BlackRock Capital Investment Corp (BKCC) 2017 Q1 法說會逐字稿

Good morning, and welcome to Blackrock Capital Investment Corporation's first quarter 2017 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 anticipates, 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 an investor presentation that complements this call. Shortly, Mike will highlight some of the information contained in the presentation. Presentation can be accessed by going to our website at www.blackrockbkcc.com and clicking the May 2017 Investor Presentation link in the Presentations section of the Investors page.

Thank you. I would now like to turn the call over to Mike Zugay, who will provide an overview of the business and first quarter highlights.

Thank you, Larry. Good morning, and thank you for joining our First Quarter Earnings Call. I'd like to start by giving an update on the first quarter's business and financial highlights, then move to our investment activity during the first quarter. Lastly, I will discuss the underlying portfolio performance before turning it over to Donna to discuss our financial results in more detail.

For the first quarter, net investment income was $0.20 per share. Based on the $0.18 per share distribution declared by our Board of Directors, it was approximately 111% distribution coverage. Additionally, net asset value per share modestly increased from $8.21 per share as of year-end to $8.22 per share as of March 31, 2017. Our leverage profile remains relatively low by industry standards at 0.5x and we have ample liquidity of over $250 million to support new investment activity.

As highlighted in our prior calls, we have been working hard to restructure many of the underperforming legacy investments. In the quarter, we completed a restructuring of U.S. Well Services, an amendment for advanced lending technologies and wrote off our residual claim in Shoreline Energy. I will discuss each of these in more detail when we discuss the portfolio performance.

As a result of these actions, we are pleased to report that as of March 31, 2017, we do not have any investments on nonaccrual status.

Also, in line with our stated strategy of rotating out of reorg equity securities, we monetized nearly $30 million of noninterest-bearing legacy equity investments in the quarter at a slight gain to the prior quarter's mark. We continue to work to monetize noninterest-bearing investments and to redeploy proceeds into income generating assets. The time required to rotate out of reorg equity positions is inherently unpredictable, but we intend to be patient in order to maximize recoveries as demonstrated by the DMS transaction, which I will discuss shortly.

As previously announced, the company's investment adviser, in consultation with our Board of Directors, agreed to waive 100% of the income-based incentive fees from March 7, 2017 through December 31, 2018. Based on the current run rate earnings of the portfolio, we continue to estimate the fee waiver amount to be approximately $0.03 to $0.04 per share per quarter. The $800,000 of income based incentive fees waived for the partial period from March 7 through March 31, accreted over $0.01 penny per share of retained value to our stockholders. For March 6, 2015, when BlackRock assumed responsibility for managing the investment activities of the company to the end of the first quarter, our team has deployed nearly $550 million in new investments. As of March 31, 2017, 50% of our current investment portfolio by fair market value is represented by investments deployed by the new adviser. As stated on our previous calls, we continue to deploy capital across 3 core channels: our portfolio company investment in BCIC Senior Loan Partners, a first lien joint venture with Windward Investments LLC; our portfolio company investment in Gordon Brothers Finance Company; and direct investments in junior capital instruments. Generally speaking, purchase price multiples for LVO remain at historically elevated levels as double-digit multiples have become fairly common. Leverage multiples are also trending up for first and second lien structures, while spreads have moderately tightened. In light of these market data points, we have set a very high bar for deploying junior capital, emphasizing instead on gaining exposure to first lien senior secured loans for the time being. As a result, we have focused our origination activities on deploying capital into BCIC Senior Loan Partners. We remain actively engaged in junior debt investment opportunities, actively seeking out the best companies with solid underlying credit profiles.

Turning to our investment activity during the quarter, we deployed approximately $8 million of net capital. Repayments were primarily represented by 3 transactions: $32.2 million of total proceeds on our debt and equity investments and Bankruptcy Management Solutions, or BMS; $18.9 million repayment of our debt investment in Accriva Diagnostics; and $7.8 million repayment of our preferred equity interest in USI senior holdings. Our gross deployments in the quarter were primarily represented by investment in a $55 million LIBOR plus 550 first lien debt to partially finance the acquisition of BMS by its new private equity owner. The BMS transaction was strategically significant for us because we were able to rotate out of approximately $20 million of noninterest-bearing equity and roll into a first lien senior secured debt investment alongside a strong private equity sponsor with significant financial services sector expertise.

We had 3 portfolio company exits during the quarter and now have 35 companies in our portfolio at a fair market value of $939 million. The weighted average yield of debt and income-producing equity securities at fair market value was 11.1% as of March 31. Although smaller in size than in previous quarters, we invested $3.1 million into senior loan partners to fund our share of equity. We are now benefiting from senior loan partners' use of leverage on its incremental investments as it ramped up its portfolio and achieved the required minimum equity contribution under its credit facility. Senior loan partners made investments into 4 new portfolio companies, which are detailed in our earnings press release. During the quarter, its portfolio commitments increased by $38 million, taking the portfolio from $55 million at the end of 2016 to $93 million at the end of Q1. We continue to believe that are good risk-adjusted investment opportunities for senior loan partners.

Our investment in Gordon Brothers Finance Company increased by approximately $1 million as new deployments were partially offset by repayments. GBFC's strong origination and underwriting platform continues to provide us exposure to Gordon Brothers' well-structured asset-based loans. We will continue to support GBFC's growth initiatives as their portfolio expands.

Moving to non-accruals. As I mentioned earlier in the call, Shoreline and Advanced Lighting were removed from non-accrual status during the first quarter. Advanced Lighting executed an amendment that reduced its cash pay interest to an amount that is more achievable for the borrower. We also added more robust financial reporting and structural protections including a leverage covenant as part of the amendment. The decision was marked up from 25 last quarter end to 30 this quarter end. Shoreline's plan of reorganization was confirmed by the bankruptcy court in February and all of the assets of value were sold in a court-approved sale process, leaving the remaining assets in a liquidating trust. We wrote off our residual claim in the liquidating trust as we did not anticipate any future recovery. There was no incremental net realized or unrealized losses as the investment was already marked at 0.

As noted on our last call, we have been focusing time and resources on SVP Worldwide and U.S. Well Services. Along with another investor, we provided leadership for a comprehensive restructuring of U.S. Well Services. The restructuring provided the borrower with liquidity and added financial flexibility through a PEG feature on the reinstated debt. Post restructuring, we hold revolving loan commitments, first lien term loan and a portion of the restructured equity that affords us the right to appoint 1 member to U.S. Well's Board of Directors. We believe that the lenders, management team and equity ownership group are now aligned and focused on responsible growth initiatives. With regard to SVP Worldwide, our mezzanine investment was marked down from 62.5% to 60%. We are in active discussions with the first lien debtholders, the other mezz lenders and the sponsor, as we evaluate constructive options aimed at rightsizing their balance sheet in order to better position SVP to execute on its 3 year business plan. Some of the more significant increases in valuations this quarter were concentrated in AGY Holding Corp, SourceHOV and Advanced Lighting. The negative movements were concentrated in U.S. Well, Fortelus and SVP. The valuations of many of these investments are highly sensitive to movements in LTM EBITDA, and most of these companies experienced EBITDA movements, which drove the increases or decreases in their fair market valuations. In the case of SourceHOV, a transaction was publicly announced, which, if consummated, would result in the debt being repaid. With that, I would like to turn the call over to Donna for some additional details regarding our financial results.

Thank you, Mike. I will take a few minutes to review additional financial and portfolio information for the first quarter of 2017. GAAP net investment income was $14.6 million or $0.20 per share for the 3 months ended March 31, 2017. Relative to distributions declared of $0.18 per share, our NII distribution coverage was 111% for the quarter. Fee income earned on capital structuring, prepayments and administration during the current quarter totaled $600,000 as compared to $2.6 million earned during the preceding quarter and $800,000 earned during the prior year quarter. Excluding fee income, investment income decreased approximately 4% compared to the prior quarter and 16% as compared to this quarter 1 year ago. The decreases were a result of a net reduction in the overall income-producing assets over the past 12 months, despite modest increases in the weighted average yield of debt and income-producing equity securities compared to Q1 2016. The portion of our portfolio invested in equity securities decreased during the quarter to 16% as of March 31, primarily due to the exit of our prior BMS investment, which removed $19.7 million of equity value, partially offset by the U.S. Well restructuring, which added $14 million of equity value. Our portfolio composition of secured debt at fair market value increased to 67% at quarter end as a result of providing $55 million of debt financing to BMS during the quarter, partially offset by the repayments of Accriva and our prior BMS debt as well as the reduction in the amount of U.S. Well debt due to the restructuring. Unsecured debt remained unchanged at 17%. Total portfolio yield at fair market value decreased 60 basis points sequentially from 11.7% as of last quarter end to 11.1%, primarily a result of U.S. Well restructuring into lower yielding debt in conjunction with the repayment of Accriva, partially offset by the removal of Advanced Lighting from nonaccrual status during the quarter. As compared to the full fiscal year 2016, our weighted average cost of debt increased 26 basis points to 4.63% for the 3 months ended March 31, 2017, primarily driven by the increase in LIBOR rates. On a dollar basis, our first quarter 2017 borrowing costs decreased 1% sequentially and more than 14% as compared to this quarter 1 year ago.

Net unrealized depreciation decreased $51.4 million during the current quarter, bringing total balance sheet unrealized depreciation to $40.9 million. During the period, growth unrealized depreciation of $9.2 million was partially offset by $7.8 million of growth unrealized appreciation due to valuations. Further, there was $52.8 million of unrealized appreciation during the quarter, primarily due to the reversal of previously recognized unrealized depreciation on Shoreline, U.S. Wells and Advanced Lighting. As previously disclosed, until March 6, 2017, our base management fee accrued at an annual rate of 2% of total assets and after March 6, 2017, at an annual rate of 1.75% of total assets excluding cash. Our base management fees declined approximately 7% sequentially, partly due to the lower rate. No incentive management fees based on income were earned in payable for the prorated period until March 6, 2017, as the distributable income amount was reduced below the hurdle by the net realized and unrealized losses in the portfolio for the trailing 4 quarter period. After March 6, 2017, $800,000 of incentive management fees based on income were earned for the partial quarter. However, as previously disclosed, any such fees earned until December 31, 2018 will be waived. During the quarter, there was no accrual for incentive management fees based on gains due largely to the net unrealized depreciation in the portfolio as of March 31, 2017. A hypothetical liquidation is performed each quarter, resulting in an additional accrual if the amount is positive or a reversal to the exiting accruals if the amount is negative. However, the resulting fee accrual is not due and payable until June 30, if at all. There is currently no balance accrued for incentive management fees based on gains as of the measuring period ending March 31, 2017. With that, I would like to turn the call back to Mike.

Thank you, Donna. I would like to thank our team for their dedication and commitment to our ongoing goal of creating long-term shareholder value. We thank you for your participation in today's call and for your continued support. With that, operator, we would like to open the call to questions.

(Operator Instructions) We'll go first to Jonathan Bock with Wells Fargo Securities.

Fin O'Shea for Jonathan Bock this morning. Congratulations on what we see as a lot of positive outcomes this quarter in restructurings, reorgs, et cetera. First question, one of those names, Bankruptcy Management. Can you give a little more color on -- you said you were part of the financing solution. On other parties in there, were they in your tranche, ahead or behind? And then the second part to that, what was -- given the nature of the interest on that loan, was that considered for the SLP?

It is Mike Zugay here. First of all, I want to apologize for the technical difficulties on the start. We got started a little bit late today, so I apologize for that. But thank you for the question and thanks for calling in and bearing with us through the beginning. So the question on BMS, the only debt in the capital structure is the debt that -- is the first lien debt that we're a party to. So as of this moment in time, we are the sole party in the debt capital structure and we did consider putting it in SLP. Unfortunately, there is a minimum EBITDA requirement of $15 million for that vehicle and the EBITDA of the company was slightly below that. So it is not currently, in its existing form, a candidate for that vehicle.

Okay. Very well, appreciate that. And then, a question on First Boston. Looks like a fairly benign markup on the equity that you do have, a good amount of subdebt there, I think $28 million, $29 million. Can you give some color if there is anything fundamental there? Is that just a sort of a valuation thing?

It's a little bit more nuanced than just a valuation thing. And without getting into too much details, there was a distribution that would be counted in our fee income on our equity there. So as a result of that distribution and the accounting behind it, there was a slight markdown to that name, but it was ultimately -- I would characterize that as a good thing as in the company distributed a dividend to the equity holders.

Okay. Awesome. And just kind of, I guess, one final global question. Obviously, you're sort of in position with your targets, the earnings power you have with the SVP, et cetera. What's -- I think I saw in the Q that you don't have any spillover at this time. Do you have a -- or you talked about potentially raising the dividend down the line as this all pans out. But do you have a view on building a certain amount of spillover? Or should you pay the dividend at sustainable NII, as many describe it?

Yes, look, I think we would -- our goal and objective is to pay the dividend with sustainable NII. If there is a earnings in excess of the dividend, we'll make a determination if we should pay the tax on it or have a special dividend. But all of that will be evaluated. It's not lost, I'll say. Ultimately, I think it'd be a good thing for out earning our dividend and have those decisions to make. But we will evaluate all the different options if that -- if and when that happens.

(Operator Instructions) And, Mr. Paredes, it appears there are no further questions at this time.

Mike?

Yes, okay. Well, thank you everybody for the questions. Thanks, Fin, for the questions. And we'll talk to you next quarter. Thank you.

That does conclude today's conference. Thank you all for your participation. You may now disconnect.