BlackRock Capital Investment Corp (BKCC) 2022 Q1 法說會逐字稿

Good morning. My name is Allan. I'll be your conference facilitator today for the BlackRock Capital Investment Corporation First Quarter 2022 Earnings Call. Hosting the call will be James Keenan, Chairman and Interim Chief Executive Officer; Nik Singhal, President; Abby Miller, Chief Financial Officer and Treasurer; Laurence D. Paredes, General Counsel and Corporate Secretary; Chip Holladay, Managing Director; Marshall Merriman, Managing Director and member of the company's Investment Committee; and James (sic) [Jason] Mehring, Managing Director and member of the company's investment committee. (Operator Instructions) Today's call is being recorded. Thank you.

Mr. Paredes, you may begin your call.

Good morning, and welcome to the First 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 May 2022 investor presentation (inaudible) 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 provide an overview and highlights from the quarter. Nik will then give an update on our portfolio activity and status, and Abby will follow with a discussion of our financial results in more detail. We will then open the call to questions. I'm pleased with the progress we have made in reconstructing and diversifying the portfolio with the goal of delivering a stable NAV and a competitive return on equity.

We started the year on solid footing building on the momentum we generated throughout 2021. We deployed $44 million of new capital in the first quarter. And keeping with our focus on senior secured debt, substantially all of this consisted of first-lien loans. Approximately 72% of the portfolio now consists of first lien investments, up from 50% at the end of 2020 and up from 34% at the close of 2019. Additionally, we continue to broaden our investments to further diversify and strengthen the portfolio. We added 9 new portfolio companies and ended the quarter with 93 portfolio companies, up from 55 at the end of 2020 and 47 at the end of 2019. We are firmly committed to a robust underwriting approach that focuses on the investment performance through economic cycles. We generally favor businesses in noncyclical industries with their growing revenue profile, ability to pass through cost increases and strong equity support. We avoid overleveraged capital structures that are more prone to precious from rising inflation and rising interest rates.

Our credit quality remains healthy as a result. There are no new nonaccrual investments in the first quarter and all of 2021. Net leverage of 0.46 times was down from 0.56 times at the close of 2021 as repayments exceeded new investments. While there were only 3 portfolio company exits during the quarter, they included some of the larger names such as St. George Logistics, which has previously the largest portfolio company at 8% of the total portfolio by fair market value. Our investment in St. George provided a 12.4% realized IRR over its 4-year hold period. With many of the more concentrated investments now exited, we anticipate that the repayment impact of any single issuer on NII to be more muted going forward.

We have ample leverage capacity as we pursue disciplined portfolio growth. We are confident we can identify compelling new opportunities that will be accretive to NII and drive solid risk-adjusted returns for our shareholders. We expect rising interest rates to be accretive to the company's NII. 99% of the debt investments in our portfolio have a floating rate coupon of which 92% have a LIBOR or SOFR floor with a weighted average floor of 1%. As these rates rise above the floor level, we expect NII to increase by approximately $0.08 per quarter for every 100 basis points of benchmark rate increase, all else being equal.

Before I pass it over to Nik, I want to take a moment to thank Abby for her contributions as CFO and Treasurer of BCIC. As we previously reported, Abby plans to step down from her roles on May 6 to pursue other career endeavors. We wish her all the best. The Board has appointed Chip Holiday to serve as interim CFO and Treasurer, effective May 6. Chip is the Managing Director with the adviser having joined BlackRock in 2005. Chip is well-qualified to step into this role and we have the utmost confidence in his abilities. I'll now turn the call over to Nik Singhal to discuss our portfolio activity in further detail.

Thank you, Jim. We have effectively completed the derisking of our portfolio and are continuing to build a diversified bulk of primarily first-lien investments. During the first quarter, substantially all of our new deployments were in first-lien investments consistent with this strategy. With respect to originations, we had gross deployments of $44 million in the quarter, primarily across 9 new and 6 existing portfolio companies with approximately 83% of the investment dollars going to new portfolio companies and the remaining 17% into existing relationships. Repayments during the quarter were $79 million. As Jim mentioned, this happened to be across 3 large names in the portfolio, leading to an elevated number for the quarter. As a result, these repayments, our total portfolio size declined quarter-over-quarter. Our pipeline of opportunities is healthy and we continue to source opportunities from a wide range of industry sectors.

In the second quarter so far, we're seeing good deployment momentum. While there can be no assurances that all transactions will close quarter-to-date, Investment Committee approved transactions totaled approximately $55 million. The details of all of our investments this quarter can be found in the earnings release with our more prominent investments, including the following: $9.4 million SOFR plus 6% first-lien term loan and $1.4 million of unfunded commitments (inaudible) provider of recycled wood pallet solutions. $7.9 million SOFR plus 8.5% first-lien term loan with an additional $7.3 million unfunded term loan as well as equity warrants to elevate brands, a consolidator of small-to medium-sized brands that sell through Amazon's third-party platform. $4.7 million SOFR plus 6.5% first-lien term loan and a $6.7 million unfunded term loan to Greystone Select company, a real estate investment firm. Importantly, BlackRock funds, including the company, were the sole lenders in 2 of these investments highlighting the benefits to the company of proprietary access to deals from BlackRock's scaled platform.

As previously announced, on April 21, 2022, we accessed the private placement market to issue notes in an aggregate principal amount of $92 million. These notes have a funding date of June 9, 2022. We anticipate using the proceeds from the notes as well as availability under our revolver, redeem our outstanding $144 million convertible debt which is maturing on June 15, 2022.

We are pleased with the execution we obtained on the notes, including the pricing and prepayment features, which are disclosed in our prior filings. We simultaneously entered into an interest rate swap to effectively convert the $35 million fixed rate tranche into a SOFR-based branch for the first 3 years of its life. Our core deployment focus is consistent with our objectives of stable income and low NAV volatility. We are optimistic about our ability to grow our portfolio this year given the broad funnel of opportunities that our extensive platform provides. We will continue to do so in a disciplined manner. And as a result, we expect to gradually increase leverage to more normalized levels over the next several quarters. We believe that this will enable us to grow NII with the goal of eventually having our core earnings fully cover our dividend which we declared a $0.10 per share in cash for the sixth quarter in a row.

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

Thank you, Nik. I'll take a few minutes to review some additional BCIC financial results for the first quarter. Before I get into the results, I want to thank Jim for his kind words. I have thoroughly enjoyed working with the entire team for the past 5 years and will help to ensure a seamless transition. Now to the financial results. GAAP net investment income was $6.5 million or approximately $0.09 per share, up 9% from the prior quarter. GAAP NII covered 88% of the $7.4 million distribution to stockholders, an increase from 80% coverage in the prior quarter. Included in the first quarter results was a reversal of $0.5 million in capital gains incentive fee previously accrued.

With such reversal at March 31, 2022, the balance of the accrued incentive fee on capital gains was approximately $1.1 million under a hypothetical liquidation basis required by GAAP. However, it should be noted that incentive fees on capital gains only become payable to the extent that realized capital gains exceed realized and unrealized capital losses from the annual measurement period ending June 30, 2022. For the 9-month period ended March 31, 2022, realized capital gains did not exceed realized and unrealized capital losses. Excluding the reversal of previously accrued capital gains incentive fee, adjusted NII was $6.0 million or $0.08 per share. Total gross investment income was $12.2 million, a slight decrease from $12.6 million in the prior quarter due to the net repayments in our portfolio.

During the quarter, the company also had fees and other one-time income of approximately $0.7 million or $0.01 per share. Total net expenses decreased by $1 million quarter-over-quarter. Excluding the impact of the capital gains incentive fee, expenses decreased by $0.3 million quarter-over-quarter. Net realized and unrealized losses were $1 million for the quarter, primarily attributable to the modest portfolio depreciation due to spread widening during the quarter. There were no new nonaccrual investments during the first quarter. At the end of the first quarter, the portfolio had 3 nonaccrual investments, representing 4.4% of total investments at fair value, relatively consistent with the December quarter-end.

Our weighted average internal portfolio rating at fair value also remained relatively consistent for the quarter of 1.25 compared to 1.21 at the prior quarter end and improved from 1.72 compared to the March 2021 quarter-end, demonstrating the robust portfolio credit quality and portfolio construction. At quarter-end, we had a strong liquidity position of approximately $248 million between available funds under our credit facility and cash on hand. Our net leverage ratio was 0.46 times, down from 0.56 times at the end of 2021 due to the net repayments during the quarter.

As Nik mentioned, we expect to gradually return to normalized leverage levels as we continue to deploy capital and selectively grow our portfolio over time. Additionally, we expect that the issuance of our unsecured notes during the second quarter will further optimize our cost of capital. During the first quarter, we repurchased approximately 106,000 shares of our stock for $440,000 at an average price of $4.14 per share including brokerage commissions. As of March 31, 2022, approximately 7.8 million shares remained available for repurchase under the current buyback program.

As announced earlier this morning, we declared a quarterly distribution of $0.10 per share payable on July 7, 2022 to stockholders of record at the close of business on June 16, 2022. With that, I would like to turn the call back to Jim.

Thank you, Abby. In closing, we continue to strengthen our financial foundation, emphasizing 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, first question, can you talk about the investment pipeline in real time for both the volume of origination on the market and the terms of the spreads and covenants and so forth, if any of that is migrating.

Thanks, Fin. I would say, obviously, the Q4 was a pretty significant flow and was, I call it, a very busy year-- end of the year of 2021. There was a bit of a slowdown in January and early February. We've started to certainly see things pick up, both on the M&A volume as well as refinancing activity across the overall portfolio of companies within our own book as well as within the market. So we see it as actually picking up pretty significantly relative to the early part of the quarter or the year and a little bit more similar to last year.

From a terms perspective, obviously, there's a lot more volatility in the public markets, and that takes a while and usually comes with a lag into the private markets. If you thought about last year, we were a little bit more concerned about the degradation of structure and documents. I would say, as we start to see the volatility in the market, we view that as an opportunity. Pricing does often up a bit, which is an opportunity for us to deploy structures and discipline in the market are getting better right now. So with regards to our leverage numbers right now, we actually think we're in a really good position with a pretty robust calendar to deploy into the rest of the year here.

Great. That's helpful. And on that matter, on the St. George repay, obviously good news. Additionally, does that exit drive any portfolio allocation benefits where the BDC would get better share given the more open, less concentrated, etc., portfolio?

Yes. It's consistent with, obviously, where we've gone with the overall book and trying to add resiliency at the aggregate level. First and foremost, the underwrite to the underlying issuers from a credit quality and structure and protection is our first line of defense. The second is really the diversification. And so as you know, we've moved from deploying in more concentrated fashion in that 5% to 8% like (inaudible) was into kind of more core positions in that 1.5% to 2% and with regards to the engine that we have from an origination standpoint, we've been able to do that clearly with regards to the name count that we've had in the book. So you'll see us taking that repayment from St. George and really kind of being more consistent with what we've been doing over the course of the last 2 years and redeploying that into more core positions of 1.5% to 2% and just continue to increase the diversification across the book.

Okay. And just a final question if I may on portfolio, company performance in the environment with a little more inflation, supply chain, etc., type if issues. Are you seeing anything yet overall or within certain sectors on headwinds to what you underwrote to and so forth.

Yes. Fin, thanks for the question. This is Nik. The way our underwriting philosophy is primarily to avoid structures which are overleveraged avoid businesses which have reliance on commodity prices and also businesses that are labor-intensive or do not have the ability to pass on cost increases. And I think that's the primary reason why our portfolio held up very well in 2021. And even in Q1, we have no new nonaccruals. As we do our portfolio reviews across entire portfolios, BDC and outside of the BDCs, there are situations where we do see margin pressure a little bit on the margin, especially in companies where the labor component might be a little bit higher. In most of our portfolio companies, we're seeing a very good ability to pass through those cost increases, but inflation is here. It's real. And our goal has been and will always be to avoid companies that are at risk of getting disrupted when the cost structure goes upside down.

Next question will come from the line of Melissa Wedel with JPMorgan.

Following on your answer just there, Nik, I'm curious if some of that margin pressure that some of the portfolio companies are seeing was related to a shift in the grade 1 levels versus grade 2? Just looking at the Q, grade 1 came down quite a bit. I'm assuming most of that was just driven by the exit of St. George and then grade 2 came up a little bit. I was just hoping to kind of dig into that a little bit and understand what you're seeing in the portfolio that might be driving those incremental changes?

Yes. That is a great question. First of all, you're absolutely correct that a lot of that migration was not a huge migration. It's a very tiny migration. Basically, arose from St. George exiting which was a one-weighted name. And obviously, when the denominator goes down, the percentage of 2 weighted names go up. I think the very small number of migrations we had were really idiosyncratic issues. In our portfolio, we are really not seeing any systemic credit concern arising from margin compression and again, to reiterate, I think that's really just a function of our core philosophy voiding situations that do not have pricing power cannot pass through inflation or just overlever-- overall, I would say, broadly speaking, our loan to values are very conservative with very strong equity support behind us in our portfolios. And I would also add that, look, our focus really has been in transitioning our book to first-lien, which is now 72% of the portfolio and that further adds to the resiliency in the book.

Okay. Got it. I appreciate that. And then I'm not sure if I missed it. On the St. George exit, did that drive any particular outside repayment fees or income?

Abby, can you chime in here?

Melissa, this is Abby. Thank you for the question. Yes, it did drive a little bit of one-time fee income. And just to recall for the quarter, the total onetime fee income or other onetime income as up to approximately $0.01 per share impact.

Got it. And then final one for me. I appreciate the insight into at least the amounts that have been approved by the Investment Committee quarter-to-date and definitely appreciate that a lot of repayment activity doesn't necessarily come with a lot of core sight or visibility into that. Is there anything that you are aware of at this point that we should be thinking about in terms of future repayments that might be more sizable and impact the portfolio like we saw in the March quarter?

Yes. Melissa, so I would say, just in a normal course, right. I mean there is -- there are always some repayments every quarter. When you look at the long-term historical sort of performance or average core sizes have tended to be 2 to 3 years on average. So we don't expect that to change. If anything, in a rising rate environment, refinancing probably become slower. And then the other benefit of sort of having St. George and just incidentally, the 2 other names that exited were also larger positions that-- to the extent there are future repayments, their impact is going to be more muted. We haven't had any repayments in the quarter so far, okay. There's always buzz around one or 2 names that may refinance sometimes the sponsor will give us feelers as the business grows, cost of capital becomes lower and they have the opportunity to do that, but nothing significant that we are aware of right now.

All right. It looks like we have no further questions at this time. So I'd like to turn it back over to our speakers for any additional or closing remarks.

Thank you and thanks Melissa, for the questions. With that, obviously, we are seeing a lot of volatility in the market. We do think we're positioned well to kind of deploy into this and set up to continue to ramp the portfolio leverage up and continue to grow NII. So I appreciate everybody's support on the call and a huge thank you as well to our team as we've continued to fully get through the transition of the overall portfolio. And with that, we can end the call.

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