Blackrock Kelso Capital (BKCC) Q1 2022 Earnings Call Transcript

Blackrock Kelso Capital (BKCC 0.27%)
Q1 2022 Earnings Call
May 02, 2022, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. My name is Al, and I'll be your conference facilitator today for the BlackRock Capital Investment Corporation first quarter 2022 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; Chip Holladay, managing director; Marshall Merriman, managing director and member of the company's investment committee; and James Mehring, managing director and member of the company's investment committee.

Lines have been placed on mute. After the speakers complete their update, they will open their lines for a question-and-answer session. [Operator instructions] Today's call is being recorded. Thank you, Mr.

Paredes, you may begin your call.

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

Good morning, and welcome to the first quarter 2022 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 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 lists some of the factors which may cause BCIC 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 May 2022 investor presentation link in the presentation 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 first quarter earnings call. I'll provide an overview and highlights from the quarter. Nik will then give an update on our portfolio activity and status.

And Abby will follow with a discussion of our financial results in more detail. We will then open the call to questions. I'm pleased with the progress we have made in reconstructing and diversifying the portfolio with the goal of delivering a stable NAV and a competitive return on equity. We started the year on solid footing.

Building on the momentum, we generated throughout 2021. We deployed $44 million of new capital in the first quarter. In keeping with our focus on senior secured debt, substantially, all of this consisted of first lien loans. Approximately, 72% of the portfolio now consists of first lien investments, up from 50% at the end of 2020, and up from 34% at the close of 2019.

Additionally, we continue to broaden our investments to further diversify and strengthen the portfolio. We added nine new portfolio companies and ended the quarter with 93 portfolio companies, up from 55 at the end of 2020, and 47 at the end of 2019. We are firmly committed to a robust underwriting approach that focuses on the investment performance through economic cycles. We generally favor businesses and non-technical industries with a growing revenue profile, ability to pass through cost increases, and strong equity support.

We avoid overleveraged capital structures that are more prone to pressures from rising inflation and rising interest rates. Our credit quality remains healthy as a result. There are no new nonaccrual investments in the first quarter and all of 2021. Net leverage of 0.46 times was down from 0.56 times at the close of 2021 as repayments exceeded new investments.

While there were only three portfolio company exits during the quarter, they included some of the larger names such as St. George Logistics, which has previously the largest portfolio company at 8% of the total portfolio by fair market value. Our investment in St. George provided a 12.4% realized IRR over its four-year holds period.

With many of the more concentrated investments now exited, we anticipate that the repayment impact of any single issuer on NII to be more muted going forward. We have ample leverage capacity as we pursue disciplined portfolio growth. We are confident we can identify compelling new opportunities that will be accretive to NII, and drive solid risk adjusted returns for our shareholders. We expect rising interest rates to be accretive to the company's NII.

99% of the debt investments in our portfolio have a floating rate coupon, of which 92% have a LIBOR or so far a floor with a weighted average floor of 1%. As these rates rise above the floor level, we expect NII to increase by approximately $0.8 per quarter for every hundred basis points of benchmark rate increase. All else being equal. Before I pass it over to Nik, I want to take a moment to thank Abby for her contributions as CFO and treasurer of BCIC.

As we previously reported, Abby plans to step down from the role on May 6th to pursue other career endeavors. We wish her all the best. The Board has appointed Chip Holladay to serve as interim CFO and treasurer effective May 6th. Chip is a managing director with the advisor having joined BlackRock in 2005.

Chip is well-qualified to step into this role, and we have the utmost confidence in his abilities. I'll now turn the call over to Nik Singhal to discuss our portfolio activity and further detail.

Nik Singhal -- President

Thank you, Jim. We have effectively completed the de-risking of our portfolio, and are continuing to build a diversified book of primarily first lien investments. During the first quarter, substantially, all of our new deployments were in first lien investments consistent with this strategy. With respect to originations, we had gross deployments of $44 million in the quarter, primarily across nine new and six existing portfolio companies, with approximately 83% of the investment dollars going to new portfolio companies and the remaining 17% into existing relationships.

Repayments during the quarter were $79 million. As Jim mentioned, this happened to be across three large names in the portfolio, leading to an elevated number for the quarter. As a result of these repayments, our total portfolio has declined quarter-over-quarter. Our pipeline of opportunities is healthy, and we continue to source opportunities from a wide range of industry sectors.

In the second quarter so far, we're seeing good deployment momentum. While there can be no assurances that all transactions will close quarter-to-date, investment committee approved transactions totaled approximately $55 million. Details of all of our investments this quarter can be found in the earnings release. With our more prominent investments, including the following; in $9.4 million SOFR plus 6% first lien term loan, and $1.4 million unfunded commitments in 4,840 a provider of recycled wood pellets solutions.

A $7.9 million SOFR plus 8.5% first lien term loan. With an additional $7.3 million unfunded term loan, as well as equity warrants elevate brands, a consolidator of small to medium sized brands that sell through Amazon's third party platform. A $4.7 million SOFR plus 6.5% first lien term loan, and a $6.7 million unfunded term loan to Greystone Select Company, a real estate investment firm. Importantly, BlackRock funds, including the company, were the sole lenders in two of these investments, highlighting the benefits to the company of proprietary access to deals from BlackRock's scale platform.

As previously announced on April 21, 2022, we access the private placement market, the issue notes and an aggregate principal amount of $92 million. These notes have a funding date of June 9, 2022. We anticipate using the proceeds from the notes as well as availability under our revolver redeem our outstanding $144 million convertible debt, which is maturing on June 15, 2022. We're pleased with the execution we obtained on the notes, including the pricing and prepayment features which are disclosed in our prior filings.

We simultaneously entered into an interest rate swap to effectively convert the $35 million fixed rate tranche into a SOFR based tranche for the first three years of its life. Our core deployment focus is consistent with our objectives of stable income and low NAV volatility. We are optimistic about our ability to grow our portfolio this year, given the broad funnel of opportunities that our extensive platform provides. We will continue to do so in a disciplined manner.

And as a result, we expect to gradually increase leverage to more normalized levels over the next several quarters. We believe that this will enable us to grow NII with the goal of eventually having our core earnings fully covered our dividend, which we declared at $0.10 per share in cash for the sixth quarter in a row. I will now turn the call over to Abby to further discuss our financial results for the quarter.

Abby Miller -- Chief Financial Officer and Treasurer

Thank you, Nik. I'll take a few minutes to review some additional BCIC financial results for the first quarter. Before I get into the results, I want to thank, Jim, for his kind words. I have thoroughly enjoyed working with the entire team for the past five years, and will help to ensure a seamless transition.

Now to the financial results. GAAP net investment income was $6.5 million, or approximately $0.09 per share, up 9% from the prior quarter. GAAP NII covered 80% of the $7.4 million distribution to stockholders, an increase from 80% coverage in the prior quarter. Included in the first quarter results was a reversal of $0.5 million in capital gains incentive fee previously accruals.

With such reversal at March 31, 2022, the balance of the accruals incentive fee on capital gains was approximately $1.1 million under a hypothetical liquidation basis required by GAAP. However, it should be noted that incentive fees on capital gains owning become payable to the extent that realized capital gains exceed realized and unrealized capital losses from the annual measurement period ending June 30, 2022. For the nine-month period ended March 31, 2022, realized capital gains did not exceed realized and unrealized capital losses. Excluding the reversal of previously accruals capital gains incentive fee.

Adjusted NII was $6.0 million or $0.08 per share. Total gross investment income was $12.2 million, a slight decrease from $12.6 million in the prior quarter due to the net repayments in our portfolio. During the quarter, the company also had fees and other one time income of approximately $0.7 million, or $0.01 per share. Total net expenses decreased by $1 million quarter-over-quarter, excluding the impact of the capital gains incentive fee, expenses decreased by $0.3 million quarter-over-quarter.

Net realized and unrealized losses were $1 million for the quarter, primarily attributable to the modest portfolio depreciation due to spread widening during the quarter. There were no new nonaccrual investments during the first quarter. At the end of the first quarter, the portfolio had three nonaccrual investments representing 4.4% of total investment at fair value, relatively consistent with the December quarter end. Our weighted average internal portfolio rating at fair value also remained relatively consistent for the quarter at 1.25 compared to 1.21 at the prior quarter end, an improved from 1.72 compared to the March 2021 quarter end demonstrating the robust portfolio credit quality and portfolio construction.

At quarter end, we had a strong liquidity position of approximately $248 million between available funds under our credit facility and cash on hand. Our net leverage ratio was 0.46 times, down from 0.56 times at the end of 2021 due to the net repayments during the quarter. As Nik mentioned, we expect to gradually return to normalized leverage levels as we continue to deploy capital and selectively grow our portfolio over time. Additionally, we expect that the issuance of our unsecured notes during the second quarter will further optimize our cost of capital.

During the first quarter, we repurchased approximately 106,000 shares of our stock for $440,000 at an average price of $4.14 per share, including brokerage commissions. As of March 31, 2022, approximately $7.8 million shares remained available for repurchase under the current buyback program. As announced earlier this morning, we declared a quarterly distribution of $0.10 per share, payable on July 7, 2022 to stockholders of record at the close of business on June 16, 2022. 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 closing, we continue to strengthen our financial foundation, emphasizing portfolio diversity and disciplined growth to produce reliable income, NAV stability and solid results for our shareholders'. We thank our shareholders' for their continued support. With that, we would now like to open the call for questions.

Questions & Answers:

Operator

Thank you, sir. [Operator instructions] We'll take our first question from Finian O'Shea with Wells Fargo.

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

Hey, everyone, good morning. Thanks for having me on. Jim, first question, can you talk about the investment pipeline in real time? For both the volume of origination on the market, and in the terms of the spreads and covenants and so forth, if any of that is migrating?

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

Thanks, and I would say, obviously, that Q4 was a pretty significant flow and was a very busy year end of the year of 2021. There was a bit of a slowdown in January and early February. We've started to certainly see things pick up both from the M&A volume as well as refinancing activity across the overall portfolio companies within our own book as well as within the market. So we see it as is -- actually picking up pretty significantly relative to the early part of the quarter or the year, and a little bit more similar to last year.

From a terms perspective, obviously there's a lot more volatility in the public markets and that takes a while and usually comes with a lag into the private markets. If you thought about this year, we were a little bit more concerned about degradation of structure and documents. I would say, as we start to see the volatility in the market, we view that as an opportunity. Pricing does often up a bit, which is an opportunity for us to deploy structures and discipline in the market are getting better right now.

So with regards to our leverage numbers right now, we actually think we're in a really good position with a pretty robust calendar to deploy into the rest of the year here.

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

Great. Thanks. That's helpful. On that matter on the St.

George repay, obviously good news. Additionally, does it -- does that exit drive any portfolio allocation benefits where the BDC would get better share given the more open, less concentrated such a portfolio?

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

Yeah. It's consistent with, obviously where we've gone with the overall book and trying to add resiliency at the aggregate level. First and foremost, the underwrite to the underlying issuers from a credit quality and structure and protection is our first line of defense. The second is really the diversification.

And so, as you know, we've moved from -- deploying in more concentrated fashion in that 5% to 8% [Inaudible] into more core positions in that 1.5% to 2%. And with regards to the engine that we have from an origination standpoint, we've been able to do that. Clearly, with regards to the the name [Inaudible] that we've had in the book. So you'll see us taking that repayment from St.

George and really being more consistent with what we've been doing over the course of the last two years, and redeploying that into more core positions of 1.5% to 2% and just continue to increase the diversification across the book.

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

OK. Thank you. And the final question, if I may on portfolio. Company performance -- in the environment with a little more inflation, supply chain, etc., type issues.

Are you -- seeing anything yet overall? Or within certain certain sectors on -- headwinds to what you underwrote to and so forth?

Nik Singhal -- President

Yeah, Fin, thanks for the question, good morning. This is Nik. The way our underwriting philosophy is primarily to avoid structures which are overleveraged, avoid businesses which have reliance on commodity prices, and also businesses that are labor intensive or do not have the ability to pass on cost increases. And I think that's the primary reason why our portfolio held up very well in 2021, and even in Q1 we have no new nonaccruals.

As we do our portfolio reviews across our entire portfolio, BDC and outside of the BDCs, there are situations where we do see the margin pressure a little bit on the margin, especially in companies where the labor component might be a little bit higher. In most of our portfolio companies, we're seeing a very good ability to pass through those cost increases. But inflation is here. It's real.

And our goal has been and will always be to avoid companies that are at risk of getting disrupted when the cost structure goes upside down.

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

Great. That's all for me. Thanks so much.

Operator

Next question will come from the line of Melissa Wedel with J.P. Morgan.

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

Good morning, everyone. I appreciate you taking my questions today. Following on your answer just there, Nik, I'm curious if some of that margin pressure, that some of the portfolio companies are seeing was related to a shift in the -- grade one level versus grade two? Just looking at the Q grade one came down quite a bit. I'm assuming most of that was just driven by the exit of St.

George. And then grade two came up a little bit. Just hoping to dig into that a little bit and understand what you're seeing in the portfolio that might be driving those incremental changes.

Nik Singhal -- President

Yeah. Melissa, it's a great question. First of all, you're absolutely correct that a lot of that migration was not a huge migration. It's a very tiny migration.

Basically a rose from St. George exiting, which was a one rated name, and obviously when the denominator goes down. The percentage of two rated names blew up. I think the -- very small number of migrations we had were really idiosyncratic issues in our portfolio.

We are really not seeing any -- systemic credit concern arising from margin compression. And again, to reiterate, I think that's really just a function of our core philosophy of weighting situations -- that do not have pricing power, cannot pass through inflation or just over levered. Overall, I would say broadly speaking, our loan to value is a very conservative with very strong equity support behind us in our portfolios. And I would also add that, look, our focus really has been in transitioning our book to first lien, which is now 72% of the portfolio.

And that further adds to the resiliency of the work.

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

OK. Got it. I appreciate that. And then I'm not sure if I missed it on the St.

George exit, -- did that drive any particular outsides repayment fees or income?

Nik Singhal -- President

Abby, can you chime in here?

Abby Miller -- Chief Financial Officer and Treasurer

Hi, Melissa, this is Abby. Thank you for the question. Yes, it did drive a little bit of a one time fee income. And just to recall for the quarter, the total one time fee income or other one time income adds up to approximately $0.01 per share impact.

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

Got it. And then a final one for me. I appreciate the insight into, at least the amounts that have been approved by the investment committee quarter to date, and definitely appreciate that a lot of repayment activity doesn't necessarily come with a lot of foresight or visibility into that. Is there anything that you are aware of at this point that we should be thinking about in terms of future repayments that might be more sizable and impact the portfolio like we saw in the March quarter?

Nik Singhal -- President

Yeah, Melissa, I would say just in a normal course, right? I mean, there is -- there are always some repayments every quarter. When you look at the long-term historical performance or average, all sizes have tended to be 2 to 3 years on average. So we don't expect that to change. If anything in a rising rate environment, refinancing's probably become slower.

And then the other benefit of having St. George and just incidentally the two other names that exited were also larger positions is that -- to the extent there are future repayments, their impact is going to be more muted. We haven't had any repayments in the quarter so far. OK? There's always buzz around one or two names that may refinance, sometimes the sponsor will give us feelers.

As the business grows, the cost of capital becomes slower and the opportunity do that, but with nothing, nothing significant that we are aware of right now.

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

Thanks, Nik. That's very helpful. Appreciate it.

Operator

All right. It looks like we have no further questions at this time. So let's turn it back over to our speakers for any additional or closing remarks.

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

Thank you, and thanks for the most of the questions. With that, obviously, we are seeing a lot of volatility in the market. We do think we're positioned well to deploy into this, and set up to continue to ramp the portfolio, leverage up, and continue to grow NII. So appreciate everybody's support on the call and a huge thank you as well to our team as we continue to fully get through the transition of the overall portfolio.

And with that, we can end the call.

Operator

[Operator signoff]

Duration: 45 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

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

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

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