BlackRock Kelso Capital Corp.
BKCC is involved in the issuance of capital in the form of investments to middle market companies. Currently, the growing demand for capital from these middle market companies is immense and plentiful, however, there is clearly a lack of supply or willingness to lend for this capital from traditional banks. This would seemingly present a compelling opportunity for BKCC to have a large amount of negotiating leverage over these companies, and therefore, very attractive yields and terms on their investments.
Unfortunately, the company was launched in 2005, just before the credit collapse, leaving them with a book of underperforming assets. These problem assets have required additional investments, and thus limited BKCC’s ability to invest in more of today’s more attractive opportunities. In order to sustain the current dividend, BKCC has been selling off existing assets. This has allowed the company to keep shareholders happy and lowered risk, but has not solved the issue of not being able to invest in more currently attractive investments that have higher yields and are presently deemed as “lower risk.” The company has just recently taken their first financial interest in new investments since early 2009 due to their lack of available resources, which was only as a result of an equity issuance in October.
BKCC is currently paying out more in dividends ($1.28/share) than they are earning in free cash flow per share, which has subsequently resulted in a slow drawing down of their cash supply, which currently stands at $803 million. To put this into perspective, the BKCC's market cap is $831 million, sales are $110 million, and book value is $553 million. The “churn rate” for their investments portfolio is running at 25-35%, which means that eventually the trouble assets will, as time passes, comprise a declining percentage of the total portfolio. Assets are not very concentrated, seeing that the largest holding is 7%, and the average investment is approximately only 1%.
My thoughts after investigating the situation are that BKCC management certainly hasn't mad the decisions worthy enough to earn their hefty 2/20 fee structure. In hindsight, they made poor judgments at the peak of a credit bubble that will continue to be an anchor on their ability to move forward as they continue pouring money into these investments. The dividend appears to be safe, and will most likely continue to be barring a significant decline in the middle market business economy that would result in a serious decline in the values of their investment portfolio. I haven’t looked at their competition, but I have to assume there are other options that have more access to capital to invest in these opportunities that are much more attractive than the book BKCC is dealing with. Momentum will slowly be regained, and like I stated previously, the dividend is certainly nothing to look past, (11% yield), but I think there are two significant causes to worry for the long term: 1) They are not participating in the abundance of attractive investments currently available and 2) they are heavily dependent on economic growth being sustainable, or else they will be stuck holding the bag on a book full of bad investments.
Disclosure: No Positions