BlackRock Capital Investment Corporation (NASDAQ:BKCC) Q4 2023 Earnings Call Transcript

BlackRock Capital Investment Corporation (NASDAQ:BKCC) Q4 2023 Earnings Call Transcript March 6, 2024

BlackRock Capital Investment Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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. 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] Mr. Paredes, you may begin the conference call.

Laurence D. Paredes: Good morning, and welcome to the fourth quarter and full year 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 your attention to 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.

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’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 www.blackrockbkcc.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. or TCPC, 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. Nik 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 $0.10 dividend for a sixth 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 strengthened 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 of 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 transformed BCIC’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, all 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 lender 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, Thras.io, on non-accrual status. Nik will provide additional detail on Thras.io as well as other exposures to the Amazon third-party aggregator space.

Additionally, we placed a portion of our investment in Kellermeyer Bergensons Services on partial non-accrual. Our first lien position in the capital stack as well as the structural protections baked into these investments enable us to drive outcomes during down cycles. 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 7, we intend to close the transaction as soon as practicable, following the 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 Nik 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 pay down with a total of $0.3 million in fee and other one-time income generated in excess of principal repaid on these transactions.

Our three largest new investments in the quarter consisted of, a $8.9 million SOFR plus 7% first lien term loan and a $0.5 million unfunded revolver to Mesquite Bidco, a casino and hotel operator; a $4.5 million SOFR plus 6% first lien term loan to Bad Boy Mowers, a lawnmower manufacturer; and a $2.7 million SOFR plus 5.5% first lien term loan with TransNetwork, a 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 invest in. Since the end of the fourth quarter, our investment committee has approved transactions of approximately $13 million that either closed in this first quarter or are pending close, subject to customary closing conditions.

Turning now to the existing portfolio. We had four companies on full nonaccrual status at the end of the quarter, which includes the new Thras.io non-accrual that Jim mentioned. These non-accruals represent 4.1% of our total portfolio at fair value. As is publicly known, Thras.io 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 and enable the company to execute on its turnaround plan. Our total exposure across all investments with the third-party Amazon aggregator space was 6.5% of the portfolio by fair value at the end of the quarter. Over the last several quarters, this subsector has come under pressure due to higher interest rates, lower operating margins, and 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 with 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 would enable companies to achieve scale, operate more efficiently. In 2023, our portfolio company, Elevate, was acquired by StellarX, another portfolio company of ours. This past week, Perch, which was a nonaccrual investment in our portfolio, was acquired by Razor, a portfolio company of ours. Following this acquisition, our prior investment in Perch has rolled into Razor in the form of a preferred equity instrument sitting below our existing debt in Razor.

We remain optimistic about the financial performance of these companies despite the decline experienced in 2023. It’s important to note these non-accrual investments represent company-specific issues and are not indicative of broader trends within our portfolio. With each of these situations, we’re leveraging BlackRock’s extensive experience and 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 by $2 million of NII 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 2023.

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 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 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 2022. The $1 million quarterly decline was primarily due to the impact of our positions in Perch and Thras.io being designated as non-accrual during the third and fourth quarters, and the 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 an 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 $0.50 earned in 2023 delivered an increase of approximately 25% from NII per share recorded 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 exits. Now turning to liquidity. At December 31, 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 $0.10 per share payable in cash on March 29, 2024, to all shareholders of record at the close of business on March 15, 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 companies’ ability to produce strong returns for our shareholders. With that, we would now like to open the call for your questions.

Operator: [Operator Instructions] We’ll take our first question from Finian O’Shea with Wells Fargo Securities.

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Q&A Session

Finian O’Shea: Hey everyone, good morning. Jim, I guess your closing comments there on the looming merger with TCPC, can you hit on like the more, say, transformational elements, as you described, that you see, assuming that the teams have been working together for the most part already, the portfolio is sort of converged? Like in what way, say, is BlackRock, the parent or the BlackRock private credit organization putting more resources to improve your origination, your workout and so forth? Any things you can call out in that area?

James Keenan: Sure. Thanks, Fin. I appreciate the question. 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 at the adviser that has been working on behalf of both these companies that have jointly transacted. And obviously, over the course of the last several years, the portfolios now have a substantial amount of overlap, too, and that 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 count in there, transition the overall portfolio in light of that. So the other part 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 that the adviser had with TCP advisers, we’ve grown that platform to near 60 people that are focused on origination and underwriting across this.

So we’ve continued to, I would call it, add resources onto the platform that is continue 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, I would call it, legal and workout capacity on the overall platform. And we continue to do that. And you’ve seen that, broadly speaking, as the adviser at BlackRock investing more in private markets and continuing to double down on that effort at the level. So that has 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, as outlined, these are things that are going to benefit to the shareholder by the economies of scale that you’re getting.

It improves the expense ratio, it improves the liquidity and the share count associated to that. It should improve, ultimately, the liability and the ability to manage the liabilities, all of which would accrete to earnings and the NII or the net investment income of the overall portfolio. So that’s the next leg of this, which is the benefits of the merger.

Finian O’Shea: Sure, helpful. Thank you. Then 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 their ’25 maturities since I think you have a little bit there, and also, you have a lower — lesser amount of unsecured debt, I’d 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 BDC, given the two of you are pretty different on that department?

Nik Singhal: Yeah. So I think — and, Finian, this is Nik. I would say just from an overarching perspective, the combined BDC will have greater access to capital than any of the two stand-alone BDCs. So that, by itself, the scale, we view that as a positive in terms of the perceived worthiness, the combined BDC. I think just TCPC has been the larger BDC in the past. It has had a greater arsenal of the different kinds of tools in the liability side of the balance sheet. We expect that approach to continue. And partly, the percentage of secured versus unsecured is also driven by rating agency considerations. We’ll obviously keep all of those in mind. We do see unsecured debt being a core component of our liability structure going forward.

James Keenan: Yeah. And Fin, this is Jim. Just to add back on to that, I mean, we’re always looking into the market to see what the optimal capital structure would be at any point in time. I think specific to BKCC, over the last several years, part of our financing strategy has really been tied towards the transition of assets, right? So if you recall, some of that legacy book had — was more junior, had more volatility associated to that, all things which were hard to kind of — or expensive to kind of 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 diversified, I think you’ll be — our liability and our cap stack will evolve between the kind of first lien and unsecured mix as well as floating and churn down facilities.

Finian O’Shea: I think that’s all for me. Thanks so much.

James Keenan: Thanks, Fin.

Operator: We’ll now take our next question from Melissa Wedel with JPMorgan.

Melissa Wedel: Good morning. Thanks for taking my question. My first one, I wanted to start with a clarifying question really around some of the investment activity levels in the portfolio. I’m curious if the pending merger decision and shareholder vote has impacted any sort of capital deployment activity in BKCC.

Nik Singhal: Hi, Melissa, this is Nik. So the short answer is no. From a deployment perspective, it’s been business as usual and the pending vote has had no impact on capital deployment.

Melissa Wedel: Okay, appreciate that. And then in terms of just sort of the outlook going forward, it’s interesting to hear your points about not seeing the core middle market as impacted by some spread compression and maybe slight loosening of terms that have happened in the upper mid-market. I mean, 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 — does that put deleveraging pressure on the portfolio throughout the year as perhaps core middle market companies are acquired?

Nik Singhal: Yeah. And, Melissa, thanks for the question. So I would just make 1 slight clarification. I’m not saying that the core middle market is not impacted by spreads at all, just that the level of compression we’re seeing is less relative to 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 or how much they will go down, we firmly believe that as there’s more and more conviction, more LBO, more M&A activity will take place because frankly having a confident view on the cost of capital, there’s a prerequisite to buyers being able to put on deals.

So we do expect certainly remainder of 2024 activity to happen. Again, could that lead to an increased level of prepayments? It is quite likely. Again, look, we operate in a competitive market. We always have, and historically, prepayment levels go up and go down. Our goal would be for companies that we like for good businesses should to try and find a way to stay in those businesses when refinancings occur. And it may even lead to opportunities where companies where — would rather get — take their money back and go home. It actually increases the probability that some of those events will happen. And just — sorry, I’ll add one more thing. So whether it’s going to be deleveraging event, it’s hard to say. I mean, quarter-to-quarter, it can be bumpy.

But we have a very diversified origination pipeline, very long track record of industry relationships, and we’re confident that we will be able to find employment opportunities but we’ll continue to be disciplined.

James Keenan: Yeah. Melissa, this is Jim. One other thing I would add that might be interesting, just from the portfolio, 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. So inherently, there’s a lower leverage in today’s deployment than there was in the legacy — or things that were deployed two or three years.

Melissa Wedel: Got it. Thank you.

Operator: And 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 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.