Blackrock Kelso Capital (BKCC) Q3 2021 Earnings Call Transcript

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Blackrock Kelso Capital (BKCC 0.27%)
Q3 2021 Earnings Call
Nov 04, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. My name is Alan, and I'll be your conference facilitator today for the BlackRock Capital Investment Corporation third quarter 2021 earnings call. Hosting the call will be James Keenan, chairman and interim chief executive officer; Nik Singhal, president; Abby Miller, chief financial officer and treasurer; Laurence D. Paredes, general counsel and corporate secretary; Marshall Merriman, managing mirector and member of the company's investment committee; and Jason Mehring, managing director and member of the company's investment committee.

[Operator instructions] Mr. Paredes, you may begin the conference call.

Laurence Paredes -- Managing Director, General Counsel, and Corporate Secretary

Good morning, and welcome to the third 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 the 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 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 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'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 November 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 -- Chief Investment Officer and Co-Head of Global Credit

Thank you, Larry. Good morning, and thanks to all of you for joining our third quarter earnings call. I'll provide an update on our strategic goals and priorities as well as our third quarter performance. Nik Singhal will then give 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 to questions. We continue to expand our universe of investment opportunities and diversifying and strengthening our portfolio. In doing so, we bolstered NII and increased NAV in the quarter, while building the portfolio for long-term strength and stability.

Importantly, we have substantially completed our strategic rotation out of non-core legacy assets. These investments now consist of less than 5% of the total portfolio at fair market value. The majority of which is performing debt. This compares with 8% at the end of the second quarter and 16% at the close of 2019.

With the extensive resources and scale of the BlackRock platform as well as our team's deep middle market experience, we are finding compelling opportunities across more sectors. We are generating solid risk adjusted returns by focusing on income-generating senior secured loans, and primarily, first lien positions. We deployed $63 million of new capital in the third quarter, grew our investment portfolio by $9 million and increased our adjusted NII by 28%. Of the new investment dollars in the quarter, a vast majority were in first lien term loans.

Approximately 68% of the portfolio now consists of first lien investments. This is double the level at which we started 2020 and represents remarkable progress. We now have 78 portfolio companies, up from 74 at the close of the second quarter and 47 at the end of 2019. Through the first nine months of this year, we've deployed over $206 million on a gross basis, including investments in 35 new portfolio companies.

We anticipate further progress as we selectively deploy capital and continue to build the portfolio in coming quarters. Recognizing the market remains competitive and inflationary pressures are mounting in the economy, we are comfortable with our portfolio construction and focus on building a diversified portfolio of senior secured floating rate investments. We are confident with the health and resiliency of the overall portfolio. Leverage was now relatively stable during the quarter as exits and repayments nearly offset gross deployments.

The repayments this quarter included approximately $20 million of cash received from the sale of SVP equity, a non-core position. We expect to prudently utilize our leverage runway as we identify appealing investments and expand the portfolio, which we expect will be accretive to NII and provide increased dividend coverage for our shareholders. I'll now turn the call over to Nik Singhal to discuss our portfolio activity in further detail.

Nik Singhal -- President

As Jim mentioned, we have substantially completed the derisking of our book and are focused on building a diversified first lien-centric investment portfolio. During the quarter, nearly 90% of new deployments were in first lien investments, consistent with our strategy to lower overall portfolio risk. With respect to originations, we had gross deployments of $63 million in the quarter across eight new and 13 existing portfolio companies with approximately 45% of the investment dollars going to new portfolio companies and the remaining 55% into existing relationships. The ability to support the growth of our portfolio companies, we have follow-on investments, continues to be an important source of deployment for us.

It gives us the opportunity to invest in businesses that we know and have a proven history with. Facilitating the growth objectives of our portfolio companies also positions us to be a preferred lending partner. Increased M&A activity in the middle market space created somewhat elevated portfolio repayments during the quarter. Combined with our previously announced $20 million monetization of our equity position in SVP, repayments amounted to $62 million and kept our total portfolio size relatively stable quarter over quarter.

Our pipeline of opportunities remain strong. In October, our investment activity consisted of one new portfolio company, three follow-on investments into existing portfolio companies and one portfolio company exit. Additionally, in October, BCIC Senior Loan Partners, our joint venture, returned $18 million of equity capital to BCIC following the sale and complete exit of Crown Paper, one of its portfolio companies. After this exit, the joint venture only holds two first lien investments and has no leverage.

The details of all of our investments this quarter 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 to Hanna Andersson, a direct-to-consumer children's apparel brand. BlackRock acted as the sole lender on this transaction and BCIC's commitment was $7.4 million. $5.4 million of incremental funding to Razor Group, a consolidator of small to medium-sized brands that sell through Amazon's third-party platform. This funding included $3.8 million of LIBOR plus 9% first lien term loan and a $1.6 million first lien convertible term loan at a fixed rate of 7%.

And a first lien LIBOR plus 6.25% term loan to OpenMarket, Inc., a developer of a cloud communications platform designed to deliver mobile interactions between businesses and consumers. BlackRock significantly influenced the structure of this deal. BCIC's share of this loan was $5 million. We are primarily co-investing with other firms in the BlackRock private credit platform, which enables us to participate in larger transactions without taking on too much concentration risk.

And we continue to avail ourselves of transactions where we lead or co-lead negotiations on the deal terms. Our core deployment focus is consistent with our objectives of stable income and low NAV volatility. As we do this, we expect to gradually increase leverage to more normalized levels over the next several quarters. We will do so in a disciplined manner as we select from a broad funnel of opportunities that our extensive platform provides.

Growing our portfolio will enable us to grow our NII as well, with the goal of eventually having our core earnings fully cover our dividend, which we declared a $0.10 per share in cash for the fourth quarter in a row. I'll 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 third quarter. GAAP net investment income was $4.9 million, or approximately $0.07 per share, for the quarter, up 1.4% from the second quarter. NII covered 66% of the $7.4 million distribution to stockholders, an improvement from 65% coverage in the prior quarter and 56% in the first quarter of this year.

Included in these results was the accrued capital gains incentive fee expense of $1.3 million. GAAP requires that the capital gains incentive fee accrual consider the unrealized capital gains as the capital gains incentive fee would be payable if such unrealized capital gains were realized on a hypothetical liquidation basis. However, it should be noted that incentive fees on capital gains only become payable to the extent that realized capital gains exceed realized and unrealized capital losses for the annual measurement period ending June 30, 2022. For the quarter ended September 30, 2021, realized capital gains did not exceed realized and unrealized capital losses.

Excluding the accrued capital gains incentive fee, adjusted net investment income was $6.2 million, or $0.08 per share, up 28% from the second quarter and would have yielded a dividend coverage of 84%. Total investment income was $12.5 million, up $1.7 million or 15.3% from the second quarter. The quarter-over-quarter increase was mainly driven by a 7.5% increase in our average investment portfolio at cost and one-time income from repayments and fees of approximately $0.01 per share during the quarter. Total net expenses increased by $1.6 million quarter over quarter.

Excluding the accrual for capital gains incentive fee, expenses increased by $0.3 million due to higher management fees. During the quarter, the company incurred an incentive fee on income of $79,000, which was voluntarily waived by the advisor. Our cumulative and permanent incentive fees waived since March 2017 totals $29.8 million. Net realized and unrealized gains were $6.7 million for the quarter, primarily attributable to appreciation in portfolio valuations.

There were no new nonaccrual investments during the third quarter. At quarter end, there were three nonaccrual investments representing 4.3% of total debt and preferred stock investments at fair value, relatively consistent with the June quarter end. Our weighted average internal portfolio rating at fair value also improved to 1.33 compared to 1.37 at prior quarter end, demonstrating the ongoing improvement in portfolio credit quality. At September 30, 2021, we had a strong liquidity position of approximately $218 million between availability under our credit facility and cash on hand.

Our net leverage ratio was 0.57 times, comparable to 0.56 times at June 30. As Nik noted, we expect to gradually return to normalized leverage levels as we continue to deploy capital and selectively grow our portfolio over time. During the third quarter, we repurchased approximately 133,000 shares of our stock for $0.5 million at an average price of $4 per share, including brokerage commissions. Year to date, we have purchased approximately 470,000 shares at an average price of $3.62 per share.

On November 2, 2021, the company's Board of Directors authorized the company to purchase up to a total of eight million shares, effective until the earlier of November 2, 2022 or at such time that all of the authorized shares have been repurchased. As announced yesterday, we declared a quarterly distribution of $0.10 per share payable on January 6, 2022 to stockholders of record at the close of business on December 16, 2021. With that, I would like to turn the call back to Jim. 

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

Thank you, Abby. In summary, we have built a strong financial foundation, and we are well positioned to methodically grow and diversify the portfolio, generating reliable income and NAV stability. Combined with the advantages of the BlackRock platform, we are confident in our abilities to continue driving solid results for our investors. This concludes our prepared remarks.

We would now like to open the call for questions.

Questions & Answers:

Operator

[Operator instructions] All right. I'm seeing no questions queued up at this time. That will conclude today's conference. We thank everyone for their participation.

You may now disconnect.

Duration: 27 minutes

Call participants:

Laurence Paredes -- Managing Director, General Counsel, and Corporate Secretary

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

Nik Singhal -- President

Abby Miller -- Chief Financial Officer and Treasurer

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