BCP Investment Corp (BCIC) 2015 Q1 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the KCAP Financial, Inc. First Quarter 2015 Earnings Conference Call.

An earnings press release was distributed yesterday. 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. As a reminder, this conference call is being recorded today Thursday, May 7, 2015. This call is also being hosted on a webcast which can be accessed at our Company's website at 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 the news events including earnings releases, please contact Jamie Lillis at 203-428-3223.

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 could 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 and good morning and thank you for joining KCAP Financial for a review of our first quarter 2015 results.

Today, I will review some of the important highlights and activities from the first quarter as well as provide some context for our direct lending and the performance of our Asset Manager Affiliates. I will then turn the call over to our Chief Financial Officer, Ted Gilpin, who will provide a brief recap of our first quarter operating results and our financial condition at the end of the quarter. We will then open the line for your questions at the end of the call. A presentation outlining a few of the key accomplishments in the quarter can be found on the IR section of our website.

To start, let me provide a brief recap of some of the important highlights in the first quarter which are summarized on page 3 of the earnings presentation. In the first quarter of 2015, our NII was $0.18 per share and our taxable distributable income was $0.19 per share. As a reminder, we also reported non-GAAP metric available for distribution, which is a good proxy for cash available to shareholders as well as what is a sustainable dividend. Available for distribution was $0.23 per share in the first quarter. Our first quarter shareholder distribution was $0.21 per share, down from the $0.25 paid in the fourth quarter.

I would now like to discuss performance of our loan and securities business and Asset Manager Affiliates in more detail. Turning to slide 4. During the first quarter, we invested $20.1 million in new originations. This is primarily funded by repayments and sales of placeholder assets. Our weighted average yield on our debt securities portfolio was 7.3% in the first quarter, flat with the [7.3%] from the fourth quarter. I'm encouraged by the quality of deal flow that we are now seeing in the second quarter as well as the strength of our pipeline and would expect the yield on our debt securities portfolio to begin to lift as we move through 2015.

Our credit quality of the portfolio continues to be strong with only one non-accrual loan representing less than $250,000 of cost. No loan originated since 2008 is defaulted. As credit markets continue to become more aggressive, we maintain our credit standards. We continue to strive to produce a healthy balance between our three main sources of investment income. While we continue to see good deal flow and middle market pricing and structure continues to be challenging for both senior and particularly junior capital investments. As always, we continue to maintain our standards, as I said earlier, and will not sacrifice credit quality in order to meet short-term income goals. KCAP believes that the current asset mix and allocation of First Lien, secured loans, mezzanine loans and CLO equity is the appropriate balance for our proper risk adjusted return.

Our asset management business continues to perform well. In the first quarter, the AMA priced Catamaran CLO 2015-1 of $463.8 million CLO was subsequently closed in the second quarter. The ongoing ability of our AMA to originate new CLO funds speaks to the rationale and success of the Trimaran acquisition. In terms of the market for our new CLO funds, the environment has remained robust thus far in 2015, as we'll soon begin warehousing for our next CLO fund. We continue to be optimistic regarding our ability to issue a new CLO fund in the near future.

As of March 15, our weighted average mark-to-market value up to par on our debt securities portfolio increased to 99 compared to 98.6 in the fourth quarter. As far as the CLO portfolio, our weighted average mark-to-market value to par was 56 as compared -- as of March 31, [2013], a slight decrease from the weighted average mark-to-market to par of 58 in the fourth quarter. A 100% ownership of our Asset Manager Affiliates is valued at approximately $72 million based on their assets under management and positive -- and prospective cash flows at March 31. Our investment portfolio at the end of the first quarter totaled approximately $488 million.

Looking at the composition of our investment portfolio, our portfolio quality continues to hold up well with no new assets on non-accrual, which is a testament to our underwriting investment discipline. At the end of the first quarter, debt securities totaled approximately $320 million and represented 66% of the investment portfolio. First Lien loans now represent 69% of the debt securities portfolio and junior loans, 31%. Importantly, as I stated earlier, we've not seen any adverse credit trends in the quarter and have exposure to only two energy credits totaling approximately $13 million. Both of these are relatively low levered secured loans.

All CLOs managed by KDA and Trimaran continue to be current on equity distributions and management fees. The stable income stream from our asset management allows them to make periodic distributions to us. In the first quarter, there was a distribution of $2.7 million, additionally as of March 31, our Asset Manager Affiliates had approximately $2.9 billion of par value of assets under management, which does not include the new CLO which closed in the second quarter and is down slightly from the $3 billion in assets under management at the end of the year.

As always, we continue to evaluate our equity and debt financing options which allow us to focus on continued balance sheet growth, increasing net investment income and dividend distributions. All in all, we are pleased with our first quarter results and the momentum which our business heads into the second quarter. And now, I'll ask Ted Gilplin to walk through the details of our financials.

Thank you, Dayl. Good morning, everyone.

As of March 31, 2015, our net asset value stood at $7.16, which is up 3.2% sequentially from $6.94 at the end of the fourth quarter of 2014. Net investment income was $6.5 million or $0.18 per basic share for the first quarter of 2015, up from $5.5 million or $0.15 per basic share for the fourth quarter of 2014 and up from $4.5 million and $0.13 per basic share for the first quarter of 2014. Taxable distributable income was $7 million or $0.19 per basic share for the first quarter of 2015 compared with $6.1 million or $0.18 per basic share for the first quarter of 2014.

Resources available for distribution, which is NII plus taxable excess cash on CLOs plus cash in the AMAs in excess of their taxable earnings, was $8.3 million or $0.23 per share during the first quarter versus $7.7 million or $0.23 per share for the same period of 2014. The Company declared a $0.21 distribution in the first quarter, which is down from $0.25 paid in the fourth quarter of 2014. Interest income on our debt securities for the three months ended March 31, 2015 is $6.2 million or $0.17 per share compared with $5.6 million or $0.15 per share for the quarter ended December 31, 2014 and compared to $5.2 million or $0.16 per share for the first quarter of 2014.

As Dayl mentioned earlier, investments which we have made in our direct lending platform have resulted in improved balanced contributions in that investment income from our three main areas of investment. And as a result, our debt securities portfolio continued to contribute roughly half of our total investment income during the quarter. Investment income from CLO fund securities was $4.6 million or $0.12 per share in the first quarter of 2015, which is up from fourth quarter of 2014, versus $3.6 million or $0.10 a share and up from $3.1 million or $0.09 a share in the first quarter of 2014.

We recognized $1.4 million of dividend income from our Asset Manager Affiliates during the first quarter or $0.04 per share, which is up slightly from the fourth quarter's distribution of $1.3 million or $0.04 a share when compared to $1.4 million and $0.04 a share in the first quarter of 2014. These three revenue components contributed to the bulk of our total investment revenue of approximately $12.3 million for the first quarter of 2015, (technical difficulty) quarter results of $10.6 million. For more detail on the breakdown of KCAP's components of distributable income, please see page 5 of the first quarter earnings presentation.

Company recorded net realized and unrealized appreciation of approximately $1.2 million for the first quarter of 2015 as compared to net realized and unrealized depreciation of $1 million during the first quarter of 2014. As Dayl mentioned in April, our asset manager closed a Catamaran CLO 2015-1 $464 million CLO and we continue to see momentum in the CLO space. The addition of Catamaran CLO 2015-1 along with Catamaran CLO 2014-1 and 2014-2 has helped to replace some of the natural run off in assets under management and has positively impacted the fair value of the Asset Manager Affiliates supporting NAV as well as our quarterly shareholder distribution run rate.

On the liability side of our balance sheet, as of March 31, 2015, our debt outstanding was approximately $224 million consisting of $38.6 million of convertible notes coming due in March 2016 at a fixed rate of 8.75%, $41.4 million of senior notes due in 2019 at a fixed rate of 7.375% and $144 million debt securitization financing transactions which as restated interest rate results on a quarterly basis -- resets on a quarterly basis based up on then current levels of benchmarked 3-months LIBOR. Our asset coverage ratio at quarter end was 215%, above the minimum required 200% for BDCs. For additional information regarding the above metrics and our [third] quarter results, please refer to our 10-Q, which was recently filed, it's available online with the SEC and from our website, kcapfinancial.com.

Now, I'd like to turn it back over to the operator to answer your questions.

(Operator Instructions). Troy Ward, KBW.

Dayl, a couple of quick questions on just kind of macro, can you speak a little bit on the CLO side, your CLO activity, the pricing, what you are seeing, where is kind of the gating point for you to continue to warehouse and get new CLOs, this is AAAs, this is the sub fees, kind of just speak broadly about what you're seeing in the CLO market?

I think the biggest issue right now with ramping new CLOs is the availability of assets at reasonable prices, so that the economics work on the other side. There has been a significant slowdown in new deal activity in the large market and so there is just not a lot of new deal activity. So we become more and more dependent on the secondary market. So I think you're going to see ramp periods potentially be longer, but certainly the AAAs are out there, the pricing varies from day-to-day and month-to-month. But we have a pretty good series of relationships with AAA providers, as well as with equity providers.

And so I think we're confident getting deals done. I think the biggest issue is going to be one of whether we can get something done in the third quarter, whether it slips a bit. So the market is certainly there. It's going to be -- I think, the first quarter of this year was even bigger than the first quarter of last year. I think it's starting to settle down a bit, but there is certainly plenty of activity.

So, can you speak also about how maybe GE, you see the -- the fact that GEs unwinding their middle market platform potentially impacting your -- the CLO business and maybe your broader business over the next couple of quarters, I think at first glance, everyone thought that while GE is moving out, that means spreads will increase, but you're saying there is actually a lack of supply which means the competition for those assets is going to stay quite high and spreads probably won't increase. Can you just speak to that and kind of how GE may fit into all that?

Yes, I think GE is going to have far less impact on the broadly syndicated loan market, which is where our CLOs invest and GEs focuses more on the middle market, primarily the upper middle-market for -- so, I don't see that impacting necessarily the CLO business. Why do you see it impacting is and we've seen it already is GE had an ability to go out and not only commit to but hold very large pieces of middle-market deals at pricing that in our view was very often below what we would consider to be the appropriate rate of return, and I think as a result we've seen pricing on First Lien middle market loan -- true middle market loans widened a bit over the course of the last six months. At the same time, the pricing on the broadly syndicated loans were narrowing a bit. So it's sort of an interesting dichotomy. So I do think the GE impact overall will be positive to spreads in the middle market, just because there is no one who is going to go and hold the types of positions GE held. Even if somebody, a big guy buys the GE portfolio, I just don't see them holding $50 million out of a $100 million term loan.

Okay, that's good color. Thanks. And then one final one, as we think about that your CLO that closed in the second quarter. Can you just speak to kind of the income metrics that you expect to see from that here in 2015 and when will those kick in? Is there some type of lag that we should be expecting in our modeling?

Not really. I mean it closed on Tuesday, so essentially you'll have almost two full months in the quarter. And then obviously for the rest of the year. I mean obviously at the beginning, I think the cash flows tend to be much higher, so the income you get on the effective interest method, but that's moves out over time.

(Operator Instructions) Andrew Kerai, BDC Income Fund.

Dayl, a little surprised given the strength in the liquid loan markets to see the CLO equities from your AMAs that you hold on balance sheet actually fell about $658,000 for the quarter from a valuation standpoint. Can you just maybe comment on what variables drove that, I was just simply modeling out lower future cash flows given some are going to be exiting their reinvestment periods, was that raising the discount rate, if you could maybe just give us some color on what drove the valuation dips given the strength in the liquid markets for Q1, that would be helpful?

Yes, I think a couple of things, Andrew. Number one, I think a lot of that was driven by the older CLOs as they wind down, we had two CLOs that were called in the fourth quarter. They still had some tail into the first quarter, but those essentially went away. And those essentially the call price was sort of spot on to our mark at the end of the third quarter, so support of our valuations. So I think you're going to see that -- that will be somewhat variable but, I think the CLO equity market still tends to be as looking for higher returns than they were maybe a year ago. So I think some of that's sort of market driven.

Sure, that makes sense. And then last question I had, so just looking at the new CLO that closed from Trimarans about $460 million, which brings your AUM, the AMAs that's about $3.4 billion, obviously you are going to have some run-offs but that's hopefully at least offset by the new CLO fund that hopefully you guys can price later this year, that you are going to be warehousing for.

So if I just run the rough math with 40 basis points on the you call up $3.4 billion roughly of AUM pro forma, I get to about $13.6 million in potential cash flow for the AMAs or about a little over about $3.4 million a quarter. My thinking about that the right way?

I think you are thinking of that -- that's the senior and sub fees, there are also some incentive fees that they've been three deals with bank, center fees, and also then you have to take the expenses out -- expenses of the AMAs out (technical difficulty) a piece of the calculation.

But you are raising an interesting point here, Andrew, and that is when we made the acquisition of Trimaran in February of 2012, the combined AMAs at that time at $3.3 billion of AUM, of which $3.3 billion were in so-called CLO 1.0 i.e. Once that at this point or either deleverage don't exist anymore. Today, subsequent to the closing of this fund, let's say, it's roughly $3.3 billion, because there has probably been some run offs since the end of the quarter nothing sit that great, but $3.3 billion. That $3.3 billion, only about $1 billion is in CLO 1.0. So, we were over $2 billion in 2.0 funds, all of that still in their reinvestment periods. So we replaced that, we do two more deals over the course of the next nine months or so. We will replace all of the old funds and actually start to grow the -- potentially grow the -- grow the AUM of the asset manager and sort of get through this period of deleveraging significantly.

I am showing no further questions. I will now turn the call back over to Dayl Pearson for closing remarks.

I'd like to thank everyone for being on the call today, and we know it's a very busy day, lots of BDCs reporting and we look forward to talking to you again in a few months. Thank you.

Thank you, ladies and gentlemen. That does conclude today's conference. You may all disconnect and everyone have a great day.