Q3 2020 BlackRock Capital Investment Corp Earnings Call
[music].
Please standby.
Good morning, everyone. My name is Lisa and I will be your conference facilitator for the Black Rock Capital Investment Corporation third quarter 2020 earnings call.
Hosting the call will be James Keenan, Chairman and interim Chief Executive Officer.
Oh, Punjab, <unk> interim Chief Financial Officer, and Treasurer, Nixing, Holt, President <unk> General Counsel and corporate Secretary of the company Hobby Miller director of Finance.
Merriman head of portfolio management, and Jason Meringue, managing director and member of the Companys Investment Committee.
Lines have been placed on mute after the speakers complete or update they will open the line great question and answer session.
In order to ask a question you can press star one on your Touchtone telephone.
Thank you Mr. Curtis you may begin the conference.
Good morning, and welcome to Blackrock capital investment corporations third quarter 2020 earnings conference call.
Before we begin our remarks today I would like to point out that certain comments made during this conference call and wed in corresponding documents contain forward looking statements are subject to risks and uncertainties.
Many of these forward looking statements can be identified by the use of words, such as anticipates believes expects caddies will should may and similar expressions.
He called your attention. The fact that actual results to Blackrock capital investment Corporation or do you see I see may differ from these statements.
As you know you see I treat as filed with the FCC reports, which lists some of the factors, which may cause bcr. These results to differ materially from these statements. These.
As he assumes no duty to and does not undertake to update any forward looking statements.
Additionally, certain information discussed and presented made been derived from third party sources and has not been independently verified. According.
Accordingly, he has he makes no workers location warranty with respect to such information.
He's nobody is posted to our website the investor presentation that complements this call.
Lastly, Jim will highlight some of the information contained in the presentation.
Alright Goodbye headboard to hear a is b C. I P. C S O and treasure effective November 9th 2020.
<unk> V Cic's financial controller, and as a black rock director of Finance since September 2017.
She has been an annual go part of the D. C. I T financed him and we look forward to her leadership and a new rug.
Also as announced yesterday <unk> board appointed Nixon golf to serve as B C. S. He's president effective November 3rd 2020.
I would like to congratulate neck as this accomplishment is a reflection of important room <unk> T I C.
We continue to progress towards a strategic goals and priorities.
A primary strategic priority has and continues to be locating out of legacy and the other junior investments and redeployment of capital to further build a portfolio of senior secure dogs that will generate stable income.
During and subsequent to the third quarter, we've made great progress towards visa directors.
And significantly reduce their exposure to both Gordon Brothers Finance company and a D y.
Ah November 3rd G. P F C, which had been our largest portfolio holding transferred a majority of the Catholics to Calgon commercial final.
A new entity controlled when a third party.
Cause the result.
$78 million in principal repayment.
On the unsecured notes.
E C. I C will retain a 5 million dollar investment via Gvhd Senior secured bank facility, which is rolled over to count on.
Additionally, herc routine it's pro rata share of G. B F sees remaining assets prudish.
Additional details of which are provided in our Ernie Germans.
Simultaneous with this transaction <unk> provided with $25 million of new financing to Canada.
Dfc reduction.
The largest of these is DCDC senior loan partners, our senior loan JV with Windward investments LLC.
We have initiated a process to explore viable opportunities to reduce or exit our investment in the JV.
However, there can be no assurances as to the degree and the timing of such dispositions, which will also be subject to obtaining required consents from our JV partner.
Historically, we have managed our leverage in a conservative manner reduction of the noncore in junior investments in our portfolio and associated de leveraging will further improve our credit profile.
And these near term priorities are accomplished we intend to address the 2022 to 2023 maturities of our unsecured and secured debt in the early part of 2021.
Another prong of our portfolio optimization strategy is the ongoing capital deployment into diversified senior secured assets that generate a stable stream of income with limited volatility.
To that end, we added four new portfolio companies in the third quarter each of which was a first lien loan. The details of these new investments can be found in the earnings release.
We continue to emphasize transactions, where we lead or co lead negotiations on deal terms.
Over the last two quarters, we were cautious in sizing our new investments given our leverage ratio in the potential for additional capital needs of existing portfolio of companies.
However, with these strategic portfolio exits accomplished to date, we are assuming a more normalized approach to sizing new investments, which was the case with our 9.5 million dollar investment in metrics trip, a new portfolio company this quarter.
As a reminder, our current portfolio composition target includes at least 50% of first lien loans compared with 37% at quarter end.
We are also targeting 65 to 75 portfolio companies.
Translating to 1% to 2% physician sizing as a percentage of the portfolio.
Lastly, our goal for our unsecured debt or equity positions is 5% or less down from approximately 30% pro forma the reduction in GBS profit.
Our core portfolio with an increasing percentage of first lien loans has continued to perform well despite the pandemic.
At the end of the third quarter, there were only three investments on non accrual totaling less than 1% of the portfolio at fair value.
Excluding energy decline associated with TBSI and energy, while the rest of the portfolio increased in value by approximately $12 million or 17 cents per share during the quarter, reflecting further improvement in credit markets and spreads.
Turning to our financial results net.
Net investment income for the quarter was 12 cents per share.
Down from 13 cents in the previous quarter and due primarily to the GBSD preferred stock nonaccrual.
In terms of investment activity, we deployed $25 million during the quarter, which was offset by a similar amount of repayments and other items.
The deployment than repayments are detailed in our earnings press release.
The weighted average yield of income producing securities at fair market value was 9.8% as of September Thirtyth down.
Down eight basis points since last quarter.
Narrowly driven by portfolio movements.
Quarter end Laggards was <unk> 0.98 times up from 0.95 times for the June quarter.
While the Eni covered our dividend by 122%.
We elected to pay a portion of our dividend in stock this quarter.
The primary reason for this was to bolster NPV by offsetting some of the decline created by the two AG.
Our goal remains to transition back to an all cash dividends in the coming quarters.
Our liquidity remains strong and unfunded commitments are relatively minimal and $5.3 million.
To further support and Avi the company's advisor waived extolling tendency for the quarter.
Which totaled $1.5 million.
Inclusive of this waiver Blackrock has permanently with $28.4 million of incentive fee on a cumulative basis.
Before I turn the call over to Mike in General I'd like to emphasize that while the economy gradually recovers from the impact was a pandemic.
We've made significant progress in our strategy of exiting non core asset.
Recognizing that these exits have been accompanied with any of the decline easily.
We believe that much of the work is now behind us as we remain optimistic about seeding the portfolio rotation in the coming quarters.
Over to you Mike.
Thank you Jamie before I get started I would like to thank Jim and the team for their support during the three years.
His interim CFO and treasurer, and Im confident that Abbvie is ready to provide the financial support necessary as the company continues and forming a strategic.
Now I will take a few minutes to review additional financial and portfolio information for the third quarter of 2020.
GAAP net investment income and I was $8.5 million or 12 cents per share for the three months ended September 32020 realm.
Relative to distributions of $7 million or 10 cents per share.
Distribution coverage with a 122% for the quarter.
Total investment income decreased $3.7 million or 18.3% as compared to the third quarter a year ago.
Excluding fee income and other income total investment income decreased by approximately 16.5% primarily due to a lower rate environment. A decrease in dividend income period over period, and a 3.7% decrease in the average investment portfolio at amortized.
<unk> cost for the comparative period.
At quarter end, there were three non accrual investments, representing 1% and 7.7% of total debt and preferred stock investments at fair value and cost respectively.
As compared to non accrual investments of approximately 2.7% and 10.7% of total debt and preferred stock investments at fair value and cost respectively. At June 32020.
Our average internal investment rating at fair market value at September 32020 improved to 1.78 from 1.93 as of the prior quarter end.
Total expenses net of incentive management fee waiver.
Pre is 2.5 million or 24.7% for the three months ended September Thirtyth 2020.
From the comparable period in 2019.
Primarily due to decreases in net incentive fees based on income base management fees interest and credit facility fees and professional fees period over period.
In the third quarter, we voluntarily waived the entire on center.
Based on income of $1.5 million, bringing our cumulative incentive fees waived since March 2000, $17 million to $28.4 million a.
Additionally, there was no accrual for incentive management fees based on game.
During the third quarter net realized and unrealized losses were $35.7 million, primarily driven by realized losses, and HG y and unrealized appreciation in GB of stake.
As of September 32020, we had approximately 134 million of availability under our credit facility as well as in cash and cash equivalents.
Net asset value benefited by $11.1 million during the third quarter as a result of a portion of our dividends paid in stock on July seven 2020 on September 29 2020.
During the third quarter of 2020, no shares were purchased under our existing share repurchase program and 4 million 13446 shares remain available for repurchase under the program as of September 32020.
On November three 2020, the company board of directors to renew the authorization for the company to purchase up to a total of 7.5 million shares effective until the earlier of November circa 2021, or such time that all the authorized shares have been repurchased.
New authorization replaces the previous authorization and the remaining approximately $4 million and purchase shares on that authorization expires on November 32020.
With that I would like to turn the call back to Jim.
Thank you Mike in closing I would like to take a moment to thank our stockholders for their continued patience and support as we work through the restructuring of the portfolio and recognize their team for their hard work.
First of all I hope everyone remains safe and healthy. This concludes our prepared remarks, operator, we are going to open up the call for questions.
Thank you.
I would like to ask a question on the phone lines today May Press Star one on your telephone keypad few on Speakerphone. Please make sure. Your mean options turned off to allow your signal to reach our equipment.
Again that is star one.
Well take a question from Finian O'shea with Wells Fargo Securities.
Hi, everyone. Thanks for having me on.
Graduations on the strategic moves pulled off this and Preston.
Justin post quarter.
I guess first question on that.
Yeah.
So my recollection I don't think Gordon brothers was.
You know.
Then soon core versus non core right and it looks like you're just lumping this new.
The gory of.
Junior and equity since to the house, which is understandable, but I.
So two part question I guess spend less time on Gordon brothers Thats already done.
But when did that become non core and then.
More importantly, the SLS.
That's always seem to be one of those you know part of your your.
Your pride and Joy is resident management with Blackrock took over so it's a bit of a surprise to some.
You all do the SLF is something we need to get Aldo.
I guess I'll wait for this second there's too many questions in one I'll stop there and just ask what's the sort of.
Has there been a revision on run companies and strategies.
Thanks, Ken and to appreciate the question Jim.
Jimmy here.
A couple of these outages obviously TBSI.
It's been a good performing asset with regards to its not part of our legacy book and it's been.
A portion of which has been supportive from and then Eni perspective.
That being said with regards to our strategic plan of trying to reduce concentration.
Remove kind of equity risk towards the new capital risk on the portfolio.
And move to kind of more diversified first lien portfolio on balance sheet, both TBSI and the joint venture play into that.
Commit TBSI standpoint, obviously was a a more concentrated position the company itself, obviously lends to.
Asset backed lending facility, which had got impacted this year from the cobot environment that for me.
From the BDC perspective, it's really in a sense.
Core to our strategy to try to reduce that volatility or trying to reduce that concentration on our balance sheet.
And continue to shift that into kind of direct first lien assets on balance sheet.
Specific to the JV that falls into that as well prior to.
The shareholders and the board approving.
The ability for the increased leverage on balance sheet.
The joint venture was a way means for.
The the company to increase or improve its eni by getting that exposure to the diversification of first names.
That approval and as we look at now has the ability for us to kind of put those now on balance sheet.
And and continue to reduce the kind of stated equity on balance sheet.
And shift to direct first things, which we think will have popular ekati side, yes.
Yes that helps and just as a small follow on for that matter.
Is there a structural impediments to just I.
I mean, most of your peers that have moved out of these are just very simply brought them on balance sheet or is there something that.
Is there something with Irrs that prevents the use of that facilitation.
So hi, then from from Citi standpoint of looking to exit we'll look at all Oh options to maximize the value of that which can include both a sale taking assets on balance sheet there.
Their variety factors there come into that inconclusive of looking at the the leverage ratios on balance sheet as well as potential new deployments.
And and other options that come into place, but yes that is a.
An option that is.
Part of that exit strategy.
For.
That helps and then just one more.
The preferred stock dividends.
You know still being incurred.
I would say that was more understandable.
Last quarter, but I think your reason now is growing and the.
Doesn't seem as compelling against the contrast of the cases against paying the stock dividend would.
Would you expand on why why growing in a really good reason for that.
Yep, no absolutely I mean to be clear, whose data is we hope to move back to a 100% cash dividend in the upcoming quarters.
And working with the board in setting the cash and then stock split for this quarter.
Multiple factors, obviously went into that as you know we are making the final stages of finally being able to restructure and exit some of.
The the legacy assets as well as transitioning out of some of the junior securities. So with that we recognize that there was some NPV decline associated to that.
That has an impact obviously with our liability side in our and our leverage covenants.
I think now that as we move forward and were able to accomplish some of these cells and having a lower levered book with less.
Less exposure to the volatility associated or downside risk to some of the equity and junior side, it's really working to extend.
The liabilities that we have we have 2022 and 2023 maturities.
And reset and solidify the the liability side.
Of the balance sheet, and then post that beyond just the stock dividend is really working with the board.
In all options than to try to look.
Look at ways and means to maximize shareholder value and certainly.
We are aware of the price to book discount that exist today.
So that's helpful. That's all for me thanks.
Thanks.
Well take our next question from Rick Shane with JP Morgan. Please go ahead.
Thank you everybody and congratulations to Mike Gabby and next.
I'm not sure what the luckiest on that list, but I I think Mike probably the happiest at this point so our best wishes to all you guys.
I wanted to talk about the incentive fee waivers on you guys have decided that.
With about $28 million in fees since 2017 at same time, that's been coincident with about $275 million at decline in equity.
And what I think is.
Interesting here is that you guys have.
Made an effort to be fair to your investors made an effort to support the dividend by flexing there but.
Sure really.
Do you think there is an incentive.
Problems, you're in that because of the because the book value continues to decline it generates that incentive scheme and so you have this construct where you've sort of optionally read it as opposed to give shareholders in mechanism that they can rely upon for dividend for tax.
Yes.
Okay.
Thank you Eric Yeah, I would say that if they take a step back there. Obviously this is you when looking at the book and restructuring this.
Obviously these are illiquid.
Complex Securities many of which are a minority stake in a restructuring and reorganization. So it's certainly taken a significant amount of time to try to exit or monetize and as you say alongside that has come some fairly significant NPV declines.
I think we're on a very good patent and again highlighted this quarter to be able to try to exit the majority of those and kind of reposition.
This portfolio I think alongside that over the last several years, we've continued to work with the board and as you know they have.
Their annual process to kind of review that is working with the board and understanding that a lot of this whole though.
I understand that we are managing this has been asked trying to work out of complex legacy securities and we recognize and understand the.
The pain that better recognized from some of the energy declines associated to that so I think from Blackrock standpoint of working with our board does not something even know and have generated a and incentive fee, which is in line our fee structure is approved.
Recently, and it's in line with the fee structures associated to the market.
That being said with regards to the experience that the restructuring of that book and the losses associated too.
DNA be declines that's that's that's still the realization of our shareholders.
The partners of this book So we have worked with our board we have not looked and tried to take performance is out.
Associated to that so in a way that were generally putting those back into.
The the BDC itself and yeah, we'll work forward I mean, our goals are mainly to completely at a 100% restructure this portfolio completely to ship this back into a more stable.
First lien portfolio and tend to have a BDC that can deliver a stable income stream and that.
You know I would say.
We would hope to take a few years is taking a little bit longer associated to that because of the exits on some of these some of these assets.
Assets. So we continue to work through our board with regards to both the fee structure and what.
The experiences for the shareholder base.
Okay understood and work I realize that some of these are inherited challenges, but having followed the company for decades.
Spinning transition for 10 years from my perspective, and that's that's I'm sure frustrating for shareholders. My concern is that to the extent that income grows that Eni rose.
As you turn off the incentive fee waiver, none of that benefit will actually accrue to shareholders and I think that that's one of the things that potentially ways of common stock because investors need to see even greater growth.
Finally get earnings and dividend growth.
[laughter], he Ed and everybody. So I mean, a lot of the things that we're realizing losses on right now are some of the 2014 and 2015 investments and a and again I think we're we're largely through that from a from our perspective, obviously, the we hope to stabilize.
And maybe by exiting those and then the market environment, depending on where.
Spreads are where LIBOR will be all of those will factor into what the potential Eni.
One of the underlying portfolio or is that being said. It's you know we have are keen to try to get us where as outlined that these are going to be pursuing continuous occurred to reducing that potential NAV decline, we're going to try to shift this into having more diversification. So that one or two names can you don't win.
Has the potential experience like we had in the past were on several names just can take severe and.
Navy declines and then ultimately continue to ship that in the market environment will also help determine of where a a whether the full eni is but ultimately that experience I think we'll be level set with what that Eni generation will be based off of a stable first embark Tom so that's it.
Basically our focus in order to kind of.
Reposition that cat aggregate book and it is certainly taken time, but that is a.
I think we are or.
In the final stages of that just based off of the legacy book is now less than 9% of the portfolio.
I appreciate that thank you guys.
Thanks, Rick.
And that does conclude the question and answer session I would like to turn the call back over to management for any additional or closing remarks.
Thank you operator, and thank you all again for your patience and support as we are finalizing continue to restructure.
This portfolio also again I'd just like to thank Mike Joel on his retirement, and then well come back and to their wells. Thanks.
Thanks, again, and hopefully everyone stays healthy in this environment.
And that does conclude today's presentation. Thank you for your participation you may now disconnect.
[music].
Oh.
[music].
[music].
[music].
[music].