BCP Investment Corp (BCIC) 2016 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the KCAP Financial, Inc., 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 day, Thursday, November 3, 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. Good morning and thank you for joining KCAP Financial for a review of our third-quarter 2016 results. Today I will review some of the important highlights and activities for the third quarter, as well as provide some context for our direct lending business 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 third-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 our key accomplishments during the quarter can be found in the IR section of our website. To start, let me provide a brief recap of some of the important highlights in the third quarter, which are summarized on slide 3 of our earnings presentation.

For the third quarter of 2016, our NII was $0.12 per share; our third-quarter shareholder distribution was $0.15 per share, consistent with the $0.15 paid in the first and second quarters of 2016. This does not include approximately $0.02 per share in cash distributions from our Asset Manager Affiliates, which did not represent taxable earnings.

I would now like to discuss the performance of our loans and securities business and Asset Manager Affiliates in more detail. Turning to slide 4, during the quarter we invested approximately $17 million in new originations. This was primarily funded by repayments and sales of placeholder assets.

These new loans had a yield slightly less than the assets they replace. We have also experienced an increase in repayments and repricings as a result of increased strength in the credit market, although the middle-market names have not been affected nearly as much.

Credit quality of the portfolio continues to be strong, with only one nonaccrual loan, representing less than 1% of the Company's total investments at September 30, 2016. We continue to monitor our portfolio closely, especially those names that are marked significantly below par.

KCAP originations have slowed during Q3. Q3 is generally a slow quarter for originations, as borrowers and sponsors have become more aggressive with pricing and structures. KCAP continues to be judicious and focused on credit underwriting, and has a growing pipeline of new deals.

During the third quarter KCAP monetized its investment in DVI, which included a realized gain in warrants of approximately $4.5 million.

In terms of the market for new CLO funds, the environment has improved in Q3 and continues positive momentum into Q4. We continued a warehouse for our next CLO fund, and the warehouse provider has increased warehouse capacity in the third quarter due to favorable market conditions.

Projected CLO issuance, although lower than 2015 highs, has increased recently, indicating resiliency and appeal of the CLO product. We continue to be positive regarding our ability to issue a new CLO fund in the future.

As of September 30, 2016, our weighted average mark-to-market value to par of our debt securities portfolio was 95, consistent with the same mark in the second-quarter 2016. As far as the CLO portfolio, our weighted average mark-to-market value to par was 50 at September 30, a decrease in the weighted mark-to-market with a par of 51 for the second quarter of 2016.

Our 100% ownership of our Asset Manager Affiliates was valued at approximately $43 million based upon assets under management and positive prospective cash flows at September 30, 2016. Our investment portfolio at the end of the quarter totaled approximately $372 million.

At the end of the third quarter debt securities totaled approximately $264 million and represented 71% of the investment portfolio. First-lien loans represent 76% of debt securities and junior loans 15%.

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 affiliates allows them to make periodic distributions to us. During the third quarter, they made a distribution of $750,000 to the Company.

Additionally, as of September 30, our asset manager affiliates had approximately $2.6 billion of par value assets under management. 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. And now I'll ask Ted Gilpin to walk through the details of our financials.

Thank you, Dayl. Good morning, everyone. As of September 30, 2016, net asset value stood at $5.38, which was down from $5.45 at the end of the second quarter of 2016 and down from $5.82 as of December 31, 2015.

As Dayl mentioned, the Company declared a $0.15 distribution in the third quarter of 2016 consistent with the second quarter as well as the fourth quarter of 2015. Net investment income was $4.5 million or $0.12 per basic share for the third quarter of 2016, down from $5.1 million or $0.14 per basic share for the second quarter of 2016 and down from $6.5 million or $0.18 per basic share for the third quarter of 2015.

At this point, I would like to discuss the details of the third-quarter results. Interest income on our debt securities for the quarter ended September 30, 2016 was $5.2 million, essentially flat compared to the second quarter of 2016 and down from $6.3 million for the third quarter of 2015. Debt Securities Portfolio contribution to total investment income for third quarter of 2016 was 58%. Debt Securities Portfolio contributed total investment income for the nine months ended September 30, 2016 was 57% compared to 52% for the corresponding period in 2015.

Investment income for the CLO -- from the CLO Fund Securities was $3.5 million in the third quarter of 2016 compared with $3.4 million in the second quarter of 2016 and $3.9 million in the third quarter of 2015.

The Asset Manager made a distribution of $750,000 or $0.02 per share compared to $850,000 or $0.02 per share in the second quarter of 2016. None of the third quarter 2016 distributions from the Asset Manager Affiliates is estimated to be a taxable dividend.

The Company recorded net realized and unrealized depreciation of investments of approximately $1.7 million or $0.05 per share during the second quarter -- during the quarter ended September 30, 2016, primarily attributable to our investment in our Asset Manager Affiliates and CLO Fund Securities as compared to net realized and unrealized depreciation of approximately $2 million or $0.05 per share in the second quarter of 2016 and net realized and unrealized depreciation of approximately $22.4 million or $0.61 per share in the third quarter of 2015.

On the liability side of our balance sheet, as of September 30, 2016, the par value of our debt outstanding was $181.4 million, consisting of $34 million of senior notes due in October 2019 at a fixed rate of 7.375% and $147.4 million of our on-balance sheet debt securitization financing transaction, which has a stated interest rate that resets quarterly.

In a previous quarter, we had convertible notes mature, which were paid on March 15, 2016, and our asset coverage ratio at quarter-end was 207% above the minimum required 200% for PDCs. For additional information regarding the above metrics for the third quarter of 2016 results, please refer to our earnings release and our recently filed 10-Q. All of our filings are available online with the SEC, SEC.gov or on our website, KCAPFinancial.com. I'd now like to turn it over to you for your questions.

(Operator Instructions) [Angelo Guarino].

Good morning. Thanks for taking my questions. So I was going back through your CAD reconciliations just for this year. I just want to make sure I understand how you are reporting this. If you go back to your Q1, you show that you had 17 available, distributed 15 and then you show the difference as a minus 2 and now what you've distributed is greater than available and you are still showing as a negative quantity. Can you let me know -- was that just a typo or are you trying to say something in Q1 that was different than the current quarter?

So I can give you -- do you have our investor presentation up by any chance?

I do. The slides?

Yes, so on page 5 is the nine months ended for the third quarter, which is just the sum of the first three quarters.

Right, but if you look at Q1 -- I don't know if you take a moment to pull that up off your website, it shows 17 available and 15 out and then it shows the difference is negative and I'm assuming that that's just a typo, that I'm not missing something that you're trying to say.

Yes, if we had 17 available, distributed 15, it should have been -- that would've been a positive 2 that we underdistributed in the first quarter.

Okay, so you just have a typo on that?

Well, we're just double-checking that while you ask your next question, so --.

Okay, great. So the other question I had was -- now that you're over your leverage ratio -- so you are tapped out -- you are restricted from taking in any more loans, are there any other impacts on your current operations until you get back under the minimum?

We're actually not over; we're 207. We have to be at 200 (multiple speakers).

I'm sorry, I misheard you then.

Yes, yes, yes. No, we still have a little bit of room. Obviously, we're not in a position where we would want to add more debt at this point, but we're within the bounds of the asset coverage test.

And we do have -- because of repayments, we do have a higher-than-usual amount of cash, which we are looking to, obviously, reinvest in the (multiple speakers).

Right. And the CLO, we're expecting that this year?

Well, CLOs are raised through a private placement process, which really restricts us from making any commentary. I'd just point to the fact that, during the quarter, the warehouse provider did increase the amount that we're allowed to warehouse without having us to increase our first loss and so you can read into that whatever you want, but, unfortunately, we're in a quiet period on that at the moment.

Okay. Will that be something that you will -- since this is done through a third party, will that be a press release through KCAP or do we monitor its --?

No, KCAP will issue a press release when we -- probably when we price the deal.

Okay.

So, yes, that will show up as it has in the past on our SEC announcements.

Okay. And just I guess my final question while you're looking that up is, over the last -- I've been an investor for a few years now, so from your perspective, have you -- are you thinking about where you're going differently than you did two years ago? How do you see next year and how does that compare to where you might have seen next year or two years ago as far as compared to what -- how you see your own company and where it's going?

Yes, I think -- that's a great question. I think the Board is constantly looking at different strategic alternatives for the Company and we are working on a number of different potential projects to be able to enhance shareholder value. I can't really go into the details of that, but people should take away from this that the Board is just not sitting there waiting for something to happen. They've tasked management with looking for alternative ways of growing the Company and the NII without issuing shares and there are some opportunities to do that, but --.

That could change -- things that would change the nature and character of KCAP fundamentally or just putting more focus on the things that you are already doing?

Yes, I think not fundamentally in terms of our core competencies. Our core competencies are not investment-grade corporate credit both on the broadly syndicated side and the middle market side and the idea is how do you leverage those core competencies and grow in an environment where issuing new stock is really not an alternative for the moment and we assume for the (multiple speakers).

So not necessarily creating new businesses or new markets, but rather expanding your current businesses into new markets?

Expanding our current business through alternative means to leverage what we have is -- I think when you look at the track record of both the CLO manager and KCAP in terms of credit performance, I think our view is we can leverage that in other ways.

Okay, thank you.

Thank you for your questions. Do we have an answer --?

Yes, the first quarter should not have had the brackets around the $0.02, it was a positive $0.02.

So it was just a typo?

Yes.

Okay. Thank you for taking my questions.

(Operator Instructions). At this time, I'm showing no further questions.

Okay, well, thank you very much for taking the time to listen. We know it's very busy with lots of people reporting over the last few and next few days, so thank you all for listening, and we will be talking to you again soon. Thank you.

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