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BlackRock Capital Investment Corp (BKCC) Q2 2019 Earnings Call Transcript

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BKCC earnings call for the period ending June 30, 2019.

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BlackRock Capital Investment Corp  (BKCC -0.55%)
Q2 2019 Earnings Call
Aug. 01, 2019, 10:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good morning. My name is Cody, and I'll be your conference facilitator today for the BlackRock Capital Investment Corporation's Second 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. 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.

[Operator Instructions] Thank you.

Mr. Paredes, you may now begin your conference.

Laurence D. Paredes -- General Counsel and Corporate Secretary

Good morning, and welcome to BlackRock Capital Investment Corporation's second quarter 2019 earnings conference call.

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 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 and clicking the July 2019 Investor Presentation link in the Presentations section of the Investors page.

I would now like to turn the call over to Jim.

James Keenan -- Chairman and Interim Chief Executive Officer

Thank you, Larry. Good morning, and thank you for joining our second quarter earnings call. I will provide you with business and performance highlights, an update on investment activity during the second quarter and the underlying portfolio performance. I will then turn it over to Mike Pungello, our Interim CFO, to discuss the financial results in more detail before opening the call up to questions.

For the second quarter, net investment income was $0.16 per share. We deployed $106 million during the quarter, which was offset by repayments and other exits totaling $46 million for a net $16 million increase in the portfolio due to investment activity.

Over the course of the last year, our direct lending platform has seen transformational growth with BlackRock's acquisition of Tennenbaum Capital Partners. Our enhanced platform delivers the scale and capabilities to provide holistic financing solutions to our borrowers, increasing our versatility and opportunity set as a direct lender. Taking together TCP's integration into the BlackRock platform and further investments in our platform sourcing channels have significantly increased deal flow and broadened our underwriting capabilities. Additionally, our ability to co-invest with affiliated funds has positioned us well to construct a more granular portfolio with increased issuer and sector diversity and reduced idiosyncratic risk. These enhancements are producing results as evidenced by our robust deployments this quarter. We added a total of 12 new names to the portfolio, and those are detailed along with our repayments in our earnings press release.

Some of our top investments this quarter include: a $12 million senior secured loan to Diamondback acquisition, also known as Sphera Solutions, a provider of software and services to the environmental health and safety market. Although this is a new investment for BCIC, our affiliated private funds have been the largest lender to the business, an upsize of the loan provided BCIC an opportunity to invest. An $11 million senior secured loan to GlobalTranz, a tech-enabled provider for multi-modal transportation services. This private placement opportunity came to us through an existing sponsor relationship. BlackRock direct lending funds, including BCIC, are the majority lender in the tranche. A $10 million senior secured loan to P&L Development, a distributor and manufacturer of over-the-counter pharmaceutical products and consumer healthcare products. The BlackRock direct lending platform has a strong familiarity with the business as a result of a prior multi-year investment in the business by funds affiliated with BCIC.

Based on completed and pending deals, the pace and granularity of deployments has continued into the third quarter. With the strong net deployment activity this quarter, the portfolio now has 38 companies at a fair market value of approximately $719 million. The weighted average yield of the income-producing securities at fair market value was 11.7% as of June 30, which is the same as last quarter. Leverage increased from 0.37 times to 0.53 times during the quarter. We have ample liquidity of $216 million to support new investment activity, and we have no debt maturing until 2022.

Net asset value decreased 4.6% from $7.15 per share last quarter to $6.82 per share as of June 30, driven by net unrealized and realized losses of $22 million. Of these losses, $12.5 million or 2.5% of NAV were unrealized losses related to the Company's legacy investment in U.S. Well Services, a publicly traded company. A substantial portion of this equity investment is subject to certain lock-up provisions, which expire in November 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. An additional $7.4 million of net losses were related to other non-core legacy investments in the portfolio.

We continue to work toward monetizing certain legacy assets by creating 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. As realizations occur, we will redeploy the proceeds in the Company's core strategy to bolster net investment income and reduce portfolio volatility. The underperformance of certain legacy investments over time has weighed on the earnings of the Company. As a result, the Company's Board and our management team have concluded that a reduction in the distribution is necessary to better align with the current earnings power of the Company. We are dedicated to completing the restructuring of the current portfolio and creating shareholder value through a more stable income-oriented portfolio.

We are focused on: one, prudently exiting the non-earning and non-core legacy assets to bring stability to book value; two, redeploying into a broader, more diverse portfolio with a greater mix of first lien assets; and three, increasing portfolio leverage while reducing downside risk. We believe that all of this will result in improved return on equity, bring the earnings power of the Company in line with the sector and drive enhanced shareholder returns.

Now, I will walk you through some details of the legacy non-core portfolio, which as of June 30 was 28% of the portfolio by fair market value, down from 33% last quarter. This part of the book is comprised of: one, performing debt and income-producing securities at 22% by fair value, with AGY, Vertellus, Sur La Table and Red Apple stores being the four largest holding; two, non-earning equities of 5% by fair value primarily consisting of U.S. Well and Vertellus equity; and three, investments on non-accrual at 1% by fair value, including Advantage Insurance preferred stock, AGY preferred stock and Advanced Lighting second lien. During the quarter, our investments in Sur La Table was paid down from $30 million to $21 million, and the credit metrics pertaining to our loan improved. This has meaningfully reduced the risk in our position. Since BlackRock began managing the company in March of 2015, our team has deployed approximately $1.1 billion into new investments, $411 million of which have been exited with a realized IRR of 14.1%. As of June 30, over 70% of the Company's investment portfolio by fair market value constitutes investments made by BlackRock.

Before I turn the call over to Mike Pungello, I'd like to emphasize the benefits that the Company has begun to derive from BlackRock's expanded direct lending platform, evident from our deployment strength in 2019. As we continue to rotate out of the legacy assets, the Company's conservative leverage and ample liquidity puts it in a position to take further advantage of these benefits and grow its earning power.

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 second quarter of 2019. GAAP net investment income, NII, was $11.2 million or approximately $0.16 per share for the three months ended June 30, 2019. Relative to distributions declared of $0.18 per share, our NII distribution coverage was approximately 91% for the quarter.

Total investment income decreased $1.6 million, or 7.7% as compared to the second quarter a year ago. Excluding fee income and other income, total investment income decreased by approximately 8.6%, primarily attributable to a 4.9% decrease in average investment portfolio size and amortized costs since the year-ago quarter. The decrease in portfolio size is primarily due to dispositions in the second half of 2018, the impact of which was partially offset by higher dividend income for the quarter ended June 30, 2019.

At quarter-end, there were three non-accrual investments, representing 1.6% and 4.1% of total debt and preferred stock investments at fair value and cost, respectively. This compares to non-accrual investments 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 June 30, 2019, was 1.43 as compared to 1.49 as of the prior quarter end.

Total expenses decreased $1.3 million or 13.7% for the three months ended June 30, 2019, from the comparable period in 2018, primarily due to a decrease in both base management fees and interest in credit facility fees.

In the second quarter, net realized and unrealized losses were $21.8 million, primarily due to depreciation and portfolio valuation. During the second quarter of 2019, no shares were repurchased. As of June 30, 2019, 3,320,309 shares remained available for repurchase under the current program.

We closed the quarter with a strong liquidity position to fund our robust pipeline of new investment opportunities, including approximately $260 million of availability under our credit facility and in cash and cash equivalent.

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

James Keenan -- Chairman and Interim Chief Executive Officer

Thank you, Mike. In closing, I would like to take a moment to thank our shareholders for their continued support and recognize our team for their continued hard work toward achieving our portfolio objectives.

This concludes our prepared remarks. Operator, we would like to open the call to questions.

Questions and Answers:


Thank you. [Operator Instructions] And we'll take our first question from Rick Shane with J.P. Morgan. Please go ahead.

Richard Shane -- J.P. Morgan -- Analyst

Hey, guys, thanks for taking my question this morning. Look, I understand the decision to cut the dividend. I understand what's going on in the portfolio. Love to hear sort of your thoughts about cutting the dividend versus potentially extending the fee waiver. And I realize, look, if we're going back and looking at our numbers, it's been -- you guys have given up $20 million of economics over the last 2.5 years. But just curious, why not consider that as an option as well?

James Keenan -- Chairman and Interim Chief Executive Officer

Thanks, Rick. Yeah. As you mentioned, over the last two years, we waived them $21 million to date. And on a go-forward basis, we continue to work with our Board on the appropriate fee structure. But also as we continue to move out of the legacy book and work with the Board with the appropriate dividend based on the earnings power of the BDC, we ultimately decided to cut the dividend to the level that we think are more appropriate with regards to where the sustainable earnings power of the current BDC is.

Richard Shane -- J.P. Morgan -- Analyst

Got it. And when you look at that, what is the implication in terms of sort of your ROE outlook, given where we are in the rate cycle and your ability, for example, to do things like capture floors on new investments?

James Keenan -- Chairman and Interim Chief Executive Officer

Yeah. Obviously, where we are in the rate cycle, the -- as growth has weakened up a bit and you've seen the Fed move yesterday, that is coming into play in our underwriting in two ways is: one, how we think about the aggregate portfolio and the sensitivity to movements in LIBOR but also on an underlying individual investment, how we think about potential risk in a growth slowdown. And then how we think about structuring any one individual asset that we are participating in.

From the standpoint of the ROE for the overall book, I think, as you know, what we've been trying to do is as we move out of the non-core legacy book is to move out of assets that are more equity-sensitive and move them into and deploy them into a more diversified kind of more first lien-oriented strategy. Our net exposure and the overall portfolio to LIBOR right now is around $300 million.

Richard Shane -- J.P. Morgan -- Analyst

Terrific. Thank you very much.

James Keenan -- Chairman and Interim Chief Executive Officer

Thanks, Rick.


Thank you. We'll take our next question from Finian O'Shea with Wells Fargo Securities.

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

Hi, guys. Good morning. Thanks for taking my question. Just to follow on Rick's first question for a moment. Recalling back, wasn't the fee waiver related to shoring up coverage of the dividend? And if so, kind of was there a change in thought of the sustainable earnings power of the business perhaps understandably driven by losses experienced since then or something else? Just some sort of thought on how we should think of the dividend and earnings power longer term understanding that there are nearer-term considerations for dividends.

James Keenan -- Chairman and Interim Chief Executive Officer

Thanks, Fin. If you remember, the fee structure was set by the Board four years ago. And what we've been doing over the last two years is waiving the fee as we, the advisor, have been trying to restructure the book from the prior management team and exit what we deemed as the non-core or legacy portfolio. That has been the part of the book that, I would say, has been more sensitive to either volatility or also where we've seen the drawdowns relative to the underlying risk of those assets. So what we've tried to do is waive any performance fees. And that equated to $21 million over the last two years as we have tried to transition and reduce or sell out of that legacy book from the prior management team and restructure that. So, as we worked with our Board on the appropriate fee structure on a go-forward basis, we've been happy and we are happy with the progress that we are making with the reduction of that legacy book.

And with regards to the aggregate, the overall fee structure and the implementation of that on both the management fee and the performance fee, ultimately trying to tie that into where the run rate earnings power of the BDC is and being sustainable right now. Hence, the dividend cut this quarter. On a go-forward basis, I would say we believe that as we fully sell out of the legacy book and we continue to ramp into a more first lien-oriented but also a more diversified book, that we will continue to move the dividend in line with regards to the fluctuations in the earning power of that. And, as you know, there are still several positions that we need to reduce and get out of. But again, we're happy with the progress on that.

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

Sure. I appreciate the color. And then as to the legacy investments and again, I know this is -- sorry, about that. Could you hear me? I was on speaker?

James Keenan -- Chairman and Interim Chief Executive Officer

Yes, we can. Thanks.

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

This is something we've touched on before, but the legacy investments have been a steady, very consistent loss driver, even stripping out U.S. Well this quarter, your usual KG, Red Apple, Advanced Lighting, it's -- they are steadily continuing to go down. So, can you provide an update on this in terms of valuation versus underlying Company performance? Is this just sort of the equity marks? Or are these companies truly sort of weathering in terms of profitability and so forth?

James Keenan -- Chairman and Interim Chief Executive Officer

I would say, I think there are two things is: one, the underlying portfolio -- the underlying names in that legacy book, each one of them have their own idiosyncratic issues associated to them, both from their own earnings power, but also many of them have gone through restructuring. I think the most sensitive part to the volatility and the drawdown are the positions that have been equity-oriented. I think we've tried to describe and outline out of the legacy book now, which is more income-oriented and which is more equity. And so, that the equity value of that has now been reduced to about, I think, 5% of the legacy book. So that has been the biggest risk associated to that and the biggest part of the overall writedown.

I would say, the progress along being able to sell them, we're happy with where we are right now. And, obviously, that is a key core focus of us is to completely exit that and reduce the sensitivity to that drawdown risk, as well as the volatility. And I think as you've seen, we've been pretty conservative with regards to our leverage at the aggregate based on our uncertainty about the volatility of drawdown risk of those legacy assets. As we've got more comfortable, we've been increasing the leverage on the margin, and we would expect that to be more in line once we're able to exit the remaining positions.

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

Thank you for the color. And one more, if I may. On the advisor side, I know that the TCP and BlackRock Capital Advisors are integrated and rolled up to the same entity. But can you provide an update on the distinct resources, whether it'd be origination management side, dedicated to BlackRock, the BDC, what kind of -- we think there are a lot of investments here. There's the Senior Loan Partners, of course, the legacy investments. What kind of service is dedicated to this portfolio on the management side?

James Keenan -- Chairman and Interim Chief Executive Officer

Thanks. Yes, just with regards to -- we are approaching the one-year anniversary today of the TCP transaction. And, I would say, we are very excited about this. The teams are -- and the investment process is 100% integrated. So the aggregate team of investment professionals is around 46 people focused specifically on investing across this. And I think you've seen the joint transactions pick up over the last couple of quarters. I think you've seen that in the numbers that we outlined, not just with the level of deployment but with 12 new issues this quarter, the breadth of the overall platform we start to see really kind of pay benefits now. And, I would say, beyond that, as you point out the origination, the expansion of the overall platform, the team, the effort, we've really seen that start to play out over the last couple of quarters as our origination volumes have really increased. So we're still converting and closing on 5% to 6% of the deal flow that we see, but the aggregate platform is just seeing many more deals. So I think that is really starting to pay benefits over the last couple of quarters, and we are very excited about that.

From the overall resources from a management standpoint, as you know, BlackRock is a large asset manager with an enormous amount of resources associated to that. So beyond the investment professionals dedicated to the underwriting and origination, there's an enormous amount of scale that has brought with regards to the finance, operations, and the overall management of the public BDC with a significant amount of resources underneath them as well. So a fair amount of resiliency on the platform there.

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

On the investment professional side, more specifically, sorry?

James Keenan -- Chairman and Interim Chief Executive Officer

Sorry. There are -- on the investment professional side, there are 46 dedicated, which is up and we have continued to invest in the platform since the acquisition of TCP. So the combined platform is and we'll continue to add resources into that as we expand our efforts. Beyond that, we've added resources in BlackRock as is capital markets, which is a further effort to increase origination that is not dedicated but is a part of BlackRock that sources for the underlying teams. But 46 dedicated to the team.

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

Is that for syndication for -- is that a syndication group in direct lending?

James Keenan -- Chairman and Interim Chief Executive Officer

The sourcing origination is combined. There is the underlying team, direct team which is part of the 46, which are dedicated to sourcing and originating with specific sponsors and corporates. And then BlackRock as obviously a broader brand has resources in our capital markets that has broader reach into advisors, banks, other sponsors that when there is something that is US direct lending, it is tailored down and brought down to in this team.

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

Thank you. And one final, if I may. Can you provide an update or any color on direct lending assets raised outside of the BDCs?

James Keenan -- Chairman and Interim Chief Executive Officer

Yeah. So specific to the US direct lending, we have -- BlackRock has continued to raise assets outside the BDC. But I think that is focused on, I'd say, mainly on being able to expand the resources and lead to the benefits that you see with regards to the specific BDC. As we mentioned, what we weren't able to do in the past that we are able to do now is to be able to really source and originate assets with a greater hold size, which allows us to be a greater solutions provider to our clients and be able to have flexibility with the types of deals. However, we're still then able to participate that in the joint transactions with regard to the BDC and increase the diversification of the BDC. And as you've seen, we've done deals or added deals inside of BKCC between the $5 million and $10 million range. So although those are small, that's allowing diversification. But our broader hold size of that is a much larger portion of that, which has again increased our overall origination power.

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

Thank you so much.

James Keenan -- Chairman and Interim Chief Executive Officer

Great. Thank you, Fin.


Thank you. That does conclude our today's question-and-answer session. I would now like to turn the call back over to Mr. Keenan for any additional or closing remarks.

James Keenan -- Chairman and Interim Chief Executive Officer

Great. Thank you, everybody. And I appreciate all the questions and look forward to continuing on our efforts to restructure the overall book, and we're happy with our progress and look forward to the next call. Thank you.


[Operator Closing Remarks]

Duration: 30 minutes

Call participants:

Laurence D. Paredes -- General Counsel and Corporate Secretary

James Keenan -- Chairman and Interim Chief Executive Officer

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

Richard Shane -- J.P. Morgan -- Analyst

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

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