Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

BlackRock Kelso Capital Corporation (NASDAQ:BKCC)

Q4 2013 Earnings Conference Call

March 6, 2014 16:30 ET

Executives

James Maher - Chairman and Chief Executive Officer

Michael Lazar - Chief Operating Officer

Corinne Pankovcin - Chief Financial Officer

Laurence Paredes - Secretary and General Counsel, Advisor

Analysts

Greg Mason - KBW

Greg Nelson - Wells Fargo Securities

Doug Harter - Credit Suisse

Evan Keefe - Prudential Financial

Jon Bock - Wells Fargo Securities

Operator

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 Maher - Chairman and Chief Executive Officer

Thank you, Ginger. Welcome to our fourth quarter conference call. Before we begin, Larry will review some general conference call information.

Laurence Paredes - Secretary and General Counsel, Advisor

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 list 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 contemplates 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 www.blackrockkelso.com and clicking the March 2014 Investor Presentation link in the Presentations section of the Investor Relations page.

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

James Maher - Chairman and Chief Executive Officer

Thanks, Larry. Good afternoon and thank you for joining our call today. We are pleased with our performance in 2013. Highlights include new investments in excess of $500 million, substantial increase in the valuation of many of our equity positions, and had an increase in net asset value to $9.54 per share.

Full year 2013 net adjusted investment income of $0.92 per share taken together with our portfolio of net realized and unrealized gains substantially exceeded our dividend and resulted in an increase in net asset value per share of $0.23. We concluded the year with a solid fourth quarter. We invested nearly $170 million while sales, repayments and other exits totaled $123 million. This quarter brings our originations for the year to $534 million.

Our adjusted net investment income was $0.22 per share for the fourth quarter and we had net realized and unrealized gains of $26.7 million. During 2013 and into the beginning of this year, economic conditions and the performance of our portfolio companies both continue to improve. As we look at new investment opportunities, we try to balance these strong economic fundamentals against the weak credit market technical factors.

Market conditions remained challenging, particularly on the upper end of the middle market for investments sponsored back M&A transactions. 2013 was characterized by record inflows of capital into the debt funds – into debt funds. Loan funds have benefited from consecutive weekly net inflows for 89 weeks increasing the supply of capital, particularly for large transactions with market liquidity. Deal flow improved throughout 2013, but never reached the more robust levels many including ourselves have predicted. Overall, the trend was somewhat lower rates, higher leverage levels and more issuer friendly structures seen in the first three quarters of 2013 continued into the fourth quarter and still persist today.

We have been very focused on the high risk adjusted returns of our current equity investments. A substantial portion of these equity investments were acquired through active distressed investing and restructuring. As a result these equity investments often have attachment points that are far more attractive in current high yield bond offerings. As we have said on our past several conference calls, we have been actively managing certain of our existing appreciated equity positions towards exits.

Early this year, we exercised two tranches of our Arclin warrants and subsequently entered into an agreement to sell our entire debt, equity and warrant position for an aggregate proceeds of $59.2 million. This transaction will generate a realized gain of $37.2 million. Anticipated proceeds will be $7 million above our year end mark for this investment. Another larger equity investment is currently in the final stages of the sale process at a price that would produce significant gain to us. We anticipate that this transaction will close in April. Together these two investments represent nearly half of our equity exposure as of December 31. Utilizing loss carry forwards to eliminate the capital gain distribution requirement will allow us to reinvest the proceeds from these transactions in interest bearing securities. We expect to redeploy these sales proceeds over time and to temporarily reduce our current borrowings.

Notwithstanding these profitable exits, we expect to continue to hold a substantial majority of the remainder of our equity investments over the near to medium term. With respect to those positions we continue to hold, we expect that rate of return these investments will continue to exceed the risk adjusted returns that we can earn by reinvestment proceeds. Finally, during the year and in the fourth quarter, we were able to increase our borrowings to move closer to our goal of approximately 0.75 times leverage. At December 31, our leverage stood at 0.67 times. Even after our $534 million of new investments in 2013, we continued to have sufficient debt capacity with which to grow our portfolio further into 2014. As a result we still don’t expect to raise additional equity capital in the near-term.

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

Michael Lazar - Chief Operating Officer

Thank you, Jim. In advance of this conference call we posted our quarterly investor presentation to our website. An overview of our fourth quarter results starts on Page 2. We are pleased that our investment portfolio grew to more than $1,200 million at the end of the fourth quarter. Net assets stood at $710 million and net asset value per share increased by $0.16 during the quarter to $9.54 per share. With respect to earnings, our portfolio generated investment income of $33 million for the fourth quarter. It was an increase relative to the $31.4 million in the prior quarter. The increase in investment income in the fourth quarter resulted from slightly lower interest income more than offset by higher fees on a quarter-over-quarter basis. And as a reminder the income tends to be relatively consistent for our business over the long run, although at times it can be somewhat lumpy from quarter-to-quarter.

Total expenses for the three months ended December 31, were $28.4 million compared to $22.5 million in the third quarter. The principal difference between these two periods relates to incentive fees, including those accrued on unrealized gains. Incentive fees relating to income were $9 million in the quarter and incentive fees accrued based on hypothetical capital gains calculation were $5.5 million. With respect to incentive management fees based on income, $10.9 million was earned for the annual 2013 period versus $17 million for 2012.

On a pro forma basis, incentive management fees for the fourth quarter were $2.5 million, up slightly from the $2.1 million in the third quarter as adjusted. Of the current period totals, $5.5 million in the quarter and $20.3 million for 2013 represent incentive management fees accrued based on a hypothetical capital gains calculation as required by GAAP. It should be noted however that capital gains fees if any are neither earned nor do when payable till the end of the annual measurement period. The total accrual at the end of the current quarter is the result of $130.5 million of net unrealized appreciation on the balance sheet as of year end. We believe that our adjusted net investment income, which removes hypothetical fees and adds an adjustment to account for incentive fees earned on the income, is the better indication of our quarterly performance.

A reconciliation of these GAAP and non-GAAP measurements appears on Page 11 of our Investor Presentation. Adjusted net investment income of $16.5 million in the quarter compares with $16.1 million in the third quarter and equated to $0.22 per share. Throughout the past year, we increasingly focused our origination efforts on a combination of higher quality investments and special situations, where we had an investment age where benefit as a result of experience, information, relationships or in most cases, all three. We look at new opportunities in current environment in the long-term view. We focus on maintaining and growing our NAV over time. Our investment strategy does not favor portfolio growth at the expense of lower credit underwriting standards that we believe don’t benefit our shareholders on the long run.

Generally, current market conditions have led us to focus on higher quality senior loans often with some significant credit support from asset coverage. We continue to seek investment opportunities, where we are able to capitalize on the premium afforded to middle-market transactions for reduced liquidity. Capital deployment during the quarter was focused on investments in new portfolio companies comprising more than $145 million of our originations for the quarter. Some of the more significant investments made during the quarter included $60 million in Quality Home Brands Holdings, or QHB in the second lien term loan and holding company term loan. The investment was split between $40 million in the operating company and $20 million at the holding company. We earned $1.8 million in capital structuring fees in conjunction with the transaction.

QHB is a leading designer, manufacturer and supplier of decorative, functional and specialty lighting products. We also invested $25 million in the senior subordinated notes of Automobile Protection Corporation, or APCO which is a marketer and administrator of vehicle service contracts. We invested $21 million in a senior secured first lien term loan to Accriva Diagnostics and we earned a $400,000 capital structuring fee in conjunction with that transaction. Accriva is a medical device manufacturer, which sells point-of-care diagnostic devices to hospitals and physicians’ offices. We also added $15.8 million of additional subordinated notes to Higginbotham Insurance Holdings. Approximately, 80 potential transactions were reviewed during the quarter resulting in investments overall in nine new portfolio companies.

While this is an unusually high success rate, we were fortunate that four of this quarter’s non-investments were made in existing or past portfolio companies. In conjunction with portfolio company exits, we recorded fees of $1.6 million in the quarter. This brings our total fees earned in conjunction with exits to $8.1 million for 2013. During the fourth quarter, we also realized fees of $3.2 million in conjunction with portfolio company investments. We continue to look for new commitments in the capital structures of businesses in which our investments are well supported by future free cash flow generation, current enterprise value and identifiable assets. We view this as a defensive posture. We expect to continue seeking these more conservative investment structures.

In general, our portfolio companies are performing quite well and many of our former problem children continue to see improvements in operations or in their capital structures or in many cases both. As we mentioned in our prior earnings call, we are able to exit our investment in Dial Global during the fourth quarter realizing a value slightly above its September 30 fair market value. We had no investments on non-accrual at quarter end. The weighted average rating of our portfolio companies at the end of the fourth quarter was 1.14 compared with 1.11 on September 30.

And with that, I would now like to turn the call over to Corinne to review some additional financial information.

Corinne Pankovcin - Chief Financial Officer

Thanks, Mike and hello everyone. I will now take a few moments to review some of the other details of our 2013 fourth quarter financial information. At year end 2013 compared to the prior quarter, the composition of our portfolio invested in senior secured loans decreased 5% to 43%, while our unsecured subordinated debt securities increased 5% to 16%. Our equity investments declined 1% to 22% at the quarter end resulting primarily from continued appreciation in our existing investments. This is a further climb in our non-income producing securities from 13% at last year end driving the 20 basis point decrease in our total portfolio yield for the year.

For the year ended December 31, 2013, our net investment income adjusted is $0.92 per share as compared to $1.8 per share one year earlier. The decrease is due to exits of some of our higher yielding assets in the recent quarters, a higher percentage of our equity securities in the portfolio and lower fee income in 2013 compared with 2012. The weighted average yield of the debt and income producing equity securities in our portfolio at the current cost basis was 12% at December 31, 2013 and 12.2% at December 31, 2012. The weighted average yields on our senior secured loans and other debt securities at their current cost basis were 11.4% and 13% respectively at December 31, 2013 versus 11.4% and 13.5% respectively at December 31, 2012. Yields exclude common equity investments, preferred equity investments with no stated dividend rate, short-term investments and cash and cash equivalents.

Relative to our $1.2 billion portfolio at fair value, we continue to have sufficient debt capacity to deploy in attractive investment opportunities. At December 31, we were in compliance with regulatory coverage requirement with an asset coverage ratio of 246% and were in compliance with full financial covenants under our debt agreement. At December 31, 2013, we had approximately $18.5 million in cash and cash equivalents; $478 million in debt outstanding; and subject to leverage and borrowing base restrictions $171 million available for use under our amended, restated senior secured revolving credit facility, which matures in March 2017.

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

James Maher - Chairman and Chief Executive Officer

Thanks, Corrine. After approximately $46 million of net new investments in the fourth quarter, equity is comprised 22% of the portfolio at year end. As I mentioned, since year end we have begun to exit several significant equity holdings. After we have exited those investments, we still hold equity positions that comprise a higher percentage of the overall portfolio and is our long-term goal.

On the other hand, we are quite pleased with the performance of the underlying companies. And we believe that many of these investments will continue to compound at a rate that exceeds the rates generally available in the marketplace today. That being said, we remain focused on additional exits as these investments continue to mature. We remain patient in the current environment. We remain focused on growing our portfolio and increasing utilization under our debt facilities. Dividend coverage from net investment income and equity appreciation remains a priority for us. We are always assessing our dividend coverage from both ordinary income and expected gains.

On behalf of Mike, Corinne, Larry and myself, I’d like to take this opportunity to once again thank our investment teams for all of their efforts to thank you for your time and attention today. Operator, would you now please open the call for questions?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Greg Mason from KBW.

Greg Mason - KBW

Great. Good afternoon gentlemen. Congrats on the nice equity gains. I believe I will be in line speaking that the other potential exit in April would be the ECI investment and just curious if as that’s approaching exit if there is potential meaningful upside from the $69 million fair value at December 31 in that investment?

James Maher

Without commenting on which investment it is, I would say that I would expect it to be when we exit that investment, it would be approximately where maybe slightly above where we had it marked at the end of the year.

Greg Mason - KBW

Okay, great, perfect color. And then as we look at your leverage, your net leverage at year end was 0.65 debt to equity, can you talk about what your target leverage is and as we approach that kind of re-leveraging the balance sheet here, what your thoughts are in terms of capital needs going forward?

Michael Lazar

Sure, Greg. It’s Mike. In the prepared remarks, we mentioned that our sort of goal in terms of leverage utilization is 0.75 to 1. We ended the year at 0.67. Since year end, Jim mentioned in his remarks we have agreed to one exit and are looking forward to a second potential exit of an equity position. Certainly, that would temporarily lower our borrowing level, but our comfort zone remains at 0.75 and that is something that we look to manage toward. It’s obviously difficult to do at any one moment in time, but as an overarching goal, that’s where we expect leverage to be and where we feel comfortable.

Greg Mason - KBW

Great, guys. Thanks. Nice quarter.

James Maher

Thank you.

Operator

Your next question comes from Greg Nelson from Wells Fargo Securities.

Greg Nelson - Wells Fargo Securities

Hi, guys. Thanks so much for taking my questions. Just hitting on equity issuance a little bit further obviously with the realizations coming in the first quarter leverage levels are going to tick down, but I just left here your thoughts on as you look at – look at your dividend yield and as we start to hit higher levels of leverage, how you guys will be able to invest and make it accretive to shareholders?

James Maher

Well, I think the first step Greg would be to redeploy a significant portion of the existing equity investments into earning assets. One of the things that we have been focused on over the last several months and continue to be focused on as we look forward into 2014 is the fact that as each of us stated in the prepared remarks and as you see in the financial statements, based on current fair market values, equities are about 22% of the portfolio as of December 31. And obviously those don’t typically have a cash yield to them. So, what we are doing is we are earning the dividend on the remaining 78% of the portfolio and if we can transfer some of that existing equity investment respectively into yielding securities and get the portion of the portfolio that is currently yielding back up to 90% or above 90%, which is our goal. Then dividend coverage and increases pretty easy to pencil out given our current net asset value.

Greg Nelson - Wells Fargo Securities

Great. Thanks for the color. And then a couple of questions on credit, so you guys are – you’re booking stuff at higher the market rates. Just be curious how you guys get comfortable with some of those things especially in second lien where leverage was a little bit higher than even in mezz leverage is going on at similar levels? And then on QHB just how you guys get comfortable with that credit has gone bankrupt before, so I’d like to hear your thought process there?

Michael Lazar

Sure. I guess two separate questions in your question. The first is that we underwrite each credit individually. We don’t do anything top-down or macro in terms of our analysis. So we’re looking with each particular credit to the structure of the transaction, which in many cases were largely responsible for. We are looking at the quality of the assets, the enterprise value and the cash flow generation of the business and we look at all three of those over a period of time we structure covenants and transaction structures to fit that particular situation in each case. And then we monitor the credits very, very actively going forward so that we can stay on top of any changes and make any sort of appropriate moves along the way.

With respect to QHB in particular we had examined that company and have followed it since the time of its original syndicated bank loan back before the time of the housing crisis. So we watched it from a par, we were not an investor in a – along the way we monitor the business, we’ve a good relationship with the private equity firm that is the sponsor of the transaction. We were able to do quite a bit of due diligence on the company. It has made several changes to its scope of business. We are investing in it off of a sort of much better capital structure and a much sort of safer macro-environment and we got comfortable based on the fact that the loan is structured into three different components of which we’re in the two more secure components and those two securities that we own relate to each other and to a third more junior security in a way that we got very comfortable with our ability to participate in controlling the outcome.

Greg Nelson - Wells Fargo Securities

Great. Thanks very much for taking my questions.

Operator

Your next question is from Doug Harter from Credit Suisse.

Doug Harter - Credit Suisse

Thanks. Just wanted to confirm I think you answered this in the last question. But you said that 10% is your long-term goal for equity allocation?

James Maher

I would say it’s really between 5% and 10%.

Doug Harter - Credit Suisse

And obviously you said you’ll be looking to exit a couple of positions in the near term. But how should we think about the pacing to get to that goal?

James Maher

Well we have four positions, other positions that are over $20 million at the moment and then the rest of them 5s and 10s for lack of a better description. One of the 5 to 10s is up for sale at the moment. I would expect in the course of 2014 there maybe one or two others of those maybe sold. I would also expect although there is no activity at the moment in any of the four that are over $20 million. If I had to guess I’d say one of those transactions will probably be realized during the course of this year so you can add that open. But that’s a real, real rough estimate.

Michael Lazar

I would only add to Jim’s remarks by saying that we’re – when we’re aware that a company is put up for sale as is the case of the one example Jim was referring to, obviously we have some sense of timing around it that type of a transaction. With respect to the others we’re not in control exclusively of the – we’re not a controlling equity shareholder of any of those businesses. So we can’t make something happen, but obviously we very closely observe the performance of the companies and we’re active in the market. So we do have a good estimate or idea sense of what may happen and obviously this is a very good market for selling companies with improving performance in the middle market and leverage finance transactions. And when you go through the list that Jim was referring to anyone can make their own assumptions but many of those companies fit that type of a description.

James Maher

I would also I guess I’d add to that with the investors in those companies tend to be of like-mind when they have had a really good – when they approached maturity I think they tend to be liquidated. The two investments that we have sold at least in our minds that reached a certain level of maturity. Those investments by the way are in the course of 2013 through closing of those transactions would have generated during that period of time roughly $40 million of unrealized appreciation until – till its realized. So there is a sort of sense of maturity that is implicit in each one of these investments. Some of the bigger investments that we still have I think have a little ways to run before it makes sense to sell it i.e. we think the returns then were going to be pretty good.

Doug Harter - Credit Suisse

Great. Thank you for that color.

Operator

Your next question is from Evan Keefe from Prudential Financial.

Evan Keefe - Prudential Financial

Hi, good afternoon. Thanks for taking my question. I actually had a question regarding your 40-APP application early in the year with respect to 52nd Street Asset Management. You say you’re going to manage furloughs there. I’m just kind of curious is that going to be furloughs from the private debt that you already have on your balance sheet versus more syndicated flavor and how do you see 52nd Street ultimately affecting your then investment income and being accretive to shareholders?

Michael Lazar

Sure, Evan. I think the high level strategic idea behind 52nd Street Asset Management is that we’re – obviously we have an application pending with the SEC right now. We hope to have that application approved so that we might begin to participate through that vehicle in the slightly larger certainly more senior typically rated bank loans that we see in the ordinary course of our business connected to the types of investments where we would otherwise on behalf of the BDC be making junior debt investments or attempting to at least make junior debt investments which is to say performing the due diligence and deciding whether or not to participate.

Many of those transactions have attractive senior loans attached to them that don’t fit the mandate of the BDC. And the application for 52nd Street and the structure around that would be to – be able to manage those types of investments that we see in our ordinary course of business without taking any of the assets that would otherwise be appropriate for the BDC itself applying a more appropriate level of leverage to those and having the benefit of that invested time and energy that we have made with our field team go into the BDC’s platform through that investment vehicle.

Evan Keefe - Prudential Financial

Just one…

Michael Lazar

52nd Street of course should we get the approval which we expect but are unsure of at this time. Should this come to pass that would of course be a separate portfolio company of the BDC. And so to the extent that there is profitability from that undertaking it would benefit to BDC.

Evan Keefe - Prudential Financial

Just one quick follow-up. Thank you for that color as well. Is – would you expect that the BDC would also contribute equity to the funds that 52nd Street manages?

Michael Lazar

I think obviously this is forward-looking. But we would hope to certainly be able to invest some amount of the equity or other securities into the structures that 52nd Street might manage because we believe in our ability to do a good job managing those assets. And because we’re already examining and understanding the types of companies whose securities, whose loans would go into those potential structures. Having said that, there are obviously a lots of complexity, there is lots of complexity around both the ‘40 Act and the accounting rules with respect to how this is all treated. So I don’t expect we would ever have any kind of majority we are controlling or substantial equity investment in the vehicles themselves.

Evan Keefe - Prudential Financial

Very good, thanks very much for taking time to answer my question.

James Maher

No problem.

Operator

(Operator Instructions) Your next question is from Jon Bock from Wells Fargo Securities.

Jon Bock - Wells Fargo Securities

Thank you for letting me hop-in and ask a few additional questions. I am going to tail off of Greg Nelson’s questions. As it relates to the subordinate debt investments that you have made, are they second lien or just pure subordinate, guys can you give me the average deleverage level that you are originating at in those assets just broad brush strokes please?

James Maher

It’s hard to do because each one is so unique Jonathan I think…

Jon Bock - Wells Fargo Securities

Range would be fine.

James Maher

Even with a range it’s a little bit hard to do. I will describe for you what we are seeing generally in the market and by what we are seeing I mean by what we are seeing that’s attractive.

Jon Bock - Wells Fargo Securities

Okay.

James Maher

We think that in solid cash flow businesses where perhaps there is enterprise value coverage or perhaps not asset coverage, we tend to see kind of first lien structures to 3.5 kind of ish attachment point. And we then see either second lien or subordinated debt or a combination of those between 3.5 and 5 or 5.25 times. There are outliers both lower and higher in what we are looking at today and there are outliers both lower and higher in our portfolio of recently booked assets.

With respect to the transactions where we are looking at them on a more asset backed basis where we are looking for security and asset protection whether in a first lien or second lien, a filo, a split collateral deal whatever – wherever it is we are going out and we are looking at the appraised value or coming to a conclusion about the valuation of the assets supporting the credits. In many of those transactions leverage can be much higher because we are looking at loan to value in those cases. Really on the assets secured or an asset supported basis. And for example many of the energy related transactions that we have done this year have that kind of asset support as opposed to a leverage level because many of those are projects where you are undertaking to go extract assets connect assets that energy is a slightly different type of investment strategy. So again the reason why I don’t mean to evade your question, but strictly looking at those on a leverage basis isn’t always appropriate. And obviously you have known us a long time, you know that we are able to and pride ourselves on finding value in things other than the simple bond market kind of what the rating agencies might pick as leverage levels or other standardized tests. Each of these assets is somewhat unique.

Jon Bock - Wells Fargo Securities

I appreciate that. And I guess I would say that the genesis of the question kind of is going to be a matter of peer comparison, because let’s say a good majority of peers that you would hold in high regard tend to focus on first lien through senior secured debt that carries with it a much lower rates and perhaps their cost of capital structures allow them to do that which might not be the case here. The question is, is there additional risk being taken owning subordinated assets and of course you would never say yes, but if the industry zigs and use zag in a different direction via owning more subordinate credits. However, you want to define it that’s just a question clients would tend to ask and so leverage or other rates that they can get at risk is probably that’s just the question we are asking?

James Maher

And Jonathan we understand and I am sympathetic to that, because you are correct and so far as the behavior of certain of our peers many of them are we respect who are chasing it more senior, more first lien lower rate assets in larger amounts. The way that they are achieving their returns is by levering those assets to an extent that’s greater than our leverage tends to be because they do things either in a vehicle or off balance sheet or a combination of those things. And it’s really a question of where you want to take your risk or how you want to take your risk. You alluded to our structure or our cost of capital, it’s not really our cost of capital, we borrow as attractively as anybody, its our structure in terms of not having off balance sheet where other credits supported higher leverage methods of financing ourselves. And as a result we tend to need to make our returns on the asset side of the ledger more than on the balance sheet on the leverage side of the ledger.

And if we do that by being really selective and being really active in how we structure these different investments because you’re right this doesn’t come for free, you really – if you’re going to get a higher return you really need to invest the time and energy in finding assets where you’re able to do that, sometimes that’s smaller businesses, sometimes that’s businesses that are in a state of greater transition and sometimes those are more asset supported credits that other lenders in our business tend to overlook. You’re right. I don’t disagree with your assumption.

Jon Bock - Wells Fargo Securities

No, and I’ll say it’s appreciated when you kind of gave that additional color because people would in light of equity gains and now you’re also the ability to rotate people can come – become a bit more comfortable with the – with potential credit risk in light of what you’re doing there. So no I appreciate you taken the time to answer the question. Thank you.

Michael Lazar

Yes, I mean our – you brought something up in the end of your comment there, Jonathan which is another good point which is that as we do redeploy this equity our need to earn pure high yielding, higher yielding yields is somewhat alleviated because we’ll be earning on a higher percentage of our total assets on a current basis.

Jon Bock - Wells Fargo Securities

I guess the only thing I throw out is to the extent that earnings go up that’s a good thing and of course as the valuation goes up and the yield that what you raise goes down or the yield, your dividend goes down due to an increase in stock price that helps. However if we’re even looking at a 10 yield held at roughly between 0.6 and 0.7 leverage with the fee structure in place. The cost of capital in our view to the extent that it’s raised should I say your required rate or return on new assets it’s almost going to be a push if you’re thinking about that 10% or 11.5% rate at which you’re originating at. And so we agree growing NOI is great but also we appreciate your focus on delivering leverage and waiting to raise equity capital at the right time what you’ve chosen to do. So just a few I wouldn’t call it a question, just open thoughts on equity capital raise you guys have been disciplined and that’s very much appreciated.

Michael Lazar

Well we agree. We’re big investors ourselves as you know.

Operator

There are no further questions at this time. Presenters, do you have any closing remarks?

James Maher - Chairman and Chief Executive Officer

No, I just like to thank each one of you for attending the call today. If you have any further questions always feel free to give us a call. Thank you.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: BlackRock Kelso Capital's CEO Discusses Q4 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts