BlackRock Capital Investment Corporation
Q1 2016 Earnings Call Transcript

Published: 29 Apr 2016

[Operator:]

Good morning. My name is Felicia; I will be the conference facilitator for the BlackRock Capital Investment Corporation First Quarter 2016 Earnings Call. Hosting the call will be Chairman and Chief Executive Officer, Steven F. Sterling; Head of Investments for BlackRock’s U.S. Private Capital Group, Michael J. Zugay; Interim Chief Financial Officer and Treasurer, Donna M. Milia; General Counsel and Corporate Secretary of the Company, Laurence D. Paredes; and Arron C. Kless, Investor Relations and 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] Mr. Paredes, you may begin the conference call.

[Laurence D. Paredes:]

Good morning and welcome to BlackRock Capital Investment Corporation’s first quarter 2016 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 anticipate, 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 posted to our website an Investor Presentation that complements this call. Shortly, Steve 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 March2016 Investor Presentation link in the Presentations section of the Investor Relations page. Thank you. I would now like to turn the call over to Steve Sterling, BlackRock Capital Investment Corporation’s Chairman and Chief Executive Officer, who will provide an update on our quarterly results.

[Steven F. Sterling:]

Thank you, Larry. Good morning, everyone, and thank you for joining us for our first quarter 2016 earnings call. The first quarter of 2016 is the fourth full quarter of BlackRock’s investment management agreement with BlackRock Capital Investment Corporation. In the four quarters under our management, we have undertaken to deliver a process of repositioning our investment portfolio in a way that we believe best serves our client shareholders, including monetizing legacy equity positions, diversifying the portfolio by increasing the number of portfolio companies, and investing in quality directly originated opportunities. Importantly, our origination activity has been sound and experiencing increased productivity. I am particularly pleased with the level of engagement and the tone of our conversations with sponsors and borrowers as these important customers see the promise of BlackRock as a committed, relevant, long-term capital provider to the middle market. Our origination success is reflected in the completion of our second consecutive quarter of nearly $100 million in gross investments. Notably, over the past four quarters our origination activity measured $323 million, representing nearly 30% of our total portfolio and over 184% of debt repayments. Turning to first quarter results, the company’s financial performance was mixed as the positives from our strong origination activity, portfolio construction initiatives and patient deployment met with further portfolio pressure from idiosyncratic developments highlighted in our fourth quarter pertaining to legacy investments that were created prior to BlackRock’s management, team taking the reins. Specifically for the first quarter ended March 31, 2016, reported net investment income calculated on a GAAP basis and net investment income as adjusted were both $0.24 per share. While net investment income as adjusted was up over 11% to the comparable period in 2015, I am disappointed to report that it was down 19% on a sequential basis due to the placement of three legacy investments on nonaccrual including Hunter Defense Technologies, Shoreline Energy and Vertellus Specialties. Absent this event, our net investment income has adjusted would have increased nearly 16%. Nonetheless, as of quarter end run rate net investment income as adjusted was $0.23 per share, which was calculated based on average fee income over the trailing four quarters. Each of these measures in net investment soundly covered shareholder distributions by over 108%. Naturally, these idiosyncratic portfolio events also had a meaningful affect on our NAV, which decreased 7% per share. As shown in our public filing, the fair market value of all nonaccrual investments totaled approximately $78 million, representing in aggregate, 45% of their respective par values. Middle market companies are inherently predisposed to events that may create challenges. The key proposition and capability we have evidenced in the past is our ability to navigate these matters in a manner that protects value for our client shareholders. With moderate net leverage of 0.63 times at quarter end, $154 million of liquidity, and approximately $300 million of capacity under our borrowing base that company maintains a financial flexibility to take advantage of selected investment opportunities while furthering the quality and diversity of our portfolio with a focus on growing stable net investment income. We are steadfast in our determination to protect value through the active management of our investments and are committed to driving measured growth that will strengthen the Company’s distribution paying capacity. Further, we are mindful of capital allocation considerations and have demonstrated our willingness to make prudent decisions, including $12 million of share repurchases during the first quarter. We continue to be constructive on the U.S. economic picture, but as pointed out previously, remain guarded given mild growth in the unusually elevated global risk profile. Our investment posture remains steady, with its focus on companies with durable business models, strong management teams, appropriately capitalized balance sheets and soundly structured investments. Our portfolio construction tilt remains toward more diversity with a strong preference for senior secured risk, which now comprises 75% of our investment portfolio. We will seek to maintain the Company’s moderate net financial leverage to ensure continued flexibility and to support future investments in compelling opportunities. With that, I’d like to now turn the call over to Mike to review our investment activity during the quarter and to provide additional portfolio detail as of quarter end.

[Michael J. Zugay:]

Thank you, Steve. On our last call, we highlighted that in Q4 2015, the middle market was in the state of price discovery and very few new deals have been completed. Additionally, transactions were taking much longer to close due to underwriting uncertainty and the fact that many market participants were sitting on the sidelines. Without the luxury of a lot of data points to reference, we saw spreads widen approximately 100 basis points as the market was clearly dislocated. As we sit today, the tone of the market has turned a bit more positive and there is a feeling of stability. As an example, the average bid price of the S&P U.S. Leveraged Loan Index increased approximately 150 basis points in Q1 2016. Although this indicator does not correlate one to one to the middle market, directionally it helps support the feeling of stabilization and the expectation to see modest tightening of spreads for new issuers. As for the types of deals in the market, generally there are no opportunistic refinancings or dividend-relating financings taking place, which means the market is solely dependent upon new LBO activity and M&A activity relating to existing issuers. The pace of LBO activity was relatively weak in Q1 by historical benchmarks but appears to be picking up, as evidenced by the recent increase in the number of new deals we are seeing from our private equity relationships. In this environment, we have been highly selective on credit quality and successful in driving better terms, both economic and structural, as COG deals that provide certainty are the preferred path of the private equity community. On the heels of $98 million of gross originations in the Q4 2015 we had another strong quarter of investing activity in Q1 2016 with another $98 million if gross originations in the quarter. Our success in originations is due to our team’s strong sourcing capabilities as we continue to see attractive financing opportunities from a variety of sourcing channels. Our new investments were primarily centered around three new names to the portfolio – $37.5 million of L1000 second lien notes in Wink Holdco Inc., also known as Superior Vision, an independent eye health and vision care insurance company.$25 billion of L950 second-lien term loan to Tri-Anim Health Services Inc. and certain of its affiliates, commonly known as Sarnova. Sarnova is a distributor of various emergency preparedness products to first responders and other healthcare professionals. And $15 million of L925 second-lien term loan and 1.5 million of common equity in Loar Group, a niche aerospace and defense component manufacturing business. Additionally, we made a $14.5 million investment of L1100 subordinated notes in Gordon Brothers Finance Company, an existing portfolio company, to help support its growth initiatives. All of these investments have a 1% LIBOR floor. Our gross originations were only partially offset by approximately $33 million of prepayments, which primarily consisted of two transactions, a $25 million repayment of our entire position in Apco and a partial pay-down of just over $6 million in K2 Pure Solutions, which was made in conjunction with a third party new money investment into the company that significantly de-risked our position. The weighted average yield on our newly funded investments in the quarter was 10.9%, which is above the 10.3% yield for all prepayments during the quarter for all prepayments for the quarter. Two investments during the quarter that in particular highlight our sourcing, underwriting, and structuring capabilities are Superior Vision and Loar Group. Superior was a deal with a new sponsor for us. We are the second-lien admin agent. We led the documentation process and structured the tranche in a manner that improved the credit terms for the second lien-investors. From the sponsors’ perspective, they had certainty of funds in an otherwise dislocated market and viewed us as a true partner, as evidenced in our status as a board observer. With regard to Loar Group, we partnered with a sponsor that we have previously worked with on several deals in the past. We were agent on the second lien, led the negotiation of terms, and worked with another investor to club the opportunity. We sized our initial exposure to scale with the company as they love to grow organically and via acquisitions. With all of our new investments you will notice that the size of our investments align with our disciplined approach to portfolio construction of greater diversity. Importantly, we continue to book investments that in many cases provide us the ability to agent or tranche and/or to lead the negotiations and legal documentation of the investment. Moving to nonaccruals. As Steve mentioned earlier, Hunter Defense, Shoreline, and Vertellus were the three legacy investments placed on nonaccrual during the period. Combined with the two non-accruals from Q4 2015, non-accruals now represent 6.9% of the investment portfolio at fair market value. Although we are disappointed with these developments, we are actively involved in these challenged situations. In some cases, we might choose to support challenged borrowers with a new money investment. We will evaluate each situation based on the facts and circumstances surrounding that particular borrower. We believe our strong track record, team capabilities, and access to resources will enable us to maximize value for our client shareholders as we vigorously pursue available options in our effort to achieve the highest recoveries. Specifically, we are actively involved in discussions with the various stakeholders of Hunter Defense. As agent for the second-lien tranche, we are taking a leadership role in an attempt to work through the evolving situation, which is unfolding in real time. With regard to Shoreline, we have engaged a team of petroleum engineers known to us through BlackRock’s distressed energy investment team to help us better understand the situation and to provide an independent assessment. On Vertellus, as a member of the ad hoc committee of the investor group we are involved in discussions with the borrower to execute on a path forward that maximizes value for the investors. With that, I would like to turn the call over to Donna for some additional details regarding our financial results and portfolio statistics.

[Donna M. Milia:]

Thank you, Mike. I will take a few minutes to review additional financial and portfolio information for the first quarter of 2016. For the first quarter 2016, GAAP net investment income and net investment income as adjusted were both $17.5 million, or $0.24 per share. This represents an increase of more than 19% on a GAAP basis and more than 11% on an as-adjusted basis when compared to the first quarter of 2015. The growth in net investment income both on a GAAP and an as-adjusted basis was primarily driven by a decrease in borrowing costs by approximately $1.4 million, or 23%, in the current quarter compared to last year’s quarterly average. And a decrease in operating expenses since Q2 of 2015, resulting in an annualized $1.6 million of savings to the Company. In the first quarter, we refinanced our $158 million 6.5% senior secured notes using proceeds from our $405 million revolving credit facility and then successfully amended and restated our credit facility. The amendment increased the commitment amount by $35 million, extended the maturity date to February 2021, and reduced pricing by up to 50 basis points to LIBOR plus a margin of either 1.75% or 2%, depending on a ratio of the borrowing base to committed secured indebtedness. 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, 2016. Furthermore, no incentive management fees based on income were earned and payable for the quarter as the distributable income amount was reduced below the hurdle by the net unrealized depreciation in the portfolio for the trailing four-quarter period. Relative to distributions declared of $0.21 per share, our NII distribution coverage was 114% for the quarter. As of quarter end, our run rate net investment income as adjusted based on average fee income over the trailing 12-month period is approximately $0.23 per share, resulting in expected distribution coverage of approximately 108%. The composition of our portfolio remained fairly stable in the first quarter. Equities remained unchanged at 11% compared to year end. Secured debt increased 1 percentage point from year end to 75%, while unsecured and subordinated debt decreased 1 percentage point from year end to 14%. During the first quarter, net unrealized depreciation increased $55.7 million, bringing total balance sheet unrealized depreciation to $94.2 million. Gross unrealized depreciation of $64.9 million was slightly offset by $10.5 million of gross unrealized appreciation due to changes in portfolio valuations during the quarter. At March 31, we had total liquidity of $154.5 million, consisting of $10.5 million in cash and $144 million of availability under our amended and restated revolving credit facility. At March 31, our net leverage stood at 0.63 times and we were in compliance with regulatory coverage requirements, with an asset coverage ratio of 255% and all financial covenants under our debt agreements. During the first quarter, we purchased 1.36 million shares of our common stock on the open market for approximately $12 million, including brokerage commissions, at an average price of $8.82 per share. Repurchases during the first quarter of 2016 accreted over $0.02 per share to the Company’s net asset value per share and the cumulative repurchases in the first full year under BlackRock’s management represented over 60% of total share repurchase activity on a dollar basis since inception. With that, I would like to turn the call back to Steve.

[Steven F. Sterling:]

Thank you, Donna. Our strong origination activity in the first quarter is a testament to the hard work and growing success our team has begun to evidence. As we continue the process of repositioning the investment portfolio, driving increased quality and diversity while focusing on dampening volatility, we remain steadfast in our determination to protect value through the active management of our investments and are committed to driving measured growth that will strengthen the Company’s distribution-paying capacity. Middle market companies are naturally predisposed to events that may create challenge. Our team works with all available resources to navigate these challenges as we seek to protect the capital of our client shareholders. With quarter-end net leverage at 6.63 times, a run rate distribution coverage ratio of 108%, $154 million available liquidity and approximately $300 million of capacity under our borrowing base. The Company is positioned to both manage its current investments and take advantage of selected new investment opportunities. In closing, I’d like to take a moment to thank you, our client shareholders for your support and our team for their efforts. Operator, you may now open the call for questions.

[Operator:]

Thank you. [Operator Instructions] We will first with Jonathan Bock of Wells Fargo Securities.

[Jonathan Bock:]

Good morning, and thank you for taking my question. Steve, maybe a discussion on Hunter and Shoreline. The question isn’t that money’s lost or there is an unrealized write-down – that happens. It’s the speed at which the loss is incurred. So for example, you have – typically in BDC space it’s a declining glide path for investments that experience write-downs and then go nonaccrual as opposed to 90 to 37 or lower. So would you be able, in both of those situations – Hunter Defense maybe specifically, but Shoreline, oil’s been low for a while. Walk us through why there was a sudden impact to the valuation this quarter as opposed to the last one. They were marked at levels that should not have raised concerns.

[Steven F. Sterling:]

Yes. Jonathan, it’s Steve. Let me provide some remarks and then Mike is welcome to jump in it as well. Look, I think in both situations it’s a reflection of sort of real-time information that we are receiving, and/or events, as it pertains to the companies. With respect to Shoreline, as we have stated in previous calls, that’s a company that we’ve always perceived in a fairly good way in terms of their positioning around their reserve base. And in their circumstance we see the development of just overall challenges associated with production, which caused sort of events associated with the company and how that shifts around available liquidity as structured in a typical borrowing base fashion for companies of that nature. So it’s very much idiosyncratic; it’s very much specific to the company. So can’t really go much further than that just given the propriety of information as pertains to the company. But like any oil and gas company, and having trafficked in oil and gas for many years, back in the 1990s, these things can happen and they can play out in a lot of different ways. But nonetheless, you’re in an environment for which there’s more uncertainty associated with valuations and borrowing basis and certainly companies can encounter issues in their various drill programs. So would leave it at that. With respect to Hunter, it’s just the development of real-time information pertaining to the company that has caused us to take a position in terms of moving the company through a process that we would seek to ultimately maximize recovery through some form of reorganization of the company. So very, very unfortunate; nobody could be more disappointed than myself that these situations have developed in the way that they did

[Jonathan Bock:]

Okay, I appreciate that. And then another question just relates to – going forward, I think that the $55 million kind of write-down that we experienced is likely to ensure that you’re not going to receive an incentive fee this quarter. Of course, things can always bounce back, but let’s expect that it’s just flat and the portfolio doesn’t change significantly. We understand that that’s obviously going to allow investors to claw a bit of that back this year through the form of no incentive paid and the ability to earn greater earnings as a result of not paying that NOI incentive fee, and that’s a benefit. Yet, if you fast forward one more year, we’re going to lose that additional incentive fee look-back protection. And I’m curious, Steve – when you consider the shareholder benefits that folks are receiving in light of these disappointments; and granted, they do happen – but what are your thoughts on kind of a market fee structure and whether or not including unrealized losses is something that maybe is a consideration for yourself in the future?

[Steven F. Sterling:]

Good question, fair question. Look, the fee structure that currently exists is one in which – was established at the time of change of control of the investment and management agreements, and one that was determined by the predecessor management. I think we will always evaluate where fee structures properly ought to be positioned and be responsive to what we think is the appropriate fiduciary construct, if you will. I don’t want to foreshadow with you any specific change, but certainly philosophically we would always reconsider as to whether or not it is the proper fee structure – again, against the principles of fiduciary relationships that you have. So we will monitor that and as we move through the year and get closer to the time at which there’s the rollover on the fee structure, we will evaluate whether or not that really sort of the proper structure here.

[Jonathan Bock:]

Makes total sense. So in terms of leverage capacity, now at 0.64, and when we think about your existing equity portfolio with the potentials for ups and downs that are normal in the market, how do we look at your current capital availability as well as the ability to churn out of some of those equity investments and grow NOI? Because you see typically managers, while they might say a 0.75 is a target, in a period where we experience heightened volatility we’re less apt to see that target and likely going to run below it because of potential write-downs to the portfolio like we’ve experienced here. What do you think of your true kind of capital or capital deployment capacity right now at BlackRock as it relates to leverage?

[Steven F. Sterling:]

Yes, good question. There are a number of positions in the portfolio where, as I’ve stated in the past, we’re focused on monetization. It pertains to sort of legacy equity positions. We’re very committed to that coming to pass and I think there’s some opportunities, certainly, for realization there. We don’t necessarily control fully those processes, but nonetheless believe that our influence is without question reflected there. So I think that will enhance dry powder, if you will, or investable capacity. Absent that, I’m a fairly conservative guy. I think that’s evidenced in all of the conversations we’ve had in the various calls. And in recognition that we’re working through the challenges associated with some of these legacy assets and the chunkiness of them, I’m going to be pretty darn prudent as to where I take leverage, and the vehicle. So in that context, I think what I have said historically in terms of the leverage ranges remains intact. We’ve always been in the sort of 1.6 to 1.7, so call it the midpoint, 1.65. I suspect that we’ll continue to operate in that sort of zone, if you will. And you can do the math as to what that implies in terms of investable capacity. That doesn’t mean – that’s on an incremental basis. That doesn’t mean that the deployment of capital in any given quarter won’t be more robust than what might be otherwise implied by that because, as I say, naturally we have opportunities for continued rotation in the portfolio from legacy assets to new investments that we see as quite viable and will take advantage of in the coming quarters.

[Jonathan Bock:]

Got it. And then just the last one and I have to ask just because it’s – we saw the potential write-down. So here we look at Oxford Mining, I think it’s a coal company, with a fairly decent mark, marked high. And originated in 4Q 2014, so kind of prior the administration change. And what we’ve noticed is that all industry bellwethers, at least in coal, Peabody, et cetera, are fairly distressed. So would you just give us some comfort there as it relates to the mark or the potential for downside, only because what folks hear about in mining typically isn’t a good news story?

[Mike Zugay:]

Yes, John, it’s Mike here. For Oxford, the company is performing on plan, and unlike other coal producers these guys are collocated with on-site with their customers, which are mostly coal-fired power plants. So they do have a leg up on their price, a little bit more competitive than other participants in the market, and they’re necessary for those plants to operate. So we are seeing stability in that company despite the broader headwinds facing the industry as we sit today.

[Jonathan Bock:]

Okay, great. Thank you so much.

[Steven S. Sterling:]

Thank you.

[Michael J. Zugay:]

Thank you.

[Operator:]

We will go next to Arren Cyganovich of D. A. Davidson.

[Arren Cyganovich:]

Thanks. I guess along the lines of John’s questions, I’d probably be most concerned about future risk of legacy investments and potential mark-downs there – or issues for the portfolio. Can you talk a little bit about the remaining pieces, and if there’s any on your particular watch list right now? If you just look at U.S. Wells, which everybody’s been talking about for many quarters, is one that kind of stands out given its size. And also there’s another one which is escaping my vision right now; I’ll come back to that one. But maybe just talk about your watch list with associated – I’m sorry, SVP Worldwide is one that’s kind of marked down relatively low.

[Steven S. Sterling:]

Yes, happy to address that. As I noted in the earnings call prepared comments, if you look at the nonaccrual exposure at NAV level, it’s $78 million in the aggregate, representing 45% of the par value of the underlying instruments. So that kind of gives you some sense of order of magnitude of exposure that’s there in that sort of bucket of names. That being said, obviously when you’re dealing with restructuring situations the dispersion of outcomes can be quite broad. The good news is we’re at a very front row seat in each of those in driving processes; or certainly a very strong voice around that. But at the end of the day, the complexity of restructuring events is such that it’s not one where you can put absolute confidence in what that outcome really looks like; you can just work very hard to protect value. So when you look at the NAV of those assets, that gives you some sort of sense of potential exposure that exists in those names. With respect to the other names, we feel very good about just overall where our book is marked. Obviously, we use a third party valuation firm; they have the exact same information we have. And so they themselves drive perceptions of value and risk as reflected in price as we did as well. So situations can develop during periods that will drive those changes, as we’ve experienced here in this first quarter, to our own frustration with that. But that’s the circumstance there. The chunkiness around a couple of the names in there – certainly we pay attention to those, we always do. Fundamentally, those are reasonably sound businesses. So we feel, I think, over all good about the businesses themselves but I’ll let Mike speak to the specific names that you’ve highlighted.

[Michael J. Zugay:]

Yes, sure. Hi, Arren, it’s Mike here. With regards to SVP, putting the marks aside, just talking about the business, the company has a new CEO and a management team. We have much better access to reporting financial information and board-level information coming out of the company. So from a flow of information we’re definitely in a better place than we were historically. And we’re comfortable with the new CEO’s plan and we’re confident he can execute on it, but that’s yet to be determined. So for that one in particular, that’s kind of the state of play in the business operations in the company. With regard to U.S. Well, looking at what happened with the mark, one of the key events for that company was really a renegotiation of a contract with one of their key customers. And what that did was – it was a tradeoff between extending that contract and maybe some near-term utilization of the fleets that were previously under contract. So there is a tradeoff that took place and that tradeoff resulted in a decrease in the current year forecast, which led to the mark on that position. So from an underlying business perspective, there hasn’t been much changed other than that contract. We still are confident in management’s ability to manage through a really difficult pricing environment. They’ve done a good job doing that and we do still believe that the clean fleet technology that they have, and that proprietary technology, is a differentiator as they go to market. So hopefully that answers your questions on those two businesses.

[Arren Cyganovich:]

That’s helpful; thank you. And then just secondly, the run rate NII got in [indiscernible] in that guidance, but NII estimate that you have – is that inclusive of any incentive fee expense coming out, or is that assuming that you would have zeros coming through on that going forward?

[Michael J. Zugay:]

That extends zero on incentive fee.

[Arren Cyganovich:]

All right; thank you.

[Michael J. Zugay:]

Yes.

[Steven S. Sterling:]

Thank you.

[Operator:]

We will go next to Ryan Lynch of KBW.

[Ryan Lynch:]

Hey, good morning and thank you for taking my questions. First, could you just maybe give a little more background on Vertellus, maybe a little background on its business model and what was specifically driving the destruction in that company this quarter?

[Steven S. Sterling:]

Yes. We have to be a little bit careful, obviously, because it’s not public information. But just suffice it to say it’s a business that over all has got one component that is orientated to specialty chemicals and another component of it that’s more commodity in nature. And the characteristics there are one in which, as you know, global commodities have come under substantive pressure and they’re not absolved of that vulnerability on that portion of their business. Over all we like the business; we think it’s a fine business. It’s just you’re dealing with macro commodity-type events that’s adversely affected that side of their business. So it’s pretty localized in that regard.

[Ryan Lynch:]

Okay. And then moving to Hunter, I was just looking up kind of the background; it says they do fully integrated deployable solutions, including shelters, generators, heaters, and etc., to U.S. military and some private customers. Are any of their private customers in the oil and gas industry, and is that causing any pressure on that company?

[Michael J. Zugay:]

No, most of their customers are military customers, as you noted, and their international customers are folks in more war-related areas or places where there are refugees and things like that. To my knowledge, I don’t think they have exposure to the oil patch.

[Ryan Lynch:]

Okay, good. In the non-accruals this quarter as you mentioned these are all legacy non-accruals that were put on by the previous management team, but also in your guys press release you mention about 30% of the current portfolio was originated by the current management team that’s in there now. So that means about 70% of the portfolio of BlackRock today is originated by the previous management team. So how should investors be thinking about the stock today when the majority of the current portfolio in BlackRock today was underwritten by the previous management team, and as we’ve seen today with these big nonaccruals, that portfolio is not performing

[Steven F. Sterling:]

Yes. So with respect to the nonaccruals, all legacy portfolio names, there are no issues pertaining to any of the newly originated investments. So we feel good about where – the performances of all those names after initially investing and don’t see any issues on the horizon there as it pertains to those names. With respect to the legacy portfolio, these are idiosyncratic events. I wouldn’t characterize it as a systemic event, which would be the focus of your question. As I think we’ve attempted to do is to provide you with an appropriate level of transparency, recognizing our own limitations from a public/private point of view on the individual names. But I don’t think you should extrapolate from that a systemic-type conclusion. It’s very company-specific.

[Ryan Lynch:]

Okay. And then, as I just kind of look at your new originations over the last couple of quarters, a lot of other BDCs have been moving up the capital structure as it feels like a credit cycle may be turning. Nobody knows when, but it feels like it’s going to be sooner rather than later. I see none of the dollars that you guys invested over the previous two quarters have been in first-lien loans. So can you just give us a little more color around is that a conscious decision to still go a little deeper in the capital structure, second lien or subdebt, or is that basically what the market’s giving you?

[Steven F. Sterling:]

Look, when we invest, and as I’ve shared in the past, instruments are certainly one consideration of risk but they’re not necessarily the determining consideration. It really comes back to how you think about the fundamental business model which the Company is executing on, and that will really drive value in the outset. But the sustainability of value through cycles, I think if you look back over the four quarters that I have participated in managing the Company and these calls, I have, on a constant basis, reflected our approach to investing as being very, very bottoms-up and fundamental in nature. So we will tilt instruments that we think optimize risk return, 75% of our portfolio is in secured risk-type exposure. I would also note to you that just because somebody says it’s in first lien as an instrument, one has to be guarded about that because not all first liens are created equal. There are examples in predecessor disclosures for which we have characterized something as second lien when in fact others have characterized it as first lien because it’s a uni-tranche. And we are taking the first loss as opposed to exposure on the whole of the tranche. So we have – in good keeping with BlackRock values, take a relatively conservative position around the characterization of things to drive confidence within the investor base as to our information disclosures. So we focus around companies, we focus on instruments that we think optimize risk return. And finally, as I was going to comment on, is my view from an economic perspective which shapes the kinds of things that we’re going to invest in, and the characterization of our portfolio and leverage is a reflection of an economic picture that we see as a sustained level of low growth and high existential risk globally that cause us, then, to select names in a way with a high degree of prudence that if, in fact, we find ourselves in unfortunate circumstances from a macro economic perspective in the U.S. of a rollover, that in fact we feel well protected. In every investment we do we look at it from the bottom up through a restructuring event with a view toward a change of control and how that would likely play out. So our disciplines there are very deep and adhered to all the way through our investing.

[Ryan Lynch:]

Okay. That’s all the questions from me.

[Steven F. Sterling:]

Great thank you.

[Michael J. Zugay:]

Thanks Ryan.

[Operator:]

[Operator Instructions] And I’ll turn the conference back to management for any additional remarks.

[Steven F. Sterling:]

Great. Thank you operator. Thanks all of you for your participation in the call. It is a disappointing result but as I stated, we are focused on the totality of our portfolio. We’re taking a leadership position, drawing upon the competency and the expertise and the skills of our team as well as resources that we can draw upon in the BlackRock platform to inform and influence the circumstances that we are confronted with relative to the identified legacy portfolio names. So with that, we appreciate the support and we look forward to a follow-up call with many of the analysts as well as our second quarter earnings call. Have a good day; thank you.

[Operator:]

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