BlackRock Capital Investment Corporation's (BKCC) CEO James Keenan on Q1 2021 Results - Earnings Call Transcript

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BlackRock Capital Investment Corporation (NASDAQ:BKCC) Q1 2021 Earnings Conference Call April 30, 2021 10:00 AM ET

Company Participants

James Keenan - Chairman and Interim CEO

Nik Singhal - President

Abby Miller - Chief Financial Officer and Treasurer

Laurence Paredes - General Counsel and Corporate Secretary

Marshall Merriman - Head, Portfolio Management

Jason Mehring - Managing Director and Member, Investment Committee

Conference Call Participants

Finian O'Shea - Wells Fargo Securities

Melissa Wedel - JP Morgan

Operator

Please stand by. Good morning. My name is Lisa, and I will be your conference facilitator today for the BlackRock Capital Investment Corporation First Quarter 2021 Earnings Call. Hosting the call will be James Keenan, Chairman and Interim Chief Executive Officer; Nik Singhal, President of the company; Abby Miller, Chief Financial Officer and Treasurer; Laurence D. Paredes, General Counsel and Corporate Secretary of the company; Marshall Merriman, Head of the Portfolio Management; Jason Mehring, Managing Director and Member of the company’s Investment Committee.

Lines have been placed on mute and after the speakers complete their update, they will open the line for a question-and-answer session. [Operator Instructions]

Thank you, Mr. Paredes. You may begin the call.

Laurence Paredes

Good morning. And welcome to the first quarter 2021 earnings conference call of BlackRock Capital Investment Corporation or BCIC. 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 BCIC’s actual results may differ from these statements.

As you know, BCIC has filed with the SEC reports, which lists some of the factors which may cause BCIC’s results to differ materially from these statements. BCIC 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, BCIC makes no representation or warranty with respect to such information.

Please note, we have 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 April 2021 Investor Presentation link in the Presentations section of the Investors page.

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

James Keenan

Thank you, Larry. Good morning. And thanks to all of you for joining our first quarter earnings call. I will begin with an update on significant progress we have made toward our strategic goals, as well as a high level view of our first quarter performance and our near-term priorities. Nik Singhal will then give an update on our portfolio activity and status, and Abby Miller will follow with a discussion of our financial results in more detail before we open the call to questions.

As we have emphasized in prior calls, one of our strategic priorities has been to rotate out of non-core legacy and other junior capital investments. Through 2020 and the first quarter of 2021, we have made substantial progress on this front.

At quarter end, our non-core legacy assets have been reduced to just 8% of our total portfolio, compared to 14% a year ago, with near-term visibility into further exits. Other junior capital exposure, excluding non-core assets is now reduced to 13% of the portfolio from 38% a year ago.

With the portfolio cleanup largely behind us, our focus has shifted more toward our other strategic priority of producing a steady reliable income with reduced NAV volatility. As we redeploy capital, we remain committed to building a diversified portfolio of income generating senior secured loans with an emphasis on first liens.

At the close of first quarter, our portfolio was composed of 62% first lien notes, 24% second lien and 14% junior capital. For comparison, at the end of 2019, only 34% of the portfolio was in first lien.

We are achieving greater diversity as well, adding 11 new companies to the portfolio this quarter. We now have 60 portfolio companies, compared to 47 at the end of 2019. The company has and continues to benefit from Blackrock’s robust origination and underwriting platform. We believe that as we selectively deploy capital, we will reach our target of at least 70 portfolio companies and 70% to 75% first lien mix.

The credit quality of our current portfolio is strong, as we have been rotating the portfolio out of non-core assets and into diversified senior secured loans. Excluding our remaining investment and Gordon Brothers finance company or GBFC, we have only one investment on non-accrual status.

Notably, we sold our preferred stock position in the Advantage Insurance, which was previously a non-accrual at the prior quarter’s mark. Essentially, the 5.5% of non-accrual at fair value we reported for the first quarter represents our remaining exposure to GBFC. Additionally, after reinstating our full cash dividend last quarter, we maintain the dividend at $0.10 per share this quarter.

While leverage decreased during the quarter, we are confident our focus on steadily building up the portfolio with senior investments will over time generate stronger NII. We expect the NII run rate to grow into our dividend over the coming quarters as we redeploy freed-up capital.

On our last call, we had stated that our goal of extending our credit facility. We accomplished this goal on April 23rd, providing us much greater flexibility into managing our liabilities. The revolver now matures in April 2025. Importantly, the amendment removes the springing maturity ahead of the 2022 convertible note maturity and removes certain restrictions on prepayment or repurchase of the 2022 notes.

Finally, our share repurchase plan kicked in again during the first quarter. We repurchased approximately 256,000 shares at an average price of $3.40 per share, including the brokerage commissions.

I will now turn the call over to Nik Singhal to discuss our portfolio activity in further detail.

Nik Singhal

As Jim mentioned, we made strong progress in reinvesting our portfolio and existing non-core and other junior investment. During the first quarter, we received $52.6 million in proceeds from reduction in non-core and junior capital investments. This brings our total proceeds from these two buckets to approximately $179 million in the last two quarters.

The largest drivers of this first quarter activity were the $39 million full repayment of our investment in First Boston Construction Holding, $6 million in the full exit of our preferred stock in Advantage Insurance and a $4 million return of capital from our equity investment in BCIC SLP.

In addition, there were approximately $35 million in repayments from our core holdings. This was primarily driven by opportunistic sales of certain second lien exposures, as well as normal course repayments.

With respect to originations, we had gross deployments of $55 million in the quarter, including 11 new and one existing portfolio companies. Consistent with our strategy, lower overall portfolio risk and increased our percentage of first lien investments, 86% of our originations were first lien loans and 14% were second lien loans.

Our pipeline of new opportunities remains solid and we are seeing less prepayment activity in the second quarter so far. In the first four weeks of the second quarter, we added four new portfolio companies. All four were first lien loans.

As the capital markets remain very robust, we remain committed to our disciplined approach to investing, executing only a small percentage of the opportunities we review. We are primarily co-investing with other funds on BlackRock Private Credit Platform, which enables us to participate in larger transactions without taking on too much concentration risk. And we continue to emphasize transactions where we lead or co-lead negotiation on these firms.

The details of our new investments can be found in the earnings release, but some of our more prominent investments include the following. A first lien LIBOR plus 9.25% term loan to World Remit, a leading global money transfer platform that facilitates international transfers online. BlackRock led this investment of which BCIC invested 9.6 million.

A first lien LIBOR plus 8.75% term loan and delayed draw term loan to the JobandTalent USA, a digital temporary staffing agency. BlackRock acted as the sole lender in this investment, of which BCIC committed $9.6 million across the two tranches.

A first lien LIBOR plus 6% term loan in unfunded revolver to 2-10 Holdco, a provider of new home and structural warranty. BCIC committed $7.5 million to this investment.

Our core portfolio with an increasing percentage of first lien loans has continued to perform well. As Jim mentioned, excluding the remaining GBFC exporter, there’s only one investment in non-accrual, which is a non-core position with $0.9 million fair market value.

During the first quarter, our NAV increased by $7.9 million or 2.5% from the December quarter, driven primarily by a $12 million net realized and unrealized gain on our investments. This reflected improved financial performance across many of our portfolio companies.

Our NAV per share increased 2.8% from $4.23 to $4.35. Our focus for the remainder of 2021 will be to deploy our liquidity into core investments consistent with our objectives of stable income and low NAV volatility.

Growing our portfolio in a disciplined manner will enable us to grow our NII as well, with the eventual goal of having our core earnings fully cover our dividend, which as Jim noted, we have paid at $0.10 in cash the second quarter in a row.

I will now turn the call over to Abby Miller to further discuss our financial results for the quarter.

Abby Miller

Thank you, Nik. I will take a few minutes to review additional financial results for the first quarter of 2021. GAAP net investment income, NII was $4.2 million or approximately $0.06 per share for the quarter. This was consistent with our expectations giving a portfolio reduction driven by our successful efforts in reducing exposure to junior capital and non-core investments. NII covered 56% of our $7.4 million in stockholder distributions.

Total investment income was $10.3 million, down $4.3 million or 29.7% from the fourth quarter of 2020, primarily driven by a decrease in investment portfolio size associated with portfolio derisking.

Total expenses decreased $1.2 million or 16.7% from the fourth quarter of 2020, primarily driven by lower base management fees and interest expense quarter-over-quarter.

In the first quarter, the company did not incur any incentive fee based on income. As you may recall, in the fourth quarter of 2020, we recorded a $1.3 million incentive fee, which was voluntarily waived by the advisor. Our cumulative and permanent incentive fees waived since March 2017 totaled $29.7 million. Additionally, in the first quarter, there was no accrual for incentive fees based on gains.

During the first quarter, net realized and unrealized gains were $12 million, primarily driven by valuation recovery in SVP-Singer, BCIC Senior Loan Partners, St. George, as well as continued general market recovery across the broader portfolio.

At quarter end, there were three non-accrual investments representing 5.5% of total debt and preferred stock investments at fair value, as compared to 6.5% at December 31, 2020. Our weighted average internal investment rating at fair value also improved to 1.72, as compared to 1.90 at prior quarter end.

At March 31, 2021, we had a strong liquidity position at approximately $294 million from availability under our credit facility and cash on hand. Our net leverage ratio was 0.38 times at quarter end, compared to 0.51 times at December 31, 2020.

We expect to gradually return to normalized leverage levels as we redeploy capital and grow our portfolio over time. Additionally, as Jim mentioned, the amendment of the credit facility provides additional flexibility for the company to further manage its capital structure in 2021.

During the first quarter, we repurchased approximately 256,000 of our own shares for $0.9 million and the average price of $3.40 per share including brokerage commissions. As of March 31, 2021, approximately 7.24 million shares remained available for repurchase under the current buyback program.

As announced yesterday and consistent with prior quarter levels, a quarterly distribution of $0.10 per share was declared payable on July 7, 2021, to stockholders of record at the close of business on June 16, 2021.

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

James Keenan

Thank you, Abby. In closing, we are pleased with our first quarter performance, which was driven by the ongoing hard work of our entire team and we are excited about the year ahead. We are in good financial shape and are well-positioned to continue to pursue our goal of growing our portfolio toward steady, reliable income and lower NAV volatility. I also want to thank our stockholders for their ongoing patience and support through this portfolio repositioning process.

This concludes our prepared remarks. Operator, we would like to open the call for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We will take our first question from Finian O'Shea with Wells Fargo Securities. Please go ahead.

Finian O'Shea

Hi, everyone. Good morning. Jim, first question on the dividend that you expect to make and burn again in the coming quarters, I assume that that would until continuing the incentive fee waiver. So would you remind us on the policy or approach you have to that? And then do you see BlackRock in a position, I think, the dividend is about 9.5% of book, obviously, today’s becoming more competitive and so forth? Do you think the BDC can earn the dividend if and when you achieve the remaining portfolio optimization that would maximize your earnings potential?

James Keenan

Thanks, Finian. Thanks for the questions. Yeah. Obviously, there’s a lot of different variables that come into the deployments and the earnings. Obviously, I think, Q1 was a good example with the 11 new deals that we were able to deploy into and consistent with the strategy of diversifying into more first liens, obviously, spreads, LIBOR, all are things that are going to impact the overall level of earnings that come into that.

When we model it out and ultimately communicate that to the market, we expect over the next couple quarters to continue on that kind of pace from a deployment standpoint and then ultimately build toward those levered ratios around that 1.15 to 1.25 type range and we believe that’s consistent with regards to the overall strategy.

From a standpoint -- from the dividend, what we are modeling out and continue to work with our Board is as we continue to deploy that and as we think we have the earnings, we -- the advisor has been, obviously, waiving all of the incentive fees to-date and we will continue to work with the Board as we complete the -- and slowly reposition or re-transition the portfolio is when to start to put that back into play when this is all pool repositioning of the overall portfolio.

But as of right now, I mean, we are pretty comfortable with regards to where we are deploying the types of spreads, what we are able to earn and just the volume and pace of activity that we see in the market today. But obviously, those will be decisions that the Board will make as we move into the quarters of being fully invested.

Finian O'Shea

Okay. That’s helpful. That’s all for me. Thank you.

James Keenan

Thanks.

Operator

And our last question comes from Melissa Wedel with JP Morgan.

Melissa Wedel

Good morning, everyone. Thanks for taking my questions today. Nik, you referenced some deal activity that’s occurred so far in April. I think you referenced 20 companies that you have deployed capital to. I was wondering if you might be willing to put some size around that for us and give us a sense of how you expect the originations to play out versus your existing repayments, should we expect that to be pretty balanced or be -- continue to be skewed more toward the exits as they did also talk about having visibility into further rotation out of some legacy investments. Thanks.

Nik Singhal

Yeah. Yeah. Thanks. Thank you, Melissa. A very relevant question indeed. So, if you look at Q1 where we deployed $56 million across 11 new portfolio companies and before that Q4 where we actually deployed $62 million. That pace of growth deployment is very, very consistent with our desired pace and we believe we are going to continue to create gross deployments at that pace.

In Q2 so far and it’s only 30 days, we mentioned the four new companies, which are all first liens and across those we have deployed $23 million, right? So I wouldn’t necessarily extrapolate it linearly, but that’s pretty much ahead of the pace that we had in the prior two quarters. We think that that pace is sustainable.

The last two quarters obviously the gross deployments were more than offset by the repayment activity. Much of this repayment activity was exits we have been trying to create. So these were large junior capital positions, First Boston, Senior Loan Partners, GBFC and then many of the non-core possessions, Advantage Insurance and others.

And one thing we mentioned on the call is that our non-core book is down to 8% with near-term visibility into further reductions. And incidentally as we were speaking on the call, our investment in Red Apple, our non-core investment paid off.

Our recovery there are at our mark and there’s potential for additional recoveries down the line, which could push recoveries above our mark. So, really great news. That’s going to take our non-core bucket down to 5%. So really most of the desirable exists are now behind us.

Additionally, just market driven refinancing activity, we were seeing a lot of it in Q4, some of it in Q1 is not really starting to slow down. So with the great Red Apple news that we just received, we think that our gross deployments would actually start turning into net deployments and which would be accretive to our leverage ratio, as well as NII.

Melissa Wedel

Breaking news. Thank you, guys.

Operator

All right. And that does conclude today’s presentation. Thank you for your participation. You may now disconnect.

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