BCP Investment Corp (BCIC) 2015 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the KCAP Financial, Incorporated 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, March 10, 2016. This call is also being hosted on a live webcast, which can be accessed at our Company's website at www.kcapfinancial.com in the Investor Relations section under events.

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 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, and thank everyone for joining us for our year-end earnings call. Today I will review some of the important highlights and activities from the fourth quarter and year end, as well as provide some context for our direct lending business and the performance of our asset manager affiliates. We will then turn the call over to our Chief Financial Officer, Ted Gilpin, will provide a brief recap of our third quarter operating results and our financial condition at the end of the year. We will then open the line for your questions at the end of the call. At that point, Dan Gilligan will join us, our head of portfolio operations, to answer questions, specifically those related to Trimaran, our asset manager affiliates, and the CLO equities.

To start, let me provide a brief recap of some of the important highlights from the year-end, which are summarized on slide 3 of our earnings presentation. For the year ended 2015, our net investment income was $0.65 per share and our tax distributable income was also -- was $.63 per share, sorry. As a reminder, we also reported a non-GAAP metric, resources available for distribution. Resources available for distribution were $0.73 per share for the year end. Our fourth-quarter declared dividend distribution was $0.15 per share compared with the $0.21 paid in the third quarter of the year.

I would now like to discuss the performance of our loan and securities business and asset manager affiliates in more detail. Turning to slide 4, during the year we invested approximately $75 million in new originations. This was primarily funded by repayments and sales of placeholder assets. These new loans had a yield generally comparable to the assets they replaced. Our credit quality of the portfolio continues to be strong, with only one nonaccrual loan, representing less than $250,000 at cost. One loan, Millennium, was restructured through a combination of new debt and equity, which resulted in an increase in the combined value for the third quarter.

KCAP stands out among most of our peers with very low nonaccruals as well as limited exposure to the oil and gas industry. Most of the marks on our loan portfolio are related to market issues and not serious credit issues. That being said, we remain vigilant in monitoring our loan portfolio and very selective on new investments.

In terms of the market for new CLO funds, the environment has become more challenging, starting late last summer. We continue to warehouse for our next CLO fund but remain very cautious on asset selection. We continue to be positive regarding our ability to issue a new CLO fund in the near future. However, the supply of new loans and AAA spreads, which are essential to raising funds, are very challenging at the moment.

As of December 31, 2015, our weighted average mark-to-market value to par on our debt securities portfolio decreased to 95 compared with 96 in the third quarter. This is consistent with the broader market selloff and decline of average marks in the leverage loan indices. For the CLO portfolio, our weighted average mark-to-market value to par was 50 as of December 30, 2015, a decrease from the weighted average mark-to-market to par of 60 for the third quarter. Again, consistent with the overall market.

Our 100% ownership of our asset manager affiliates was valued at approximately $57 million, based on their assets under management and positive and prospective cash flows at December 31, 2015. Our investment portfolio at the end of the fourth quarter totaled approximately $410 million.

Looking at the composition of our investment portfolio, again, as I said, our portfolio quality continues to hold up well, with no new assets on nonaccrual. I think this is unusual given the current environment. At the end of the fourth quarter, debt securities totaled approximately $285 million and represented about 70% of the investment portfolio. First lien loans now represent 68% of the debt securities portfolio and junior loans, 13%. All CLOs managed by KDA and Trimaran continue to be current on equity distributions and management fees.

The stable income strength for our asset manager affiliate allows them to make periodic distributions to us. During the year these distributions totaled $9 million. Additionally, as of December 31, 2015, our asset manager affiliates had approximately $2.7 billion of par value assets under management, which is similar to the end of the third quarter. As always, we continue to evaluate our equity and debt financing options, which will allow us to focus on continued balance sheet stabilization, increased net investment income, and dividend distributions.

On the recent conference calls, when we were questioned about the idea of a stock buyback, we mentioned two issues that the Board was concerned about. First, we were concerned about a possible selloff in the credit markets that could cause our leverage to increased unacceptable levels. Unfortunately, that selloff in the credit markets did happen. Second, we were concerned about the near-term maturity of our convertible bonds.

Despite that -- despite the selloff in the credit markets and other volatility in the markets, we continued to repurchase our convertible bonds during 2015, and as of today have sufficient cash to pay off the remaining bonds at their maturity on March 15, 2016. And now I will ask Ted Gilpin to walk through the details of our financials.

Thank you, Dayl, and good morning, everyone. As of December 31, 2015, our net asset value stood at $5.82, down from $6.33 at the end of the third quarter of 2015 and down from $6.94 on December 31, 2014. Volatile markets in the latter half of 2015 resulted in a full-year realized and unrealized depreciation of $2.3 million, or approximately $1.15 per average basic share. $36.2 million of that depreciation was unrealized. The Company declared a $0.15 distribution in the fourth quarter of 2015, which is down from $0.25 per basic share in December of 2014.

Net investment income for the three-month period ended December 31, 2015, was $5.3 million, or $0.14 per basic share, down from $6.5 million or $0.18 per basic share in the third quarter of 2015 and down from $5.5 million or $0.15 per basic share in the fourth quarter of 2014. For the year ended December 31, 2015, net investment income was $24.2 million, or $0.65 per basic share compared to $20.1 million or $0.59 per basic share for the year ended 2014.

Taxable distributable income for the year ended 2015 was $23.3 million or $0.63 per share compared with $26.8 million or $0.78 per share for the year ended 2014. Resources available for distribution, a non-GAAP measure -- which is net investment income, plus the taxable distributable excess cash on CLOs, plus cash distributed by the AMAs in excess of their taxable earnings -- for the full year 2015 was $27 million or $0.73 per basic share versus $33.3 million or $0.97 per basic share for the full year 2014.

At this point I would like to discuss the details of our results for 2015. First, investment income on our debt securities for the three months ended December 31, 2015, was $5.7 million or $0.15 per basic share compared to $6.3 million or $0.17 per basic share for the third quarter of 2015. Our debt securities portfolio continues to grow as a percentage of total NII. The contribution today stands at 56% at the end of the fourth quarter, which compares to 54% in the third quarter of 2015 and 53% for the full year, as compared to 52% of the full year of 2014.

Second, investment income from our CLO fund securities was $3.2 million or $0.09 per share in the fourth quarter of 2015, compared with $3.9 million or $0.10 per share in the third quarter of 2015. Lastly, our dividend income from our asset manager affiliates was $1.2 million, or approximately $0.03 per basic share in the fourth quarter of 2015, a decrease of approximately $390,000 from the third quarter of 2015. In the full year ended December 31, 2015, we recorded $5.3 million or $0.14 per basic share in dividend income from our asset manager affiliates, as compared with $5.5 million or $0.16 per basic share in the prior year.

In addition, the asset manager affiliates distributed $3.7 million or $0.10 per basic share in excess of their tax basis earnings and profits as a return of capital in 2015, compared with $6.4 million or $0.19 per basic share in 2014. The Company recorded net realized and unrealized depreciation of approximately $16.5 million or $0.44 per share during the quarter ended December 31, 2015, primarily attributable to our CLO equity investments and our asset manager affiliates, as compared to net realized and unrealized appreciation of approximately $13.7 million or $0.38 per share in the same period of 2014.

On the liability side of our balance sheet as of December 31, 2015, our debt outstanding was $205.1 million, consisting of $19.3 million of convertible notes due March 15, 2016 at a fixed rate of 8.75%; $41.4 million of senior notes due in October of 2019 with a fixed rate of 7.375%; and $144.4 million of our debt securitization financing transaction, which has a stated interest rate that resets on a quarterly basis, based upon the then-current level of the benchmark three-month LIBOR.

Our asset coverage ratio at year-end 2015 was 202%, which is above the minimum required 200% for BDCs. As Dayl mentioned earlier, we have set aside the cash to satisfy our obligations on the convertible notes when they come due next week. For additional information regarding the above metrics for both the fourth-quarter and full-year 2015 results, please refer to our earnings release and our recently filed 10-K. All of our filings are available online with the SEC or on our website.

We would now like to turn it back over to you for your questions.

(Operator Instructions). Adam Waldo, Lismore Partners.

With respect to available liquidity as you think about this all in, you're just above the statutory minimum for BDCs at year-end, but you've also indicated you have sufficient liquidity to repay the convertible outstanding that matures on -- in mid-March. Can you give us any visibility into how much incremental liquidity you see coming in over the next few quarters? Do you have much visibility into the maturities of your existing portfolio, that would give us some visibility on additional liquidity that could be used for either debt repayment of share repurchases? And then I have a follow-up.

Sure. Thanks for the question. We have a fair amount of liquid assets in the portfolio, maybe $10 million to $15 million. Some of it is maybe coming due, some may not, some of the illiquid stuff we do expect to pay off. There is one in a particular large position that we thought was going to pay off in the first quarter, but we are working through and should pay off perhaps by the end of March, if not in April. So we are not concerned about liquidity at this point.

We have positive cash flow, and as I point out that to people who haven't followed us for a long time, we survived the 2008-2009 financial crisis and we were a lot more constrained back then than we are today in terms of our capital structure and everything else. And so we know how to manage for liquidity and we've done it effectively.

No, I'm aware of that and I actually followed you back then, although I've just recently become a shareholder. The other question I have is with respect to visibility in the NII stream, and then how you are thinking about the calls on capital here as between share repurchases and socking away liquidity for the next round of debt maturities. We are pretty late here in the first quarter. Do you feel quite comfortable that NII for the quarter should cover the distribution level at the fourth-quarter run rate of $0.15?

We don't really comment. That's a forward-looking statement. But I think we will know more over the next few weeks. But when we set the dividend in the fourth quarter, the Board looked forward 12 months to see what they expected -- that we expected the performance of the Company to be over the next 12 months. And that $0.15 dividend was set based upon that 12 month look-forward. And then nothing has really changed since then that we would think would change that. So, that's as far as we go in terms of guidance, but I think we reset it in the fourth quarter, as we said, to realign it with NII and we are confident that over the course of the year, that's how it will play out.

Fair enough. And then with respect to then the calls on available liquidity here as we go through 2016, is the first call on capital share repurchase, given the huge discount NAV? Or should we think about socking away surplus liquidity over the course of 2016 for debt maturities in 2017?

We don't have any debt maturities in 2017.

I'm sorry, my mistake.

The next debt is due in October of 2019.

Okay.

So we will see whether we want to use our liquidity resources to invest back in the market or whether we want to repurchase shares. Or we could save it to delever, too.

Yes, as I commented earlier, we've had this question in the past, and we were concerned about leverage and our leverage ratio is pretty tight right now. What we want to do is get [off-sides] on your new leverage ratio. And so, until we see the market for credit assets stabilize and improve, unless we can find some other way of deleveraging, I'm not sure this is something that is prudent to undertake a share repurchase which might cause us, with further sell offs in the credit market, to violate our leverage restrictions.

Understood. So the first call on capital would be further deleveraging. Is that fair?

Based upon the current environment, correct.

Thank you very much.

(Operator Instructions). David Chiaverini, Cantor Fitzgerald.

A couple questions for you. The CLOs -- so the AUM is at $2.7 billion, and you mentioned about how the environment is challenging for new issuance. I was just curious if you're unable to issue any more CLOs or if your CLO AMAs are unable to issue any more CLOs this year, where would the AUM stand at the end of 2016 if no new issuance occurs? Would it stay flat at $2.7 billion or are there any CLOs that are expected to be called in the coming quarters?

It's unlikely that any of the CLOs will be called in the current environment, just because of where CLO equity is trading -- or not trading, but is quoted. There's not a lot of trades going on. And the fact that the NAV of the loan market has gone down, it's unlikely that someone is going to call any CLOs. That being said, we only have about $500 million left in 1.0 CLOs, so it's not been significant.

I think you can see that the absence of the loan market -- there was no reduction in the fourth quarter in the AUM. So these things are not paying down because there is not a lot of refinancing going on. So, it's impossible to project what the fourth quarter AUM is going to be, because you just don't know what repayments are going to look like. But given past experience, when you have a market like this CLOs tend to not have a lot of assets pay off, and so they tend to be pretty steady state.

So, it's -- the bad news/good news is it's hard to issue new CLOs. But because it is hard to issue new CLOs, there is not a lot of refinancing going on and so the old CLOs don't delever as fast. But again, there is no way of predicting that at the current time.

That's good color on that, thank you. And then a follow-up, more of a housekeeping question. So, the dividend that was declared in the fourth quarter and the X dividend date was in the first quarter. Should we think of that $0.15 dividend payment as the first quarter dividend? So that, for the full year, we should expect $.60 of -- assuming that the dividend remains unchanged -- that there would be three additional X dividend dates in 2016. So the full year would be $0.60, assuming the dividend is not changed?

Yes, that's correct.

Okay. That's all for me, thank you.

Matthew Larson, Morgan Stanley.

My question was actually answered. Appreciate it.

[Yehuba Katz], private investor.

Hi, just a couple questions on two of your large positions. The first is your loan to the AMAs -- the first loss warehouse. What would happen if that CLO looks like it's not going to get issued? Would there be a first loss as of today?

Yes. So, again, there is a loan from KCAP to Trimaran. Trimaran uses that loan to finance its first loss in the warehouse. If we were to liquidate the warehouse today there would be a first loss. But again, that could -- it would be a relatively small one, offset by some of the carrier that's in that. And Trimaran has the financial resources to repay the loan in full in addition to that. But if we were to liquidate it right now in a dislocated market, there would be some loss in it.

And can you guys comment on about how large that loss would be?

It's not significant. It's probably around $1 million or something like that. So it changes from day to day given the loan market. But again, that's a loss done at Trimaran. That would not impact their ability to repay the loan. The loan will still get repaid in full because Trimaran has other cash resources other than the warehouse.

You can also see in our subsequent event footnote that we have taken down that warehouse slightly, so the loan is not $23 million anymore. They have repaid $7 million of that loan, so the loan currently stands at $16 million.

Yes, and the reason behind that is, given where the loan market is today, you don't necessarily need to have a big warehouse to get a CLO done. When the loan market was trading at par and above, you really needed to have new issue loans, which you are able to buy below par in the new issue market. Today you can buy loans in the high 90s. So you don't need a big warehouse. And so, we were doing some de-risking of Trimaran.

Okay, thanks. That's helpful. The other question is your only large CLO 1.0 position left, which was [opened] in 2007. You guys are still marking that at about $20 million. Can you walk us through what assumptions -- what cash flow assumptions are baked into that and when it gets called, and what you guys recover when it does roll off?

Yes, just so you know, we do own 100% of equities, so we control the call and we control how that works. But I'm going to actually let Dan Gilligan answer that question, since he is most closely involved with the CLO valuations.

Sure. This is a less -- more lightly levered CLO 1.0, that we do around $31 million of the notional. So we use a traditional 2% CDR -- 75%, 80% recovery, with haircutting of defaulted or distressed assets in the pool. So, this deal has performed well over its lifetime and we do control the call on that. So, we've been happy with how it's played out through the lifestyle and it's past -- it is slightly deleveraging, but we are also reinvesting below par assets until we bump up against maturity issues. So, it's a bit accretive to the fund, buying in assets in the mid-to high 90s and getting prepayments at par.

Yes, this is one of the few 1.0 CLOs because it has re-achieved its initial ratings; has some ability to reinvest even though it's passing through investment periods. So it's not delevering very quickly. And as Dan said, the leverage here is 8 to 1 instead of 10 to 1, so it's a less levered, less risky deal. It was the last deal done before the market shut in January 2008.

So if you guys are fine getting a little bit more granular and sharing with us when that reinvestment period is over, how much cash you are looking to -- in the model, you are looking to get from it every year? And then what you expect to recover when it rolls off?

I think it still has a healthy cash flow, 4% to 5% a quarter. And if it gets called in the next three years, the cash flows discounted today, plus the residual value, is how we get to the fair market value. So that's spot on where we think it's going to shake out.

Okay. Thanks, guys. That's it for me. Appreciate it.

Thank you. And I am not showing any further questions at this time. I would now like to turn the call back to Mr. Dayl Pearson for closing remarks.

I don't really have any closing remarks, other than to thank everybody for participating on the call and we will talk to you again in May. Thank you very much.

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