BlackRock Capital Investment Q1 2023 Earnings Call Transcript

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May 2, 2023

There are 7 speakers on the call.

Operator

Good morning. My name is Taryn, and I will be your conference facilitator today for the BlackRock Capital Investment Corporation First Quarter 2023 Earnings Conference Call. Hosting the call will be James Keenan, Chairman and Interim Executive Officer Nick Singhal, President Chip Holliday, Interim Chief Financial Officer and Treasurer Lawrence De 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

Thank you. Mr. Paredes, you may begin the conference.

Speaker 1

Good morning, and welcome to the Q1 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 list some of the factors which may cause BCIC's results to differ materially from these statements.

Speaker 1

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.

Speaker 1

The presentation can be accessed by going to our website atwww.blackrockbkcc.com and clicking the May 2023 investor presentation link and the Presentations section of the Investors page. I would now like to turn the call over to Jim.

Speaker 2

Thank you, Larry. Good morning and thank you for joining our Q1 earnings call. After I provide an overview of our performance and highlights for the quarter. Nick will give an update on our portfolio activity. Then Chip will discuss our financial results in more detail.

Speaker 2

And then we will open the call to your questions. Building on the momentum we generated over the past couple of years, We produced another strong quarter by further diversifying our portfolio and increasing net investment income. We selectively identified several compelling investments during the quarter, while benefiting from higher LIBOR and SOFR rates and an improved pricing environment for new originations to drive a 9.5% sequential increase in NII as compared to the prior quarter. Our NII covered our $0.10 dividend by 122% this quarter, up from 112% in the Q4 of 2022, marking our 3rd consecutive quarter of full dividend coverage. This is a reflection of our delivered strategy to grow our loan portfolio with high quality investments.

Speaker 2

As is evident from the results over the last several quarters, we have made significant progress with this strategy. We had no new non accrual investments in the Q1. The vast majority of our investments are in 1st lien positions where we have extensive downside protection. In the current market environment, we have been able to structure new loans with improved pricing, lower leverage and a more favorable documentation. Our 1st quarter weighted average portfolio yield increased by 50 basis points from the 4th quarter to 12.4% based on total portfolio fair value.

Speaker 2

We have a solid foundation to continue our pursuit of prudent growth, adding to our portfolio's earning power and delivering consistent and favorable risk adjusted returns to our shareholders. Our net leverage for the Q1 increased to 0.81 times from 0.77 times from the prior quarter, driven by $37,600,000 New deployments, nearly all in 1st lien loans. We added 8 new portfolio companies, Boosting our total to 121 as compared to 116 at the close of 2022, 86 at the end of 202155 at the end of 2020. Notably, our current leverage leaves us ample runway to further diversify the portfolio as we draw upon our team's expertise across multiple cycles and the power of BlackRock platform to identify compelling income producing investment opportunities. 1st lien investments now make up 82% of our portfolio, another record for BCIC.

Speaker 2

This marked a dramatic improvement from 50% at the end of 2020. Junior capital investments now comprise only 5% of our portfolio, down from 23% at the end of 2020. And another indicator of an ongoing improvement in the credit quality and positioning of our portfolio. While the U. S.

Speaker 2

Job market remains resilient amidst higher inflation and interest rates. We are mindful that such conditions have historically resulted in slower economic growth or contraction, Creating tiny financial conditions for borrowers. We believe that the diversified nature of our portfolio with the prevalence of 1st lien loans as well as high quality of ownership support in our portfolio companies help us to be defensively positioned in an economic downturn. 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 the management teams in the event of emerging challenges. For now, our investments continue to perform well and our credit quality remains strong.

Speaker 2

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 Nick to discuss our portfolio activity in further detail.

Speaker 3

Thanks, Jim. We again made steady progress this quarter towards increasing our core earnings power. We provided capital to 8 new and 7 existing portfolio companies with a weighted average interest rate of 11.9%, up from 11.5% on our new deployments from the prior quarter. Approximately 26% of investment dollars went into existing relationships. 1st quarter investments in new portfolio companies were nearly all in 1st lien loans consistent with our strategy maintaining a lower risk profile, especially as the risk of a recession remains ahead of us.

Speaker 3

Exits and repayments during the quarter were $21,000,000 This included the full exits of our investments in Zest Acquisition Corp, KEMRA and Advanced Lighting. KEMRA and Advanced Lighting were both legacy non core positions and we realized approximately $3,000,000 of proceeds from the exit of those investments. Advanced Lighting was also a prior non accrual investment. So far in the Q2, we're seeing a steady flow of opportunities across both new and existing names, Although we continue to be very selective about what we invest in. Since the end of the Q1, our investment committee has approved transactions of $12,000,000 that have either closed subsequent to the Q1 or are pending close, although there can be no assurances that all such Our 3 largest new portfolio company investments in the first quarter include a $6,100,000 SOFR plus 7.5 percent 1st lien term loan and $700,000 unfunded commitments to Showtime Acquisition LLC, a live dinner and Family Entertainment Operator.

Speaker 3

A $5,900,000 SOFR plus 7.25 percent 1st lien term loan and $500,000 unfunded revolver to binder, a digital asset management provider and a $5,100,000 SOFR plus 7.5 percent 1st lien term loan and $500,000 unfunded revolver Duck Creek, a property and casualty software provider. Our NAV per share increased by 0.5% in the Q1, largely driven by net investment income exceeding our dividend. Portfolio marks were approximately flat from the 4th quarter. As previously mentioned, we had no new non accruals during the Q1. We feel confident about our overall credit quality and believe that we're well positioned to withstand the impact of a potentially deteriorating economic environment.

Speaker 3

We're pleased to once again achieve more than full coverage of our dividend even if we excluded the benefit of one time fee income. We remain conservative in underwriting new investments and vigilant in monitoring our existing portfolio. We still have room to grow our portfolio towards our target leverage range. As we continue to evaluate the pipeline of attractive opportunities in this market, we will remain disciplined in our approach. I'll now turn the call over to Chip to further discuss our financial results for the quarter.

Speaker 4

Thank you, Nick. I will now take a few minutes to review some additional BCIC financial results for the Q1. In GAAP net investment income for 1st quarter was $8,900,000 or approximately $0.12 per share, an increase of over 9% from the 4th quarter and up 36% from the Q1 of 2022. NII provided 1st quarter dividend coverage of 122% as compared to 112% in the 4th quarter and up substantially from 88% coverage in the Q1 of 2022. Our gross investment income was $18,800,000 for the Q1, an increase of 7% from the prior quarter and up 54% from the Q1 of 2022.

Speaker 4

The increase was driven primarily by the impact of a higher interest rate environment, Net deployments of approximately $25,000,000 over the past two quarters and a performing portfolio with no new non accrual assets. Company's weighted average portfolio yield based on fair value increased to 12.4% at quarter end, up from 11.9 percent at December 31. Total net expenses for the Q1 increased by approximately $500,000 from the Q4, 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 rates. Portfolio valuations remained relatively flat quarter over quarter due to stabilizing credit spreads and a slight increase in the unrealized value of our interest rate swap. We recorded total net unrealized gains of $300,000 in the Q1.

Speaker 4

We also recorded realized losses $600,000 in the quarter upon exiting 2 non core positions in Kemmer and Advanced Lighting. At quarter end, the portfolio had 2 nonaccrual investments, representing 2.7% of our portfolio's total fair value, down from 4.4% as of March 31, 2022. Our weighted average internal portfolio rating at fair value remained fairly consistent at 1.35 as compared to 1.33@yearend. At quarter end, total available liquidity for deployment and general operating use was approximately $98,000,000 including cash on hand and subject to leverage and borrowing base restrictions. Our net leverage ratio was 0.81 times, up from 0.77 times at the end of the 4th quarter due to approximately $10,000,000 in net borrowings during the quarter to fund new deployment.

Speaker 4

As announced yesterday, we declared a quarterly dividend of $0.10 per share payable on July 6, 2023, shareholders of record at the close of business on June 15, 2023. With that, I would like to turn the call back to Jim.

Speaker 2

Thank you, Chip. In closing, our strategy of portfolio diversity, senior positioning and disciplined growth puts BCIC in great shape for the year ahead, and we are confident in our ability to drive strong profitability and strong returns for our shareholders. With that, we would now like to open the call for your questions.

Speaker 5

Thank you.

Operator

Please go ahead.

Speaker 6

Hi, everyone. Good morning. On the portfolio overall, we Saw a couple of borrowers migrate to partial pick this quarter. Can you give us a sense of your discussions with borrowers, if we should see More of this in the coming quarters or if you have any outlook on what PIK might reach as a percent of revenue this year.

Speaker 3

Hi, good morning, Finian. This is Nick. Let me first just give some overarching Commentary on the portfolio, then I can address your specific question about the PIK. So overall, I would say that The portfolio we feel has held up very well. There were no new non accruals in the Q1.

Speaker 3

In certain sectors, we are seeing a slowdown in revenue growth. And needless to say, persistent inflation is impacting margins at some companies. What we're seeing are many of these borrowers or Their private equity sponsors adjusting to this reality by rightsizing their cost structure and or Passing the increased cost to their customers and much of this happened in the second half last year. Those the impact of those initiatives is starting to show up in their financials, albeit with a lag, And we see more and more of that activity on an ongoing basis. We take comfort in the fact that we are 1st lien heavy With a substantial capital behind us, in the borrower's capital structure, we structure and underwrite our loans to be resilient In down cycles like this one and importantly most of our loans are financial covenants which facilitate a seat at the table in the event of adverse performance.

Speaker 3

Specifically, I would note, there was one name where the conversion to PIK was via an amendment. That's our investment in Razer. And the other name where part of the interest convert to PIK was actually contractual. We have that feature in some of our more tech oriented names and we actually anticipate that that Conversion will be used from time to time. So that's the sort of overall commentary I would give.

Speaker 3

Our PIK income was approximately 6% of total income in the Q1. We engage with our portfolio companies almost on a continuous basis throughout the quarter. Again, could over time as things progress, could the PIK income increase over time? That's a possibility. But we're also seeing on the other hand, a number of the companies taking all the actions that they need to take to preserve margins in this market.

Speaker 3

That's

Speaker 6

very helpful color. Thank you. And just as a follow-up sort of related question If you have these numbers for the overall portfolio, What's the current or forward looking fixed charge coverage? And then what percent of the portfolio is underwater or under 1?

Speaker 3

Yes. So and I don't have the exact numbers in front of me right now. What I can say is that when we underwrite new loans at inception, generally we require the interest coverage ratios It will be strong, call it 2.5 to 3 times, in many cases even more than 3 times. And largely because of LIBOR and SOFR having gone up, we've seen contraction in those ratios. Ian, I would say, in an aggregate basis that maybe come down by a turn.

Speaker 3

So, look at the median Interest coverage ratio, that might be in the high ones or low twos at this point in time compared to 2.5 times to 3 times at origination. And the one thing I would say is that when we speak to our borrowers, we're very, very focused on their liquidity situation and we were starting to see liquidity getting tighter for some of the names In Q3 and Q4, surprisingly, many of those names were actually seeing the liquidity situation get better as the owners continue to take the right actions to manage their cash flow.

Speaker 6

Okay. That's helpful. And just one more for me. Can you talk about the remaining securities related to Gordon Brothers? How that portfolio is performing and any outlook for that eventual off ramp?

Speaker 6

And that's all for me. Thank you.

Speaker 3

Yes. So, if you will recall, we monetized most of our GBFC position back in November 2020 And GBFC itself was left with certain additional assets that one have Continue to provide a source for additional pay downs since that time, and we expect We'll continue to provide additional recoveries over time. The exact Timing is just by its nature uncertain. I would say it's not a few quarters. I think it's going to be over the Next several quarters.

Speaker 3

And while we can talk about the underlying portfolio at ColorDyne specifically, Well, we can tell you is that the reference portfolio of loans, to which the 1st loss note related, continues to shrink in size as Caladyne realizes exits and recoveries on those names.

Operator

We'll take our next question from Melissa Wedel with JPMorgan. Please go ahead.

Speaker 5

Thanks very much. Appreciate you taking my questions today. Ben covered a lot of it, but I was hoping to follow on in a couple of areas. First, Nick, I believe you gave an update on activity quarter to date of $12,000,000 of originations. Just wanted to make sure I heard that right.

Speaker 5

And then did I don't think I caught anything that you mentioned perhaps on exits for the quarter to date or did I miss it?

Speaker 3

Yes. No. So that is correct, Melissa. Dollars 12,000,000 Is the expected number, but again keep in mind that that's only 1st 4 weeks of the quarter. And so things can change, right, in the remaining 2 months.

Speaker 3

Again, I think the point I would enforce is that We are seeing opportunity. Even though overall M and A activity is very slow in the market, it's not 0. We're still seeing deal making activity. The one thing we can assure you is that it will continue to remain selective In the opportunities we invest in, and also every quarter, our existing portfolio companies continue to be An important source of deployment opportunities and these are not defensive deployments. These are good deployments that we want to make to help our companies grow.

Speaker 3

And again, I think what we feel good about is we have enough dry powder to take advantage Of the market conditions we are in right now, obviously rates are up, spreads are attractive And we're also seeing it's not sort of the borrower's market that used to be. We can get favorable documentation. We can get tight cushion on covenants. So it's really a good period of time to be deploying capital. And on the repayments, correct that we did not have any repayments or at least any material repayments in the quarter so far.

Speaker 5

Okay. Got it. And I appreciate that context. It did jump out to us that you guys are finding opportunities in a lot of new portfolio companies, which is consistent with what your stated goal has been of diversifying the portfolio. Just conceptually, is that intention or is that diversification of the portfolio somehow intention with the idea of keeping your lending standards incredibly tight.

Speaker 5

And Arguably, we see a lot of managers deploying primarily to existing borrowers because they know them. There's that sense of we know the business better. How do you guys approach that? And is there a point at which you might feel like the diversification piece should take a back seat to sort of deploying to companies that you know better. Hopefully that makes sense.

Speaker 3

Yes. No, it does. I'm going to answer 2 ways, right? First, the strategy to diversify is 100% intentional, right? We are focused on creating NAV stability, predictable net investment income, And we feel that achieving portfolio diversification is a key tool in delivering that to our shareholders, okay.

Speaker 3

Secondly, the way our platform, the BlackRock direct lending platform has evolved and grown over time, It actually tremendously helps BCIC in achieving diversification. And what I mean by that is that The team that supports BCIC also supports a much larger direct lending platform, Which enables us to be a player in scale and size. So as an example, we might be participating The investment that's call it $100,000,000 $200,000,000 even more in size. And then we allocate it across multiple different funds, Including BCIC, right. So we're getting the benefit of being a scaled lender.

Speaker 3

And at the same point of time, BCIC Is getting the benefit of diversification, right? So that's my response from an overall strategy perspective. And then I think the second part of your question was new investments versus existing portfolio companies. I think we have both Who's opened, right? And you'll see that percentage vary from quarter to quarter.

Speaker 3

I think in the past, it has Range from 20% to 50%. We don't necessarily have any preconceived notions there. It's all about Putting our capital in the best available opportunities. But if you look at the number of portfolio companies, it's 121 portfolio companies. That's a massive, massive improvement from the 20 7 or so portfolio companies, BCIC had a few years ago, right.

Speaker 3

So it's truly a diversified portfolio at this point in time.

Speaker 5

Certainly, point taken. If I could follow on with Sort of my persistent question quarter over quarter. We did notice on repurchase activity that there wasn't any in this quarter following Decent track record, I think it was 7 ish quarters prior to that of some share repurchase. Can you given that you do have Plenty of room to increase leverage and that share repurchases are inherently a levering activity. Can you update us on just how you're thinking about that now and what has changed if anything?

Speaker 3

Yes, Melissa. So in terms of the share repurchases being one of our tools to deliver shareholder value, nothing has changed With respect to that, we and the Board assess the plan every quarter and any repurchases that we make Are conducted pursuant to the provisions of rules 10b5-1 and 10b18. And once that program is in place, repurchases are out of control. So it's possible to see variability Quarter over quarter and I'm just going to unfortunately I can't comment anymore. So I'll leave it there.

Speaker 5

Okay. Thank you, Nick.

Operator

That concludes today's question and answer session and this concludes today's call. We thank you for your participation. You may now disconnect and have a great day.

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Earnings Conference Call
BlackRock Capital Investment Q1 2023
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