BlackRock Kelso Capital's CEO Discusses Q1 2013 Results - Earnings Call Transcript

May. 2.13 | About: BlackRock Kelso (BKCC)

BlackRock Kelso Capital Corp. (NASDAQ:BKCC)

Q1 2013 Earnings Call

May 2, 2013 4:30 pm ET


James R. Maher – Chief Executive Officer

Laurence D. Paredes – Senior Vice President, General Counsel

Michael B. Lazar – Chief Operating Officer

Corinne Pankovcin – Chief Financial Officer, Treasurer


Troy L. Ward – Keefe, Bruyette & Woods, Inc.


Good afternoon. My name is Ginger and I will be your conference facilitator today. At this time, I would like to welcome everyone to the BlackRock Kelso Capital Corporation Investor Teleconference.

Our hosts for today’s call will be Chairman and Chief Executive Officer, James R. Maher; Chief Operating Officer, Michael B. Lazar; Chief Financial Officer, Corinne Pankovcin; and Secretary of the Company and General Counsel of the Advisor, Laurence D. Paredes. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session (Operator Instructions).

Thank you. Mr. Maher, you may now begin the conference.

James R. Maher

Welcome to our First Quarter Conference Call. Before we begin, Larry will review some general conference call information.

Laurence D. Paredes

Thank you, Jim. 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 the fact that BlackRock Kelso Capital Corporation’s actual results may differ from these statements. As you know, BlackRock Kelso Capital Corporation has filed with the SEC reports, which lists some of the factors which may cause BlackRock Kelso Capital Corporation’s results to differ materially from these statements. BlackRock Kelso Capital 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 Kelso Capital Corporation makes no representation or warranty with respect to such information.

Please note that we have posted to our website an investor presentation that complements this call. Shortly, Jim and Mike will highlight some of the information contained in the presentation. At this time, we would like to invite participants to access the presentation by going to our website at, and clicking the May 2013 Investor Presentation link in the Presentation section of the Investor Relations page.

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

James R. Maher

Thanks, Larry. Good afternoon and thank you for joining our call today. The first quarter was a difficult environment for making new investments. We invested $46 million, while sales repayments and other exits totaled $104 million. Our net portfolio decreased by $55 million in the first quarter.

For the first quarter, our adjusted net investment income was $0.22 per share bringing our trailing fourth quarter’s adjusted net investment income to $1.04 per share. On a trailing four quarters basis, we continue to cover our dividend paid of $1.40 per share on our adjusted net investment income.

We work very hard to deploy capital and not substantially change the risk profile of the portfolio. This effort remains a big challenge from this heated credit market environment and which many of our successful investments were repay or exited, the environment of sustain near zero interest rates has fueled continued and increasing demand for higher yielding assets and for risks assets more generally. Despite this our weighted average yields increased to 12.4% from 12.2% last quarter. During the first quarter new issued leverage loans climbed to a post credit crunch high of $185 billion, from $137 billion in the fourth quarter of 2012. The last time volume was higher was in the second quarter of 2007, when a record $188 billion was completed.

New private equity transaction activity continues to remain slower than market participants including us had expected. As a result supply of capital exceeded demand. The excess supply continues to be directed to other types of transactions such as issuer friendly opportunistic loan repricings, upsizings, and dividend recapitalizations for higher leveraged levels and weaker credit protection. For example, covenant light volume during the first three months of 2013, accounted for 57% of new issued institutional loan volume and our all time high in both dollars and as a percentage of all new loans. Net bills on a prior peak of 40% established in the prior quarter.

As the supply demand and balance continued in the first quarters, leverage widened on middle market credits to a record high of 5.1 times from 4.5 times in the fourth quarter.

Without new middle market M&A transactions increased supply many lenders jumped into senior only refinancing that took out mezzanine debt or funded dividends to sponsors. Given the current market conditions, and our focus on capital preservation we continue to be highly selective.

We continue to avoid transactions were deal structures are weak. Leverage is too high and returns are not adequate to appropriate weak compensate us for risks. Since quarter end, we’ve experienced some portfolio repayments, which have contributed to a reduction in our overall portfolio this quarter to date. We have several transactions in our current investment pipeline, and our expectation is for positive quarter overall for net investment. We have plenty of debt capacity to grow our portfolio without needing to issue additional equity capital. At quarter end, we had more than $330 million available under our revolving credit facility.

As we discussed on our last conference call, during the quarter we increased commitments and extended the maturity of our revolving credit line. In addition, we closed $115 million convertible notes offering.

Mike will now discuss our results in portfolio activity in more detail.

Michael B. Lazar

Thank you, Jim. Good afternoon and thanks for joining our call today. Please to have the opportunity to talk about some of our financial results and to discuss portfolio strategy. And in advance of the conference call we posted our quarterly investment presentations of the website and financial section of our presentation starts on page 8.

As we anticipated, we experienced in excess of $100 million of portfolio repayments driven by an elevated demand of liquidity in the markets, which is contributed to a net reduction in our overall portfolio for the quarter.

With respect to the operating details, our portfolio generated investment income of $31.1 million for the first quarter compared with $37.9 million for the quarter ended December 31. The components of the $6.8 million difference between these two periods were interest income is and dividend income. Of these interest income was $2.6 million of the difference and resulted from a smaller portfolio in the first quarter relative to the portfolio size in the fourth quarter. Average balance of our total investments at amortized costs is slightly above $1 billion during the current period. Fee income was $1.6 million lower this quarter, fee income tends to be relatively consistent for our business on an annual basis, although at times it maybe somewhat lumpy from quarter-to-quarter. In the first quarter, we received a nominal amount of dividend income, included in the fourth quarter net investment income was at $2.5 million special cash dividend related to our investment in M&M Holdings.

Total expenses for the three months ended March 31, were $18.2 million compared to total expenses for the three months ended December 31 of $29.6 million. Normalizing for the timing of incentive fee payments based on income and we’re moving the incentive management fee accrual based on capital gains, total expenses for the three months ended March 31, were $15 million compared with $17.8 million for the fourth quarter. The significant quarter-over-quarter difference was pro forma incentive fees, which were $3.5 million lower this quarter. Base management fees were also lower in the first quarter compared with the fourth quarter of last year.

The 2013 actual expense amount of $18.2 million includes $3.7 million in incentive management fees accrued based on hypothetical capital gains calculation required by GAAP. The hypothetical fee calculated and accrued is not doing payable, if at all till the end of each measurement period or every June 30.

Interest and credit facility related expenses were $4.8 million during the first quarter. Interest expense reflects average debt outstanding of approximately $330 million and weighted average cost of 5.45%.

Going forward additional borrowings will be drawn under our new revolving credit facility, which is priced to LIBOR plus 250. Adjusted net investment income of $16.1 million in the quarter compares with $20.1 million in the fourth quarter and equated to $0.22 per share. With respect to investment activity, we invested $46 million during the three months ended March 31 and $290 million over the last four quarter period. Some of the more significant investments made during the quarter where as follows.

During March 2013, we invest an additional $18 million in an upsizing of the TriMark second lien term loan. As part of the transaction, the coupon was increased by 150 basis points to 13%. This brings our total investment to $51.4 million at par. The new investment in TriMark supports the company’s acquisition of strategic equipment, the fourth largest market participant.

During the quarter, we made additional investments in Attachmate second lien term loan and the 12% senior secured notes of American Residential Services. In conjunction with the investments we made this quarter we’ve recorded fees and discounts of $1 million. We’ve also recognized $1.9 million in fees and prepayment penalties in conjunction with exits.

Sales, repayments and other exists of investments totaled $104 million during the three months ended March 31. Some other significant repayments included $52.5 million of par amount of Ashton Woods second lien term loan, $25.8 million par amount of Sarnova subordinated debt, $14.7 million of Source Corp senior secured second lien loan, $10 million of par amount of Advantage Sales & Marketing senior secured second lien loan. In the aggregate these exited transactions produced cash-on-cash return or IRR in excess of 14%. The weighted average yield of the debt and income producing equity securities in our portfolio at its current cost basis, 12.4% for the quarter ended March 31. This is comprised of an 11.5% yield on our senior secured loans and the 13.6% yield on our other debt securities at cost basis.

We had no investments on non-accrual at quarter end, since year-end we’ve been actively engaged in the restructuring of two portfolio companies. We originally expected at least one of these transactions would result in a non-accrual as of the end of our current first quarter of 2013. Neither of the two restructuring transactions had been completed by that date and each portfolio company earned its interest and other income during the first quarter. One of these transactions has in fact completed its restructuring in April and as a result we’ve exchanged certain debt securities for new debt and preferred equity securities, which will have an effect on our interest and dividend income during the upcoming June quarter. Including these transactions the weighted average rating of our portfolio company’s at March 31 was 1.21 compared to 1.20 on December 31.

I would now like to turn the call over to Corinne to review some of the GAAP financial information for the first quarter.

Corinne Pankovcin

Thanks Mike and hello everyone. I will now take a few moments to review some of the other details for our 2013 first quarter financial information. At March 31 2013 our portfolio consisted of 44 portfolio companies and with invested 49% in senior secured loans, 21% in senior secured notes, 16% in equity investments, 14% in unsecured and subordinated debt securities, and less than 1% in cash and cash equivalent. Although no new equity investments were made during the quarter, the composition of our portfolio invested in equity securities increased due to the appreciation in existing equity investments.

Our averaged portfolio company investment at amortized costs excluding investment below $5 million was approximately $27.6 million at March 31, up from $26.9 million at year end. For the quarter ended, the net increase in net assets from operations was $29.8 million or $0.40 per share compared to $1.7 million or $0.02 per share for the quarter ended December 31.

Our net asset value was $9.31 per share at year end, and increased to $9.47 per share at the end of the first quarter. During February 2013 we close a private offering of $115 million of our 5.5% unsecured convertible senior notes. During the quarter we also amended and extended the maturity as well as increase the commitments under our revolving credit facility. Currently we have available commitments of $350 million, which may under certain circumstances be increased to $750 million under an “accordion” feature.

The interest and credit facility related expenses were $4.8 million for the three months ended March 31, 2013. At March 31, we had approximately $305 million of net debt outstanding and $333 available for use under our revolving credit facility. Relative to our $1 billion portfolio at fair value, we continue to have ample debt capacity to deploy in an attractive investment opportunity.

At March 31, we were in compliance with regulatory coverage requirements with an asset coverage ratio of 327% and we’re in compliance with all financial covenants under our debt agreement. Our leverage stood at 0.44 times at the quarter end, a reduction from 0.5 times at year-end providing us with regulatory debt capacity of $391.5 million at March 31.

For the three months ended March 31, the change in net unrealized appreciation or depreciation on investment and foreign currency translation was an increase in net unrealized appreciation of $16.6 million. Net unrealized appreciation was $37.4 million at March 31, 2013. Much of the net appreciated related to equity investments in companies with improving performance.

For the three months ended March 31, we were pleased with the improved overall health of our investment portfolio.

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

James R. Maher

Thanks Corinne, our watch word for the current investment environment is patience. We’re focused on growing our portfolio prudently with a continued focus on capital preservation. We’re also focused on our continued dividend coverage and remain comfortable about the level of our dividend as we look into the remainder of the year.

On behalf of Mike, Corinne, Lary and myself I’d like to take this opportunity to once again thank our investment team for all their efforts to thank you for your time and attention today.

Ginger would you now please open the call for questions

Question-and-Answer Session


(Operator Instructions) We do have a question from the line of Troy Ward from KBW.

Troy L. Ward – Keefe, Bruyette & Woods, Inc.

Good afternoon guys.

James R. Maher

Hey, Troy.

Troy L. Ward – Keefe, Bruyette & Woods, Inc.

Real quick, some of the commentary you made on the market specifically with respect to the leverage and things like that. Can you provide just a little bit of bifurcation on how much of that you see are in the more syndicated institutional market versus the middle market, and how pervasive do you think some of things are becoming in what we consider the kind of the traditional middle market?

James R. Maher

Sure. A lot of the data that we use to track the market, when it gets put together and aggregated in the way that’s useful to communicate as Troy, it comes from S&P’s LCD and another outside sources. That those statics that we refer to in the call tend to be the market cut by companies with EBITDA of less than $50 million.

So this is already a self selection for a smaller less syndicated more club transactions within there. Having said that not every transaction that we review in fact probably less than half of the transactions that we review end up in that data set. For generally speaking as yield assets are becoming more and more difficult for traditional asset managers to source they’re beginning to step into smaller club like, smaller syndicated and smaller range transactions. We see this most particularly in the first quarter and loan structured deals as opposed to fixed rate structure deals. And I think that’s just because there is so much of a robust environment right now, in terms of inflows into funds that our meant to put money into floating rate assets.

Troy L. Ward – Keefe, Bruyette & Woods, Inc.

Okay, and then, with the originations that you did accomplish in the quarter the 46 obviously it’s lower but we understand it’s a lumpy business and we want our managers to quite obviously be able to pull back the warrants, they don’t see the right deals, but it’s seem like what you did get accomplish was much more focused towards add-ons, something it was already in your portfolio, is there an incumbency there where you were able to drive their terms or were that just kind of a function of one quarter and maybe not a complete trend?

James R. Maher

I would suggest that there is a little bit of both of those attributes in what happened, it’s very difficult to extrapolate one quarter into too much of the trend, but certainly, on the transactions that we did participate in this quarter incumbency was a very important part of our ability to structure and invest in what we believe are good risk adjusted assets and in an environment where those things are difficult to come by.

Michael B. Lazar

I think you will see some of that again in the second quarter also.

Troy L. Ward – Keefe, Bruyette & Woods, Inc.

And then, further to your comments about your comfortably with the dividend and still getting to those type of levels for the remainder of the year. What assumptions does are embedded in that statement with regard to portfolio growth.

Michael B. Lazar

It’s a combination of portfolio growth turn over in the portfolio, because as you will know these are important part of our dividend coverage certainly lower in the first quarter, and we expect that to be different higher in the second quarter. And that’s important component there, I think we can achieve dividend coverage again we have to make some assumptions about turnover these and so forth with modest growth in the part of portfolio.

James R. Maher

I mentioned in the prepared remarks just add to that we had a special dividend paid in the fourth quarter by one of the companies in which we’re in equity participant. Also separately in the prepared remarks Corrrine mentioned that the equity portion of our overall portfolio value has increased and that’s not because we’re making new equity investment that’s because there is value increases there and while we can’t make assurances obviously, it would not be unreasonable to think that some of our additional equity positions maybe in a position over time to begin paying dividends.

Troy L. Ward – Keefe, Bruyette & Woods, Inc.

Great, you just answered my final question. Thanks guys.


(Operator Instructions) Currently there are no further questions at this time.

James R. Maher

Well, once again thank you for joining us today and as I always like to say we’re available to answer any questions that come to mine. Thank you.


Ladies and gentlemen, this does conclude today’s conference call. Thank you for participating. At this time, you may now disconnect.

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