BlackRock Capital Investment Corporation (NASDAQ:BKCC) Q2 2023 Earnings Call Transcript

BlackRock Capital Investment Corporation (NASDAQ:BKCC) Q2 2023 Earnings Call Transcript August 3, 2023

Operator: Good morning. My name is Jenny and I will be your conference facilitator today for the BlackRock Capital Investment Corporation Second Quarter 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 Paredes, General Counsel and Corporate Secretary; Jason Mehring, Managing Director and member of the company’s Investment Committee. Lines have been placed on mute. 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 conference call.

Laurence Paredes : Good morning and welcome to the second quarter 2023 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 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, our management team 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 August 2023 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 thank you for joining our second quarter earnings call. After I provide an overview of our performance and highlights for the quarter, Nik will give an update on our portfolio activity. Chip will discuss our financial results in more detail and then we will open up the call to your questions. We produced another solid quarter of results, continuing on our strong level of net investment income by successfully executing our strategy of prudent portfolio management, while maintaining strong credit quality. For the fourth consecutive quarter, our NII covered our $0.10 dividend with a robust coverage of 123%, up from 112% at the close of 2022. Our capital approach to portfolio diversity and our ongoing focus on senior positions in our investments, complements our robust credit culture, and positions us well to navigate the current market uncertainty in any potential economic downturn.

First lien investments now make up 84% of our portfolio, a new peak for BCIC and up from 50% at the end of 2020. Junior capital investments now make up only 4% of our portfolio, down from 23% at the end of 2020. We ended the quarter with 121 portfolio companies, which is more than twice the number of portfolio companies we had at the end of 2020. We are proud of the substantial progress we’ve made in the last few years under the BlackRock platform in diversifying our portfolio and enhancing its credit positioning. We had no new non-accrual investments in the second quarter. We have also been able to structure new loans that benefit from a lender-friendly environment with improved pricing and better structural protections. Our second quarter weighted average portfolio yield increased to 12.8%, up from 12.4% in the prior quarter.

This was driven by increases in LIBOR and SOFR rates. Our net leverage for the second quarter increased 0.86x from 0.81x from the prior quarter, driven by $20.8 million of new gross deployments, nearly all in first lien loans. This was our fifth consecutive quarter of net portfolio growth, deploying in excess of a $100 million on a net basis over that period. We believe that our results demonstrate the benefits derived from our comprehensive repositioning of our portfolio. Notably, we have room to methodically increase leverage and improve ROE, as we identify compelling investments and further diversify the portfolio. Total available liquidity for deployment, including cash on hand, was $85 million at quarter end. As we move into the second half of the year, we continue to be mindful of macroeconomic conditions.

Inflation, while coming down, has the potential to remain a headwind for certain pockets of the economy. Higher rates with the potential for further increases may also continue to create tighter financial conditions for borrowers. We communicate regularly with our portfolio companies to assess their financial health and outlook, and we are well equipped with the experience and resources to proactively engage with management teams in the event of emerging challenges. We believe that the diversified nature of our portfolio with the prevalence of first lien loans, as well as high quality of ownership support in our portfolio companies, help us in being defensively positioned in an economic downturn. We continue to emphasize less cyclical companies that are relatively well positioned to withstand recessionary pressures.

We are confident in our ability to succeed across economic cycles while generating improved profitability on behalf of our shareholders. I’ll now turn the call over to Nik to discuss the portfolio activity in more detail.

Nik Singhal: Thanks, Jim. We again made steady progress this quarter, growing the portfolio and delivering consistently strong earnings power. We provided capital to three new and five existing portfolio companies. Approximately 43% of investment dollars went into existing names to facilitate further growth. Nearly all of our second quarter deployments were in first lien loans, consistent with our strategy of maintaining a lower risk profile, especially as the risk of a recession remains. Total exits and repayments during the quarter were $6.5 million. This included the full exits of our investments in Sunland Asphalt & Construction, Fusion Risk Management, and RigUp, with a combined realized IRR of 10.1%. We also received a $500,000 partial repayment from our unsecured debt position in Gordon Brothers Finance Company in non-accrual investment.

In the case of Fusion Risk Management, we received a full repayment of our remaining $400,000 first lien term loan and then participated in a new financing with the company. Our portion of the new deal was a $4.5 million SOFR plus 7% first lien term loan and a $0.6 million unfunded revolver. Our other two new portfolio company investments in the quarter include a $6.1 million SOFR plus 6.5% first lien term loan, and $0.6 million unfunded commitment to Sumo Logic, a cloud native software provider for observability and security management; and a $2.2 million SOFR plus 7.5% first lien term loan and $0.3 million unfunded commitment to Global Payments, a payment services provider to the gaming sector. With respect to our current investment activity, we’re seeing a steady flow of opportunities across both new and existing names, but we remain very selective about what we invest in.

Since the end of the second quarter, our investment committee has approved transactions of $6.5 million that have either closed subsequent to the second quarter or are pending close, although there can be no assurances that all such transactions will close. As previously mentioned, we had no new non-accrual positions during the second quarter. Our NAV per share decreased by 1.8% in the second quarter, largely driven by a $7 million unrealized valuation decline in the portfolio that was primarily concentrated in three names. 62% of this valuation decline or $4.4 million was attributable to equity in Stitch Holdings, L.P. The markdown was driven by deterioration in the company’s underlying financial performance. We note that this equity position was received in connection with the prior monetization event in 2021 related to our legacy SVP-Singer investment.

Following the markdown of Stitch equity to zero, the legacy non-core investments in the portfolio have a de minimis value. Overall, we feel confident about the credit quality of our portfolio. With a heavy emphasis on senior secured loans, especially first liens, we believe that we’re well positioned to withstand the impact of a potentially deteriorating economic environment. I’ll now turn the call over to Chip to further discuss our financial results for the quarter.

Chip Holladay: Thank you, Nik. I will now take a few minutes to review some additional BCIC financial results for the second quarter. GAAP net investment income for the second quarter was $8.9 million or $0.12 per share, consistent with our strong NII levels from the first quarter of 2023 and an increase of 25% from the second quarter of 2022. Our gross investment income was $19.9 million for the second quarter, an increase of 6% from the prior quarter, and up 63% from the second quarter of 2022. The increase was driven primarily by the impact of a higher interest rate environment, net new deployments, and a performing portfolio with no new non-accrual assets. Company’s weighted average portfolio yield based on fair value increased to 12.8% in second quarter, up from 12.4% in the first quarter.

Total net expenses for the second quarter increased by approximately $1.1 million from the first quarter, primarily driven by an increase in interest and other borrowing costs due to an uptick in our average outstanding debt balance quarter-over-quarter, and an increase in LIBOR and SOFR rates. Net unrealized depreciation was $7.6 million for the second quarter, due to a $7 million valuation decline in our portfolio, concentrated principally in three portfolio companies, and to a $0.6 million unrealized loss on our interest rate swap. We recorded realized gains of $0.2 million for the quarter. At quarter end, the portfolio had just two non-accrual investments, consistent with prior quarter, representing 2.5% of our portfolio’s total fair value.

The weighted average internal portfolio rating at fair value was 1.44 at quarter end compared to 1.35 at March 31 and 1.33 at the end of 2022. At quarter end, total available liquidity for deployment and general operating use was approximately $85 million, including cash on hand and subject to leverage and borrowing based restrictions. Our net leverage ratio was 0.86x up from 0.81x at the end of the first quarter due to additional borrowings to fund new deployment. As announced yesterday, we declared a quarterly dividend of $0.10 per share, payable on October 6, 2023 to shareholders of record at the close of business on September 15, 2023. With that, I would like to turn the call back to Jim.

Q&A Session

James Keenan: Thank you, Chip. In closing, we believe our exceptional progress in diversifying the portfolio while focusing on senior positioning, demonstrates the merits of our strategy and our team’s ability to execute and generate strong returns for our shareholders. With that, we would now like to open the call for your questions,

Operator: [Operator Instructions] And our question is going to come from Melissa Wedel from Morgan Stanley (Sic) [JPMorgan].

Melissa Wedel : Was hoping to start with just some commentary on your outlook in terms of new deployments. Noticed that there were very few sort of repayments or exits during the quarter. And while you put some money to work and in new investments, it seemed to be a very gradual process of ramping sort of leverage towards the target levels. So taking that with your comments about macro — I guess wariness about the macro environment, how do you think about ramping portfolio leverage since we have heard that this terms on new investments are particularly attractive right now?

Nik Singhal: Yes. Melissa, this is Nik Singhal. Thanks for your question. So let me just take a step back here for a second. So, approximately two years ago, going back to March or June of 2020, okay, we had made tremendous progress in exiting our old legacy portfolio and we were at a leverage ratio of 0.3x with 50 or so portfolio companies back then. Since then, we have ramped up our portfolio to 0.86x leverage as well as we have 121 portfolio companies, that’s more than twice the level. Okay. So from a trend perspective, we view that as a very, very solid progression, okay, towards where we want to be. Last year we had a very, very healthy growth deployment volume. Obviously, this year, because how rates have behaved, they’ve gone up by 500 basis points over the last few quarters.

That has had its impact on LBO activity generally speaking, refinancing opportunities, growth capital, et cetera. So, that has slowed down volumes in the market, right? That doesn’t mean that our deployment is zero. We’re still seeing — we’re still deploying new capital. Any given quarter can be lumpy. And I would note that we’ve had $105 million of net deployments over the last five quarters. Our target leverage range still remains anywhere between 1x to maybe 1.2x, okay? We’ll — we don’t want to be that BDC which runs at 1.5x. And we will continue to deploy capital in our core strategy and we will remain disciplined, as we progress towards our target leverage ratio.

James Keenan: And Melissa, this is Jim here. I’ll just add on to the Nik’s comments there. I think you’re right. Obviously, what we see in the market and you’ve heard this is that the terms are fairly favorable from a lender perspective just with everything that has gone on. That being said, as Nik said, volumes are lower, and I would say we probably tightened up our own standards as well, as we are seeing some volatility and concerns with regards to the overall market and some of the earlier comments that Nik had. So that in general leads to slower volumes. But just from a reminder standpoint, at the portfolio level, some of this kind of the slow methodic ramp up is — if you remember what we’ve tried to shift the portfolio was three, four years ago was a far more concentrated portfolio, where you could have one or two names create some idiosyncratic risk or volatility.

What you see now is we’re being very disciplined with kind of 1% to 2% positions and so. On the deals that we’re closing, each deal is going to be an additional 1% to 2%. And we think that’s important. And as Nik said, that’s kind of ramped up the diversity to 125 plus names that de-risk the portfolio in a major way. But that being said, that means the ramp is more methodical.

Melissa Wedel: Okay. I appreciate the comments from both of you, and take those points. Also wanted to follow up if I could on the partial repayment from Gordon Brothers. I know it was a small partial repayment, but interesting nonetheless. Just wondering if you could kind of update us on what’s going on there? Any path to further repayments or any line of sight that you have on that would be great? Thanks.

Nik Singhal: Yes. Hi Melissa. So the — as we mentioned in the past, there are two chief sources of potential recovery on our remaining investment. One of them is a first-loss note held by Gordon Brothers Finance Company, which refers to the portfolio that it sold to Callodine, and the other is a profit participation note also in Callodine that the GBFC hold. This specific $0.5 million payment that we received was related to a payment from the profit participation note. And this note entitles GBFC to a share of the purchasing entity’s annual earnings through 2027, this specific payment related to our share for last year, 2022’s profits at the buyer. So our expectation still remains that we will continue to receive paydowns over a period of time.

And I will again reiterate that it’s multiple years just given the nature of the first-loss note and the profit participation versus just a few quarters. And I would also note that since November 2020 when GBFC actually sold their portfolio, we have received in excess of $15 million in paydowns on our residual position.

Operator: And this will conclude today’s question-and-answer session as well as today’s call. Thank you for your participation. You may now disconnect.