BlackRock Capital Investment Corporation (NASDAQ:BKCC) Q3 2023 Earnings Call Transcript

BlackRock Capital Investment Corporation (NASDAQ:BKCC) Q3 2023 Earnings Call Transcript November 9, 2023

Operator: Good morning everyone. My name is Lynette, and I will be your conference facilitator today for the BlackRock Capital Investment Corporation Third Quarter 2023 Earnings Conference Call. This call is being recorded. Hosting the call today will be James Keenan, Chairman and Interim Chief Executive Officer; Nik Singhal, President, Chip Holladay, Interim Chief Financial Officer and Treasurer, Laurence Paredes, Corporate Secretary, Diana Huffman, General Counsel; 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. [Operator Instructions]. At this time I would like to turn the conference over to Mr. Paredes. You may begin the conference call.

Laurence Paredes: Good morning and welcome to the third 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 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.

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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 November 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 third quarter earnings call. I will begin the call with a review and reminder of our proposed merger with our affiliated BDC BlackRock TCP Capital Corp or TCPC that was announced in September. I will then 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. On September 6, 2023, we announced a proposed merger of BCIC with TCPC. As highlighted at the time of the announcement, the proposed transaction is a very logical and natural strategic next step in the growth and evolution of BlackRock BDC platform and the broader $81 billion Global Private Debt business at BlackRock.

With BCIC having successfully transformed its portfolio, the investment portfolios of the two BDCs are now very similar to each other. And importantly, our collective investment team has been managing both portfolios for many years now. We believe the proposed merger positions the combined company for sustained growth and will create meaningful value for BCIC shareholders, including combined operational cost synergies, enhanced scale, better access to capital on improved terms, and potential for improved trading dynamics. We also anticipate that the transaction will be accretive to NII. As an added reminder, BlackRock, the company’s advisor, is supporting the transaction with several shareholder-friendly measures, including a reduction of the management fee after closing of the merger from 1.5% to 1.25% for assets equal to or below 200% of net assets.

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Q&A Session

Coverage of NII via waiver of advisory fees for any of the first four quarters after the merger in the event NII for the combined company in any such quarter is less than $0.32 per share, up to a maximum of the advisory fees earned during such quarter. And coverage by BlackRock of 50% of the merger costs for both companies up to a combined cap of $6 million, subject to closing of the transaction. The transaction will be an NAV for NAV exchange that will result in an ownership split of the combined company that is proportional to each of BCICs and TCPCs respective net asset values BCIC shareholders will receive newly issued shares of TCPC common stock based on the ratio of BCIC’s net asset value per share divided by the TCPC net asset value per share each determined shortly before the closing.

We expect the transaction to close in the first quarter of 2024, subject to each company’s shareholder approvals, customary regulatory approvals, and other closing conditions. I’ll turn now to our third quarter performance. We again generated strong results covering our $0.10 dividend for the fifth consecutive quarter with solid net investment income that was up 7% compared to the prior quarter and 24% year-over-year. Our dividend coverage of 131% for the quarter was up from 123% for the previous quarter. This marked the 10th successive quarter of increased dividend coverage. With the successful portfolio transformation behind us, we have substantially diversified our portfolio over the past few years by identifying compelling, firstly in opportunities that align with our unwavering focus on prudent underwriting and sound credit quality.

We are in an excellent position to continue deploying capital into attractive investments while navigating through this period of economic uncertainty and global market volatility. First lien investments now make up 85% of our portfolio, a record high level for BCIC, and up from 50% at the end of 2020. Junior capital investments now make up only 4% of our portfolio, a fraction of the 23% proportion that junior positions comprised at the close of 2020. We ended the third quarter with 120 portfolio companies. We have more than doubled this number over the past three years, creating significant diversity across multiple sectors with a focus on companies that are defensively positioned to weather downturns. Of note, we had just one new non-accrual investment in the third quarter, for a total of three this quarter.

Even in the middle of a soft deal-making and origination environment, we added three new portfolio companies this quarter, each of which was a first lien loan. Overall, we remain disciplined and continue to pass on a substantial number of the less attractive opportunities coming to market, particularly when we believe that the pricing does not appropriately reflect the current marketing conditions or when terms do not provide adequate lender protections. Our third quarter weighted average portfolio yield was 12.8%, up from 10.5% year-over-year, supported by increases in SOFR rates, as well as marginally wider spreads negotiated on new investments over the past few quarters. Our net leverage for the third quarter was 0.84 times, down slightly from the prior quarter, as we had modest net repayments during the quarter.

In September, we also amended our credit facility, which among other terms extended the maturity of the loans made under the credit facility to September, 2028, and reduced the applicable interest margin by 25 basis points per annum. We are in regular communication with our portfolio companies to assess their financial health, and we are confident in the overall strength of our borrowers. In a small number of situations where there might be emerging challenges, we are also highly confident in our team’s experience and resources to proactively engage with these management teams. We believe we are well-positioned to withstand the impact of the economic downturn while driving toward improved profitability on behalf of our shareholders. I’ll now turn the call over to Nik to discuss some portfolio activity in more detail.

Nik Singhal: Thanks, Jim. We again deliver solid results this quarter, growing net investment income, and increasing our NAV per share. We provided $40 million in capital with three new companies and six existing portfolio companies. Substantially, all of the third quarter deployments were in first-lien loans, consistent with our strategy of maintaining a lower risk profile, especially in this uncertain macroeconomic environment. Total exits and repayments during the quarter were $44 million, including three portfolio company exits. These repayments drove a total of $1 million in fee and other one-time income generated on these transactions. Some of our new portfolio companies during the quarter included a $4.5 million SOFR plus 9% first-lien term loan to Nephron Pharmaceuticals Corp., a pharmaceutical company specializing in manufacturing generic respiratory medications.