currently have an SEC co-investment exemptive [ph] order which [technical difficulty] both BDCs to co-invest should the opportunity arise. We will consistently and continuously evaluate the opportunities to determine whether or not a co-investment should or should not take place.

[Fin O'shea:]

Okay, thank you and I'll just do one more sort of macro-oriented question. A lot of your competitors who reported thus far noted a maybe not lender-friendly but at least supply heavy marked throughout this past quarter and continuing through now. Any comment on reasonably like originations on your behalf despite having still quite low leverage rates?

[Jason Mehring:]

Fin, its Jason Mehring here. I would say is that we were very, very active in the quarter in terms of opportunities we reviewed, as you know our businesses by definition somewhat lumpy there were a variety of actions we had an interest in that had structures of either events in different direction or perhaps the parties with whom we were working, we're not ultimately victorious in the auction or in the process. So again, we were very active and I think we're getting good looks it's just a matter of managing to win or having or being part of the winning transaction. So we feel comfortable with our activity level and continue to proceed in a cautious way, given the backdrop. But we certainly are [indiscernible] after looking at lot of things.

[Fin O'shea:]

Thank you so much guys.

[Operator:]

And we have no current questions in the queue [Operator Instructions] and we have a question from Melissa Whittle [ph] with [technical difficulty].

[Unidentified Analyst:]

Can you hear me?

[Jim Keenan:]

Melissa, go ahead.

[Unidentified Analyst:]

Sorry about that. Wanted to get a quick update on the portion of the portfolio that is comprised of legacy investments, update on plan to manage [indiscernible] at this point?

[Marsh Merriman:]

Good morning, Melissa. It's Marsh again. Our plan with respect to the legacy continues to be of the same as it has been all long, which is when circumstances permit, we will exit those investments in fashions that we think are advantageous. In many of those positions while we have influenced over the timing and manner of excess of exits, we do not have control. We sort of work the situation it's best and hard to predict how long it takes or what level we let [ph]?

[Jim Keenan:]

Thanks Marsh. This is Jim. I'll just add onto that. I mean just to be clear with our goals from a strategic standpoint. As Marsh said, there is at times complexities or limitations with regards to exiting, but obviously that the legacy of the book create a bit of volatility associated to the portfolio to be clear, our plan is to continue to work through and ultimately monetize those positions to the best that we can to get the best results. And then ultimately redeploy them in more stable interest bearing assets [ph] or more similar how we deployed over the last three years. So the timing of that has continued to move around a bit, but I would say we're aggressively trying to continue to transition the remaining book.

[Unidentified Analyst:]

Understood and what portion of the portfolio remains in legacy investments?

[Marsh Merriman:]

It's approximately 30% I believe, Melissa.

[Unidentified Analyst:]

Okay and then just to clarify the whole - with the acquisition, there will be basically two independent separate vehicles that have co-investment release on the BlackRock [technical difficulty] that will operate.

[Jim Keenan:]

Correct, there are - and Larry you could jump in, there will be two vehicles. Obviously there's two of the transaction but the team's continue to work together and we will continue to optimize the platform to ultimately create better investments across certainly BKCC, but across the wide range of vehicles we have. Whereas right now there are two vehicle BDCs and the variety of other strategies that are run by the teams. And as Larry pointed out before, we co-exempt [ph] order from the SEC that governs the transaction.

[Unidentified Analyst:]

Okay, thank you.

[Operator:]

Thank you and we have no further questions in the queue at this time.

[Jim Keenan:]

Great. Well thank you. I just wanted to highlight again, thank you for the team and all the work they've done across the portfolio, but thank you again for you all and all your support in the business here. With that, we'll end the call. Thank you.