BlackRock Capital Investment Corporation
Q2 2015 Earnings Call Transcript

Published: 30 Jul 2015

[Operator:]

Good afternoon. My name is Ginger, and I will be your conference facilitator today for the BlackRock Capital Investment Corporation’s Q1 2015 Earnings Call. Hosting the call will be Chairman and Chief Executive Officer, Steven S. Sterling; Chief Financial Officer, and Treasurer, Corinne D. Pankovcin; and General Counsel and Corporate Secretary of the Company, Laurence D. Paredes and Aaron C. Kless, Investor Relations and Strategy. Lines have been placed on mute. After the speakers’ complete their updates, they will open the line for a question-and-answer session. [Operator Instructions]. Thank you. Mr. Paredes, will begin with a review of general conference call information.

[Laurence Paredes:]

Good afternoon and welcome to BlackRock Capital Investment Corporation’s second quarter 2015 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, believe, 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, that we have posted to our website an Investor Presentation that complements this call. Shortly, Steve 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 July 2015 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.

[Steve Sterling:]

Thank you, Larry. Good morning everyone and thank you for joining us for second quarterly earnings call. We are pleased to report continuous strong operating performance for the second quarter 2015, with GAAP net investment income in earnings per share of $0.24 and $0.20 respectively, generally in line with our expectations. Run rate, net investment income as of quarter was $0.23 per share, as adjusted and excluding fee income. Actual in run rate distribution covered for the period was 107% and 109% respectively, which on as adjust basis of a seven percentage point increase over the first quarter. I am pleased to report that the first full quarter under BlackRock’s management, we have made significant strides of our strategic objectives of risk return profile portfolio strengthening our distribution paying capacity, and maximizing the total return to our shareholders. In the quarter, we improved the risk return profile portfolio into the sale of 63%, of our total equity positions. We sold our three largest equity positions for 161 million and recognized 131 million of net realized gains in the quarter. Total sales were transacted at about 3.6% discount to the March 31, 2015 evaluations, which was more than offset by annualized savings in management fees and marginal financing costs. At quarter end, equities at fair market value now represent 9.8% of our total portfolio, down to 20.7% in the prior quarter. We remain comfortable with our remaining equity positions of which 80% were comprised of portfolio companies, Gordon Brothers finance, bankruptcy management solutions in U.S. Well Services. As a result of the equity monetization, our net leverage as of quarter end was 0.33 times, down from 0.53 times in the prior quarter. This low leverage in earnings power of our investment portfolio has positioned us well to be patient and disciplined in deploying client-shareholder capital has strengthened our distribution paying capacity. We believe we are in excellent position for the second half of 2015 and beyond which I’ll discuss in detail later in the call. In addition, our Board has amended our share repurchase program, increasing by 40%, the number of shares authorize for repurchase for a total of 4 million shares through June 30, 2015. This increase in share repurchase program is an important part of our outburst to capital allocation and we believe it enforces the ability to create value for client-shareholders in the long-term. Before I provide more details on our second quarter results and review our portfolio activity, I’d first like to discuss market conditions. Total leverage loan volume including broadly syndicated loans in the middle market increased in the second quarter to an estimated 135 million from 94 million in the first quarter of 2015. Despite this sequential increase, second quarter new issue volume was down 15% versus the second quarter 2014, and down 30% for the first half year-over-year. In addition, private equity backed their share of leverage loan volume is at a six year loan, up 43%, down from 54% last year. LBO loans as a share of overall leverage loan volume remains challenged by both regulatory pressure and historically high purchase price multiples, allowing strategic buyers to prevail. Global factors causing volatility including Greece, Iran in the markets sell off in China as well as factors close to home, including modest U.S. growth rates, in the anticipation of rising interest rates, volatility and market structure[ph] more likely in the coming months ahead. Such volatility may use future -- activity levels but may give rise to more attractive non-[indiscernible] investment opportunities that provide appropriate risk adjusted returns for our client shareholders and allow us to continue to grow. In light of current market conditions, and our expectations for the second half of 2015, our intent remains disciplined in our investment process. Proactive immunity in underperforming situations, imprudent in regards to portfolio construction and our financial leverage. It’s the earnings power of our investment portfolio forces the ability to be patient with deployment of client shareholder capital. I would now like to turn the call to second quarter highlights. Our portfolio has generated our whole investment income of 32.8 million or $0.44 per share during the period, of which about 94% was derived in interest and dividend income. These results represent about a 3% decrease in total investment income over the comparable 2014 period. Excluding fee income however, total investment income grew to 10%. Net investment income totaled $18.2 million or $0.24 per share during the quarter, as compared to $13.4 million or $0.22 per share in the corresponding 2014 quarter, representing approximately 11% growth rate on a year-over-year basis, with the improvement largely driven by decline in incentive management fees. At June 30, 2015, our investment portfolio and share market value totaled 1.1 billion, representing approximately 100% cost. Relative to December 31, 2014, this represents $173 million decrease of investments at fair value which is attributed to equity sales as the debt portion of our portfolio, remain relatively unchanged at just under $1 million. At June 30, 2015, 68% of our debt portfolio was floating rate, of which 91% was subject to a LIBOR floor. Now I’ll spend a few moments discussing portfolio composition. The GAAP related portion of the investment portfolio remains recently diversified cost sectors and investments. Specifically, no one sector exceeds 12% of the portfolio. Our mix of instruments continues to buy senior secured loans having increased by 10 percentage points to 63% from December 31, 2014. As of quarter end, our energy portfolio represented 121 million to fair market value or 11.2% of our portfolio. Of these investments, 62% are in first lien senior secured positions as it’s comprised of four[ph] companies. In the America, the Gulf resources were both oil focused in the companies operating in the line of East Texas. Shoreline is a gas focused producer operating primarily along the Louisiana Gulf Coast. Finally, U.S. Well is an oil fields services provider operating pressure pumping fleets. And the America continues to perform to plan and generate attractive economics on its acreage despite the current oil price environment. New – operating in the same areas in the America but earlier in Australian program, has modified capital plan to better see the current oil price environment. Shoreline’s developed position on the Gulf Coast is predominantly gas and continues to perform as plan and generate target returns. With U.S. Well the value of our peak due diligence has proven out as the company has continue to expand strong demand and high utilization with a differentiated product offering. As a portfolio, our energy investments continue to perform despite the challenging price environment. We remain vigilant however, with respect to each of these investments. I would also like to provide a brief summary of one of the largest investments in our portfolio, Gordon Brothers Finance Company. At June 30, 2015, Gordon Brothers Finance Company had total assets of 298.5 million. Total revenue for the three and the six months ended June 30, 2015, were 6.6 million and 12.7 million respectively. Net loss for the three and six months ended June 30, 2015 was 1 million and 2.2 million respectively. After given effect of organizational costs, [indiscernible] and changes in unrealized foreign currency of 1.1 million and 2.1 million because of three and six months ended June 30, 2015, the company had net income of 44,000 and a net loss of 108,000 respectively. Net new investments excluding the effects of equity sales totaled 13 million reflecting a continuation from relatively weak new investment opportunities. Overall activity levels were elevated relative to Q1 with total yields reviewed during the quarter up over 30% versus the prior quarter. This increase new deal activity has continued at the end of the second quarter. Across our portfolio, quality remains stable with no investments on non-accrual. During the period, the company recorded net cash proceeds from investment dispositions at 105 million of which 160.9 million was from equity proceeds. These flows were a result of investments of 90.3 million in sales, repayments and restructuring of 238.3 million. During the quarter, our [indiscernible] investment was a $20 million car, 9% first lien term loans for Liberty Tire Recycling. Liberty Tire Recycling the leading scrap tire collector and recycler in North America, with a one-third U.S. market share at top share in Canada. The company has a national footprint and a competitive client equipment base, the result of an extensive increase in capital investment program which we believe enhances the business and our credit. Additionally, we made several add-on investments through existing portfolio companies. Our exit investments included equity positions in Penton Business Media Holdings, -- Financial Corporation, and USI Senior Holdings Inc. all of which were exited at price equal or slightly below as of March 31, 2015 evaluation. Some detail on our three equity sales, we sold our equity ownership at Penton, the largest independent business to business communications company in United States, generating net proceeds of 70.2 million resulting in a 61.1 million realized gain. We sold our entire common and preferred stock holdings in Financial, the financial services company handling the under bank to Hispanic community, in more than 160 locations across five states, for an aggregate proceeds of 30.7 million, resulting in a realized gains of 18.4 million. We sold our entire investment in the common stock of USI, the largest independent installation sub-contractor in the U.S., generating net proceeds of 60 million, resulting in a 51 million realized gains. We are also entitled to future value in our prior common stock holdings upon its sale of the company within a certain time frame and price range. We continue to hold that preferred equity stakes in USI. We continue to focus our efforts on improving our risk reserve profile, increasing our net investment income by making improved net investment decisions and by reducing our equity holdings, we expect further equity sales in the future as we continue to evaluate ways to maximize the value of our portfolio. I would like to now turn the call over to Corinne for some additional details regarding second quarter financial and portfolio results.

[Corinne Pankovcin:]

Thank you, Steven. Hello everyone. I will now take a few moments to review some of the other details of our 2015 second quarter financial information. For the three months ended June 30, 2015, our basic earnings per share were $0.20 and our GAAP net investment income was $0.24 per share and $0.23 per share on an as adjusted basis. While total share market value of the portfolio declined by approximately 12% of the quarter, in light of the equity sales through the debt portion of the portfolio remained relatively stable, increasing approximately 1% for the period. The share market value of our equities as a percentage of NAV, declined to 14% at June 30th, from 32% at March 31st. The weighted average yields of debt and income producing equity securities in our portfolio at their current cost basis remains unchanged at 11.5% at June 30, 2015, compared to the prior quarter. The weighted average yields on our senior secured loans at the current cost basis also remained unchanged at 11.1%. Our average investment rating was relatively unchanged at 1.31 as compared to 1.32 for the prior period, as we believe the overall credit quality of our portfolio continues to remain strong. In addition, this quarter we aligned all of our industry classifications to Moody’s 35 industry category. This has resulted in some minor reclassifications which can be found at footnote 5 of our June 30th Form 10-Q. The composition of our debt portfolio shifted toward more senior loans in the second quarter. Our portfolio composition of senior secured loans increased eight percentage point to 63% during the quarter and 11 percentage point over the last 12 months from 52% at June 30, 2014. The portion of our portfolio invested in senior secured notes remain unchanged at 8%, unsecured or subordinated debt securities increased three percentage points to 19% during the quarter as a result of the decrease in the size of our overall portfolio primarily from equity --. At June 30th, we had approximately 304 million in debt outstanding and 56 million in cash and cash equivalents, resulting in net leverage of 0.33 times adjusted for available cash, receivables for investments sold and payables for investments purchased as compared to 0.53 times in the prior quarter. Comparing the full year 2014 to the six months ended June 30, 2015, our weighted average cost of debt decrease 26 basis points to 4.96%. Our liquidity position was 455 million at period end, subject to leverage and borrowing base restriction as compared to 277 million at March 31, 2015. Furthermore, our asset coverage ratio was 353% at period end. With that, I would like to turn the call back to Steve.

[Steve Sterling:]

Thank you, Corinne. While still early in our transition, we continue to expand our efforts in leveraging the breadth and depth of BlackRock. We continue to see progress in harnessing the power of the platform. Our investment decision process has strengthened, thanks to increased access to research, information, management teams, market players and customers. Our opportunity has broadened by direct deal referrals and [indiscernible] trust platforms. We believe that in the coming quarters, BlackRock resources brand and reputation will only further enhance our ability to create value for our client shareholders. In the first full quarter in the BlackRock’s management, we have made significant strides towards strategic objectives of enhancing our risk return profile to portfolio, strengthening our distribution paying capacity and maximizing the total returns to our client shareholders. We achieved our stated goal of monetizing the non-earning equity assets to 9.8% of our portfolio. Our run rate NII per share were $0.23 per share as adjusted, excluding any fee income provides a cushion for our stated distribution or $0.21 per share and our net leverage is low at 0.33 times. Our increased share buyback program is an important part of our capital allocation and we believe it forges the ability to create value for client shareholders over the long-term. As we think about distributions for the balance of 2015 and beyond, we have set the distribution level and we believe it takes into account the rates available for the more conservative types of investments and we’re comfortable with today’s environment. In closing, I’d like to take this opportunity to thank our client and shareholders for their support, our teams for all their efforts, and thank you for joining the call today. Ginger, you may now open the call for questions.

[Operator:]

[Operator Instructions]. Your first question comes from Greg Mason from KBW.

[Greg Mason:]

Great. Good morning guys. Congrats on monetizing large percentage of the equity investments. I’ve got a bunch of questions but I’ll ask two and then hop back in the queue. First, on the kind of the amount of new deals that you’re seeing in the pipeline, will you talk about your market overall? I kind of sensed it was very slow and you expected it to be slow but then you talked about some of the opportunities within the platform and pipeline is up 30%. So, can you just give us your views on what BlackRock is going to be able to see in the second half of this year and then your thoughts about investment opportunities?

[Steve Sterling:]

Sure. I think – good morning, Greg. I think with respect to just the pace of new investment activity, overall activity as pointed out, was meaningfully higher during the second quarter relative to our first quarter. And we’ve seen that momentum carry forward into our third quarter. During the second quarter, as noted, we reviewed investments rose about 30% may be touch over that which interestingly is I went back to the data is the highest level in any given quarter for the last five quarters, so very meaningful step up. Our sourcing intensity certainly has improved demonstrably as indicated by these numbers. Having said that though, we do remain focused on elevating the activity as we move forward, but importantly over time strengthening the overall diversity of our sourcing channels. So, we feel good about where our activity is for the moment which context of the market, we feel good about the early signs of impact relative to BlackRock platform and its generating ideas. As pointed out as an example, BlackRock global capital markets team which is the legacy business has done a fantastic job generating price investment ideas for us. And I expect us to grow over time to kind of put some context around that since April, we’ve probably seen over 20 investment ideas, most of these coming in the June-July timeframe as we’re getting our likes[ph] under us driving that kind of activity in that relationship. So the notion of momentum relative to source of ideas, feels as if that’s certain building. The thing I do want to be cautious about here in the – clear on, and that is we’ve deployed capital, call the opportunity is not support [indiscernible]. And as you know, and others and this is the first quarter, we as a firm, BlackRock made decision to enter this business with a view that is very long term in nature. We’re looking to build a brand and reputation in the sector and in no way we’ll trade new term success and deployment volume to marginal investment – we absolutely must be convicted in the things that we are doing.

[Greg Mason:]

Great. And then one question on the target yields on new investments, Liberty Tire with a 9% coupon, what is your thought process in terms of the yields that you want to accept on new investments relative to what the 11.5% portfolio yield you got right now?

[Steve Sterling:]

Greg, good question. Look, I think over the longer time, we are focusing on a 10% plus ROE and to achieve that, we are certainly going to need to be focused on more than 10% asset yields. And in case of Liberty Tire certainly we would anticipate to achieve that when taken into consideration of the LIBOR floor associated with that investment. This is a need over investments will fit into that category obviously it’s a risk adjusted return consideration and we’ll make a prudent decision of what we think is more sensible for our client capital. So, again, 10% ROE is a target bogie, that can drive us to asset yield and certainly obviously need to be a 10% plus to support that objective.

[Greg Mason:]

Great. Thank you guys.

[Operator:]

Your next question comes from David Chiaverini from Cantor Fitzgerald.

[David Chiaverini:]

Thanks. Good morning guys. Couple of questions for you, so, regarding capital management, so this is the first full quarter under BlackRock management. So just wanted to get your thoughts in terms of, you have authorization to raise equity below book value, I wanted to get your thoughts as to when you may utilize that?

[Steve Sterling:]

Yeah, I think when we consider what’s our approach to capital allocation, particularly as it relates to share repurchase, we are not inclined to be in the market issuing equity at below book value. The business hasn’t historically done that, we don’t see any reason as to why we should do that. We have ample dry powder after getting effect to the equity monetization and the change in complexion of the risk profile the portfolio that we can deploy capital against the opportunities that we’re developing in the context of our current capital base. So, we don’t see any reason as to why in the market issuing equity, philosophically we would be hard pressed to do that unless we found it extremely compelling as a value creation for our client shareholders.

[David Chiaverini:]

Great, great. And as a follow-up, can you remind me, with the new buyback or expanded buyback authorization, remind me when that was last executed? And on a go forward basis, how aggressive do you plan to be with it?

[Steve Sterling:]

Yeah, I think the whole notion of share repurchase may be just if I could address it more broadly, I noted in the first quarter and I remain convicted around this perspective and that is, we will definitely be prudent capital allocators. With these decisions approaching on a very holistic basis and we’ll take into consideration a number of factors including not limited to, the anticipated investment opportunities that we see on the horizon, the portfolio construction that we have and that we’re seeking to create certainly credit rated implications of the decisions. But also, importantly enough be lost in dialogue the capital market implications of those decisions as it relates to secondary liquidity which is also an important consideration for our clients. So, these are some of the things that would sort of captured analysis of what is the right thing to be doing at share repurchase. All of this of course is taking a long term perspective in value creation for our clients. I note too that understanding these points and if we take a step back and to put some perspective around it, we certainly believe that the most compelling way to create sustained value, and highlight sustained value for our client shareholders, is really through the successful execution of our business strategy. The monetization of the equities is the first step along the path that we think will take us toward the goal of driving sustained value for our client shareholders. So we will actively consider capital allocation is very much top of my the increase in the size of the program, is a contemplation of ensuring us the flexibility to provide requisite support for equity and we will supply appropriately against that.

[David Chiaverini:]

Okay, that’s very helpful. And the shares that have already been bought back on under the authorization, but that can you remind me when that was last executed? Was that a few years ago or when…

[Steve Sterling:]

I’ll leave it to Corinne, there were no share purchased in the second quarter and to my knowledge, the purchase was first half. So nothing has been purchased recently relative to the share program from the perspective of the first two quarters.

[Corinne Pankovcin:]

[indiscernible] repurchase was in 2014 and you can see that in the financial disclosures.

[David Chiaverini:]

Got it. Thanks very much.

[Steve Sterling:]

Thank you, David.

[Operator:]

Your next question is from Doug Harter from Credit Suisse.

[Unidentified Analyst:]

Hi, this is actually Stan Sho filling in for Doug Harter. You guys have answered our question about repurchased activity. So no further questions. Thank you.

[Steve Sterling:]

Thank you.

[Operator:]

Your next question is from Heather [indiscernible] from JP Morgan.

[Unidentified Analyst:]

Hi, good morning. I was looking at your statement, I hear you have a negative amount on the income statement for the [indiscernible]. I was just wondering if you could run through the math of that please?

[Steve Sterling:]

Yeah, so Corinne would you mind…

[Corinne Pankovcin:]

It’s actually a reversal of an accrual. So very short story, each quarter we are required under U.S. GAAP to calculate an accrual on incentive fees on a fully liquidated portfolio. It was a slight depreciation in value on some of the underlying portfolio, securities driving that, their part of the accrual was slightly less and that’s just basically U.S. GAAP requirement.

[Unidentified Analyst:]

And then, just one more question, I had noticed that you had a pretty large position in Gordon Brothers which you mentioned earlier, how does your portfolio fare with respect to your asset diversification requirement?

[Steve Sterling:]

We think we are in very good shape there. We have no issues there pertaining to diversity. I also point out with respect to Gordon Brothers it runs eight diverse portfolios. So it’s our single largest eighth position you might hold the fact that the [indiscernible] activity the GAAP portfolios companies engaged in and of itself has its own diversity requirements.

[Unidentified Analyst:]

Okay, thank you.

[Operator:]

Your next question comes from Greg Mason from KBW.

[Greg Mason:]

Great. Thanks. Two follow up on the equity sales, were those sold off in a group to a single buyer or were you kind of piece stealing those out?

[Steve Sterling:]

Our goal was maximization of values so we saw that, that’s prosecuted on a handcrafted deal by deal basis as opposed to wholesale opportunity. Certainly a wholesale opportunity would have been completely viable but we didn’t see that as the right path to maximize value back to shareholders. So each situation was again one in which we attacked individually.

[Greg Mason:]

And then as we kind of talked about the big four equity pieces, bankruptcy management solutions is still on your balance sheet, any thoughts there on why that’s still on versus being sold off in a quarter like some of the others?

[Steve Sterling:]

So I think you’re raising a point too, as we thought about the equity monetization, there are a number of things that came into mind for us and one of those was size and number two was perceptions of where we were in the value curve. And so with that, we focused on the ones that had been reflected and are released. The remaining positions is really means that we continue to like really it is captured by three positions, it represents 80% of that residual approximately which includes Gordon Brothers that we see strategic long term values associated with that and few non-anticipated a change of that entity. The second is the EMS and the third is U.S. Well the record is 80%. When we think about EMS, interestingly EMS is what we would consider to be a counter cyclical opportunities, given the nature of its business, servicing bankruptcy trustee capabilities, it’s a business service what in fact happens revenue business, is A, earnings on cash deposits. And so increasing LIBOR rate environment is a revenue enhancement to EMS. The second thing that drives value for EMS is increased level of bankruptcy activity, and so those two things are certainly supportive of value creation and if you consider that we’ve in all probability get below point on the call, likely to increase that ought to lead to upside value. And given where LIBOR likewise is that they peer anticipate increasing combinations would suggest, meaningful upside value in EMS. I would say that with respect to EMS, a bit different than the other positions to some degree and that is we have a more substantial level influence over the changed control event, for which we’re very actively engaged with the company around prosecuting the strategy and gets the picture of the upside value. So it will be one in which we’ll get patient in monetization up but we believe that, that value was there. The last one among the top three is U.S. Wells, it is the company that is executing very well, its business plan it’s in the pressure pumping size of the energy space. It has done a terrific job of taking costs out of the business in light of pressure that has occurred in the services sector, you like you have a differentiated offering and clean pumping capability. And they are playing into a part of the energy space that has a very low breakeven, and [indiscernible] So we like the business a lot. We think it has meaningful upside value, and is well poised for our client shareholder to participate in that value at some point in the future for monetization. So very thoughtful process on how far is why we want to monetize what we did and believe we’ve restored or maintain value for our portfolio for our clients.

[Greg Mason:]

Great commentary. Thanks. And then on three kind of modeling questions, as we look at the debt side of the balance sheet you’ve got some senior notes, the mature January 16 at 6.5%. Just kind of thoughts on replacing that paper and are you guys looking at an S&P rating for an investment grade rating?

[Steve Sterling:]

It’s a great question, certainly we actively think about those notes coming through in January. We need to make a prudent decision as it pertains over to the makeover part of that relative to where we would execute if we did go to the capital markets. We haven’t made that determination, it’s a live and active and ongoing monitoring of what the right things to do there. I would say having executed on monetization of the equities and moving forward of the deployment of our stated business plan, in control of BKCC, we feel like we are in a much better position to drive a good result if we did choose to go to the markets. But, again we’ll just continue to monitor that. Having said that, we do have ample liquidity as reflected in our earning release, and 10-Q and in our discussion this morning that to the degree we didn’t go to the capital markets, there is ample available liquidity our $405 million revolving credit facility to address future rates.

[Greg Mason:]

And then also, can you talk about the timing of the equity sales in the quarter and kind of the average borrowings you had out on the credit facility? I know it went from call it 180 million on the credit facility to the end of March to 15 million this year. But what was the average outstanding?

[Steve Sterling:]

I’ll leave it to Corinne to look for the average borrowing. From the timing of the monetization, that timing would be largely toward the backend of the quarter. If you recall we resumed our responsibility from March 6th so my focus around that monetization obviously check in close and these things that a little bit of time so you should assume that it’s pretty back end loaded from a timing point of view.

[Greg Mason:]

So we probably didn’t see the interest expense savings from paying down the credit facility very much in the quarter?

[Steve Sterling:]

I think that that would be an accurate prediction.

[Corinne Pankovcin:]

The backend so the average would have also pressed on to that.

[Greg Mason:]

Okay, great. And one final question on the dividend income, was there any impact of dividend income from if these equity investments, being part of your portfolio, previously and kind of how should we be thinking about that, $1.3 million dividend income this quarter on a long term basis?

[Steve Sterling:]

Yeah, there is no material impact so assume that.

[Greg Mason:]

I assume most of that dividend income, is that coming from the Gordon Brothers investment?

[Steve Sterling:]

That would be correct.

[Greg Mason:]

Great. Thank you guys. I appreciate it.

[Steve Sterling:]

Thank you.

[Operator:]

Your next question comes from Andrew Careye, from BBC Income Fund.

[Andrew Careye:]

Hi, good morning. Thank you for taking my questions. I apologize if this was asked I had to hop off for a minute. But just looking at New Gulf Resources, this is a position that’s also held by another BDC peer of yours. The second – I should say the piece obviously at a considerable pressure the 12% pick. Just curious, I know you alluded kind of in your comments that there’s been a new capital plan, if you could may be give any color what that liquid asset sales notice in the market, looks like little bit this quarter at about 84 on the second lien fees. May be you can give some color about your level of confidence in kind of the deviation of the mark so to speak on the piece higher capital structure given that clearly the [indiscernible] and the equities are at a considerable pressure.

[Steve Sterling:]

Yeah, I think a part of that goes back to where you proceed collateral coverage to be based on the capital structure. And also what the implied yield would be at this very [indiscernible] properly compensated top of the capital structure is being evaluated liquidation value basis but rather no risk appropriate returns at that point of the capital structure. And believe that at the current market is that would be implied high teens return which is preferably inappropriate returns when the risk profile is shifted in that name. So I think that’s the basis upon that change in where the [indiscernible]. Obviously as it relates to New Gulf it’s one in which we continue monitor quite closely. The company we believe does have sufficient liquidity and has made some moves relative to the modification of its growing program to preserve [indiscernible]. So they’ve done a decent job in terms of their drilling program and it will as I said monitor that situation fairly closely.

[Andrew Careye:]

Sure. Thank you, Steve and I appreciate the color. Just for clarity, is the only thing above you guys are the second lien a reserve base loan or what’s sitting above you and the capital structure?

[Steve Sterling:]

Yeah, so in the case of New Gulf, you have senior secured notes, which is the notes that I was focusing my conversation around, $84 price, above that.

[Andrew Careye:]

Got it. And can you give us a sense of what the leverage attachment is on your [indiscernible] direct ABL?

[Steve Sterling:]

I’d have to come back to that I don’t know…

[Andrew Careye:]

Okay. Certainly thank you. Appreciate the color.

[Operator:]

Your next question is from Jonathan Bock from Wells Fargo.

[Jonathan Bock:]

Hi, good morning and thank you for taking my questions. Steve I appreciate your comment on stock repurchases versus new investment opportunities set. I want to take a moment to focus in on two investments that originated this quarter so the first I believe the 20 million in Liberty Tire. Can you give us a sense of how this investment was sourced and how large the overall tranche is for Liberty Tire?

[Steve Sterling:]

Yeah, so in terms of the sourcing of the opportunity, it was a situation really, where there was a bit of a story around the company, did go through its share of stress which manifested itself at a restructuring event. And it was a transaction that was seeking refinancing probably in the syndicated market, for which Jeffery is leading the financing struggled and ultimately we engaged in a conversation with Jefferies but also spent a fair amount of time with the management team to really get behind the fundamental business and build a sense of confidence about the strength of their business model, the appropriateness of the capital structure and executability of the plan such that we were in a position to provide a few to where we thought fair value would be investing in the opportunity and effectively participating as an anchor in the creation of that particular tranche. In terms of the components of the capital structure, the piece that we’re in is a first lien term loans which is 107 million which is leveraged through our piece just inside 4.7 times.

[Jonathan Bock:]

Thank you. And just trying to – when you say the anchor, was this a BLK asset that went across a number of different where BlackRock in total was able to ride a sizeable cheque or is BKCC investment in Liberty Tire BlackRock’s only participation because 20 of 170 doesn’t seem like a anchor hold.

[Steve Sterling:]

Yeah, fair point. It isn’t across the platform for sure, however, as you think about anchoring around an investment capital certainty and support and I don’t want to suggest on this call that we would sell an anchor that would not be a fair representation. However, having spent 20 plus years of my life in syndicating high credit what I would suggest to you is that in addition to capital financial capital, intellectual capital as to how one thinks about the risk and where you’re pricing the risk to clear the market, has terrific value to syndication desks and we engage that conversation with the desk in a very fundamental and constructive way such that I think it did if you benefit to the distribution as to where the [indiscernible] client relationship and fair value exists. So capital is certainly important but intellectual capital is also important it’s [indiscernible] for particular situation to support all distribution of the opportunity.

[Jonathan Bock:]

Okay, thank you and then as we look at NBS Group Holdings it appears that this would have been a restructuring and so I believe that it’s 40 of the near 90 that you put to work. So asset kind of restructured at a bit of a loss, but perhaps improving your position. One, are we correct that it was restructured and this was the process you went ahead and enhanced your credit position? And two, when we think about BlackRock’s first quarter from an origination perspective, we’re saying of the 90, 20 came from a dealer’s desk and 40 was a restructuring on the new NBS loan and then of course there was 7 million you bought in prepaid and a little bit more in Gordon’s. What clients are going to ask and it’s a fair question, how is that in some form or fashion better than the return that you and more importantly your shareholders receive from a stock repurchase that is or was in the 80-85% of book value range over the past quarters? And it’s one that we ask with respect it’s just a question that people have because direct origination is important the people are perhaps willing to give a pass. But if they feel that in some case or form or fashion it’s not, they are likely to look at a stock buyback as a better choice. Curious your thoughts.

[Steve Sterling:]

Sure, that’s a fair question. I think first, with respect to the restructuring event it’s a name that has been in the portfolio for quite some time and has been actively managed as a controlling shareholder of that entity. The decision to further restructure in the second quarter, the decision that made on the basis of a review of what I saw as a sustainable profile of the company and what would be the appropriate capital structure that can be supported by that earnings profile so I took a fairly proactive approach to restructuring the exposure to really enable the company to be successful recognizing that I can recapture the value through the equity if properly executed as part of the management team. So that’s the context of the restructuring. As it relates to sourcing an origination I’d share with you my philosophical views, we are in direct origination business, we’re also at business making attractive returns for our clients. You cannot foreclose where those opportunities might manifest themselves. We’re smart, good at what we do. We dig in around the individual credits at the case of Liberty Tire, we [indiscernible] accepting and offering them random from some desk and responding to a rather it was a fact circumstance situation to a company that on the rent buyers would naturally be involved to which it has the ability to do what we typically would do which is go directly into the company to underwrite the fundamental business from – clients capital and way --. So we will not deviate from what we believe as our core value proposition. I would also suggest to you that we cannot use a data point and define it as a trend. We have to look at situations through time and it is through time and looking back upon the things that we do, one year hence, two hence, one can express an opinion as about whether or not executing the strategy that is appropriate for the value proposition or percentage of our client base. So there is no notion of deviation towards some model of buying syndicated products unless in fact we have some hedge, or have some insight to the – to support our investment view.

[Jonathan Bock:]

Appreciate the comments, I mean obviously the skepticism is something is certainly is not brought on by any actions that you have done to the – it’s a little bit of indictment of the industry writ large. That being the case we all share each others’ risk. So thank you for your candor. Moving a bit to your energy investments, very quickly yes we understand, you mentioned it both New Gulf as well as the other producer in the America. Just curious, are they producing at a price that is currently economic i.e. is cash flow – are these investments currently cash flow positive as they pull product out of the ground?

[Steve Sterling:]

The answer is they are in the America is you got a very good spot in the play and is generating IRRs at attractive levels. It supports capital deployments in the context of the current price environment. So I think the answer to your question is at this point they are –

[Jonathan Bock:]

I probably should have hedged myself part the pun but are these cash flow positives x any hedging activities which are a really point time phenomenon that eventually roll off I should have asked it that way my apologies.

[Steve Sterling:]

Yeah, there are certainly are hedges but their hedges are not that material when you look at the over time, there’s certainly some in if you look at something like in the America, you’re talking hedges that are low double digits. So we’re not looking at a picture for example in that case, hedge down 90% of their production, is there some hedging certainly that’s a prudent policy in any EMPs activities. However, it’s not so material that it would be to what’s happened here, it’s a little low double digit type hedge position to have.

[Jonathan Bock:]

Really appreciate the candor. And then finally, what we’ve seen and I’ll use Goldman Sachs as a quick example just of a well respected asset management franchise adopting the BDC model and turn it to execute on it. There is a focus where given the resources they have, they have an ability to drive G&A costs lower or at the underlying BDC through a number of expense sharing arrangements etcetera. Curious if you believe that BKCC can benefit from lower expenses that can be put on BOK’s income statement over time? And if that is a potential driver of shareholder return in terms of how you think about the dollars going out the door to fund your ability to transact?

[Steve Sterling:]

I think what you will [indiscernible] is pretty metrics driven individual and I pay very close attention to the numbers. I think we will manage holistically the BDC in a very prudent way and that includes what our expenses are. Now, I will say that I believe the value that has already been brought to their BDC in the presence of BlackRock post transaction is meaningfully higher without any incremental cost to BKCC. So we have done a fair amount of delivering value there from infrastructure, risk management tools, portfolio constructions tools and the like that didn’t exist to the same degree previously. So, even at the current run rate there has been a meaningful value brought into the business with no hedging costs. Having said as much, I’m very focused on managing those costs in order to deliver best value to our client shareholder. So it’s something I monitor closely. I will look for opportunities to improve upon that but be rest assured and think about value or risk delivered is not recognized in those numbers but is very [indiscernible] to our minds.

[Jonathan Bock:]

Okay fair enough. And then the last question, I just wanted to check to see if Gordon Brothers still owns AMP I believe there was $36 million first lien nine plus yield securities that’s in Gordon’s portfolio today, given the company file for bankruptcy?

[Steve Sterling:]

Yeah, the answer is using their portfolio the related answer is and I think you may have made a note of it, is feel very good about collateral coverage in that case we feel very good about the sustainability to remain current in [indiscernible].

[Jonathan Bock:]

Yes, yes. Great. Thank you so much.

[Steve Sterling:]

Thank you.

[Operator:]

At this time, we have no further questions. Presenters, do you have any closing remarks?

[Steve Sterling:]

I don’t other than to say thank you all for participating today. We appreciate your interest in BKCC. We appreciate your support. We’re definitely available for follow on conversations those who’d like that and otherwise have a great day. Thank you.

[Operator:]

Ladies and gentlemen, this does conclude today’s conference call. Thank you for participating. At this time, you may now disconnect.