BlackRock Capital Investment Corporation (NASDAQ:BKCC) Q2 2022 Earnings Conference Call August 4, 2022 10:00 AM ET
Company Participants
Laurence Paredes – General Counsel and Corporate Secretary
James Keenan – Chairman and Interim Chief Executive Officer
Nik Singhal – President
Chip Holladay – Interim Chief Financial Officer and Treasurer
Conference Call Participants
Melissa Wedel – JPMorgan
Operator
Good morning. My name is Justin and I will be your conference facilitator today for the BlackRock Capital Investment Corporation Second Quarter 2022 Earnings Call. Hosting the call will be James Keenan, Chairman and Interim Chief Executive Officer; Nik Singhal, President; Chip Holladay, Interim Chief Financial Officer and Treasurer; Laurence D. Paredes, General Counsel and Corporate Secretary; Marshall Merriman, Managing Director and member of the company’s Investment Committee; and Jason 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 line for a question-and-answer session. [Operator Instructions] Thank you.
Mr. Paredes, you may begin the conference call.
Laurence Paredes
[Technical Difficulty] 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 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 August 2022 Investor Presentation link in the Presentations section of the Investors page.
I would now like to turn the call over to Jim.
James Keenan
Thank you, Larry. Good morning, and thanks to all of you for joining our second 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 Chip will then discuss of our financial results in more detail. We will then open the call to questions.
We delivered another quarter of strong results, highlighted by our ongoing deployment momentum and solid progress in building a diversified portfolio that generate favorable risk adjusted returns for our shareholders. Our net leverage increased to 0.64x, up from 0.46x at prior quarter, driven by $73 million of deployments in the second quarter.
We added 11 new portfolio companies during the quarter with the portfolio reaching a milestone of 100 portfolio companies, up from 86 at the end of 2021 and 47 at the end of 2019. We are also pleased to report metrics that demonstrate significant advancement towards our portfolio construction goals.
Approximately 74% of our investment portfolio consists of first lien investments, a high point for BCIC and up substantially from 34% at the end of 2019. Junior Capital investments now comprise of only 6% of our portfolio, down from 43% at the end of 2019.
Let’s turn now to our portfolio positioning. I missed the current backdrop of the economy end-markets. While some measures indicate the U.S. economy remains on sound footing, including a robust job market and increased consumer spending year-over-year. We are mindful of the concerns about an impending slowdown or a possible recession driven by rising inflation and interest rates, and potentially increasing unemployment levels.
Our underwriting emphasis on less cyclical companies that are better able to withstand inflationary pressures, rising rates, and broader economic slowdowns along with a focus on seniority in the capital structure positions us well in the current macroeconomic scenario. We remain committed to selective investing based on our time tested and proven underwriting approach that focuses on credit analysis through the cycle.
We are engaged in regular dialogue with our portfolio companies to understand and evaluate how the evolving macro landscape is impacting their business. While we are seeing signs of a slowdown in revenue growth and/or margin contraction in some names, we have not seen an evidence of a broad based credit deterioration.
Notably, we had no new non-accrual loans in the quarter and no amendments resulting in deferral of payment terms. In the third quarter so far, we are seeing a continuation of the level of deployment activity that we saw during the first half of the year. We are also seeing pricing instructions more favorable to lenders in the private credit market.
Additionally, 99% of the yielding debt investments in our portfolio have a floating rate coupon, substantially all of which are above their LIBOR or SOFR [floors] [ph] in the current market. We expect the rising rate environment to be accretive to portfolio income. As we proceed, we will pursue compelling new opportunities while remaining true to our underwriting discipline.
We believe this will be accretive to NII and provide increased dividend coverage for our stockholders as we progress through the coming quarters.
I’ll now turn the call over to Nik to discuss our portfolio activity in further detail.
Nik Singhal
Thanks, Jim. We’re seeing good momentum towards our goal of re-levering the portfolio by building a diversified book of primarily first lien investments. During the second quarter, 85% of our new deployments were in first lien investments consistent with the strategy. Gross deployments in the quarter were primarily across 11 new and 6 existing portfolio companies. 62% of the investment dollars went into new portfolio companies and the remaining 38% into existing relationships.
Follow-on investments in existing portfolio companies continue to be an important source of opportunity for us as these are businesses we already know and understand well. Repayments during the quarter were $25 million. This was driven by four realized investments with an average realized IRR of 10.1%, along with a 4.2 million paydown on the legacy Gordon Brothers Finance Company investment.
We continue to have a healthy pipeline of opportunities across a wide range of industries. So, far in the third quarter, we’re seeing a steady deployment pace. Whilst there can be no assurances that all transactions will close, our investment committee has approved transactions over $50 million that either closed subsequent to the second quarter or are pending close.
Our three largest new portfolio company investments included the following: an $11.4 million SOFR plus 7.5% first lien term loan to InMoment, Inc., a provider of customer experience management software and analytical solutions. $7.4 million SOFR plus 5.75% first lien term loan and $1 million of unfunded commitments to Kaseya Inc., a provider of Cloud-based IT management solutions.
A 5.5 million SOFR plus 6% first lien term loan and 0.6 million of unfunded revolver to [become] [ph] a global provider of compensation management software. Importantly, the company and other BlackRock Funds were the sole term loan lenders in two of these investments, highlighting the benefits to the company of primary access to deals from BlackRock’s scaled platform.
Our NAV per share declined by 2.8% in the second quarter, largely driven by the valuation impact of wider credit spreads in the market. As previously mentioned, we had no new nonaccruals or payment modifications during the second quarter. Our core deployment focus remains consistent with our objective of stable income and low NAV volatility. We’re seeing the opportunities that become more attractive in this market as we deploy capital to re-lever the portfolio.
As a result, we expect to gradually increase leverage to more normalized levels over time. We believe that this will enable us to grow NII with the goal of eventually having our core earnings fully power our dividend, which we declared at $0.10 per share in cash.
I’ll now turn the call over to Chip to further discuss our financial results for the quarter.
Chip Holladay
Thank you, Nik. I will now take a few minutes to review some additional BCIC financial results for the second quarter. GAAP net investment income was $7.1 million or approximately $0.10 per share, up 10% from the prior quarter. GAAP NII covered 97% of the $7.4 million distribution we declared to our stockholders this quarter, an increase from 88% coverage in the prior quarter.
Included in the second quarter results was a reversal of $1.1 million and capital gains incentive fee previously accrued under a hypothetical liquidation basis required by GAAP. With such reversal, the balance of accrued incentive fee on capital gains was zero for the annual measurement period ending June 30, 2022, and no incentive fee on gains was payable to the advisor.
Excluding this reversal, adjusted NII was approximately $6 million for the second quarter or $0.08 per share, in-line with our adjusted NII results for the prior quarter. Total gross investment income was $12.3 million, a slight increase from $12.2 million earned in the prior quarter.
During the quarter, the company had one time fees and other income of approximately $0.4 million against $0.7 million in the prior quarter. Excluding one-time fees, our gross investment income grew approximately 3% quarter-over-quarter. The company’s weighted average portfolio yield based on fair value increased to 9.1% as of June 30, up from 8.4% as of the prior quarter end. This increase was driven by a rise in LIBOR and SOFR rates, as well as slightly wider spreads on new originations we made during the quarter.
Total net expenses decreased by $0.5 million for the first quarter, driven largely by the reversal of capital gains incentive fee accrual. Excluding the impact of such reversal, expenses were roughly unchanged. Net unrealized losses on the portfolio were $9.7 million for the quarter, primarily attributable to spread widening and general market declines. The company had no realized gains or losses during the quarter.
At the end of the quarter, the portfolio had three non-accrual investments, representing 3.5% of our portfolio’s total fair value, an improvement from 4.4% as of the March quarter-end. This reduction was due to the partial repayment of $4.2 million of our unsecured debt position in Gordon Brothers Finance Company. There were no new non-accrual investments during the second quarter.
Our weighted average internal portfolio rating at fair value declined slightly to 1.27, compared to 1.25 at the prior quarter-end, and improved from 1.37 compared to the June 2021 quarter-end.
At quarter-end, total available liquidity for deployment was approximately $141 million, including cash-on-hand and subject to leverage and borrowing base restrictions. Our net leverage ratio was 0.64x, up from 0.46x at the end of the prior quarter, due to strong net deployments during the quarter.
As previously announced, we issued $92 million of senior unsecured notes in a private placement on June 9, 2022. We used the notes proceeds, as well as availability under the credit facility to repay our $143.7 million of outstanding unsecured convertible notes on their June 15, 2022 maturity date.
During the second quarter, we repurchased approximately 420,000 shares of our stock for $1.6 million at an average price of $3.78 per share, including brokerage commissions. As of June 30, approximately 7.4 million remained available for repurchase under our current buyback program. As announced yesterday, we declared a third quarter distribution of $0.10 per share to be paid on October 6, 2022 to stockholders of record at the close of business on September 15, 2022.
With that, I would like to turn the call back to Jim.
James Keenan
Thank you, Chip. In summary, we continue to emphasize prudent underwriting, 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.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] And we will go to Melissa Wedel with JPMorgan Wedel with JPMorgan.
Melissa Wedel
Thanks for taking my questions this morning. I think first to start, I’d like to follow-up on what was an active quarter and a little bit of re-leveraging in the portfolio. It sounds like you’re seeing that pace, sort of continue into the back half of the year at least to start. I was hoping to get your thoughts on net originations, what that could mean for the trajectory of leverage at the portfolio level, and how that will drive some incremental earnings? How do you think about that driving some incremental earnings power and potential progress on dividend coverage?
Nik Singhal
Yes. Hi, Melissa. This is Nik. That’s a great and very relevant question. And just to take a step back, we’ve spent the last several quarters in repositioning the book as we had mentioned that we would. And as a result, our portfolio construction is really starting to look like what we set out to be. The unsecured and equity portion is now just 6% of the portfolio, non-core is 4% and first lien and second liens combined are 94% of the book of which 74% is first lien rate.
So, really accomplishing everything that we set out to do. And we’ve seen some good deployment momentum in the first half of the year. Recall that we had $45 million of repayments from St. George in Q1. We were able to redeploy that and really grow our leverage from 0.46x to 0.64x, which still gives us plenty of room to grow the portfolio.
We’re also fortunate to do so at a time when the market conditions are becoming more lender friendly. We’re seeing improved pricing in the market. I think if you take both [OID and yield] [ph] combined basis, we’re seeing 50 basis points to 100 basis points of incremental return on new investments and that’s before any benefit of LIBOR and so far increase in structures, we’re seeing fewer interest rate step downs more lender friendly documents.
So, really a good environment to be deploying into. And BKCC really benefits from the scale of the BlackRock platform. We have a very broad funnel, deep industry expertise, which allows us to be very selective, and not abandon our prudent credit underwriting discipline. So, I would say, we also mentioned in the prepared remarks that we have about $50 million of deals which have either closed since the end of the quarter or approved pending close, not all of them might necessarily come to close, but I guess directionally I can point out that we are trending to a very similar deployment pace that we did in the second quarter.
And when it comes to yields, I mean, LIBOR and SOFR, they’ve gone out even since the end of June quarter. I would say, SOFR is up about 60 basis points to 65 basis points and yields as I mentioned are on the margin better than say the last 12 months to 15 months that we’ve seen in the market. So, hopefully that’s, sort of addresses your question. We’re happy to hit upon any other aspects of your question as well.
Melissa Wedel
Thanks, Nik. That is helpful. I’d actually like to pick up on a comment that was made earlier in the call in your prepared remarks actually around existing portfolio companies being an attractive and likely fruitful source of new investment opportunities going forward. Can you elaborate on that and what might be driving, I assume you distinguish between, sort of incremental needs for capital versus maybe more bridge financing through a tough environment and how you’ll make that distinction and think about allocating between new and existing investments? Could you expand on that a little bit?
Nik Singhal
Yes, absolutely. And again, to provide more context here, historically roughly two-thirds, maybe actually more than two-thirds more like 70% of our portfolio companies tend to be in our [sponsor backed] [ph] businesses. We work with a lot of sponsors, very rapid rate sponsors that often they will buy one or two businesses to start a platform and then make subsequent acquisitions to grow that platform. That’s been a proven strategy for private equity and it’s really been a very good risk and leverage strategy for the private credit book also.
Most of our incremental opportunities come from plays like that where we have sponsor relationships. We finance the initial investments and then the sponsors thesis is to grow that platform by making incremental acquisitions. And that’s really been when we look at percentages, we mentioned this quarter it was 38% that was in follow-on investments. I think typically it varies from 25% to 50%, and that’s really a good source of additional deployment opportunities for us.
We have the advantage of incumbency in these situations. And then we’ve also had a chance to look at these investment businesses up close having invested in them. So, that’s how I would contextualize the following investments here.
Melissa Wedel
Okay. So Nik, if I could just recap what I heard there. What you’re talking about is, perhaps portfolio companies taking advantage of some volatility in the environment and doing some, sort of bolt-on M&A type deals that need financing rather than, sort of more of a stressed scenario where companies might need some amendment and some bridge financing?
Nik Singhal
Yes. So, Melissa, I think this works not necessarily in a volatile market. Actually, it works in most markets, right? So, if you’re a private equity sponsor, you want to consolidate a certain subsector or niche place where there are many smaller players. So, they’ll start off with maybe one or two acquisitions and then keep making additional acquisitions to create, sort of a role of play.
It actually works very well in all cycles, not just down cycles. In fact, it could tend to slow down a little bit in down cycles as maybe sellers are not willing to sell even though buying opportunities become more attractive. So, we really view this as an ongoing benefit that our platform has and not necessarily a feature of the current volatility in the marketplace.
Melissa Wedel
Okay. Thanks Nik.
Operator
Thank you. [Operator Instructions] And that does conclude the question-and-answer session. I’ll now turn the conference back over to you for any additional or closing remarks.
James Keenan
Thank you, operator. If there are no further questions, I’d just like to thank our shareholders for their continued support and we can end the call.
Operator
Thank you. And that does conclude today’s conference. We do thank you for your participation. Have an excellent day.
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