Q4 2019 Earnings Call
[music].
Please standby.
Good morning, My name is Kathy and I'll be your conference facilitator today for the Black Hawk Capital Investment Corporation fourth quarter Twain 18 earnings call.
Hosting the call will be chairman and interim Chief Executive Officer, James can interim Chief Financial Officer in Cheshire, Michael Gallo General Counsel of corporate Secretary of the company Lori deep kinetic Marshall married instead of portfolio management for Blackrocks U.S. private capital group.
Good morning, Chairman of the U.S. private capital gets investment Committee and Nick <unk> head of Investor Relations embittered strategy by Incidentally Sarnia. After the speakers complete their update that we'll open the line freight question and answer session in order to ask a question press Star one on your touched on telephone. Please note today's call is being recorded.
Thank you Mr. today, you may begin your conference call.
Good morning, and welcome to Blackrock Capital investment Corporation's fourth quarter 2019 earnings conference call before.
Before we begin our remarks today I would like to point out that certainly comments made during the conference call and within corresponding documents.
Forward looking statements subject to risks and uncertainties.
Many of these forward looking statements can be identified by the use of words such as.
Dissipate believes expects intends well should may and similar expressions.
We call to your attention the fact that black rock capital investment corporations actual results may differ from these statements.
As you know Blackrock capital Investment Corporation has filed with the FCC reports, which with 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 and presented May have been derived from third party sources. It 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 website in investor presentation that complements this call shortly Jim will highlight some of the information contained in the presentation.
One patient can be accessed by going to our web site.
Www Dot Blackrock BK Si Si dot com and clicking into March 2020, Investor presentation late in the presentation section investors.
I would now like to turn the call over to check.
Thank you Larry.
Good morning, Thank you for joining our fourth quarter earnings call.
Ill start with an overview of a meaningful progress we have made on our core strategy.
Give an overview of the book warrants during the fourth quarter.
I will then turn it over to Michael JLL, our interim CFO to discuss the financial results in more detail before providing some closing remarks and opening the call to question.
To reiterate our goal continues to be to optimize our eni and reshape the portfolio to provide a stable stream of income with little volatility.
Our strategy involves exiting non core positions redeploying into core income producing senior secured investments.
An increase our target leverage to create diversified stable portfolio.
We achieved significant progress on these strategic objectives in 2019.
Our net leverage ratio increased from 43, six times 2.7 times.
I mean, you're closer to our desired leverage levels.
During the year, yet gross deployments of $304 billion, including first or second lien mountains to 25, you portfolio companies.
At the same time portfolio composition improved meaningfully increase diversity and increased income producing secured investments.
The number of portfolio companies increased from 27 to 47.
First lien investments increased from 24% to 34% my fair market value.
Secured investments increased from 47% to 57%.
We accomplished this has been noncore exposure declined to 16% fair market value compared to 33% at the beginning of 2019.
As we announced last quarter, the company's board of directors approved a reduction of the company's minimum acid coverage required me from 200% 250%.
After careful consideration of the progress made in achieving our strategic goal.
Exiting non core assets and improving portfolio mix.
With the support of the border wins and you also see shareholder approval for the same at the annual meeting of stockholders to be held on base for 2020.
Additional information will be provided in our proxy statements.
Back to file shortly.
[music] shareholder approval is obtained tend to reduce acid coverage shall become effective day after such approval.
We believe that the added leveraged flexibility will allow the company to continue to pursue its goal of improving return on equity, while creating a more diversified portfolio of secured income producing investment.
As we achieve further progress with noncore exits, we want endeavor to prudently increase leverage from current levels, but the steady state leverage target of 1.95 to 1.25 times.
Because he added flexibility we will continue to increase diversity in the portfolio with a target portfolio count of 65 to 75 names.
And increasing the percentage of first lien investment in our book to greater than 50%.
Although other factors may impact the portfolio composition at any given time.
At the time that the reduced acid coverage becomes effective we intend to lower the base management fee rate for the company from 1.75% to 1.5%.
It's an additional reduction to one person on assets that exceed 200% of anything.
Additionally, at the same time, we intend to reduce the rate for incentive fees based on income in capital gain.
20% to 17 and a half person.
The company has benefited from the significant investments made by the advisor across our platform and sourcing channel, including the integration of any problem capital partners, along with other resources within Blackrock.
You guys are now has over 50 investment professionals dedicated to our U.S. middle market direct lending strategy.
Our intention to continue to invest in additional sourcing and underwriting capabilities.
Additionally, our ability to co invest with certain affiliates.
Coinvestment order is enabling the company to construct a more diversified portfolio with reduced idiosyncratic risk.
And we expect this trend to continue.
We remain confident in the continuation of our strategy are creating shareholder value through a more stable income oriented book.
We believe that this strategy will result in improved return on equity and Green the earnings power of the company in line with the sector, while driving enhanced shareholder returns.
Turning to the fourth quarter results. The net investment income for the quarter was 14 cents per share.
Redeployed $73 million.
In the quarter, which was offset by repayments and other exits totaling $38 million.
Approximately $35 million net increase in the portfolio due to investment activity.
During this quarter, we added a total of five new names to the portfolio, which are detailed along with repayments in our earnings press release.
With the net deployment activity this quarter the portfolio now has a fair market value of $750 million across 47 companies.
The weighted average yield of income producing securities at fair market value was 10.9%.
But 31st.
Five basis points its last quarter.
Quarter and leverage was <unk> 0.7 times increase from 0.61 times from the prior quarter.
We have ample liquidity of $187 million to support new investment activity could we have no debt maturing until 2022.
Net asset value decreased 2.5% from 6049 cents per share last quarter for 6033 cents per share as of December 31st driven by net unrealized and realized losses of $11 million.
He's markdowns were largely related to non core legacy investments in the portfolio, including a $9 million related to the company's legacy investment in AG wide Holdings Corp.
You wide markdown was in part driven by reduced profitability due to a significant an atypical hi, everyone at the metals used in their production process.
I will now discuss our progress on rotating out of the legacy noncore portfolio, which as of December 31st reduced to 16% of the portfolio, Hi, fair market value down from 18% last quarter.
As part of the book is comprised of first performing dead and income producing securities at 13% by fair value.
With age you why first lien Charlotte's hobble and write up of stores being that three largest home.
Second non earning equities at approximately 1% by fair value, primarily consisting of U.S. well equity.
And third investments on nonaccrual and 2% my fair value, including age you why second lien and preferred stock advantage insurance prefer song Vince lighting second lien.
During the fourth quarter $1.6 million proceeds were realized from the partial redemption of advantage insurance preferred stock.
Since Blackrock began managing the company in March of 2015.
Our team has deployed approximately $1.3 billion into new investments.
$421 million of which has an exit it with a realized.
A 14.1%.
As of December 31st over 84% other companies investment portfolio.
Our market value constitutes investments made by Blackrock.
Before I turn the call over to Mike from Joel.
Besides the company's continued transformation and progress towards its strategic objectives.
As evidenced by the strong deployments in 2019 increased diversity in the portfolio and improved portfolio composition.
Each of which is a trend that we expect to continue.
Oh pretty sure Mike.
Thank you Jimmy.
Well take a few minutes to review additional.
Portfolio information.
2019.
Yeah.
Got it.
With $9.6 million or 14 cents per share.
30 for 2019.
Relative to distributions declared a 40 cents per share or <unk> distribution coverage was 100%.
[music].
Total investment income decreased 1.5 million dollar was <unk>, 0.4% as compared to the fourth quarter a year ago.
Excluding fee income in other income.
Total investment income decreased by approximately 5.9%.
Primarily attributable to would decrease in dividend income from abuse SIFI Angelo Gordon.
The decrease in interest income from age you I definitely note that result, non accruals.
At quarter right, there were four nonaccrual investments, representing 2.4% and 6.9%.
Total debt preferred stock.
At fair value in cost.
This compares to nonaccrual investments of approximately 1.6 or 7.1% of total debt preferred stock.
Everybody when course, respectively at December 31st 2018.
Our average internal investment raising at fair market value at December 30 for 2009 to 1.3 valley as compared to 1.3.
Or whatever.
Total expenses increased $2.6 million or 7% freemont.
30 birth to belt designed to from the comparable period in 2018.
Early due to increases in that it's a fee based on income and interesting credit facility.
During the quarter, there was no accrual for incentive management fees based on good.
In the fourth quarter, we voluntarily impartially waves incentive fees of $1.1 billion.
Bringing up cumulative incentive fees waived since March 2017.
$23.4 million.
In the fourth quarter net realized and unrealized losses were $11.2 million, primarily due to depreciation.
Core would do.
<unk> portfolio valuation during the quarter.
During the fourth quarter of 2019, no shares were repurchased.
December 31st 2009 to 5 million share remains available for repurchase.
Program.
We closed the quarter would have been strong liquidity position to fund a robust pipeline of new investment opportunities.
Approximately a $187 million of availability.
Our credit facility, adding catching fish.
With that I'd like to sort of pulled back to Jim.
Thank you Mike.
Before we conclude I'd like you commented on the uncertainties in the economy greedy, but the impact of the hosted 19 or Corona virus.
Well, if this potential impact on our portfolio.
A wide range of outcomes are possible regarding the speed of the virus contagion as well as harmfulness.
The respective.
Believes that near term disruptions are likely in several industries with first order impacts.
Such as those wouldn't supply chain or manufacturing impact.
And those where demand will likely software such as travel leisure five events or conferences.
We believe that our portfolio is relatively less exposure to businesses with first order impact.
It's actually only one portfolio company in the transportation and logistics sector reporting tangible decline.
The quarterly due to covert 19.
We are monitoring each of our investment closely and expect that the impact will become clearer businesses over the course of the next several weeks as more data becomes available regarding the buyers as well just came back.
We get comfort and one the underlying diversity of our portfolio and to the fact that the majority of the portfolio investments are secure.
You know like what photos of the largest unsecured debt and equity exposes such as easy I see senior loan partners in Gordon Brothers Finance company are also diversified secured debt positions.
In closing I would like to take a moment to thank our shareholders for their continued support as we make progress on the company strategy and recognized our team for their continued hard work toward achieving our portfolio objectives.
This concludes our prepared remarks.
Operator, we would like to open the call for questions.
Thank you and ladies and gentlemen to ask a question that is again star one on your telephone keypad. Please note that if you're on a speakerphone. Please pick up the handset or do you press your mute function to other signature resources data.
And then a star one to ask a question.
And we'll go work first to Rick Shane of JP Morgan.
Hey, guys. Thanks for taking my questions. This morning.
HM two things.
This tragedy.
Oh occasion in part is the way you guys described it eats gene.
Do you get some cradic Wes.
Imports lead that suggest it was shifting sort of prominent help a strategy to 88 strategy.
Good morning airplanes and.
That makes sense sort of more than indexed approach given the fee structure.
Thanks, Rick it's Jim I wouldn't describe as they try to move towards a beta strategy I think when you look at.
The legacy portfolio on historical side filed.
Yes.
And more concentrated positions into more equity oriented or distressed risk.
In a portfolio that was trying to do you still more stable or income stream. So we've seen that in the experience with regard to legacy book on the volatility.
That has on Mark said, the volatility and they have on.
The anti ice cream.
Potential risks of impairments associated to that.
When you look at our heart team got structure and what we're trying to rotate into I would say our conversion rate up the deal flow that we see is probably around between five and 7% anyone period of time.
And that's a significant amount of.
Of work that gets done so I wouldn't look at any one of the positions.
As being data oriented it's a fair amount of.
Diligence and structuring and protections that are built that that being said.
Relative to reducing some of the vulnerability that exists in the kind of the fourth markets an economy over a period of time.
No I'd have to these illiquid investments, we were trying to get more diversification associated to that right I remember that we are.
Oh investing alongside.
Variety of different strategies within the advisor so we are taking significant positions.
In any one of these assets, but we are translating that from a portfolio construction.
Yeah, I think more diversified.
Yeah, heavy selection, but more diversified portfolio to reduce any kind of outside risk that we've seen hopping to anyone else.
Experiencing some of the legacy books, and I think that will lead to a more consistent eni and dividend stream in the future.
Got it in human maybe other aspect to that I think there what shall we expect.
Yeah.
Our about waiving fees in order to support the dividends out of and I, but I think there's a challenging me is on the math side.
The other party goods.
Strategies to reduce that downward.
Uh huh.
Absolutely.
Yes, we have ways, just north of 23 million feet dolls and fees over the last several years.
And you got there continue to work through tried that transition that legacy book and.
Yeah. If you look at all the new investments made since March of 2015 isn't far more stable.
The parent [laughter].
He and parents.
Volatility as well any disruption at home.
Legacy assets held.
By the prior advisor so I don't our goal is to reduce that experience and then the debt experiments on a go forward basis.
Got it well that's my one question all thank you guys.
Patrick.
And now we will go to fin O'shea of Wells Fargo Securities.
Hi, Good morning, Thanks for my question.
I'll keep it does give us some backlog.
Out of the boss Snow Gordon doubles and supportive.
[noise], Hey, Jason as it relates to our incremental investment he Gordon brothers as they continue to make incremental investments in their own diversified portfolio, we slowing incremental capital to support those investments. So I think what you see from quarter to quarter.
Washing machine.
You heard increases in size or decreases in size.
Thanks.
Just to add on [noise].
Yeah, the nature of that portfolio inside of Gordon brothers is more shorter duration secured portfolio. So we can bad.
And you'll see this quarter by quarter.
Yeah.
Certainly payments a into that vehicle.
Because the duration of those assets are shorter tenors and what we've seen a corporate lending book.
Yeah.
And it did that called whereas I mean.
Consciousness.
From third party investors.
[noise] what are we exit voluntary.
[noise] heavy heavy partnership with the other shareholder in that business, whereby when you're making incremental investments to support their growth.
Right alongside Investor.
Not added new investors can mix.
Okay. Thank you and on the.
Jim You mentioned one of your.
Yes.
Hi post quarter as Walt.
In Pops from some slowdown and that sort of activity can you give us only guidelines as to what we get back you know what.
What might be the unrealized and patterns.
In real time today [noise].
[noise]. Thanks, Yeah, obviously, I think we along with everyone are trying to.
Yeah.
True and potential impacts.
The current of ours I did.
Yes.
Into United States and more globally.
Yeah, I would say the range of outcomes, it's pretty broad based off of the potential spread and the impact that you see but even more so from an economic standpoint.
It is the levels, which are the response to that or or <unk>, which governments corporates.
Local municipalities are trying to.
Going through a prevention note from the yeah well spread.
So I would say, it's what we're trying to assess all of our company. We kept the highlights some of the area is why didn't you have generally minimal exposure at the overall portfolio level, but things that are obviously, but it's more conversation.
Oh human being.
The airlines to me a the logic spaces, our convention centers are all more at risk.
There's gonna be some volatility associated to supply change, which I think we'll be more kind of oral.
And everything will be an area, where they'll be dispersion between industry. So what we're looking at right now some of our portfolio complex will actually see.
Got it fits based off of probably a pull forward in demand.
And then there are other areas that we think are a little bit more vulnerable and I wouldn't say.
We are necessarily seen that all come to fruition, yet, but we do think that over the next couple of quarters.
You start to assess the data around that prevention, there could be some volatility around some of the the earnings of certain industries that we have.
Itself to call the magnitude.
At this point, though.
Okay.
Thank you and just one final question HM.
We need the buyback program.
Yes, some color.
How you are.
That lever.
Hey.
[noise] time, what's towards [noise].
Legacy Walters library.
Sure so.
[noise], Yeah, hi, Nick So our share repurchase are conducted under a and b.
Dan.
You know with three Satish turns which are sick.
So last quarter and effect, although were the up.
Three which is not trigger based on their terms with the band. That's the plan, we believe that really every quarter the board better.
In the go up or bad is really you know two for one and Super light stability to the stuff right in to enter the market dislocations and also to buyback stock at attractive yields. So that continues to be a part of course strategy.
Were you know the other keegan born support strategy or one producing onshore assets, which over the last three quarters, we've made significant progress and in exiting mortality in de risking sort of a topical in reducing our exposure and good advantage insurance et cetera, and also redeploying.
And increasing leverage floor current target levels in really diversified.
Senior secure income.
Producing investments.
Yeah. This is Joe I I know there specific.
Thanks to the point I started to pick up as we had been.
Reducing that legacy bucket it now got around 16% concentrated in does.
Hey, those three positions in the a junior parts of those physicians tend to be the ones that have the most volatility on a on a quarter to quarter basis from a valuation.
So with that.
Our current leverage.
Turning up seven times, and that's kind of our comfort level at this point.
As we continue to refuse and focus that reduction of that legacy book.
Honestly I think we'll take that back for a job.
We expect a as mentioned earlier if it goes through the for the two to one leverage goal.
This year.
And those today I would say that deployments would be very similar with regard to the style over the last several quarters and ER increase that leverage as we reduce that legacy volatility.
Yeah.
Okay. Thanks, so much the locally.
Thank you.
And with that that does conclude today's question and answer session I'd like to turn the conference back to our presenters for closing comments.
Great. Thank you everyone falls, we continue to support as we continue to transition this portfolio.
We look forward to the continued progress that we see here.
And hopefully everyone stays healthy.
And 60 next quarter. Thank you [noise].
And with that ladies and gentleman that does conclude today's call we'd like to thank you again for your participation you may now disconnect.
[noise].
Oh.
[noise] Oh.
No.