Q4 2023 BlackRock Capital Investment Corp Earnings Call

Participants

Laurence Paredes; Corporate Secretary; BlackRock Capital Investment Corp

James Keenan; Interim CEO & Chairman; BlackRock Capital Investment Corp

Nik Singhal; President; BlackRock Capital Investment Corp

Chip Holladay; Interim CFO & Treasurer; BlackRock Capital Investment Corp

Finian O'Shea; Analyst; Wells Fargo

Melissa Wedel; Analyst; JPMorgan

Presentation

Operator

Good morning. My name is Anna, and I will be your conference facilitator today for the BlackRock Capital Investment Corporation fourth-quarter and full-year 2023 earnings call.
Hosting the call will be James Keenan, Chairman and Interim Chief Executive Officer; Nik Singhal, President; Chip Holladay, Interim Chief Financial Officer and Treasurer; Laurence D. Paredes, Corporate Secretary; Diana Huffman, General Counsel; Jason Mehring, Managing Director and member of the Company's investment committee. (Operator Instructions)
Thank you. Mr. Paredes, you may begin the conference call.

Laurence Paredes

Good morning and welcome to the Fourth Quarter and Full Year 2023 earnings conference call of BlackRock Capital Investment Corporation or BC.
I see 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 that may cause BCIC.'s results to differ materially from these statements. CCIC. 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. And accordingly, BCIC 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, our management team will highlight some of the information contained in the presentation. The presentation can be accessed by going to our website at w. w. w. dot BlackRock BKCC. dot com and clicking the March 2024 Investor Presentations 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 thank you for joining our fourth quarter and full year 2023 earnings call. We remain very excited about our pending merger with BlackRock TCP Capital Corp for TCBC., one of our affiliated BDCs. I will speak more about the merger shortly, but first, I'll provide an overview of our performance and highlights for the quarter. Nick will then discuss our portfolio activity and Chip will address our financial results in more detail. We will then open the call to your questions.
We finished 2023 on a strong note, posting solid fourth quarter earnings and covering our $0.1 dividend for six consecutive quarter. We generated year over year fourth quarter net investment income growth of 15% and provided dividend coverage of 128% over the past several quarters, we have successfully diversified and strengthen our portfolio as we continue to identify attractive opportunities to prudently grow on behalf of our shareholders. We closed the year with a well-diversified portfolio of 121 companies, more than doubling our portfolio companies over the past three years, first-lien term loans make up 85% of the portfolio, up from 50% at the end of 2020. In that space of time, we methodically transform PCIC.'s portfolio, drawing upon the breadth and power of the BlackRock platform. Specifically, we have defensively positioned the portfolio with compelling first-lien loans with a steadfast focus on strict underwriting and reliable, strong credit quality as well as diversity across multiple sectors. Junior capital investments now make up only 4% of our investments down from 23% at the close of 2020. During the quarter, we added five new portfolio companies and deployed 25 million on a gross basis fall in first-lien loans. We also made follow-on investments in four existing portfolio companies. These are companies we know and understand well and as such, are excellent avenue for continued deployment.
In terms of our overall market commentary, we are seeing a level of bifurcation in different segments of direct lending. Borrower-friendly trends such as tighter credit spreads and covenant-light deal structures are becoming more prevalent in the upper middle market however, the core middle market where we focus has been less impacted by this trend. And we continue to leverage our industry expertise to source and invest in deals that present attractive risk-reward opportunities. We remain disciplined and continue to pass on a substantial number of less attractive opportunities, particularly when we believe that pricing does not appropriately reflect the corresponding risk or terms don't provide adequate blended protections. Our diversified first lien oriented portfolio is constructed to be resilient in adverse macroeconomic conditions, such as the environment we are in today characterized by high interest rates, relatively high inflation and slowing consumer and corporate spending. However, we are not completely immune to these factors. We are seeing this impact on a portion of our book during the quarter, we placed one additional investment trust deal on nonaccrual status. Nick will provide additional detail on Fazzino as well as other exposures to the Amazon third-party aggregator space. Additionally, we placed a portion of our investment in Howard Mayer burdens and services on partial non-accrual, our first-lien position and the capital stack as well as the structural protections baked into these investments enable us to drive outcomes during down cycle. Our experience and resources to proactively engage with management teams in the event of emerging challenges gives us tremendous confidence in our ability to identify and address company-specific issues, we believe we are well positioned to withstand the impact of any economic slowdown. And broadly speaking, our portfolio remains healthy. Our fourth quarter weighted average portfolio yield was 12.7%, relatively consistent with the prior quarter and supported by higher interest rates. Our net leverage for the fourth quarter was 0.91 times, driven by borrowings to fund new deployments during the quarter. Total available liquidity for deployment, including cash on hand, was 73.4 million at quarter end, giving BCIC. ample resources to fund new investments in the current quarter. And of course, I'd like to conclude by emphasizing the merits of our pending merger and its expected benefits as we approach our shareholder vote meeting scheduled for March seventh. We intend to close the transaction as soon as practicable following a successful vote from shareholders of each BDC. We remain excited about the potential for the merger, which will bring together two very similar portfolios with substantial overlap in which we expect to create meaningful value for our shareholders.
I'll now turn the call over to Nick to discuss our portfolio activity in more detail.

Nik Singhal

Thanks, Jim. We continued the strong momentum this quarter, growing our portfolio and generating solid net investment income despite a modest decline in NAV per share. As Jim noted, we deployed $25.4 million in five new and four existing portfolio companies. All of our new investments in the quarter were deployed in first-lien loans consistent with our strategy, maintaining a lower risk profile, especially in this uncertain macroeconomic environment.
Total exits and repayments during the quarter were $12.6 million and were primarily concentrated in six portfolio companies, including one partial paydown with a total of $0.3 million in fee and other onetime income generated in excess of principal repaid from these transactions. Our three largest new investments in the quarter consisted of $8.9 million, so far plus 7% first-lien term loan and a $0.5 million unfunded revolver through Mesquite, BidCo casino and hotel operator, a 4.5 million or so for the 6% first lien term loan, Bad Boy mowers, lawn mower manufacturer and a $2.7 million, silver plus 5.5% first-lien term loan with trends, network IT provider of payment processing services.
With respect to our current investment activity, we're still seeing a decent flow of opportunities across both new and existing names. However, we remain very selective about what we invested since the end of the fourth quarter. Our Investment Committee has approved transactions of approximately 13 million have either closed in this first quarter or are pending close subject to customary closing conditions.
Turning now to the existing portfolio, we have small companies on full nonaccrual status at the end of the quarter, which includes the new transient nonaccrual that Jim mentioned. These nonaccruals represented 4.1% for total portfolio at fair value, and that's publicly known drug. You filed for Chapter 11 bankruptcy protection last week. Our first lien position is at the top of the capital structure. We believe that a Chapter 11 driven financial restructuring will result in a healthier balance sheet. It enabled the Company to execute on its turnaround. Our total exposure across all investments for the third-party Amazon aggregator space was 6.5% of the portfolio by fair value at the end of the quarter. For the last several quarters, this subsector has come under pressure due to higher interest rates, lower operating margins in excess inventory levels. We're starting to see our portfolio companies revert to more normalized inventory levels. One of our underwriting principles is that things can go wrong. And we have a long history of managing underperforming situations for successful outcomes. We have been working diligently to create successful outcomes in this space as well. We believe that consolidation is a logical trend in this space, which should enable companies to achieve scale operate more efficiently in 2023 are our portfolio company. Elevate was acquired by seller X, another portfolio company of ours. This past week purge, which was a nonaccrual investment in our portfolio, was acquired by River, a portfolio company of ours. Following this acquisition, our prior investment in perch as rolled into razor in the form of preferred equity instrument sitting below our existing debt in ratio. We remain optimistic about the financial performance of these companies despite the decline experienced in 2023. It's important to note these nonaccrual investments represent company-specific issues not indicative of broader trends within our portfolio. With each of these situations, we're leveraging BlackRock's extensive experience work towards successful outcomes on behalf of our shareholders.
Our NAV per share for the quarter was down by less than 1% due primarily to 3.9 million of net realized and unrealized losses on the portfolio, partially offset like $2 million of ENI earned in excess of the declared dividend despite economic uncertainty driven by the pressures of inflation and interest rates. Our NAV demonstrated relative stability in 2022, and we believe this is a direct consequence of the successful transition into a primarily first-lien oriented portfolio as well as a prudent approach, selectively adding new investments.
I'll now turn the call over to Chip for further discuss our financial results for the quarter.

Chip Holladay

Thank you, Nick. I will now take a few minutes to review some additional BCIC. financial results for the fourth quarter. Gaap net investment income remained strong in the fourth quarter at $9.3 million or $0.13 per share as compared to 9.5 million earned in the third quarter and delivered a 15% increase from the fourth quarter of 2022. Our gross investment income was $20.3 million for the quarter, a decrease of 5% from the prior quarter, but an increase of 16% from the fourth quarter of 2020 to the $1 million quarterly decline was primarily due to the impact of our positions in herbs and for osteo being designated as nonaccrual during the third and fourth quarters and to lower fee and other onetime income earned from the investment exits compared to the third quarter. This decrease in our gross investment income was partially offset by approximately $800,000 decrease in total expenses during the fourth quarter. The decrease in total expenses for the fourth quarter was primarily driven by lower incentive fees resulting from lower pre-incentive fee NII and to the reversal of previously accrued incentive fees on capital gains we recorded in the third quarter due to unrealized losses in the portfolio in the fourth quarter. Overall, our aggregate net investment income per share of $0.5 earned in 2023 delivered an increase of approximately 25% from ENI per share reported in 2022. Net unrealized depreciation during the quarter was $4 million, driven primarily by markdowns associated with our nonaccrual investments, partially offset by an unrealized gain on our interest rate swap position. We also recorded nominal realized gains of $100,000 for the quarter on certain investment assets.
Now turning to liquidity. At December 31st, total available liquidity for deployment and general operating use was approximately $73.4 million, including cash on hand and subject to leverage and borrowing base restrictions. Our net leverage ratio was 0.91 times up from 0.84 times at the end of the third quarter, driven by borrowings to fund new deployments during the quarter. As announced yesterday, we declared a quarterly dividend of $0.1 per share payable in cash on March 29th, 2024, to all shareholders of record at the close of business on March 15th, 2024. With that I would like to turn the call back to Jim.

James Keenan

Thank you, Chip. In summary, we have successfully repositioned and diversified the portfolio and believe that we are in a great position to close our transformational merger with TCPC. The combination will create meaningful scale that we believe will enhance the combined company's ability to produce strong returns for our shareholders. With that, we would now like to open the call for your questions.

Question and Answer Session

Operator

(Operator Instructions) Finian O'Shea, Wells Fargo Securities.

Finian O'Shea

Good morning from Jim. I guess your closing comments there on the looming some merger with TCPC., can you hit on like the more from say, transformational elements as you described from that, that you see you're assuming that the teams have been working on together for the most part already, the portfolio is sort of converge like in what ways say is BlackRock on the parent or the BlackRock private credit organization, putting more resources to improve your your origination, your workout and so forth. Are there any things you can call out in that area?

James Keenan

Sure. Thanks, and I appreciate the question from. Yes, as you outlined there. If you think about what we've disclosed over the last couple of years, it's been one integrated lending platform as the advisor that has been working on behalf of all these companies that have jointly transacted. And obviously over the course of the last several years, the portfolio is now have a substantial amount of overlap, too, and they have benefited from the aggregate origination and underwriting capacity of the overall platform. So you've already seen that accrete to the story for BKCC. in the sense that we've been able to diversify and really grow the name counts in their transition, the overall portfolio in light of that. So the other parts of that to your question about resources over the course of the last, call it, five years, we've continued to add a significant amount of resources. And even post the transaction at the advisor had with PCP. advisors, we've grown that platform to near 60 people that are focused on origination and underwriting across the US. So we've continued to our card, add resources onto the platform that it's continued to provide value across that.
And I would say that's in all functions. We've added origination. We've added underwriting capacity as well as we've added some, I'll call it, legal, legal and work out capacity on the overall platform, and we continue to do that. And you've seen that broadly speaking at the advisor at BlackRock of investing more in private markets and continue to and double down on that effort at the time of. So that is already been, I guess, part of the story about the transition of the portfolio and the value. I think when it comes down to the merger itself has outlined. These are things that are going to benefit to the shareholder by the economies of scale that you get, it improves the expense ratio and improves the liquidity and the share count associated to that it should improve. And ultimately, there's a liability and the ability to manage to the liabilities, all of which would be accretive to our earnings and ENI or the net of its investment income of the overall portfolio. So that's the next leg of this, which is the benefits of the merger.

Finian O'Shea

I'm sure helpful. Thank you. And then, Tom, just to hit on one of the points you made at the end on liabilities, which have become a more relevant topic now as a lot of BDCs are rolling there, 25 maturities. And so I think you have a little bit there some and also you have a lower lesser amount of unsecured debt. I have to check as to how that blends with TCPC., but where do you sort of fall given the market cost of debt capital and the desire to have more unsecured, do you see yourselves as more of a 30% unsecured or 50% unsecured type of BDC given the two?
The two of you are pretty different on that, that department?

Nik Singhal

Yes. So I think this is Nick. I would say just from an overarching perspective of the combined BDC will have greater access to capital than any of the two stand-alone basis. So that by itself of the scale, we view that as a positive in terms of the perceived credit worthiness and the combined BDC.
Yes, I think just so you're TCPC has been the larger community in the past, it has had a greater arsenal of some of the different kinds of tools and the liability side of the balance sheet. We expect that approach to continue on. And partly the percentage of secured for secured versus unsecured is also driven by rating agency considerations. And obviously, keep all of those in mind.
We do see unsecured debt being a core component of our liability structure, then folks can then have finished.
Jim, the agile to add back on to that, I mean, we're always looking into the market and see what the optimal capital structure would be at any point in time.
I think specific to BKCC., as you know, over the last several years, part of our financing strategy has really been tied towards the transition of assets rights of. If you recall, some of that legacy book at was more junior had more volatility associated to that all things which were hard to kind of our expensive sticker price on an unsecured basis. And so we've kind of managed the liability as part of that transition. And I think now that we're predominantly first-lien more diversify, I think you have the our liability and our cap stack will evolve between the kind of first and first lien and unsecured mix as well as floating and <unk>. I've checked out our facility.

Finian O'Shea

I think that's all for me. Thanks so much. Thanks.

Operator

Melissa Wedel, JPMorgan.

Melissa Wedel

Good morning. Thanks for taking my questions. And my first one, I wanted to start with a clarifying question really around some of the investment activity levels in the portfolio. Things curious if the pending merger decision and shareholder vote has impacted any sort of capital deployment activity in BKC?

James Keenan

I know it's a little mixed, so the short answer is no. On Premion from a deployment perspective, it's been business as usual in the pending vote has had no impact and we've gone direct in Canada.

Melissa Wedel

Okay. Appreciate that. And then insurance and I just sort of the outlook going forward. I think it's interesting to hear your points about not seeing the core middle market as impacted by spread compression and maybe slight loosening of terms that have happened at the upper middle market? And if any, do you expect to see more M&A activity this year? And if so, how does that impact the portfolio potentially Is that sort of a deal? Does that put deleveraging pressure on the portfolio throughout the year as perhaps core middle market companies are acquired?

Nik Singhal

Yes. And thanks for the question. So one. I would just make one slight clarification of not saying that the core middle market is not impacted by spreads are all just at the level of compression we're seeing in that relative to the the upper middle market, we're seeing M&A activity starting to pick up. And I really think that that's to a large extent, a function of the belief that interest rates have stabilized. And while there is a range of opinions about how fast and how much they will do, then we firmly believe that as there's more and more conviction on more LBO, more M&A activity will take place with this by having a confident view on cost of capital is a prerequisite to buyers, be able to put it in multiple on deals. So on, we do expect certainly remainder of 2024 for activity to happen.
And again, what could that lead to an increased level of prepayments on it is quite likely. Again, we operate in a competitive market. We always have. And historically prepayments, I will go up and go down. Our goal would be for companies that rely for good businesses through trying to find a way to stay in the business when refinancings occur. And it may even lead to opportunities where some companies where we'd rather get our money back and go home, but actually increase the probability that some of those are exported. We anticipate that Mercer has ever more thing. So whether it's going to be a deleveraging event, it's hard to say, I mean, quarter to quarter, it can be lumpy, but we have it. We have a very diversified origination pipeline on a very long track record of industry relationships and we're confident that we will be able to find investment opportunities, but we will continue to be disciplined.

James Keenan

You have I know first, Jim, one other thing I would add IP interests just from the portfolio and the market trends that you see based off of the increasing cost of capital. And obviously that has an impact on some of the deals that exist today when it comes to the interest coverage ratios on new deals from new sponsor activity and new M&A because of the increased cost of capital, we are seeing lower leverage levels being put on those companies relative to two, three years ago, Bob, So inherently, there's a lower leverage in today deployment than there was in the legacy. I think that was the plus two or three years.

Melissa Wedel

Got it. Thank you.

Operator

That concludes today's question and answer session. I'd like to turn the conference back to our presenters for any additional or closing comments.

James Keenan

I just want to say I thank you again and appreciate the support throughout this. And just thank you for the our shareholders and our team to ultimately the work done over the course of the last year to get here. Thank you.

Operator

And once again, that does conclude today's conference. We thank you all for your participation. You may now disconnect.