Q3 2019 Earnings Call

Good morning, My name is and I now will be a conference facilitator today for the Blackrock Capital Investment Corporation third quarter 2019 earnings call.

Hosting the call will be chairman and interim Chief Executive Officer, James Canon.

And train Chief Financial Officer, and Treasurer Michelangelo.

General Counsel and corporate Secretary of the company Laurent de Paradis.

Marshall Merriman had a portfolio management for Blackrocks U.S. private capital Graham.

Jason Meringue chairman of the U.S. private capital Cranston investment.

Relations business strategy I'm, sorry investments Committee and next thing called head of Investor Relations and that's that's Triaging.

Claims have been placed on you after the speakers complete their update they will open the line for question and answer session in order to ask a question you can press star one on your touched on telephone.

Thank you Mr. Pruritus, you may begin the conference call.

Good morning, and welcome to Blackrock Capital investment Corporation's third quarter 2019 earnings Conference call.

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 words, such as anticipates believes expects intends will should may and similar expressions.

We call to your attention the fact that Blackrock capital investment corporations actual results may differ from these statements.

As you know Blackrock capital Investment Corporation has filed with the FCC reports, which lists some of the factors, which may cause Blackrock capital investment Corporation's results to differ materially from these statements.

Blackrock Capital Investment Corporation assumes no duty to and does not undertake to update any forward looking statements.

Additionally, certain information discussed in presented May have been derived from third party sources and has not been independently verified.

Accordingly, Blackrock capital investment Corporation makes no representation or warranty with respect to such information.

Please note, we posted to our web site and Investor presentation that complements this call shortly Jim will highlight some of the information contained in the presentation.

Presentation can be accessed by going door website at www Dot Blackrock BK Si Si dot com and clicking the October 2019, Investor presentations link in the presentation section of the investors page.

I'd now like to turn the call over to Jim.

Thank you Larry.

Good morning, and thank you for joining our third quarter earnings call I will provide you with business and performance highlights an update on investment activity during the third quarter and a summary of underlying portfolio performance.

It will then turn it over to Mike, which allow our interim CFO to discuss the financial results in more detail before opening the call two questions.

For the third quarter net investment income was 14 cents per share.

Redeployed to $67 million during the quarter, which was offset by repayments and other exits totaling $37 million.

For an approximately $30 million net increase in the portfolio due to investment activity.

Over the last year. The company's advisor has continued to make significant investments across our platform and sourcing channel.

Including Tennenbaum capital partners integration and other resources within Blackrock that bolster origination.

The advisor as approximately 50 investment professionals dedicated to our U.S. middle market direct lending strategy.

The company is seeing the benefits of these investments made by the advisor via increased deal flow and broader underwriting capabilities.

Additionally, our ability to co invest with certain affiliates under our co investment order is helping the company to construct a diversified portfolio with reduced idiosyncratic risk.

To focus on this quarter, we added a total of five new names to the portfolio this quarter, which are detailed along with repayments in our earnings press release.

Since the beginning of 2019 keep portfolio highlights include.

Gross deployment of $230 million, including first or second lien loans to 20, new portfolio company.

Number of portfolio companies increased from 27 to 43.

First lien investments increased from 24% other portfolio by fair market value to 33% and.

And secured investments increased from 47% of the portfolio by fair market value to 57%.

With a net deployment activity this quarter the portfolio now has a fair market value of $726 million across 43 company.

The weighted average yield of income producing securities at fair market value was 11%.

As of September Thirtyth down 72 basis points since last quarter.

Quarter and leverage was 161 times increase from 0.53 times prior quarter.

We have ample liquidity of $206 million to support new investment activity and we have no debt maturing until 2022.

Net asset value decreased 4.8% from 6082 cents per share last quarter to $6.49 per share.

As of September Thirtyth, driven by net unrealized and realized losses of $22 million.

85% of these losses or $19 million were related to non core legacy investments in the portfolio, including $11 million related to the company's legacy investment in U.S., well services, a publicly traded company.

A substantial portion of this equity investment is subject to certain lockup provisions was expire in November of 2019.

Although there can be no assurances, we anticipate the devaluation of this investment will continue to shift inline with the quarter and closing prices have you SWS common stock.

Now I will talk about the progress on rotating out of the legacy noncore portfolio, which as of September Thirtyth is reduced to 18% of the portfolio by fair market value down from 28% last quarter.

This part of the book is comprised of first performing dad and income producing securities at 13% by fair value.

With AG, why first lien churilla travel and Red Apple stores being the three largest holding.

Second.

Non earning equities at approximately 1% by fair value, primarily consisting of U.S. well equity.

And third investments on nonaccrual at 4% by fair value, including AG, why second lien and preferred stock advantage insurance preferred stock and advanced lighting second lien.

During the third quarter.

$32 million of proceeds were realized from the sale of certain investments in Vertellus holdings and related issues.

Which was previously the largest noncore position.

Hi, equity and second lien physicians were exited at levels, which in aggregate were $2.2 million lower than the prior quarter Mark.

Additionally, $5 million of Vertellus first lien investment was sold at a price of 101.

With these transactions.

One team point $5 million Vertellus first lien remains in the portfolio, which we do not view as noncore on a go forward basis.

We remain dedicated to completing the restructuring of the current portfolio and creating shareholder value through a more stable income oriented book.

We are focused on one prudently exiting non earning and non core legacy assets to bring stability to book value.

Two redeploying onto a broader more diverse portfolio with a greater mix of first lien assets.

And three increasing eni through a better mix of portfolio and optimizing leverage.

We believe that all of this will result in improved return on equity during the earnings power of the company in line with the sector and drive enhanced shareholder value.

After careful consideration of the progress in achieving our strategic goals of exiting non core assets improving portfolio next.

The company's board of directors approved a reduction of the company's minimal asset coverage requirement from 200% to 150%.

Which will become effective on October 29 in 2020 or earlier, if stockholder approval is obtained.

We believe that the added flexibility will allow the company to pursue it school of improving return on equity, while creating a more diversified portfolio of secure income producing investments.

As we achieve further progress with noncore exits, we want to ever to prudently increased leverage from current levels.

With a steady state leverage target of one to one in a quarter die.

Additionally, at the time that reduced acid coverage ratio becomes effective which would be October 29, 2020 or earlier, if stockholder approval is obtained.

We intend to lower the base management fee for the company from one in three quarters percent to 1.5% with an additional reduction to 1% on assets that exceed 200% of anything.

Additionally, at the same time, we intend to reduce the rates of incentive fees based on income in capital gain from 20% to 17.5%.

Since Blackrock began managing the company in March 2015.

Our team has deployed approximately $1.2 billion into new investments.

414 million of which has been exited with a realized IR.

14.1%.

At June Thirtyth over 80% of the company's investments portfolio by fair market value constitutes investments made by Blackrock.

Before I turn the call over to Mike and Jello I'd like to emphasize the company's continued transformation as a result of Blackrocks expanded direct lending platform.

As evidenced by strengthen deployment in 2019.

As we continue to rotate out of legacy assets, the company's conservative leverage and ample liquidity puts it in a position to take further advantage of these benefits and grow its earnings power.

Well, what do you Mike.

Thank you Jimmy I will take a few minutes to review additional financial and portfolio information for the third quarter 2019.

GAAP net investment income and I was $9.6 million were approximately 14 cents per share in the three months ended September 30 in 2019.

Relative to distributions declared a 14 cents per share.

Hi coverage was 100% from a third quarter.

Total investment income decreased $1.1 million were 5% as compared to the third quarter a year ago.

Moving fee income in other income total investment income decreased by approximately 4.4%.

Primarily attributable to an increase in non accrual.

At amortized cost.

1.4% at September 32018% to 5.9% of total portfolio in September 32019.

Partially offset by an increase of 4% in average investment portfolio or the amortized cost for the comparative periods.

At quarter end, there were four nonaccrual investments, representing 4.3% and 7.6% of total debt and preferred.

Investments at fair value and cost respectively.

This compares to nonaccrual investments of approximately 1.6%.

And 1% total debt and preferred stock investments at fair value when cause respectively at December 31st 2018.

Our average internal investment ranging at fair market value at September Thirtyth 2019.

With 1.3 days as compared to 1.43 of the prior quarter ends.

Total expenses increased $1.8 million, 21.1% three months in September Thirtyth 2019 from the comparable period in 2018.

Merely due to the increase in net incentive fees based on income.

Yes, you know fees and interest in credit facilities.

Well in the quarter ended September 32019, we incurred incentive management fees based on a couple of $2.1 million.

Which our advisor in voluntarily partially way incentive fees of $1.2 million, resulting in net incentive fees or <unk> point 9 million puts a period.

Including the voluntary partially waiver $22.2 million of incentive management fees have been wayzata cumulative basis.

During the quarter, there was no accrual for incentive management fees based on game.

In the third quarter, net realized and unrealized losses were $22.3 million.

Early due to depreciation and portfolio valuation during the quarter.

During the third quarter 2019, no shares were repurchased.

Tempur 32019, Threemillion 320309 shares remains available for repurchase zones of the current program we took since expire.

The board has authorized to repurchase of up to 5 million shares in November 2020.

We closed the quarter strong liquidity position. Some funds are robust pipeline of new investment opportunities, including approximately $205.5 million of availability under our credit facility and in cash and cash equivalent.

I'd like to turn the call back to Jimmy.

Thank you Mike in closing I would like to take a moment to thank our shareholders for their continued support as we made progress on the restructuring of the company's book and recognizing our team for their continued hard work toward achieving our portfolio objectives.

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

Yes. Thank you.

Sounds good question. Please take note by pressing star one on your telephone keypad, if he or anything else speakerphone. Please make sure. Your mute function has turned out to Meyer said not reach our equipment.

Again that is star wanted to ask a question.

Well now take a question.

With Wells Fargo Securities.

Hi, good morning, Thanks for taking my question.

Congratulations on some moves in the legacy book this quarter.

I've a question on fees.

But you know it's.

Also appreciating your fee waiver.

No.

It seems like your modernizing their fee structure to markets at this point.

First question is why is that tied to.

The management pursuing higher leverage for one and then just.

Big picture, how do you use a management fee because optically.

Do you guys say all the right things every quarter.

You know your old legacy book, you want to shore up a market dividends so for us, but your actions show.

Show you when the cap of those bdcs that sort of.

Seemingly.

Hedging Lee Chase the market structure like a year after everyone else goes Swans 15, 17 in house, you're in that kept it finally follow this along and it's tied to use getting.

A large benefits. So can you just kind of touch on I noticed points, while you're doing what you're doing on the fee side just thank you.

Thanks, Dan It's a it's Jim King.

Good question I would say a couple of things there's as as you highlight before is yeah. We worked very closely with the our board of directors with regards to optimizing our and setting the appropriate fee structure.

For the vehicle and as you as you mentioned before.

I think we've now on a cumulative basis.

Waived a 22 plus billion dollars' worth of feedstock.

On the benefit of the shareholder base.

So how long the strategic.

Initiative a of the of the portfolio company we've had.

A process in place that it takes a long time based off of the liquidity.

If some of these assets and the minority position in these assets to ultimately liquidate a variety of stress physicians.

And Oh restructure that into play that into a far more diversified pool of capital. So the only putting nature of that obviously is taken time, we worked with our board throughout that time with the appropriate fee structure.

And yeah that was basically a combination of management fees as well as the performance fees up or waived they gotta go forward basis, I think where we are.

Happy with where we are on the progress now and have a more conviction with regards to some of the exits you highlighted vertellus for the quarter, but we're happy with the progress that we're seeing on the rest which has led us.

To work with our board on yeah, moving towards the two to one.

Leverage ratio and ultimately optimizing that into the new assets that were deploying into.

I'd say over the course of the last couple of years why some of our peers may have done that we did not viewed as appropriate for this video call based off of distress, what equity oriented assets that come from that legacy bulk. So yes, I think we've talked in the past when you look at our leverage ratio that has come up.

The reason why that we have increased our leverage it and and deployed further is because we've gotten.

Either realizations of of of exits of some of those legacy books I'm always gotten more conviction on some of the sale. So this quarter.

As we started to see for teletext that we were willing to kind of increased that leverage.

I think as you look forward into the next year and I think we highlight is that were owes the progress that we're seeing we're getting more conviction. So we've worked with our board to increase that leverage.

That we'd be willing from a portfolio discipline standpoint.

To increase leverage when we start to exit that that equity portion. So you think about why it's ultimately tied to I would say it's been a combination of a progress over time with our board to set the appropriate fee structure, our willingness to increase leverage at the portfolio level.

And start to move that above the 0.6 to 0.72, the one to one in a quarter ratio that we talked about before.

Because we believe we'll be able to exit the remaining portion of that book and.

As we do that I think you know relative to others in the market. We think about that fee is when we're starting to lever.

Increase that leverage C., we should start to see benefits of economy of scale for the portfolio and the shareholders.

And do you know at that leverage on balance sheet, we should be able to potentially find other assets that may have a lower.

Return on asset our away associated to that still be able to be at III accretive.

And so I would say that's it's a combination of all those factors that ultimately.

We in the board got comfortable with regards to how we want to set the fee on a go forward basis, but why now versus a year ago was really based off of our construct and the legacy the volatility and drawdown risk at the legacy book.

Makes sense. Thank you and can you talk about.

EG why it looks like that was a new.

Non accrual this quarter still.

Probably or.

Legacy position of focus.

At this juncture.

Anything.

We should expect on.

You know an outcome perspective.

Now that that's on non accrual how much does that set you back.

In terms of moving that position.

Oh, Yeah. This is March merriment. Thanks for your question the the non accrual there at AG, while reflects the investor base, concluding that it is better lead capital in the business to fund various initiatives at the business.

At this time and so it does reflect sort things going on at the business that are generally.

Our operational things that we wanted to do I don't think it has any impact one way other as to timing of exit age you why like all the other legacy portfolio positions as one of those that we are interesting and actually made at the appropriate time and out at appropriate value.

Thank you.

If forgive me this expense I didnt want that perfectly.

Well, that's we're asking is is that sort of some.

Covenant breach that gives you more more control over the situation.

It is not fan that as a situation where we are in both the debt and the equity. So we had flexibility to do things across the capital structure.

In the absence of a covenant breach.

Got it. Thank you so much for the color.

Thanks, Dan.

Well now take our next question it sounds Melissa Wedel with JP Morgan.

Good morning, Thanks, Melissa and if I recall.

I wanted to follow up on your commentary from your prepared comments about the expiration of a lot that.

On the last fall services I love to understand better how you guys have a role.

The trade off the total wanting to stabilize garage.

But also understand all apparel has traded off my will roll over quarter, I think I think about that trade off what's the strategy.

Well Michael.

Well the existence of the lock up this marsh again, the existence of the lock all.

That you reference meant that we had extremely limited opportunity to exit the shares during the existence of the lockup period.

Which is a lockup that extends to a vast majority of the shareholders of the company.

The lockup expires here in a couple of weeks and a large number of holders will be free to trade.

It's difficult to predict how that will play out when that happens.

We of course are monitoring and we'll continue to monitor the situation, but we have no hard and fast parameters for timing or prices exit at this point.

And I'll add my let's say, it's a it's Jim King and again and thanks for the question I I'd say at a high level just to take us back from U.S., well, because I think it's an important area with a balance of of rotating the book.

So maximizing the recovery on a navy.

I would say all some of the reasons why this is taking a very long period of time is that each one of these individual assets within the legacy book has its own level of complexity associated to it.

And that illiquidity it can come from a variety of different ways, whether it was to lock up agreement for the shares or whether it was a restructuring.

The minority nature of some of our positions relative to.

No other constituents in those debts and I think.

The balance of why this is taking a very long time is because there's been a lotta of effort to work of trying to.

Really recover.

I get the best recovery.

And in order to rotate that into new deployments overtime and yeah. I think we've stated that this isn't itself that legacy noncore, but because it was a very challenged buck of of stressed assets and so that I think we've been able to protect and some of the but with that we certainly have seen a lot of write offs and write downs pays off.

Of operational losses, each one of those assets outcome, but Ah. Thank you for the question on you as well, but that is that that nature has been a specific to each asset that we've been trying to sell.

Understood and then my follow up question on roll off that coverage ratio Charles I'm wondering if you I am sorry, if I Miss that's only or are you guys going to pursue shareholder approval personal effectively.

Yes, we we plan to.

Pursue shareholder approval and again, probably consistent with.

As we continue to see movement.

Oh that exists.

That our willingness to manage the portfolio with a higher degree of forever leverage I would expect you to see us.

Those two things to be coinciding.

Okay.

It appears there now for their telephone questions at this time I'd like to turn the conference back over to our presenters for any additional or closing remarks.

Great. Thank you.

And again I would like to thank everybody for they continue to support as we continue to make progress on our strategic goals are very happy with some of the movement that we saw on some of the legacy noncore assets in the quarter I'm very happy with regards to the pace and scale of the deployments that we're seeing on a forward basis. So thanks again.

Again for all the sport and we'll continue to progress on the strategic strategic goals of the portfolio.

Thank you.

Once again that definitely today's conference. We thank you all for your participation you may now disconnect.