BCP Investment Corp (BCIC) 2012 Q1 法說會逐字稿

Good morning, ladies and gentlemen, welcome to the Kohlberg Capital Corp. 2012 first-quarter earnings conference call. An earnings press release was distributed yesterday, Thursday, May 10, 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 is being recorded today, Friday, May 11, 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 events, including earnings releases, please contact Denise Rodriguez at 212-455-8300.

At this time, management would like me to inform you 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 Forms 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 would like to introduce Dayl Pearson, CEO. Dayl, please go ahead.

Thank you, and thank all of you for joining the Kohlberg Capital for a review of the Company's first quarter 2012 financial results. I will open the call with some broad commentary about our activities during the quarter, including the impact of the acquisition of Trimaran Advisors, and will then discuss our investment portfolio in more detail. At that point, I will turn the call over to our Chief Financial Officer, Mike Wirth, who will provide a recap of our first quarter results and performance. We will then open the line up to your questions.

First, let me provide a brief recap of recent events. On February 29, 2012, the Company closed on the acquisition of Trimaran Advisors, and much of March was spent on integrating that acquisition into our asset management platform. As you will recall, as part of the acquisition we purchased equity positions in four CLO funds managed by Trimaran for a cash purchase price of approximately $12 million. These funds contributed approximately $470,000 to our total revenues for the quarter.

Obviously, we only realize one month benefit from these distributions and full-quarter dividend income from these incremental CLO fund securities will be realized starting with the second quarter. Over the next 12 months, we expect these funds to continue to generate cash distributions of close to 40% of fair market value. The remainder of the purchase price relates to the purchase of Trimaran Advisors' asset management business. As part of the asset acquisition, key employees of Trimaran continue to be involved in managing those funds, including the principles, the portfolio manager and other key investment professionals. This strategic acquisition allows us to realize substantial economies of scale and operations, and now that we have fully integrated the platform in the second quarter, KCAP should see significant increase in distributable income for our combined Asset Manager Affiliates.

Trimaran should incrementally contribute approximately $7 million of base management fees over the next four quarters. In addition, we expect to begin realizing incentive fees in the fourth quarter of 2012. I will talk more about these incentive fees in a moment.

The incremental run rate expenses associated with Trimaran should be approximately $3 million annually. As a result, we expect to see an additional $4 million in pre-tax income attributable to our asset management platform over the next four quarters. While there may be some taxes paid at the Trimaran level, we would still expect a minimum of $3 million of incremental after-tax income available for distribution to KCAP over the next four quarters.

The incentive fees could significantly increase the income available for distribution beginning in 2013. While the incentive fees will reduce the distribution coming from the CLO securities we own, we own approximately 16% of the equity interest in these funds but are entitled to 100% of the incentive fees. In other words, a $1 million incentive fee paid to Trimaran will only reduce our equity distribution in that fund by approximately $160,000.

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 access the new issued CLO market, allowing us to grow the platform internally. Now that the integration is complete, we are in discussions with several dealers concerning structuring a new CLO fund to take to market later in 2012.

I will now review our portfolio of corporate loans and equity investments and our new origination activity. We continue to see repayment of lower yielding assets at par which allow us to further increase our net spread as we reinvest these assets in higher yielding assets, primarily mezzanine and other junior securities. We also invested in approximately 16 new syndicated first lien loans, which will be funded by our new Credit Suisse credit facility. As always, we will continue to be focused on credit quality and we'll manage and monitor our risk appropriately.

Since early February, deal flow in our traditional middle-market direct lending business has increased dramatically. Since the beginning of 2012, we have reviewed close to 60 new transactions with a turndown rate of around 85%. We have committed to three new deals since the beginning of 2012, one of which closed in early April, a second lien loan; one of which should close in mid-June, a uni-tranche loan, and one which will close near the end of June, a senior unsecured loan. In all three cases, these loans were originated with financial sponsors and we have partnered with mezzanine funds and/or other BDCs in each case. These three transactions totaled more than $26 million deployed in the yield of approximately 12%, not including any OID or equity kickers.

Given the uncertain economic environment and the volatile credit market, we have remained very 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 first-quarter financial metrics and commentary. On March 31, 2012, our NAV per share was $7.78. Net investment income for the first three months of 2012 was $0.15 per share as compared to $0.22 per share for the first quarter of 2011. The Company declared a dividend of $0.18 for the first quarter of 2012 as compared to $0.17 for the first quarter of 2007.

For the quarter ended March 31, 2012, KCAP had $7.4 million of total income as compared to $7.3 million for the same period in 2011. However, it should be noted that our first quarter of last year, the $7.3 million or revenues included a one-time $2 million payment we received from our then-current lenders as a settlement for litigation we initiated against them. Again, it should also be noted that the full impact of the Trimaran acquisition at the beginning of March is not reflected in the Company's operating statement. In addition, one-time professional fee expenses of approximately $420,000 related to the Trimaran Advisors acquisition were borne by Trimaran Advisors, which will reduce the amount available for distributions from Trimaran in the first quarter of 2012.

The combined yield of our debt portfolio -- loans, bonds and CLO securities -- was 15% on fair value in the first quarter. Our two largest CLO fund investments, Katonah X and Katonah 2007-1, represent 67% of our CLO investments and 70% of KDA-managed CLOs and are currently yielding an approximate average annual return of 23% on fair value. On March 31, 2012 our weighted average mark on our debt securities portfolio was 86 as compared to 84 at the end of 2011.

As for our CLO portfolio, our weighted average mark was 67 as of March 31, a slight decrease in the weighted average mark of 69 on March 31, 2011. Our 100% ownership of our Asset Manager Affiliates was valued at approximately $75 million based on its asset under management and perspective cash flows.

Our investment portfolio at the end of the first quarter 2012 totaled approximately $291 million. Looking at the composition of our portfolio, our portfolio quality continues to hold up well. At the end of the first quarter, our debt securities totaled approximately $136 million and represented 47% of the investment portfolio. First lien loans now represent 52% of debt securities and second lien loans now represent 34%. Approximately 8% of our investments are fixed-rate investments with a weighted average yield of 13.9%. On March 31, we had four issuers on nonaccrual status representing less than 1% of total assets.

All CLO Funds managed by our Asset Manager Affiliates continue to make their distributions to the junior securities who hold as investments, and all senior and subordinate management fees are being paid to our Asset Manager Affiliates on a current basis. The management fee stream paid to our Asset Manager Affiliates is based on the par value of the assets managed and thus provides a relatively stable income stream not subject to potential volatility in the market crisis of the underlying assets. This stable income stream allows our Asset Manager Affiliates to make periodic distributions to us in the form of a dividend. In the first quarter of 2012, this dividend was $825,000. Additionally, as of March 31, 2012, our Asset Manager Affiliates had approximately $3.4 billion of par value assets under management.

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

Thank you, Dayl, good morning, everyone. For the quarter ended March 31, 2012 we reported net investment income of approximately $3.6 million or $0.15 per share compared to approximately $5 million or $0.22 per share for 2011. Subtracting the onetime $2 million settlement we received from our lenders in the first quarter of 2011, the prior year's first-quarter net investment income would have been $0.13 per share.

Our total investment income for the three months ended March 31, 2012 was approximately $7.4 million as compared to approximately $7.3 million for the same 2011 period. Although reflective of a slight increase in first-quarter year-over-year total revenues, the increase is more dramatic if comparative first quarters are normalized by excluding the effects of the litigation settlement income in 2011 and our first quarter 2012 acquisition of Trimaran. The first quarter 2011 total revenues excluding the one-time litigation settlement we received were normalized to approximately $5.3 million. If we backed out one month incremental effects of the Trimaran acquisition, first-quarter 2012 revenues of $7.4 million would be reduced by approximately $720,000 to a normalized $6.7 million. The $720,000 incremental effect of Trimaran, which is, again, for one month, includes approximately $470 million of income related to the Trimaran CLO Funds and $250,000 of dividends from the Trimaran Asset Manager Affiliates.

First-quarter year-over-year investment income from debt securities increased 27% to approximately $2.5 million from approximately $2 million in 2011. This increase was primarily due to an increase in the size of our loan portfolio and, thus, higher average investment balances on which interest is earned. The increase in the par amounts of debt securities held at March 31, 2012 of approximately $159 million was a 27% increase from the $125.6 million par balance of debt securities at the end of the first quarter of 2011. This percentage increasing and year-over-year par closely correlates to the increase in investment income from debt securities.

First-quarter year-over-year investment income from CLO Fund securities increased 17% or $690,000 to approximately $4 million from approximately $3.3 million in 2011. Again, 68% of that increase is due to the aforementioned addition of subordinate tranches of CLO Fund securities acquired in connection with the Trimaran acquisition.

Overall, approximately 99.9% of our equity CLO investments are distributed cash flows with a first-quarter weighted average annual return of approximately 32% to fair value. For the quarter ended March 31, 2012 we recorded from our Asset Manager Affiliates dividends of $825,000.

Expenses for the quarter ended March 31, 2012 totaled approximately $3.8 million as compared to approximately $2.3 million for the first quarter 2011. However, much of the first-quarter year-over-year increase of total expenses is related to interest expense. In the first quarter of 2012 we had approximately $1.5 million of interest expenses on average outstanding debt of $60 million as compared to $300,000 of interest expense in the first quarter of 2011, which was the quarter we paid off in full our previous lending facility and thus had a far lower average debt outstanding balance.

For the full year of 2012 we have -- I'm sorry -- for the first quarter of 2012 we had professional fees of approximately $920,000 compared to $770,000 for the same period of 2011. Approximately $130,000 of the additional professional fees in that were incurred in connection with the Trimaran Advisor acquisition during the quarter. Realized gains of approximately $300,000 or $0.01 per share were recognized in the quarter ended March 31, 2012, as compared to realized losses of $1.8 million or $0.08 per share in 2011.

During the quarter ended March 31, 2012, our total investments had net unrealized depreciation of approximately $3.4 million due to net unrealized depreciation and debt securities in Asset Manager Affiliates of $6.4 million, offset by $3 million of unrealized depreciation in the CLO Fund and equity securities.

Moving onto our balance sheet, at year end we had approximately -- or at quarter end we had approximately $11.8 million in liquid money market funds and cash. On the liability side of our balance sheet, as of March 31, 2012 our only debt outstanding is $60 million of convertible notes with a five-year term and a fixed rate of 8.75%. Meanwhile, a $30 million financing facility with CS was undrawn as of March 31, 2012.

At quarter end we had sufficient liquidity and cash and high liquid investments and availability on the CS facility which will provide funds for liquidity in future balance sheet investments that meet our credit and underwriting profile. Our asset coverage ratio at quarter end was 445%, well above the minimal required 200% for BDCs and above the 400% we had at year end. For the first quarter, we declared an $0.18 dividend, which was paid in cash on April 27 of 2012 to holders of record as of April 6, 2012.

In determining the dividend for the first quarter, considerations included estimated current quarter net income, anticipated net income for the year, the impact of increased legal and accounting and valuation -- professional fees related to the Trimaran acquisition and this moving out of the dividend in future quarters. As we continue through the second quarter of 2012, we can better determine the realization of the synergies from the Trimaran acquisition. Future quarter dividends will incorporate this positive and increased earnings from the acquisition of the Trimaran CLO Funds securities and the dividends we expect to receive from the Trimaran (technical difficulty) affiliate.

The aforementioned discussions on first quarter 2012 results are also discussed in our recently filed 10-Q and our 2011 Form 10-K, which was filed earlier in the first quarter. With that I'd like to turn the call back over to the operator to start the Q&A session. Operator?

(Operator instructions) Troy Ward, Stifel Nicolaus.

Great, thanks, good morning, guys. Can you just talk briefly about the movements in the portfolio, both on the originations and the exit front? What did you see? How much of that from the exits, in particular -- how much of that was kind of stuff that you were looking to move out and how much activity do you see coming from the market? And also, it looked like the yield on the portfolio took a step down. Can you speak to what you're seeing on the yield side?

Yes. I think one of the reasons the yield on the portfolio went down -- I'll answer that question first -- as we did add, as I mentioned, about $30 million in new [broadly] syndicated loan assets, which will go, once they are funded, into the credit facility. But when we calculate the yield, those are already -- because the loans have been purchased although not settled, they actually show up on our portfolio. And so that drove the yield down and we got almost no income from that in the quarter. So it's a bit of an anomaly at this point.

But, again, the weighted average yield should be down a little bit because we do have those first lien loans. But, again, they're going to be funded by a credit facility with a lower cost basis. So that's that.

In terms of activity, we had not a lot. We had some small repayments during the quarter primarily. One sort of large one was Freescale Semiconductor, which was a bond position. We had that paid off at 1.05. And we had some smaller prepayments and normal amortization payments, but it was not a large amount of money. It was, what, about $5 million, Mike?

Yes.

About $5 million. We do expect to see some more activity in the second quarter -- again, one lower yielding loan which will result in an increase of our liquidity, about $7 million, which will immediately be redeployed in some of these new loans that we're closing. So that will actually result in an uptick in our net interest margin and our weighted average yield. And we also -- there's a potential for a repayment in one of our second lien loans which would, if it happens, result in a fairly large prepayment penalty, on the order of $800,000 or $900,000. But again, that money will be redeployed fairly quickly.

Okay, and can you just give us, Dayl, a little bit of background on the Trimaran acquisition? Kind of how long have you known the group and how did the transaction kind of come into being and why was KCAP the person to consummate the transaction? Were there other players looking for these guys as well?

Well, I think, first of all, I've known the principles of Trimaran Advisors for close to 20 years and actually used to work with them in a previous life. So I think there was, first of all, a comfort level in terms of how we look at the world and credit culture, etc. I think -- I know they had talked to other folks as well but they didn't really want to just sell for cash. They saw the CLO business as a business that could grow but they saw it difficult to grow in a small platform without a significant equity partner who could take down a portion of future equity trenches and new CLOs. And so they saw the opportunity to sell the business but obviously get a significant piece of the upside of the business going forward by taking back a substantial share position in KCAP. And I don't think anyone else -- most other people they had talked to probably were just looking to buy them off for cash.

Okay, and then you talked about the possibility or maybe the hope that, as you were speaking to dealers throughout 2012 to do another CLO. How important, or how vital is that to the success of the transaction? What if the market doesn't -- what if Europe continues to throw us curve balls and such, or other JPMorgan events continue to happen and the CLO market doesn't come back in 2012? How will that impact this acquisition and how you view the space?

Well, in the short term, it's not going to impact acquisition because, again, we're not looking for a substantial amount of growth in fees or AUM or income in the short-term. Obviously, we think that over the long-term it's an important part of the acquisition, and we do think the CLO market will -- well, it probably won't be as robust as it once was, but continue to be there. I think a number of -- what sort of held the CLO market back over the last year or two has been the lack of investors in the AAA class. They have generally been one or two parties willing to take down AAA tranches, which as you know are about 70% of the capital structure of a CLO. That has changed fairly dramatically over the last years, and now you have as many as a half a dozen people looking to invest in those assets. And it's a very attractive asset class, certainly at LIBOR 120 or 130, which is where those are currently getting done.

So we do think that the market for new CLOs will be there. Will it be volatile, like all financial markets? Yes. But we do think we will get new CLOs done. Obviously there's no guarantee we're going to get something done in 2012, but based upon the current marketplace, we believe that there's a high probability we can get something done in 2012.

And can you just give us a little bit of color on that CLO market that you see today compared to 3-4 years ago, from a pricing standpoint and also a leverage standpoint, what that new CLO market looks like today?

Yes. I think if you sort of dial back to mid-2007, the leverage is not substantially worse. It's a little bit lower leverage, but not a lot -- not a lot lower, maybe 10 times instead of 11 times. The big difference is in the pricing of the AAAs. The pricing of the AAAs in Katonah X, I believe, was LIBOR 23 or LIBOR 24. Now we're talking about LIBOR 120 to 130. Obviously -- on the asset side, those yields are very different, too. Instead of LIBOR 200 or 225 for broadly syndicated loans, they're higher than that. And most new loans still have LIBOR floor, so the yield even becomes somewhat higher.

So the arbitrage still works. I think it's more -- obviously, more difficult and more dependent upon managing these things very, very well, which was one of the attractions of the Trimaran acquisition.

Okay, and then just one last one -- on the professional fees in the quarter, how much did you say was related to Trimaran? And will there be any additional fees, kind of one-time fees hitting in the second quarter?

Directly at KCAP, it was about 130,000, and then at the affiliate level, at the Trimaran affiliate, which would pay up a dividend to KCAP, it was about 400 --

Yes, it's a little over $600,000 (multiple speakers) the impact on -- almost $700,000 is the impact on it. And we don't really see much in the way of additional fees in the (multiple speakers) --

Yes, those were all handled in the first quarter.

We tried to get as much as we could into the first quarter, just because we knew there was going to be a lot of noise, as there was in our first quarter last year. So we expect the run rate fees to sort of return to the normal. If you look at the fourth quarter of last year --

495?

Yes, $400,000, as opposed to $900,000. And again, also some of that -- as Mike said, were at the Trimaran level. So that just reduced distribution we got from Trimaran and KDA.

Okay, and then one last one on KDA -- I think I got the number right here, $825,000 was brought in through the line this quarter. How much capital is being retained down at KDA for future dividends?

There is some capital down at the KDA level. I don't know what the number is off the top of my head. I believe it's about $1 million that hasn't been distributed.

But again, that will probably go up as we start to see additional fee -- see income coming in from Trimaran. So we sort of look at it as a combined asset manager business, even though they're technically separate legal entities. So that will start to grow, based upon how much we decide to distribute. As I said, I think last year there was about -- a little over $2 million of net income at KDA. For the next four quarters, we are expecting that to continue, around $2 million. And then you add in what we talked about earlier, is sort of $3 million to $3.5 million from Trimaran, assuming no CLOs. We obviously continue the ability to upstream that as we need it to support the dividend at KCAP.

Great, all right, guys, thank you.

(Operator instructions) I'm showing no further questions.

Okay, well, thank you all very much and we look forward to talking to you on our second-quarter conference call. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the conference and you may now disconnect. Everyone have a wonderful day.