U.S. Markets open in 7 hrs 7 mins

Edited Transcript of BKCC earnings conference call or presentation 2-May-19 2:00pm GMT

Q1 2019 BlackRock Capital Investment Corp Earnings Call

NEW YORK Jul 10, 2019 (Thomson StreetEvents) -- Edited Transcript of BlackRock Capital Investment Corp earnings conference call or presentation Thursday, May 2, 2019 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* James E. Keenan

BlackRock Capital Investment Corporation - Chairman of the Board & Interim CEO

* Laurence D. Paredes

BlackRock Capital Investment Corporation - General Counsel & Corporate Secretary

* Michael L. Pungello

BlackRock Capital Investment Corporation - Interim CFO & Interim Treasurer

* Nik Singhal

BlackRock Capital Investment Corporation - MD

* R. Marshall Merriman

BlackRock Capital Investment Corporation - Investment Professional

================================================================================

Conference Call Participants

================================================================================

* Finian Patrick O'Shea

Wells Fargo Securities, LLC, Research Division - Associate Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, everyone. My name is April, and I will be your conference facilitator for today's BlackRock Capital Investment Corporation First Quarter 2019 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 Security (sic) [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. (Operator Instructions) Thank you. Mr. Paredes, you may begin the conference.

--------------------------------------------------------------------------------

Laurence D. Paredes, BlackRock Capital Investment Corporation - General Counsel & Corporate Secretary [2]

--------------------------------------------------------------------------------

Good morning, and welcome to BlackRock Capital Investment Corporation's First Quarter 2019 Earnings Conference Call.

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 expression. 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 statement. BlackRock Capital Investment Corporation assumes no duty to and does not undertake to update any forward-looking statement. 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 2019 Investor Presentation link in the Presentations section of the Investors page.

I would now like to turn the call over to Jim, who will provide an overview of the business and first quarter highlight.

--------------------------------------------------------------------------------

James E. Keenan, BlackRock Capital Investment Corporation - Chairman of the Board & Interim CEO [3]

--------------------------------------------------------------------------------

Thank you, Larry. Good morning, and thank you for joining our first quarter earnings call. I will provide you with business and performance highlights and update on investment activity during the first quarter and underlying portfolio performance before turning it to Mike Pungello, our interim CFO, to discuss the financial results in a bit more detail.

For the first quarter, net investment income was $0.17 per share. Based on the $0.18 per share distribution declared by the company's Board of Directors, there was approximately 92% distribution coverage for the quarter. Additionally, we had net portfolio deployments of $2 million for the quarter, which I will talk more about shortly.

Net asset value per share increased from $7.07 per share last quarter to $7.15 per share as of March 31, a 1.1% quarter-over-quarter increase. Net unrealized and realized gains of $7 million were largely driven by the company's equity investment in U.S. Well Services, a publicly traded company. A substantial portion of this investment is subject to certain lock-up provisions, half of which expire in May with the other half expiring in November of 2019. Although there could be no assurances, we anticipate that the valuation of this investment will continue to shift in line with the quarter end closing prices of the USWS common stock.

We continue to work towards monetizing and exiting certain legacy assets in the portfolio. We are seeking to create sales or natural exits of these noncore positions in a manner that we believe in the best interest of the company's stockholders. Strategically, we are focused on exiting these positions and redeploying the proceeds in the company's core strategy to improve net investment income and reduce volatility in the portfolio valuation.

Due to a slight increase in net deployments this quarter, leverage increased from 0.36x to 0.37x during the quarter. We have ample liquidity of $269 million to support new investment activity and have no debt maturing until 2022. Under the existing share repurchase program during the first quarter, $0.5 million were invested at an average repurchase price of $5.49.

Turning to the company's investment activity during the quarter, we deployed $58 million, which was offset by repayments and other exits totaling $56 million for a net $2 million increase in the portfolio due to investment activity. The company's deployments and repayments are detailed in the first quarter earnings release.

We began to realize the sourcing and underwriting benefits of the PCP integration during the first quarter. Two new investments, CareATC and Financial Force, demonstrated the ability of BlackRock's extended middle-market platform to provide holistic financing solutions to borrowers.

Both of these investments were co-investments across multiple BlackRock-managed funds. Based on current visibility and to close and approve deals, we anticipate deployments in new companies to increase during the second quarter, which would also result in increased sector and issuer diversity.

We continue the strategy to pursue a more diversified and stable income-producing portfolio. The company's 3 core channels for deployment are, one, high-quality, first- and second-lien investments; two, investments in our portfolio company, Gordon Brothers Finance Company; and three, investments in our portfolio company, BCIC Senior Loan Partners, the company's first-lien joint venture. Both Senior Loan partners and Gordon Brothers Finance Company have underlying investments in diversified pools of primarily first-lien loans that generate attractive risk-adjusted returns, yielding 11% or higher on the company's investments in each of these 2 entities.

With the repayment and deployment activity this quarter, there are 28 companies in the portfolio at a fair market value of approximately $680 million. The weighted average yield of income-producing securities at fair market value was 11.7% as of March 31, which is up 22 basis points from the last quarter.

From March 6, 2015, when BlackRock became responsible for managing the investment activities of the company, to the end of the first quarter, the BlackRock team has deployed approximately $1 billion into new investments, of which $387 million has been exited with a realized IRR of 14.1%. As of March 31, almost 70% of the company's investment portfolio by fair market value is represented by investments deployed by BlackRock.

Let me now talk a little bit about the company's legacy noncore portfolio, which as of March 31, was 33% of the portfolio by fair market value. This part of the book is comprised of, one, performing debt and income-producing securities at 25% by fair value with AGY or Vertellus, Sur La Table and Red Apple Stores being the 4 largest holders; two, nonearning equities at 7% by fair value, primarily consisting of U.S. Well and Vertellus equity; and three, investments on nonaccrual at 1% fair value.

As mentioned earlier, the U.S. Well equity is in a form of publicly traded USWS common shares, a significant portion of which is subject to lock-ups expiring in May and November of 2019. As of March 31, investments on nonaccrual status represented 1.2% of the total portfolio on fair market value. These include Westmoreland first lien, AGY preferred stock and advanced lighting second lien, each of which is part of the noncore legacy book.

Before I turn the call over to Mike Pungello, for additional details regarding the financial results, I'd like to emphasize that the company's low leverage and ample liquidity puts it in a position to benefit from enhanced sourcing capabilities and industry expertise of the BlackRock's expanded direct-lending platform. Over to you, Mike.

--------------------------------------------------------------------------------

Michael L. Pungello, BlackRock Capital Investment Corporation - Interim CFO & Interim Treasurer [4]

--------------------------------------------------------------------------------

Thank you, Jimmy. I will take a few minutes to review additional financial and portfolio information for the first quarter of 2019.

GAAP net investment income, NII, was $11.4 million or approximately $0.17 per share for the 3 months ended March 31, 2019. Relative to distributions declared of $0.18 per share, our NII distribution coverage was approximately 92% for the quarter. Total investment income for the 3 months ended March 31, 2019, decreased $1.5 million or 7.3% as compared to the 3 months ended March 31, 2018.

Excluding fee income and other income, total investment income decreased by approximately 6.2% primarily attributable to a decrease of 10% in average investment portfolio for the quarter ended March 31, 2019, at amortized cost as compared to the same quarter in 2018. The decrease in portfolio size is primarily due to dispositions after the first quarter of 2018 and in 2019, the impact of which was partially offset by a higher rate environment and higher dividend income for the quarter ended March 31, 2019.

As of March 31, 2019, there are 3 nonaccrual investment positions, representing approximately 1.6% and 7% of total debt and preferred stock investment at fair value and cost, respectively, as compared to nonaccrual investment positions of approximately 1.6% and 7.1% of total debt and preferred stock investments at fair value and cost, respectively, at December 31, 2018. Our average internal investment rating at fair market value at March 31, 2019, was 1.49 as compared to 1.44 as of the prior quarter end.

Total expenses decreased $1.3 million or 14.1% for the 3 months ended March 31, 2019, from the comparable period in 2018 primarily due to a decrease in base management fees and interest and credit facility fees. As previously disclosed, we announced the continuation of our waiver of incentive management fees based on income through June 30, 2019.

For the quarter ended March 31, 2019, $2.3 million of incentive management fees based on income earned by our investment adviser have been waived. Through March 31, 2019, we have waived a total of $18.8 million of incentive management fees based on income on accumulative basis. During the quarter, there was no accrual for incentive management fees based on gains. Net realized and unrealized gain was $6.6 million for the 3 months ended March 31, 2019, primarily consisting of appreciation in our equity investment in USWS.

During the first quarter of 2019, we repurchased 85,543 of our shares for $0.5 million at an average price of $5.49 per share, including brokerage commission. As of March 31, 2019, 3,320,309 shares remains available for repurchase under the current program.

At March 31, 2019, we are in a very strong liquidity position to grow our investment base. We had approximately $269 million of availability portfolio company investments between availability under our credit facility and cash and cash equivalents.

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

--------------------------------------------------------------------------------

James E. Keenan, BlackRock Capital Investment Corporation - Chairman of the Board & Interim CEO [5]

--------------------------------------------------------------------------------

Thank you, Mike. In closing, I would like to take a moment to recognize our team and thank them for their continued hard work as we demonstrate progress in achieving our portfolio objectives. I would also like to thank you for your continued support.

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

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And we'll first hear from Finian O'Shea of Wells Fargo Securities.

--------------------------------------------------------------------------------

Finian Patrick O'Shea, Wells Fargo Securities, LLC, Research Division - Associate Analyst [2]

--------------------------------------------------------------------------------

Can you guys first give an update on the rotation of legacy names, given last quarter, you said you'd be more so proactive in moving out of those. Can you give us some color on just the market out there and your feel for how soon this can get done?

--------------------------------------------------------------------------------

James E. Keenan, BlackRock Capital Investment Corporation - Chairman of the Board & Interim CEO [3]

--------------------------------------------------------------------------------

Thanks, Fin. This is Jimmy. I'll start and then I'll let Marsh, who's leading the effort there, answer as well. But I would say, as mentioned in the last quarterly call, this is a key part of our strategy is to continue to work through exits of those -- the legacy names. I think we've communicated to you all that each one of these names has idiosyncratic issues and stories to them. And our main focus is, obviously, balancing the speed at which we can exit but also getting the inherent best value for each one of those entities. So I would say, as you can see, the market is fairly robust with regards to economic activity, and obviously asset price is out there, so we believe it's a good environment, and we've seen good progress. But I'll also let Marsh follow on.

--------------------------------------------------------------------------------

R. Marshall Merriman, BlackRock Capital Investment Corporation - Investment Professional [4]

--------------------------------------------------------------------------------

Sure. Thanks, Jimmy, and thanks for your question, Fin. There's not a whole lot I can add to what Jimmy said other than to just emphasize that, while this is a market that should be receptive to exits of these names, each of these names has -- and it's a term we use a lot, "idiosyncratic" features in their capital structure or their governing documents that impose, sort of, if nothing else some time hurdles with respect to how quickly you can get out of things, even when you have ready, willing and able buyers. So it is a full-time project that we are working on. It's hard to prognosticate how quickly it will happen, but the goal is to make it happen as quickly as possible given the constraints we're working under.

--------------------------------------------------------------------------------

Finian Patrick O'Shea, Wells Fargo Securities, LLC, Research Division - Associate Analyst [5]

--------------------------------------------------------------------------------

Sure. And then just a follow-up, if I may, 2 parts. You guys talked a bit about your liquidity and capacity. And there was a really good opportunity for buybacks. You only bought 0.5 million, which, given the position you're in, one would think that, that could and should have been more. And then also on the deployment side, these 2 co-investment names, CareATC and Financial Force, we'll see next week. But it looks like the bite sizes that you were allocated were on the smaller ends. So any color you would have to those 2 elements?

--------------------------------------------------------------------------------

Nik Singhal, BlackRock Capital Investment Corporation - MD [6]

--------------------------------------------------------------------------------

Fin, it's Nik. So let me first address the share buyback question. So we -- our share buybacks are conducted, purchased -- pursuant to an approved 10b5 program. And in quarter 1, we bought back 85,000 shares. The reality is that throughout all 2018, we bought over 4 million shares, including almost 2 million shares in Q4 at an average purchase price of $5.62. So the level of buyback is really a function of the price at which the stock is trading and as Q4 happen to provide exceptional opportunity to be conducting those buybacks. And then for the second question, I am going to turn back to Jimmy.

--------------------------------------------------------------------------------

James E. Keenan, BlackRock Capital Investment Corporation - Chairman of the Board & Interim CEO [7]

--------------------------------------------------------------------------------

Yes. Thanks, Nik. Yes, and with regards to fee deployment, I think we've mentioned about the -- Q2, I think we've seen some pretty strong trends. And obviously, the combined platform, we really -- yes, we talked about this in the last quarter. Just from a timing perspective of some of the deals that are coming through, I'd say we'd expect deployments to pick up pretty rapidly in the second quarter. First quarter was a little bit slow based off of our activity in Q4. With regards to the allocations of some of those, as I think we've communicated to you, all -- they're guided by allocation policies that are both driven by the -- so again, to relieve order and then to be very pro rata across the overall book of assets that the adviser manages.

And the last comment -- just the last comment on that, and I think all that is just in general in line with the goals that we've tried to communicate as well. Historically speaking, and you're looking for legacy book, the assets have been far more concentrated, and they tended to be more second lien. So I think what you'll see with Financial Force, CareATC is we are -- will have more names in the portfolio. We tend to be more first lien. But the quality of the book will increase because of, obviously, where we are from a security standpoint but also the diversification that we plan to have. So that's part of the allocation as well.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

(Operator Instructions) And it appears there are no further questions at this time.

--------------------------------------------------------------------------------

James E. Keenan, BlackRock Capital Investment Corporation - Chairman of the Board & Interim CEO [9]

--------------------------------------------------------------------------------

Thank you, operator. And again, I'd like to thank everybody for your support. We look forward to talking to you in next quarter as we continue to progress across the goals of the portfolio. Thanks again.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

That does conclude today's conference. Thank you all for your participation. You may now disconnect.