BCP Investment Corp (BCIC) 2017 Q3 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, Tuesday, November 7, 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 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 afternoon, and I thank all of you for joining today's call. Today, as I usually do on earnings calls, I will review some of the highlights from the quarter and provide context for our direct lending business and performance of our asset manager affiliates. Our Chief Financial Officer, Ted Gilpin, will provide a more thorough review of the quarterly results and then we will open the line for your questions.

Before we get into the discussion of our results though, we thought it will be an appropriate time to provide some wider context of where we see our business heading and the initiatives we have underway to get us there.

The overall objective of these initiatives is to extend and increase our AUM, reduce leverage and expand our borrowing capacity. By prudently redeploying the capital made available we expect to see continuous improvements in our key financial metrics over the coming quarters and increase cash flow which will fund distributions to our shareholders.

Let me take you through the key initiatives starting with an update on the joint venture with Freedom 3 opportunities and the related redemption of $147 million of debt that we announced last quarter. With the improved balance sheet flexibility that this provided, we have been able to make a number of attractive investments to generate incremental free cash flow. As of the end of the third quarter, we have invested approximately $7 million of these funds, primarily in core assets with approximately 25% in noncore placeholder assets.

You will also recall that there is -- that as part of this transaction, we set up a new fund owned by the JV called KCAP F3C Senior Funding LLC, which is managed by a wholly owned asset manager affiliate of KCAP. This fund is on track to shortly be fully invested in approximately $300 million of primarily senior middle-market levels. KCAP has the ability to upsize this fund to further increase AUM in the future. So KCAP has benefited in 3 ways since announcing this JV. And as you can see from Slide 4 on the investor presentation. We freed up capacity on our balance sheet to making investments with proceeds from the approximately $77 million raised to new borrowings so far. We have been getting an attractive return on the investments we've made in the JV and we have been receiving a management fee from managing the JV fund. Many of you also know that our asset manager affiliate, Trimaran Advisors, has been actively working on the resets of certain of the CLO funds they currently manage. Last month, we announced $696 million reset and upsizing and with original $468 million CLO managed by Trimaran. This closed on October 31.

There are a number of benefits to this. We extended the maturity of the CLO by 5 years. We lowered the liability cost, which enhances the value of the equity in the CLO held to KCAP. And of course, we upsized the CLO itself making available a significant amount of investable funds.

We expect to see additional reset and upsizing activity in our CLO portfolio in the coming months. The longer-term result of this activity will lead to expand our assets under management.

Now let me give you a high-level summary of our quarter before handing it over to Ted. For the third quarter of 2017, our NII was $0.07 per share. As a reminder, we also reported non-GAAP metric called resources available for distribution, which is a good proxy for cash available to shareholders. We have -- resources available for disruption was $0.08 per share in the quarter. One thing to bear in mind is that these figures reflect the short-term impact of the JV taking $184 million of assets and $147 million of debt off our balance sheet and replacing that capacity with $77 million in new debt. As I said, we are using the balance sheet capacity to make new investments that will contribute to IRR growth down the road value and create value for shareholders.

Our third quarter distribution of $0.12 is consistent with the $0.12 paid in the second quarter. At the end of the quarter, KCAP had approximately $59 million in divestible cash, which we intend to invest in the coming months.

Turning to our direct lending business, during the quarter, we invested approximately $70 million in new originations with yields comparable to the current portfolio. We also have a robust pipeline of new opportunities from the balance sheet and repayments in the quarter totaled only about $2 million.

Our credit quality continues to be strong. We have 2 investments that are nonaccrual, which represent a percentage of total investment portfolio of 1.6% at cost and less than 1% at fair market value.

In terms of the market for new CLO funds, the environment is robust. Our track record with CLO investments has been good and given that we are about to embark on the new record ground of CLO investments, we thought it might make sense to look back. Please refer to Slide 5 of the investor presentation. One question we get a lot is where-- when we sell or unwind our CLO equity investments, how do the net proceeds compare to our previous mark? Slide 9 indicates that we've generally realized very close to the amount -- the full amount of the mark previously.

As of September 30, 2017, our weighted average mark-to-market to par on our debt securities portfolio was 94 consistent with the market at second quarter of 96. In terms of our CLO portfolio during the quarter, our weighted average mark-to-market value to amortized cost was 66 as of September 30 versus weighted average mark-to-market par of 67 from the second quarter.

Our 100% ownership of our asset manager affiliates was valued at approximately $40 million, based on the assets under management and positive prospective cash flows. AMAs have approximately $2.8 billion of assets under management, with 1 CLO, 1.0 outstanding and 6 2.0 CLOs outstanding. Our CLO equity portfolio at the end of the third quarter totaled approximately $50 million.

At the end of the quarter, debt securities totaled approximately $127 million and represented about 40% of the investment portfolio. First lien loans now represent 38% of debt securities and junior loans represent 62%.

All CLOs managed by KCAP and Trimaran continue to be current on equity distribution and management fees. The income stream from the equity distribution from our asset manager affiliates allows them to make periodic distributions to us. During the third quarter, there were distributions totaling $880,000.

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

Thanks, Dayl. Good afternoon, everyone.

As of September 30, 2017, net asset value stood at $4.95, which is down from $5.10 at the end of the second quarter of 2017. This is due primarily to a onetime loss of $4 million, which is associated with the calling of $147 million in debt.

The company declared a $0.12 distribution in the third quarter of 2017, consistent with the second quarter of 2017.

Net investment income was $2.5 million or $0.07 per basic share for the third quarter of 2017, consistent with $2.6 million or $0.07 per basic share in the second quarter of 2017.

Interest income on our debt securities for the quarter ended September 30, 2017, was $2.5 million, compared with $4.8 million for the second quarter of 2017, primarily due to the removal of $184 million of assets in conjunction with formation of the joint venture.

Our debt securities portfolio contribution to total investment income for the quarter was 39%, which compares approximately 62% for the second quarter of 2017.

Investment income from CLO fund securities remained flat at $2.8 million in the third quarter of 2017, about the same as $2.8 million reported in the second quarter of 2017.

We received distributions from our asset manager affiliates totaling $880,000 in the third quarter of 2017. $180,000 of this distribution was dividend income and $700,000 is in excess of the AMAs estimated taxable earnings, and profits in this is, therefore, treated as return on capital. AMA distributed $650,000 in the second quarter of 2017, all of which was return to capital.

For the 3 months ended September 30, 2017, total expenses decreased by approximately $1.3 million, from the second quarter of 2017, primarily attributable to lower interest expense due to redemption of KCAP senior fundings liabilities and lower professional fees.

The company recorded net realized and unrealized gains on investments of approximately $816,000 for the 3 months ended September 30, 2017, compared with net realized and unrealized gains of approximately $20,000 for the three months ended June 30, 2017.

On the liability side of our balance sheet, as of September 30, 2017, par value of our debt outstanding was $104 million, consisting of entirely publicly issued debt; $77 million of which was issued in the third quarter and which will mature in 5 years.

Our asset coverage ratio at quarter's end was 274%, well above the minimum required 200% for BDCs.

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

Thank you, Ted. Just want to finish by talking about, again, we're confident with our JV transaction together with the multiple CLO reset and upsize transactions and our ability to prudently invest the resulting liquidity will enhance the company's financial position. We have a long track record of success both in the middle market and broadly syndicated loan space founded on a highly selective and diversified asset accumulation strategy, and we're excited that our plans to grow AUM are coming to fruition.

This was a quarter of significant amount of transition, and so it's going to take a while for all these initiatives to yield the final results. So we look forward to providing updates as we reach the strategic milestones that we've discussed today.

Now I'll turn the call over to the operator for any questions. Operator?

(Operator Instructions) I'm not showing any questions at this time. So I'll turn the call back over to the Dayl Pearson.

Thank you -- somebody just...

I apologize. Yes, so we did have Troy Ward with Ares Management did pop up.

Sorry, I was late pressing in. Dayl, could you just remind us kind of the impact of rising LIBOR that has on your CLO business and how that provides benefits and headwinds to both valuation and your future CLO income?

Yes. It has some sort-term impact when -- most of which is in the past now, because the LIBOR has exceeded the 75 basis point to 1% floors in most broadly syndicated loans a while back. So really hasn't impacted -- or should not impact anymore going forward, except somewhat in the positive light, because obviously our equity is not floating right now. So the residual impact is a slight positive to the CLOs. And the other point to make is that in the reset transactions, we are significantly reducing the cost and the liabilities. In the most recent transaction, I think it was about 25 basis points lower roughly overall. So that's going to make up for quite a bit. And then the future transaction we think we're even going to do better than that in terms of reducing liability cost. (inaudible) any issues we have, but again, most of that is behind us now for about 2 quarters.

Great. And you may have said this, but I apologize I missed it. Can you just remind me how many of the reset transactions that you feel like you have in the near term? And what does that near term look like? I mean, are we talking months, quarters? And when do you expect some of these to get done?

We would like to get 1 or 2 more done before the end of this year. We think we're on track to do that. And we have some other plans for 2018, both in terms of resets and perhaps refinancing older funds that have gone past their reinvestment period.

And then the final question, can you just kind of outline your thought process of your current income stream relative to your current dividend payment?

Yes, I think, as I said, the last couple of quarters have been a significant transition period. And I think the board reassesses the dividend on a quarterly basis. And we'll certainly do that again in our December board meeting. But we try to look out in terms of where we think we're going to be down the road in terms of cash flow and so that's -- it's something that constantly is being rethought, but that's where we're at the moment.

And at the moment, while we didn't put a number on, the JV and taking the debt off the balance sheet, raising new debt and then deploying that in our core portfolio will all be accretive to earnings, so you should start seeing the pickup on that over the next several quarters.

But we still have $60 million liquidity and we may have some more liquidity in the future. So we're not going to throw that all out in the market at once. So we're going to be very prudent, as we've always been, in terms of making new investments. So I think you need to sort of see the glide path as we go through the next few quarters.

Since the last board meeting, I would assume there hasn't been any negative trends to your expected future cash flows when the board decided to keep the dividend steady. So if we assume that there is no negative trends to future cash flows, would we assume that potentially the board is going to come to the same decision in December?

Well, that's one of the things that board considers. The board also looks at the stock and where it's trading and whether or not it may be prudent to change the dividend one way or the other. But right now, I think the dividend is $0.12. So I'm not going to -- I'm 1 of the 7 members of the board, so I'm not going to speak for the other 6 in terms of where we're going to be in December. But the board looks at a lot of different things and one of them is future cash flows and that's obviously important and nothing has changed since September when we announced the dividend.

And I'm not showing any further questions.

Okay. Thank you very much. And it will be a while before we talk to you because that will be for our K, which will be in March. But look forward to having further discussion on that and bringing you up-to-date on where we stand on our strategic initiatives. Thank you.

Ladies and gentlemen, this does conclude the program. You may now disconnect. Everyone, have a great day.