BlackRock Capital Investment Corp (BKCC) 2021 Q1 法說會逐字稿

Good morning. My name is Lisa and I will be your conference facilitator today for the BlackRock Capital Investment Corporation First Quarter 2021 Earnings Call. Hosting the call will be James Keenan, Chairman and Interim Chief Executive Officer; Nik Singhal, President of the company; Abby Miller, Chief Financial Officer and Treasurer; Laurence Steve Paredes, General Counsel and Corporate Secretary of the company; Marshall Merriman, Head of the Portfolio Management; Jason Mehring, Managing Director and Member of the company's Investment Committee. (Operator Instructions)

Thank you. Mr. Paredes, you may begin the call.

Good morning and welcome to the First Quarter 2021 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 lists 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 April 2021 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 first quarter earnings call. I'll begin with an update on significant progress we have made towards our strategic goals as well as a high-level view of our first quarter performance and our near-term priorities. Nik Singhal will then give an update on our portfolio activity and status, and Abby Miller will follow with a discussion of our financial results in more detail before we open the call to questions.

As we have emphasized in prior calls, one of our strategic priorities has been to rotate out of non-core legacy and other junior capital investments. Through 2020 and the first quarter of 2021, we have made substantial progress on this front. At quarter end, our non-core legacy assets have been reduced to just 8% of our total portfolio compared to 14% a year ago with near-term visibility into further exits. Other junior capital exposure, excluding non-core assets, is now reduced to 13% of the portfolio from 38% a year ago.

With the portfolio cleanup largely behind us, our focus has shifted more towards our other strategic priority of producing a steady, reliable income with reduced NAV volatility. As we redeploy capital, we remain committed to building a diversified portfolio of income-generating senior secured loans with an emphasis on first lien. At the close of first quarter, our portfolio was composed of 62% first-lien loans, 24% second lien and 14% junior capital. For comparison, at the end of 2019, only 34% of the portfolio was in first lien.

We are achieving greater diversity as well, adding 11 new companies to the portfolio this quarter. We now have 60 portfolio companies compared to 47 at the end of 2019. The company has and continues to benefit from BlackRock's robust origination and underwriting platform. We believe that as we selectively deploy capital, we will reach our target of at least 70 portfolio companies and 70% to 75% first-lien mix. The credit quality of our current portfolio is strong as we have been rotating the portfolio out of non-core assets and into diversified senior secured loans.

Excluding our remaining investment in Gordon Brothers Finance Company or GBSC, we have only 1 investment on non-accrual status. Notably, we sold our preferred stock position in Advantage Insurance, which was previously on non-accrual at the prior quarter's mark. Essentially, the 5.5% of non-accrual at fair value we reported for the first quarter represents our remaining exposure to GBSC. Additionally, after reinstating our full cash dividend last quarter, we maintained the dividend at $0.10 per share this quarter.

While leverage decreased during the quarter, we are confident our focus on steadily building up the portfolio where senior investments will over time generate stronger NII. We expect the NII run rate to grow into our dividend over the coming quarters as we redeploy freed up capital.

On our last call, we had stated that our goal of extending our credit facility. We accomplished this goal on April 23, providing us much greater flexibility into managing our liabilities. The revolver now matures in April 2025. Importantly, the amendment removes the springing maturity ahead of the 2022 convertible note maturity and remove certain restrictions on prepayment or repurchase of the 2022 notes.

Finally, our share repurchase plan kicked in again during the first quarter. We repurchased approximately 256,000 shares at an average price of $3.40 per share, including the brokerage commissions.

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

As Jim mentioned, we've made strong progress in derisking our portfolio and exiting non-core and other junior investment. During the first quarter, we received $52.6 million in proceeds from reduction in non-core and junior capital investments. This brings our total proceeds from these 2 buckets to approximately $179 million in the last 2 quarters. The largest drivers of this first quarter activity were the $39 million full repayment of our investment in First Boston Construction Holdings, $6 million in the full exit of our preferred stock in Advantage Insurance and a $4 million return of capital from our equity investment in BCIC SLP.

In addition, there were approximately $35 million in repayments from our core holdings. This was primarily driven by opportunistic sales of certain second lien exposures as well as normal course repayments. With respect to originations, we had gross deployments of $55 million in the quarter, including 11 new and 1 existing portfolio companies. Consistent with our strategy to lower overall portfolio risk and increase our percentage of first-lien investments, 86% of our originations were first-lien loans and 14% were second lien loans.

Our pipeline of new opportunities remain solid and we're seeing less repayment activity in the second quarter so far. In the first 4 weeks of the second quarter, we added 4 new portfolio companies. All 4 were first-lien loans. As the capital markets remain very robust, we remain committed to our disciplined approach to investing, executing only a small percentage of the opportunities we review. We are primarily co-investing with other funds on BlackRock private credit platform, which enables us to participate in larger transactions without taking on too much concentration risk. And we continue to emphasize transactions where we lead or co-lead negotiations on deal terms.

The details of our new investments can be found in the earnings release, but some of our more prominent investments include the following. A first-lien LIBOR plus 9.25% term loan to World Remit, a leading global money transfer platform that facilitates international transfers online. BlackRock led this investment, of which BCIC invested $9.6 million. A first-lien LIBOR plus 8.75% term loan in delayed draw term loan to JobandTalent U.S.A., a digital temporary staffing agency. BlackRock acted as the sole lender in this investment, of which BCIC committed $9.6 million across the 2 tranches. A first-lien LIBOR plus 6% term loan in unfunded revolver to 2-10 Holdco, a provider of new home and structural warranty. BCIC committed $7.5 million to this investment.

Our core portfolio with an increasing percentage of first-lien loans has continued to perform well. As Jim mentioned, excluding the remaining GBFC exposure, there is only 1 investment in non-accrual, which is a non-core position with $0.9 million fair market value.

During the first quarter, our NAV increased by $7.9 million or 2.5% from the December quarter, driven primarily by a $12 million net realized and unrealized gain on our investments. This reflected improved financial performance across many of our portfolio companies. Our NAV per share increased 2.8% from $4.23 to $4.35. Our focus for the remainder of 2021 will be to deploy our liquidity into core investments, consistent with our objectives of stable income and low NAV volatility.

Growing our portfolio in a disciplined manner will enable us to grow our NII as well with the eventual goal of having our core earnings fully cover our dividend, which, as Jim noted, we have paid a $0.10 in cash in the second quarter in a row.

I'll now turn the call over to Abby Miller to further discuss our financial results for the quarter.

Thank you, Nik. I will take a few minutes to review additional financial results for the first quarter of 2021. GAAP net investment income, NII, was $4.2 million or approximately $0.06 per share for the quarter. This was consistent with our expectations giving a portfolio reduction driven by our successful efforts in reducing exposure to junior capital and non-core investments. NII covered 56% of our $7.4 million in stockholder distributions.

Total investment income was $10.3 million, down $4.3 million or 29.7% from the fourth quarter of 2020, primarily driven by a decrease in investment portfolio size associated with portfolio derisking. Total expenses decreased $1.2 million or 16.7% from the fourth quarter of 2020, primarily driven by lower base management fees and interest expense quarter-over-quarter. In the first quarter, the company did not incur any incentive fee based on income. As you may recall, in the fourth quarter of 2020, we recorded a $1.3 million incentive fee, which was voluntarily waived by the adviser. Our cumulative and permanent incentive fees waived since March 2017 totaled $29.7 million. Additionally, in the first quarter, there was no accrual for incentive fees based on gains.

During the first quarter, net realized and unrealized gains were $12 million, primarily driven by valuation recovery in SVP-Singer, BCIC Senior Loan Partners, St. George as well as continued general market recovery across the broader portfolio. At quarter end, there were 3 non-accrual investments representing 5.5% of total debt and preferred stock investments at fair value as compared to 6.5% at December 31, 2020. Our weighted average internal investments rating at fair value also improved to 1.72 as compared to 1.90 at prior quarter end.

At March 31, 2021, we had a strong liquidity position at approximately $294 million from availability under our credit facility and cash on hand. Our net leverage ratio was 0.38x at quarter end compared to 0.51x at December 31, 2020. We expect to gradually return to normalized leverage levels as we redeploy capital and grow our portfolio over time. Additionally, as Jim mentioned, the amendment of the credit facility provides additional flexibility for the company to further manage its capital structure in 2021.

During the first quarter, we repurchased approximately 256,000 of our own shares for $0.9 million at an average price of $3.40 per share, including brokerage commissions. As of March 31, 2021, approximately 7.24 million shares remained available for repurchase under the current buyback program. As announced yesterday and consistent with prior quarter levels, a quarterly distribution of $0.10 per share was declared payable on July 7, 2021, to stockholders of records at the close of business on June 16, 2021.

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

Thank you, Abby. In closing, we are pleased with our first quarter performance, which was driven by the ongoing hard work of our entire team, and we are excited about the year ahead. We are in good financial shape and are well positioned to continue to pursue our goal of growing our portfolio towards steady, reliable income and lower NAV volatility. I also want to thank our stockholders for their ongoing patience and support through this portfolio repositioning process.

This concludes our prepared remarks. Operator, we would like to open the call for questions.

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

Jim, first question on the dividend that you expect to make in -- earn again in the coming quarters. I assume that that would entail continuing the incentive fee waiver. So would you remind us on the policy or approach you have to that? And then do you see BlackRock in a position -- I think the dividend is about 9.5% of book. Obviously, today is becoming more competitive and so forth. Do you think the BDC can earn the dividend if and when you achieve the remaining portfolio optimization that would maximize your earnings potential?

Thanks, Fanny, and thanks for the questions. Yes, obviously, there is a lot of different variables that come into the deployments and the earnings. Yes, obviously, I think the Q1 was a good example with the 11 new deals that we were able to deploy into and consistent with the strategy of diversifying into more first liens. Obviously, spreads, LIBOR, all are things that are going to impact the overall level of earnings that come into that. When we model it out and ultimately have communicated that to the market, we expect over the next couple of quarters to continue on that kind of pace from a deployment standpoint. And then ultimately, build towards those lever ratios around that 1.15- or 1.25-type range and we believe that's consistent with regards to the overall strategy.

From a standpoint, from the dividend, what we are modeling out and continue to work with our Board is as we continue to deploy that and as we think we have the earnings, the adviser has been obviously waiving all of the incentive fees. To date, I will continue to work with the Board as we completely and fully reposition or retransition the portfolio is when to start to put that back into play when there's a full repositioning of the overall portfolio. But as of right now, I mean we're pretty comfortable with regards to where we're deploying, the types of spreads, what we're able to earn, and just the volume and pace of activity that we see in the market today. But obviously, those will be decisions that the Board will make as we move into the quarters as well being fully invested.

Our last question comes from Melissa Wedel with JPMorgan.

Nik, you referenced some deal activity that's occurred so far in April. I think you referenced 4 new companies that you deployed capital to. I was wondering if you might be willing to put some size around that for us and give us a sense of how you expect the originations to play out versus your exits and repayments. Should we expect that to be pretty balanced or be -- continue to be skewed more towards the exit as you did also talk about having visibility into further rotation out of some legacy investments?

Yes. A very relevant question indeed. So if we look at Q1, where we deployed $56 million across 11 new portfolio companies and before that, Q4 where we actually deployed $62 million, that pace of gross deployment is very, very consistent with our desired pace. And we believe we're going to continue to create gross deployments at that pace. In Q2 so far, and it's only 30 days, we mentioned the 4 new companies, which are all first liens. And across those, we've deployed $23 million, right? So I won't necessarily extrapolate it linearly, but that's pretty much ahead of the pace that we had in the prior 2 quarters. We think that that pace is sustainable.

In last 2 quarters, obviously the gross deployments were more than offset by the repayment activity. Much of this repayment activity was exits we've been trying to create. So these were large junior capital positions, First Boston, Senior Loan Partners, GBFC and then many of the non-core positions, Advantage Insurance and others. And one thing we mentioned on our call is that our non-core book is down to 8% with near-term visibility into further reductions.

And incidentally, as we were speaking on the call, our investment in Red Apple, our non-core investment, paid off. Our recoveries there are at our mark and there's potential for additional recoveries down the line, which could push recoveries above our mark. So really great news, that's going to take our non-core bucket down to 5%. So really, most of the desirable exits are now behind us.

Additionally, just the market-driven refinancing activity we were seeing a lot of it in Q4, some of it in Q1, is now really starting to slow down. So with the great Red Apple news that we just received, we're saying that our gross deployments will actually start turning into net deployments in -- which will be accretive to our leverage ratio as well as the NII.

All right and that does conclude today's presentation. Thank you for your participation. You may now disconnect.