BlackRock Capital Investment Corp (BKCC) 2011 Q2 法說會逐字稿

Good afternoon. My name is Kristen, and I'll be your conference facilitator today. At this time, I would like welcome everyone to the BlackRock Kelso Capital Corporation Investor Teleconference. Our hosts 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, Kristin. Welcome to our Second Quarter Conference Call. Before we begin, Frank will review some general conference call information.

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 subject to risks and uncertainties. Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expect, intends, will, should, may and similar expressions.

We call to your attention the fact that BlackRock Kelso Capital 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. Good afternoon, and thank you for joining our call today. I guess, what a day, what -- might be an appropriate comment, some of these prepared remarks seem a little bit off the mark, given the turmoil in the market today. But I would like to begin today's remarks with a brief overview of the market environment for investing, and how current conditions influence our portfolio and deal flow.

Mike will then review some of the portfolio details for the quarter, and the year-to-date. In addition, Mike and I will talk about our strategy for managing the portfolio today and over the next several quarters. Later, Frank will touch upon our financial highlights for the quarter and then we will open the call for questions and answers.

Before we launch into those topics, I'd like to take a moment to announce that Frank Gordon will be stepping down as CFO of BlackRock Kelso Capital and returning to BlackRock. In his six years as our Chief Financial Officer he has made contributions that far exceed the role that a typical CFO plays.

Frank has helped us create a financially strong and growing enterprise with a bright future, in building a solid foundation he has paved the way for a successor. For that we are grateful and fortunate. Frank is transitioning the CFO position to [Karin Pancosin].

Like Frank, Karin is a BlackRock Managing Director who started working us and Frank and Frank in January, and is here with us on the call today. I would like to welcome Karin to our team, and thank Frank for his many contributions.

Following a robust period of new issuance in the first quarter leveraged loan volumes fell 30% in the second quarter. Despite the overall pullback, refinancing and repricing activity remains the predominant source of new loan transactions, accounting for 68% of the volume.

This impacts us in two ways. First of all, we are seeing several of our investments repaid during the year-to-date, and several of these have been the results of refinancing with senior bank loans. Secondly, our universe of new investment opportunities tends to be more closely correlated with change of control transactions, which have comprised the minority of leverage lending opportunities during the first half of the year.

We expect to increase our net new investment in the second half of 2011 as the refinancing subsides and private and M&A activity rebounds. First half transaction volume for leverage buyouts was approximately $50 billion, which is up significantly from the first six months of 2010.

It appears that to some extent however, a price gap persists between buyers and sellers that limit the number of change of control transactions. Sellers remain optimistic about further earning improvement in the rest of the year, and are reluctance to sell businesses based on trailing or even estimated 2011 cash flow levels.

On the other hand, buyers are more cautious, in their view the outlook remains uncertain. Therefore, even though there is more debt available on better terms finance deal, buyers are generally unwilling to pay a multiple of future EBITDA as a basis for a transaction.

One thing that is driving transactions in the current environment, particularly in the larger end of the market, is that buyers can finance more of the purchase price of a new leverage buyout. In the second quarter, the average debt multiple of large corporate leverage buyouts increased to 5.4 times on average. In addition, covenant light activity increased during the second quarter.

Between April and June the share of overall institutional volume represented by covenant light loans expanded to 31% of the leverage loan market. This availability of debt capital influenced the purchase price multiples of leverage buyout transactions during the second quarter. Large LBOs, defined as those with values greater than $500 million, fetched an average purchase multiple of 9.1 times during the quarter.

Fortunately, middle market transactions continue to exhibit better returns at lower risk levels, than larger broadly-syndicated loans in high yield markets. In the second quarter, the debt multiple of middle market LBOs was 4.4 times total debt to cash flow on average. Spreads on middle market transactions remain higher than those of large liquid market deals.

Likewise, valuations for new leverage buyouts in the middle market reflect more discipline. In transactions value was less than $500 million, average purchase price multiples were well below eight times EBITDA. Against this background, BlackRock Kelso Capital has had a successful second quarter in terms of new originations with more than $80 million of new investment.

Third quarter originations are also off to a good start, already surpassing the second quarter. We continue to utilize our established sourcing model and high credit underwriting standards to structure some investments in middle market companies. We continue to be pleased with the investment opportunities that have resulted from our strong relationships in the middle market. We examined 96 investment opportunities during the second quarter, up significantly from the number we reviewed during the first quarter.

Our success in sourcing and examining an increasing number of opportunities is not only due to an improvement in the transaction volumes in the market, but also the result of the efforts of our investment team. In the last three months, we have added five new transaction professionals to the BlackRock Kelso team. We now have 19 deal professionals 100% dedicated to delivering on our goal of being a premier provider of capital to middle market companies, and providing an attractive return to our shareholders.

This morning, we announced our Board of Directors declared a quarterly dividend of $0.26. This dividend will be paid on October 3rd, and represents a 10.6 annualized yield on our net asset value and over 12% based on yesterday's closing price. Generally, valuations of our portfolio investments increased in the second quarter. Our net asset value per share stood at $9.83 at June 30, which represents an increase in net asset value per share of $0.27 from March 31st.

Mike, will now discuss our portfolio activity and market conditions in more details.

Thank you, Jim. Before I begin my remarks I'd like to add my thanks and express my gratitude to Frank for all that he's done in creating a terrific company with us over the past six years. Thank you, Frank.

I'm pleased to have the opportunity to speak with everyone this afternoon. With respect to the quarterly portfolio details, total investment income was $37.1 million for the second quarter compared with $25.2 million for the quarter ended March 31st. Net investment income totaled $0.35 per share, compared with $0.20 per share in the first quarter.

Had our incentive fees been accrued ratably throughout the year, rather than heavily weighted through the fourth quarter as required under GAAP, our net investment income would have $0.29 in the second quarter, compared with $0.20 in the first quarter as adjusted.

The largest contributor to the increase was fees related to prepayments during the second quarter. In the current quarter, both our net investment income of $0.35 and our adjusted net investment income of $0.29 per share, exceeded our $0.26 dividend.

We made four new portfolio company investments during the second quarter of 2011, totaling $75 million of par amount. All of our new portfolio company investments in the quarter remained in senior secured loans or notes. In addition, these investments were subject to either fee payable to BlackRock Kelso Capital or an original issue discount to par.

The largest of the four was a $30 million investment in the senior secured notes, of Sizzling Platter. The remaining three of our new portfolio company investments consisted of floating rate structures with LIBOR floor arrangements.

With respect to these transactions, each was an investment in a senior secured first or second lien loan with double digit current returns. In aggressive markets, we believe that a focus on senior secured loans remains the most prudent use of our capital.

Investments in existing portfolio companies were primarily the result of a series of opportunistic secondary market purchases of bankruptcy management solutions characterized by high floating rate coupons purchased at discounts. In total, we invested $81.6 million during the second quarter. We did receive one significant prepayment of $50 million during the quarter in conjunction with the sale of Aspen Marketing. Total repayments during the quarter were $71.4 million.

The portfolio continues to be well positioned. At quarter end, our portfolio consisted of investments in 55 companies with 65% invested in senior secured loans and senior notes; 18% in unsecured or subordinated debt securities, with 12% in equity investments, and 5% in cash and cash equivalents. Approximately 48% of our debt investments bore interests at a fixed rate. The balance of our debt investment, or floating rate, although approximately half, benefit from LIBOR floor arrangements at quarter end.

Our balance sheet remains extremely under-leveraged, total debts floated to $175 million on June 30th. In addition we had cash and cash equivalents on our balance sheet $46.4 million for net debt of $228.6 million, or 0.32 to 1 coverage on a net basis. Balance sheet provides us with significant capital resources available from new investments, our balance sheet remains under-leveraged, affording us the opportunity to raise NII without additional capital.

During the second quarter, we once again had an improvement to underlying portfolio company evaluations. Appreciation on investments during the quarter exceeded depreciation and losses by approximately $13 million. At June 30, 2011 our portfolio was valued at 95.4% of cost, an increase from 90% of cost at year end.

We continue to be pleased with the overall performance of the portfolio companies themselves, non-accruals remain low, currently 1.1% of our total portfolio and 1.3% of our debt portfolio at fair market value, corresponding to 1.5% of our portfolio -- our total portfolio, and 1.7% o four debt portfolio at cost is held on non-accrual. And the weighted average rating of our portfolio companies at June 30th, was 1.24.

Our portfolio yield continues to improve, during the first of the year, our weighted average yields increased. At June 30th, the weighted average blended cost basis yield of out portfolio decreased to 11.5%. This is up from 10.9% on the same basis at year end. This increase in yield was largely a result of the full run rate effect of higher rates on investments made at the end of 2010 and the first half of 2011, and the elimination of certain lower yield in investment from our portfolio during that time.

On a fair market value basis, our portfolio yield at June 30th is 12.2% compared to 12.4% at year-end. The fair market value yield decrease is driven by increases in valuations since year end.

Since the end of the second quarter we made new investments of $105 million in portfolio companies. Repayments have totaled approximately $31.2 million so far in the third quarter, although we expect at least one additional repayment to be completed before September 30th.

Over the next several quarters we expect that we will be able to grow our total assets by deploying the cash we carry in our balance sheet, and using our currently available loan facilities to make our new investments. At BlackRock Kelso Capital, we have an active opportunity pipeline and anticipate closing at least one additional investment in the third quarter although, of course, no assurances can be made.

While the market has been aggressive recently, middle market transactions continue to be more conservatively capitalized with lower levels of leverage and better debt coverage than those available in liquid credit markets.

As Jim mentioned earlier, our investment opportunities are weighted towards transactions involving merger and buyout activity in the middle market. We remain optimistic that the estimated $243 billion of undeployed capital controlled by private equity firms will lead to an increase in new deal activity over the course of the next few years.

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

Thanks, Mike. I will not take a few minutes to review some of the details of our second quarter 2011 financial information.

In comparing the second quarter with the previous three months, our total investment income increased to approximately $12 million to $37.1 million or $0.51 per share. The increase in investment income for the three months ended June 30, 2011, is primarily attributable to interests and one-time fees collected from the early repayment of one of our largest portfolio company investments.

On average our net investments made during the first quarter were very heavily weighted toward the end of the question so little interest income was earned on new investment during Q1, 2011, while in the second quarter new investments closed more ratably throughout the period.

Net investment income of $25.7 million during the second quarter equated to $0.35 per share, as expenses increased to approximately $1 million as compared to the first quarter. On an adjusted net investment basis, the second quarter was also up relative to the first quarter at $20.9 million or $0.29 per share, compared with $14.6 million or $0.20 in the first quarter.

BlackRock Kelso Capital did not realize any material gains or losses during the second quarter, and the portfolio benefited from $13.8 million of investment appreciation during the period.

For the three months ended June 30th, 2011, a net increase in net assets from operations was $38.9 million or $0.53 per share. At quarter end June 30th, the Company was in compliance with regulatory coverage requirements with an asset coverage ratio of 356% and was in compliance with all financial covenants under its credit facility.

At quarter end, we had net borrowings of $228.6 million, and our net borrowings amounted to 24% from the fair market value of portfolio. Taking our most restricted debt covenants into account at year end, we had cash equivalents and borrowing of $319 million at June 30th.

Net asset value per share was $9.83 at June 30, 2011. This is up from $9.56 per share at year end ,due to increases in portfolio company valuations, the absence of expenses related to any incentive fee payments in the current quarter, and the excess of current period earnings over current period dividend payments.

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

Thanks, Frank. As we look out in the remainder of the year, we remain tempered by our overall conservative investment philosophy focusing on preservation of capital. While investment opportunities have certainly increased throughout the year, we remain selective in seeking to achieve [out-sized] returns without taking any inappropriate risks.

That said, our capital deployed in new investments during the second quarter on a gross basis outpaced the first quarter results, and a third quarter-to-date is on a pace to surpass that amount.

We continue to succeed in our effort, putting more money to work in well-structured transactions as the year progresses. Overall, our pipeline of opportunity remains robust and continues to improve throughout the year which allows to remain disciplined.

On behalf of Mike, Frank and myself, I would like to take this opportunity to thank our investment team for all of the efforts, and to thank you for your time and attention today.

Kristen, will you open the call for questions?

Yes, sir.

(Operator Instructions)

Your first question is from Arren Cyganovich with Evercore.

Hi, gentlemen. The NAV increase during the quarter surprised me a little bit just seeing how your competitors did. I know your portfolio is different from anybody else's portfolios, but what was driving the higher marks on your assets?

Sure, I think -- hi, Arren, first of all. It's -- our process for valuing our assets hasn't deviated since we started the business with entirely third party, and each asset is review every quarter. So what the increase really reflects is just general improvement in the economic conditions and the results really for each -- for a large proportion of our portfolio companies.

You know performance tends to be pretty good, earnings have been good, and the companies -- that increase in value in the aggregate is really spread across lots of small increases for many of the portfolio companies.

Yes, it's really hard to generalize. You know, there are certainly ups and downs in the portfolio, and I don't thing there is anything in particular that I would call attention to it. It's just a result -- (inaudible) evaluation of the portfolio.

All right. And then, Jim, you mentioned the repayments that you thus far in Q2, I actually -- I missed what you said -- how much were those thus far.

Sure, that -- it was me actually, Arren, but the -- it was about $31.5 million -- $31.6 million quarter-to-date in the third quarter. And I think I added that we expected at least one more --

Right. And then you also indicated that your new investments are higher than the pace of the last quarter as well, correct?

Correct, that number was $105 million quarter to-date.

Okay, thank you.

Your next question comes from Rick Shane with JPMorgan.

Hi, guys, thanks for taking my question. Frank, one last question for you. And thank you very much for all of your help over the years.

Sure, Rick.

When we look at the $12 million -- the incremental $12 million of income during the quarter it basically falls into three buckets, one is the layering on a first quarter investment, the second is the layering on of second quarter investments, and then the third would be magnitude of prepayments and make-whole interest from the prepayment.

Can you just help us understand with a little bit more specificity those three components? Because I think it will help people get the right run rate going forward especially in terms of the make-whole and prepayment penalty.

Well, why don't we start with that first, since that's what -- you mentioned is probably more significant. Mike, do you want to--?

Yes, sure. Hi, Rick. With respect to the, we did have one outsized prepayment, we mentioned Aspen Marketing, a $50 million investment that was at 13% investment in the portfolio for about a year or so time. There was some prepayment penalty with respect to that investment.

There was the reversal of some -- the recognition of some unamortized fee -- upfront fee. And then, lastly, there was the collection of interest on that with respect to that security. And if you looked at those three components of just that deal, the largest of it was the collection of interest, followed by the prepayment penalty, and then lastly by the recognition of the previously unamortized discount.

And, again, of the difference between quarter to quarter, the single biggest component of the difference is that Aspen Marketing transaction.

Okay. So it is -- and again, the -- if you think about it, if you take a 13.5% yield and for one quarter that's about 3.5 points, and it's fair to state the other two components represent a couple points on the $50 million?

Yes, again, I think -- what we are able to disclose on the relative size of the three components.

Okay.

So interest largest, fee next, and unamortized discount recognition, third.

Okay, great. Thank you, guys. And, Frank, good luck and we look forward to talk to you in the future.

Thanks, Rick. I appreciate it.

Your next question is from Dean Choksi with UBS.

Hi, gentlemen. Just a follow-up to the question on the fees. Are there any sort of prepayment of exit fees associated with the $32 million of repayments that you disclosed quarter-to-date?

With respect to those investments -- those specific investment, one portion of that is easy; one portion of that the simple answer is no, there is no prepayment penalty. The other one is a little bit more complicated, because it involves a sort of simultaneous refinancing.

Okay, fair enough. And then, you mentioned that you had $102 million or $103 million kind of quarter-to-date and there was like one pipeline was robust and there was one more loan you expect to close in the third quarter. Is that correct?

Yes, again, the number was -- that I gave was 105 quarter-to-date. And when the -- although we are hopeful to close at lest one more transaction during the quarter, what I was talking about with respect to that comment more specifically was we do expect to see at least -- we very specifically expect to see at least one more repayment during the quarter.

Okay. Sorry about that.

That's okay.

And then, I think, Jim, you mentioned that there were some -- five new employees were added. Can you provide any color on what level or what roles they were, and were those kind of - is that organic growth or are those replacements?

I would say they are -- I would characterize one as replacement, and the other for as totally new incremental employees. The employees are -- one managing director, one associate, and three analysts.

Got it. And one last question, just on bankruptcy management solutions, the term loan B I guess increased quarter-to-quarter -- the balance of that. Was there anything that was going on there, you can talk about?

There is nothing really specific to talk about with respect to bankruptcy management other than that -- the comment that I made earlier which is that we did very opportunistically go into the market during the quarter, and we were able to source some additional loan of two bankruptcy management, which is the credit that we are already in, that we know very well. And we are able to add to a position.

Great. Good job this quarter. Thanks.

Thank you.

(Operator Instructions)

Your next question is from [Stewart Burling].

Hello, I was a little late to the conference call so I don't know if this question has been asked, but being a private investor, and one looking for income, when I first started with you guys the dividend was a little higher and slowly accumulated more shares at the $0.26 quarterly level.

I'm just curious if you have any comments about the dividend, the realistic probabilities of the dividend and if protection you have for us guys that are -- lived our live of work and are now in the luxury of playing golf, except the market goes down, the golf balls are going to have to get bigger.

Or less expensive.

Less expensive is right.

We went -- I think we talked about this a lot in the last conference call about dividend and the sustainability of it, and obviously we try to set it at a rate that we think is sustainable. We are obviously subject to performance of portfolio, but our goal is to set our dividend based on what we believe is sustainable at that point in time, and we loot at it over an annual -- over a one year period of time, generally and look at the sustainability on that within that timeframe.

And do you have anything that makes you confident that you will be able to maintain the current dividend, and not make any changes or -- I know it's difficult to say, but if there is anything that you could add to it --

I think I've said all I really can on the matter --

Okay. All right, that's what I asked. I didn't push you. Have a great year.

Thank you.

(Operator Instructions)

Well if there are no more questions, I would like to, again, thank everybody for participating in this conference call. And as I say at the end of all of these calls we are available for your further questions, and call us if you have any latent questions. Thank you, all, very much.

This concludes today's conference call. Thank you for your participation. You may now disconnect.