BlackRock Capital Investment Corporation
Q3 2018 Earnings Call Transcript

Published: 1 Nov 2018

[Operator:]

Good morning. My name is Anna. And I will be your conference facilitator today for the BlackRock Capital Investment Corporation Third 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 call.

[Laurence Paredes:]

Good morning and welcome to BlackRock Capital Investment Corporation's third 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 representation 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 October 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 third quarter highlights.

[Jim Keenan:]

Thank you, Larry. Good morning and thank you for joining our third quarter earnings call. I will provide you with the business and performance highlights, and then update on our investment activity during the third quarter, as well as an 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 third quarter net investment income was $0.18 per share. Based on the $0.18 per share distribution declared by our Board of Directors, there was approximately 98% distribution coverage for the quarter. We had net portfolio repayments of $4 million for the quarter, which I will talk more about shortly. Net asset value per share increased from $7.56 per share last quarter to $7.66 per share as of September 30, or 1.3% quarter-over-quarter increase. The increase was in large part due to net mark ups on certain legacy positions which have tended to be more volatile given their equity or equity like nature. Our leverage stayed flat at 0.43x relative to the prior quarter. We have ample liquidity of $233 million to support new investment activity and have no debt maturing until 2022. Under our existing share repurchase program during and subsequent to the third quarter, we repurchased approximately 1.3 million shares at an average price of $5.84. As discussed on prior calls, our three core channels for deployment continued to be; one, 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 three, investment 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 five add-ons to its portfolio during the third quarter. As previously announced, Senior Loan Partners refinanced and upsized its credit facility from $200 million to $270 million in July, providing with the total investment capacity of over $400 million. Our investment in Senior Loan Partners is an important part of our business strategy and its underlying investment portfolio is performing very well. Turning to the Company's investment activity during the quarter, we made new investments of approximately $71 million, which were offset by repayments and other exits totaling approximately $75 million for a net $4 million decrease in our portfolio due to investment activity. Our deployments and repayments are detailed in our third quarter earnings release. We increased our net investment in Gordon Brothers Finance Company by $26 million. We also invested in the first lien term loan of United PF Holdings, a new portfolio company which reflects our disciplined approach to credit selection in this market. We saw two portfolio company exits in the third quarter. Additionally, we sold our equity position in CB-HDT, previously known as Hunter Defense Technologies, as the prior quarters mark of approximately $20 million. This marks the successful monetization of yet another legacy equity investment and eliminates some downside volatility related to disposition. With repayment and deployment activity this quarter, we now have 28 companies in our portfolio at a fair market value of approximately $781 million. The weighted average yield of income producing securities at fair market value was 11.2% as of September 30, which is down 25 basis points from the last quarter. From March 6, 2015 when BlackRock assumes responsibility for managing the investment activities of the company to the end of the third quarter, the BlackRock team has deployed $930 million into new investments, of which $335 million has been exited with a realized IRR of 14%. As of September 30, approximately 64% of our current investment portfolio by fair market value is represented by investments deployed by BlackRock. Let me now talk a little bit about our legacy non-core portfolio. U.S. Well, which is a largest position in that part of the book comprises 11% of the Company's total portfolio by fair market value, of which 5% is performing debt and 6% is equity. As previously disclosed, U.S. Well announced a merger agreement with a publicly traded stack which is pending shareholder approval. If the merger is approved then shortly after its completion our U.S. Well debt position is expected to get paid off while creating a path for eventual exit of the equity position. The remaining non-core legacy book consists of performing debt on the one hand and equities and non-performing debt on the other. The performing debt portion represents 21% and the equity and non-performing debt represents 5% of the total portfolio by fair market value. Among some of the watch-list names, Westmoreland's performance declined and the company filed bankruptcy protection in October. We expect the bankruptcy process to be long and complex and it's hard to predict outcomes at this point in time with any degree of certainty. At fair market value our exposure to Westmoreland represents 1.4% of our total portfolio. The increase in AGYs preferred stock fair market value was driven among other things by removal of a minority discount on valuation and the impact of operational improvements at the business. The removal of the minority discount occurred as certain Tennenbaum funds owning AGY preferred stock are now under BlackRock's common advisory. As of September 30, AGY preferred stock is the only investment on non-accrual status, representing 1.3% of our total portfolio at fair market value. We are focused on creating monetization avenues for the remaining non-core book, so as to redeploy into a stable pool of income producing assets. Over the next quarter we expect to gain greater visibility around some of these names, as well as into sustainable earnings power of the portfolio. We expect to share the increased visibility during the future updates. Before I turn the call over to Mike Pungello, for additional details regarding our financial results, I'll note that BlackRock's acquisition of Tennenbaum Capital Partners which closed on August 1, gives the company access to even larger origination network and deal flow. The increase scale and expertise helps us to be a broader solutions provider to our borrowers which enhances both the quality and quantity of the opportunities set. Over to you Mike.

[Mike Pungello:]

Thank you, Jimmy. I'll take a few minutes to review additional, financial and portfolio information for the third quarter of 2018. GAAP net investment income, NII was $12.5 million or approximately $0.18 per share for the three months ended September 30, 2018. Relative to distribution declared of $0.18 per share, our NII distribution coverage was 98% for the quarter. Total investment income for the three months ended September 30, 2018 decreased $1.8 million or 7.7% as compared to the three months ended September 30, 2017. Excluding fee income and other income, total investment income decreased by approximately 9.8% primarily attributable to a decrease in average investment portfolio for the quarter ended September 30, 2018 as compared to the same quarter in 2017. The decrease in portfolio size is primarily due to dispositions during the fourth quarter of 2017 and the second quarter of 2018. The impact of which was partially offset by a higher rate environment. As of September 30, 2018 there was one non-accrual investment position representing approximately 1.7% and 1.8% of total debt and preferred stock investments at fair value and cost respectively. As compared 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 rating at fair market value at September 30, 2018 was 1.31 as compared to 1.23 as of the prior quarter end. Total expenses decreased $2.1 million or 19.8% for the three months ended September 30, 2018 from the comparable period in 2017 primarily due to a decrease in base management fees and interest and credit facility fees. As previously disclosed, we announced the waiver of incentive management fees based on income from March 7, 2017 to December 31, 2018. For the quarter ended September 30, 2018, $2.5 million of incentive management fees based on income earned by our investment advisor have been waived. Through September 30, 2018 we've waived a total of $14.1 million incentive management fees based on income on accumulative basis. During the quarter there was no accrual for incentive management fees based on gains. Net realized loss was $2.2 million for the three months ended September 30, 2018 primarily resulting from the sale of equity investments in CB-HDT Holdings Inc. partially offset by a gain related to Bankruptcy Management Solutions, Inc. Net unrealized depreciation decreased $10.1 million before deferred taxes primarily due to appreciation of portfolio valuation as well as the reversal of previously recognized unrealized depreciation due to disposition. For the three months ended September 30, 2018 unrealized gains and a consolidated taxable subsidiary resulted in an increase to our deferred tax liability of $0.4 million. During the third quarter of 2018 and subsequent to it, we repurchased 1.28 million shares for $7.5 million at an average price of $5.84 per share including brokerage commission. At September 30, 2018 we are in a very strong liquidity position to grow our investment base as we had approximately $233 million of availability for 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 them for their continued hard work as we demonstrate progress in achieving our portfolio objectives. I would also like to thank you for your continued support. This concludes our prepared remarks. Operator, we like to open up the call for questions.

[Operator:]

[Operator Instructions] We'll now take a question from Rick Shane with JPMorgan.

[Rick Shane:]

Just want to clarify on the share buyback. What is the remaining capacity under the authorization following the quarter delayed activity?

[Nik Singhal:]

So as of now, we re-up our share reauthorization program and we have approximately 4.2 million shares available for repurchase.

[Rick Shane:]

And then given the market opportunity in terms of investments and obviously you guys have taken advantage of the attractiveness of repurchasing shares as we move through the quarter you have cited your capacity, there's ultimately opportunity for greater leverage. How do you balance those different objectives?

[Nik Singhal:]

Yes Rick, so look our first and foremost goal is to deploy our shareholder's capital and attractive risk adjusted opportunities. And that as we mentioned several times before that's our investment in Gordon Brothers, our investment in Senior Loan Partners which is our Senior Loan JV, as well as junior capital investments. So that continues to be our focus. I think our share repurchase program serves as a supplement to buy at prices that redeem to be very attractive to provide stability into the stock price at times of dislocation. So I would view that as a supplement to our core investment philosophy.

[Rick Shane:]

It is obviously interesting when companies that are trading at premiums to NAV or premiums to book repurchases are obviously accretive to - can be accretive to income. But in your phase it’s also substantially accretive to NAV and ROE. And so it does actually ultimately enhance your ability to cover and pay the dividend as well?

[Jim Keenan:]

Rick, its Jim Keenan. Completely agree, I think what we do try to balance is the diversification by deploying into different assets also the value to the shareholders and obviously creating a stable dividend and income stream. So we do balance a sense of the attractiveness of being able to buy at a discount and compare that versus the ability to deploy in diversified assets to achieve our goals.

[Operator:]

[Operator Instructions]

[Jim Keenan:]

Thank you, Operator. If there is no further questions, I just like to thank everybody again for the support and look forward to continue to the performance for BKCC. Thanks again.

[Operator:]

And once again that does conclude today's conference. We thank you all for your participation. You many now disconnect.