BlackRock Capital Investment Corp (BKCC) 2022 Q3 法說會逐字稿

Good morning. My name is Keith, and I'll be your conference facilitator today for the BlackRock Capital Investment Corporation Third Quarter 2022 Earnings Call. Hosting the call will be James Keenan, Chairman and Interim Chief Executive Officer; Nik Singhal, President; Chip Holladay, Interim Chief Financial Officer and Treasurer; Laurence D. Paredes, General Counsel and Corporate Strategy; and Jason Mehring, Managing Director and Member of the Company's Investment Committee. (Operator Instructions)

Mr. Paredes, you may begin the conference.

Good morning, and welcome to the Third Quarter 2022 Earnings Conference Call of BlackRock Capital Investment Corporation, or BCIC.

Before we begin our remarks today, I would like to point out that certain comments made during 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 BCIC's actual results may differ from these statements. As you know, BCIC has filed with the SEC reports which list some of the factors, which may cause BCIC's results to differ materially from these statements. BCIC 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, BCIC 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 November 2022 Investor Presentation link in the Presentations section of the Investors page.

I would now like to turn the call over to Jim.

Thank you, Larry. Good morning, and thanks to all of you for joining our third quarter earnings call. I'll provide an overview and highlights from the quarter. Nik will then give an update on our portfolio activity and status, and Chip will then discuss our financial results in more detail. We will then open the call to questions.

We again produced solid results, sustaining and building upon the momentum we generated in the first half of 2022. We continue to demonstrate the strength of our increasingly diversified portfolio and our commitment to delivering solid risk-adjusted returns.

Rising interest rates, stronger pricing on new originations and solid fee income during the third quarter combined to drive a 27% increase in adjusted quarterly net investment income. Importantly, our NII more than covered our dividend this quarter. Our net leverage increased to 0.71x, up from 0.64x for the prior quarter, driven by $78 million of gross deployments in the third quarter.

We added 16 new portfolio companies and now have 111 portfolio companies, an all-time high, up from 86 at the end of 2021 and 47 at the end of 2019. Notably, our leverage remains relatively modest, and we have ample room to take advantage of the current attractive market conditions for deployment. We expect to continue to grow and diversify the portfolio and further increase our earnings power.

A core tenet of our underwriting is the emphasis on seniority in the loans we originate. First lien investments now make up 77% of our portfolio, more than doubling the 34% we reported at the end of 2019. Junior capital investments now comprise only 6% of our portfolio, down from 43% at the end of 2019. We also reduced our noncore portfolio to less than 2% of our entire portfolio by the close of the third quarter. We now view the transition away from the legacy portfolio as largely behind us.

Even as we grow, we are mindful of the impact on our portfolio of companies of the rising interest rates, stubbornly high inflation as well as lingering global supply chain constraints. We remain committed to selective investing based on our time-tested and prudent underwriting approach that focuses on credit analysis through the cycle. We are engaged in a regular dialogue with our portfolio companies to assess the impact of the current macroeconomic environment on their financial performance. While we are seeing indications of an economic slowdown, we believe that our portfolio is relatively well positioned to withstand broader economic slowdown.

As a result of our focus on investing in well-structured first lien loans in less cyclical businesses, we had no new nonaccrual loans in the quarter. In the quarter to date, our pipeline is healthy, and we continue to draw upon the BlackRock platform and our team's deep experience to identifying compelling opportunities. Pricing and deal structures also continue to improve as the market shifts and becomes more lender-friendly.

99% of our yield on debt investments in our portfolio carry a floating rate coupon, all of which are above their SOFR or LIBOR floors in the current market. We expect the rising rate environment to further boost interest income.

I'll now turn the call over to Nik to discuss our portfolio activity in further detail.

Thanks, Jim. We made good progress this quarter, growing the portfolio and increasing our core earnings power. During the third quarter, our new deployments were almost entirely in first lien investments, consistent with our strategy of maintaining a lower risk profile, especially as we enter uncertain economic times.

Our gross deployments in the quarter were primarily across 16 new and 7 existing portfolio companies. Approximately 74% of the investment dollars went into new portfolio companies and the remaining 26% into existing relationships. Follow-on investments in existing portfolio companies continue to be an important source of opportunity for us as these are businesses we already know and understand well.

Sales, exits and repayments during the quarter were $61 million, including full repayments from 5 existing portfolio companies. Of particular note, we monetized our position in MBS Opco and MBS Parent, previously our largest noncore holding. This included the full exit of our $11.7 million debt position at par and a $0.5 million distribution from our equity position in which we still hold a residual interest.

Additionally, we fully exited our debt investments in Juul, Metricstream, Dude Solutions and Power Home. In each of these, we realized principal at par with an aggregate realized IRR of 11.6% over the holding period across these 4 names. Some of the more prominent new portfolio company investments include the following: an $11.1 million SOFR plus 6.75% first lien term loan and $4 million unfunded commitment to ICIMS, Inc., a cloud-based human resources and recruiting software company; a $7.1 million SOFR plus 6.75% first lien term loan and $2 million unfunded commitment to Numerix, a software provider for valuation and risk management of derivatives and structured products; and a $5.4 million SOFR plus 6.25% first lien term loan and $1.6 million unfunded commitment to Accordion Partners, LLC, a provider of financial consulting services to private equity-owned portfolio companies.

Our NAV per share was relatively consistent with the second quarter, with wider market spreads modestly impacting the market value of our holdings. As previously mentioned, we had no new nonaccruals during the third quarter. While being mindful of the broader economic softening, we are excited about the positioning of our portfolio. We believe that the underlying diversity and the emphasis on senior secured investments will help the portfolio defend against a recessionary scenario. Additionally, our modest leverage of 0.71x still leaves room to grow and take advantage of attractive market conditions to deploy new capital.

The impact of the repositioning of our portfolio is already playing out in terms of our earnings growth. As in the third quarter, our NII exceeded our dividend level of $0.10 per share in cash.

I will now turn the call over to Chip to further discuss our financial results for the quarter.

Thank you, Nik. I will now take a few minutes to review some additional BCIC financial results for the third quarter. GAAP net investment income was $7.7 million or approximately $0.10 per share for the third quarter, an increase of 8% from the prior quarter, providing dividend coverage of 105% compared to 97% in the prior quarter.

Our gross investment income was $16 million, an increase of 31% from the prior quarter. During the quarter, the company had onetime fees and other income of $1.3 million against $0.4 million in the prior quarter. Excluding onetime fees, our gross investment income grew 24% quarter-over-quarter. This increase was driven primarily by the impact of a higher interest rate environment on top of net deployments of $66 million over the past 2 quarters.

The company's weighted average portfolio yield based on fair value increased to 10.5% as of September 30, up from 9.1% as of the prior quarter end, driven by a rise in LIBOR and SOFR rates during the quarter.

Total net expenses increased by $3.2 million from the second quarter, primarily driven by a $1.5 million increase in incentive fees on income due to NII exceeding our performance hurdle, coupled with a $1.1 million reversal of our capital gains incentive fee accrual in the prior quarter. The company did not incur any incentive fee based on capital gains during the third quarter. Additionally, interest and debt-related expenses increased by $0.5 million due to a higher average debt balance from deployments during the quarter and an increase in LIBOR and SOFR rates.

Net unrealized losses were $2.4 million for the quarter, primarily attributable to the impact of general market declines on our portfolio and to a valuation decrease on our interest rate swap. Our net unrealized losses were partially offset by realized gains of $0.4 million during the quarter. At the end of the quarter, the portfolio had 3 nonaccrual investments, representing 3.3% of our portfolio's total fair value. And as stated previously, there were no new nonaccrual investments during the quarter.

Our weighted average internal portfolio rating at fair value declined slightly to 1.28 compared to 1.27 at the prior quarter end and improved from 1.33 as of the September 2021 quarter end.

Total available liquidity for investment deployment and general operating use, including cash on hand, was $124.9 million at quarter end, subject to leverage and borrowing base restrictions. Our net leverage ratio was 0.71x, up from 0.64x at the end of the prior quarter, due to $17 million of net deployments during the quarter, resulting in a higher ending debt balance.

During the quarter, we repurchased approximately 464,000 shares of our stock for $1.7 million at an average price of $3.68 per share, including brokerage commissions. As announced yesterday, our Board declared a quarterly dividend of $0.10 per share, payable on January 6, 2023, to stockholders of record at the close of business on December 16, 2022.

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

Thank you, Chip. In closing, we are committed to conservative underwriting, portfolio diversity and disciplined growth to produce reliable income, NAV stability and solid results for our shareholders. We thank our shareholders for their continued support.

With that, we would now like to open the call for questions.

(Operator Instructions) We'll take our first question from Finian O'Shea with Wells Fargo.

Jim, can you talk about your appetite to invest into liquid opportunities given your ability to do that? Not only with the smaller size of the BDC, you could likely meaningfully ramp into attractive assets. And obviously, your leverage position is conservative and you have ample runway there as well. Just how do you look at that proposition today?

Thanks, Fin. Thanks for the question. Yes, I think as you point out, obviously, I think we're in a really good position from a leverage standpoint going into kind of today's market volatility. It's allowing us to take advantage of the opportunity to lend into an environment that has obviously got higher yields associated to it and higher spreads but, more certainly, being able to get better structure and documents associated to our loans.

And so that plays into the fact of our focus has been more on the private markets where we are able to actually control the structure and the documents and the protections associated to them. So as outlined, we've talked about this, but we've had a key core focus of trying to create a little bit more NAV stability and more diversification and resiliency with regard to the NII, but also the NAV.

And like I say, obviously, the public market volatility is something that does create opportunities in the private market as well. Obviously, it makes the, I would say, capital a bit more tighter for companies to access the public markets. And so you are seeing more of those companies seek private solutions associated to that. Even some ones that have public debt structures are going to the private market to try to get some refinancing or loans associated with that.

So I don't think you'll see us go into the public market and look at that volatility and also because those documents may not be up to the standard that we want to deploy money into. So we will look at those companies if they are looking at our private solutions where we can kind of control docs and pricing.

Sure. That's helpful. And just to sort of follow up there, it sounds like you want your proprietary structure or just the private market structure, understandably the stability, the NAV stability. But given the market is slower there and those terms aren't moving as quickly, at what point does the liquid proposition become more attractive for shareholders? Do you need to see, say, another 200 basis points? Or any sort of handle you could give us there on how you think -- or is it maybe a never, just how you think about that?

Yes. No, thanks. I don't think you can look at it in isolation, right? It's not that the public market is moving. It's in relation to what you can get in the public markets versus what you could deploy into the private markets. And obviously, they are correlated. They may have a lag between how they move. So if you saw the market move on the public side 200 basis points wider, it doesn't necessarily mean that there would be great opportunities in the private market to better structure and pricing as well. So we have to take that all into account. I would say the bar is very high for us to deploy money into the public space. But again, we would look at that in general relative to what does that mean on the private side.

And so from that standpoint, when we look -- even though the M&A volume has generally slowed, obviously, because liquidity has become tighter and you see some of the M&A volumes go down, our pipeline still is pretty robust. And you can see that in the deployment for the last quarter and even our forward pipeline is pretty robust. And that's not just because of the M&A deals. Obviously, there are embedded companies who, in this environment, are going to look to grow, right, roll-up acquisitions and transactions like that might be more attractive today because you can make acquisitions at a much better multiple. So we do see those deals. There's obviously some embedded companies, both in our existing portfolio companies and others, that are going to look to refinancing to this market uncertainty.

And so when you think about our sourcing network, it's fairly robust. And on any 1 year, we're looking at over 1,000 deals. And so you can see, I would call, the style of those deals or the reasons of use of proceeds vary in any 1 quarter. But in general, I don't think it's slowing down kind of our views of what we're able to kind of look into to deploy into this market. And again, I would say we certainly before are being able to kind of structure our protections because there are a lot of unknowns from a macro perspective. And when we are doing our kind of disciplined underwrite, we want to be able to know that, and we have comfort with regards to the covenants that we put in place.

We'll take our next question from Melissa Wedel with JPMorgan.

I was hoping to start with just sort of earnings power and NII levels. I was a little bit surprised that despite the pickup in NII quarter-over-quarter that most of it seems to be driven by fee income despite an increase in base rates and sort of the yield on the portfolio. Can you kind of unwrap that a little bit and talk about how you're thinking about earnings power going forward?

Melissa, it's Nik. Thank you for the question. So our NII this quarter in Q3 was clearly a meaningful increase from Q2. And there are many factors there. As you pointed out, fee income is certainly one of them. The fee income is just inherently unpredictable. We're going to have quarters with high fee income. We're going to have quarters with low fee income. But really the tailwinds we're seeing, one is rates, again, as you mentioned, right? And not only are the rates continuing to rise, there's actually a lag effect. And when the Fed raises the rates and when it actually flows through our portfolio, it could be anywhere from like a 2- to 3-month lag, okay? So that we expect to continue to provide tailwinds going forward.

And then finally, spreads. We are seeing in the -- all of the new deployments we're seeing, we're seeing wider spreads. Whether it's coupon rate, whether it's OID or some combination thereof, we're seeing pricing roughly 100 bps higher than, say, 6 months ago, right? And we're in the fortunate position that our leverage is still modest and we have the dry powder to be deploying in these market conditions. So we think that there will be, frankly, another tailwind as we look into future quarters. So we're actually pretty happy that we're covering our dividend this quarter at just 0.71x leverage, and there's plenty of room to grow and deploy into these very attractive market conditions.

Okay. That actually takes me to my follow-up question on activity levels in 4Q. I know that sometimes it can be a seasonally busy quarter. When I look back at the last 2 years, it just happens that you guys had repayments and exits that actually exceeded capital deployment. Given the robustness of the pipeline and the opportunity set that you're seeing now, would you expect that to sort of reverse trend and expect net deployments this year? Or is it just too tough to tell?

Yes. No, so I mean, in some ways, it is impossible to predict with certainty, right, how deployments or prepayments will be quarter-over-quarter. But historically, I would say Q2 and Q3 have been very strong gross deployment months, even by our own historical levels, right? And we are seeing a little bit of slowdown in the market in terms of M&A activity or organic growth activity. We're still seeing deployable opportunities. And as of now, I think -- I don't have the exact numbers in front of me, but Q4 so far is a positive net deployment month.

And the other thing I would add is that we talk about seeing more than 1,000 transactions in a year. And while at this point in time, the pace might be slower, okay, I would say that the slowness is more towards that part of the broad funnel. Some of them are like [desicles], right? Like half of those deals, we wouldn't spend more than an hour on, not spend any time on, right? So much of that kind of investment opportunities we're not seeing. There hasn't been that big a hit to the real deployable opportunities that we're seeing in the market.

Every single quarter, we also have been able to deploy additional capital into existing portfolio companies, and these are not defensive investments. These are truly incremental investments to support our portfolio companies' growth, whether that's organic or inorganic. So Q4 might be a little bit slower than normal. But structurally, we feel we're very well positioned, as Jim had mentioned earlier, in terms of our ability to source and deploy.

And Melissa, this is Jimmy, just jumping in here, too. I think if you compare it to prior years, just to kind of reference, when we were transitioning the legacy book, if you remember, that legacy book had far more kind of concentrated size positions. And as we've kind of exited those, we've kind of rebalanced that into kind of not just first lien but far more diversified book, and we talked about the name count going up. So some of those prior quarters that you referenced, we were able to exit. And we had some, I would call it, chunky exits that were part of those repayments relative to taking those down into kind of smaller single name investments.

Okay. If I could with one last question, I saw that you guys continued some repurchase activity in the $1.5 million to $2 million range per quarter. Also saw that the Board authorized or re-upped the authorization. Is it fair to say that your outlook on the value-add from repurchase at these levels is unchanged?

Yes. Melissa, so share repurchase plan has typically been a part of our strategy, and we have used it in the past for 2 reasons. One is to buy stock at attractive level and the other is to provide stability in dislocated market conditions. Our share repurchase has always been conducted in accordance with 10b-5-1 and 10b-18 plans. And our Board, every quarter, reviews that plan. And if a plan is put into effect, they are generally set up by the Board.

We have no further questions in the queue. At this time, I'd like to turn the conference back to you, presenters, for any additional or closing remarks.

Thanks, operator. No further remarks, just want to thank you all our shareholders and investors for their continued support, and we'll talk to you next quarter.

Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may now disconnect.