BlackRock Capital Investment Corp (BKCC) 2009 Q3 法說會逐字稿

Good afternoon, my name is Sara 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 speakers' remarks, there will be a question-and-answer session. (Operator instructions).

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

Thank you, Sara and welcome to our Third Quarter Conference Call. 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 Corporation's actual results may differ from these statements. As you know, BlackRock Kelso Capital Corporation has filed with the SEC reports which list some of the factors which may cause BlackRock Kelso Capital Corporation's results to differ materially from these statements. Finally, BlackRock Kelso Capital Corporation 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 today and I'd like to begin by highlighting a few things. Earlier today, we announced that our Board of Directors has declared a regular fourth quarter dividend of $0.32 per share. This is double our first, second and third quarter dividends of $0.16.

As you may recall, we reduced our dividend for the first three quarters as a matter of prudence. We now feel comfortable restoring our dividend after taking into account the underlying strength of our portfolio as well as our balance sheet. Our portfolio continues to produce strong investment income and there are positive signs in many of our companies. For the quarter, we had net investment income of $0.39 per share.

Our balance sheet is now conservatively positioned, debt stood at less than $350 million on September 30th as compared with $426 million at year end. At the end of the third quarter, we had more than $190 million of cash equivalents and borrowing availability under our senior credit facility.

Our statutory BDC asset coverage test stood at 255%, an increase from the 237% level at June 30th. In addition, our net asset values increased by $26 million from $514 million on June 30th to $540 million at September 30th. This increase isn't due in part to improving market conditions as well as improved performance at several portfolio companies.

Our NAV per share was $9.59, an increase of $0.35 per share from June 30th and $0.55 per share since March 31st. our NAV per share is $0.08 lower than it otherwise would have been due to the net impact of our dividend reinvestments and share repurchase plan activity. In other words, we are feeling confident as the economy, the market and our portfolio have stabilized. We are optimistic regarding future improvement. As always, we remain cautious and conservative as we do not expect the economy or the credit markets to reach the 2006/2007 levels for a very long time, if at all.

Looking forward, there are attractive investment opportunities available in the middle market and a dwindling number of capital providers to middle market companies. We're excited to have the capital resources and the disciplined investment processing place to take advantage of these opportunities.

We've invested in excess of $1.8 billion across more than 100 portfolio companies since our initial funding in 2005. In that time, we have exited more than $540 million of investments at an unlevered compound rate of return of more than 14%. Including the dividend declared today, we will have paid dividends equal to $5.56 per share since our inception in July of 2005.

We remain conservatively positioned for the long term. Our balance sheet is solid. We believe we have the financial flexibility to profit from the improving market and environment -- and economic environment for the balance of 2009 and beyond.

Mike Lazar will now discuss our third quarter portfolio activity and market conditions in more detail.

Thank you, Jim, and thank you for joining our earnings conference call today. In terms of portfolio activity, the third quarter was generally a slow environment for new transactions, but a busy quarter for activity and portfolio companies. We sourced both new investment opportunities and follow on investment opportunities in several of our existing portfolio companies during the quarter. We were once again successful in proving our portfolio as a result of credit enhancement events in some of our portfolio companies.

Portfolio acquisitions during the quarter totaled $11 million, including new investments in the securities of five portfolio companies, three of which were made at significant discounts. This activity was once again focused on investments in portfolio companies that improved their capital positions or advanced our position in a capital structure. Repayments of investments equal $28.3 million during the third quarter.

Looking ahead, the volume of new transaction opportunities rebounded significantly after Labor Day. That increase has been sustained into the fourth quarter. We believe that our portfolio continues to be very well positioned for the current economic environment. On September 30th, our portfolio consisted of 60 companies and was 59% invested in senior secured loans and 6% invested in senior notes. At the end of the third quarter, 4% of our portfolio was invested in equity securities and less than 1% in cash and cash equivalents. The remainder of the investment portfolio or approximately 31% was comprised of unsecured or subordinated debt securities.

Throughout the economic downturn, BlackRock Kelso Capital worked actively to enhance the risk adjusted returns of our investment portfolio by repricing securities, working with equity sponsors to arrange for significant equity and junior capital investments to support our portfolio companies, and to restructure investments to capture increased economics.

We've been able to do this in large part as a result of the existence of financial covenants and other protections in the significant majority of our investments. We enjoyed the benefit of more than $129 million of junior capital invested by equity sponsors in support of our portfolio companies during the last 12 months. Those investments represent an increase in the capitalization of those companies of more than 22%.

We repriced securities that account for nearly 15% of our portfolio on a par amount basis and received amendment and other fees on securities representing more than 20% of the par amount of our portfolio. Both junior capital contributions and repricings have slowed dramatically in the third quarter. This trend coincides with the improvements in the general economic conditions as well as the improvement in the credit market.

Our portfolio valuations improved overall during the quarter. The total portfolio experienced appreciation of approximately $9 million during the quarter and our net asset value increased approximately $45 million since March 31st. We are pleased that the performance of our portfolio companies continues to be strong. At September 30th, 2009 2.4% of our total debt investments at fair market value were on non-accrual status. The fair value of these assets is $19.9 million at September 30th.

The cost basis of our debt investments on non-accrual was $57.1 million or 5.5% of amortized costs at September 30. This compares to $88.8 million at the end of the first quarter. Our non-accrual performance compares favorably with the over 10% default rate observed in the liquid leveraged loan index and the over 11% default rate in the high yield bond index at the end of October. Our weighted average yield on income producing securities was 10.9%.

At September 30, 2009 the company was in compliance with regulatory coverage requirements with an asset coverage ratio of 255% and was in compliance with all financial covenants under its credit facility. At September 30th, we had net borrowings of approximately $348 million and taking it -- the most restrictive debt covenants into account, we had cash equivalents and borrowing capacity of more than $190 million at quarter end.

Current environment for new commercial loan and mezzanine transactions is excellent. We are reviewing more transaction opportunities from middle market companies with solid and improving performance. Mezzanine investing returns are currently available at rates of return similar to those typical for equity investments in 2007, yet these mezzanine opportunities are at leverage levels commensurate with senior loan leverage levels of two years ago.

We believe that economic conditions and the economic outlook have improved considerably this year. For the first three quarters of 2009, we generated net investment income of $71 million or $1.28 per share and for the full year have declared dividends equal to $44 million or $0.80 per share. Finally, while we cannot make any assurances, it is our current intention to carry forward any excess 2009 taxable income into 2010.

With that, I would now like to turn the call over to Frank Gordon to review some of the GAAP financial information for the third quarter.

Thanks, Mike, and hello, everyone. I will now take a few moments to review some of the details of our third quarter 2009 GAAP financial information. Net investment income totaled $21.8 million and $71.1 million, or $0.39 per share and $1.28 per share for the three and nine months ended September 30th, 2009.

This compares with net investment income of $25.6 million and $72.1 million or $0.47 per share and $1.34 per share for the three and nine months ended September 30th, 2008. The decrease in net investment income reflects the impact of lower levels of LIBOR on our floating rate debt investments and a lower level of total investment compared with the prior period.

Total expenses for the three and nine months ended September 30th, 2009 were $7.6 million and $23.5 million versus $11.9 million and $36 million for the three and nine months ended September 30th, 2008. The decrease in expenses is largely due to lower interest expense, which again is a result of lower prevailing levels of LIBOR in 2009.

Other general and administrative expenses were generally lower than in the prior periods due to the reduced level of new investment originations and lower portfolio valuations. There were no incentive management fees during the three and nine months ended September 30th, 2009 and 2008.

Total realized net gain or loss for the three months ended September 30th, 2009 was a loss of $56.3 million. Net realized loss from the disposition of investments resulted primarily from the restructuring of our investments in Advanced Star Inc., Alpha Media Group Inc. and Mattress Giant Corporation in a third quarter and United Subcontractors Inc. in the second quarter of 2009. Substantially, all the net realized loss represents amounts that had been reflected in unrealized depreciation on investments in prior periods.

For the three months ended September 30th, 2009 the net change in unrealized appreciation or depreciation on the company's investments and foreign currency translation was appreciation of $65.7 million versus depreciation of $44.4 million for the three months ended September 30th, 2008. The net unrealized depreciation on investments for the three months ended September 30th, 2009 includes $60.6 million relating to reversals of prior period net unrealized depreciation as a result of investment restructurings and dispositions. Net unrealized depreciation was $264.6 million at September 30th, 2009.

The valuations of our investments were favorably impacted by market wide decreases in interest yields as well as increases in multiples used to estimate the fair value of some of our investments. Market wide movements and trading multiples are not necessarily indicative of any fundamental change in the condition or prospects of our portfolio companies.

The weighted average yield of the debt and income producing equity securities in our portfolio at their current cost basis was 10.9% at September 30th, 2009 compared to 11.9% at September 30th, 2008. The weighted average yields on our senior secured loans and other debt securities at their current cost basis were 10% and 13.2% at September 30th, 2009.

Under the terms of our amended and restated dividend reinvestment plan, 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 or NAV 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 NAV per share, which could cause our stock holders to experience dilution. Reinvestment of our dividends declared, year to date, and net of the impact of share repurchase activity resulted in dilution of our NAV of approximately $0.08 per share.

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

Thank you, Frank. In summary, we feel very, very good about our business. The business environment has stabilized, portfolio is well diversified, conservatively constructed and performing well. We've increased our regular dividend and strengthened our already well capitalized balance sheet. In short, our conservatism has placed us in a position of strength. Finally, I'd like to thank our highly talented investment team for their diligence and perseverance.

Thank you for your continued interest in BlackRock Kelso Capital. Sara, please open the call to questions.

(Operator instructions).

And your first question comes from the line of Troy Ward with Stifel Nicolaus.

Thank you and good afternoon. Quickly on -- if you guys could just speak a little bit on your thought process around originations in the coming quarters, obviously you haven't been originating a lot of new assets, but you were getting down to a debt to equity level where it appears like you could begin putting some additional capital to work. How do you feel about that in the coming quarters?

We continue to look at a lot of transactions and we will obviously continue to do that and depending on the quality of those transactions, I would expect that there's a probability or reasonably high probability that we will be putting some assets on our books.

Well, let's approach it a different way, you have about $190 million max by your comments under your loose -- you're most restrictive covenant. Where do you feel comfortable taking the leverage to?

Well, as I think you know, we are -- we will be renegotiating our credit facilities at sometime in the next 12 months and I think without ducking your question completely, I think it depends on where we stand in terms of renegotiating that credit agreement as to how -- what level we would feel comfortable.

And try -- this is Mike, I would just say that the analysis of the opportunity set that's in front of us at any given time is consistent. We have examined and done quite a bit of work on several transactions that, for whatever set of reasons, didn't make it to the finish line. It's very difficult to predict whether or not the work that se set out to do will result in a transaction at the end of the day.

As you know, a very lumpy business and so it's very difficult for us to predict, not withstanding out best intentions, what transactions may be available and then even more difficult to predict, which may come to a positive conclusion. So, as you know, we tend to not try to forecast that because there are too many things that stand a little bit out of our control with respect to the timing and the completion of any given transaction.

And I think it's also fair, we also take a good look at what looking forward over the next three to six months of at our current portfolio and the possibility and probability of some of those securities being repaid.

Considering the stability we've seen in the credit markets from this springtime for sure, can you comment whether or not you've approached your lender as to try to extend that into a multiyear facility?

I think we'll comment on that when we extend it into a multiyear facility.

Fair enough. And then -- over the last 12 to 18 months, there's clearly been a lot of opportunity to reprice securities, you've talked about that in the past. Is that -- is the availability of pick up additional yield in the portfolio still there or is that pretty much exhausted at this point?

Well --

It's -- go ahead Mike.

I'm sorry. Troy, I mentioned in the prepared part of the remarks that that activity had slowed somewhat during the most recent quarter. Having said that, the opportunities are still out there and they present themselves several different ways. One is as you suggested through renegotiating an existing transaction.

Another is to be opportunistic in putting more capital to work either on a primary or a secondary basis in some of the portfolio companies that we currently have an investment in and we've been very active in that regard. Although we haven't made investments in new companies, you'll note over the past several quarters we have put quite a bit of capital to work in existing portfolio companies on a very, very opportunistic basis with what we expect to be very, very positive returns.

Okay and just one final one, and I'll let somebody else hop in there. On credit quality, over the last couple of quarters you've had several rather large restructurings and it's obviously optically helping your non-accruals, but you had another company drop into the non-accrual bucket. Could you give us a little color on what's going on there? It's [Arcelin] holdings?

Yes, Arcelin.

Arcelin.

That particular credit is something that where we're actively pursuing restricting of the transaction so during the pendency of that, we've placed the loan on non-accrual. When that's all completed, we'll have more news -- more specific news about the outcome of that transaction going forward.

And then, quickly on the accounting for some of the restructurings, I know there's been -- in the BBC sector, there's been a different approaches to restructurings with respect to pick income. I know on the -- on the [Aveinstar] investment that you've just restructured, historically you've accrued some pick in that for sure and then obviously with the restructuring, you've lost principal. How does that pick -- or reversal of pick affect the income statement or does it?

We -- I think it's somewhat described in the foot notes when something goes on non-accrual or is restructured in the current period, we basically reverse most of the current period interest income and certainly the past pick that we've accrued is part of the principal. So, if there is principal loss that does become a realized loss.

Okay, so it didn't -- the pick in past periods does not come through the income statement?

That's right.

And we had had -- we had had a conversation about that in the past I think and our accounting has remained consistent on that from the beginning.

Okay, great. Thanks, guys.

Your next question comes from the line of Chris Harris with Wells Fargo Security.

Great, thank you. Good afternoon, guys.

Hey, Chris.

Hi. Michael, in your prepared remarks here, you talked about the favorable market opportunity and I was just curious, what kind of -- what kind of yields are you guys seeing right now in the senior loan and subordinated loan markets?

Sure. I think generally across the board, the spreads of each of those two classes of securities to their respective treasury or LIBOR have increased from 50% to 100% from where they were at the height of the market at the beginning of 2007. So, transactions where LIBOR spreads might have been 500 basis points for a senior or second lien loan transaction, those spreads today would be anywhere from 800, 900 to 1,000 basis points comprised both of pure spread and of the inclusion of interest rate floors for LIBOR.

With respect to high yield or mezzanine transactions, the -- I guess the high yield index is at least a vague guide. It had gotten all the way down to about 7% at the height of the market and is now -- well, it's come in quite a bit over the last several weeks, it's trading around -- in the low double digits. The types of securities that we seek to structure in privately placed -- in privately negotiated mezzanine transactions are several hundred basis points wide of that typically.

Okay, great. That's helpful. And then, on these restructurings, I'm curious how you guys are kind of restructuring these investments. Are you guys writing off the debt and then taking equity stakes in these companies?

Well, each restructuring that we engage in is unique and based on the circumstances of the company, the capital structure and the securities that we own. But in its most basic format when we're able to -- particularly when we're able to take advantage of opportunities to buy debt securities at a discount, we often do that with a view toward conversation of at least some portion of those debt securities to an equity opportunity in the company. So, in the cases where that happens, the debt securities become realized losses and our new securities become equity securities and there is I guess one or two instances of that in this quarter.

But they do -- every restructuring is very, very different, it depends on the value of the company relative to our position in the capital structure and what we try to do is evaluate the most attractive security in the new restructured company and head in that direction.

Okay, great. Thanks, guys.

Your next question comes from the line of [Daniel Padwanna] with Neuberger.

Hi. I had a couple of questions. One was were there any developments in this quarter with respect to event rentals? That was one where you partially exited the debt in the second quarter. And then, the second question I had was looking from the second quarter to the third quarter, the repayments in the second quarter were $43 million and in this quarter $28 million. Was there something special to account for the big decline?

No, the -- the answer to the first question, the answer is no. There was nothing -- nothing happened to event rentals. And the second question is they're just lumpy Danny, and it just -- it's all about timing and I don't think you can interpret any kind of trend there. We may or may not have repayments in the -- of some significance in the fourth quarter and it really depends, oftentimes, on capital market transactions for those particular companies.

I see. So, it's not a -- it's not an amortization schedule that they're looking at?

No, no, no. It's --

Okay, it's a refinancing or something --

It's company specific, transactions specific. Go ahead.

I was just going to say normal amortization and excess cash flow payments that are structured into some of our loans tend to have a little bit of seasonality because many of those that have excess cash flow requirements, those are based typically off the audited financial statements and so there tends to be a little bit more of a seasonal excess cash sweep or slightly more amortization at the time we receive annual financial statements from our companies and that tends to happen in the first and second quarter more frequently than in the third and fourth quarter.

I see.

But absent that, as Jim said, it's very random.

Okay, thank you.

Your next question comes form the line of [Jasper Birch] with Fox-Pitt Kelton.

Hey, guys, thanks for taking my call and great job raising the dividend as I think it did great things for your stock today. First of all, in terms of your non-accruals at the fair value, they're up. I was just wondering are you seeing high recoveries in the market? Is that what's driving it? Are you expecting high recovery on sort of defaulted debt or is it on underlying operations of the company?

Hey, Jasper, it's Mike. We couldn't quite make out the end part of your question. I apologize.

I'm sorry about -- I'm sorry about that. In terms of non-accruals in the fair value going up whereas the costs that went down, are you seeing higher -- are you expecting higher recoveries at those companies and are you seeing higher recoveries across the market?

Well, I think it's a little bit too early in the cycle to comment on the market rate of recovery on defaulted securities, but with respect to the specifics of the higher fair market value for the non-accruals, that's just an outcome of our valuation process, which as you know is very sort of third party dominated and those securities have been valued to somewhat higher during this most recent quarter and that accounts for the fair market value difference.

Okay, fair enough. In terms of your incentive fee, I noticed you still don't have it, can you give us any guidance on -- I mean, are you expecting that to be a fourth quarter event in coming back?

Yes, I think we expect some incentive fees in the fourth quarter and it's -- it is very difficult to predict exactly what that will be, but we expect a significant amount of incentive.

Significant amount of incentive -- okay.

Well, we expect and hope, I guess I was -- I would insert hope. I think obviously because we have a very unique and what we believe to be uniquely shareholder-friendly incentive fee structure, there are several variables that might serve to limit the incentive fee that we're entitled to take and we won't know some of the values of those inputs until the end of the quarter. So, it's very hard to comment with any specificity today.

Okay, fair enough. I appreciate the color you guys gave on the opportunity in the market, the yields you're looking at, especially in senior -- or the returns, I should say. I'm just wondering for a little bit deeper into that, are you mostly seeing -- looking at recapitalizations right now? Are you -- I mean in terms of what's in your pipeline, is there a significant shift in company size that you're looking at? How cyclical the -- how cyclical the industries are?

Well, I mean -- I think -- our business continues to be driven by seeking out and finding opportunities wherever they may exist at the moment. There's sort of -- it's a little bit of a tale of two cities out there still, given the economic environment. There are a bunch of companies that have not yet sort of returned to their earlier levels of profitability that may be seeking some type of balance sheet restructuring or recapitalization, and in conjunction with that, are looking to raise new capital.

And there are some other companies that we've looked at in other industries that may be through the other side of any economic downturn, perhaps early cycle type companies, where they're looking to add on more capital per growth or maybe engaged in some type of a change of control transaction and it's across the board, it's very dependent upon the company, the situation, and the industry in which they play.

Okay, so what we'd expect. And then, I'll just ask one more question and hop off. And you talked about renegotiating your credit facility, possibly expanding it. Are you primarily focused on maintaining the same sort of structure of a credit facility? Are you looking at this point at possibly longer term debt or changing the type of capital that you're looking at raising.

Well, Jasper just to be specific, I think what Jim said is not expanding so much as extending --

Extending. Right.

-- and that was the question earlier. And with respect to the credit facility, as it exists today, it's served us very well in the past, it's provided us with sufficient capital to conduct our business and we look forward to finding the most least expensive capital that we can in a process that we're currently beginning to engage in and so, that's a long winded way of saying what Jim said earlier, which is we have no comment at this time because there's nothing to comment on.

Okay, fair enough. Thank you guys a lot.

Thank you.

(Operator instructions). And at this time, there are no further questions.

Well, I'd like -- I'd like to thank you all for calling in today. If you have any further questions, feel free to call Frank, Mike, or myself, be happy to answer your questions and thank you.

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

Good night.