BCP Investment Corp (BCIC) 2012 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the KCAP Financial, Inc. second quarter 2012 earnings conference call. An earnings press release was distributed on Wednesday, August 8, 2012. If you did not receive a copy the release is available on the Company's website at www.KCAPFinancial.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, Thursday, August 9, 2012. This call is also being hosted on a live webcast which can be accessed at our Company's website, www.KCAPFinancial.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. Today's conference call includes forward-looking statements and projections and we ask that you refer to KCAP Financial's most recent filings with the SEC for important factors that would cause actual results to differ materially from those projections. KCAP Financial does not undertake to update its forward-looking statements unless required by law.

I would now like to introduce your host for today's conference, Mr. Dayl Pearson, President and Chief Executive Officer of KCAP Financial. Mr. Pearson, you may begin.

Thank you all for joining KCAP Financial for a review of its second quarter 2012 financial results. I will open the call with some broad commentary about important highlights and activities during the quarter, including the impact of our financial results of our acquisition of Trimaran Advisors earlier this year, and we'll then discuss our investment portfolio in more detail.

I will then turn the call over to our Chief Financial Officer, Ted Gilpin, to provide a recap of our 2012 second quarter operating results and our financial conditions at the end of the quarter. We will then open the line for your questions at the end of the call.

So let me first provide a brief recap of the some important highlights in the second quarter. In the second quarter our NII increased from $0.15 in the first quarter to $0.23; this resulted in an increase of our dividend by 33% to $0.24 per share.

The second-quarter marked first full quarter following our February 29, 2012 acquisition of Trimaran Advisors and the acquisition was an important factor behind our increased dividend and net investment income.

As you will recall, as part of the acquisition we purchased equity positions in four CMO funds managed by Trimaran for a cash purchase price of approximately $13 million. Distributions to us from these funds contributed approximately $1.4 million to our total investment income for the second quarter.

Aside from the acquisition of the equity interest we also purchased the Asset Management business of Trimaran Advisors which was responsible for an increase in the periodic dividends we receive from our two asset manager affiliates from $825,000 in the first quarter to $1.2 million in the second quarter of 2012. Our other asset manager affiliate is Katonah Debt Advisors.

Trimaran should generate approximately $3.6 million of base management fees over the remainder of the year. In addition, we expect to realize incentive fees from some of the CLO funds it manages will likely beginning in the fourth quarter of 2012. The incentive fees could significantly increase income available for distribution to us beginning in 2013.

While those incentive fees will reduce the distributions on the related CLO funds -- equities that we own, our ownership interest in the CLO funds managed by Trimaran only represent approximately 17% of the equity interest in these funds. Because Trimaran, which is wholly owned by us, is entitled to 100% of the incentive fees the loss of these distributions and our CLO fund securities will be more than offset by a receipt of such incentive fees via distributions from Trimaran.

As we said last quarter, from a long-term strategic perspective we believe that 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 issue -- CLO market and allow us to grow the platform internally. In fact, we recently signed a nonbinding engagement letter to start working on a new CLO fund.

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 should allow us to further increase our net spread as we seek to reinvest these proceeds in higher yielding assets. As always, we will continue to be focused on credit quality and will manage and monitor our risks appropriately.

Since early February deal flow has increased substantially. Since the beginning of 2012 we reviewed close to 60 new transactions with a turndown rate of approximately 85%. We closed four new deals in the second quarter including two second liens and two senior note transactions. Three of these closed in June and therefore made a very limited contribution to our net investment income in the quarter.

In all four cases these loans were originated with financial sponsors and we partnered with mezzanine funds and/or other BDCs in each case. These four transactions totaled over $20 million deployed at a yield of approximately 12%.

Given the uncertain economic environment and volatile credit market we have remained very cautious in terms of deploying capital and continue to maintain adequate liquidity.

The combined yield on our debt portfolio loans, bonds and CLO securities was 21% at June 30, 2012. As of June 30, 2012 our weighted average mark to market value to par on our debt securities portfolio was [84] which was unchanged from the year end 2011. As far as CLO portfolio, our weighted average mark to market value to par was [67] as of June 30, 2012, an increase from the weighted average mark to market of [63] at year-end 2011.

Our 100% ownership of our asset manager affiliates was valued at approximately $72.9 million based on their assets under management and prospective cash flows at June 30, 2012. Our investment portfolio at the end of the second quarter of 2012 totaled approximately $299 million.

Credit quality remains good. At the end of the second quarter our debt securities totaled approximately $143 million and represented 47% of the investment portfolio. First lien loans now represent 49% of the debt securities and second lien loans represent 30%. Approximately 14% of our debt investments are fixed-rate investments with a weighted average rate of 13.3%.

At June 30, 2012 we had four issuers on non-accrual status representing less than 1% of total assets. All CLOs managed by KDA and Trimaran continue to be current on equity distributions and management fees.

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 prices 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; as mentioned earlier, $1.2 million in the second quarter.

Additionally as of June 30, 2012 our asset manager affiliates had approximately $3.3 billion of par value assets under management. 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.

In fact, on August 2 we filed a Form N-2 registration statement with the SEC with the intent of offering unsecured notes in the latter half of 2012. And now I will ask Ted Gilpin, who joined KCAP Financial in June, to walk you through the details of our financial performance. Ted?

Thank you, Dayl, and good afternoon, everyone. I will first cover some high-level financial information and then go into a little more detail on specific metrics. As of June 30, 2012 our NAV stood at $7.66 per share as compared to $7.78 at the end of March 2012, the decrease can be attributed to a net negative realized and unrealized mark to market loss of $4.4 million on our investments in the second quarter.

The Company declared a dividend of $0.24 a share for the second quarter of 2012 as compared to $0.18 a share for the second quarter of last year. The vast majority of the increase can be attributed to the full integration of our first-quarter acquisition of Trimaran Advisors.

Component pieces of the dividend can be found in our operating results for the 2012 second quarter. First, interest income for the three months ended June 30, 2012 was $2.7 million or $0.10 per share compared to $2.1 million or $0.09 per share for the same period of 2011. The increase can be attributed to more invested assets.

Second, dividends from the investments in CLO securities was $5.5 million or $0.21 per share in the second quarter of 2012 compared with $3.3 million and $0.14 per share in the same period of 2011. The majority of the increase can be attributed to the acquisition of the equity in the four Trimaran CLOs.

And finally, the third revenue component, as stated earlier, our asset manager affiliated dividended up to KCAP Financial $1.2 million or $0.05 per share in the second quarter of 2012 as compared to $650,000 in the second quarter of 2011 or $0.03 per share. The increase resulted from our acquisition of Trimaran Advisors in early 2012 and the respective net assets -- or their net asset management fees available to be dividended up to us.

These three revenue components resulted in total investment revenue of $9.5 million in 2012 -- in the second quarter of 2012 as compared to $6.1 million for the same period in 2011. This coupled with the fact that total expenses year over year remained relatively flat at $3.5 million, interest expense increased by approximately $200,000 while compensation expense decreased by a like amount. As a result we recorded net investment income, or NII, of $6.0 million or approximately $0.23 per share.

In addition, a one-time expense adjustment of over $300,000 relating to the transition of a new CFO was expensed in the period rather than accruing the cost over the year. The result was around a penny and a quarter per share hit to earnings. Therefore, absent this onetime expense, NII was $0.24 per share in the second quarter of 2012.

Now I will cover and a few aspects in more detail. As I mentioned earlier, second quarter year over year investment income from debt securities increased to approximately $2.7 million, a 30% increase from 2011. This increase was primarily due to an increase in the size of our loan portfolio, $143.3 million at quarter end versus $114.7 million the prior year, an increase of 21%. The increased balance can be attributed to the utilization of a portion of our credit facility.

Second quarter year over year investment income from CLO fund securities increased to 66% or $2.2 million to approximately $5.5 million from approximately $3.3 million in 2011. This increase is due to the aforementioned addition of subordinate tranches of CLO fund securities acquired in connection with the Trimaran acquisition.

The Company recorded net realized and unrealized depreciation of approximately $4.4 million or $0.16 per share during the second quarter ended June 30, 2012 as compared to net realized and unrealized depreciation of approximately $1.8 million or $0.08 per share for the same period in 2011.

On the liability side of the balance sheet, as of June 30, 2012 our debt outstanding consisted of $60 million of convertible notes, a five year term and a fixed rate of 8.75 and $21.5 million utilized under our $30 million credit facility with Credit Suisse at LIBOR plus 300 basis points.

At quarter end we had sufficient liquidity in cash and highly liquid investments to meet our credit and underwriting projection. Our asset coverage ratio at quarter end was 351%, well above the minimum required 200% for BDCs.

For additional information regarding the above metrics and for the full second-quarter 2012 results, please refer to our recently filed second-quarter 10-Q available online at the SEC or on our website, www.KCAPFinancial.com. With that I'd like to thank you for your time and we will now turn the call back to the operator to start the Q&A session.

(Operator Instructions). Greg Mason, Stifel Nicolaus.

To take a look at the asset manager, you had $1.2 million this quarter, I believe you said you've got $3.65 million of base management fees for the remainder of this year, so that would be about $1.8 million a quarter. How much of that do you expect to flow through of that $1.8 million to the BDC? Obviously you have got to cover your expenses at the asset manager. What should we be thinking about in the second half of this year?

Well, the $3.6 million I mentioned refers to just the Trimaran fees; I was talking about what the acquisition brought to the table. So in addition to that, the $3.6 million KDA should be probably around $4.3 million or $4.4 million.

In terms of what we think we will be able to dividend over the next two quarters, I think $1.2 million is probably a good starting point, we think there may be a little bit of upside in that. It also depends upon if we get any incentive fees in the fourth quarter from some of the Trimaran (inaudible).

And then as we think about those incentive fees in 2013, any color on how we should think about trying to calculate or quantify the incentive fees to the manager and ultimately to the BDC?

That's a great question. I think that my guess is -- we talked about the amount of the incentive fees per quarter 2013. It's somewhat a function of performance over the next couple of quarters. We know they are going to be earned; the question is exactly how much they are going to be. I think we will probably have more color on that, but I wouldn't be surprised of seeing $1 million a quarter in 2013.

I think that's a good proxy.

That's a good proxy. But again --.

It depends a little bit about when it turns on and when it (multiple speakers).

Yes, I mean, the problem is it's when you -- exactly when you meet the hurdle and then the money starts to kick in. So it depends upon how much of a stub piece we take in fourth quarter 2012 or it's not even a first full quarter until 2000 -- first quarter of 2013. But I would say roughly $1 million a quarter for 2013 is probably a good guesstimate.

And then about your leverage, what is your target leverage that you look for for your balance sheet?

I think we have talked about in the past about -- depending on the form of the leverage, somewhere between sort of 0.5 and 0.7 times our NAV. The more we have in longer term fixed rate leverage I think the more comfortable we are with having a slightly higher ratio. But it's sort of in that ball park.

Okay, great. Thank you, guys.

(Operator Instructions). John Hecht, Stephens.

It seems like credit quality is pretty stable, Dayl. Anything on the watch list or any trends you are seeing in the portfolio worthy of mentioning?

Yes, I think by and large you are correct, it has been fairly stable. There are one or two names which we are watching closely especially those which have reliance on state and local government expenditures which obviously are under a lot of pressure.

In terms of overall cyclicality, we are really not seeing -- we don't have that many cyclical names, but the ones we do have have been relatively stable. So we are not seeing a major impact from the economy right now, it is more other sort of one-off factors.

And then it sounds like you are looking to issue a new CLO out of the asset management division. Structurally what changes do you expect to see, whether it is over collateralization or equity tranche levels or rates versus the CLOs that may be done prior to the recession?

A lot of it is sort of minor structural changes which are a bit esoteric. But surely the biggest difference is the cost of debt. The cost of AAAs in the 2006 and 2007 funds is somewhere between 23 and 25 basis points over LIBOR. What's getting done so far this year has ranged anywhere from a low of 130 basis points over LIBOR to more recently 145 to 150. We expect that to come down a bit.

But the leverage is -- leverage levels really haven't changed much, it is really just the cost of funds. On the other hand obviously those go hand in hand, the returns on the assets are also higher than the initial assets that were in the funds that we now manage. But the real driver of new CLO issuance is the cost of the AAAs because that's 70% to 75% of the capital structure.

Great, thanks very much.

J.T. Rogers, Janney Capital.

First question on the $1 million per quarter run rate next year on the incentive fees. Is that net of lower income flowing through to the income notes and preferred shares of the Trimaran CLOs?

Well, let me be clear, we are not providing guidance, we are providing sort of a bit of a guesstimate. And again, if that $1 million fee we are talking about, that would probably result in something like a $150,000 to $175,000 reduction in the CLO distribution. So net it is still a significant contributor. And again, it is not guidance, it is just a guesstimate.

Okay, great, that helps. And in terms of the CLO issuance, would you all retain all of the equity in a potential CLO issuance or would you look to parcel that out to other buyers?

We would not; based upon guidance we've gotten from counsel we would probably more likely target something around a 25% retention of the equity tranche. The SEC has not really come down in terms of where they feel consolidation of the entire liability structure would be warranted, but we think if we stay at 25% or so we -- the guidance we have gotten from counsel is that is sort of the appropriate place to be. And so we would look for partners to fill out the other 75% and we have been in the process of doing that over the last couple months.

Is there any hurdle in terms of where this spread for the Triple-A tranche needs to go to before you -- there is a big appetite for partners in the equity tranche?

Not really. I mean, I think there are a number of people out there who either have specialized funds or have an allocation to invest in this. And I think they are looking at the overall returns on the fund, not necessarily just the pricing of the AAAs. So if you have assets and liabilities, sort of the same sort of relative sort of higher pricing structure, they are looking at total returns in our IRR.

Well, I guess to the sense that --.

As are we, obviously.

Yes. I was thinking to the extent that lower spreads to the AAA that affects your expected IRR for the equity --.

Yes, what happened was when the AAA pricing goes down pricing on loans gets pushed down too. So again you are not locking in the spreads on the loan so and the loan spreads will move around while you have locked in your spreads on the AAA.

All right, well, thanks for taking my questions.

(Operator Instructions). I'm showing over the questions at this time. I would like to turn the conference back over to Mr. Dayl Pearson for any closing remarks.

I don't have any other remarks. But I appreciate everyone being on the call this afternoon and we look forward to talking to you again soon. Thank you.

Ladies and gentlemen, this does conclude today's conference. You may all disconnect and have a wonderful day.