Blackrock Kelso Capital (BKCC) Q2 2021 Earnings Call Transcript

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Blackrock Kelso Capital (BKCC 0.27%)
Q2 2021 Earnings Call
Aug 06, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. My name is Lauren, and I will be your conference facilitator today for BlackRock Capital Investment Corporation second-quarter 2021 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 D. 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 call.

Larry Paredes -- General Counsel and Corporate Secretary

Good morning, and welcome to the second-quarter 2021 earnings conference call of BlackRock Capital Investment Corporation or BCIC. Before we begin our remarks today, I would like to point out that certain comments made during this conference call and within corresponding documents contain forward-looking statements subject to risks and uncertainties. Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may and similar expressions. We call the retention of fact that BCIC's actual results may differ from these statements.

As you know, BCIC has filed with the SEC reports, which lists some of the factors which may cause BCIC's results to differ materially from these statements. BCIC assumes no duty to and does not undertake to update any forward-looking statements. Additionally, certain information discussed and presented may have been derived from third-party sources and has not been independently verified. Accordingly, BCIC makes no representation or warranty with respect to such information.

Please note, we have posted to our website an investor presentation that complements this call. Shortly, 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 August 2021 Investor Presentation link in the Presentations section of the Investors page. I would now like to turn the call over to Jim.

Jim Keenan -- Interim Chief Executive Officer and Chairman of the Board

Thank you, Larry. Good morning, and thanks to all of you for joining our second-quarter earnings call. I'll provide a high-level update of our second-quarter performance, which reflected continued progress toward our strategic goals and priorities. Nik Singhal will then give you an update on our portfolio activity and status, and Abby Miller will follow with a discussion of our financial results in more detail.

We will then open the call for questions. We produced strong momentum in the second quarter, generating solid investment portfolio growth, increased NII and a higher NAV. The 7.5% increase in NAV per share from the prior quarter was largely driven by increased valuation of SVP Singer Equity, which was a legacy noncore position. A large portion of this investment was monetized subsequent to the second quarter at a level consistent with the Q2 mark.

This resulted in cash proceeds of approximately $20 million. As we have highlighted before, a key strategic priority for BCIC has been to rotate out of noncore legacy and other junior capital investments. Following the monetization of the SVP Singer Equity, we are pleased to report that the noncore portfolio is now less than 5% of the total portfolio on a pro forma basis. Of this, less than 2% consists of nonincome-producing investments.

With SVP and other recent exits, our goal of noncore portfolio divestiture is largely behind us. Our near-term priorities are focused on using our resources and expertise to continue to build the portfolio for stable long-term strength. We deployed nearly $90 million in the quarter. We continue to draw upon the power of BlackRock platform to identify compelling new opportunities with solid risk-adjusted returns.

We remain committed to building a diversified portfolio of income-generating senior secured loans with an emphasis on first lien physicians. Of the new investment dollars deployed during the quarter, more than 75% were in first lien term loans. We now have 74 portfolio companies, a total that represents steady and ongoing progress in our pursuit of greater diversity. This compares to 60 portfolio companies at the close of the first quarter and 47 at the end of 2019.

As we continue to capitalize on BlackRock's robust origination and underwriting platform, we believe that we can selectively deploy capital and continue to increase both issuer diversity and the percentage of first lien loans in the portfolio over the coming quarters. Net deployment of $64 million during the quarter helped to increase the portfolio leverage to 0.56 times and enabled a $0.01 increase in the NII per share quarter over quarter. We expect to methodically increase leverage by continuing to redeployment of capital in a disciplined manner. As the portfolio continues to grow in coming quarters, we expect such growth to be accretive to NII, leading to increased dividend coverage for our shareholders.

I'll now turn the call over to Nik Singhal to discuss our portfolio activities in further detail.

Nik Singhal -- President

As Jim mentioned, we continue to make solid progress in monetizing noncore assets and growing the core investment portfolio. During and subsequent to the second quarter, $38 million of cash proceeds were received on noncore and other junior positions, leading substantial completion of our efforts in exiting this part of the book. During the second quarter, we had strong deployments across a variety of industries with the vast majority being in first lien investments. Consistent with our strategy to lower overall portfolio risk and increase the first lien percentage in the book.

Gross deployments were $89 million in the quarter, across 16 new and four existing portfolio companies, which further diversified our portfolio by both industry and issuer. As a result of the SVP exit, the first lien percentage in the portfolio is 66% by fair value on a pro forma basis, up from 50% at the end of 2020. The details of each 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 8% term loan and revolver to Pluralsight a learning and development platform that helps businesses and individuals develop critical technology skills. BCIC committed $11.9 million to this investment.

A first lien LIBOR plus 9% delayed draw term loan in words in Razor Group a consolidator of small- to medium-sized brands that sell through Amazon's third-party platform. BCIC committed $11.8 million to the term loan in this investment. A first-lien LIBOR plus 7.25% term loan to Keep Truckin, a provider of safety and fleet management solutions to the transportation and logistics industry. Blackhawk was the sole lender in the investment in which BCIC committed $9.6 million.

With several noncore exits already realized and the refinancing pressure easing, Q2 also happened to be our biggest net deployment quarter in three years. This helped us to progress toward our leverage target and boosted NII. Our opportunity set for new investments remains solid. In the third quarter to date, we've added two new first lien and one second lien investment in addition to several follow-on investments.

While the markets remain competitive, we are able to create a large funnel of opportunities due to the broad scope of our origination channels, deep multisector expertise and the capital base to provide complete solutions to both sponsored and nonsponsored borrowers. This allows us to be selective and to move quickly on attractive transactions. We're seeing opportunities across a variety of industries. We continue to focus on investing in less cyclical businesses and they are experiencing strong secular growth.

A co-investment order from the SEC allows us to co-invest with other funds on the BlackRock private credit platform, enabling the company to participate in larger transactions without creating excessive portfolio concentration. And we continue to emphasize transactions where we lead or co-lead negotiations on deal terms. Our core portfolio with an increasing percentage of first lien loans has continued to perform well as evidenced by no new nonaccrual investments in 2021. 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 some additional financial results for the second quarter. GAAP net investment income, NII, was $4.8 million or $0.07 per share for the quarter, up 15.6% from the first quarter. NII covered 65% of the $7.4 million distribution to stockholders, an improvement from 56% coverage in the prior quarter.

The increasing NII was primarily driven by a larger investment portfolio resulting from strong net deployments. Total investment income was $10.9 million, up $0.6 million or 5.7% from the first quarter of 2021. Total expenses decreased 1.1% quarter over quarter. Within that, general operating expenses, excluding management fees and financing expenses decreased by approximately $260,000 or 17%, driven primarily by lower professional fees incurred.

Partially offsetting that was $216,000 or 7.8% increase in financing expenses due to higher leverage. The company did not incur any incentive fees based on income or capital gains during the quarter. Net realized and unrealized gains were $27.2 million for the quarter, primarily driven by a $23.2 million increase in the valuation of our equity position in SVP Singer, coupled with $4.0 million of net fair value markup across the portfolio as credit spreads narrowed and we saw improved financial performance at a number of our portfolio companies. At quarter end, there were three nonaccrual investments, representing 4.4% of total debt and preferred stock investments at fair value as compared to 5.5% at the end of first quarter.

Our weighted average internal portfolio rating at fair value also improved to 1.37 compared to 1.72 in the prior quarter. Demonstrating our continued improvement in portfolio credit quality. At June 30, 2021, we had a strong liquidity position of approximately $230 million from borrowing availability under our credit facility and cash on hand. Our net leverage ratio was 0.56 times, up from 0.38 times at March 31, 2021, which was primarily driven by positive net deployment.

We expect to gradually return to normalized leverage level as we continue to deploy capital and selectively grow our portfolio over time. During the second quarter, we repurchased approximately 81,000 shares of our stock for $0.3 million at an average price of $3.73 per share, including brokerage commissions. As of June 30, 2021, approximately 7.2 million shares remained available for repurchase under the current buyback program. As announced yesterday, a quarterly distribution of $0.10 per share was declared payable on October 6, 2021, to stockholders of record at the close of business on September 15, 2021.

With that, I would like to return the call back to Jim.

Jim Keenan -- Interim Chief Executive Officer and Chairman of the Board

Thank you, Abby. In closing, we are pleased with our second-quarter performance, which was driven by the ongoing hard work of our entire team, and we are excited about the remainder of the year. We are in great financial shape and are well positioned to pursue our goal of growing and further diversifying our portfolio so that it will produce steady, reliable income and lower net asset value volatility. I also want to thank our shareholders for the ongoing support through this portfolio repositioning process.

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

Questions & Answers:

Operator

Thank you. [Operator instructions] We'll take our first question from Finian O'Shea with Wells Fargo Securities. And I do apologize. Mr.

O'Shea is no longer on the line. One moment, please.

Jim Keenan -- Interim Chief Executive Officer and Chairman of the Board

Thanks, operator, it looks like we may have lost Fin. Is there any other questions?

Operator

We have no further questions at this time.

Jim Keenan -- Interim Chief Executive Officer and Chairman of the Board

Great. Well, we thank everybody for their time, and I think we've call it there, but I appreciate everyone's support over the quarter. Thank you.

Operator

[Operator signoff]

Duration: 22 minutes

Call participants:

Larry Paredes -- General Counsel and Corporate Secretary

Jim Keenan -- Interim Chief Executive Officer and Chairman of the Board

Nik Singhal -- President

Abby Miller -- Chief Financial Officer and Treasurer

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