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BlackRock Capital Investment Corp  (NASDAQ:BKCC)
Q1 2019 Earnings Call
May. 02, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, everyone. My name is April, and I will be your conference facilitator for today's BlackRock Capital Investment Corporation First Quarter 2019 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. 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. After the speakers complete their update, they will open the line for a question-and-answer session. (Operator Instructions)

Thank you. Mr. Paredes, you may begin your conference call.

Laurence D. Paredes -- General Counsel and Corporate Secretary

Good morning, and welcome to BlackRock Capital Investment Corporation's First 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 contain forward-looking statements subject to risks and uncertainty. 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. The presentation can be accessed by going to our website at www.blackrockbkcc.com and clicking the March 2019 Investor Presentation link in the Presentations section on the Investors page.

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

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

Thank you, Larry. Good morning, and thank you for joining our first quarter earnings call. I will provide you with business and performance highlights and an update on the investment activity during the first quarter and 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 first 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, there was approximately 92% distribution coverage for the quarter. Additionally, we had net portfolio deployments of $2 million for the quarter, which I will talk more about shortly. Net asset value per share increased from $7.07 per share last quarter to $7.15 as of March 31, a 1.1% quarter-over-quarter increase.

Net unrealized and realized gains of $7 million were largely driven by the Company's equity investment in US Well Services, a publicly traded company. But substantial portion of this investment is subject to certain lockup provisions, half of which expire in May with the other half expiring in November of 2019. 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.

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 noncore positions in a manner that we believe 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.

Due to a slight increase in net deployments this quarter, leverage increased from 0.36 times to 0.37 times during the quarter. We have ample liquidity of $269 million to support new investment activity and have no debt maturing until 2022. Under the existing share repurchase program during the first quarter, $0.5 million were invested at an average repurchase price of $5.49.

Turning to the Company's investment activity during the quarter. We deployed $58 million, which was offset by repayments and other exits totaling $56 million for a net $2 million increase in the portfolio due to investment activity. The Company's deployments and repayments are detailed in the first quarter earnings release.

We began to realize the sourcing and underwriting benefits of the TCP integration during the first quarter. Two new investments, CareATC and FinancialForce demonstrated the ability of BlackRock's expanded middle-market platform to provide a holistic financing solutions to borrowers. Both of these investments were co-investments across multiple BlackRock-managed fund. Based on current visibility into closed and improve deals, we anticipate deployments in new companies to increase during the second quarter, which would also result in increased sector and issuer diversity. We continue the strategy to pursue a more diversified and stable income producing portfolio.

The Company's three core channels for deployment are; one, high quality first and second-lean investments, two, investments in our portfolio Company, Gordon Brothers Finance Company, and three, investments in our portfolio Company, BCIC Senior Loan Partners, the Company's first-lean joint venture. Both Senior Loan Partners and Gorden Brothers Finance Company have underlying investments and diversified pools of primarily first-lean loans that generate attractive risk adjusted returns yielding a 11% or higher on the Company's investments in each of these two entity.

With the repayment and deployment activity this quarter, there are 28 companies in the portfolio at a fair market value of approximately $680 million. The weighted average yield of income producing securities at fair market value was 11.7% of March 31st, which is up 22 basis points from the last quarter. From March 6, 2015 when BlackRock became responsible for managing the investment activities of the Company, to the end of the first quarter, the BlackRock team has deployed approximately $1 billion into new investments, of which, $387 million has been exited with a realized IRR of 14.1%. As of March 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 noncore portfolio, which as of March 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 and Red Apple Stores being the four largest holder; two, non-earning equities at 7% by fair value, primarily consisting of US Well and Vertellus equity; and three, investments on nonaccrual at 1% by fair value.

As mentioned earlier, the US Well equity is now in the form of a publicly traded USWS common shares, a significant portion of which is subject to lockups expiring in May and November of 2019. As of March 31, investments on nonaccrual 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 noncore legacy book.

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 ample strong liquidity puts in a position to benefit from the enhanced sourcing capabilities and the industry expertise of BlackRock's expanded direct lending platform.

Over to you, Mike.

Michael L. Pungello -- Interim Chief Financial Officer and Treasurer

Thank you, Jimmy. I will take a few minutes to review additional financial and portfolio information for the first quarter of 2019.

GAAP net investment income, NII, was $11.4 million or approximately $0.17 per share for the three months ended March 31, 2019. Relative to distributions declared of $0.18 per share, our NII distribution coverage was approximately 92% for the quarter. Total investment income for the three months ended March 31, 2019 decreased $1.5 million or 7.3% as compared to the three months ended March 31, 2018. Excluding fee income and other income, total investment income decreased by approximately 6.2%, primarily attributable to a decrease of 10% in average investment portfolio for the quarter ended March 31, 2019, an amortized cost as compared to the same quarter in 2018. The decrease in portfolio size is primarily due to dispositions after the first quarter of 2018 and in 2019. The impact of which was partially offset by a higher rate environment and higher dividend income for the quarter ended March 31, 2019.

As of March 31, 2018, there were three nonaccrual investment position representing approximately 1.6% and 7.1% of total debt and preferred stock investments at fair value and cost, respectively, as compared to nonaccrual investment positions of approximately 1.6% and 7.1% of total debt and preferred stock investments at fair value and cost, respectively, at December 31, 2018. Our average internal investment rating at fair market value at March 31, 2019 was 1.49 as compared to 1.44 as of the prior quarter end.

Total expenses decreased $1.3 million or 14.1% for the three months ended March 31, 2019 from the comparable period in 2018, primarily due to a decrease in base management fees and interest in credit facility fee. As previously disclosed, we announced the continuation of our waiver of incentive management fees based on income through June 30, 2019. For the quarter ended March 31, 2019, $2.3 million of incentive management fees based on income earned by our investment advisor had been waived. Through March 31, 2019 we have waived a total of $18.8 million of 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 gain was $6.6 million for the three month and the March 31, 2019, primarily consisting of appreciation in our equity investment in USWS. During the first quarter of 2019, we repurchased 85,543 of our shares for $0.5 million at an average price of $5.49 per share, including brokerage commission. As of March 31, 2019, 3,320,309 shares remained available for repurchase under the current program.

At March 31, 2019, we are in a very strong liquidity position to grow our investment base. We had approximately $269 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 and 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 you to open it up for questions.

Questions and Answers:

Operator

Thank you. (Operator Instruction) And we'll first hear from Fin O'Shea of Wells Fargo Securities.

Finian Patrick O'Shea -- Wells Fargo Securities -- Analyst

Hi, good morning. Thanks for taking my question. Can you guys first give an update on the rotation of legacy names, given last quarter, you said, you'd be more so proactive in moving out of those. Can you give us some color on just the market out there and your feel for or how soon this can get done?

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

Thanks, Fin. This is Jimmy. I'll start and I'll let Marsh, who's leading the effort there answers as well. But I would say, as mentioned in the last quarterly call, this is a key part of our strategy is to continue to work through exits of those legacy names. I think we've communicated to you all that each one of these names as a idiosyncratic issues and stories to them. And our main focus is obviously balancing the speed at which we can exit, but also getting the inherent best value for each one of those entities.

So I would say, as you can see the market is fairly robust with regards to economic activity, and obviously asset prices out there. So we believe it's a good environment and we've seen good progress, but I also let Marsh follow-on.

Marshall Merriman -- Head of Portfolio Management for BlackRock U.S. Capital Group

Sure. Thanks, Jimmy, and thanks for question Fin. There's not a whole lot I can add to what Jimmy said, other than to just emphasize that, while this is a market that should be receptive to exits of these names. Each of these names has and it's a term we use a lot idiosyncratic features in their capital structure or their governing documents that impose sort of -- if nothing else, some time hurdles with respect to how quickly you can get out of things even when you have ready, willing and able buyers. So it is -- it is a full time project that we are working on. It's hard to prognosticate how quickly it will happen. But the goal is to make it happen as quickly as possible given the constraints we're working under.

Finian Patrick O'Shea -- Wells Fargo Securities -- Analyst

Sure, thank you. And then, just a follow-up if I may. Two parts, you guys talked a bit about your liquidity and capacity and there was a really good opportunity for buybacks. You only bought $0.5 million which -- given the position you're in, one would think that could and should have been more. And then also on the deployment side, these two co-investment names CareATC and FinancialForce, we'll see next week, but it looks like the bite sizes that you allocated were on the smaller end. So any color you would add to those two elements?

Nik Singhal -- Head of Investor Relations and Business Strategy

Hi, Fin, it's Nik. So let me first address the share buyback question. So -- our share buybacks are conducted -- purchase -- pursuant to an approved 10b5 program. And while in quarter, we bought back 85,000 shares. The reality is that throughout all of 2018, we bought over 4 million shares, including almost 2 million shares in Q4 at an average purchase price of $5,62. So the level of buybacks is really a function of the price at which the stock is trading and this Q4 happened to provide an exceptional opportunity to be conducting those buybacks. And then for your second question, I am going turn back to Jimmy.

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

Yeah, thanks, Nik. Yeah, Fin with regard to obviously deployments, I think we've mentioned about the -- I would say Q2, I think we've seen some pretty strong trends. And obviously the combined platform really -- we talked about this in the last quarter. Just from a timing perspective of some of the deals that are coming through, I'd say, we would expect deployments to pick up pretty rapidly in the second quarter. First quarter was a little bit slow based on our activity in Q4.

With regards to the allocations of some of those -- I think we've communicated to you all, they are guided by allocation policies that are both driven by the -- co-exempted for the order and tend to be very radar (ph) across the overall book of assets that the advisor manages.

Finian Patrick O'Shea -- Wells Fargo Securities -- Analyst

Very well. Thank you.

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

Just a last comment on that. And I think you know all of that is just -- in general in line with the goals that we've tried to communicate as well. You know historically speaking, when you look at the legacy book, the assets had been more -- far more concentrated and they tended to be more second- lean. So I think what you'll see with FinancialForce carriage, you see is, we'll have more names in the portfolio, it tend to be more first-lean. But the quality of the book will increase because of obviously where we are from a security standpoint but also the diversification that we plan to have. So that's part of the allocation as well.

Finian Patrick O'Shea -- Wells Fargo Securities -- Analyst

Thanks.

Operator

(Operator Instructions) And it appears there are no further questions at this time.

Thank you, Operator. And again I'd like to thank everybody for your support. We look forward to talking to you next quarter as we continue to progress across the goals of the portfolio. Thanks again.

Thats does conclude today's conference. Thank you all for your participation. You may now disconnect.

Duration: 21 minutes

Call participants:

Laurence D. Paredes -- General Counsel and Corporate Secretary

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

Michael L. Pungello -- Interim Chief Financial Officer and Treasurer

Finian Patrick O'Shea -- Wells Fargo Securities -- Analyst

Marshall Merriman -- Head of Portfolio Management for BlackRock U.S. Capital Group

Nik Singhal -- Head of Investor Relations and Business Strategy

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