BlackRock Capital Investment Corporation (NASDAQ:BKCC) Q3 2023 Earnings Conference Call November 9, 2023 10:00 AM ET
Company Participants
Laurence Paredes – General Counsel and Corporate Secretary
James Keenan – Chairman and Interim CEO
Nik Singhal – President
Chip Holladay – Interim Chief Financial Officer and Treasurer
Jason Mehring – Managing Director and Investment Committee
Conference Call Participants
Melissa Wedel – JP Morgan
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. 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.
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.
In a $2 million SOFR plus 6.5% first-lien term loan and a $0.2 million revolver to Trintech Inc., a software provider of cloud-based reconciliation and financial close solutions.
Additionally, in the Amazon brand aggregator space, SellerX, one of our portfolio companies, acquired Elevate, which was also one of our portfolio companies. As a result of this transaction, our prior investments in these respective companies were repaid. We rolled these proceeds in the combined SellerX entity.
As a result of these transactions, our funded exporter to these companies remained substantially the same quarter-over-quarter, whereas our unfunded exporter reduced by $11.6 million. These transactions are included in our deployment and repayment figures for the quarter respectively.
Our deployment and repayment numbers also include new investments in three existing portfolio companies, namely Bluefin Holdings, Cole Haan, and Reveal. These new investments refinanced our prior investments in these portfolio companies. Each of these investments demonstrate our ability to stay invested with or upside our exporter to well-performing portfolio companies.
With respect to our current investment activity, despite a slow private credit market, we’re seeing a slight uptake in the flow of opportunities across both new and existing names. But we remain selective in allocating capital to those investments where we see attractive pricing coupled with good lender protections.
Since the end of the third quarter, our investment committee has approved transactions of $17 million that have either closed subsequent to the third quarter or are pending close, although there can be no assurance that all such transactions will close.
As of the end of the quarter, we designated our $6.5 million first lien loan to Perch as a non-accrual position due to a continued decline in their operating performance. This brought total non-accrual investments at quarter end to three companies representing 3.4% of our total portfolio at fair value.
Our NAV per share increased in the quarter, up roughly 1% from the second quarter, driven by $2.3 million of NII in excess of the declared dividend and $1.3 million of net realized and underlined gains on the portfolio during the quarter.
Overall, we feel good about the credit quality of our portfolio. With a diverse portfolio of senior secured first lien loans, we believe that we are well-position to withstand the impact of potentially deteriorating economic conditions.
I’ll now turn the call over to Chip to 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 third quarter. GAAP net investment income for the third quarter was $9.5 million or $0.13 per share, up from $8.9 million or $0.12 per share in the second quarter, and an increase of 24% from the third quarter of 2022.
This quarter marked our 10th consecutive quarter of net investment income growth. Our gross investment income was $21.3 million for the quarter, an increase of 7% from the prior quarter, and up 33% from the third quarter of 2022.
The increase from the prior quarter was driven primarily by additional income earned on $11 million of net deployment into portfolio company investments over the last two quarters, as well as to $1 million in fee and other one-time income earned on investment exits during the quarter. The company’s weighted average portfolio yield as a quarter end based on fair value, was 12.8% consistent with the second quarter.
Total expenses for the third quarter increased by approximately $800,000 from the second quarter, attributable to higher accrued incentive fees due to higher pre-incentive NII and net unrealized appreciation on the portfolio, an increase in borrowing costs due to higher SOFR rates, and an increase in professional fees incurred during the period.
Net unrealized appreciation during the quarter was $1.1 million due to higher valuations across the majority of our holdings, partially offset by markdowns on other portfolio positions, and by $200,000 of unrealized appreciation on our interest rate swap position.
The company also had realized gains of approximately $200,000 during the quarter. As Nick noted earlier, the portfolio had three non-accrual investments at quarter end, including the addition of our first lien loan position in Perch, up from two non-accrual investments in the prior quarter. The three positions represented 3.4% of our portfolio’s total fair value at quarter end.
Our weighted average internal portfolio rating was 1.45 at quarter end, changed slightly from 1.44 at June 30th. At quarter end, total available liquidity for deployment and general operating use was approximately $90 million, including cash on hand and subject to leverage and borrowing base restrictions.
Our net leverage ratio was 0.84 times, down slightly from 0.86 times at the end of the second quarter due to net repayments of our credit facility during the quarter. As announced yesterday, we declared a quarterly dividend of $0.10 per share, payable on January 8th, 2024, to shareholders of record at the close of business on December 15th, 2023.
With that, I would like to turn the call back to Jim.
James Keenan
Thank you, Chip. In summary, our transformed portfolio, coupled with prudent portfolio management and strong credit quality, has led to increased return on equity, as well as improved NAV stability.
Furthermore, we are excited about the merger with TCPC and believe that the transaction will bolster the combined company’s abilities to generate strong returns for our shareholders.
With that, we would like to now open the call for your questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] We do have a caller in the queue. We’ll hear from Melissa Wedel from JP Morgan. Please go ahead.
Melissa Wedel
Good morning. Thanks for taking my questions today. I wanted to get your thoughts on the amount of repayment activity that you’re seeing in the portfolio. Are you surprised, especially in the rate environment that we’re in with base rates remaining so high, are you surprised to see the kind of repayment activity sort of outpacing new deployments?
Nik Singhal
Yes. Hi, Melissa, this is Nik. Thank you for the questions. In general, I would say that repayment activity can tend to be very lumpy quarter-over-quarter and just inherently unpredictable. Thematically, I would say in the rate environment that you refer to, it’s not easy for companies to get refinancing done, so we’re definitely seeing a slower pace of repayment.
In the third quarter, there were some idiosyncratic items, and I would note three existing portfolio companies. For example, Cole Haan, Reveal, and one of the companies where we actually provided a new financing to these healthy, well-performing companies. They all had their idiosyncratic circumstances. One was a situation where the company consolidated their first and second lien loan into a new unit ranch facility. Another was an acquisition add-on.
So what you’ll see is that many of these repayments, also at corresponding entries as deployments in our schedule of investments. And so, that’s contributing to a somewhat elevated gross repayment number this quarter. Overall, I would say repayment activity is still at below historical levels.
Melissa Wedel
Sure. That makes sense. And then, in terms of the opportunities that you’re seeing in existing names in particular, can you – I mean, would the nature of those opportunities be similar to what you just described in terms of add-on financing, or are you seeing some extension and amendment potential as well?
Nik Singhal
Yes. So Melissa, predominantly, and deployment into existing companies has been a huge source of deployment for us. And it’s predominantly of the nature where we’re helping our companies grow. These are healthy companies. We are the incumbent lender. We have informational advantage. We have a relationship advantage. And that gives us an opportunity to deploy additional capital into these companies. I would say that if I just look at the last four to five quarters, the actual dollars deployed in terms of defensive capital have been very, very small compared to just normal course business as usual deployments into existing portfolio companies.
Melissa Wedel
Okay. I appreciate that context. If I could sneak in one more question related to the overlap in portfolios between BKCC and TCPC. To the extent that there is a lot of name overlap and similarity among positions and investments, but there might be some discrepancies on portfolio marks on a variety of names. To the extent that that exists, would you expect those marks to converge as you get further along in the process? Thank you very much.
Nik Singhal
Yes. Melissa, the difference that you see in valuation arises from a slightly different valuation policy. I think one BDC uses the midpoint and the other uses the bid side if there’s a two-way code [ph] available. It is our intent that for the purposes of the combination, when the final NAV will be struck, we will align the approach for both BDCs for the overlapping positions.
Melissa Wedel
And so with that, I guess the natural following question would be, does that imply a shift in the approach at BKCC to merge into sort of the TCPC methodology?
Nik Singhal
Yes. And since TCPC will be the surviving entity, again, we expect that TCPC’s valuation policy will carry forward to the combined entity.
Melissa Wedel
Okay. Thank you, Nik.
Operator
And at this time, there are no additional callers in the queue. I would like to thank everyone for their participation today for today’s conference. You may now disconnect.
