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BlackRock Capital Investment Corp (BKCC) Q4 2018 Earnings Conference Call Transcript

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BKCC earnings call for the period ending December 31, 2018.

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BlackRock Capital Investment Corp  (BKCC -1.49%)
Q4 2018 Earnings Conference Call
March 07, 2019, 10:00 a.m. ET


Prepared Remarks:


Good morning, ladies and gentlemen. My name is Greg, and I will be your conference facilitator today for the BlackRock Capital Investment Corporation Fourth Quarter 2018 Earnings Call.

Hosting the call will be Chairman and Interim Chief Executive Officer, James Keenan; Interim Chief Financial Officer and Treasurer, Michael Pungello; General Counsel and Corporate Secretary of the Company, Laurence D. Paredes; Marshall Merriman, Head of Portfolio Management for BlackRock's U.S. Private Capital Group; Jason Mehring, Chairman of the U.S. Private Capital Group's Investment Committee; and Nik Singhal, Head of Investor Relations and Business Strategy.

Lines have been placed on mute. And after the speakers complete their updates, they will open the line for a question-and-answer session. (Operator Instructions) Thank you. And Mr. Paredes, you may begin your conference call.

Laurence D. Paredes -- General Counsel & Corporate Secretary

Good morning, and welcome to BlackRock Capital Investment Corporation's fourth quarter 2018 earnings conference call.

Before we begin our remarks today, I would like to point out that certain comments made during the course of this conference call and within corresponding documents contains 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 BlackRock Capital Investment Corporation's actual results may differ from these statements.

As you know, BlackRock Capital Investment Corporation has filed with the SEC reports, which lists some of the factors which may cause BlackRock Capital Investment Corporation's results to differ materially from these statements. BlackRock Capital Investment Corporation 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, BlackRock Capital Investment Corporation 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, Jim will highlight some of the information contained in the presentation. Presentation can be accessed by going to our website at, and clicking the March 2019 Investor Presentation link in the Presentations section of the Investors page.

I would now like to turn the call over to Jim, who will provide an overview of the business and fourth quarter highlights.

James E. Keenan -- Interim Chief Executive Officer & Chairman of the Board

Thank you, Larry. Good morning, and thank you for joining our fourth quarter earnings call. I will provide you with business and performance highlights and an update on the investment activity during the fourth quarter, as well as our underlying portfolio performance before turning it over to Mike Pungello, our Interim CFO to discuss the financial results in a bit more detail.

For the fourth quarter, net investment income was $0.17 per share. Based on the $0.18 per share distribution declared by the Company's Board of Directors, it was an approximately 94% distribution coverage for the quarter. We had net portfolio repayments of $63 million for the quarter, which I will talk more about shortly.

Net asset value per share decreased from $7.66 per share last quarter to $7.07 per share as of December 31, a 7.7% quarter-over-quarter decrease. Net unrealized and realized losses of $46 million were largely concentrated in certain equity or equity-like legacy investments. The Company's investment in U.S. Well alone resulted in $20 million of unrealized loss.

As we mentioned on the call last quarter, U.S. Well was to merge with a publicly traded SPAC or SPAC, pending shareholder approval. This merger closed in November, pursuant to which the legacy privately held equity in U.S. Well was converted into shares of the publicly traded entity with the ticker USWS, a significant portion of which are subject to certain markup provisions.

The quarter-end valuation for U.S. Well reflected a closing price of USWS of $6.50 on December 31, 2018, subject to additional discounts for lock-up periods. Since December 31, 2018, the stock price of USWS has increased, and although there can be no assurances, we anticipate that the valuation of this investment will continue to shift in line with the quarter-end closing prices of the USWS common stock.

Additionally, the equity markets saw a broad decline in the fourth quarter with the Russell 2000 Index falling 21% quarter-over-quarter. As a result of this, the comparable multiples used in valuing some of the Company's other investments also declined, contributing significantly to the reduced valuations. We continue to work toward monetizing and exiting certain legacy assets in the portfolio.

We are seeking to create sales or natural exits of these non-core positions in a manner that we believe to be in the best interest of the Company's stockholders. Strategically, we are focused on exiting these positions and redeploying the proceeds in the Company's core strategy to improve net investment income and reduce volatility in portfolio valuation.

We had waived incentive fees based on income on March 6, 2017 to December 31, 2018. Under this waiver, which spanned over seven quarters, the cumulative fees waived by the advisor to the Company totaled $16.5 million. We have now extended this waiver for an additional two quarters until June 30, 2019, as we continue to make progress in repositioning the portfolio.

Due to net repayment activity in the quarter, leverage declined to 0.36 times from 0.43 times, relative to the prior quarter. We have ample liquidity of $252 million to support new investment activity, and have no debt maturing until 2022. Under the existing share repurchase program, during and subsequent to the fourth quarter, approximately 2.1 million shares were repurchased at an average price of $5.61.

As previously announced, BlackRock closed on the acquisition of Tennenbaum Capital Partners, TCP, in August of last year, bolstering BlackRock's position as a leading middle-market direct lending manager. Since the closing, BlackRock has been focused on integrating TCP's operations into BlackRock. We believe that the integration will help add value for the Company's stockholders. The investment teams and the investment processes of the Company and TCP have been integrated, resulting in increased deal flow and added industry-specific expertise for the Company.

Subsequent to the quarter-ended December 31, 2018, the Company has begun to co-invest with TCP affiliated funds, and we expect the frequency of co-investments to increase going forward. Additionally, we believe that this co-investment ability helps to mitigate the Company's portfolio risk by deliberately increasing exposures to first lien loans and creating greater issuer and sector diversity.

We are pleased to announce that Howard Levkowitz and Raj Vig, former managing partners of TCP has joined the investment committee that supports the Company, as voting members, who bring vast experience and expertise in direct lending.

The Company's three core channels for deployment are; one, high-quality first and second-lien investments; two, portfolio company investments in Gordon Brothers Finance Company; and three, portfolio company investments in BCIC Senior Loan Partners, the Company's first lien joint venture with Windward Capital.

Both Senior Loan Partners and Gordon Brothers Finance Company has underlying investments in diversified pools of primarily first lien loans that generate attractive risk-adjusted returns, yielding a 11% or higher on the Company's investments in each of these two entities. Senior Loan Partners added four new investments and four add-on to its portfolio during the fourth quarter. We continue to expand first lien exposure in the Company, including through Senior Loan Partners. The underlying investment portfolio of Senior Loan Partners is performing very well.

Turning to the Company's investment activity during the quarter, we made new investments of $32 million, which were offset by repayments and other exits, totaling approximately $95 million for a net $63 million decrease in the portfolio, due to investment activity. The Company's deployments and repayments are detailed in the fourth quarter earnings release.

U.S. Well term loan and revolver was repaid following the U.S. Well merger, accounting for $39 million of the repayments. This marks a partial exit from one of our large non-core positions in the portfolio. With the repayment and deployment activity this quarter, there are 27 companies in the portfolio at a fair market value of approximately $672 million. The weighted average yield of income producing securities at fair market value was 11.5% as of December 31, which is up 28 basis points from last quarter.

From March 6, 2015, when BlackRock assumed responsibility for managing the investment activities of the company to the end of the fourth quarter, the BlackRock team has deployed $962 million into new investments, of which $362 million has been exited with a realized IRR 14%. As of December 31, almost 70% of the Company's investment portfolio by fair market value is represented by investments deployed by BlackRock.

Let me now talk a little bit about the Company's legacy non-core portfolio, which as of December 31 was 33% of the portfolio by fair market value. This part of the book is comprised of one performing debt and income producing securities at 25% by fair value with AGY, Vertellus and Sur La Table being the three largest holders. Two, non-earning equities at 7% by fair value primarily consisting of U.S. Well and Vertellus equity. And three, investments on non-accrual at 1% by fair value.

As mentioned earlier, the U.S. Well equity is now in the form of a publicly traded USWS common shares, a significant portion of which is subject to lock ups expiring in May and November of 2019. As of December 31, investments on non-accrual status represented 1.2% of the total portfolio at fair market value. These included Westmoreland first lien, AGY preferred stock and Advanced Lighting second lien, each of which is a part of the non-core legacy book.

Among some of the watch-list names, Westmoreland's bankruptcy process continues to progress. While resolution is expected soon, it is still difficult to predict the outcome given the numerous constituencies involved. At fair market value, exposure to Westmoreland represents less than 1% of the total portfolio. The decrease in fair market value for AGY's preferred stock was driven in part by a year-over-year decline in profitability, and in part by a decline in the comparable multiples used in the valuation, which is a reflection of the fourth quarter equity market decline, referenced previously.

Before I turn the call over to Mike Pungello for additional details regarding the financial results, I'd like to emphasize that the Company's low leverage and strong liquidity puts it in great position to benefit from the enhanced sourcing capabilities and industry expertise of BlackRock's expanded direct lending platform.

Over to you, Mike.

Michael Pungello -- Interim Chief Financial Officer & Treasurer

Thank you, Jimmy. I will take a few minutes to review additional financial and portfolio information for the fourth quarter of 2018.

GAAP net investment income or NII was $11.8 million, or approximately $0.17 per share for the three months ended December 31, 2018. Relative to distributions declared of $0.18 per share, the NII distribution coverage was 94% for the quarter.

Total investment income for the three months ended December 31, 2018 decreased $3.7 million or 15.1%, as compared to the three months ended December 31, 2017. Excluding fee income and other income, total investment income decreased by approximately 5.8%, primarily attributable to a decrease in average investment portfolio for the quarter ended December 31, 2018, as compared to the same quarter of 2017. The decrease in portfolio size is primarily due to dispositions throughout 2018, the impact of which was partially offset by a higher rate environment and higher dividend income for the quarter ended December 31, 2018.

As of December 31, 2018, there were three non-accrual investment position, representing approximately 1.6% and 7.1% of total debt and preferred stock investments at fair value and cost respectively. That compared to non-accrual investment positions of approximately 3.6% and 14.3% of total debt and preferred stock investments at fair value and cost, respectively, at December 31, 2017. The average internal investment rating at fair market value at December 31, 2018, was 1.44 as compared to 1.31 as of the prior quarter end.

Total expenses decreased $0.9 million or 9.6% for the three months ended December 31, 2018 from the comparable period in 2017, primarily due to a decrease in interest and credit facility fees and other expense. As previously disclosed, we announced a waiver of incentive management fees based on income from March 7, 2017 to December 31, 2018, which has been extended to June 30, 2019.

For the quarter ended December 31, 2018, $2.4 million of incentive management fees based on income earned by the company's investment advisor have been waived. Through December 31, 2018, we have waived a total of $16.5 million incentive management fees based on income on a cumulative basis. During the quarter, there was no accrual for incentive management fees based on gains.

Net realized and unrealized loss before deferred tax with $46.4 million for the three months ended December 31, 2018, primarily resulting from an increase in unrealized depreciation on certain legacy equity investment. For the three months ended December 31, 2018, a decrease in unrealized gain in the consolidated taxable subsidiary resulted in an reversal to our deferred tax liability of $2.2 million.

During the fourth quarter of 2018, 1,986,014 shares were repurchased for $11.2 million at an average price of $5.62 per share, including brokerage commissions. At December 31, 2018, the Company is in a very strong liquidity position to grow its investment base. We had approximately $252 million of availability for portfolio company investments between availability under our credit facility and cash and cash equivalents.

With that, I would like to turn the call back to Jimmy.

James E. Keenan -- Interim Chief Executive Officer & Chairman of the Board

Thank you, Mike. In closing, I would like to take a moment to recognize our team and thank them for their continued hard work, as we demonstrate progress in achieving our portfolio objectives. I would also like to thank you for your continued support. This concludes our prepared remarks.

Operator, we would like to open it up for questions.

Questions and Answers:


(Operator Instructions) All right. And first from JP Morgan, we have Rick Shane.

Richard Shane -- JP Morgan -- Analyst

Hey, guys. Thanks for taking my questions this morning. Look, obviously we understand the U.S. Well acquisition in terms of mark-to-market. And appreciate the fact that you guys mark that as precisely as you did. I am curious, does it make sense in any way to try to hedge that position? But more importantly, when we look at the history, and I was just going through a model in terms of now over time, it's really just continuing to decline. I am curious, how you see sort of restoring that, especially given at this point the cycle has been pretty long and the opportunities to enhance NAV probably they are more in the rearview mirror than they are in the windshield display?

R. Marshall Merriman -- Head of Portfolio Management for BlackRock's U.S. Private Capital Group

Hi. This is Marsh Merriman. And with respect to the U.S. Well acquisition, we're on the opinion that we don't have the ability to hedge the acquisition. And then with respect to the other NAV issues, as you know we have been in the process attempting when possible to exit the equity positions that are exposed to volatility -- that exposed the marks to volatility, and we continued to do so. As Jimmy pointed out earlier, part of what you see going on in our portfolio marks for Q4. One, obviously what went on with U.S. Well where we are tied to the public trading value of the stock; and the other is, there is a substantial portion of those marks that are reflective of the comparables that are used to value those positions. We're all trading down at the end of December when the valuation was going on, and so, we are a little bit reflective of what's going on in the market.

Richard Shane -- JP Morgan -- Analyst

Look I appreciate that. It's a very fair point. The quality remarks versus the market highly correlated, that's certainly the way we looked at things going into the quarter for the Group. And I think that there has been divergent approaches. So we really do appreciate that. But the challenge I think at this point is within the business model being at this point a little bit under-leveraged and the distributions. How did you start to restore that in (inaudible)?

James E. Keenan -- Interim Chief Executive Officer & Chairman of the Board

Thanks, Rick. This is Jim. I will add on that. To touch on that, obviously, as Marsh mentioned, I think we've been explicit. Our goal and our plan of the aggregate entity is to continue to work through and exit these non-core legacy position, many of which are non-interest bearing or having inherent volatility or risk associated to that. So as you mentioned the under-leverage part of the, I would call the hedge of the entity that we've had has been running with lower leverage relative to having that inherent volatility in the book. As we work through these and really focus on exiting these positions, our core strategy is to redeploy these into a more diversified portfolio, but one that is far more stable with regards to an income-oriented strategy, in which case as we look at the combined efforts that we have at the advisor to be able to redeploy those proceeds, those sales, not just based on the exits, the value of the exits, but once we reduce that volatility it should be able to have that into a more fully levered profile book that can create that stable dividend stream.

Richard Shane -- JP Morgan -- Analyst

Got it. Okay. And look I appreciate that there is a -- given the liquidity of the portfolio is transitioning from legacy book to new originations certainly takes time and value can be destroyed if you do that too quickly and imprudently. So, definitely appreciate the process there as well. Thanks, guys.

James E. Keenan -- Interim Chief Executive Officer & Chairman of the Board

Thanks, Rick.


(Operator Instructions) Next we have Fin O'Shea with Wells Fargo.

Finian O'Shea -- Wells Fargo -- Analyst

Hey, guys. Good morning. Thanks for taking my question. Appreciating the commentary on the ongoing integration with TCP including, Howard and Raj joining the -- sorry, the Investment Committee, in or after the quarter as you touched on, can you kind of explain going forward, what the main differences will be? Like will there be any loans or investment opportunities that BlackRock BKCC find suitable, but TCP doesn't or vice versa or any other differences in strategy?

James E. Keenan -- Interim Chief Executive Officer & Chairman of the Board

Thanks for the question, Fin. If you look at the -- I mean, from a top-down strategic standpoint, as mentioned, I mean the philosophies of what we've been trying to transform BKCC is similar in the sense that we want to create a more diversified portfolio that creates that stable dividend and income stream. I think from a combined entity standpoint, it has given us far more caught breath (ph) and that's with regard to the resources, the industries and the types of origination and assets that we could potentially buy within this portfolio.

And as noted, with regards to the co-exemption relief order (ph), it allows for us to co-invest across both BDCs, and we've already started to see some activity across that. So, from a strategic standpoint, we have the similar philosophy at BKCC with regards to having a -- again a more diversified portfolio that is going to have a greater weighting into kind of first lien -- in more first lien, in a more stable portfolio to kind of stabilize dividend and stabilize the NAV relative to what we've seen in the past.

With regards to the current status, that is a separate and distinct entity. And so there are portfolio constraints and portfolio differences that may lead to differentials with regards to any one asset at one period of time. That being said, strategically bulk portfolios and the teams has integrated looking for opportunities to kind of deploy capital, and with that co-exempt relief order, as you know, both BDCs have the potential to invest in all assets that come through the platform.

Finian O'Shea -- Wells Fargo -- Analyst

Sure. Thank you. And then just another big picture look at this and maybe it extends a bit on what Mr. Shane was touching on in terms of leverage, but it seems like your originating less and less, and this quarter, I think the private markets were advantaged, a lot of your competitors have very robust origination. So with your previous and existing rate of leverage, why not -- you already have a very good BlackRock deal team in place, you guys have been deploying pretty solidly over the past few years, since you took over. You know, what do we think about -- are you super conservative dialing back or is this -- are you focusing on legacy names. How do we look at your -- what I see as numbers wise dwindling rates of deployment?

James E. Keenan -- Interim Chief Executive Officer & Chairman of the Board

Thanks, Fin. I think there a couple of things that go into that. Obviously, some of -- some of the deals that were done in the fourth quarter in the market, obviously you know the gestation period of these can take a very long time from start to finish. And so some of those deals were kind of generally started in Q3 and ended in Q4.

I would say, from our standpoint, there were couple of things that come into that, which was, one, the composition of our own book, obviously Q4 had -- we had visibility into the public markets, and the potential impact that we were going to see on volatility associated to some of the assets that we own on balance sheet, and that had an impact with regards to the prepayments of some of the deals that we saw from a net deployment standpoint.

But I would say we're definitely not conservative. I would say we are probably being more aggressive about trying to work through and exit some of the legacy positions. And I think from what we see from an origination standpoint, that really is kind of more in Q1, and I would say like the Q2 is an increased level of that origination, if you remember that we closed in August of last year on the TCP transaction and as the integration between the two teams really had kind of worked through to the fourth quarter. What we see in our pipeline, in our potential deployments on a go-forward basis, I would say, we're certainly not being conservative at this point and we certainly think that we would expect to see a significant increase with that and our confidence increased more will come alongside with the exits of our -- the more equity or volatile components of our book.

Finian O'Shea -- Wells Fargo -- Analyst

Okay, guys. Thank you for the color, and thank you for taking my questions.

James E. Keenan -- Interim Chief Executive Officer & Chairman of the Board

Thank you, Fin.


(Operator Instructions) And at this time, it doesn't look like we have any further questions. I'll turn the floor back to management for any additional or closing remarks.

James E. Keenan -- Interim Chief Executive Officer & Chairman of the Board

Great. Thank you, operator. If there is no further questions, I'd like to thank all of you for all your support. And again thank our team for all their efforts with the portfolio. If there are any further questions from anybody on the line, please feel free to contact us directly. Thank you.


And ladies and gentlemen, that concludes our call for today. We do thank you for joining us. You may now disconnect.

Duration: 31 minutes

Call participants:

Laurence D. Paredes -- General Counsel & Corporate Secretary

James E. Keenan -- Interim Chief Executive Officer & Chairman of the Board

Michael Pungello -- Interim Chief Financial Officer & Treasurer

Richard Shane -- JP Morgan -- Analyst

R. Marshall Merriman -- Head of Portfolio Management for BlackRock's U.S. Private Capital Group

Finian O'Shea -- Wells Fargo -- Analyst

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