BCP Investment Corp (BCIC) 2011 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Kohlberg Capital Corporation 2011 earnings conference call. An earnings press release was distributed earlier today, March 15, 2012. If you did not receive a copy the release is available on the Company's website at www.KohlbergCapital.com in the Investor Relations section.

At this time, all participants are in a listen-only mode. Following today's presentation instructions will be given for the question-and-answer session. (Operator Instructions). As a reminder this conference call is being recorded Thursday, March 15, 2012. This call is also being hosted on a live webcast which can be accessed at our Company's website, www.KohlbergCapital.com, in the Investor Relations section under Events. In addition if you would like to be added to the Company's distribution list for news including earnings, releases, please contact Denise Rodriguez at 212-455-8300.

At this time me to inform me that certain statements made during this conference call which are not historical may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Kohlberg Capital Corporation believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks such as those described in the risk factors section of our 10-K and sections of our 10-Q and other SEC documents filed during the course of the year could cause actual results to differ materially from expectations.

Now at this time for opening remarks I'd like to introduce Dayl Pearson, CEO. Mr. Pearson, please begin.

Thank you and thank all of you for joining Kohlberg Capital for a review of the Company's fourth-quarter 2011 financial results as well as a discussion of some recent events. I will open the call with some broad commentary during the quarter, subsequent events and we will then discuss our investment portfolio in more detail.

I will then turn the call over to our Chief Financial Officer, Mike Wirth, who will provide a recap of our fourth-quarter financial results and performance. We will then open the line up for your questions at the end of the call.

First let me provide a brief recap of recent events. On February 29, 2012 the Company closed on the acquisition of Trimaran Advisors for a total purchase price of $50.2 million, $25 million of which was in cash. This increased our investment in two types of assets.

First, we purchased $18 million of par value CLO equity, for approximately $12 million. The yield on those CLO funds on fair market value is similar or higher than the current yield on fair market value of the KDA managed funds, which is approximately 33%. The remainder of purchase price relates to the purchase of the Trimaran Advisors asset management business. The four CLO funds managed by Trimaran are similar to the five CLO funds currently managed by KEA. The management fees on $1.4 billion of Trimaran funds approximate 50 basis points.

As part of the acquisition six of the employees of Trimaran will continue to be involved in managing those funds including the two principals and the portfolio management manager. As you know asset management businesses have significant economies of scale. After we integrate the platform in the next quarter KCAP should see significant increase and distributable income from our combined asset management platform.

From a long-term strategic perspective, increasing the size of our asset management business in terms of both AUM and professionals will lead to a greater ability to assess the -- access the new issue CLO market, allowing us to grow the platform internally.

Prior to closing on the Trimaran acquisition, we closed on a new $30 million credit facility with Credit Suisse. This is attractive from both a spread and structural viewpoint at LIBOR plus 300 with no LIBOR floor and total collateral pledged on fully funded of $42.5 million, allows us to make accretive investments in first lien loans.

Now to review 2011. As you may recall, we repaid in full the outstanding balance of our secured credit facility on January 31, 2011. In addition we also received a settlement payment of $2 million from the lenders which we recognized in the first quarter of 2011. And then in March we issued $60 million in convertible notes.

Since then, we've been focused on utilizing the proceeds of the convertible debt issuance to increase our investment portfolio debt securities.

At year end we had sufficient liquidity in cash and highly liquid investments with which to make continued higher yielding investments that meet our credit and underwriting profile. Given the uncertain economic environment and volatile credit market, we have remained cautious in terms of deploying capital and continue to maintain significant liquidity.

We also continue to evaluate our equity and debt financing options which will allow us to focus on continued balance sheet growth, increasing net investment income and dividend distributions.

I will now briefly present some fourth-quarter financial metrics and commentary. On December 31, 2011, NAV per share was $7.85, adjusting for the dividend payable which only occurs at year end, and not the intervening quarters, NAV would have been $8.03. For the 12 months ended December 31, 2011, net investment income was $0.70 per share as compared to $0.53 per share for the same period in 2010. Net investment income for the three months ended December 31, 2011 was $0.18 per share. This compared to $0.23 per share for the fourth quarter 2010. The Company declared and paid a dividend of $0.18 for the fourth quarter of 2011 and $0.70 for the entire 2011 calendar year.

For the year ended December 31, 2011, KCAP had $28 million of total income as compared to total income of $29.4 million for the same period of 2010.

I will now review our portfolio of middle-market corporate loans and equity investments and our new origination activity.

We continue to see repayment of lower yielding assets at par which allows us to further increase net spread as we invest these proceeds in higher yielding investments primarily in mezzanine and other junior securities. As always, we will continue to be focused on credit quality and will manage and monitor risk appropriately. After a very strong level of high quality deal flow in the second and third quarter of 2011 the overall level and quality of that flow was considerably lower during the fourth quarter. However, since early February deal flow has increased dramatically.

We have one new middle-market investment that should close before the end of the first quarter. And we have several outstanding term sheets on other new middle-market deals.

As of December 31, 2011, the weighted average yield on fair value for our income-producing loan and bond portfolio was approximately 8.4% as compared to 8.6% at the end of last year.

The yield on our loan and bond portfolio coupled with our overall CLO portfolio that is yielding over 20% on fair value provides a reasonable net interest spread before factoring any distributions that may be made from Katonah Debt Advisors. The combined yield on our total debt portfolio loans, bonds, and CLO securities was 14% on fair value in the fourth quarter.

Our two largest CLO investments, Katonah X and Katonah 2007-1, represent 83% of our total CLO investments and 88% of KDA managed CLOs and currently yield an average annual return of 27% of fair value.

As of December 31, 2011, our weighted average marked on our debt securities portfolio was 84, this compared to 71 at year-end 2010.

As far as CLO portfolio, our weighted average mark was 69 as of December 31, 2011, a slight decrease in the weighted average mark of 74 for the year earlier. Year end. Our 100% ownership of KDA was valued at approximately $41 million based upon its assets under management and perspective cash flows at December 31, 2011. Our investment portfolio at the end of the fourth quarter of 2011 totaled approximately $240 million.

Looking at the composition of our investment portfolio, our portfolio quality continues to hold up well. At the end of the fourth quarter our debt securities totaled approximately $114 million and represented about 48% of the investment portfolio. First lien loans now represent approximately 39% of the debt securities and second lien loans, 41%. Approximately 10.2% of our investments are fixed rate with the weighted average rate of 12.9%.

As of December 31, we had three issuers on non-accrual status representing less than 1% of total assets at fair value.

Our KDA-managed CLOs continued to perform well with the quarter-over-quarter increase in the distributions to us. All KDA-managed CLO funds continue to make the distributions to junior securities we hold as investments and all senior and subordinate management fees are being paid to KDA at a current basis.

The management fee stream paid at KDA is based upon the par value of assets managed and thus provides a relatively stable income stream, not subject to potential volatility in the market prices of the underlying assets being managed.

This stable income stream allows KDA to make periodic distributions to us in the form of a dividend. In 2011, KDA made distributions to us at $1.9 million.

Additionally as of December 31, 2011, KDA had approximately $1.9 billion of par value assets under management.

And now I will ask Mike to walk through the details of our financial performance. Mike?

Thank you, Dale. Good afternoon, everyone. For the year ended December 31, 2011 we reported net investment income of approximately $16 million or $0.70 per share compared to approximately $11.9 million or $0.53 per share for 2010. For the three months ended December 31, 2011, we reported net investment income of approximately $4.1 million or $0.18 per share.

Our total investment income for the year ended December 31, 2011 was approximately $20 million as compared to approximately $29.4 million for the same 2010 period.

Our total investment income for the three months ended December 31, 2001 was approximately $7.1 million as compared to approximately $6.9 million for the fourth quarter of 2010. Investment income from debt securities decreased $5 million from approximately $14.4 million in 2010 to approximately $9.4 million in 2001 -- 2011.

This decrease was primarily due to a reduction in the size of our loan portfolio and thus lower average investment balances on which interest is earned. The decline in debt securities revenue was offset by an increase in CLO income of $4.4 million for 2011, relative to 2010.

For the full-year 2011, CLO fund securities' income was approximately $14.6 million as compared to prior year's reported CLO income of $10.2 million. For the three months ended December 31, 2011, our CLO funds securities' dividend income was approximately $3.7 million as compared to approximately $3 million for the same period of the prior year.

Overall, approximately 99% of our equity CLO investments are distributing cash flows with a fourth-quarter weighted average annual return of 33% to fair value. Given that our CLO portfolio has an average remaining term of approximately six years, we expect to continue to see significant equity distributions from our CLO investments for many more years.

For the year ended December 31, 2011, Katonah Debt Advisors, the Company's wholly-owned asset managers, paid cash dividends to the Company of $1.9 million.

Expenses for the year ended December 31, 2011 totaled approximately $12 million as compared to approximately $17.5 million in 2010. For the full-year 2011, we had professional fees of approximately $2 million compared to $5.4 million for the same period in 2010. The decrease was due to having incurred higher than usual accounting, third-party valuation and printing fee expenses in 2010 of approximately $3.5 million, related to the restatement of year-end 2008 first- and second-quarter 2009 financial statements.

Interest expense was $4.6 million in 2011 and $7 million for 2010. The reduction is due to average -- lower outstanding average balances on the Company's credit facility which, as Dayl mentioned earlier, was paid off on January 31, 2011. The average outstanding balance in 2011 was approximately $65 million as compared to $157 million from 2010 after considering the convertible debt issuance that we had in the first quarter.

Focusing on just the fourth quarter of 2011, expenses for the three months ended December 31 totaled approximately $3 million as compared to approximately $1.7 million for the same quarter in 2010. In this case, the increase in the 2011 fourth quarter only expenses relative to 2010 was due to increased interest expense that is partially offset by a decrease in compensation costs.

Realized losses of approximately $18.5 million or $0.81 per share were recognized during the year ended December 31, 2011 as compared to $17.9 million or $0.79 per share in 2010.

During the year ended December 31, 2011, our total investments had net unrealized [appreciation] of approximately $10.11 million -- I'm sorry, $10.1 million. During the year ended December 31, 2010, our total investments had net unrealized depreciation of approximately $[8.3 million].

The $10.1 million of unrealized gains during the year ended December 31, 2011 are due to net unrealized gains of approximately $11 million on debt securities, equity securities and CLO funds securities and a $1 million decrease in the values of Katonah Debt Advisors.

Moving on to our balance sheet, at year end we had approximately $33 million in liquid money market funds in cash. Ultimately a portion of that cash was used to fund the Trimaran acquisition at the end of February.

On the liability side of our balance sheet, as of December 31, 2011 our only debt was $60 million convertible notes, the five-year term and a fixed rate of 8.75%.

Our asset coverage ratio at year end was 400%, well above the minimal required 200% for BDCs. Pro forma with the new $30 million credit facility Dayl mentioned earlier, our asset coverage is over 330%.

For the fourth quarter, we declared a $0.18 dividend which was paid in cash on January 27, 2012 to holders of record as of December 23, 2011. For 2011, we paid total dividends of $0.70 per share as compared to total dividends of $0.68 per share in 2010. In determining dividend for the fourth quarter, considerations included estimated quarter net income, anticipated net income for the year, the impact of increased or decreased expenses and the sustainability in smoothing out of the dividend for future quarters. The aforementioned discussions in the fourth-quarter 2011 results and year-end results are also discussed in our recently filed Annual Report on Form 10-K and Quarterly Reports on Form 10-Q which are available at our website, www.KohlbergCapital.com or at www.SEC.gov.

With that, I would like to turn the call back over to the operator to start the Q&A session. Operator?

(Operator Instructions). John Hecht, JMP Securities.

Good afternoon, guys. Thanks for taking my questions. First, I take spreads are down nominally since the end of last year yet you guys seem to be, you highlighted that your pipeline looks pretty solid. Where are you finding pockets or where are you finding the most attractive risk-adjusted returns in the market right now?

I think the middle market M&A activity sort of died significantly in the September time period last year. Started to pick up once people had year-end 2011 results and we're seeing mostly sponsor-oriented investments.

I will say in a lot of cases we're trying to place somewhere between necessarily the most senior piece and the most junior mezzanine piece where we can get a nice risk-adjusted return and have a lot lower leverage. One of the deals we're looking at now we're sort of a second lien behind a first lien and ahead of a mezzanine piece where the total leverage is four times and we are going to be around 2.6 times or 2.7 times.

But if the deal goes forward we've still got a 12-plus percent return. So we like those types of pieces of paper where we can manage risk. We also like to keep looking at things with relatively low leverage; the deal we're going to close at the end of the month is a mezzanine deal but again the leverage is well under four times. So those types of things we like. But it's really just a lot of different activities some of it. Significantly, most of it from sponsors but also some from other relationships we have.

Okay. And Mike, you mentioned, you referred to that 83% of the CLOs you've invested and I guess 2010 and 071 that they're cash flowing but there's a small group that aren't. Would you expect those to regain full cash flows or distributions to equity? And if so how much could that -- how much would it be on a quarterly basis?

There is only 1% of the CLO funds in total that aren't and they're not actually managed by KDA. They're managed by another asset manager.

I'm actually referring to the CLO equity securities you guys --

The ones that we own are all cash --

The ones that we own that we manage are all cash flowing (multiple speakers).

Excuse me, I heard that wrong. I'm sorry.

No problem.

And then with respect to the Trimaran acquisition, do you expect any kind of one time closing and professional fees in Q1?

Yes, we are going to have some excess costs in Q1. We were hoping to close it earlier in Q1 so I don't think you're going to see in Q1 any accretion to the Company because of those professional fees; but you'll start to see the difference in Q2.

Do you have a sense of what that cost might range or is it too speculative at this point?

We still haven't got all the legal fees and things like that so we are just now getting some of those billings in.

Regal and a lot of accounting fees as well.

Okay and then on the KDA platform, how do you guys view the new issue of CLO market, how far away or spreads to the equity level or AAA level to get somewhat fluid again where you could start considering new issuances of the KDA structure or the KDA segment?

It's starting to get very interesting right now. The spreads to new issues have been coming down much more slowly than they did last year. Last year they sort of went from 175 to 120 in three or four months and then popped back up again when you have the credits seize up in mid-summer. You know, they sort of went from -- quickly from 175 down to 150 now. Each new deals that gets priced goes down 4 or 5 basis points. I think the last one was around LIBOR, 142, on the AAAs. And what's also out is the pricing on the more junior securities has come in.

So it starts to get very interesting at the levels we are at now. You're talking about IRs in the low to mid teens. So it moves up very quickly from there. And that's not factoring in obviously the fees we get, the additional incremental fees we're going to get, the KDAs. It's just return on the equity investment.

So LIBOR plus 142 on the senior notes now. Is there a threshold of LIBOR plus some level where you would say that it's a market that you would be actively trying to do a new issue?

I don't know if we have a specific number but it's very close to that number today.

Thanks very much, guys.

Greg Mason, Stifel Nicolaus.

Could you talk about the two major Katonah CLO equity pieces you own, along with the new Trimaran equity $12 million that you own? How long until those start exiting the reinvestment period and we start seeing some declines in equity distributions?

Well for the Katonahs X and 2007-1, I think those -- I think the earliest reinvestment end of reinvestment E.A. Kratzman is on the line, the President of Katonah. E.A., do you remember those offhand? I think it's 2015 or 2014?

The 20071 CLO is probably one of the last CLOs that will go through the reinvestment period in basically January of 2015 and X will go probably in (multiple speakers) middle of 2014.

So we have three years of runway in 2011 and call it 2.5 on X. The last Trimaran deal essentially is the same vintage as X so that also goes through '14 and the earlier ones are a little bit before that. So we have a fair amount of runway on those.

All right. Can you talk about, looks like there is about a $2 million write-down in the CDO equity and about a $2 million write-down in the dealer ownership of KDA fair values this quarter. Can you talk about the purpose for those?

Sure for KDA, we do a discounted cash flow, the cash model so much didn't change as much as how the discount rate was built up. So there was some compression there that impacted fair value there. On the CLO funds they went down just by the nature of those projected cash flows as well and --

I also think there was some public marks on some related securities that were down a bit in the fourth quarter, right?

I can't remember if it was the fourth quarter or the third quarter but there are some, yes. But we weighed and we changed the modeling ever so slightly for both types of asset classes as we continue to refine the valuation models and make them a little bit more robust. And also as well because there's more market information that's available as well that we can point to to weigh into our final valuations.

Okay, great. And then, in the press release today you talked about you want to use prudent leverage in the model and mentioned some additional types of debt that you could raise. And I think you actually mentioned SBIC debt in there. Can you tell us what your kind of target leverage is that you as a prudent leverage and then I would assume you've at least looked into the SBIC if you're mentioning on the press release, can you tell us where you are in the process?

Yes, I think we are in the early stages of the SBIC process, I think, in terms of prudent leverage and I think that probably and again our NAV is gone up because of the issuance of the shares we related Trimaran so that gives us an additional $25 [billion] or so of borrowing capacity over and above what we have now and you know we probably look to keep that. And I think we talked about this in the past in sort of the somewhere between 0.6 and 0.7 leverage probably not as high as 0.7, more like 0.6, 0.65 at the most. And I don't anticipate us getting to that leverage anytime soon.

But we think with the mix of securities we have today, we want to keep the leverage lower than we had in the past.

Great, and on the new $30 million of debt that you guys issued from the CDO notes what is the maturity on those?

You mean the Credit Suisse facility?

Yes.

It is a three-year maturity.

Okay. And is it all outstanding or is that a revolver you can draw up and down on?

It is a revolver but we will have it pretty fully funded fairly quickly.

Okay, great. And then, one last quick modeling question. In the fourth quarter what were your origination and repayment activity?

I don't think we closed any new deals and I don't think we had any repayments in the quarter either. Mike will take a look at that and we'll add to that before we get off.

Great. Thank you, guys.

The fourth quarter was a pretty slow quarter for origination and it was a very slow quarter also for repayments. We may have had one small repayment but I don't think we had any new middle-market deals that closed. We had one that closed on the last day in the third quarter and we had one that we thought we were going to close in the fourth quarter but it never did close. So, I don't think we had any significant move of either.

(Operator Instructions). J.T. Rogers, Janney Capital.

Good afternoon, guys. I had a question on the -- I guess one of the non-managed CLOs that moved to non-accrual during the quarter. Just wondering if you recognized any income from that CLO during the fourth quarter?

That was Katonah 3 which isn't managed by KDA. Right now it's kind of in limbo as far as we didn't recognize any income from it now. (multiple speakers)

one of the reasons I think is that the incentive fees kicked in there right. And so that (multiple speakers).

Kind of in limbo as to whether or not it's going to get called or --.

The manager and some of the equity holders are trying to call it and I think the value would probably -- if it did get called the value will probably be above where we're (multiple speakers).

No, 3 2. (multiple speakers)

Okay. At the end of the quarter so we're not expecting any more distributions but we do expect fairly significant payout when and if it is called.

Okay, great. And then just sort of looking at the income we saw from non-affiliate CLO during the quarters, $462,000. I wouldn't expect that to drop off in the first quarter -- (multiple speakers).

The vast majority of that is [Grant Grove], which is sort of the same vintage as Katonah 10 so you know that's -- that has a long time to run as well managed and we don't really anticipate any falloff in that. And I think that's probably all the non-managed income or (multiple speakers).

And 3 and 5 aren't producing anything, those are the ones [valued at 1,000 each].

Okay great. And then the decline you saw in projected cash flow for the managed CLOs, is that a function of credit or a function of them approaching the end of their reinvestment period? Just trying to get an idea of what.

It actually is somewhat volatile from quarter to quarter depending on when LIBOR resets for the liability and that type of thing. So I mean the decline isn't really all that, I guess, significant because like I said it could be somewhat volatile.

I mean I think to some extent we were surprised there wasn't a bit of decline earlier but there have been a lot of repricings of loans which have brought some of the asset spreading a tiny bit. But as Mike says it can be volatile quarter to quarter depending on when they reset and what the spreads are when they reset and what the LIBOR is when they reset.

Okay. So great credit quality remain strong there.

Credit quality is very strong as absolutely. As is true with the 4 that we approached as part of the Trimaran acquisition the credit quality is excellent.

Great. In terms of the new deals here you put on the books this quarter, do you have a rough -- maybe I missed this earlier -- but a rough yield on the portfolio of leveraged loans you purchased from Credit Suisse?

You mean, for the credit facility? My guess is you're probably looking at what? 150 basis point net spreads after you take into account the interest costs.

Okay. Great, so I guess Credit Suisse revolvers is L + 300 so looking at something like L +450?

Something like that may be a little bit under that.

Okay, great, and I think that that, one -- I guess one investment moved off non-accrual. Just wondering which one that was.

That was (multiple speakers) last quarter?

You know I will have to get back to you -- I.

I think looking at the portfolio last quarter, non-accrual was Suncoast, the Ginn-LA Conduit Lender and International Architectural Products and Creative Media?

(multiple speakers). I'm sorry -- you got restructured and so the loan got reinstated. I forget what the loan was when we got some equity but that is -- that loan is paying interest. Sorry.

Great. Thanks.

Greg Mason, Stifel Nicolaus.

Actually, to follow up on John's question earlier about issuing new CLOs outside from KDA. For the equity investments in those are you guys expected to provide the capital for the junior tranches or is the market open where there are buyers of that junior capital as well? And so it's all going to be owned by third-party investors?

I wouldn't say it's all going to be owned by third-party but it's going to be substantially owned by third parties. We will have a investment in the lowest tranche, but that will be a function of a number of things. We haven't worked through yet what that is. But everything above BB, BBBs, all those things are -- will be placed.

You don't have to worry about K Capital liquidity in terms of issuing new CLO equity that shouldn't be a limiting factor of issuing new CLOs?

It shouldn't be, no.

Okay. Great, thank you guys, appreciate it.

Thank you. There are no further questions at this time. I would like to turn the call over to management for any closing remark.

I don't have anything but I want to thank you all for being on the call and participating and we will talk to you soon again. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect and have a wonderful day.