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Blackrock Kelso Capital (NASDAQ:BKCC)
Q4 2020 Earnings Call
Mar 04, 2021, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning. My name is Jennifer, and I will be your conference facilitator today for the BlackRock Capital Investment Corporation's fourth-quarter 2020 earnings call. Hosting the call will be James Keenan, chairman and interim chief executive officer; Nik Singhal, president of the company; Abby Miller, chief financial officer and treasurer; Laurence Paredes, general counsel and corporate secretary of the company; Marshall Merriman, head of portfolio management; and Jason Mehring, managing director and member of the company's investment committee. [Operator instructions] Thank you.

Mr. Paredes, you may begin the conference.

Laurence Paredes -- General Counsel and Corporate Secretary

Good morning, and welcome to the fourth-quarter and year-end 2020 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, intend, 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. BCIC assumes no duty 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've posted to our website and 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 2021 Investor Presentations link in the Presentations section of the Investors page. I would now like to turn the call over to Jim.

Jim Keenan -- Managing Director, Chief Investment Officer, and Co-Head of Global Credit

Thank you, Larry. Good morning and thank you for joining our fourth-quarter earnings call. Today, I'm going to provide an update on the significant progress we have made toward our strategic goals during and after the fourth quarter. I will also provide an overview of our fourth-quarter performance and our remaining near-term priorities.

Nik Singhal will then give an update on our portfolio status and activity. And Abby Miller will follow with a discussion of our financial results in more detail before we open the call to questions. As we have stated in the past, our primary strategic priority has been to rotate out of non-core legacy and other junior investments and redeploy the capital to primarily senior secured first-lien loans with the overall objective of generating stable recurring income and reducing the volatility of our net asset value. I am pleased to report that we have made significant progress in 2020 toward achieving these goals and continue to do so as we move into 2021.

During and subsequent to the fourth quarter, we exited over $170 million of non-core and other junior investments. This brings our non-core holdings to $40 million as of February 23rd, which is 9% of our total portfolio at fair market value, down from 16% on December 31, 2019. Our current portfolio consists of 58% first-lien loans, 28% second lien, and 14% junior capital. The junior capital concentration is down from 43% at the beginning of 2020.

If we adjust for our 85% equity interest in BCIC SLP, which now consists of four first-lien loans in cash on the balance sheet, our pro forma exposure to first-lien loans is 65%. They have also made good progress in reducing portfolio concentration and achieving greater diversity as the portfolio now consists of 58 companies. We are confident that as we selectively deploy capital into new investments, we will reach our target of at least 70 portfolio companies. Our credit quality remains solid with only four investments are non-accrual at year end, which includes our $23 million unsecured debt investment in Gordon Brothers Finance Company or GBFC.

As we mentioned last quarter, this investment is expected to pay down gradually as GBFC realizes recovery uncertain retained assets following the sale of its portfolio to Callodine in November of last year. Since that sale, BCIC has already received $10 million from these residual assets. Excluding GBFC, the three remaining non-accruals represented only 1.2% of our total portfolio at fair value. One of those investments returns to performance status in the first quarter of 2021.

Overall, we feel very good about the credit quality of our portfolio. In addition, we reinstated our all-cash dividend for the first quarter and maintain the rate of $0.10 per share. We appreciate the patience of our shareholders while we paid a portion of our dividend in stock, the last three quarters as a way to bolster our NAV. With the strategic portfolio, as it is largely behind us, and the redeployment strategy firmly taking hold, we feel very comfortable returning to an all-cash dividend.

The significant risk that we accomplished as expected to compress our NII in the near term. With our current leverage at roughly 0.4 times, our quarterly and NII run rate is expected to be in the $0.05 to $0.06 per share range. We expect the NII run rate to grow into our dividend over the coming quarters as we redeploy the freed up capital in a disciplined manner. Finally, we are still authorized to repurchase up to $7.5 million shares of our common stock.

Our share repurchase plan did not kick in during the fourth quarter. Given the significant improvement in our leverage profile and our ongoing discount to NAV, we have increased the capital allocated toward our share repurchases under a 10b5-1 and 10b-18 plan. I'll now turn the call over to Nik Singhal to discuss a portfolio activity in further detail,

Nik Singhal -- Managing Director, Investor Relations

Thank you, Jim. As Jim mentioned, we made significant progress in exiting over $170 million in non-core and other junior investments since the end of the third quarter. The largest drivers of this were the $87 million we received from our investment in the GBFC unsecured debt followed by the $39 million full repayments of our investment in First Boston Construction Holdings, and a $27 million return of capital from more equity investment in BCIC SLP. We also successfully exited our $9 million possession in CB-HDT Holdings and received a $6 million partial payment on our second-lien investment in Red Apple.

In addition, there were approximately $67 million in repayments from our core holdings. This was primarily driven by strong refinancing activity during the fourth quarter as the economy began to pick up and the capital markets opened up. With respect to originations, we had growth deployments of $91 million during and after the fourth quarter, spanning 13 new and five existing portfolio companies. Approximately, 75% of our originations were first-lien loans.

Our pipeline of new opportunities remains robust and we're seeing less repayment activity in the first quarter. We are maintaining our disciplined approach to investing executing only a small percentage of the opportunities we -- we're seeing opportunities across a variety of industries and generally continue to invest in less technical businesses. We are primarily co-investing with other BlackRock funds, which enables us to participate in larger transactions without taking on too much concentration risk. And we continue to emphasize transactions where we lead or co-lead negotiations on their terms.

The details of all of our new investments can be found in the earnings release. But some of our more prominent investments include the following. A first-lien LIBOR plus 6.25% term loan with Paula's Choice Holdings, a well-established direct-to-consumer skincare brand. BlackRock led an investment of $175 million in this loan.

Of which, BCIC invested $7.8 million. A first-lien LIBOR plus 7% term loan in unfunded delayed draw term loan to Thras.io, a consolidator of small to medium-sized brands that sell through Amazon's third-party platform. BlackRock committed $125 million to this transaction. Of which, BCIC committed $7.8 million across the two tranches.

A second-lien LIBOR plus 9% term loan with Team Services Group, a leading provider of self-directed home care assistance for the elderly and people with disabilities. BlackRock provided the entire $85 million tranche. Of which, BCIC invested $5.8 million. Our core portfolio with an increasing percentage of first-lien loans has continued to perform well despite the pandemic.

As Jim mentioned, excluding GBFC, there are only two investments currently on nonaccrual, both with zero fair value. During the fourth quarter, our NAV increased by $8.4 million, or 2.8%, from the prior quarter. This was driven by 0.8% increase due to realized and unrealized gains and approximately 2% due to issuing a portion of dividend in stock. The NAV per share declined by $0.01 to $4.23 per share due to the associated increase in share count.

As Jim mentioned earlier, we are pleased to revert to an all-cash dividend this quarter. Now that we have substantially completed the repositioning of our portfolio, our focus in 2021 will be to deploy our liquidity into core investments, consistent with our objectives of stable income and low NAV volatility. As we do this, our goal is to build back leverage to normalized levels over the next several quarters. We will do so in a selective manner, benefiting from the broad funnel of opportunity that our platform provides.

The de-risking of our portfolio also provides us significantly higher flexibility in managing our capital structure. We intend to address both the 2022 maturity of our convertible notes, as well as working on extending our credit facility this year. I will now turn the call over to Abby Miller to further discuss our financial results for the quarter.

Abby Miller -- Chief Financial Officer and Treasurer

Thank you, Nik. I will take a few minutes to review additional financial results for the fourth quarter of 2020. GAAP net investment income, NII, was $7.3 million, or $0.10 per share, for the fourth quarter and will present a 101% coverage of our $7.2 million distribution for the quarter. Total investment income for the quarter was $14.6 million, down $1.7 million, or 10.4%, from the third quarter, primarily driven by a 12.3% decrease in the average investment portfolio size, combined with GBFC's unsecured debt going on nonaccrual during the quarter.

Compared to the fourth quarter of 2019, total investment income decreased $4.6 million, also primarily due to GBFC going on nonaccrual, as well as a 17.1% decrease in the average investment portfolio size. Total expenses net of incentive management fee waivers decreased $0.5 million, or 6.1%, from the third quarter, primarily the result of a smaller average portfolio which translated into lower base management fees and lower interest expense quarter over quarter. Compared to the fourth quarter of 2019, net expenses decreased $2.3 million, or 23.6%, mainly due to decreases in net incentive fees, base management fees, and interest expense period over period. In the fourth quarter, we voluntarily waived all incentive fees earned of $1.3 million, bringing our cumulative and permanent incentive fees waived since March 2017 to $29.7 million.

Additionally, there was no accrual for incentive management fees based on gains. During the fourth quarter, net realized and unrealized gains were $2.6 million, primarily driven by markups in First Boston, Red Apple, and some core assets. These gains were partially offset by markdown in GBFC and BCIC SLP. As of December 31, 2020, we had a strong liquidity position at approximately $285 million from availability under our credit facility and cash on hand.

Our net leverage ratio was 0.51 time at year-end, and as of February 23 had declined further to 0.43 time due to additional repayments that we received subsequent to year-end. As Nik mentioned, we expect to gradually return to normalized level as we redeploy capital and grow our portfolio over time. Net asset value was $315 million, or $4.23 per share, which included the impact of $5.8 million dividends paid in stock on December 30, 2020. And as Jim mentioned, we announced the resumption of our all-cash dividend for the first quarter of 2021.

On April 7, we will pay a cash dividend of $0.10 per share to stockholders of record at the close of business on March 17. During the fourth quarter, no shares were repurchased, and 7.5 million shares remained available for repurchase under the current program as of December 31, 2020. With that, I would like to turn the call back to Jim.

Jim Keenan -- Managing Director, Chief Investment Officer, and Co-Head of Global Credit

Thank you, Abby. In closing, I would like to take a moment to thank our stockholders for their ongoing support and to recognize our team for their continued hard work in creating exits for noncore provisions. We are excited about the pipeline of opportunities from the advisors' middle market lending platform, which manages over $15 billion of capital and is supported by approximately 50 dedicated investment professionals. Above all, I hope everyone remains safe and healthy during this ongoing pandemic.

This concludes our prepared remarks. Operator, we'd like to open the call for questions.

Questions & Answers:


Operator

Thank you. [Operator instructions] We'll pause for just a moment to allow everyone an opportunity to signal for questions. And we'll go first to Finian O'Shea with Wells Fargo Securities.

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

Hi, good morning, everybody. First question on I suppose naturally GBFC. Can you provide some color on what happened there underneath the entity or -- or at least the unsecured claim composition? And -- and also is it still added in there, is it still paying cash?

Nik Singhal -- Managing Director, Investor Relations

Hi, Fin. This is Nik. Thank you for your question. So as we had mentioned last quarter, GBFC, so all of its investment portfolio to Teledyne in November of last year post that transaction.

It was left with a basket of residual assets which were namely they're entitled to up to $40 million recovery, works for the first lien not -- first-lien note in the portfolio that was sold. Additionally, there is an earn-out note with a maximum potential recovery of $15 million. There was a warrant position in -- in existing portfolio company that GBFC actually monetized in December and that was used to return $10 million of capital to BCIC. And then initially, there's some cash and some escrow proceeds approximately $1 million was returned initially to BCIC.

You know, none of these assets are income-generating. As a result, that unsecured note does not pay an income and is not expected do so. We view that as -- as a recovery play. And I mentioned that we've already seen approximately $10 million of recoveries on that base.

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

So -- so the -- the non-accrual was more a result of -- of moving stuff around than anything that happened underneath fundamentally?

Nik Singhal -- Managing Director, Investor Relations

Correct. Correct. So, all of the income-producing portfolio of loans were sold as part of their transactions and none of these sort of residual assets actually are income-generating. And at this point, clearly, that's the only GBFC unsecured debt is the only non-accrual position in the portfolio.

There are -- there are two other non-accruals in the portfolio but they actually have zero fair market value.

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

OK, thanks. That's helpful. And another question on the dividend. How -- how is the -- how is there such a high return of capital component given that you over-earned a dividend on NII and I figured there'd be even more taxable income with non-accruals.

It's a pretty big surprise, if you could give some color on that.

Abby Miller -- Chief Financial Officer and Treasurer

Hi, Fin. This is Abby. Thank you for the question. As you pointed out, that our total year NII was $34 million and total distribution declared was $31 million.

The main ROG that you mentioned was due to tax characteristics of our distribution. So, with anything tax, there is more complication. The tax code allows the fourth-quarter declared distribution that's paid in January to be count toward either prior year or current-year distribution number. So, this is our January 2020 distribution where it was counted toward the 2020 tax distribution.

So, the way to look at it is that that block number we disclosed is from a tax perspective and that was driven by the January 2020 distribution.

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

OK. That's helpful. Thank you. And just last one for me.

Can -- can you provide an update on the -- on the BCIC efforts to -- to exit that or liquidate any progress post-quarter what you're thinking there now?

Nik Singhal -- Managing Director, Investor Relations

Yes, Fin, this is Nik. So, I just -- I'll -- I'll ask, is your question specific to just the remaining non-core positions and other equity capital?

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

No The -- the -- the -- sorry, I worded -- I gave you the wrong acronym there. The -- the -- the SLA.

Nik Singhal -- Managing Director, Investor Relations

Yes. Yeah. So, yeah. So, that's the -- that's the CD loan JV.

We conducted a portfolio sale in Q4 of last year and that sale resulted -- that process resulted in the sale of 14 out of the 18 first-lien names that that vehicle held. That sale enabled that vehicle to retire its average in full and return an additional 23 $23 million of capital to BCIC. Of those remaining four names, one was partially sold in January of this year which resulted in another $4 million in return of capital. So, you know, the -- that portfolio now is just, you know, four first-lien positions and some cash completely held on an un-levered basis.

We will continue to look for opportunities to exit those investments at attractive levels.

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

OK. Very well. That's all for me. Thank you.

Nik Singhal -- Managing Director, Investor Relations

Thank you, Fin.

Operator

We'll go the next two Melissa Wedel with J.P. Morgan.

Melissa Wedel -- J.P. Morgan -- Analyst

Good morning, everyone. Thanks for taking my questions today. I want to make sure I'm thinking about the activity in the portfolio the right way. I -- I appreciate the additional disclosure provided on some statistics through most of February.

If we're looking at that right, does that sort of translate into or imply, you know, originations around $30 million-ish so far in Q1 versus about $58 at exit so far in Q1?

Jim Keenan -- Managing Director, Chief Investment Officer, and Co-Head of Global Credit

Thanks, Melissa, this is Jimmy here. You know, I appreciate it. I think there are -- are a couple of things, you know, with regard to the base of the deployment. Obviously, last year was a fairly volatile year and we saw our activities slowdown in the market.

And obviously, we slowed down with regards to our own book in a kind of Q2, Q3 timeframe. It really picked up in the end of the year, but also repayments started to pick up pace as well. But for the most part, a large part of our -- our repayments were us exiting out of non-core and legacy positions. I think as we look forward, obviously, there's going to be some volatility around, you know, the -- the timing of close and, I would say, the selective nature that we have with regards to the types of deals that we're looking at.

So, I would say, there's upside and I would guide you to, you know, an increase with regard to that number. We're kind of thinking in -- in aggregate, we should see 5 to 10 dates of deals as we had diversification across the quarter, more in the first lien and we're generally closing in the kind of mid-single digits to the amount of deals that we see. And, you know, if you look at our hold size, the expected hold size, I would say, you know, that number we would expect to be that greater than $30 million averaging over the next couple of quarters. And so, probably somewhere in the range of $30 million to $50 million, but you can easily determine that exactly just because it depends on the -- the quality of the deal flow that is coming in.

Melissa Wedel -- J.P. Morgan -- Analyst

OK. Understood. And I have a couple of follow-up questions on the dividends. Sort of just the thinking of returning to an all-cash dividend at the current level while expecting some compressed NII over the near term.

Can you just talk about the process of -- of thinking through that and then, you know, whether or not the interplay between that and allocating capital to share repurchases right now?

Nik Singhal -- Managing Director, Investor Relations

Thanks, Melissa. Yeah, that's exactly -- that's exactly it. Obviously, it's, you know, we went through the 2020 environment, you know, the -- the unknown, and also the uncertainty of the volatility risk with regards to our junior capital and equity positions. We were in a different place and obviously we -- we -- we distributed some of the dividend and stock.

I think as we look into 2020 and we've been able to exit a significant portion of our -- our equity positions and are going to more non-core assets, obviously, leverage has come down significantly in that dynamic as we look forward. You know, one, we have more conviction with regards to the book and returning to an all-cash dividend. But two, with regard to a balance of the kind of the three things that we look at of trying to return capital to shareholders, is first and foremost is that deployment that we just discussed and we're adding more diversification across a broader range of first-lien notes. And obviously, that will take time but over the next couple of quarters.

And then the -- the balance of over distributing the dividend to add some stability and managing that dividend as we grow into and as we redeploy. And lastly is the measure of allocating toward stock repurchases which we've -- we've disclosed in the book with regard to the $7.5 million shares and we'll have a programmatic plan that's in place. It's really those three measures.

Melissa Wedel -- J.P. Morgan -- Analyst

OK. Thank you.

Nik Singhal -- Managing Director, Investor Relations

Thanks, Melissa.

Operator

And at this time, I'll turn the call back to the speakers for closing remarks.

Nik Singhal -- Managing Director, Investor Relations

Thank you, operator, and I think that concludes the call. Thank you, every -- everyone, for your continued support in -- in the -- in the portfolio and the company. And look forward to the continued progress and transition -- and full transition with regard to the -- the company's coming forward strategy. Thanks again and stay happy and healthy.

Operator

[Operator signoff]

Duration: 38 minutes

Call participants:

Laurence Paredes -- General Counsel and Corporate Secretary

Jim Keenan -- Managing Director, Chief Investment Officer, and Co-Head of Global Credit

Nik Singhal -- Managing Director, Investor Relations

Abby Miller -- Chief Financial Officer and Treasurer

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

Melissa Wedel -- J.P. Morgan -- Analyst

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