BlackRock Capital Investment Corp (BKCC) 2020 Q4 法說會逐字稿

Good morning. My name is Jennifer, and I will be your conference facilitator today for the BlackRock Capital Investment Corporation Fourth Quarter 2020 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 Paredes, General Counsel and Corporate Secretary of the company; Marshall Merriman, Head of Portfolio Management; and Jason Mehring, Managing Director and member of the company's investment committee.

(Operator Instructions) Thank you. Mr. Paredes, you may begin the conference.

Good morning, and welcome to the fourth quarter and Year-end 2020 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 your attention to 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 have 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 March 2021 Investor Presentations 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 thank you for joining our fourth quarter earnings call. Today, I'm going to provide an update on the significant progress we have made towards our strategic goals during and after the fourth quarter. I will also provide an overview of our fourth quarter performance and our remaining near-term priorities. Nik Singhal will then give an update on our portfolio status and activity; then Abby Miller will follow with a discussion of our financial results in more detail before we open the call to questions.

As we have stated in the past, our primary strategic priority has been to rotate out of noncore legacy and other junior investments and redeploy the capital into primarily senior secured first lien loans with the overall objective of generating stable recurring income and reducing the volatility of our net asset value. I am pleased to report that we have made significant progress in 2020 towards achieving these goals and continue to do so as we move into 2021.

During and subsequent to the fourth quarter, we exited over $170 million of noncore and other junior investments. This brings our noncore holdings to $40 million as of February 27, which is 9% of our total portfolio at fair market value, down from 16% at December 31, 2019.

Our current portfolio consists of 58% first lien loans, 28% second lien and 14% junior capital. The junior capital concentration is down from 43% at the beginning of 2020. If we adjust for our 85% equity interest in BCIC SLP, which now consists of 4 first lien loans and cash on the balance sheet, our pro forma exposure to first new loans is 65%. They have also made good progress in reducing portfolio concentration and achieving great diversity as the portfolio now consists of 58 companies.

We are confident that as we selectively deploy capital into new investments, we will reach our target of at least 70 portfolio companies. Our credit quality remains solid with only 4 investments on nonaccrual at year-end, which includes our $23 million unsecured debt investment in Gordon Brothers Finance Company or GBFC. As we mentioned last quarter, this investment is expected to pay down gradually as GBFC realizes recoveries on certain retained assets following the sale of its portfolio to Callodine in November of last year.

Since that sale, BCIC has already received $10 million from these residual assets. Excluding GBFC, the 3 remaining nonaccruals represented only 1.2% of our total portfolio at fair value. One of those investments returned to performance status in the first quarter of 2021. Overall, we feel very good about the credit quality of our portfolio.

In addition, we reinstated our all cash dividend for the first quarter and maintained the rate of $0.10 per share. We appreciate the patience of our shareholders while we paid a portion of our dividend in stock in the last 3 quarters as a way to bolster our NAV. With the strategic portfolio exits largely behind us and the redeployment strategy firmly taking hold, we feel very comfortable returning to an all-cash dividend.

The significant derisking that we accomplished is expected to compress our NII in the near term. With our current leverage at roughly 0.4x, our quarterly NII run rate is expected to be in the $0.05 to $0.06 per share range. We expect the NII run rate to grow into our dividend over the coming quarters as we redeploy the freed-up capital in a disciplined manner.

Finally, we are still authorized to repurchase up to 7.5 million shares of our common stock. Our share repurchase plan did not kick in during the fourth quarter. Given the significant improvement in our leverage profile and our ongoing discount to NAV, we have increased the capital allocated towards our share repurchases under a 10b5-1 and 10b–18 plan.

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

Thank you, Jim. As Jim mentioned, we made significant progress in exiting over $170 million in noncore and other junior investments since the end of the third quarter. The largest drivers of this were the $87 million we received from our investment in the GBSC unsecured debt, followed by the $39 million full repayment of our investment in First Boston Construction Holdings and a $27 million return of capital from our equity investment in BCIC SLP.

We also successfully exited our $9 million position in CB-HDT Holdings and received a $6 million partial payment on our second lien investment in Red Apple. In addition, there were approximately $67 million in repayments from our core holdings. This was primarily driven by strong refinancing activity during the fourth quarter as the economy began to pick up and the capital markets opened up.

With respect to originations, we had gross deployments of $91 million during and after the fourth quarter, spanning 13 new and 5 existing portfolio companies. Approximately 75% of our originations were first lien loans.

Our pipeline of new opportunities remains robust, and we're seeing less repayment activity in the first quarter. We are maintaining our disciplined approach to investing, executing only a small percentage of the opportunities we review. We're seeing opportunities across a variety of industries and generally continue to invest in less technical businesses.

We are primarily co-investing with other BlackRock funds, 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 colead negotiations on deal terms.

The details of all 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 6.25% term loan to Paula's Choice Holdings, a well-established direct-to-consumer skincare brand. BlackRock led an investment of $175 million in this loan, of which BCIC invested $7.8 million.

A first lien, LIBOR plus 7% term loan and unfunded delayed drawn term loan to Thras.io, a consolidator of small to medium-sized brands that sells through Amazon's third-party platform. BlackRock committed $125 million to this transaction, of which BCIC committed $7.8 million across the 2 tranches.

A second lien, LIBOR plus 9% from loan, the Team Services Group, a leading provider of self-directed home care systems for the elderly and people with disabilities. BlackRock provided the entire $85 million tranche, of which BCIC invested by $5.8 million.

Our core portfolio with an increasing percentage of first lien loans has continued to perform well despite the pandemic. As Jim mentioned, excluding GBFC, there are only 2 investments currently on nonaccrual, both with 0 fair value.

During the fourth quarter, our NAV increased by $8.4 million or 2.8% from the prior quarter. This was driven by a 0.8% increase due to realized and unrealized gains and approximately 2% due to issuing a portion of dividend in stock. The NAV per share declined by $0.01 to $4.23 per share due to the associated increase in share count. As Jim mentioned earlier, we are pleased to revert to an all-cash dividend this quarter.

Now that we have substantially completed the repositioning of our portfolio, our focus in 2021 will be to deploy our liquidity into core investments, consistent with our objectives of stable income and low NAV volatility.

As we do this, our goal is to build back leverage to normalized levels over the next several quarters. We will do so in a selective manner, benefiting from the broad funnel of opportunities that our platform provides. The derisking of our portfolio also provides us significantly higher flexibility in managing our capital structure. We intend to address both the 2022 maturity of our convertible notes as well as working on extending our credit facility this year.

I will 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 fourth quarter of 2020.

GAAP net investment income, NII, was $7.3 million or $0.10 per share for the fourth quarter and represented 101% coverage of our $7.2 million distribution for the quarter. Total investment income for the quarter was $14.6 million, down $1.7 million or 10.4% from the third quarter, primarily driven by a 12.3% decrease in the average investment portfolio size, combined with GBFC's unsecured debt going on nonaccrual during the quarter. Compared to the fourth quarter of 2019, total investment income decreased $4.6 million, also primarily due to GBFC going on nonaccrual as well as a 17.1% decrease in average investment portfolio size.

Total expenses net of incentive management fee waivers decreased $0.5 million or 6.1% from the third quarter, primarily as a result of a smaller average portfolio, which translated into lower base management fees and lower interest expense quarter-over-quarter. Compared to the fourth quarter of 2019, net expenses decreased $2.3 million or 23.6%, mainly due to decreases in net incentive fees, base management fees and interest expense period-over-period.

In the fourth quarter, we voluntarily waived all incentive fees earned of $1.3 million, bringing our cumulative and permanent incentive fees waived since March 2017 to $29.7 million. Additionally, there was no accrual for incentive management fees based on gains.

During the fourth quarter, net realized and unrealized gains were $2.6 million, primarily driven by markups in First Boston, Red Apple and [Suncor] assets. These gains were partially offset by markdowns in GBFC and BCIC SLP.

As of December 31, 2020, we had a strong liquidity position at approximately $285 million from availability under our credit facility and cash on hand. Our net leverage ratio was 0.51x at year-end and as of February 23, had declined further to 0.43x due to additional repayments that we received subsequent year-end. As Nik mentioned, we expect to gradually return to normalized level as we redeploy capital and grow our portfolio over time.

Net asset value was $315 million or $4.23 per share, which included the impact of $5.8 million dividends paid in stock on December 30, 2020. And as Jim mentioned, we announced the resumption of our all cash dividend for the first quarter of 2021. On April 7, we will pay a cash dividend of $0.10 per share to stockholders of record at the close of business on March 17. During the fourth quarter, no shares were repurchased, and 7.5 million shares remained available for repurchase under the current program as of December 31, 2020.

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

Thank you, Abby. In closing, I would like to take a moment to thank our stockholders for their ongoing support and to recognize our team for the continued hard work in creating exits for noncore positions. We are excited about the pipeline of opportunities from the Advisors middle market lending platform, which manages over $15 billion of capital and is supported by approximately 50 dedicated investment professionals. Above all, I hope everyone remains safe and healthy during this ongoing pandemic.

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

(Operator Instructions) And we'll go first to Finian O'Shea with Wells Fargo Securities.

First question on, I suppose, naturally GBFC. Can you provide some color on what happens there underneath the entity or at least the unsecured claim composition? And also, is it still adding there, is it still paying cash?

Fin, this is Nik. Thank you for your question. So as we had mentioned last quarter GBFC, so all of its investment portfolio to Callodine in November of last year. Post that transaction, it was left with a basket of residual assets, which were namely, they are entitled up to $40 million recovery. It works for the first lien note in the portfolio that was sold. Additionally, there's an earn-out note with a maximum potential recovery of $15 million. There was a warrant position in an existing portfolio company that GBFC actually monetized in December. And that was used to return $10 million of capital to BCIC. And then initially, there's some cash and some escrow proceeds, approximately $1 million was returned additionally to BCIC.

None of these assets are income generating. As a result, that unsecured note does not pay an income and is not expected to do so. We view that as a recovery play. And as I mentioned, we've already seen approximately $10 million of recoveries on that base.

So the nonaccrual was more a result of moving stuff around then anything that happened underneath fundamentally?

Correct, correct. So all of their income-producing portfolio of loans was sold. As part of that transaction. So none of these sort of residual assets actually are income generating.

And at this point, really, that's the only GBFC unsecured debt is the only nonaccrual position in the portfolio. There are 2 other nonaccruals in the portfolio, but they actually have 0 fair market value.

Okay. That's helpful. And another question on the dividend. How is the -- how is there such a high return of capital component given that you over earned the dividend on NII and I figured there'd be even more taxable income with nonaccruals. It's a pretty big surprise. If you could give some color on that.

Fin, this is Abby. Thank you for the question. As you pointed out that our total year NII was $34 million and total distribution declared was $31 million. The main [rock] that you mentioned was due to tax characteristics of our distribution.

So with anything tax, there is more complication. The tax code allows the fourth quarter declared distribution that's paid in January to be count towards either prior year or current year distribution number. So this is our January 2020 distribution where it was counted towards the 2020 tax distribution. So the way to look at it is that, that rock number we disclosed is from a tax perspective, and that was driven by the January 2020 distribution.

Okay. That's helpful. And just last one for me. Can you provide an update on the BCIC efforts to exit that or liquidate? Any progress post quarter, what you're thinking there now?

Yes, Fin, this is Nik. Sorry, just -- is your question specific to just the remaining noncore positions and other equity capital?

No. The -- sorry, I worded that -- I gave you the wrong acronym there. The SLP.

Yes, yes. So yes. So that's a senior loan JV. We conducted a portfolio sale in Q4 of last year. And that sale resulted -- that process resulted in the sale of 14 out of the 18 first lien names that vehicle held. That sale enabled that vehicle to retire its leverage in full and returned an additional $23 million of capital to BCIC. Of those remaining 4 names, 1 was partially sold in January of this year, which resulted another $4 million kind of capital.

So that portfolio now is just 4 -- first lien positions and some cash completely held on an unlevered basis. We will continue to look for opportunities to exit those investments at attractive revenues.

Over next to Melissa Wedel with JPMorgan.

I want to make sure I'm thinking about the activity in the portfolio the right way. I appreciate the additional disclosure provided on some statistics through most of February. If we're looking at that rate, does that sort of translate into or imply originations around $30 million-ish so far in Q1 versus about $58 million of exits so far in Q1.

Thanks, Melissa, this is Jimmy here. No, I appreciate it. I think there are a couple of things with regard to the basis of deployment. Obviously, last year was a fairly volatile year, and we saw activities slow down in the market. And obviously, we slowed down with regards to our own book in the kind of Q2, Q3 time frame. It really picked up in the end of the year, but also repayments started to pick up pace as well.

But for the most part, a large part of our repayments were us exiting out of noncore and legacy positions. I think as we look forward, obviously, there's going to be some volatility around the timing of close and I would say, the selective nature that we have with regards to the types of deals that we're looking at.

So I would say there's upside, and I would guide you to an increase with regard to that number. We're kind of think in aggregate, we should see 5 to 10 types of deals as we had diversification across the quarter. More in the first lien, and we're generally closing in the kind of mid-single digits is the amount of deals that we see.

And if you look at our hold size and expected hold size, I would say, that number, we would expect to be greater than $30 million averaging over the next couple of quarters. And so probably somewhere in the range of $30 million to $50 million, but you can't necessarily determine that exactly just because it depends on the quality of the deal flow that is coming in.

Okay. Understood. And I have a couple of follow-up questions on the dividend. Sort of just the thinking of returning to an all-cash dividend at the current level, while expecting some compressed NII over the near term, can you just talk about the process of thinking through that? And then whether or not is it the interplay between that and allocating capital to share repurchases right now?

Thanks, Melissa. Yes, that's exactly it. Obviously, as we went through the 2020 environment, the unknown and also the uncertainty of the volatility risk with regards to our junior capital and equity positions, we were in a different place. And obviously, we distributed some of the dividend in stock.

I think as we look into 2020, and we've been able to exit a significant portion of our equity positions and our kind of more noncore assets, obviously, leverage has come down significantly in that dynamic as you look forward. One, we have more conviction with regards to the book and returning to an all cash dividend. But two, with regards to a balance of the kind of the 3 things that we look at of trying to return capital to shareholders is, first and foremost, is that deployment that we just discussed and really adding more diversification across a broader range of first lien notes.

And obviously, that will take time, but over the next couple of quarters. And then the balance of over distributing the dividend to add some stability and managing that dividend as we grow into it as we redeploy. And lastly is the measure of allocating towards stock repurchases, which we've disclosed in the book with regards to the $7.5 million shares, and we'll have a programmatic plan, that's in place. So it's really those 3 measures.

And at this time, I'll turn the call back to the speakers for closing remarks.

Thank you, operator. And I think that concludes the call. Thank you, everyone, for the continued support in the portfolio, in the company. And look forward to the continued progress and transition -- and full transition with regards to the company's, call it, forward strategy. Thanks again, and stay happy and healthy.

This does conclude today's conference. We thank you for your participation.