BlackRock Capital Investment Corp (BKCC) 2007 Q4 法說會逐字稿

Good afternoon. My name is Janice and I will be your conference facilitator today. At this time, I would like to welcome everyone to the BlackRock Kelso Capital Corporation investor teleconference. Our host for today's call will be Chairman and Chief Executive Officer, James R. Maher; Chief Operating Officer, Michael B. Lazar; Chief Financial Officer, Frank D. Gordon; and Chief Compliance Officer, Vincent B. Tritto. (OPERATOR INSTRUCTIONS) Thank you, Mr. Maher, you may begin your conference.

Thank you and welcome to BlackRock Kelso Capital Corporation's fourth quarter 2007 earnings conference call. I'm joined today by Mike Lazar, our Chief Operating Officer; Frank Gordon, our Chief Financial Officer; and Vincent Tritto, our Chief Compliance Officer. We will begin by having Vinny talk about some general conference call information, including forward-looking statements.

Thank you, Jim. Before we begin our remarks today I would like to point out that during the course of this conference call we may make a number of forward-looking statements. We call to your attention the fact that BlackRock Kelso Capital's actual results may differ from these statements. As you know, BlackRock Kelso Capital has filed with the SEC reports which list some of the factors which may cause BlackRock Kelso Capital's results to differ materially from these statements. Finally, BlackRock Kelso Capital assumes no duty to update any forward-looking statements. I would now like to turn the call back over to Jim.

Thanks, Vinny. We are delighted to have the opportunity to speak with you this afternoon. We are very pleased with our fourth quarter and our 2007 fiscal year results. We continue to deliver on our goals of becoming a premiere provider of capital to middle market companies and providing an attractive return to our stockholders. Since our inception in July 2005, we built a strong team of investment professionals, some18 today, and an extensive outreach program to access middle market companies. 2007 saw many accomplishments for BlackRock Kelso Capital of which we are very proud.

We successfully completed $711 million of new investments in 26 new and 12 existing portfolio companies. We completed our initial public offering, raising $160 million. We opened our Chicago office during the second quarter and continued to execute on our strategy of being close to where middle market investments are created, directly with the sponsors and intermediaries engaged in the business. Further, we have hired a new managing director during the first quarter of this year who will have responsibility for covering the west coast. Our availability of credit was $600 million at year end and we have a well diversified investment portfolio of more than $1.1 billion in assets. On average, the coupon burn securities in that portfolio have delivered an annualized yield in excess of 12.5%.

We view the recent turbulence in the credit markets as an opportunity for BlackRock Kelso Capital to apply our thorough investment selection process to enhance the risk adjusted returns of our investment portfolio. As a business development company, our balance sheet is limited to one to one and balance sheet leverage is limited to one to one and BlackRock Kelso Capital had a balance sheet leverage of approximately 0.5 to 1 on December 31. Needless to say, or maybe I should point out, we do not make any mortgage or real estate loans and we do not own any CDOs or CLO securities. On Thursday, our Board of Directors declined first quarter dividends of $0.43. This dividend will be paid on March 31 and represents a 12.5% annualized yield on a net asset value and over 14% based on Friday's close and over 15% based on today's close.

Since inception dividends have been derived entirely from taxable income and net capital gains. Net investment income for 2007 was $1.66 with $0.43 per share in the fourth quarter. Mike and Frank will discuss more of our financial results shortly. We continue to be pleased with the investment opportunities that have resulted from our outreach program. As a result of these efforts, we invested $76 million in five investments with new and existing relationships during the fourth quarter. We examined more than 100 investment opportunities during the quarter and over 1,000 since our initial funding in 2005. We attribute our success to our terrific investment team. We are proud to have accomplished this during a quarter that was characterized by slowing transaction volume for sponsor led leveraged buyouts.

Activity in the middle market, which we define as companies with EBITDA between $10 and $50 million, slowed significantly in the second half of 2007. It has since picked up somewhat, but albeit at much lower levels. We continue to see many opportunities today and believe that the significant changes in the environment for broadly syndicated loans and public high-yield debt will provide great opportunities for BlackRock Kelso Capital. We believe that our portfolio is well-positioned for the current economic environment. On December 31, our portfolio consisted of 60 companies and was 68% invested in senior secured loans and senior notes. At the end of the fourth quarter 5% of our portfolio was invested in equity securities and of those investments, more than half of our equity assets are invested in preferred rather than common. The remainder of our portfolio, or approximately 26%, was invested in unsecured or subordinated debt securities.

Despite the conservative positioning and strong underlying credit quality of the portfolio we were not immune to the impact of marks on our portfolio assets during the fourth quarter. We believe that being actively involved in the due diligence and structuring of the assets that we acquire provide us with a conservative portfolio. The terms of the loan in which we invest are largely different from those available when buying broadly syndicated loan assets from Wall Street dealers. We continue to make investments where we are able to play an active role either as the sole or lead investor or as a member of a small club of investors. Investments made in these lead or club transactions represent approximately 70% of the assets in our portfolio today.

Our underwriting process is focused on investments in high free cash flow businesses. Our transaction are structured based on our underwriting credit cases which factor in the effects of recessionary environments on each of the company's cash flow forecasts, and we are very pleased with the results for 2007. We continue to demonstrate our ability to originate and structure investments in middle market companies. These investments produce high risk adjusted returns with a high recurring yield and the opportunity for higher total return from structuring and prepayment fees and from equity investments. Mike Lazar will now review our portfolio and the investment activity in more detail.

Thank you, Jim, and thank you everyone for joining our earnings conference call today. I'm pleased to report that BlackRock Kelso Capital Corporation invested a total of approximately $76.2 million in five companies during the fourth quarter. Three of these investments involved companies with which BlackRock Kelso Capital had previously completed a transaction. Our ability to invest throughout the capital structures of middle market company's affords us the opportunity through being flexible to capture the best risk adjusted returns available in a variety of different companies and industries. During the fourth quarter all but one of our new investments were made in fixed rate securities. We made one investment on a floating rate loan as part of an add on transaction for an existing portfolio company.

As you know, conditions in the broadly syndicated corporate credit markets changed dramatically in the second half of 2007 as a result in part of events in the sub-prime mortgage sector. The impact on the credit markets for middle market companies, however, was muted because we as lender to middle market companies, such as BlackRock Kelso Capital, tend to retain rather than further distribute their credit exposure. This is contrary to the norm in the broadly syndicated markets. Furthermore, the broad-based selling of loans that accelerated in the broadly syndicated markets during the fourth quarter did not occur to the same extent in the market due to the significantly smaller presence of CLO investors in that marketplace.

In the first quarter of 2008 the condition of the credit markets generally deteriorated even further. The valuations of the quoted portion of our portfolio declined during the fourth quarter along with those of most other credit related investments. Slightly less than half of the dollar value of our portfolio is valued via dealer quotes. Quotes on this portion of the portfolio were down approximately $18 million in the fourth quarter. Total portfolio unrealized depreciation during the quarter was approximately $37 million or less than 3.5% of assets. At quarter end our net asset value per share was $13.78. In our view, most of the declines in the quoted loans were not largely based on actual trades or changes in the long-term prospects of the underlying companies but instead on dealer's relative value estimates. As we hold most investments to maturity and are not subject to the types of forced selling due to portfolio leverage that may affect hedge funds or CLOs in a broader market, we anticipate that for investments in companies with adequate fundamental performance we will not ultimately realize losses in value.

Despite this market dislocation we've been able to utilize our relationships to identify quality investments with attractive risk adjusted returns. We continue to believe that in this marketplace hard work is rewarded and our willingness and ability to roll up our sleeves affords us the opportunity to make investments with a focus on preservation of capital while earning attractive yields and returns. Part of the total return that we generate on these investments is derived from the structuring fees that we earn on many of the investments that we make. These structuring fees are typically paid in cash at the time of a new transaction and are treated as income for tax purposes. GAAP amortizes these fees over the life of the investment which can result in a timing difference between our net investment income and our dividends. In the fourth quarter BlackRock Kelso Capital earned structuring and upfront fees equal to approximately 1.7% relative to new investments.

During the fourth quarter we made several new investments. We were able to find and capitalize on these investment opportunities as a result of our active origination program, our access to sponsors and management teams, our thorough due diligence process, and the resources of our partners. In the current market environment we were finding that by being selective we were able to make new investments at a higher yield and the investments made during the fourth quarter have a stated yield of more than 13.5% at December 31, not including fees, discounts or any call premiums. We experienced $36.5 million of portfolio run off during the quarter. We are pleased that we collected prepayment and related fees and capital gains equal to more than 1% of par value in connection with these repayments during the fourth quarter. While we have seen some companies with credit issues during 2007, we find we fine the condition of the company to be quite strong today. Our investments are well diversified. Our largest exposures are to companies that provide business and other services to media and publishing companies and to consumer product companies. Overall, these industries represented just under half of the total portfolio at December 31.

The fair market values in our GAAP financial statement are derived by dealer quotations for those securities that are quoted and by engaging third party valuation firms to perform valuations on all non-quoted portfolio investments on a company by company security by security basis for each investment every quarter. We are pleased that the performance of our portfolio company's continues to be strong with an overall weighted-average rating of 1.23 using our one to four credit rating scale. Less than 4% of the portfolio is rated at level three or four. We utilize this scale as an internal management tool and believe it to be quite conservative. As of December 2007 we have three investments on non-accrual status. The fair market value of these assets is $5.2 million at 12/31, which represents about 30% of their aggregate costs. The majority of the increase in unrealized depreciation for non-quoted appraised investments relates to one portfolio company that has significantly underperformed its plan and its historical results due to a confluence of company specific events. BlackRock Kelso Capital is actively, is actively involved in working out a recovery plan by taking measures such as changing management and taking an active role on the company's Board of Directors. In the future we may take further legal action to pursue a full recovery.

At December 31 the leverage multiple for all of the debt investments cross our portfolio was between 4.5 and 5 times. The median EBITDA for our portfolio of companies was approximately $32 million. This level of leverage represents the highest rather than the average dollar at risk in these portfolio companies for all of the coupon bearing investments that we've made, including preferred stock. This represents lower levels of leverage and much more conservative transaction structures than have been available in the liquid credit market and in large leverage buyouts.

We extended our credit availability by completing a $145 million term loan priced at LIBOR plus 1-1/2 in December. We used the proceeds of this term loan to reduce borrowings under our revolving credit facility. This capital raise left us with capacity for new investment opportunities in what is now a very attractive investment environment. We borrow under our revolving credit facility at LIBOR plus seven-eighths and at December 31 we had availability of more than $200 million. 2008 is off to a good start with an increasing number of attractive investment opportunities for BlackRock Kelso Capital. Middle market deal activity has regained some of its strength and our access to these transactions continues to increase as we add to our already established investment team and grow our outreach and marketing effort. We remain focused on finding the best risk adjusted returns in middle market companies where we are able to play an active role in due diligence and transaction structuring. So far we've closed on new investments of more than $75 million in the first quarter of 2008. I'd now like to turn the call over to Frank Gordon to review some of the GAAP financial information for the fourth quarter and for the full year.

Thanks, Mike, and hello everyone. I will now take a few moments to review some of the details of our GAAP financial information for the fourth quarter and full year 2007. Investment income totaled $35.4 million and $127.8 million respectively for the quarter and year ended December 31, 2007, compared to $17.9 million and $53.9 million for the quarter and year ended December 31, 2006. The increases reflect the growth of our portfolio and the transition of the portfolio from temporary to long-term investments as the portfolio was not yet fully invested in the prior periods.

Net expenses for the quarter and year ended December 31, 2007, were $13.2 million and $51.9 million respectively versus $5.7 million and $14 million respectively for the corresponding periods in the prior year. Of these totals, for the quarter and year ended December 31, 2007, $5.8 million and $20.3 million respective many were interest and other credit facility expenses. Interest and other credit facility expenses totaled $0.3 million for each of the corresponding 2006 periods. In addition, performance based incentive fees totaled $9.4 million and $4.4 million for the years ended December 31, 2007, and 2006 respectively, and $3.1 million for the quarter ended December 31, 2006. There were no incentive fees for the quarter ended December 31, 2007.

Expenses net of performance based incentive fees, interest and other credit facility expenses for the quarter and year ended December 31, 2007, were $7.4 million and $24.3 million respectively compared to $3 million and $13.6 million respectively in the corresponding periods of 2006. Overall, the increase in expenses was driven primarily by an increase in base management fees resulting from the growth of our portfolio, the incurrence of performance based incentive fees and incurrence of borrowing costs under our credit facility. Net investment income totaled $22.1 million and $75.8 million, or $0.43 per share and $1.66 per share respectively for the quarter and year ended December 31, 2007. For the corresponding periods in 2006, net investment income totaled $12.2 million and $39.9 million, or $0.32 per share and $1.09 per share respectively. Total net realized gain loss for the quarter and year ended December 31, 2007, were losses of $1.3 million and $0..6 million respectively compared to a gain of $0.5 million for each of the quarter and year ended December 31, 2006.

For the quarter and year ended December 31, 2007, the net change in unrealized appreciation, depreciation on our investments, foreign currency translations and cash equivalents was depreciation of $36.8 million and $59 million respectively versus depreciation of $0.9 million and appreciation of $1.2 million respectively for the quarter and year ended December 31, 2006. Net unrealized appreciation depreciation was net depreciation of $57.6 million at December 31, 2007, and net appreciation of $1.4 million at December 31, 2006. For the quarter and year ended December 31, 2007, the net increase, decrease and net assets from operations was a net decrease of $15.9 million or $0.31 per share and a net increase of $16.2 million or $0.35 per share respectively compared to net increases of $11.9 million or $0.31 per share and $41.6 million or $1.13 per share respective for the quarter and year ended December 31, 2006. With that, I would like to turn the call back to Jim.

Thank you, Frank. Looking forward into 2008 we continue to be excited about our business and about our prospects. The portfolio is well diversified, conservatively constructed and performing well. Our focus on preservation capital and on finding the best risk adjusted returns throughout the capital structure of middle market companies in which we invest continue to be the force behind our success. Finally, I'd like to thank the talented investment team of BlackRock Kelso Capital and our partners at BlackRock and at Kelso for their dedication to the success of BlackRock Kelso Capital Corporation. Now, would the operator please open the call to questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) Your first question comes from the line of Daniel [Pandona] with Neuberger.

Hi. Can you hear me?

Yes, we can hear you, Dan.

Hi, here's my question. If you look at fourth quarter to fourth quarter, the yield on the senior stuff went from 13% to 12% and that is after saying that there was depreciation due to quoted market. Now, I don't understand how the yield went down if we had depreciation of 57 million. I appreciate that not all of the 57 million is tied to the senior stuff. I mean, there was [tie gem] writedown as well. But the numbers don't seem to parse. If you have depreciation I would think yield overall would go up. That's question one. Question two is, I heard you say that the 145 million is at LIBOR plus 1.5. Did I hear, and I may have misheard you say that the facility that's being paid off is at LIBOR plus seven-eighths or maybe I just misheard that and you can clarify that for me. Then the third thing, if I may, is when you issue a press release in the future, I'd appreciate it if in addition to the balance sheet and income statement you included a cash flow statement. I mean we can create it but it's going to be in the K any way. So those are my three.

Well, Dan, it's Mike. I just, maybe I can start with the middle one first which was what did you do with the $145 million proceeds of the term loan, I think.

And is it LIBOR plus 1-1/2 and you used it to pay off.

We used it to reduce outstanding loans but we didn't reduce the size of the facility. So what we did is we expanded our total credit availability by drawing down a LIBOR based term loan and that refreshed our ability and allowed us to pursue new investments in the future with the availability which remains at LIBOR plus seven-eighths. That didn't go away.

Oh, I see. Okay.

So again it's a revolver so we just used the proceeds. The term loan obviously you have to draw it all at once so when we received those proceeds, we reduced the outstanding amounts but not the availability on the revolver.

Right, but, in other words it takes a little bit of a hit to draw it all down because you are drawing it down at LIBOR plus 1-1/2 and while it's still available you're paying down the revolver at seven-eighths.

That's correct.

Sure, that's right.

I mean, could we go to the first quarter which is the first one that really confuses me?

Sure, Dan, it's Frank Gordon, I would be happy to answer that. The reason for that is our yields are based on the cost of the investment. In other words, regardless of what happens to the marks on the investment, we still receive the same coupon income from the security based on the amount we originally invested.

Oh, so the 12% is not based on the mark.

That's right.

What would it be based on the mark?

It would be higher.

Well, I'm going to presume sure as heck it would be.

Well, it wouldn't -- because a significant part of that mark is equity related it wouldn't move it as much as you might think it might. We can calculate that number and get it for you.

Yes, all right, I would appreciate hearing it because you understand my confusion with this.

Sure.

Sure.

Okay.

This is Mike again. It shouldn't have a very big affect. We are happy to go through the exercise with you.

But it should certainly have some effect because it was a $57 million year to year write off, not write off but I mean depreciation in the quoted value of the asset. Some of it tied to pure write off which is [tie gem] and then the balance due to --

None of it is tied to pure write off. All marked down. None of it's realized.

Okay. Okay. Thank you.

Thank you for your suggestion about the cash flow statement. It's certainly something we'll try to work into the next release.

(OPERATOR INSTRUCTIONS) Your next question comes from the line James Shanahan of Wachovia.

Good afternoon, thank you for taking my call. A couple questions here, please. The revolving credit facility, the one that's at LIBOR plus seven-eighths, unless I'm mistaken, does that decline to $400 million in available capacity in mid April? Or have you taken steps to increase that capacity?

That does decline to 400 million on April, I believe April 15.

And the revolver is currently $455 million.

This is the LIBOR plus 150 term facility?

The LIBOR plus 150 term facility is $145 million.

Okay. Sorry, then what was 455 million? Pardon me.

The current revolver, current revolver which is LIBOR plus seven-eighths, Jim, is the portion that's scheduled to reduce and it's scheduled to reduce on April 14, I think that's right, Frank, and the current balance of it is 455 in terms of availability. And that's the number that reduces to 400, not the total credit facilities, just the revolver portion.

So what is the plan given, is $600 million sufficient to finance the opportunities that you're seeing or is there a plan or a strategy to increase available capacity any time in the next say next quarter or so?

We would very much like to increase capacity and as I think it should come as no surprise to anyone on this phone call that the availability of capital in the marketplace at attractive pricing at the moment is limited, if not non-existent.

Jim, this is Mike again. We do still have plenty of availability to make new investments. I mentioned earlier that we had and you'll see when the final numbers are out that we had more than $200 million available at 12/31 for new investments. And so as we've talked about in the past, we don't want to carry the excess cost burden of available credit particularly in today's market environment unless we are ready to use it.

Right. Now is there any chance that, we are more than two-thirds away through the March quarter here, do you, can you comment on the impact of portfolio marks and any credit related items that have emerged here quarter to date given that we are where we are in the reporting cycle here?

The only comment I would make is that during the quarter there's been some further depreciation in the marks and I don't think there's any reason to comment on what those are. They are not -- they are consistent with what's going on in the marketplace I would say. In terms of credit, I think credit is very similar to where it was at the end of the year, very consistent with where we were at the end of the year.

One final question, Michael, can you please recap for me, I wasn't able to get all the numbers down, regarding the three investments on non-accrual did I hear you correctly that $5.2 million at fair value at year end, but that represented 30% of the cost basis of those three loans?

That's correct, it's around 30% of cost for those three and as you'll see in the year end financial statements they currently carry a fair market value of $5.2 million in the aggregate.

When is the case scheduled to be filed?

Frank, you can confirm this.

Sure, it's scheduled to be filed this Friday.

Thank you.

(OPERATOR INSTRUCTIONS) Gentlemen, there are to further questions at this time.

Well, thank you very much. Thank you all for attending our conference call.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.