BCP Investment Corp (BCIC) 2018 Q1 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 today, Thursday, May 3, 2018. This call is also being hosted on the 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 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. For -- I thank all of you for joining KCAP Financial for a review of our first quarter 2018 results.

Today, I will review key highlights and activities for the quarter as well as provide context for our direct lending business and the performance of our Asset Manager Affiliates. I will then turn over the call to our Chief Financial Officer, Ted Gilpin, who will provide a more thorough review of our operating and financial results for the quarter and then open the line for your questions.

We continue to execute on our strategy to lower our overall borrowing costs, optimize our balance sheet and position ourselves for growth in 2018 and beyond. In the first quarter, we closed on a new $50 million credit facility. Over the course of 2018, we will increasingly turn our focus to prudently investing this incremental capital.

During the first quarter, we evaluated a number of opportunities to invest in a very competitive marketplace. We invested or reinvested a total of approximately $52 million since the end of 2017. And although most of the activity did not take place until late in the quarter or early in the second quarter and is not entirely reflected in our reported NII or net operating income, we are confident that these investments will generate good returns over time. Asset quality continues to be strong, with our net asset value essentially unchanged from last quarter.

Turning to our joint venture. The $300 million fund owned by the joint venture and managed by KCAP is now fully invested. During the first quarter of 2018, dividend income from the joint venture was $700,000. This is more than double that of the fourth quarter and should increase as we optimize the portfolio. While we were active in investing our capital in the first quarter, we currently still have significant dry powder on the balance sheet with liquidity of approximately $36 million compared to $45 million at year-end 2017 as well as some lower-yielding loans available for sale to fund new investments.

Now let me give you a high-level summary of our first quarter 2018 financial highlights before handing over to Ted. For the first quarter ended March 31, 2018, our NII was approximately $2.5 million or $0.07 per share. This was negatively impacted by some onetime professional fees and the costs associated with the wind up of Katonah (sic) [Catamaran] 2012-1.

Turning to performance of our Asset Manager Affiliates during the first quarter. One of the CLOs was called. That's Katonah 2012-1 -- not Katonah, sorry, Catamaran. And we are using a significant portion of those assets to fund the warehouse for a new CLO, which we expect to begin marketing in the second quarter.

The market for new CLO funds continues to be robust, especially with the end of risk retention. As of March 31, 2018, our weighted average mark-to-market [on] par for our debt securities was 95, consistent with the market in the fourth quarter. In terms of our CLO portfolio, our weighted average mark-to-market value to par was 66, slightly higher than year-end.

Our 100% ownership of our Asset Manager Affiliates was valued at approximately $38.7 million based upon assets under management and positive prospective cash flows. The AMAs have approximately $2.8 billion of assets under management, with all CLO 1.0 redeemed and 5 2.0 CLOs outstanding, with an additional 1 currently in the warehouse. Our CLO portfolio at the end of the first quarter totaled approximately $41 million.

At the end of the first quarter, debt securities approximated $116 million and represented about 59% of our investment portfolio. Secured loans now represent 78% of the debt securities portfolio.

All CLOs managed by our AMAs 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 was a distribution totaling $820,000, of which $500,000 was a return of capital. Additionally, as of March 31, 2018, our Asset Manager Affiliates had approximately $2.8 billion of par value assets under management.

In the first quarter, our Board of Directors approved a cash distribution of $0.10 per common share payable on April 27, 2018, to shareholders of record at close of business on April 6, 2018, and adopted a dividend reinvestment plan or DRIP. This plan provides reinvestment of our distributions that we have for our stockholders unless the stockholder elects to receive cash. As a result, if we declare a cash distribution, our stockholders who have not opted out of our DRIP will have their cash distributions automatically reinvested as additional shares of common stock.

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

Thank you, Dayl. Good morning, everyone.

As of March 31, 2018, net asset value stood at $4.85 compared with $4.87 as of December 31, 2017. Net investment income was $2.5 million or $0.07 per basic share for the first quarter of 2018, down from $2.7 million or $0.07 per basic share in the fourth quarter of 2017 and $3.2 million or $0.09 per basic share in the first quarter of 2018 (sic) [2017].

Interest income on our debt securities for the quarter ended March 31, 2018, was $3.8 million compared with $3.3 million for the fourth quarter of 2017. Interest income on our debt securities was $4.6 million in the first quarter of 2017. Our debt securities portfolio contribution to total investment income for the quarter was 55%, which compares to approximately 50% for the fourth quarter of 2017 and 59% for the first quarter of 2017.

Investment income from CLO funds securities decreased to $1.9 million in the first quarter of 2018, a decrease from the $2.5 million reported in the fourth quarter of 2017 and $3.1 million in the first quarter of 2017. It's primarily due to the call of Catamaran 2012-1 CLO in the first quarter of 2018.

We received distributions from our Asset Manager Affiliates of $820,000 in the first quarter of 2018. $500,000 of such distribution is in excess of the AMA's estimated taxable earnings and profits and is therefore treated as a return of capital. The AMAs distributed $650 (sic) [$650,000] in the first quarter of 2017, all of which was a return of capital to KCAP.

For the 3 months ended March 31, 2018, total expenses decreased by approximately $191,000 as compared to the same period in 2017, primarily due to the decrease in interest expense, partially offset by higher professional fees. The company recorded net realized and unrealized gains on investments of approximately $318,000 for the 3 months ended March 31, 2018, compared with net realized and unrealized gains of approximately $1.5 million for the 3 months ended December 31, 2017, and net realized and unrealized losses of approximately $2.8 million in the first quarter of 2017.

On the liability side of our balance sheet, as of March 31, 2018, par value of our debt outstanding was $104 million, including $19.8 million from our new revolving credit facility. Our asset coverage ratio at quarter-end was 270%, compliant with the current minimum required 200% for BDCs. As you know, BDCs can increase its leverage under a newly passed statute, and KCAP's board has approved the adoption of the new leverage, which will become effective in March of 2019. KCAP would still be restricted in its ability to increase leverage by covenants in our existing -- in our outstanding publicly traded debt.

With that, we would now like to turn the call over to you for any questions. Operator?

(Operator Instructions) Our first question comes from the line of Christopher Nolan with Ladenburg Thalmann.

For the higher leverage ratio, given that your unsecured debt seems to prevent you from increasing, what are the options? Is -- are you inclined to call that debt at some point or not go above the 1:1 debt-to-equity?

Well, there's one other option, which is to amend the debt covenant, which we've discussed with the bankers, and it's another possibility for us to tap into.

But the 7.375% notes are -- there's only $7 million of them left. They're already in their call period, so we could obviously clean up that piece. The 6.25% notes were issued.

6.125%.

6.125%, excuse me. They'll be callable, I think, in August, September of 2019, so we're getting pretty close to that. Obviously, that will be an option shortly after it becomes available. Or as Dayl said, we could amend it. Or we could just not do anything until we feel like...

And we're not really running up against the -- our debt-to-equity ratio at this point. So we have some time to sort of figure out the right path to go on.

Okay. And Dayl, given that you guys do have time, is there an intention to get a shareholder vote on the higher leverage ratios as well?

Well, it's an either/or, right? Either you could do it -- I mean, if we were to file a proxy for some other reason, we would probably include that in the proxy. But I think most people have only done one or the other. And I think that whole idea of -- you have to wait a year before you can do it if you do it through a vote of the board, and I think the idea behind that is that gives shareholders a chance, if they're uncomfortable with the higher leverage, if they want to trade out the stock, they can. So they can vote with their feet.

Yes. We've seen some BDCs are actually doing both, FYI, so...

Because, we -- again, it's a longer-term issue, not a short -- not an issue that we have to deal with over the next 3 to 6 months.

Understood. Also, where do you think we are in the credit cycle? I only ask because I see that you have a fair amount of junior secured debt and CLO funds. And depending on where you think you are on the credit cycle, those could be more riskier or problematic in terms of if we have a downturn. And I'm just trying to get your perspective as to where things are.

Yes. I mean, I think -- we think it's a very aggressive point in the credit cycle. People like to talk about innings, and I don't know what that -- what's behind that. But obviously, the credit markets are pretty aggressive right now. That being said, we see numerous deals. We turn down, over time, 85-or-so percent of what we see, and that even includes first-lien debt. And so we're pretty comfortable with the junior positions we have at this point. Some had gone through some stress and seem to be coming out the other end. But I think we're pretty comfortable with our portfolio today, and we're very cautious about what we're investing in going forward. Particularly with the credit facility we have now, that's going to sort of -- we obviously get more bang for our buck if we do more senior stuff within that credit facility. So we're being very cautious. And we've put a fair amount of money to work, but most of it has been in very high-quality credits. So -- but you're right. I mean, you're seeing a lot of looser covenants, covenant-light, although we generally don't see much covenant-light in sort of our core middle-market business of less than $50 million of EBITDA. But I think we're being very, very cautious.

Final question. How low do you think you could take money market balances in the second quarter?

I'm not sure I...

The money market is about roughly $10 million in the first quarter. Should we expect the money market account balances to decline further?

Probably, although it's going to be a subject also of repayments. So I would think -- assuming we don't have a massive amount of repayments, I would expect that to go down a bit, and I would expect the borrowings out of the credit facility to go up as well.

We do have some other sources of capital. With risk retention going away, there's going to be more -- some capital coming back from the asset managers that we [needed to pulley too], so...

Yes. We have about 10 -- $12.6 million invested in risk-retention vehicles at our asset manager. We expect that those are going to get unwound over time, so that's going to be some additional -- that's not -- when I said we have $36 million of liquidity, I'm not counting that $12.6 million.

Our next question comes from the line of Ryan Lynch with KBW.

First question, CLO income dropped pretty significantly in the first quarter from the fourth quarter. Was that solely due to -- I believe you said you called 1 CLO in the first quarter. Was that what drove the...

It's actually 2 things, Ryan. One, '07-1, which is one of our largest positions, had been called in the fourth quarter of '17, and it's now completely gone. And then we also called Catamaran 2012. So when it unwound, it put a little bit of pressure on the CLO...

Yes. There was some costs that -- a couple -- $250,000 of costs associated with liquidating that portfolio that hit directly to the revenue line.

Okay. And do you guys see -- foresee -- it doesn't look like you guys have any set maturities in 2018 for any other CLOs. Do you guys foresee yourselves calling any additional CLOs over the coming quarters?

Well, again, generally, we don't control the call. That being said, the only one I think we reset -- the next one would have been 2013-1, which got reset and extended in the fourth quarter of last year, so that's not callable for a while. 2014-1 was reset, increased and extended, so that's not going to be called for a while. 2014-2, I guess, potentially, is a candidate either for further reset or calling, but we don't anticipate that happening. And so that would be the only ones potentially in 2018. And as I said, we have $200 million of assets in the warehouse. Primarily, those came out of 2012, and those are the warehouse for a new CLO, which we are hoping to be in the market with very soon.

Okay, that's helpful. Just going back to the 2:1 leverage just to make sure I'm clear. I know you said you have some covenants in your guys' bonds that prevent you from going above 1:1 today. Does your credit facility have any sort of 1:1 covenants? Or are you guys free to move above the 1:1 in your credit facility?

We do not have any covenants like that in the credit facility.

Okay. And then just one last kind of modeling question. Were there any onetime fees associated with the redemption of the $20 million 7.375% notes in the quarter? And if so, what was that? Kind of onetime accelerated fees?

Yes. About $170,000 of expenses had to be brought forward. It's -- yes, exactly. Realized -- it shows that there's realized loss on the extinguishment of debt of $169,000.

Okay. Yes, I see it. And then is the plan -- it's not a meaningful number, but is the plan, as you guys continue to deploy capital and draw down debt, just to clean up the remaining portion of -- the $6 million or $7 million remaining on those 7.375% notes probably fairly soon?

Most likely that will happen. I mean, we have approval from the board to redeem those at any time. I think with rates coming up, actually, it's not as onerous as it was a year ago. So -- but obviously, we want to clean that up well in advance of the 2019 October maturity. We want to be -- we want to certainly have it cleaned up before -- 12 months before that.

I'm not showing any further questions. I will now turn the call back over to Mr. Pearson for closing remarks.

Thank you all for joining us this morning. I know we're a little bit early -- earlier than usual, so we apologize for that. But we will talk to you again in August on our second quarter results. Thank you very much.

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