BCP Investment Corp (BCIC) 2017 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the KCAP Financial, Inc. conference call. An earnings press release was distributed today. 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 4, 2017. 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 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, or good afternoon, and thank you for joining KCAP Financial for a review of our first quarter 2017 results.

Today, I will review some of the highlights and activities from the quarter as well as provide some context for our direct lending business and performance of asset manager affiliates. I will then turn the call over to 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 our key accomplishments during 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 quarter, which are summarized on Slide 3 of our earnings presentation. For the first quarter 2017, our NII was $0.09 per share and our taxable distributable income was $0.06 per share.

As a reminder, we also reported a non-GAAP metric resources available for distribution, which is a good proxy for cash available to shareholders as well as what is a sustainable dividend. Resources available for distribution was $0.10 per share in the quarter end. Our first quarter shareholder distribution was $0.12 per share, consistent with the $0.12 paid in the fourth quarter of 2016.

At the end of the quarter, KCAP had approximately $25 million in investable cash due to repayments over the past few months. We expect to invest this cash over the next few months, which will have a significant impact on income going forward. 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 quarter, we invested approximately $18.5 million in new originations. The majority of these loans were purchased in the primary market at a discount to par. The market remains issuer-friendly, resulting in spread contraction on all new deals. Our credit quality continues to be strong, with only 2 of our investments on partial nonaccrual status, whereby we have recognized income on a portion of contractual PIK amounts due.

KCAP stands out among most of our peers with very low nonaccruals as well as a 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 monitoring our portfolio and very selective on new transactions. As always, we continue to maintain our standards. As I have previously said, we will not sacrifice credit quality in order to meet short-term income goals.

In terms of the market for new CLO funds, the environment has improved in the first quarter and continues with positive momentum into the second quarter. Liability spreads continued to tighten across the debt stack and activity in the CLO reset market remains robust. CLO resets are the resetting of CLO debt interest rates in conjunction with an extension of the reinvestment period, and in some cases, an increase in the overall size of the CLO. This reset is accretive to both the CLO manager and the equity holder. And KCAP expects to be active in the reset market with several Trimaran transactions this year.

As of March 31, 2017, our weighted average mark-to-market value to par on our debt securities portfolio was 95, consistent with the same mark in the fourth quarter of 2016. As noted earlier, we have observed loan market improvement into 2017, resulting in increased asset redemptions at par but also observing spread compressions in new transactions. As far as the CLO portfolio, our weighted average mark-to-market value to par was 53 as of March 31, 2017, similar to the weighted average mark-to-market to par of 54 for the fourth quarter of 2016.

Our 100% ownership of our asset manager affiliates was valued at approximately $36.9 million based on their assets under management and positive and prospective cash flows at March 31, 2017. AMAs have approximately $2.8 billion of assets under management with 1 CLO 1.0 outstanding and 6 2.0 of CLOs outstanding. Our investment portfolio at the end of the first quarter totaled approximately $355 million.

At the end of the first quarter, debt securities totaled approximately $238 million and represented about 67% of the investment portfolio. First lien loans now represent 83% of debt securities portfolio and junior loans, 16%. All CLOs managed by KDA and Trimaran continue to be current on equity distributions and management fees. This income stream from our asset manager affiliates allows them to make periodic distributions to us. During the first quarter, there were distributions totaling $650,000. Additionally, as of March 31, 2017, our asset manager affiliates had approximately $2.8 billion of par value assets under management.

As always, we continue to evaluate our financing needs, which will allow us to focus on 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 financials. Ted?

Thank you, Dayl, and good afternoon, everyone. As of March 31, 2017, net asset value stood at $5.14, which is down from $5.24 at the end of the fourth quarter of 2016 and down from $5.50 on March 31, 2016. The company declared a $0.12 distribution in the first quarter 2017, consistent with the fourth quarter of 2016.

Net investment income was $3.2 million or $0.09 per basic share for the first quarter of 2017, down from $4.8 million or $0.13 per basic share for the first quarter of 2016 and down from $4.1 million or $0.11 per basic share for the fourth quarter of 2016, primarily attributable to uninvested cash and higher first quarter expenses.

Interest income on our debt securities for the quarter ended March 31, 2017, was $4.6 million, slightly down compared with $4.7 million for the fourth quarter of 2016. Interest income on our debt securities was $5.7 million for the first quarter of 2016. Our debt securities portfolio contribution to total investment income for the year was 59% at the end of the first quarter of 2017, which compares to approximately 58% contribution in the fourth quarter and 60% for the first quarter of 2016.

Investment income from CLO fund securities was $3.1 million in the first quarter of 2017 compared with $3.2 million in both the fourth quarter of 2016 and in the first quarter of 2016. We received distribution from our asset manager affiliates of $650,000 in the first quarter of 2017. Such distribution is in excess of the AMAs' estimated taxable earnings and profits and is, therefore, treated as a return of capital. The AMAs distributed $1.1 million in the first quarter of 2016, $550,000 of which was a return of capital.

The company recorded net realized and unrealized depreciation on investments of approximately $2.8 million or $0.08 per basic share during the quarter ended March 31, 2017, primarily attributable to our investment in our asset manager affiliates as compared to net realized and unrealized depreciation of approximately $4.0 million or $0.11 per share in the fourth quarter of 2016 and net realized and unrealized depreciation of approximately $11.6 million or $0.31 per share in the first quarter of 2016.

On the liability side of our balance sheet, as of March 31, 2017, par value of our debt outstanding was $180.9 million, consisting of $33.5 million of senior notes due in October 2019 with 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. Our asset coverage ratio at quarter-end was 203%, above the minimum required 200% for BDCs. In addition, subsequent to March 31, 2017, the company has called an additional $6.5 million of its senior notes, reducing the par outstanding to $27 million.

For additional information regarding the above metrics for the first quarter of 2017 results, please refer to our earnings release and our recently filed 10-Q. All of our filings are available online with the SEC at sec.gov or on our website at kcapfinancial.com.

We'd now like to turn it over to you for any questions.

(Operator Instructions) And our first question comes from Troy Ward from Ares Management.

Dayl, if you could just comment a little bit more on -- you talked about being active in the reset market with several Trimaran transactions hopefully by the end of this year. What are the steps and/or hurdles to get -- to be active in that reset market and get something done on your Trimaran transactions?

Well, as you know, these are all private placements, so we have to be careful in terms of what we say. But we have several 2.0 transactions. And it really involves getting the current majority equity holders to agree to extend -- essentially extend the maturity and extend the reinvestment period and also going, if we can, to increase the amount of the CLO. And clearly, there's plenty of activity among the debt securities. And obviously, the other thing we have to do is we then also have to solve risk retention because now these vehicles have to be risk retention-compliant. But we do have several ways to solve risk retention since we already own a significant portion of the equity and there are other ways to get to the 5% total through either incremental vertical strips or incremental equity.

Okay. And then...

Before you go on, doing a reset is a much simpler and shorter transaction because, obviously, if you have a $450 million CLO and you're upsizing it, let's say, to, whatever, $600 million, $575 million, whatever, you don't have to go out and find $450 million of assets and warehouse for a lengthy period of time. So it's much easier and much quicker to get a reset done. And yet from an economic perspective, it's just as powerful for the manager.

So that's part of the thought process, when you think you can be active in what you said was several by the end of the year versus the kind of the 1 CLO we've seen annually over the last couple of years?

Correct.

Okay. And then all else equal, how would the reset of these transactions impact the fair value of the asset manager?

Well, obviously, it's going to have a positive impact. Exactly how positive it's going to be is in terms of if we increase them and by how much we increase them. And assuming we can extend for an additional 4 years, we see that as adding 4 more years of management fees going forward and potential incremental management fees based upon upsizing deals. So it's going to obviously have a positive impact. I can't really tell you what that's going to be, but it's clearly positive. It also should have a positive impact on the equity, CLO equity positions, because again you're extending it out and you're going to get more cash flows in the CLO equity as they don't delever in the out years.

But would you have to give up anything -- any type of their percentage of the fees that you receive now in order to meet the 5% roll holding, your required amount of each transaction? And has anything changed with the math on the fees?

The math -- the arithmetic may change, but the bottom line is it's net-net positive in dollars and percentage terms.

Okay. And then just one last one. Obviously, we're looking at the value of the asset manager this quarter relative to the 12/31 mark was down, it looks like, 8% or 9%. Can you just speak to what were the changes in the value -- fair value there of the asset manager?

Yes. Troy, most of that was attributable to one of our older 1.0 deals getting called and making its final distribution -- or incentive fee distribution to us of around $3 million.

Our next question comes from Ryan Lynch from KBW.

Following up on Troy's question about the value of the asset manager. I mean, over the last couple of years, 2015, 2016, the write-down for the asset manager as well as the first quarter 2017, you mentioned the most recent write-down was due to a 1.0 CLO rolling off with probably some higher fees. I think you mentioned you only had 1 CLO 1.0 remaining in your portfolio. I guess 2 questions. Was the majority of the decrease in the value of the asset manager over the past several years from higher management fee paying CLO 1.0s rolling off? And number two, if you only have 1 CLO 1.0 remaining, does that mean that we should expect to see much more stabilization in the asset manager value going forward?

Yes, Ryan. So most of the decrease has been because not necessarily because of higher management fees, although past deals could have been slightly higher. It's mostly due to the older 1.0 deals were paying incentive fees. So a lot of them had triggered the incentive fees. At one point, we had 5 deals paying incentive fees at once. And all of those incentive fees now have been washed through the system over the last couple of years. And so that leaves you with the 2.0 deals, which have not triggered any incentive fees yet. Some may, but we haven't taken any of that into account. And so yes, they should be stabler in that regard. The remaining 1.0 deal has one of the lower fee structures, so they won't have as big an impact as it winds down. But yes, I think generally speaking and if we can do the resets, though, even get more stable, stay out longer.

Okay. And then when I look at fees from -- paid out from the asset manager, it looks like in the most recent quarter, there is a distribution of about $650,000 in the first quarter. Now that was all deemed as return of capital as the previous -- I guess since the third quarter of 2016, those have all been deemed as return of capital. So when I look at your guys' -- when I was actually looking at the 10-K, it looks like there was about $11 million of unamortized cash basis goodwill from the KDA acquisition and about $7.5 million of unamortized goodwill from the Trimaran acquisition. Are those the numbers -- do those basically have to be amortized down before you can start to record taxable income in the asset manager, and then those distributions to KCAP will then be tax issues -- or not tax issuance but actually be income generation as opposed to return of capital, number one? And if that is the case, to me, these are being amortized over 15-year straight line periods, I would then -- if that's the case, I would expect then we shouldn't expect to receive any income from the asset manager affiliate for several years going forward.

Yes, I mean, I think that you're right on the amounts and that 15-year straight line in that if the asset managers don't grow or get significant incentive fees over the next several periods, then that is correct. It'll be -- it'll come up as a return of capital it they're excess cash. If they grow and/or have incentive fees, then obviously some of it will trip into the taxable earnings and profits bucket, which is sort of the goal.

Or if we raise other types of vehicles at the asset manager, which would be fee-generating vehicles. So I mean, there are a number of ways. All of that would result in growing AUM and income from the asset manager. But you're correct. If we didn't grow the asset manager at all, your analysis would be correct.

And I'm showing no further questions from our phone lines. I would now like to turn the conference back over to Mr. Dayl Pearson for any closing remarks.

Thank you all very much, and we will talk to you next quarter. Thank you very much.

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