BlackRock Capital Investment Corp (BKCC) 2018 Q2 法說會逐字稿

Good morning. My name is Derek, and I will be your conference facilitator today for the BlackRock Capital Investment Corporation Second Quarter 2018 Earnings Call. Hosting the call will be Chairman and Interim Chief Executive Officer, James Keenan; Interim Chief Financial Officer and Treasurer, Michael Pungello; General Counsel and Corporate Secretary of the company, Laurence D. Paredes; Marshall Merriman, Head of Portfolio Management for BlackRock's U.S. Private Capital Group; Jason Marion, Chairman of the U.S. Private Capital Group's Investment Committee; and Nik Singhal, Head of Investor Relations and Business Strategy. (Operator Instructions) Mr. Paredes, you may begin the conference call.

Good morning, and welcome to BlackRock Capital Investment Corporation's Second Quarter 2018 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 to 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, Jim 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 August 2018 Investor Presentation link in the Presentations section of the investors page.

I would now like to turn the call over to Jim, who'll provide an overview of the business and second quarter highlights.

Thank you, Larry. Good morning, and thank you for joining our second quarter earnings call. I'll provide you with the business and performance highlights and an update on our investment activity during the second quarter as well as an underlying portfolio performance before turning over to Mike Pungello, our interim CFO, to discuss our financial results in a bit more detail.

For the second quarter, net investment income was $0.16 per share. Based on the $0.18 per share distribution declared by our Board of Directors, it was approximately 90% distribution coverage for the quarter. We deployed $61 million in 2 new and 4 existing portfolio companies. However, significant repayment activities drove a net repayment of $91 million for the portfolio.

Net asset value per share decreased from $7.65 per share last quarter to $7.56 per share as of June 30 or a 1.2% quarter-over-quarter decrease. This decline was in large part due to incremental markdowns on certain legacy positions. We will cover this in more detail in our portfolio overview discussion.

Our leverage decreased to 0.43x down from 0.56x prior quarter, driven by the net repayments. We do have ample liquidity of $280 million to support our new investment activity and have no debt maturing until 2022.

Under our existing share repurchase program, we repurchased nearly 1.3 million shares during the quarter at an average price of $6.21. As discussed on prior calls, our 3 core channels for deployment continue to be: one, the portfolio company investment in BCIC Senior Loan Partners, our first lien joint venture with Windward Capital; two, our portfolio company investments in Gordon Brothers Finance Company; and three, investments in high-quality junior capital opportunities. Both Senior Loan Partners and Gordon Brothers Finance Company have underlying investments in diversified pools of primarily first lien loans that generated attractive risk-adjusted returns yielding a 11% or higher on our investments in each of these 2 entities. Senior Loan Partners added 3 new investments and 3 add-ons to its portfolio during the second quarter. As previously announced, we upsized our equity commitment to Senior Loan Partners from $85 million to $113 million in April, with our joint venture partner upsizing their commitment in a pro rate manner. Additionally, subsequent to the quarter end, Senior Loan Partners refinanced and upsized its credit facility from $200 million to $270 million, providing it with a total investment capacity of over $400 million. Senior Loan Partners is an important part of our business strategy and its underlying investment portfolio continues to perform very well.

Turning to the company's investment activity during the quarter. We made new investments of approximately $61 million, which were offset by repayments and other exits, totaling approximately $152 million for a net $91 million decrease in our portfolio due to this investment activity. Our deployments and repayments are detailed in our second quarter earnings release. We increased our net investment in Senior Loan Partners by $18 million. We also invested in 2 new portfolio companies: Northstar Financial Services and Pharmalogic, which reflect our disciplined approach to credit selection in this market.

With the repayment and deployment activity this quarter, we now have 29 companies in our portfolio at a fair market value of approximately $776 million. The weighted average yield of income-producing securities at fair market value was 11.5% as of June 30, which is up 22 basis points from last quarter.

From March 6, 2015, when BlackRock assumed the responsibility for managing the investment activities of the company, to the end of the second quarter, the BlackRock team has deployed $860 million into new investments, of which $290 million has been exited with a realized IRR of 13.8%. As of June 30, approximately 64% of our current investment portfolio by fair market value is represented by investments deployed by BlackRock.

As of June 30, we had one investment on nonaccrual status, AGY preferred stock, representing 0.1% of our debt and preferred stock investments at a fair market value. We continue to have volatility in the fair market value of our portfolio due to certain legacy investments, which primarily drove the negative $6.6 million change in portfolio, March versus last quarter. The decrease in valuations was driven by AGY preferred stock and Westmoreland term loan, partially offset by increases in valuations in U.S. Well and Vertellus equity positions.

U.S. Well announced a pending merger with a publicly-traded SPAC or SPAC. As we pointed out last quarter, Westmoreland continues to be a credit that bears special attention given the macro forces at work for coal producers. Given the equity and equity-like nature of these 4 investments, they are highly sensitive to movements in EBITDA and these businesses experienced varying degrees of underlying improvement or decline that contributed to the changes in valuations. We continue with our strategy to rebuild our portfolio with a stable pool of income-producing assets. To accomplish this goal, we remain diligent in enhancing recoveries on the restructured assets, monetizing reorg equities and redeploying into interest-earning investments.

Apart from the portfolio mark activity, we had net realized gains of $4 million, arising from a $6 million gain from the exit of a relatively small equity position in ECI, offset by $2 million realized loss on SVP Worldwide Limited contingent claim. As of June 30, we have no fair market value exposure to SVP.

Before turning the call over to Mike Pungello for some additional details regarding our financial results, I would like to add that we are very excited about the closing of Tennenbaum Capital Partners acquisition by BlackRock, which bolsters BlackRock's position as a leading global credit manager. Over to you, Mike?

Thank you, Jimmy. I will take a few minutes to review additional financial and portfolio information for the second quarter of 2018. GAAP net investment income, NII, was $11.5 million or $0.16 per share for the 3 months ended June 30, 2018. Relative to distribution declared of $0.18 per share, our NII distribution coverage was 90% for the quarter. Total investment income for the 3 months ended June 30, 2018, decreased $3.9 million or 15.6% as compared to the 3 months ended June 30, 2017. Excluding fee income and other income, total investment income decreased by approximately 14.4%, primarily attributable to a decrease of 14.2% in average investment portfolio for the quarter ended June 30, 2018, and amortized costs as compared to the quarter ended June 30, 2017.

The decrease in portfolio size is primarily due to the dispositions during the second half of 2017 and in 2018. The impact of which was partially offset by a higher rate environment and higher dividend income in 2018. As of June 30, 2018, there was one nonaccrual investment position, representing approximately 0.1% and 1.8% of total debt in preferred stock investments at fair value and costs, respectively, as compared to nonaccrual investment positions of approximately 3.6% and 14.3% of total debt and preferred stock investments at fair value and costs, respectively, at December 31, 2017.

Our average internal investment rate at fair market value at June 30, 2018, was 1.23 as compared to 1.24 at the prior quarter end. Total expenses decreased $1.6 million or 14.1% for the 3 months ended June 30, 2018, from the comparable period in 2017, primarily due to a decrease in base management fees and interest expenses. As previously disclosed, we announced a waiver of incentive management fee based on income from March 7, 2017, to December 31, 2018.

For the quarter ended June 30, 2018, $1.9 million of incentive management fees based on income earned by our investment adviser have been waived. Through June 30, 2018, we have waived the total of $11.6 million of incentive management fees based on the income on a cumulative basis.

During the quarter, there was no accrual for incentive management fees based on gains.

Net realized gain was $3.9 million, primarily resulting from a gain on the sale of ECI Cayman Holdings, LP, partially offset by a loss relating to our investment in SVP Worldwide Limited.

Net unrealized depreciation increased $9.5 million before deferred taxes, primarily due to an increase in unrealized depreciation on certain legacy investments as well as the reversal of previously recognized depreciation upon dispositions. For the 3 months ended June 30, 2018, unrealized gains in a consolidated taxable subsidiary resulted in a deferred tax liability of $1.8 million.

During the second quarter of 2018, we repurchased 1,268,684 of our shares for $7.9 million at an average price of $6.21 per share, including brokerage commission. At June 30, 2018, we are in a very strong liquidity position to grow our investment base. We had approximately $280 million of availability for portfolio company investments between availability under our credit facility and cash and cash equivalents.

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

Thank you, Mike. In closing, I would like to take a moment to recognize our team and thank them for their continued hard work even through the current transition. I would also like to thank all of you for your continued support.

This concludes our prepared remarks. Operator, we can open it up for questions.

(Operator Instructions) And we'll take our first question from Fin O'Shea with Wells Fargo Securities.

Just to start on the losses, start with the bad stuff. Both of these were pretty severe drops. Westmoreland, I know we talked about last (technical difficulty) You seemed comfortable with your (technical difficulty) already there. Did -- I guess, in both fees, were there big negative turns in them or (technical difficulty) just -- I guess, just give us some color on that front.

And this is Marsh Merriman. Thanks for your time this morning. Just a couple of things with respect to Oxford. As is evident from the news coming out in the public filings from the various constituencies, various parties are involved in discussions here regarding the issues in play. As that moves forward, I think the market force perceives that there are certainly macro issues at play with the company. Given the nature of the discussions and the public disclosure that's already out there, we're not at liberty to discuss status or predict an outcome there. With respect to AGY, this is a business that's subject to inter-year lumpiness, so when it's guided on a quarter-by-quarter basis, the equity value just tends to see some variability. Beyond that, there's not a lot of detail we can give you.

Okay. So it's maybe something intermittent on that front. I'll move on to, I think, you gave some kudos to the TCP acquisition by your the managers parents block. Can you give any color on how the 2 BDCs respectively will coexist assuming there are probably similar mandates? Are you sitting in different parts of the platform and focusing on different (technical difficulty)

Thanks, Fin. This is Jim. And obviously, we're very excited about the closing of the TCP acquisition yesterday of the adviser. I would say, we are excited to, obviously, bring them on to the platform. They've got a great track record, both within their own BDC, but on the breadth of their platform. I would say, we are, at BlackRock, working closely with them to optimize the scale and scope and the breadth of the platform on a combined effort. I think the benefit of the combined team is, we believe much of what they have done and the great track record they have had is very complementary to our existing business and the nature of the investments, the sponsors, the type of deals that we have done. So on a combined effort of the adviser, I think we will be able to provide better, broader origination efforts, better quality underwrites. And ultimately, I think that will lead to better outcomes for what we could do in both BDCs, but specifically the BKCC, we're excited about the expansion there.

So are there any structural bylaws, let's say, of soft debts that mandate shared allocation. Do you have similar mandates or are you able to keep things separate for the time being? I know, for example, the (technical difficulty) has a few sets of -- and they'll give you a few options in terms of how you can choose allocation. Sorry, go ahead.

No, absolutely. Thanks. I'll actually turn it over to Larry Paredes to let him run through that but I think that is really where I think we'll be able to provide benefits and scale to the platform. So I'll turn it over to Larry now.

Thanks, Jim. So we currently have an SEC coinvestment exemptive order, which would allow both BDCs to coinvest should the opportunity arise. We will consistently and continuously evaluate potential opportunities to determine whether or not a coinvestment should or should not take place.

Okay. And I'll just do one more sort of macro-oriented question. A lot of your competitors, who reported thus far, have noted a -- maybe not vendor-friendly, but at least supply heavy (technical difficulty) throughout this past quarter and continuing through now. Any comment on reasonably light originations on your behalf despite having still quite low leverage rates?

Fin, this is Jason Mehring here. I guess what I would say is that we were very, very active in the quarter in terms of opportunities we reviewed. As you know, our businesses by definition is somewhat lumpy. There were a variety of transactions we had an interest in. And had structures of either wins in different direction or perhaps the parties with whom we were working. We're not ultimately victorious in the auction or in the process. So again, we're very active and I think we're getting good luck. It's just a matter of managing to win or having or being part of the winning transaction. So we feel comfortable with our activity level and continue to proceed in a cautious way given the backdrop, but we, certainly, are actively looking at a lot of things.

And we have no current questions on the queue. (Operator Instructions) And we have a question from Melissa Wedel with JPMorgan.

Just wanted to get an -- can you hear me?

Yes, Melissa, go ahead.

Sorry about that. Wanted to get a quick update on the portion of the portfolio that is comprised of legacy investments and just an update on a plan to manage through those at this point?

Melissa, it's Marsh again. Our plan with respect to the legacy portfolio continues to be of the same as it has been all along, which is when circumstances permit, we will exit those investments in batches that we think are advantageous. In many of those positions, while we have influenced over the timing and manner of excess of exits, we do not have control, so we sort of worked the situation as best we can. Hard to predict how long it takes or what level we'll exit.

Thanks, Marsh. Melissa, this is Jim. I'll just add on to that. I mean, just to be clear with our goals from a strategic standpoint. As Marsh said, there's, at times, complexities or limitations with regards to existing. But obviously, the legacy portion of the book creates a bit of volatility associated to the portfolio. To be clear, our plan is to continue to work through and ultimately, monetize those positions to the best that we can, to get the best recoveries and then ultimately, redeploy them in more stable interest-bearing assets, far more similar to how we deployed over the last 3 years. So the timing of that has continued to move around a bit. But I would say, we are aggressively trying to continue to transition the remaining book.

Understood. And what portion of the portfolio remains in legacy investments?

It's approximately 30%, I believe, Melissa.

Okay. And then, just to clarify the -- so with the acquisition, there will be basically 2 independent separate vehicles that have coinvestment release (technical difficulty) on the BlackRock side, but how that will operate?

Correct. There are 2, and Larry, you can jump in here, but there are 2 -- there will be 2 vehicles. Obviously, this is day 2 of the transaction, but the teams continue to work together, and we will continue to optimize the platform to ultimately create better investments across certainly BKCC, but across the wide range of vehicles we have. As of right now, there are 2 vehicles -- there are 2 BDCs and there are a variety of other strategies that are run by the teams. And there's a, as Larry pointed out before, the coexemptive order from the SEC that governs the joint transaction.

Thank you. And we have no further questions in the queue at this time.

Great. Well, thank you. I just wanted to highlight, again. Thank you for the team and all the work they've done across the portfolio, but thank you, again, for you all and all your support in the business here. With that, we will end the call. Thank you.

Thank you. And ladies and gentlemen, once again, that does conclude today's call. We thank everyone for their participation. You may now disconnect.