BCP Investment Corp (BCIC) 2013 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the KCAP Financial first-quarter 2013 earnings conference call. An earnings press release was issued yesterday, Monday, May 6, 2013. 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 a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded today, May 6 (sic - May 7), 2013. 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, press -- please contact Denise Rodriguez at 212-455-8300.

Today's conference call includes forward-looking statements and projections, and we ask that you referred to KCAP Financial's most recent filings with the SEC for important factors that could cause actual results to differ materially from these 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 the first quarter of 2013. I will open the call with some broad commentary about important highlights and activities during the quarter and subsequent events, including the performance of our Asset Manager Affiliates and our principal investment portfolio.

I will then turn the call over to our Chief Financial Officer, Ted Gilpin, for him to provide recap of our first-quarter operating results and our financial condition at the end of the quarter. We will then open the line up for your questions at the end of the call.

First, I'm going to provide a brief recap of some important highlights. In the first quarter of 2013, our NII decreased from $0.28 in the fourth quarter to $0.24. Our dividend remained at $0.28. This decrease was partially due to about $600,000 in audit expense that we had in the first quarter, plus a significant increase in shares outstanding due to an equity offering in February, the proceeds of which were not immediately invested.

Subsequent to the end of the quarter, we priced an on-balance-sheet debt securitization of approximately $105 million to provide additional leverage for our core middle-market lending business. A significant portion of the proceeds from this facility will be invested in first lien, middle-market loans. Due to the pricing of this facility, the overall returns from this leverage will be equivalent to our mezzanine loans, but will reduce the overall risk profile of our balance sheet. The transaction is expected to close in the middle of June. Our Asset Manager Affiliates continue to warehouse assets for their next CLO, which we expect to price before the end of the quarter.

I will now review our principal investments and new origination activity. Deal flow in the middle-market lending business year-to-date has been about $800 million in new potential opportunities. We have reviewed 101 new deals. We committed to 12 new deals; eight of those closed in the first quarter. Many of these were middle-market, first lien loans for our balance sheet securitization.

In the first quarter we closed eight new investments totaling approximately $43.75 million, including loans to our AMAs to provide capital for the new CLO warehouse. Many of those loans closed late in the quarter. And if you look at our net interest income from debt securities, about 42% of that occurred in the month of March.

To date, in the second quarter, we have closed approximately $8.5 million of new loans in three transactions. We also had one loan pay off in the first quarter, of $4.5 million; and an additional loan payoff in the second quarter of about $5 million. We expect three other loans to fund this month, and have a robust pipeline of new deals.

Given the uncertain economic environment and an aggressive credit market, we have remained very cautious in terms of deploying capital, despite having substantial liquidity. The combined yield on our debt portfolio of loans, bonds, and CLO securities was 18% on par, and 20% on fair value, at the end of the quarter.

As of March 31, our weighted average mark-to-market value to par on our debt securities portfolio was 87 compared to 81 for year-end 2012. As for our CLO portfolio, our weighted average mark-to-market value to par was 74, a decrease in the weighted average mark-to-market of par of 78 at year-end 2012.

Our 100% ownership of our Asset Manager Affiliates were valued at approximately $80 million, based on their assets under management and prospective cash flows. Our investment portfolio at the quarter end 2013 totaled approximately $357 million.

Looking at the composition of our portfolio, our portfolio quality continues to hold up well. At the end of the first quarter of 2013, our debt securities totaled approximately $152 million, and represented 42% of the investment portfolio. First lien loans represent 51% of the debt securities; and second lien loans, 26%. Approximately 11% of our debt investments are fixed-rate investments with a weighted average rate of 11%.

At March 31, 2013, we had five issuers on nonaccrual status, representing less than 1% of total assets at fair value. This is unchanged from the end of 2012. All CLOs managed by KDA and Trimaran continue to be current on equity distributions and management fees. This stable income stream for our Asset Manager Affiliates allows them to make periodic distributions to us in the form of a dividend. In the first quarter, there was a distribution of $3 million.

Additionally, as of March 31, 2013, our Asset Manager Affiliates had approximately $3.5 billion of par value assets under management. This does not include assets in the warehouse for a new transaction. We also continue to evaluate debt and equity financing options, which will allow us to focus on continued balance sheet growth, increasing net investment income and dividend distributions.

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

Thank you, Dayl, and good morning, everyone. First, let me cover some of the higher level financial information; then I'll go into a little more detail on specific metrics. So, as of March 31, 2013, as Dayl mentioned, our NAV stood at $8.33 per share, which compares to $7.85 at the end of December of 2012. The increase can be attributed to issuing shares above NAV in the first quarter, and to a dividend payable at year-end of approximately $7.4 million, which had an effective equivalent of about $0.23 per share, based on the common shares outstanding in March of 2013.

The Company declared a dividend of $0.28 for the first quarter of 2013, the same as the prior quarter; and that compares to $0.18 for the first quarter of last year. The component pieces of the dividend can be found in our operating results for 2013 first quarter. First, interest income for the three months ended March 31, 2013, was $2.5 million or $0.08 per share. Again, relatively flat to $2.5 million, or $0.10 per share, for the same period of 2012.

Second, dividends from investments and CLO securities were $5.9 million or $0.20 per share in the first quarter of 2013, compared with $4 million and $0.17 per share in the same period of 2012. The majority of the increase can be attributed to the acquisition of the equity in the four Trimaran CLOs and to the addition of the Catamaran 2012 CLO.

Finally, the third revenue component, the dividend from our Asset Manager Affiliates, was $3 million or $0.10 per share in the first quarter of 2013, as compared to $825,000 in the first quarter of 2012, or $0.03 per share; the increase resulting from our acquisition of Trimaran Advisors earlier in 2012 and their respective net asset management fees available to be distributed up to us.

Something to note -- we had a one-time expense of approximately $950,000 in the first quarter related to severance at the Asset Manager Affiliates. So the run rate for the near-term is approximately $3.3 million per quarter without the charge. These three revenue components resulted in total investment revenue of $11.4 million for the quarter ended March 31, 2013, as compared to $7.4 million for the same period of 2012.

This, coupled with the fact that total expenses year-over-year increased $4.4 million, we recorded net investment income, or NII, of $6.9 million or approximately $0.24 per share. Another note -- we issued 5,432,500 new shares in the quarter, the proceeds of which we are in the process of fully investing. Without the drag of the new shares, NII per average share would have been $0.26 a share.

Of the $4.4 million of expenses, $2.3 million related to debt expense, an increase of approximately $818,000 over the same quarter in the prior year. In addition, approximately $350,000 or $0.01 per share, were related to traditionally higher first-quarter expenses.

Now I'll cover of few aspects in more detail. As I mentioned earlier, first-quarter year-over-year investment income from debt securities remained flat, at approximately $2.5 million. First-quarter year-over-year investment income from CLO funds and securities increased 47.5%, or $1.9 million, to approximately $5.9 million from approximately $4 million in 2012. This increase is due to the aforementioned addition of subordinate tranche to the CLO fund securities acquired in connection with Trimaran.

The Company recorded net realized and unrealized appreciation of approximately $267,000 or $0.01 per share, during the quarter ended March 31, 2013, as compared to net realized and unrealized depreciation of approximately $3.1 million, or $0.13 per share, for the same period in 2012.

On the liability side of our balance sheet, as of March 31, 2013, our debt outstanding consisted of $60 million of convertible notes with a five-year term and fixed rate of 8.75%; and $41.4 million of senior notes with a seven-year term and a fixed rate of 7.375%. Subsequent to the quarter end, approximately $9 million of the convertible notes converted into 1,102,093 shares of common stock.

At quarter-end, we had sufficient liquidity in cash and highly liquid investments to meet our credit and underwriting projections. Our asset coverage ratio at quarter-end was 362%, well above the minimum required of 200% for BDCs.

So, for additional information regarding the above metrics, and for full first-quarter 2013 results, please refer to our recently filed first-quarter 10-Q, which is available online at www.sec.gov or on our website, www.kcapfinancial.com.

And with that, I'd like to thank you for your time. And we'll now turn the call back over to the operator to start the Q&A session.

Operator?

(Operator Instructions). Greg Mason, KBW.

Great. Good morning, gentlemen. First off, Dayl, can you talk a little bit more about the securitization in terms of -- I think you said you officially priced it. So, can you talk about what debt you would hold on your balance sheet and what the cost of that debt might be?

Yes, the debt on the balance sheet is approximately $105 million. And if you sort of fully load all of the costs, including discounts and everything else, it's a little bit -- it's right around 3%. And we expect to be investing that in sort of -- 80% of that is first lien; 20% of that we can invest in a combination of second lien and unsecured.

So is that -- you said 3%. Is that L plus 3%? Or would that be more like L plus 2.75% -- all-in cost of 3%?

Yes. It's really sort of L plus 2.85%, so it's right around 3%.

Okay, great. And then --

And [generally] I think, the term, just so you, it's -- unlike our previous credit facilities that we had, that had a three-year or four-year revolving credit component and then that was it; this has a four-year reinvestment period. And then after that, a six-year term out, so it's a really 10-year money, assuming we need it to run out 10 years.

Great. And then can you talk about, because of that securitization, you mentioned you're going to have to focus on first lien, middle-market loans. Can you talk about what you're seeing today in yields on the first lien, middle-market and what you're pipeline is for that area?

Pipeline is pretty good, although a lot of our pipeline right now is more second lien and mezzanine. But we're also using this as a marketing tool in that we can commit to, in a club deal, to a piece of first lien to get second lien and mezzanine opportunities. In terms of pricing, it's sort of all over the place. But in traditional, smaller middle-market stuff, it's between 6% and 7%, all-in.

There will be a sprinkling over time. Initially, there will be some broadly syndicated. Over time, that will essentially trade out of what broadly syndicated we have, and it will be mostly first lien -- mostly middle-market.

Great. And then one more, and I'll hop back in the queue. You had some write-downs this quarter in your CLO equity investments. Can you talk about what the reason for that write-down was? And is this going to impact earnings and cash flow generation going forward from those CLO equity tranches?

Yes, this is Ted. Well, the CLO equities, some are of these are past their reinvestment period. So every time we receive a payment in the quarter, they tend to go -- they're de-leveraged, so they -- or their value is trending in. We're obviously -- that kicks in on the other side, incentive fees, so the manager will receive incentive fees which offset some of that. And also, we are obviously adding new CLOs that will hope to fill that bucket, and then some.

Yes, one other point on that, Greg, as you may or may not remember, back in 2007 and early 2008, when you did new CLOs -- when you book a new CLO, the equity tranche, you're really not recognizing much income on that for the first two quarters, because the cash is being used to pay the fees of the transaction. So, for example, the Catamaran deal that we closed in December, you're not really going to see a healthy distribution until the third quarter of this year. So there's a little bit of a drag there, but once those kick in, obviously they'll be pretty healthy.

Great. Thanks, guys.

(Operator Instructions). JT Rogers, Janney Capital Markets.

Thanks a lot. Thanks for taking my question. You saw operating expenses increase in the quarter. Just wondering how much of that is seasonal, versus you guys may be adding headcount or cost generally going up.

Yes, as I said, the first quarter is traditionally a little bit higher. What we are looking at, is it about $0.01 a share higher than a normal run rate, about $350,000. Part of that relates to some of the -- and that's at KCAP. Part of that relates to what Dayl mentioned, was audit fees come in a lot, and we pay from the first quarter. Some of that is down at the asset manager level, which also impacts their ability to dividend. But, for the most part, it was about $350,000.

At KCAP.

At KCAP.

And then there is some additional audits. Again, we can't spread the audit fees over the year. We have to take them all in the quarter. If you go back and look at our first-quarter numbers, historically the expense has always been a little bit on the high side. And given our size, our audit expenses are relatively high. As we grow, obviously that will become less important.

Okay, great. And then just wondering if you guys talk about any trends you're seeing in the CLO market for what you're expecting the price in, by June. Would there be any reason why this would be any different than the Catamaran transaction in the prior quarter?

You're talking about our on-balance-sheet securitization?

No, this is (multiple speakers).

No, I think that deal, as I said, we're warehousing those assets now. The broadly syndicated market has tightened quite a bit in terms of pricing in the last six months. And the supply of paper is tight. But we're finding good value right now. And we take it a little bit slower, in terms of the warehousing and getting this done, because we wanted to make sure we added as much new issue as possible.

But we're very close to having the other pieces of the equity put in place. And we hope to be launching into the debt side of it in the next week or two. (Multiple speakers). So, a lot of guys -- there's a lot of deals getting done.

All right. So, other than just the assets going into CLO, no changes in the structure, leverage, pricing, on the debt side?

The liabilities have definitely come in quite a bit; probably 25 to 30 basis points from where they were in December.

Okay, great. And then last thing, on your -- we're seeing quite a bit of refinancing on your CLOs that are past their reinvestment period. Any change in your expectation as to the rate at which they wind down?

Well, it's lumpy; the whole refinancing is lumpy. Luckily, a lot of the new deals have been these so-called cashless rolls, which allow CLOs that are in past their reinvestment period to not commit to a new deal, even though it's somewhat of a deal. So that helps a bit. But there is a fair amount of refinancing activity. And we have seen -- we were at probably $100 million of deleveraging in the quarter over the entire -- it was $3.6 million; it's now $3.5 million.

All right. Just wondering where that compares to what your expectations were, maybe six months ago.

Pretty much in line. Maybe not quite as aggressive initially, as we thought; a little more aggressive more recently.

Okay, great. Thanks a lot.

Chris York, JMP Securities.

Thanks. Good morning, gentlemen. You've made some strong investments in your asset management business over the last couple quarters, and realized some nice growth as well. Can you give me an idea for headcount at the Manager and the potential need for future hires?

Yes, I think we added a couple of analysts over the course of the last six months, in anticipation of this growth. And we don't really see -- it's a very leverageable structure. Because, whether you're managing five funds or 10 funds or 15 funds, you're essentially investing in the same number of loans. And so really you need about the same number of analysts, because you're spreading those loans. Instead of pivoting $10 million to loan X, and putting $2 million each in five funds, you're doing $20 million to loan X, and you're putting $2 million each in 10 funds.

We constantly look at the needs; and if we need to, well, we will add additional staff. But I think we conservatively think we're in pretty good shape right now, in terms of number of loans handled per analyst.

Okay. And then what did you close the quarter at for headcount?

At the Asset Manager?

Yes.

Well, that's a little bit of -- eight credit staff, I think; compared probably to six at the end of the third quarter.

Great, okay. And then are you still focusing on originating first lien, middle-market loans in order to pledge that to that new debt instrument?

Yes.

Okay. And then, forgive me if I missed this -- what was the weighted average yield on the investment portfolio? And does that include your money market?

The weighted average yield on the investment portfolio -- hold on one second. The weighted average yield on our total debt portfolio was 18% on par; 20% on fair value. And that does not -- that's what it says here.

On the loan portfolio?

You're talking about the total debt portfolio.

Total debt and (multiple speakers). Yes.

Loans and CLOs?

Correct.

Yes. On loans and CLOs combined, the total debt portfolio -- it's 18% at par; 20% on fair value. On the loans alone, it's about 8%.

Yes, got it. Okay. That's it for me. Thanks a lot.

Greg Mason, KBW.

Great, thank you. Can you talk about the new credit facility that was issued to Trimaran Advisors? And I assume that's for the warehousing facility, but just talk about that new facility.

Yes, sure. KCAP lent money into Trimaran, essentially for their [wicks] to ramp up there warehouse lines. We did that in the fourth quarter of last year. Again, we're doing the same thing for this warehouse line.

You didn't see it last year because it got funded and paid off in the quarter, but it's actually going over the quarter at this point.

That's what I was going to ask. How long do you expect to be outstanding with that loan?

Well, that will get paid off when we close the new CLO, which we expect to close before the end of the quarter.

Okay, great. And can you give us -- I assume that facility is in the $45 million of originations this quarter?

Yes.

Okay. And then, last --

And, again, when that gets repaid, Greg, a big piece of that will then be invested in the equity, and potentially a single V tranche in the new CLO. So we're not getting all of that back.

It shifts to the loans.

It shifts to the loans to KCAP's investment in the equity.

Makes sense. Thanks. The incentive fees on the legacy Trimaran CLOs, can you talk about how many of those have turned on today, and expectations for timing and potential of any additional incentive fees?

In the first quarter, there were two paying incentive fees. We expect two more to pay probably starting in the third and fourth quarter.

Great. And so, that gets to my last question, just on your dividend philosophy. I know in the past you've talked about you want the dividend to be covered from an operating income perspective. Obviously that was low this quarter, $0.24 versus the $0.28 dividend. Can you give us an update on your dividend thought process going forward?

Yes, I think the Board continues to evaluate that quarterly. And, again, as we've talked about, they look forward over the next four quarters, so we're not constantly adjusting our dividend, but to try to anticipate what we're going to be able to earn over the next four quarters. And that philosophy has not changed. And we'll evaluate -- the Board evaluates it every quarter when we make our dividend decision.

Great. So, it was reasonable to assume, when you announced the $0.28 dividend, that you knew this weaker first quarter was coming?

It was in our year-end budget. It was a little bit -- it ended up being a little bit weaker, just because, to be honest with you, our budget, we didn't anticipate issuing as many shares as we did. But it really was not -- that was a marginal impact. It was pretty much in line with our full-year budget.

Okay. Great. I appreciate it, guys.

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

Thank you for your time and your questions. And we hope to talk to you again in August. Thank you very much.

Thanks, take care.

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