BlackRock Capital Investment Corp (BKCC) 2009 Q1 法說會逐字稿

Good afternoon. My name is Kara 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; and Chief Financial Officer, Frank D. Gordon. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer session.

(Operator Instructions)

Thank you. Mr. Maher, you may begin the conference.

Thank you, Karen, and welcome and to our first quarter conference call. I'm joined today by Mike Lazar, our Chief Operating Officer, and Frank Gordon, our Chief Financial Officer. We will begin by having Frank review some general conference call information.

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 [may 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, and does not undertake to update any forward-looking statements.

I would now like to turn the call back over to Jim.

Thanks, Frank. We're pleased to have the opportunity to speak with you this afternoon. Since our last earnings call, just under two months ago, we've witnessed some signs of stability in both the credit markets and economic conditions generally. While stability is not the same as improvement, we believe that the worst of the credit crisis may be behind us.

The market stabilization has had an effect on our valuations in some of our portfolio companies. And while the portfolio did suffer some net depreciation during the first quarter, the amount was less than 3% of total assets at cost. The status of our portfolio, our balance sheet and our investment team remains very strong.

We've taken steps throughout the last twelve months and in the first quarter to safeguard our portfolio against the deterioration in the economy. With respect to our financial position, we entered the first quarter in a position of strength. As a business development company, our balance sheet asset coverage must be greater than or equal to 200%. Our BDC statutory asset coverage ratio remains largely unchanged at 217% on March 31st.

We continue to have capital resources available to fund additional investments. At March 31, 2009 we had more than $125 million of cash equivalents and borrowing availability under our senior credit facility. During the first quarter, our net invested income was $0.43 per share. At cost, more than 80% of our portfolio's rated level one or two, the highest levels of our portfolio company rating system. These investments represent more than 93% of our portfolio value.

At March 31st, nearly half of the net unrealized depreciation reflected in our financial statements corresponds with portfolio companies that are rated one or two under our credit rating system. Our financial statements will show that our debt investments currently not accruing income amount to 2.3% of our portfolio at fair value and 7.6% at cost.

Overall, the earnings derived from our portfolio companies remains substantial and sustainable. Notwithstanding our financial strength, we, together with our board of directors, have taken approach to our quarterly dividends that continues to be influenced by an abundance of caution. This morning we announced that our board of directors has declared a regular second quarter dividend of $0.16 per share consistent with our first quarter dividend.

The dividend rate is not a reflection of any change in the fundamental earnings capacity of our portfolio, but rather our cautious approach to balance sheet management while the current economic environment remains unpredictable. As we said in March, we believe it is prudent to retain capital until market conditions normalize.

This precautionary measure will enable us to protect our balance sheet by reducing borrowings under our credit facility. This will allow us to make additional investments in existing portfolio companies and to preserve operating flexibility during this period.

We continue to believe that our best investment opportunities consist of secondary investments in existing portfolio companies. We think that having sufficient investment capacity for these opportunities will give us the ability to derive very attractive returns in companies that we know well and monitor closely.

BlackRock Kelso Capital intends to maintain its status as a RIC for tax purposes. As most of you are aware to retain our RIC status, we will be required to distribute at least 90% of taxable income that we earn during the year to our shareholders.

Yesterday our board of directors approved the continuation of our share repurchase plan, under which we may repurchase up to an additional 2.5% of our outstanding shares from time to time. We evaluate share repurchases on much the same basis as we evaluate new investment opportunities. We believe that our shares provide an attractive current return and a total return opportunity.

Our repurchases made under the plan to-date have been in prices that were accretive to net asset value. We anticipate that we will benefit from the current severe market dislocation, as a result of our conservative positioning over the long term. Perhaps, most importantly, our balance sheet is solid; we have access to capital under our attractively priced bank credit facility.

We believe that we have the financial flexibility to withstand the whims of the current market and economic environment. Mike will now review our financial results, portfolio and investment activity in more detail.

Thank you, Jim, and thanks, everybody, for joining our earnings conference call today. For BlackRock Kelso Capital, the first quarter was again characterized by an extremely slow environment for new transactions due to the general slowdown in the deal business, as well as the uncertainty of the credit markets generally.

We sourced our fair share of opportunities, but did not close any transactions with new portfolio companies during the first quarter. We were successful in improving our portfolio through a handful of re-pricing and credit enhancement events in some of our portfolio companies. This includes three new investments in the securities of existing portfolio companies at significant discounts.

We continue to find that many of our best investment opportunities in this current environment are in the securities of our existing portfolio companies. These opportunities generally are of two varieties; opportunistic secondary purchases of securities in performing companies from distressed sellers and direct investments in portfolio companies to improve their capital positions or advance our position in a capital structure.

We believe that our portfolio is well positioned for the current economic environment. On March 31st, our net portfolio consisted of 63 companies and with 61% invested in senior secured loans and 6% invested in senior notes. At the end of the first quarter, 3% of our portfolio was invested in equity securities and less than 1% in cash equivalents. The remainder of the investment portfolio were approximately 30% which comprised of unsecured or subordinated debt securities.

While all investments involve some degree of risk, we believe that because we are actively involved in the due diligence and structuring of the assets that we acquire, we have constructed a conservative portfolio. The terms of the loans in which we invest typically include financial covenants, security and other protections. These structural protections have been an important tool to reduce risk in our investments as the economy has remained slow.

The industry composition of our portfolio is reflective of our focus on investments in companies that demonstrate high sustainable free cash flow. The largest industry segments represent that in our portfolio are consumer products, business and other services and healthcare companies.

The turbulence in the credit markets continues to provide an opportunity for BlackRock Kelso Capital to enhance the risk adjusted returns of our investment portfolio. We have positioned our portfolio and each investment in it to withstand the economic downturn to the greatest extent possible.

As we have said before, much of this groundwork was put into place during the construction of the portfolio. Toward that end, we enjoyed the benefit of more than $25 million of junior capital invested by equity sponsors in support of our portfolio companies during the first quarter. This brings the total of new junior capital infusions to our portfolio companies to approximately $175 million during the last 12 months. Those investments represent an increase in the capital and junior securities of those companies of more than 20%.

Our active involvement in the due diligence, structuring and documentation of the significant majority of the investments in our portfolio has resulted in our having the opportunity to re-price a portion of our portfolio in the recent credit environment. During the last 12 months, we've re-priced securities that account for more than 22% of our portfolio on a par amount basis.

We also received amendment and other fees on securities representing more than 25% of par amount. The average rate increase on those securities has been in excess of 300 basis points and amendment fees averaged over 100 basis points. In total, these rate increases will contribute 68 basis points of incremental return on our total portfolio.

Although we invested only $15.3 million of capital during the quarter, we have invested in excess of $1.7 billion across more than 100 portfolio companies since our initial funding in 2005. In that time, we have exited more than $525 million of investments at a compound rate of return of more than 14.5%, and with the dividend declared today -- would have paid dividends of more than $5.00 per share.

Repayments of investments were less than $1 million during the quarter. Fixed rate assets, including those with LIBOR floor arrangements comprised 60% of our debt investments and approximately 58% of our total assets at fair market value at the end of the quarter.

Our net exposure to changes in LIBOR stood at approximately $65 million at March quarter end. The fair market values in our GAAP financial statements are determined under the requirements of statement of financial accounting standards, or FAS 157. BlackRock Kelso Capital adopted FAS 157 on January 1, 2008. Our process for determining fair value includes the use of market quotations and independent third-party valuations.

During the first quarter, as in prior periods, we engaged independent third-party valuation firms to perform valuations on all of our non-traded portfolio investments. These valuations are performed on a company-by-company and security-by-security basis for each investment every quarter, and comprised of nearly all of our investments.

Our portfolio valuations were not immune from the effects of the current economic and credit environment. Total portfolio unrealized depreciation net of gains was approximately $27.8 million during the quarter. Many portfolio investments continue to experience unrealized depreciation as a result of the unsettled credit markets and the increase in market yields for high-yield loans and bonds since September of last year.

As the liquid debt market seized in the fourth quarter of 2008, the market became characterized by distressed and for sales by third parties in an illiquid market. While the volume of these forced sales seems to have abated somewhat, these values continue to effect market pricing in the first quarter.

We believe these distressed sales had an effect on the comparable yields and trading values which are an input into the determination of fair value of many of our portfolio investments. Market-wide movements and distressed sales are not necessarily indicative of any fundamental change in the condition and prospects of our portfolio companies. As we have stressed in the past, unrealized depreciation on investments does not have an impact on our current ability to pay distributions to stockholders.

A significant portion of our net unrealized depreciation corresponds with investments in companies that are performing in line with our original expectations. As we hold most investments to maturity, we anticipate that for investments in companies with adequate fundamental performance, we will not ultimately realize any losses in value.

One effect of the reduced mark-to-market valuations of our portfolio companies is on the incentive fees paid to our investment advisor. As a result of our unique high-water mark incentive fee structure, BlackRock Kelso Capital paid no incentive fees during the last four quarters due to the change in unrealized depreciation.

Notwithstanding valuations, we are pleased with the performance of our portfolio companies and that continues to be strong with an overall weighted average rating of 1.44, using our one to four credit rating scale. This compares to 1.45 at December 31, 2008 and 1.23 at December 31, 2007. Approximately 7% of investments are rated three or four, with the remainder of the portfolio rated one or two at fair market value.

As of March 31, 2009, we have investments on non-accrual , representing 2.3% of portfolio value. The fair market value views assets as $20.6 million at March 31st compared with $15.8 million as of December 31st. The cost basis of our debt investments on non-accrual was $88.8 million, compared to $76.1 million at year-end.

At March 31, 2009, the Company was in compliance with regulatory coverage requirements with an asset coverage ratio of 217% and was in compliance with all financial covenants under its credit facility. At March 31st, we had borrowings of approximately $421 million. Taking our most restrictive debt covenants into account, we had cash equivalents and borrowing capacity of more than $75 million at quarter-end.

I'd now like to turn the call over to Frank Gordon to review some of the GAAP financial information for the first

Thanks, Mike, and hello, everyone. I will now take a few moments to review some of the details of our first quarter 2009 GAAP financial information. Investment income totaled $31.8 million and $35.7 million for the quarters ended March 31, 2009 and 2008 respectively. The decrease in investment income for the quarter ended March 31, 2009 primarily reflects the impact of lower levels of LIBOR on our floating rate debt investments, which generally bear interest based on LIBOR.

Three month LIBOR averaged 1.24% during the quarter ended March 31, 2009, compared to 3.29% during the quarter ended March 31, 2008. Net expenses for the quarters ended March 31, 2009 and 2008 were $8.1 million and $12.5 million respectively. Of these totals, for the quarters ended March 31, 2009 and 2008, $1.8 million and $5.2 million were interest in other credit facility expenses. The decrease in interest expense was a result of reduced borrowing costs from lower prevailing levels of LIBOR, partially offset by higher average borrowings outstanding.

Base management fees for the quarter ended March 31, 2009 decreased to $4.7 million from $5.6 million in the first quarter of 2008. The decrease in base management fees reflects a decline in the quarterly portfolio values on which the fees are paid. There were no incentive fees during the quarters ended March 31, 2009 and 2008, due primarily to the increase in unrealized depreciation on investments.

General and administrative expenses were $1.5 million for the quarter ended March 31, 2009m compared to $1.7 million for the quarter ended March 31, 2008. The decline in general and administrative expenses reflects a decrease in professional fees.

Net investment income totaled $23.8 million or $0.43 per share for the quarter ended March 31, 2009, versus $23.2 million or $0.44 per share for the quarter ended March 31, 2008. Total debt realized gains for the quarter ended March 31, 2009 were $2.1 million, compared to $0.2 million for the quarter ended March 31, 2008.

For the quarter ended March 31, 2009, the net change in unrealized depreciation on our investments and foreign currency translation was depreciation of $29.9 million versus depreciation of $62.9 million for the quarter ended March 31, 2008. Net unrealized depreciation was $339.2 million at March 31, 2009 and $120.5 million at March 31, 2008.

For the quarter ended March 31, 2009, the net change in net assets from operations was a decrease of $4.1 million or $0.07 per share, compared to a decrease of $39.5 million or $0.75 per share for the quarter ended March 31, 2008. The weighted average yield of the debt and income producing equity securities in our portfolio at their current cost basis was 10.4% at March 31, 2009, compared to 11.5% at March 31, 2008.

The weighted average yields on our senior secured loans and other debt securities at their current cost basis were 9.9% and 12.1% respectively at March 31, 2009, versus 10.6% and 13.2% at March 31,2008. At March 31, 2009, we had $1.6 million in cash equivalents, $421.5 million in borrowings outstanding and $123.5 million available for use under our $545 million credit facility, which matures in December 2010.

Under the terms of our amended and restated dividend reinvestment plan adopted on March 4, 2009, dividends may be paid in newly issued or treasury shares of our common stock at a price equal to 95% of the market price on the dividend payment date, irrespective of our net asset value on that date.

This feature of the plan means that under certain circumstances, we may issue shares of our common stock at a price below net asset value per share, which could cause our stockholders to experience dilution. Reinvestment of our April 3, 2009 dividend at such price resulted in dilution of our net asset value of approximately $0.08 per share.

During the quarter ended March 31, 2009, we purchased a total of approximately 501,000 share of our common stock on the open market at prices below net asset value per share for $1.9 million, bringing cumulative repurchases since the August 2008 inception of our share repurchase plan to approximately 879,000 shares for $5.1 million.

As Jim mentioned earlier in the call, our board of directors approved an extension and increase to our share repurchase plan which authorizes us to repurchase up to an additional 2.5% of our outstanding shares of common stock. After giving effect to the board's action, the total number of additional shares authorized for repurchase is approximately $1.8 million. The repurchase plan is expected to be in effect through the earlier of June 30, 2010 or until the approved number of shares has been repurchased.

With that, I would like to turn the call back over to Jim.

Thanks, Frank. Looking forward to the remainder of 2009, we continue to feel good about our business and about our prospects. Our portfolio is well diversified, conservatively constructed and performing well. The private equities sponsors with whom we have partnered have committed approximately $175 million of new junior capital during the last 12 months to support our portfolio companies through this economic downturn.

And finally, I'd like to thank you for your interest in BlackRock Kelso Capital and for joining our conference call today. Kara, please open the call to questions.

(Operator Instructions)

Your first question comes from the line of Jasper Birch with Fox-Pitt Kelton.

Hi, guys. Thanks for taking my question. To start off on your portfolio, I was just wondering could you give us any more color on some portfolio metrics like debt to EBITDAs and interest coverage ratios -- how those are moving?

Sure. Jasper, it's Mike. I think as we track each individual [portfolio] company, there hasn't been a huge movement overall in the average or last dollar commitment to portfolio companies and there's been some movement within the portfolio though, some better and some worse. But on average when you look across the whole portfolio it's in -- it's pretty similarly situated as it has been in the past.

As we think about it and we look at all of the components to the performance of each of the portfolio companies, we think that one of the best things to look at and one of the things that we look at internally, which is the culmination of a lot of inputs, is what the weighted average ratings are of the portfolio; and you'll see that period to period to period over the last three is very consistent at about 1.44 or 1.45 last quarter.

Great, and then I think, Mike, you also talked how you've been seeing a lot of deals. On that topic, I mean you haven't made any investments, so where are those deals coming from. I'm assuming their mostly refinancing, and you can correct me if I'm wrong. What have been the sticking points?

What I said was that I think we're seeing our fair share of deals, but new deal flow; transactions --M&A related transactions, refinancing tend to be much, much slower than this time last year or really in any time other than the fourth quarter when things slow down right after the Lehman Brothers situation.

What I would say in terms of what we're seeing is that, like it always is with us, it's all over the map. We're seeing some larger transactions, some distressed companies looking to recapitalize their balance sheet, make some changes to their capital structures.

We're also seeing some ordinary course or regular way, middle market transactions from all the sources that we normally have for this line of business, be they directly with equity sponsors through some of the regional banks, through some of the New York money center banks and investment banks, through finance companies, through accounting firms and lawyers -- sort of our ordinary direct sourcing process is leading to the transactions that we're seeing.

Again, what we like about the transactions that we're seeing is that they tend to be more conservative in this most recent period. However, at the moment or at least in the first quarter, we found that a lot of the best opportunities that we've had for a total return investing and from both a defensive and offensive position has been in many of our own portfolio companies where we're able to pick up some opportunistic investments inside the companies that we already know very well.

Okay. So is your direct sourcing -- is that more active now than it was say five months ago, three months ago?

I'd say it's about the same, yes.

Okay.

Jasper, what I would add is that the velocity of transactions, the number of opportunities in direct sourcing has held up much better, as you would expect, then the massive volume of transactions that we saw -- most of which we didn't participate in but certainly we looked at them all that came from the more heady market of transactions brought primarily by broker dealers. We saw all of those; we didn't participate in too many of them. The direct business is much less volatile.

Well, thank you for the time to take my question and nice job on the quarter, guys.

Thanks.

Thank you.

Your next question comes from the line of Troy Ward with Stifel Nicolaus.

Thanks, guys, good afternoon.

Hi, Troy.

Can you give us a little bit of color on your thoughts on the share buyback? Obviously, the board reloaded the shareholder buyback in this quarter very attractive purchases and in volume which was nice to see, but where does that make sense here going forward? How do you look at as a company in purchasing shares at what level?

We don't disclose what level we set the repurchase program at, but the way we think about it is really as an offset to our dividend reinvestment program. And do depending on where the stock price is, we start the program at the beginning of -- or after we announced earnings and we set a price at that level at that point in time, and it's really targeted to eliminate some of the dilution that's created through the dividend reinvestment program.

Okay, thanks. And then could you remind me of when is your tax year-end?

Sure. Frank?

Yes, it's December 31st, calendar year.

It's calendar year, okay. And then how do you view that the RIC requirements -- your payouts under the RIC requirements when you're earning well in excess of your new dividend rate. How are you viewing that? And secondarily, do you have the ability to realize losses to offset taxable income?

The answer is we do have the ability to realize losses to offset taxable income. I think as we approach the end of the year we'll make some determinations about what course of action to take, whether to take advantage of issuing securities in kind, taking tax losses on securities that we own, or some combination thereof.

Or, if we come to that point of the year and the economy and the world have repaired themselves and the need for our conservatism has abated somewhat, we would certainly look to make the distributions as they're originally intended on a cash basis.

Yes, and I think you just answered a little bit, but what do you mean by distribution in kind? Do you mean deemed distribution or paying it in stock, or what do you mean there?

I mean paying it in stock.

Okay. All right. All right, that's all we got. Thanks, guys.

Sure.

(Operator Instructions)

Your next question comes from the line of James Shanahan with Wachovia.

Thank you. Troy asked all my questions, but I would like to follow-up with one. Would you consider a dividend policy that would be based upon some -- not low, but relatively low level of regular quarterly dividend with a true-up towards year-end?

It would enable you potentially to retain a little bit of capital, maybe you'd get to the point where you could pay out 60% over the course of the year, 30% of taxable income special and then you wind up being able to retain a little bit of capital, perhaps even use it for share repurchases or what not. Because I'm starting to believe that this policy that a lot of your peers have and primarily have enacted where they set a regular quarterly dividend that they wind up either regretting or maybe they lose sleep over, it really isn't the best strategy long-term. I think investors see through it and I'd like to just get your thoughts on that.

I think what we did last quarter was to set the sort of floor, so the first piece of that equation with the notion of making a determination later in the year and as I think I said to either pay with stock, pay with cash, or some -- or to reduce the obligation through a sale of assets that produce a tax loss, so I think, and again this is I believe a unique year. The ability to pay in stock may or may not extend beyond this year, but we know that it's there this year. Certainly going forward a policy that you've talked about, or some form that's similar to what you talk about I think makes a lot of sense.

By the way, I'll add a comment. And thank you for that. I'll add a comment though that I think I'm speaking for at least some of the retail investors in our company here that are with Wachovia want to say that, paying a dividend in stock isn't particularly helpful to some of them if they wind up having to pay taxes and you've given them a distribution that's not in cash. And a lot of these folks that buy these stocks -- right or wrong, maybe they have 10% of their portfolio invested in higher-yielding names like this; maybe it's 5%, I don't know. But if you give them -- they live off of it.

Sure.

And paying a distribution to them in stock and having them have to turn around and write a tax check, that can be painful.

Right.

So I just thought I'd mention that.

No, we understand that and appreciate it. And Jim, its Mike. The level at which we set the dividend payments, you'll notice are to cover hopefully anybody's tax obligation.

Understood. Thank you.

There are no further questions in the queue. You may proceed with your presentation or any concluding remarks.

Well, thank you all very much for dialing in, and we look forward to talking to you again. Thank you.

This concludes today's conference call. You may now disconnect your line.