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BlackRock Kelso Capital Corporation (NASDAQ:BKCC)

Q1 2010 Earnings Call Transcript

May 6, 2010 4:30 pm ET

Executives

Jim Maher – Chairman and CEO

Frank Gordon – CFO

Michael Lazar – COO

Analysts

Greg Mason – Stifel Nicolaus

Arren Cyganovich – Ladenburg

Jasper Birch – Macquarie Capital

Chris Harris – Wells Fargo Securities

Jim Ballan – Lazard Capital Markets

Operator

Good afternoon, my name is Christian 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 host for today’s call will be Chairman and Chief Executive Officer, Jim R. Maher; Chief Operating Officer, Michael B. Lazar; and Chief Financial Officer, Frank D Gordon.

All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. (Operator instructions) Mr Maher, you may begin the conference.

Jim Maher

Thank you, Christian, and welcome to our first quarter conference call. We will begin by having Frank review some general conference call information.

Frank Gordon

Thank you, Jim. Before we begin our remarks today, I would like to point out that during the course of this conference call, we may make a number of forward-looking statements. 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 list some of the factors, which may cause BlackRock Kelso Capital Corporation’s results to differ materially from these statements. Finally, BlackRock Kelso Capital Corporation assumes no duty to and does not undertake to update any forward-looking statements.

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

Jim Maher

Thank you, Frank. It is great to have the opportunity to speak to you about our first quarter results. Our first quarter performance was strong, 2010 has had a good start and I expect a productive year for BlackRock Kelso Capital.

Our portfolio continues to produce strong investment income. I am very encouraged by the improving economic environment and its impact, positive impact on our investments. We are seeing more and more investment opportunities, and we continue to actively manage our existing portfolio.

As I mentioned last quarter, during 2009 we exited several investments with either low interest rates or significant tech interest features. This continued in the first quarter of 2010. We generated more than $70 million in additional cash, and further reduced our leverage during the quarter. We finalized the first stage of our credit agreement amendment extending a significant portion of our debt maturities by three years.

For the quarter, we had net investment income of $0.36 per share. Net investment income is adjusted for incentive fees equalled $0.30 per share. Yesterday, our Board of Directors declared a regular second quarter dividend of $0.32 per share. This dividend is consistent with the company’s first quarter dividend, and is supported by net investment income.

The volume of new transaction opportunities began to increase late last year; this increase has been sustained and is accelerated into the second quarter of 2010. Importantly an improvement in the quality of actionable opportunities has been evident. Solid businesses that had performed well in the most recent cycle are now seeking capital for new transactions.

Portfolio valuations continued to improve during the first quarter. During the quarter ended March 31. 2010, the investment portfolio increased in value by $10.2 million. We attribute this increase to stronger general economic conditions, a contraction in market interest rates and credit spreads, and specific efforts made at certain portfolio companies to improve balance sheet and reduce debt. The effects of cost reduction programs put in place by many of the portfolio company’s management teams are also having a positive impact on profitability and valuations.

Our balance sheet remains very conservatively positioned. Net debt stood at less than $250 million on March 31. Our statutory BDC asset coverage tests stood at less than 0.5 to 1. We are pleased that we have completed our credit facility extension and would especially like to thank our banking partners of Citi, Bank of America, UBS, and Credit Suisse for their support. Access to equity and debt capital will allow us to resume and sustain our profitable growth into the future.

Net asset value increased again during the first quarter and now stands at $553 million that equates to $9.77 per share, up from $9.55 per share at year-end, and $9.04 per share last March 31. We believe that the current investment environment provides us with an attractive opportunity to put capital work at rates that are accretive to our net investment income. There continues to be attractive investment opportunities available in the middle market, and fewer capital providers to middle market companies.

We are excited to have the capital resources and disciplined investment process in place to take advantage of these opportunities. We remain conservatively positioned for the long term. Our balance sheet is solid and we believe that we have the financial flexibility to profit from the improving market, and economic environment through 2010 and beyond.

Mike will now discuss our portfolio activity, and market conditions in more detail.

Michael Lazar

Thank you, Jim. I am pleased to have the opportunity to speak with you about the portfolio and current market conditions today.

Portfolio activity increased in the first quarter and into the second quarter both for portfolio repayments and exits as well as for our review of new investment opportunities. We completed several follow-on investments in existing portfolio companies during the first quarter, and are currently working on multiple investment opportunities that we sourced during the first quarter. While we cannot make assurances about which transactions will ultimately close, we do have an active pipeline and hope to close several transactions in the next few months.

We are very optimistic about our current deal pipeline in the current origination environment. During the first quarter, we reviewed both new investment opportunities and follow-on investment opportunities for several of our existing portfolio companies. Portfolio acquisitions during the first quarter totaled $16.4 million, all in existing portfolio companies. This activity was once again focused on investments in portfolio companies to improve their capital positions or advance our position in our capital structure.

Repayments of investments equaled $72.7 million during the quarter. Since quarter end, we have exited several additional investments totaling $144 million. This includes our investment in advantage sales and marketing PIK notes together with the exit of other securities including our investment in the PIK notes of (inaudible) transportation company in the first quarter, more than $110 million of non-cash interest bearing securities have been removed from our balance sheet.

The current investment environment is attractive. While the market has been more actively recently, new transactions are more conservatively capitalized, have lower levels of leverage, and higher levels of debt coverage. Lenders are provided better protections and higher credit spreads. In addition to these general market trends, we continue to find that the middle market offers the most attractive overall investment profile. The middle market lending environment remains characterized by lower leverage multiples of cash flow. New debt investments in today’s transactions are markedly more conservative than transactions structured under the prevailing market conditions of 2007 and 2008.

Middle market debt investments continue to have better loan to value coverage than is available in the more liquid credit markets. There are fewer market participants in both the middle market and in the liquid credit markets today than two years ago. This continues to yield improved all end return opportunities for us. Our portfolio continues to be very well positioned for the economic environment. At quarter end, our portfolio consisted of 55 companies and was 60% invested in senior secured loans and 6% invested in senior secured notes. At the end of the first quarter, 7% of our portfolio was invested in equity securities and less than 1% in cash and cash equivalents. The remainder of the investment portfolio or approximately 26% was comprised of unsecured or subordinated debt securities.

Portfolio valuations once again improved overall during the quarter. The total portfolio experienced appreciation net of reversals of approximately $10 million during the quarter and our net asset value increased approximately $57.4 million since its low on March 31, 2009. At March 31, 2010, our portfolio was valued at 84.1% of cost an increase from 80.3% of cost at year-end and from the June low of 72.9% of cost. We are pleased that the performance of our portfolio companies continues to be strong. At March 31, 2010, 2.1% of our total debt investments at fair market value were on non-accrual status. The fair value of these assets is $15.9 million at March 31 compared with $27.9 million at December 31.

The cost basis of our debt investments on non-accrual was $46.3 million, were 5.3% of amortized cost at quarter end. This slight decrease in non-accruals is the net result of no new securities having been placed on non-accrual, two securities removed from non-accrual, and a smaller total portfolio. During the first quarter, our weighted average yield on income producing securities increased to 11.6% from 11.2% at the end of the fourth quarter. At quarter end, the company was in compliance with regulatory coverage requirements with an asset coverage ratio of 311% was in compliance with our financial covenants under its credit facility. At quarter end, we had net borrowings of approximately $254 million.

At the end of the quarter and subject to leverage restrictions, we had more than $298 million of cash equivalents and borrowing availability under our senior credit facility. Since quarter end, we have reduced our debt balance even further. As of May 5, debt outstanding on our credit facility was down to $245 million. Last month, we entered into an agreement to amend our credit facility. The amendment extends lender’s commitments totaling $300 million for more than three and a half years from today through December 2013. The extended commitments consist of $200 million of revolving loan commitments and $100 million of term loan commitments. Subsequent to the amendment becoming effective, we added a new lender to the facility with revolving loan commitment of $50 million. The addition of this commitment will bring the total extended commitments to $350 million and the total current commitments to $595 million.

Non-extending lender commitments of $245 million mature on December 6, 2010 unless they are extended prior to that date. Pricing for borrowings made by non-extending lenders will remain at LIBOR plus seven-eights for revolving loans, and LIBOR plus one and one-and-a-half percent for term loans. The pricing for outstanding borrowings made by extending a new revolving credit lender is now LIBOR plus three percent or three and one quarter percent based on our pricing grid. Extended term loans are priced at LIBOR plus three percent.

On May 5, 2010, the effective LIBOR spread under the credit facility was 2.34%. The credit facility includes an accordion feature that allows us to increase the size of the facility by up to an additional $550 million of commitments. Going forward, we expect to approach new lenders to solicit additional commitments to our credit facility.

With respect to exits, since 2006 we have exited 43 investments of which 41 have been exited for proceeds that exceeded the fair market value in our most recent financial statements. We took the opportunity to realize some losses in the first quarter, a portion of which may offset income and reduce the amount of any excise tax payable for 2010. Realized losses of approximately $43 million were matched by a like amount of net unrealized depreciation reversals.

With that I would now like to turn the call over to Frank Gordon to review some of the GAAP financial information for the quarter.

Frank Gordon

Thanks, Mike, and hello everyone. I will now take a few moments to review some of the details of our first quarter 2010 financial information.

Net investment income totalled $20.3 million or $0.36 per share for the three months ended March 31, 2010. This compares with net investment income of $23.8 million or $0.43 per share for the three months ended March 31, 2009. The decrease in investment income primarily reflects a reduction in the size of our portfolio due to sales and repayments as well as the impact of lower levels of LIBOR on our floating rate debt investments.

This quarter, we are introducing certain non-GAAP financial measures intended to address the concentration of our incentive fees in the fourth quarter of each year as occurred in 2009. These measures reflect the application of the formula for computing incentive fees to each quarter’s results rather than on a trailing four-quarters basis. Should conditions remain relatively stable through the end of the year, the estimated incremental incentive fee reflected in our as-adjusted results may become due in the fourth quarter.

Net investment income as adjusted totaled $16.8 million or $0.30 per share for the three months ended March 31, 2010 compared to net investment income as adjusted of $19.1 million or $0.35 per share for the three months ended March 31, 2009. Total expenses for the three months ended March 31, 2010 were $7.5 million versus $8.1 million for the three months ended March 31, 2009. The decrease in expenses is largely due to lower interest expense and base management fees in 2010.

Total net realized gain or loss for the three months ended March 31, 2010 was a loss of $42.4 million versus a gain of $2.1 million for the corresponding 2009 period. The net realized loss in investments resulted primarily from the restructuring of our investment in Penton Media Inc. and Arclin US Holdings Inc. Nearly the entire net realized loss on investments represents amounts that had been reflected in net unrealized depreciation on investments in prior periods.

For the three months ended March 31, 2010, the net change in unrealized appreciation or depreciation on the company’s investments and foreign currency translation was a decrease in unrealized depreciation of $52.6 million versus an increase in unrealized depreciation of $29.9 million for the three months ended March 31, 2009. The decrease in unrealized depreciation on investments for the three months ended March 31, 2010 includes $42.5 million relating to reversals of prior period net unrealized depreciation as a result of investment restructurings and dispositions. Net unrealized depreciation was $155.3 million at March 31, 2010 an improvement of $52.6 million from the December 31, 2009 level of $207.9 million.

The valuations of our investments were favorably impacted by market-wide decreases in interest yields, as well as increases in multiples used to estimate the fair value of some of our investments. Market-wide movements and trading multiples are not necessarily indicative of any fundamental change in the condition or prospects of our portfolio companies.

The weighted average yield of the debt and income producing equity securities in our portfolio at their current cost basis was 11.6% at March 31, 2010 compared to an 11.2% at December 31, 2009. The weighted average yields on our senior secured loans and other debt securities at their current cost basis were 10.3% and 13.9% at March 31, 2010.

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

Jim Maher

Thank you, Frank. As we look forward from our first quarter results, we find that the business environment has stabilized, and our portfolio is performing well. We believe that BlackRock Kelso Capital is well positioned to return to actively growing our portfolio.

We have extended our bank credit facilities to December 2013, investment opportunities continue to increase, and we expect the environment to support our focus on originating restructuring new transactions. In short, we are in a position of strength to produce profitable growth in 2010 and beyond.

I would like to thank our team for their hard work and thank you for your continued interest in BlackRock Kelso Capital.

Christian, please open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question comes from the line of Greg Mason with Stifel Nicolaus.

Greg Mason – Stifel Nicolaus

– were those to new companies and what type of rates are you seeing on new investments today?

Michael Lazar

Hi Greg, it is Mike. I think you might have made a mute button on at the beginning of your question, we could not hear the front end of it.

Greg Mason – Stifel Nicolaus

Sure, I apologize; the $58 million that you had in new investments from April to May, can you talk about those, were those investment to new companies and what type of terms were you seeing on those investments?

Michael Lazar

I am not sure that we are in a position to disclose that at this point. There is a couple of transactions that are in the public purview, the largest one I mentioned in my remarks which was advantage sales and marketing that unfortunately the one which is public is, it is publicly known that it was refinance, but I do not think there is public information about all of the new investments that we have made yet.

Greg Mason – Stifel Nicolaus

Okay, can you talk just broadly about what you are seeing in the market then in terms of leverage multiples and rates of returns on new investments broadly?

Michael Lazar

Sure, I mean I can speak generally about it. It has been consistent for the last couple of weeks or months. The opportunities that we are most focused on at this point tend to be investments with expected total returns IRRs in a sort of low teens to mid teens depending upon where particular investment is in a particular capital structure. We are seeing that set of opportunities increase as deal activities continue to pick up at this time.

Greg Mason – Stifel Nicolaus

And then I know you mentioned on the $144 million of repayments from the end of the quarter, advantage sales and marketing looks like it makes up a third of that. The rest is that coming from refinancing activities or are you going out and purposely selling the investments, just trying to get a feel for an 18% type of repayment on your portfolio is pretty meaningful here.

Michael Lazar

Yes I think a good portion of that is sort of corporate activity or capital markets activity in terms of realizations, again, the most significant dollars is advantage sales and marketing. You know we do – there are other investments where we have been working with the equity owners of the business or with other people in the capital structure to try to create an exit opportunity.

Of course, in some cases, it is a recapitalization as I think through the various repayments that have happened so far this quarter; two of the more substantial ones other than advantage sales and marketing are capital markets activity or recaps that take out our loans. One is an equity market recap, the other one was a debt market recap. And then again, as I think it is out in the public domain, the advantage sales is a debt capital market recapitalization of our investment there

Greg Mason – Stifel Nicolaus

Okay, great, thank you. And then, one last question and I will hop back in the queue, on the two securities removed from non-accrual status, were those removed because they turned back to performing status or are they part of the realized loss during the quarter?

Michael Lazar

It is actually, I think, a mixed bag.

Greg Mason – Stifel Nicolaus

Okay, half and half.

Michael Lazar

I think the Q has some details about this but the two securities are part of an investment in the same company and one is now a current cash paying instrument, and one has been converted as part of a restructuring.

Greg Mason – Stifel Nicolaus

Great, thank you, gentlemen.

Operator

Our next question comes from the line of Arren Cyganovich with Ladenburg.

Arren Cyganovich – Ladenburg

I was wondering if you could maybe give me a little bit better feel for why there has been such a lack of new primary market transactions, and now that you have closed your credit facility – not closed but amended your credit facility out three years, do you feel that the primary market activity will start to increase now that there is a better sense of your funding going forward?

Jim Maher

I think there is no question, I think we made the point several times in our presentation, we are seeing a fair amount of actionable transactions and we, clearly as Mike said, expect to never say never but I think we expect to close on a number of those transactions in the near future and that a number of deals in the pipeline continues to grow. As always, this business can be a little lumpy, some transactions have been pushed off over time and it is not reflective of what we are seeing in the marketplace today.

Arren Cyganovich – Ladenburg

So it was not really a choice from your perspective of reducing –

Jim Maher

No, I think with the level of enquiry, the level of activity started to increase call it November of last year and has continued to increase. The life of one of these transactions is anywhere from two to four months. If you have to pick an average, an average gestation period, it is probably three months, and we are just hitting that period now.

Michael Lazar

Yes, this is Mike, just in terms of the timing of transactions which Jim was getting at there towards the end, if we saw an increase in opportunities sort of in the middle of the first quarter and towards the end of the first quarter, things that we really liked and had done a bunch of work on, our normal expectation is that of those transactions that eventually have a closing, they would be closing somewhere in the second to third quarter just based on how long it takes to complete the transaction. So there is an element of timing built into ramping up the investment activity for our firm.

Arren Cyganovich – Ladenburg

That is very helpful. And then finally, kind of getting back to Greg’s question about the repayment activity, and I know this also is pretty lumpy and it is hard to predict, but do you expect beyond what we have seen thus far a large amount coming forward again going over the next couple of quarters or is it just hard for you guys to predict that?

Jim Maher

I think the activity that we saw at the end of the fourth quarter and into the first quarter is likely to diminish going forward in the second, third and fourth quarter. It is very hard to predict because we do not – sometimes people make a decision to sell a business and we are not advised of that. But my guess is that that level of activity will decrease and probably decrease fairly significantly over the next three quarters.

Michael Lazar

I think this is – it takes about three to four months to complete a transaction, the same is true for a transaction that we are exiting as it is for making a new investment. These tend to be private companies there tend to be a process, tends to take a while for that process to come to completion. And so things that we started the process of exiting maybe at the end of 2009 and in the first quarter of 2009, many of those transactions came to pass here in the second quarter, and I would expect that this is going to be a pretty big quarter certainly we have mentioned it has been pretty big already for repayments, and again that goes just to the timeframe that it takes to typically complete one of the private transactions in which we are involved with both in a new investment as well as something that we are taking off the balance sheet.

Jim Maher

Yes, although we are not always aware when somebody is going to sell a business but we have pretty good visibility into what is going into our portfolio and I think the level of activity in terms of repayments at least in terms of our visibility is currently lower than what it has been year to date.

Arren Cyganovich – Ladenburg

Understood, thanks a lot.

Operator

Our next question comes from Jasper Birch with Macquarie Capital.

Jasper Birch – Macquarie Capital

Good afternoon guys, it is with Macquarie Capital. Just to go back to the pipeline and deal flow question, just wondering where are you seeing the deals coming from and what sort of usage? Is it all still recap? Are you seeing any, maybe six months down the road bio financing that you are working on, change of control, gross capital things like that?

Michael Lazar

Jasper, it is Mike, I think the answer to all of your questions is yes. We know we have a broad network for sourcing new transactions. We continue to be actively participating and calling on all types of companies and sources of deals in the middle market. We have an active sourcing effort and a lot of senior professionals here working on several transactions. It is always unclear at the front end, which will come to pass muster with us, get through our investment diligence process, and become an actionable investment opportunity, but you know the breadth of sources remains pretty wide.

We have relationships with banking firms, Wall Street firms; we have relationships directly with private equity sponsors in the middle market. Other folks who transact business whether it is lawyers, other finance companies, accounting firms, you name it, relationships with management teams, and we are seeing transaction opportunities come into our shop from all of those different sources, and they represent all the different kinds of transactions.

Thanking firms might be working on a preponderance of recapitalizations at the moment. Lawyers might come to us with private companies seeking to finance or somebody is trying to sell. Private equity sponsors, they are quite flush with cash at the moment and are looking now that there is some stability in the economic environment to put that capital to work. So really across the board, yes to everything, our sourcing remains pretty broad.

Jasper Birch – Macquarie Capital

Okay, I guess my question is more to the health of those markets, so I guess taking from your answer, you are seeing a new level of the middle market the health coming back into things other than recap.

Michael Lazar

Absolutely. I guess it is hard to know exactly what you meant by recap. There is recap like a company that has got some sort of problems, issues, is over levered and needs to be recapitalized in some distressed way, which is still a portion of what we are seeing, but there is also a recap as in recapitalizing balance sheet where sponsors and other equity holders in these companies have put equity into the business during the downcycle to see them through and now are looking to recapitalize their balance sheet to take those equity positions out, those temporary investments to stabilize companies.

Jasper Birch – Macquarie Capital

Excellent, thank you. And then in terms of – last quarter you seemed somewhat cautious with commentary on the economic recovery, is it safe to say you guys are a little bit more bullish now just in terms of your portfolio companies I understand that they have done a lot to bring down costs and improve EBITDA trends but what are revenues looking like and what is sort of the track that they are pacing on?

Jim Maher

Our portfolio is pretty far reaching so it will be pretty hard to comment on it, to generalize on the type of growth in revenues. We are seeing in certain cases very, very significant growth in revenues. We also have other companies where the growth in revenue, later cycle companies is somewhat muted. So it is really all over the lot depending on the type of company and where it participates in the cycle.

Michael Lazar

Further to what Jim says, there is such a diversification in our portfolio, there is so much diversification in our portfolio among industries, and then in any particular industry the companies are so niche [ph] as from the fact that they are middle-market companies. Having said that, I think it is fair to generalize to say that some of our companies may be healthcare businesses or advertising related businesses are starting to see recovery,

I think the fact that a lot of the questions about what healthcare was going to look like as the folks down in Washington DC got their hands on legislation, I think there has been improvement in some of those businesses, and businesses related again to advertising where people sort of seeing the bottom, there is some stability, revenues are beginning to increase in those businesses. Some of our more cyclical companies cover industries that are earlier cycle and so they might be ones from some improvement in revenues, but I think it is very tough to generalize other than that.

Jim Maher

On the other hand to your, I guess your base question, are we more optimistic than we were at the last call, I would say decidedly so.

Jasper Birch – Macquarie Capital

Okay, that is good to hear, and then just one last question, first of all, congratulations on all the action at the facility, at the expansion, in terms of going forward a year, two years from now, do you have any commentary on what you think the new sort of capital structure of the BDC is what is going to be optimal? Is it going to be a revolver? Do you think BDC is going to move to having securitization on balance sheet, maybe having preferred in their capital structure, are you guys been thinking about that and talking about that?

Michael Lazar

This is Mike. We have certainly been thinking about it and talking about it. As to my guess about what the industry might look like in two years, it is hard to say. We have always had a very simple approach to our financing, to our balance sheet. We have wanted to make sure that we had certainty of financing, consistency, sort of opportunity to grow our financing over time. We have had good partners in our banking facilities, certainly that is not the only type of financing that we have entertained, but it has been to date the only type of financing that we have utilized.

We do not require lots of leverage for our model, for our business to work. Obviously the prudent use of some leverage in our model is important but unlike some other folks as we talk about the industry they have optimized leverage over time, we always look at optimizing the investments. We are doing our best work on coming up with a sort of best portfolio, managing it appropriately, managing it for cash flow, and we have always found, sometimes it has been easier than others, sufficient financing to continue to grow our business and provide us with an appropriate amount of leverage for the portfolio.

Jim Maher

I think it is fair to say in an ideal world we would like to have some laddered term debt in our capital structure and we think that will become available as we move out over the next year or so and use the revolver as sort of surge capacity. We think that is the ideal capital structure for us and we think that will be the ideal capital structure – if we think it is ideal for us, we obviously think that would be ideal for the rest of the industry.

Jasper Birch – Macquarie Capital

Thank you that is very helpful, I appreciate your time.

Operator

Our next question comes from Chris Harris with Wells Fargo Securities.

Chris Harris – Wells Fargo Securities

Great, thank you very much. Obviously a lot of discussion guys on your pipeline, and I am just curious, what does the competitive landscape look like these days for your transaction? I know a couple of your peers have talked about competition heating up in certain markets and I am just wondering if that is the case with your transactions or if there is competition still very light, if you can just give us an overview of that situation.

Jim Maher

The way I look at this there is always competition for any transaction and it sort of varies in terms of degrees depending on how hard the sponsor wants to push and the type of that and then also depending on the asset that has been financed. Certain (inaudible) and relationships are a very important part of the universe that we operate in, and so being cost effective is important but being able to structure a transaction, and work with a sponsor at a reasonable rate tends to win the day in the marketplace that we operate.

Now you cannot be off by 50 or 100 basis points and expect to win that transaction but it is nowhere near akin to what you would see in the public high yield markets where you basically have a feeling that it just does not happen in this marketplace,

Michael Lazar

I would just add Chris to Jim’s remarks, I would just suggest that perhaps the end, as you think about the breadth of the parts of the capital structure that we are able to actively participate in, in any particular transaction, it is in the sort of syndicated senior loan, which is really not what we do, where there has been the most active and heated competition that we have observed in these transactions. Again that is not the capital structure segment that we participate in actively but that is where we are seeing the most competition among other institutions. And I think that goes back to the fact that the first quarter of 2010 has seen a very, very active market in larger existing private equity sponsored deals using the high yield fixed rate bond market whether public or private to take out what had been pretty aggressive loans made back in the 2006, 2007 timeframe. That capital returned to those funds needs to be put back into the marketplace, and I think that is what is leading to such an active market and competitive market on that end of the spectrum. Again, that is not really what we do.

Chris Harris – Wells Fargo Securities

Okay, that is very helpful. Obviously you guys have declared a $0.32 dividend here, your adjusted net investment income not quite covering the dividend although it is close. You know your credit facility expenses I guess have to rise here over the course of the next year here, how do you guys determine the appropriate level of the dividend or what do you think – I seem to think you can grow into the current dividend, is that kind of what the view is?

Jim Maher

When we reinstated the dividend, we took a look out over a fairly lengthy period of time including obviously cognizant that we were going to be refinancing our debt that some assets would be coming off of our books and that there would be opportunities going out there and we set the dividend a level that we thought was sustainable and continue to think that.

Michael Lazar

Sorry if I jumped in, I would just add we did carry forward into 2010 a pretty significant earnings carry-forward of $0.46.

Chris Harris – Wells Fargo Securities

Right.

Jim Maher

Fees are lumpy in this business; the levels of fees in the first quarter were relatively thin compared to other quarters. Am I correct there, Frank?

Frank Gordon

Yes, absolutely.

Chris Harris – Wells Fargo Securities

Then on the adjusted NII figure, just making sure I am understanding it correctly here; it is $0.06 lower than what the reported NII for the period was, we do assume that your estimate of incentive fees for the year is roughly $0.24 per share.

Jim Maher

It is actually calculated on what it would be for the first quarter if we were able to pay it in the first quarter. So it will depend on both the actual income in the second, third and fourth quarter.

Chris Harris – Wells Fargo Securities

So we do not actually estimate it?

Michael Lazar

Right, it just what it would have been had you picked –

Jim Maher

We just calculate it and again, one of the components of the way our fee works is it looks back over the prior four quarters and reduces any fee payable in a particular quarter by fees paid recently. And since our fees are lumpy and we just paid the full amount in the prior quarter that is the limit on the fee payment for this first quarter.

Chris Harris – Wells Fargo Securities

Okay, got it, then final question here. Can you guys remind us what your exposure to Greece is please?

Jim Maher

That is a very short answer, I would be happy to give it to you. We do not have any exposure to Greece.

Chris Harris – Wells Fargo Securities

Obviously, joking. Okay, thanks guys.

Operator

(Operator instructions) Our next question comes from Jim Ballan of Lazard Capital Markets.

Jim Ballan – Lazard Capital Markets

Thanks a lot. In the process of trying to get more bank commitments, can you talk to me about or maybe give me some color on where you are in that process? Are you in active discussions with a number of banks or is that something that you are sort of planning on continuing to do over time? Can you just give us some color on your thoughts on increasing the bank wins?

Michael Lazar

Hi Jim, it is Mike. With respect to the bank credit facility, it has always been our intention – I think we have said this for a while now to take it in what I would describe as two phases. Phase one was to work with our existing lender group and identify lenders that would be interested in extending the commitments and work with them to create that amendment and to go through that process. We completed that process at the very beginning of the second quarter, and in fact, shortly or almost immediately after the conclusion of that process, we were approached by a new lender with whom we have been having conversations for a long, long time for all sorts of business opportunities, who desired to get into the credit facility based on the way that we have amended it with our existing lenders.

Normally we would have gone out at some later date, and a more organized and orderly syndication process but because of the action and the interest reversing query almost of that institution, we have changed our strategy slightly. We have brought that new institution in and we would expect to approach other institutions serially as needed to continue to grow the facility over time.

Jim Ballan – Lazard Capital Markets

Okay. And I hate to go back to this investment spending and capital returning issue that I think we have talked about a lot.

Michael Lazar

Sure.

Jim Ballan – Lazard Capital Markets

There is one last question, maybe a little more direct, there is obviously net capital coming back at you in the first quarter, and it looks like unless there is significant change that may happen again in the second. For the second half of the year, do you think that you could find yourself back in a net investment position for the second half? Obviously there has been a pretty significant decrease in your leverage over the last year or maybe a little more than that. Are your thoughts that you would want to be in a net investment position getting that leverage back up again?

Michael Lazar

Yes.

Jim Maher

We fully expect to be a net added to a net investment increase in the second half of this year.

Jim Ballan – Lazard Capital Markets

Great, thanks a lot gentlemen.

Operator

(Operator instructions).

Jim Maher

Well, Christian, if there are no further questions, I would like to thank everybody for calling in.

Operator

Yes, there appears to be no questions at this time. Are there any closing remarks?

Jim Maher

I would just like to thank everybody for calling in and being supportive. We appreciate it. Thank you.

Operator

Ladies and gentlemen, this does conclude today’s BlackRock Kelso Capital Corporation conference investor teleconference. We thank you for your participation. You may now disconnect.

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Source: BlackRock Kelso Capital Corporation Q1 2010 Earnings Call Transcript
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