BlackRock Capital Investment Corporation (NASDAQ:BKCC) Q1 2020 Earnings Conference Call May 7, 2020 10:00 AM ET
Laurence Paredes - General Counsel and Corporate Secretary
James Keenan - Chairman and Interim-Chief Executive Officer
Michael Pungello - Interim-Chief Financial Officer and Treasurer
Marshall Merriman - Head of Portfolio Management of BlackRock's U.S. Private Capital Group
Conference Call Participants
Richard Shane - JPMorgan Chase & Co.
Good morning. My name is Vicki, and I will be your conference facilitator today for the BlackRock Capital Investment Corporation First Quarter 2020 Earnings Call. Hosting the call will be Chairman and Interim Chief Executive Officer, James Keenan; Interim Chief Financial Officer and Treasurer, Michael Pungello; General Counsel and Corporate Secretary of the Company, Laurence D. Paredes; Marshall Merriman, Head of Portfolio Management for BlackRock's U.S. Private Capital Group; Jason Mehring, Chairman of the U.S. Private Capital Group's Investment Committee; and Nik Singhal, Head of Investor Relations and Business Strategy. Lines have been placed on mute. After the speakers' complete their update, they will have open lines for the question-and-answer session. [Operator Instructions]
Mr. Paredes, you may begin the conference call.
Good morning, and welcome to BlackRock Capital Investment Corporation's first quarter 2020 earnings conference call. Before we begin our remarks today, I would like to point out that certain comments made during this conference call and within corresponding documents contain forward-looking statements subject to risks and uncertainties. Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may and similar expressions. We call to your attention the fact that BlackRock Capital Investment Corporation's actual results may differ from these statements.
As you know, BlackRock Capital Investment Corporation has filed with the SEC reports, which lists some of the factors, which may cause BlackRock Capital Investment Corporation's results to differ materially from these statements. BlackRock Capital Investment 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 Capital Investment Corporation makes no representation or warranty with respect to such information.
Please note, we've posted to our website an investor presentation that complements this call. Shortly, Jim will highlight some of the information contained in the presentation. The presentation can be accessed by going to our website at www.blackrockbkcc.com and clicking the May 2020 Investor Presentation link in the Presentations section of the Investors page.
I would now like to turn the call over to Jim.
Thank you, Larry. Good morning and thank you for joining our first quarter earnings call. I know this is a difficult time for many people. So first and foremost, I hope you, your families, and your friends are all staying healthy and safe.
I would like to begin by saying that our investment and business teams are fully operational and engaged with our portfolio companies during this time of unprecedented business economic and social disruption.
We have been in regular and frequent contact with our portfolio companies to assess the impact on their finances and operations. The strength of BlackRock's technology platform and business continuity plans have allowed our teams to work remotely in a seamless manner.
I will provide an overview of key first quarter update and the progress of our strategy. I will then turn it over to Mike Pungello, our Interim CFO, to discuss the financial results in more detail before providing some closing remarks and opening the call to questions.
We are pleased to report that the company's stockholders approved a reduction in minimum asset coverage ratio requirement from 200% to 150%, which became effective on May 2, 2020. This provides the company with significant additional operating flexibility.
Although our long-term desired leverage range is 0.95x to 1.25x, we remain cautious about increasing leverage in this uncertain environment. And note that our decision to seek shareholder approval proceeded any COVID-related development and was a natural evolution of our strategy.
Consistent with our strategy of reshaping the portfolio to provide a stable stream of income with limited volatility, our current priorities are focused on reducing our equity and non-core position and redeploying capital into income-producing senior secured investments. Since the beginning of 2019, we have made first or second lien loans to 30 new portfolio companies, increasing the total number of portfolio companies to 52.
Over that period, first lien investments have increased from 24% to 37% by fair market value and total secured investments increased from 47% to 60%. We accomplished this as the non-core exposure declined to 14% of fair market value compared with 33% at the beginning of 2019.
Following the integration of Tennenbaum Capital Partners, the adviser now has over 50 investment professionals dedicated to our U.S. middle market direct lending strategy, working with risk management, sourcing and other professionals within BlackRock.
The advisors turning pension to continue to invest additional sourcing and underwriting capabilities. We remain confident that despite the pandemic-related economic slowdown, our strategy of creating shareholder value through a more stable income-oriented book remains unfold. We believe that this strategy will result in improved return on equity and bring the earnings power of the company in line with the sector while driving enhanced shareholder returns.
Turning to first quarter results. Net investment income for the quarter was $0.14 per share, nearly unchanged from the NII from the previous quarter. We deployed $37 million during the quarter, which was offset by $37 million of repayments and other exits, resulting in no change in the portfolio due to investment activity.
During the quarter, we added a total of five new names to the portfolio, which included four first lien and one second lien. We also received $11.6 million return of capital from BCIC Senior Loan Partners, our joint venture.
Our goal is to reduce the equity investment in the joint venture all the time and redeploy capital into senior, secured investments. The deployments and repayments are detailed in our earnings press release.
The weighted average yield of income-producing securities at fair market value was 10.3% as of March 31, down 60 basis points since last quarter, primarily driven by decline in LIBOR rate.
Quarter end leverage was 0.85x, up from 0.7x for the prior quarter. Net asset value decreased from $6.33 per share last quarter to $5.35 per share as of March 31, driven by pandemic-related economic stress, widening of credit spreads and the declining comparable methods.
The legacy non-core book, which represents 14% of the portfolio by fair market value at quarter end, is comprised of, first, performing debt and income-producing securities at 11% by fair value with AGY first lien, MBS first lien and Red Apple Stores being the three largest holdings; second, non-earning equities at under 1% by fair value primarily consisting of U.S. Well equity; and third, investments on non-accrual at 3% by fair value, including AGY second lien and preferred stock, Sur La Table first lien, Advantage Insurance preferred stock and Advanced Lighting second lien.
Sur La Table was the only new non-accrual in Q1 as nationwide mall closures impacted the retailer significantly. Except for non-accrual investments, which totaled 3.2% of total debt and preferred stock at fair value, all portfolio companies have paid their interest on time during the first quarter and subsequently as of April 30.
As of March 31, 86% of the company's investment portfolio by fair market value was comprised of investments made by BlackRock. Given the pandemic-driven uncertainty, we took a conservative step of reducing our dividend and paying a portion of dividends and stock.
Our liquidity remains adequate and unfunded commitments are small relative to the available liquidity. Our election to pay a portion of our dividend and stock was not driven by any requirement or request from our lenders. We have sufficient liquidity to pay the dividend in cash and a portion of the dividend in stock, insurance cash and build net assets providing additional cushion and operating flexibility in the event of additional pressures on marks due to the broader market weakness in the future.
Although, the pandemic impacted market prices in the first quarter, we expect the full impact on company's financial performance to be felt in coming quarters. However, as pandemic-related uncertainties ease and the financial markets stabilize, our goal will be to transition to an all cash dividend and eventually grow the dividend level.
Secondly, we are working with our bank lenders to reset our financial covenant levels and incorporate the newly adopted 150% asset coverage ratio framework into our borrowing base calculation. Additionally, on May 2, our base management and incentive fee rates were lowered as disclosed in the earnings release.
Before I turn the call over to Mike Pungello, I'd like to emphasize that while the impact of the shutdowns on many U.S. businesses remain uncertain, the company has continued to increase diversity in its portfolio with limited or no new exposure to certain adversely impacted sectors such as retail, energy, restaurant, leisure and hotel.
We have historically operated the company at modest leverage levels relative to the sector. Our risk management protocols are strong and our work [indiscernible]. We believe the company remains defensively positioned to weather this economic crisis.
Over to you, Mike.
Thank you, Jim. I will take a few minutes to review additional financial and portfolio information for the first quarter of 2020. GAAP net investment income, NII was $9.6 million with just over $0.14 per share for the three months ended 2020. Relative to distributions of $0.14 per share, our NII distribution coverage was 101% for the quarter.
Total investment income decreased $0.6 million or 3.2% as compared to the first quarter a year-ago. Excluding fee income and other income, total investment income decreased by approximately 0.4%, primarily due to a lower rate environment and a decrease in dividend income period-over-period, the impact of which was partially offset by a 12.5% increase in the average investment portfolio at amortized cost for the comparative periods. The increase in portfolio size is primarily due to acquisitions throughout 2019.
At quarter end, there were five non-accrual investments representing 3.2% and 9.8% of total debt and preferred stock investments at fair value and cost, respectively. This compares to non-accrual investment of approximately 2.4% and 6.9% of total debt and preferred stock investments at fair value and cost, respectively, at December 31, 2019.
Our average internal investment rating at fair market value at March 31, 2020, was 1.86 as compared to 1.39 as of the prior quarter end. Total expenses increased $1.2 million or 14.8% for the three months ended March 31, 2020, from the comparable period in 2019, primarily due to increase in interest and credit facility fees, and base management fees.
In the first quarter, we voluntarily waived all of our incentive fees of $1.9 million, bringing our cumulative incentive fees waived since March, 2017 to $25.3 million. During the quarter, there was no accrual for incentive management fees based on gains.
In the first quarter, net realized and unrealized losses was $68.8 million predominantly driven by depreciation in our equity investment in BCIC Senior Loan Partners in the U.S. as well, our debt investment in AGY Holding and Sur La Table and overall valuation depreciation across our portfolio as a result of macroeconomic conditions impacted by the COVID-19 outbreak.
During the first quarter of 2020, we repurchased 986,554 of our shares with $3.6 million at an average price of $3.68 per share including brokerage commission. As of March 31, 2020, 4,013,446 shares remained available for repurchase under the current program. As of March 31, 2020, we had approximately $62 million of availability under our credit facility as well as in cash and cash equivalent.
With that, I would like to turn the call back to Jim.
Thank you, Mike. In closing, I would like to take a moment to thank our stockholders for their continued support and recognize our team for their continued hard work. Most of all, I hope everyone remains safe and healthy during these challenging and uncertain times.
This concludes our prepared remarks. Operator, we would like to open the call for questions.
Thank you. [Operator Instructions] We will take our first question today from Rick Shane with JPMorgan. Please go ahead.
Hi guys. Thanks for taking my question this morning. Look, obviously, we realized there's a lot moving around this moment, when we look at sort of your top five or 10 investments, there were some pretty significant mark for stocking instruction and AGY Holding, just curious – and also St. George, Warehousing. I'm curious if this is more mark to cash flow or this is really spread widening and what you're seeing amongst your top investments in terms of actual fundamental performance?
Rick, this is Marsh Merriman. Thanks for your time and your question. Let me just speak generally through a couple of the names that you mentioned and thinking about valuations and performance. With respect to First Boston, performance continues to be steady there. The valuation change was a change in – was a reduction of the change in the valuation of the comp set for that business. And there's a consistent valuation approach here that is driven somewhat by trading multiples to the concept. That's what accounts for that.
At AGY, that is a company that the topline performance of that company has continued to hold up with profitability is under pressure as we have discussed before, due to a significant and atypical spike in one of the metals used in the production process. And so that has impacted profitability, which then impacted the valuation of the business in the mark.
I think you had also asked about St. George that you can imagine, St. George is a shipping and logistics company that deals with ocean freight. So it was one of the earliest companies to see impact from the COVID situation, which was reflected in it performance in the quarter hence it was reflected in evaluation.
So generally speaking, I would say that the evaluations move around or a result of two things. One, the comps from these businesses is generally down for [indiscernible] idiosyncratic reasons for their performance varying over the last quarter.
Got it. Okay. Well, thank you for [indiscernible] helps us understand the thought process and what's going on. So I really value those insights.
[Operator Instructions] And that will conclude our question-and-answer session. I'll turn the conference back over to James Keenan for any additional or closing remarks.
Thank you. And again, I'd just like to thank everyone for their support and continue to work through these uncertain times, and I’ll just reiterate the point that I hope everyone get some times and continue to be happy and healthy during this unique period of time. So thank you for your time today.
And thank you very much. That does conclude our conference for today. I'd like to thank everyone for your participation, and you may now disconnect.