Q4 2021 BlackRock Capital Investment Corp Earnings Call
Please standby were about to begin.
Good morning, My name is Jennifer and I will be your conference facilitator today for the Blackrock Capital Investment Corporation fourth quarter 2021 earnings call.
The call will be James Keenan, Chairman and interim Chief Executive Officer.
Mixed single President.
Miller, Chief Financial Officer, and Treasurer, Lawrence Loretta 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 the line for a question and answer session in order to ask a question you can press star one on no touch tone telephone. Thank you. Mr. Paredes you may begin the conference.
Good morning, and welcome to the fourth quarter 2021 earnings conference call of Blackrock Capital Investment Corporation or PC option.
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.
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 <unk> actual results may differ from these statements.
As you know <unk> has filed with the SEC reports, which list some of the factors, which may cause <unk> results to differ materially from these statements.
<unk> 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, the CIC 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.
<unk> can be accessed by going to our website.
Www Dot Blackrock PKC C dot com and clicking the March 2022, Investor presentation link.
In the presentations section of the investors page.
I would now like to turn the call over to Jim.
Thank you Larry good morning, and thanks to all of you for joining our fourth quarter and full year 2021 earnings call.
I'll provide a company update as well as highlights from our 2021 performance.
Nick will then give an update on our portfolio activity and status and Andy will follow with a discussion of our financial results in more detail.
We will then open the call to questions.
2021 was a strong year in which we completed our strategic rotation out of non core legacy assets, we repositioned the portfolio was well diversified income producing investments.
And we culminated in a very active year by deploying $275 million for the full year on a gross basis, including $68 million in the fourth quarter.
We focused on senior secured debt first lien loans in particular.
For all of 2021, 82% of our deployment dollars were in first lien term loans.
Approximately 74% of the portfolio now consists of first lien investments.
Up from 50% at the end of 2020 and 34% at the close of 2019.
In 2021.
Exited $124 million.
A junior capital and noncore investments, including $32 million in the fourth quarter.
Junior capital now comprises only 7% of our portfolio.
Down from 23% at the end of 2020 and 43% at the end of 2019.
We ended the year with a modest leverage ratio of five six times. This gives us significant operating flexibility to continue to build our portfolio in a disciplined manner.
Which could be accretive to NII and Roe.
And provide an increased dividend coverage for our stockholders.
Given the breadth of the Blackrock platform and the extensive middle market expertise of our investment team. We are confident that we can identify compelling new opportunities with solid risk adjusted returns into the year ahead.
And we intend to further diversify the portfolio to capitalize on a broader range of sectors and opportunities building on the momentum we generated in 2021.
We ended the year with 86 portfolio companies up from 55 at the end of 2020.
We exceeded the target we set two years ago the <unk>.
Overall size of the portfolio also grew in 2021, increasing by 15% at fair value to $553 million at year end.
I would also like to touch a positive stable credit quality of our portfolio. We did not have any new non accrual positions during 2021.
The weighted average internal rating of our portfolio improved from one nine at the beginning of 2021 to one to one at year end.
Our underwriting approach focuses on credit analysis through the economic cycle.
We generally avoid businesses that have material exposure to commodity prices or have inability to pass through cost inflation are there on the material side or on the labor front.
We monitor our companies to evaluate inflationary and supply chain impacts and overall, we believe that our portfolio is well positioned to withstand the current inflationary environment.
We expect rising interest rates to be accretive to the earning power of our portfolio, 99% of the debt investments in our portfolio have a floating rate coupon of which 93% have a LIBOR or sofa floor with a weighted average floor of 1%.
While we cannot predict the timing and magnitude of rate hikes by the fed we anticipate rate increases in excess of approximately 80 basis points to be accretive to our NII.
Lastly, as we have sufficient flexibility on our credit facility and as we may approach the capital markets for a new bond issuance. We believe we are well positioned to redeem or refinance our existing convertible bonds on or prior to their June 2022 maturity.
I'll now turn the call over to Nick to discuss our portfolio activity in further detail.
Thank you Jim Gray.
To reiterate we.
Effectively completed the derisking of our portfolio and are continuing to build a diversified book of primarily first lien investments.
During the fourth quarter, nearly 80% of new deployments were in first lien investments consistent with our strategy.
With respect to origin Nations, we had gross deployments of $68 million in the quarter across 13, new and 13 existing portfolio companies with approximately 75% of the investment dollars going to new portfolio companies.
The remaining 25% and two existing portfolio companies.
<unk> ability to support our portfolio companies with follow on investments continues to be an important source of deployment or Kathryn.
This gives us the opportunity to invest in businesses that we already know and have a proven history with.
For 2021 follow on investments represent approximately 26% of our total gross investment dollars.
Our total investment portfolio grew modestly during 2021.
Gross deployments of $2 $75 million were offset by repayments or other exits of $251 million during the year, we note that $124 million or almost 50% of these repayments.
<unk> exit from noncore and other junior positions consistent with our strategy.
Repayments during the quarter were $76 million.
$32 million from <unk> senior loan partners, our joint venture with Windward capital, which has now been completely exited.
The return of capital from our JV also included $5 million of cash previously held by that entity.
Details of our investments this quarter.
Can be found in our earnings release with some of our war covenant investments, including the following.
A $15 2 million LIBOR, plus 8% first lien commitment to stellar X.
Consolidator of small to medium sized brands that sell through Amazon's third party platform.
Initial funded amount on the loan is $5 $5 million with the remaining being a delayed draw tranche.
Blackrock funds, where the lead lender on this facility.
At $10 8 million LIBOR, plus 7% first lien delayed draw term loan grew somewhat holdings, a U K based global mobile point of sale provider.
At quarter end, $5 4 million or half of the commitment was funded.
The investment is some up was made possible by the combination of Blackrock global sourcing reach combined with our sector expertise Blackrock funds were influential lenders in this club deal.
Is $7 2 million LIBOR, plus 888% second lien term loan.
<unk> acquisition Corp, also known as anthology it provider educational software to higher education and cater growth issues globally.
We were comfortable making the second lien investment here based on the fundamentals of the business strong sponsor support and relatively conservative leverage ratio and loan to value ratio.
We are able to co invest with other funds and the Blackrock private credit platform.
Enabling us to participate in larger transactions without taking on too much concentration risk.
We are optimistic about our ability to grow our portfolio. This year given the range of opportunities that are extensive platform provides.
We will continue to invest 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 this will enable us to grow NII.
Our goal eventually covering our dividend, which we declared a <unk> <unk> per share in cash for the fifth quarter in a row.
Now I'll turn the call over to Abbe to further discuss our financial results for the quarter.
Thank you Nick I will take a few minutes to review some additional financial results for the fourth quarter GAAP net investment income was $5 9 million or approximately eight cents per share up 21% from the third quarter gap.
GAAP NII covered 80% of the $7 4 million distributions to stockholders and improvement from 66% coverage in the prior quarter.
Included in the fourth quarter results.
What day and accrued capital gains incentive fee of 0.3 million compared to $1 3 million in the third quarter.
GAAP requires that the capital gains incentive fee accrual consider the unrealized capital gains that would be payable if such unrealized gains were realized.
In a hypothetical liquidation basis. However, it should be noted that incentive fees on capital gains only become payable to the extent that realized capital gains exceed realized and unrealized capital losses for the annual measurement period ending June 32022.
For the six month period, ending December 31st 2021 realized capital gains did not exceed.
Realized and unrealized capital losses.
Excluding the accrued capital gains incentive fee.
Adjusted net investment income was $6 2 million or eight cents per share and would have yielded dividend coverage of 84% consistent with the third quarter.
Total investment income was $12 6 million a slight increase from $12 5 million earned in the prior quarter.
During the quarter the company had fees and other one time income of approximately $1 million or one four cents per share.
Total net expenses decreased by <unk> 9 million quarter.
Quarter over quarter.
Excluding the accrual for capital gains incentive fee.
<unk> remained relatively flat compared to the prior quarter.
Net realized and unrealized gains were zero point $7 million for the quarter, primarily attributable to appreciation in portfolio valuation.
There were no new nonaccrual investments during the fourth quarter at year end the portfolio had three nonaccrual investments representing four 1% of total investments at fair value relatively consistent with the September quarter and.
Our weighted average internal portfolio rating at fair value also improved to one to one compared to $1 three three at prior quarter items and 190 at the end of 2020, demonstrating the ongoing improvement in portfolio credit quality.
At December 31, 2021, we had a strong liquidity position of approximately $224 million between available funds under our credit facility and cash on hand, our net leverage ratio was 0.56 times up from that.
051 times at the end of 2020.
As Nick mentioned, we expect to gradually return to normalized leverage levels as we continue to deploy capital and selectively grow our portfolio over time.
During the fourth quarter, we repurchased approximately 120000 shares of our stock for $489000 at an average price of $4 <unk> per share, including brokerage commissions for.
For the full year during 2021, we repurchased approximately 590000 shares at an average price of $3 72 per share.
As of December 31, 2021, approximately seven 9 million shares remained available for repurchase under the current buyback program.
As announced yesterday, we declared a quarterly distribution of 10 cents per share payable on April seven 2022 to stockholders of record at the close of business on March 17 2022.
With that I would like to turn the call back to Jim.
Thank you Abby.
In summary, we achieved many strategic portfolio objectives in 2021.
And have built a strong financial foundation.
We are well positioned to grow and diversify the portfolio with discipline and.
And producing reliable income NAV stability and solid results for our shareholders.
We thank our shareholders for their continued support.
This concludes our prepared remarks, we would now like to open the call for questions.
Thank you if you'd like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off so buyers have military to our equipment.
Press Star one to ask a question, we'll pause for just a moment to allow everyone an opportunity to signal for questions.
And we'll go first to Finian O'shea with Wells Fargo Securities.
Hi, everyone. Good morning.
Jim or or Nick.
Any.
Relevant information for us to think about.
The Blackrock private BDC.
If that will be a similar strategy to the public we're on now.
And if thats potentially a private to public.
Just any update you can provide given that it looks like it's off the ground and running.
Thanks, Dan This is Jamie I'll take that one I appreciate that yes, we just filed for the private BDC that.
It will take some time to get up and running.
The following is out there, but it will take some time to get up and running as you know and we've talked about in this forum as the Blackhawks aggregate U S. Private capital has a variety of different funds.
In a BDC format as well as private funds that.
This BDC does co invest alongside with them. So the new private BDC that is getting it up and running well.
It will be similar in the sense that was investing across the overall platform I would say it will have some differences and it probably is a.
A broader.
We met with regards to the scope of investments that might fit that versus this thing. So there probably will be differences. When you think about the calls from an NII perspective, some of the types of assets that will fit into that.
But it will give us an opportunity for a found on the platform too to jointly co invest alongside with and be able to grow.
Great that's helpful and one of the financing side I think you mentioned.
That that you would.
We financed the Congress with new bonds, correct me, if I'm wrong there.
Also what I recall you dropped.
The rating.
So I forget which agency a year or two ago.
Correct me, if I'm wrong, there as well, but all that considered.
What are your sort of options you have.
To replace the upcoming convert.
Yes, Phil this is Nick thanks for the question so.
Just know that first of all we have sufficient flexibility under our bank revolver to redeem one in full.
Additionally, opportunistically, but we know in in the June tornado maturity, we might access the capital markets and either the public.
Form a private placement for them.
There's an established template for that already.
There are many bdcs have tapped that market and.
That's a very realistic option for or because we see as well.
Okay sure that's helpful and just a final and just on your rating point, yes, So we dropped the switch.
In December Okay.
And again I think.
Other bdcs have issued bonds using private placement.
For example, so.
We have no concerns about our ability to redeem or refinance our notes.
Okay.
Hum.
Although potential post quarter anyway.
We saw in the press.
The Blackrock private credit.
What's involved in financing to route.
If you're familiar with that wondering if that sort of deal would make its way into the U.
Senior direct lending BDC franchises. Obviously your franchise has has evolved and the strategies that are different than the past, but we're wondering if that's.
Something that would fit within.
The desired allocation for for BK cc.
Thanks, Yeah. This is Jim I'll jump in yes.
The broader platforms a variety of different strategies associated to that route is one that gets more of our opportunistic.
Strategy base.
And it comes to the BDC I think we've been consistent with what we've been trying to restructure this BDC in and so we generally are focused more on first lien.
Performing assets to try to create that stability of that and that resiliency from an income standpoint. So some of those things that might be a little bit more complex than opportunistic generally you may not see the BDC format for what we've been describing.
Just because there may be a higher level of volatility associated to some of those types of assets.
We were just trying to stay consistent from what we're putting into this BDC.
It makes sense at all for me. Thanks, so much.
Thanks.
We'll go next to Melissa Wedel with JP Morgan.
Good morning, Christian you, taking my questions today.
Was hoping to start with the portfolio yield at cost, which saw a nice jump up quarter over quarter to eight 4% I wanted to understand.
Sort of the driver of that increase given that you know.
Some prepayment income was pretty flat sequentially.
And it looks like maybe some of the yields on your investment.
May be sort of in line with potentially some that were exited so just want to understand that better and then the potential impact of the SLP exit on the yield and how youre thinking about that going forward.
Hi, Melissa this is Nick Thank you for the question.
So.
Before I address your specific questions I want to make a general comment that you know we've spent a lot of time over the last three years.
Existing out of the noncore portfolio, which is substantially complete.
And that's what's led to the deleveraging of the book and we're very carefully constructed a well diversified firstly in heavy portfolio.
As we've disclosed in our materials. The first lien percentage in the book is up to 74% now it used to be less than 50% not too long ago, and we have 86.
Portfolios.
And the book again, it's a significant increase from from three years ago.
Additionally, the percentage of equities in the book has declined significantly.
It's now down to just 7% of the book.
So I think it's been a tremendous success story and what we set out to do.
Two years ago in terms of the yield look where.
We've been able to maintain our yields at a portfolio level.
Despite the overall markets.
Tighter than before and that's really a function of the strength of our platform.
Really.
The breadth of the funnel at the top our industry expertise our.
Our sourcing channels that bring us proprietary deal flow all of these things that really helped us maintain.
Maintain our year levels without really taking on too much incremental risk or either at the individual security level or at the portfolio level specifically the reason for the yield increased quarter over quarter was actually the exit of RBC <unk> senior loan partners JV.
That you mentioned.
It was essentially an equity security with no yield you alert was paying.
Some level of dividend and there was low.
So that the exit of the vehicle effectively makes our portfolio even more efficient there's some cash was trapped in that vehicle.
It was received.
Okay. So if I'm hearing that it sounds like your view.
With the exit from F. L. P is that that increase in the portfolio yield is should be sustainable.
A lot of one time Pops.
Yeah, I mean look I mean or the next several quarters, it's hard to predict how credit spreads land right, but we do have a very well diversified portfolio or our deployment pipeline is very strong. Additionally.
99% of our loans are floating rate loans and and with the.
The anticipation of fed hikes, okay. All of that provides a tailwind to the.
The yield that the portfolio can generate and additionally at.
0.56 times leverage we have the potential to grow the portfolio from their own you know the markets have been volatile, which which may play out in our favor, especially given our operating flexibility here allow us to deploy more capitals.
More capital the prevalent spreads.
So that's our goal that's what we're focused on.
Okay. Thanks, Nick that's helpful. And then obviously contributing to some of the repayment activity in the fourth quarter was the S. L. P. Looking forward I'm curious if you're seeing any.
Sizable prepayment repayment activity upcoming or if you have any expectations around that that we should be thinking about.
Yeah, well listen again, that's a good question look gross deployments of something we can control repayments are generally not controllable by.
Buyers look long term our average hold period has been in the two two and a half to three year range for for any given investment in the short term repayments can be lumpy and unpredictable.
And the mentally we actually don't see any reason why an average corporates are going to change.
Also add that you know almost a quarter of our deployments are follow on deployments and in our existing portfolio of companies.
That gives us.
The advantage of incumbency in these investments that help us mitigate some of the repayment pressure that we saw.
See from time to time, the other thing I would note is that if you look at 2021 .
Half of our repayments were approximately half.
Came from really noncore assets or junior capital that we were trying to exit rate.
Most of that pressure is behind us and in fact, all of that is behind us. So we feel like we're going to operate in a more normalized deployment versus repayments scenario, having said that any individual quarter is just inherently unpredictable.
Sure understood.
And then if I could one final question I think you've been using the repurchase authorization.
But a pretty stable rate over the last two quarters.
Is that something was that by design is that how you're thinking about anticipating using that repurchase authorization throughout the remainder.
'twenty two.
Thank you yes.
Yes, so our share repurchases are conducted pursuant to a 10, one and 10 to 18 plans, which are which are sort of pre decided and automated and look we view share repurchases as one of many tools to deliver shareholder value.
And we view the two goes basically to share repurchase program, one is to buy shares at accretive prices.
And the other is to provide some protection in periods of market volatility right. So we expect our forward or share repurchases to be consistent with our current approach.
Thanks, Nick.
And at this time there are no further questions.
This does concludes today's conference we thank you for your participation.
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