BlackRock Capital Investment Corp (BKCC) 2015 Q2 法說會逐字稿

Good afternoon. My name is Ginger and I will be your conference facilitator today for the BlackRock Capital Investment Corporation second-quarter 2015 earnings call.

Hosting the call will be Chairman and Chief Executive Officer Steven F. Sterling; Chief Financial Officer and Treasurer Corinne D. Pankovcin; General Counsel and Corporate Secretary of the Company Laurence D. Paredes; and Aaron C. Kless, Investor Relations and Strategy.

(Operator Instructions)

Mr. Paredes will begin with a review of general conference call information.

Good afternoon and welcome to BlackRock Capital Investment Corporation's second-quarter 2015 earnings conference call.

Before we begin our remarks today I would like to point out that certain comments made during the course of this conference call and within corresponding documents contain forward-looking statements subject to risks and uncertainties. Many of these forward-looking statements can be identified by the use of words such as anticipate, believes, expects, intends, will, should, may, and similar expressions. We call to your attention the fact that BlackRock Capital Investment Corporation's actual results may differ from these statements.

As you know BlackRock Capital Investment Corporation has filed with the SEC reports which list some of the factors which may cause BlackRock Capital Investment Corporation's results to differ materially from these statements. BlackRock Capital Investment Corporation assumes no duty to and does not undertake to update any forward-looking statements.

Additionally certain information discussed and presented may have been derived from third-party sources and has not been independently verified. Accordingly, BlackRock Capital Investment Corporation makes no representation or warranty with respect to such information.

Please note we've posted to our website and investor presentation that complements this call. Shortly Steve will highlight some of the information contained in the presentation. The presentation can be accessed by going to our website at www.blackrockbkcc.com and clicking the July 2015 investor presentations link in the presentations section of the investor relations page.

Thank you. I would now like to turn the call over to Steve Sterling, BlackRock Capital Investment Corporation's Chairman and Chief Executive Officer, who will provide an update on our quarterly results.

Thank you, Larry. Good morning everyone and thank you for joining us for our second-quarter 2015 earnings call.

We are pleased to report continued strong operating performance for the second-quarter 2015 with GAAP net investment income and earnings per share of $0.24 and $0.20 respectively, generally in line with our expectations.

Run rate net investment income as of quarter end was $0.23 per share as adjusted and excluding fee income. Actual end run rate distribution coverage for the period was 107% and 109% respectively which on an as-adjusted basis is a 7 percentage point increase over the first quarter.

I am pleased to report that in the first full quarter under BlackRock's management we have made significant strides towards our strategic objectives of enhancing the risk return profile of the portfolio, strengthening our distribution paying capacity and maximizing the total return to our client shoulders. In the quarter we improved the risk return profile of the portfolio through the sale of 63% of our total equity positions. We sold our three largest equity positions for $161 million and recognized $131 million of net realized gains for the quarter.

Total sales were transacted at about a 3.6% discount to the March 31, 2015 valuations which was more than offset by annualized savings in management fees and marginal financing costs. At quarter end, equities at fair market value now represent 9.8% of our total portfolio, down from 20.7% in the prior quarter. We remain comfortable with our remaining equity positions of which 80% are comprised of portfolio companies Gordon Brothers Finance, Bankruptcy Management Solutions and US Well Services.

As a result of the equity monetization our net leverage as of quarter end was 0.33 times, down from 0.53 times in the prior quarter. This low leverage and the earnings power of our investment portfolio has positioned as well to be patient and disciplined in deploying client shareholder capital and has strengthened our distribution paying capacity. We believe we are in an excellent position for the second half of 2015 and beyond which I will discuss in detail later in the call.

In addition, our Board has amended our share repurchase program, increasing by 40% the number of shares authorized for repurchase to a total of 4 million shares through June 30, 2016. The increased share repurchase program is an important part of our approach to capital allocation and we believe it affords us the ability to create value for our client shareholders over the long term.

Before I provide more details on our second-quarter results and review our portfolio activity, I would first like to discuss market conditions. Total leverage loan volume including broadly syndicated loans in the middle market increased in the second quarter to an estimated $135 billion from $94 billion in the first quarter of 2015. Despite this sequential increase, second-quarter new issue volume was down 15% versus the second-quarter 2014 and down 30% for the first half year-over-year.

In addition, private equity backed issuers' share of leverage loan volume is at a six-year low of 43%, down from 54% last year. LBO loans as a share of overall leverage loan volume remains challenged by both regulatory pressure and historically high purchase price multiples, allowing strategic buyers to prevail.

Global factors causing volatility including Greece, Iran and the market selloff in China as well as factors close to home including modest US growth rates and the anticipation of rising interest rates make volatility and market disruption more likely in the coming months ahead. Such volatility may mute future buyout activity levels but may give rise to more attractive non-buyout investment opportunities to provide an appropriate risk-adjusted return for our client shareholders and allow us to continue to grow NII. In light of current market conditions and our expectations for the second half of 2015, we intend to remain disciplined in our investment process, proactive in managing underperforming situations and prudent in regards to portfolio construction and our financial leverage as the earnings power of our investment portfolio affords us the ability to be patient with deployment of client shareholder capital.

I would now like to turn the call to second-quarter highlights. Our portfolio has generated total investment income of $32.8 million, or $0.44 per share during the period of which about 94% was derived from interest and dividend income. These results represent about a 3% decrease in total investment income over the comparable 2014 period.

Excluding fee income, however, total investment income grew 10%. Net investment income totaled $18.2 million, or $0.24 per share during the quarter as compared to $16.4 million of $0.22 per share in the corresponding 2014 quarter representing approximately an 11% growth rate on a year-over-year basis with the improvement largely driven by a decline in incentive management fees.

At June 30, 2015, our investment portfolio at fair market value totaled $1.1 billion, representing approximately 100% of cost. Relative to December 31, 2014 this represents a $173 million decrease in investments at fair value which is attributed to equity sales as the debt portion of our portfolio remained relatively unchanged at just under $1 billion. At June 30, 2015, 68% of our debt portfolio was floating rate of which 91% was subject to a LIBOR floor.

Now I'll spend a few moments discussing portfolio composition. The debt-related portion of the investment portfolio remains reasonably diversified across sectors and investments. Specifically, no one sector exceeds 12% of the portfolio.

Our mix of instruments continues to bias toward senior secured loans, having increased by 10 percentage points to 63% from December 31, 2014. As of quarter end, our energy portfolio represented $121 million at fair market value or 11.2% of our portfolio. Of these investments, 62% are in first lien senior secured positions and it's comprised of four companies.

MD America and New Gulf Resources are both oil focused E&P companies operating in the Woodbine in East Texas. Shoreline is a gas focused producer operating primarily along the Louisiana Gulf Coast. Finally, US Well is an oilfield services provider operating pressure pumping fleets.

MD America continues to perform to plan and generate attractive economics on its acreage despite the current oil price environment. New Gulf operating in the same area as MD America but earlier in its drilling program has modified its capital plan to better suit the current oil price environment. Shoreline's developed position on the Gulf Coast is predominantly gas and continues to perform to plan and generate target returns.

With US Well, the value of our deep due diligence has proven out as the Company has continued to experience strong demand and high utilization with a differentiated product offering. As a portfolio, our energy investments continue to perform despite the challenging price environment. We remain vigilant, however, with respect to each of these investments.

I would also like to provide a brief summary of one of the largest investments in our portfolio, Gordon Brothers Finance Company. At June 30, 2015 Gordon Brothers Finance Company had total assets of $298.5 million. Total revenue for the three and six months ended June 30, 2015 was $6.6 million and $12.7 million respectively.

Net loss for the three and six months ended June 30, 2015 was $1 million and $2.2 million respectively. After giving effect to organizational costs, loan-loss reserves and changes in unrealized foreign currency of $1.1 million and $2.1 million for the three and six months ended June 30, 2015 the company had net income of $44,000 and a net loss of $108,000, respectively.

Net new investments excluding the effect of equity sales totaled $13 million reflecting a continuation of relatively weak new investment opportunities. Overall activity levels were elevated relative to Q1 with total deals reviewed during the quarter up over 30% versus the prior quarter. This increased new deal activity has continued past the end of the second quarter.

Across our portfolio quality has remained stable with no investments on non-accrual. During the period the Company reported net cash proceeds from investment dispositions of $195 million of which $160.9 million was from equity proceeds. These flows were the result of investments of $90.3 million and sales repayments and restrictions of $238.3 million.

During the quarter our principal new investment was a $20 million par 9% first lien term loan to Liberty Tire Recycling. Liberty Tire Recycling is a leading scrap tire collector and recycler in North America with a one-third US market share and top share in Canada. The Company has a national footprint and a competitive plant and equipment base, the results of an extensive recent capital investment program which we believe enhances the business and the credit. Additionally we made several add-on investments to existing portfolio companies.

Our exited investments included equity positions in Penton Business Media Holdings, Opportune Financial Corporation and USI Senior Holdings, Inc. all of which were exited at a price equal or slightly below their March 31, 2015 valuations.

Some detail on our three equity sales is as follows. We sold our equity ownership in Penton, the largest independent business-to-business communications company in the United States, generating net proceeds of $70.2 million, resulting in a $61.1 million realized gain.

We sold our entire common and preferred stock holdings in Opportun Financial, a financial services company targeting the under-banked Hispanic community through more than 160 locations across five states for aggregate proceeds of $30.7 million resulting in a realized gain of $18.4 million.

We sold our entire investment in the common stock of USI, the largest independent insulation subcontractor in the US, generating net proceeds of $60 million, resulting in a $51 million realized gain. We are also entitled to future value on our prior common stock holdings upon a sale of the company within a certain timeframe and price range. We continue to hold our preferred equity stake in USI.

We continue to focus our efforts on improving our risk return profile, increasing our net investment income by making prudent investment decisions and by reducing our equity holdings. We expect further equity sales in the future as we continue to evaluate ways to maximize the value of our portfolio.

I would like to now turn the call over to Corinne for some additional details regarding the second-quarter financial and portfolio results.

Thank you, Steve, and hello everyone. I will now take a few moments to review some of the other details of our 2015 second-quarter financial information.

For the three months ended June 30, 2015, our basic earnings per share were $0.20 and our GAAP net investment income was $0.24 per share and $0.23 per share on an as adjusted basis. While total fair market value of the portfolio declined by approximately 12% in the quarter in light of the equity sales, the debt portion of the portfolio remained relatively stable, increasing approximately 1% for the period. The fair market value of our equities as a percentage of NAV declined to 14% at June 30 from 32% at March 31.

The weighted average yield of the debt and income-producing equity securities in our portfolio at their current cost basis remained unchanged at 11.5% at June 30, 2015 compared to the prior quarter. The weighted average yield on our senior secured loans at their current cost basis also remained unchanged at 11.1%.

Our average investment rating was relatively unchanged at 1.31 as compared to 1.32 as we believe the overall credit quality of our portfolio continues to remain strong. In addition, this quarter we aligned all of our industry classifications to Moody's 35 Industry Categories. This has resulted in some minor reclassifications which can be found in footnote 5 of our June 30 Form 10-Q.

The composition of our debt portfolio shifted toward more senior loans in the second quarter. Our portfolio composition of senior secured loans increased 8 percentage points to 63% during the quarter and 11 percentage points over the last 12 months from 52% at June 30, 2014.

The portion of our portfolio invested in senior secured notes remains unchanged at 8%. Unsecured or subordinated debt securities increased 3 percentage points to 19% during the quarter as a result of the decrease in the size of our overall portfolio primarily from equity sales.

At June 30 we had approximately $304 million in debt outstanding and $56 million in cash and cash equivalents, resulting in net leverage of 0.33 times adjusted for available cash, receivables for investments sold and payables for investments purchased as compared to 0.53 times in the prior quarter. Comparing the full-year 2014 to the six months ended June 30, 2015, our weighted average cost of debt decreased 26 basis points to 4.96%.

Our liquidity position was $455 million at period end subject to leverage and borrowing base restrictions as compared to $277 million at March 31, 2015. Furthermore, our asset coverage ratio was 353% at period end.

With that I would like to turn the call back to Steve.

Thank you, Corinne. While still early in our transition we continue to expand our efforts in leveraging the breadth and depth of BlackRock. We continue to see progress in harnessing the power of the platform.

Our investment decision process has strengthened thanks to increased access to research, information, management teams, market players and customers. Our opportunity set has been broadened by direct deal referrals from colleagues across the platform. We believe that in the coming quarters BlackRock's resources, brand and reputation will only further enhance our ability to create value for our client shareholders.

In the first full quarter under BlackRock's management we have made significant strides toward strategic objectives of enhancing the risk return profile of the portfolio, strengthening our distribution paying capacity and maximizing the total return to our client shoulders. We achieved our stated goal of monetizing the non-earning equity assets to 9.8% of our portfolio. Our run rate NII per share of $0.23 as adjusted excluding any fee income provides a cushion to our stated distribution of $0.21 per share and our net leverage is low at 0.33 times. Our increased share buyback program is an important part of our approach to capital allocation and we believe it affords us the ability to create value for client shareholders over the long term.

As we think about distributions for the balance of 2015 and beyond we have set the distribution at a level that we believe takes into account the rates available for the more conservative types of investments that we are comfortable with in today's environment.

In closing, I'd like to take this opportunity to thank our client shoulders for their support, our team for all their efforts and to thank you for joining the call today. Ginger, you may now open the call for questions.

(Operator Instructions) Greg Mason, KBW.

Great, good morning guys. Congrats on monetizing a large percentage of the equity investment. I've got a bunch of questions but I will ask two and then hop back in the queue.

First on the amount of new deals that you're seeing in the pipeline when you talked about the market overall I sensed that it was very slow and you expect it to be slow but then you talked about some of the opportunities within the platform and your pipeline is up 30%. So can you just give us your views on what BlackRock is going to be able to see in the second half of this year and your thoughts about investment opportunities?

Sure. Good morning, Greg. I think with respect to just the pace of new investment activity overall activity as pointed out was meaningfully higher during the second quarter relative to our first quarter. And we've seen that momentum carry forward into our third quarter.

During the second quarter, as noted reviewed investments rose for us about 30%, maybe a touch over that, which interestingly as I look back at the data, is the highest level in any given quarter for the last five quarters. So very meaningful step-up.

Our sourcing intensity certainly has improved demonstrably as indicated by these numbers. Having said that, though, we do remain focused on elevating the activity as we move forward but importantly over time strengthening the overall diversity of our sourcing channels.

So we feel good about where our activity is at the moment, particularly in the context of the market we feel good about the early signs of impact relative to the BlackRock platform as it's generating ideas. I'd point out as an example, BlackRock's Global Capital Markets team, which is my legacy business, has done a fantastic job generating private investment ideas for us. And I expect this to grow over time.

To put some context around that, since April we've probably seen over 20 investment ideas, most of these coming in the June-July timeframe as we're getting our legs under us and driving that connectivity and that relationship. So the notion of momentum relative to sourcing of ideas feels as if that's certainly building.

The thing, though, I do want to be cautious about here and be unequivocally clear on and that is we will not deploy capital if the quality of the opportunity is not supported for an investment decision. And as you know, and I've shared this in the first quarter, we as a firm, BlackRock, made a decision to enter this business with a view that is very long term in nature.

We're looking to build our brand and reputation in the sector and in no way will we trade near-term success on deployment and volume for marginal investment risk. We absolutely must be convicted in the things that we're doing.

Great. And then one question on the target yields on new investments, Liberty Tire you said was a 9% coupon. What is your thought process in terms of the yields that you want to accept on new investments relative to what the 11.5% portfolio yield you've got right now?

Great. Yes, good question. So look, I think over the longer term we are focusing on a 10% plus ROE.

And to achieve that we're certainly going to need to be focused on north of 10% asset yields. And in the case of Liberty Tire certainly we would anticipate achieve that when taking into consideration the LIBOR floor associated with that investment.

That doesn't mean all of our investments will fit into that category. Obviously it's a risk-adjusted return consideration and we will make a prudent decision of what we think is most sensible for our client capital.

So again 10% ROE is our targeted bogey. That's going to drive us to asset yields that certainly, obviously, need to be at 10%-plus to support that objective.

Great, thank you, guys.

David Chiaverini, Cantor Fitzgerald.

Thanks, good morning guys. A couple of questions for you.

So regarding capital management, so this is the first full quarter under BlackRock management but I just wanted to get your thoughts in terms of you have authorization to raise equity below book value. I wanted to get your thoughts as to when you may utilize that.

Yes, I think when we consider what's our approach to capital allocation particularly as it relates to your point on share repurchase we are not inclined to be in the market issuing equity at below book value. The business hasn't historically done that.

We don't see any reason as to why we should do that. We have ample dry powder after giving effect to the equity monetization and the changing complexion of the risk profile of the portfolio that we can deploy capital against the opportunities that we're developing in the context of our current capital base.

So I don't see any reason as to why we would be in the market issuing equity. Philosophically we would be hard-pressed to do that unless we found it extremely compelling as a value creation for our client shoulders.

Great, great. And as a follow-up, can you remind me with the new buyback or expanded buyback authorization, remind me when that was last executed? And on a go-forward basis how aggressive do you plan to be with it?

Yes, I think the whole notion of share repurchase maybe just if I could address it more broadly. I noted in the first quarter and I remain convicted around this perspective and that is that we will definitely be prudent capital allocators. With these decisions we approach it on a very holistic basis and we'll take into consideration a myriad of factors including, not limited to, the anticipated investment opportunities that we see on the horizon, the portfolio construction that we have and that we're seeking to create, certainly credit rating implications of the decisions but also importantly and not to be lost in the dialogue is the capital market's implications of those decisions as it relates to secondary liquidity which is also an important consideration for our clients.

So these are some of the things that would be captured in the analysis of what is the right thing to be doing relative to share repurchase. All of this of course is taking a long-term perspective in value creation for our clients.

I note, too, that understanding these points and if we take a step back and put some perspective around it, you know we certainly believe that the most compelling way to create sustained value, and I highlight sustained value for our client shareholders, is really through the successful execution of our business strategy. The monetization of the equities is the first step along the path that we think will take us toward the goal of driving sustained value for our client shareholders.

So we will actively consider capital allocation. It's very much top of mind. The increase in the size of the program is in contemplation of ensuring us the flexibility to provide the requisite support for our equity and we will deploy appropriately against that.

Okay, that's very helpful and the shares that have already been bought back under the authorization, can you remind me when that was last executed? Was that a few years ago or when was that?

I will leave it to Corinne. There were no shares purchased in the second quarter and to my knowledge there were none purchased in the first half. So nothing has been purchased recently relative to the share program from the perspective of the first two quarters.

Yes, the last full repurchase was in 2014. And you can see that in the financial disclosures.

Got it. Thanks very much.

Doug Harter, Credit Suisse.

Hi, this is actually Sam Cho filling in for Doug Harter. You guys answered our question about repurchase activity, so no further questions. Thank you.

Heather [Scaberra], JPMorgan.

Hi, good morning. I was looking at your statement. I see here you have a negative amount on the income statement for the incentive fee, and I was just wondering if you could run through the math of that please?

Yes, so Corinne would you --

Sure. It's actually a reversal of an accrual. So very short story, each quarter we're required under US GAAP to calculate an accrual on incentive fees on a fully liquidated portfolio.

There was a slight depreciation in value on some of the underlying portfolio securities driving that therefore the accrual was slightly less. And that's just basically US GAAP requirement.

Okay and then just one more question. I had noticed you had a pretty large position in Gordon brothers which you mentioned earlier. How does your portfolio fair with respect to your asset diversification requirements?

I think we're in very good shape there. We have no issues pertaining to diversity.

I also point out that with respect to Gordon Brothers it, too, runs a diverse portfolio. So while it is our single largest position, be mindful of the fact that the asset lending activity that that portfolio company is engaged in, in of itself, has its own diversity requirements.

Okay, thank you.

Greg Mason, KBW.

Great, thanks. To follow up on just the equity sales, were those sold off in a group to a single buyer or were you piecemealing those out?

Look, our goal was maximization of value, so we saw that best prosecuted on a handcrafted deal-by-deal basis as opposed to a wholesale opportunity. Certainly a wholesale opportunity would have been completely viable but we didn't see that as the right pack to maximize value back to the shareholders. So each situation was one in which we attacked individually.

And then as we kind of talked about the big four equity pieces, bankruptcy management solutions is still on your balance sheet. Any thoughts there on why that's still on versus being sold off in the quarter like some of the others?

Yes, so I think it raises the point, too, that as we thought about the equity monetization there were a number of things that came into mind for us. And one of those was size and number two was perceptions of where we were in the value curve. And so with that we focused on the ones that have been reflected in our release.

The remaining positions are really names that we continue to like. Really it is captured by three positions that represent 80% of that residual approximately which includes Gordon Brothers that we see strategic long-term value associated with that and do not anticipate any change of ownership in that entity.

The second is BMS and the third is US Well that in the aggregate as I pointed out is 80%. When we think about BMS, interestingly BMS is what we would consider to be a countercyclical opportunity set.

Given the nature of its business, servicing bankruptcy trustee capabilities as a business service, what in fact drivesrevenue in that business is A, the earnings on cash deposits and so an increasing LIBOR rate environment is a revenue enhancement to BMS. The second thing that drives value for BMS is an increased level of bankruptcy activity.

So those two things are certainly supportive of value creation. And if we consider that we've in all probability hit the low point on defaults and that they're likely to increase that ought to lead to upside value and given where LIBOR likewise is at in nadir and we anticipate increasing, the two in combination would suggest that there's meaningful upside value in BMS.

I would say that with respect to BMS, a bit different than the other positions to some degree, and that is we have a more substantial level of influence over the change of control event for which we're very actively engaged with the company around prosecuting a strategy there against the picture of that upside value. So it will be one in which we'll be patient in the monetization of but we believe that value is there.

The last one among the top three is US Wells. And it's a company that is executing very well against its business plan. It's in the pressure pumping side of the energy space.

It has done a terrific job of taking cost out of the business in light of price pressure that is occurred within the services sector. We like it a lot. We think they have a differentiated offering in clean pumping capability and they're playing into a part of the energy space that has a very low breakeven in the Utica Marcellus play.

So we like the business a lot. We think it has meaningful upside value and is well poised for our client shareholders to participate in that value at some point in the future associated with monetization. So very thoughtful process on our part as to why we monetized what we did and we believe we've restored or maintained value in the portfolio for our clients.

Great commentary. Thanks.

And then on three kind of modeling questions, as we look at the debt side of the balance sheet you've got some senior notes that mature January of 2016 at 6%. Just kind of thoughts on replacing that paper and are you guys looking at an S&P rating for an investment grade rating?

Look, it's a great question. Certainly we actively think about those notes coming due in January. We need to make a prudent decision as it pertains to the make-whole requirements of that relative to where we would execute if we did go to the capital markets.

We haven't made that determination. It's a live and active and ongoing monitoring of what the right thing is to do there. I would say that having executed on the monetization of the equities and moving forward in the deployment of our stated business plan with BlackRock assuming control of BKCC we feel like we're in a much better position to drive a good result if we did choose to go to the markets, but again we'll just continue to monitor that.

Having said that, we do have ample liquidity as reflected in our earnings release or 10-Q in our discussion this morning that to the degree we didn't go to the capital markets there is ample available liquidity under our $405 million revolving credit facility to address the near-term maturity.

And then also can you talk about the timing of the equity sales in the quarter and the average borrowings you had out on the credit facility? I know it went from call it $180 million on the credit facility at the end of March to $15 million this year but what was the average outstanding?

I will leave it to Corinne to look for the average borrowing. From the timing of the monetization that timing would be largely toward the back end of the quarter, recallingthat we assumed responsibility March 6. So my focus around that monetization obviously kicked in post-close and these things take a little bit of time, so you should assume that it's pretty backend loaded from a timing point of view.

So we probably didn't see the interest expense savings from paying down the credit facility very much in the quarter? Would that be on appropriate assumption?

I think that that would be an accurate depiction.

And back to the backend, so the average would have also corresponded to that.

Okay, great. And one final question on the dividend income, was there any impact of dividend income from these equity investments being part of your portfolio previously? And how should we be thinking about that $1.3 million of dividend income this quarter on a long-term basis?

Yes, there's no material impact associated with that.

And I assume most of that dividend income, is that coming from the Gordon Brothers investment?

That would be correct.

Okay, great, thank you, guys. I appreciate it.

Andrew Kerai, The BDC Income Fund.

Yes, hi, good morning, thank you for taking my questions. I apologize if this was asked already. I had to hop off for a minute.

But just looking at New Gulf Resources this is a position that's also held by another BDC peer of yours. The second or I should say the mezz piece obviously under considerable pressure the 12% PIC piece, just curious I know you had alluded kind of in your comments that they had considered a new capital plan.

If you could maybe give any color of whether that included asset sales? Or noticed that the mark came in it looks like a little bit this quarter at about $84 on the second lien piece, if you can maybe just get some color about your level of confidence in the deviation of the mark so to speak on the piece higher in the capital structure given that clearly the mezz and the equity is under considerable pressure?

Yes, I think importantly it goes back to where you perceive the collateral coverage to be based upon the tranche that you have in the capital structure and also what the implied yield would be at those various tranches and are you being properly compensated. The top of the capital structure isn't being evaluated in a liquidation value basis but rather on what is an appropriate return for that point in the capital structure. And I believe that based upon where that current mark is that would be an implied high-teens return which is probably an appropriate return for where the risk profile has shifted in that name.

So I think that's the basis upon that change in mark and where the mark landed. Obviously as it relates to New Gulf it's one in which we continue to monitor quite closely.

The company we believe does have sufficient liquidity and has made some moves relative to the modification of its drilling program to preserve liquidity. So they've done a decent job in terms of their drilling program and we'll as I said continue to monitor that situation fairly closely.

Sure, thank you, Steve. I appreciate the color. And just for clarity, is the only thing above you guys in the second lien piece a reserve base loan or what is sitting above you in the capital structure?

Yes, so in the case of New Gulf you have senior secured notes which is the note that I was focusing my conversation around that's the $84 price. Above that is the ABL.

Got it. And can you give a sense of what the leverage attachment is on your piece right below the ABL?

I'd have to come back to you. I don't know what that number is offhand.

Okay, certainly. Thank you, I appreciate the color.

Jonathan Bock, Wells Fargo.

Good morning and thank you for taking my questions. Steve, I appreciate your comment on stock repurchases versus new investment opportunity set.

I want to take a moment to focus in on two investments that you originated this quarter. So the first I believe the $20 million in Liberty Tire, can you give us a sense of how this investment was sourced and how large the overall tranche is for Liberty Tire?

Yes, so in terms of the sourcing of the opportunity, it was a situation really where there's a bit of a story around the company. The company did go through its share of stress which manifested itself in a restructuring event.

And it was a transaction that was seeking a refinancing in the broadly syndicated market for which Jefferies was leading the financing and the financing struggled. And ultimately we engaged in a conversation with Jefferies but also spent a fair amount of time with the management team to really get behind the fundamental business and build a sense of confidence about the strength of their business model, the appropriateness of the capital structure and the executability of the plan such that we were in a position to provide a view as to where we thought value would be in investing in the opportunity and effectively participating as an anchor in the creation of that particular tranche. In terms of the components of the capital structure, the piece that we're in is a first lien term loan which is $107 million with the leverage through our piece at just inside of 4.7 times.

Great, thank you. Now Steve, just trying so when you say the anchor so was this a BLK asset that went across a number of different funds where BlackRock in total was able to write a sizable check? Or is BKCC's investment in Liberty Tire BlackRock's only participation because $20 million of $170 million doesn't seem like an anchor hold?

Yes, fair point. It isn't across the platform for sure. However, as you think about anchoring around an investment capital certainly in part is important and I don't want to suggest in this call that we were the sole anchor.

That would not be a fair representation. However, having spent 20-plus years of my life syndicating high-yield credit what I would suggest to you is that in addition to capital, financial capital, intellectual capital as to how one thinks about the risk and where you price the risk to clear the market has terrific value to a syndication desk and we engage that conversation with the desk in a very fundamental and constructive way such that I think it did imbue benefits to the distribution desk as to where they ought to be managing their client relationship and where fair value really exists. So capital is certainly important but intellectual capital is also important and both were brought to bear in this particular situation to support the ultimate distribution of the opportunity.

Thank you. And then as we look at MBS Group Holdings it appears that this would have been a restructuring and so I believe it's $40 million of the near $90 million that you put to work. So an asset restructured at a bit of a loss but perhaps improving your position.

One, are we correct in that it was restructured and this was a process where you went ahead and enhanced your credit position? And two, when we think of BlackRock's first quarter from an origination perspective, we're saying that of the $90 million, $20 million came from a dealer desk and $40 million was a restructuring on the new MBS loan and then of course there's $7 million you bought in prepaid and a little bit more on the Gordon's.

What clients are going to ask and it's a fair question is how is that in some form or fashion better than the return that you and more importantly your shareholders receive from a stock repurchase that is or was in the 80%, 85% of book value range over the past quarters? And it's one that we ask with respect. It's just a question that people have because direct origination is important and people are perhaps willing to give a pass but if they feel that in some case or form or fashion it's not they'll likely look at a stock buyback as a better choice. Curious your thoughts.

Sure, that's a fair question. I think first with respect to the restructuring event, it's a name that has been in the portfolio for quite some time and has been actively managed as a controlling shareholder of that entity.

The decision to further restructure in the second quarter was a decision that I had made on the basis of a review of what I saw as a sustainable earnings profile of the Company and what would be appropriate capital structure that could be supported by that earnings profile. So I took a fairly proactive approach to restructuring the exposure to really enable the company to be successful, recognizing that I can recapture the value through the equity if properly executed on the part of the management team. So that's the context of the WBS restructuring.

Look, as it relates to sourcing and origination I share with you my philosophical views. We are in the direct origination business. We're also in the business of making attractive returns for our clients.

You cannot foreclose where those opportunities might manifest themselves. We're smart, we're good at what we do, we dig in around the individual credits. As in the case of Liberty Tire we weren't here just accepting the offering from some desk and responding to it, rather it was a facts and circumstances situation pertaining to the company that your on-the-run buyers would not naturally be involved for which it afforded us the ability to do what we typically would do, which is go directly into the company to underwrite the fundamental business risk for which we're putting our clients' capital in the way of.

So we will not deviate from what we believe is our core value proposition. I would also suggest to you that we cannot use a data point and define it as a trend.

We have to look at situations through time. And it is through time and looking back upon the things that we do one year hence, two years hence, one can express an opinion is about whether or not we're executing a strategy that is appropriate for the value proposition represented to our client base. So there is no notion of deviation toward some model of buying syndicated product unless in fact we have an edge or have some insight that affords and supports our investment view.

Appreciate the comments. I mean obviously the skepticism is something that certainly is not brought on by any actions that you have done, Steve.

It's a bit of an indictment of the industry writ large. That being the case we all share each other's risk. So thank you for your candor.

Moving a bit to your energy investments, very quickly, yes, we understand you mentioned in both the New Gulf as well as the other producer, MD America, just curious are they producing at a price that is currently economic, i.e., is cash flow -- are these investments currently cash flow positive as they pull product out of the ground?

The answer is they are. MD America has got a very good spot in the Woodbine play and is generating IRRs at attractive levels that support capital deployment in the context of the current price environment. So I think the answer to your question is at this point they are.

I probably should have hedged myself and pardon the pun but are these cash flow positive ex- any hedging activities which are really a point-in-time phenomenon that eventually roll off, Steve, I should've asked it that way. My apologies.

Yes, there certainly are hedges but their hedges are not that material when you look over time. There are certainly some if you look at somebody like MD America, you're talking hedges that are low double digits. So we're not looking at a picture, for example, in that case where they've hedged out 80% or 90% of their production.

So is there some hedging? Certainly, that's a prudent policy on any E&P's activities.

However, it's not so material that it would be misleading as to what's happening here. It's a low double-digit-type hedge position to have.

Oh, great. Really appreciate the candor.

Then finally what we've seen and I'll use Goldman Sachs as a quick example just of a large and well-respected asset management franchise adopting the BDC model and choosing to execute on it, there is a focus where given the resources they have they have an ability to drive G&A cost lower at the underlying BDC through a number of expense sharing arrangements, etc. I'm curious if you believe that BKCC can benefit from lower expenses that could be put on BLK's income statement over time and if that is a potential driver of shareholder return in terms of how you think about the dollars going out the door to pay for to fund your ability to transact?

You know, look, what you will find and I'm a pretty metrics-driven individual and I pay very close attention to the numbers. I think we will manage holistically the BDC in a very prudent way. And that includes what our expenses are.

Now I will say that I believe the value that has already been brought to bear to BKCC in the presence of BlackRock post-transaction is meaningfully higher without any incremental cost to BKCC. So we have done a fair amount in delivering value there from infrastructure, risk management tools, portfolio construction tools and the like that didn't exist to the same degree previously.

So even at the current run rate there has been I think meaningful value brought into the business with no marginal cost. Having said as much, I'm very focused on managing those costs in order to again deliver best value to our client shareholders.

So it's something I monitor closely. I will look for opportunities to improve upon that. But rest assured I think the value already delivered is not recognized in those numbers but is accruing benefit to our clients.

Fair enough. And then the last question, I just wanted to check to see if Gordon Brothers still owns A&P? I believe it was a $36 million first lien 9%-plus yield. Just curious if that's in Gordon's portfolio today given the Company filed for bankruptcy?

Yes, the answer is it is in their portfolio. The related answer is, and I think you may have even made note of it in one of your research pieces, is we feel very good about collateral coverage in that case and we feel good about the sustainability to remain current in that position.

Excellent, great. Thank you so much.

At this time we have no further questions. Presenters, do you have any closing remarks?

I don't other than to say thank you all for participating today. We appreciate your interest in BKCC. We appreciate your support.

We're definitely available for follow-on conversation for those who would like that. And otherwise have a great day.

Thank you. Bye-bye.

Ladies and gentlemen, this does conclude today's conference call. Thank you for participating. At this time you may now disconnect.