Q1 2022 BlackRock Capital Investment Corp Earnings Call

May 2, 2022

Operator: Good morning. My name is Allan. I'll be your conference facilitator today for the BlackRock Capital Investment Corporation first quarter 2022 earnings call.

Operator: Hosting the call will be James Keenan, Chairman and interim Chief Executive Officer, Nik Singhal, President, Abby Miller, Chief Financial Officer, and Treasurer, Lawrence D. Paredes, General Counsel and Corporate Secretary, Chip Halliday, Managing Director, Marshall Merriman, Managing Director and member of the company's investment committee, and James Mehring, managing Director and member of the company's investment committee.

Speaker 1: Lines have been placed on mute. After the speakers complete their update, they will open their lines for a question-answer session. In order to ask a question, you could press star one on your touchstone telephone. Today's call is being recorded. Thank you, Mr. Paredes, you may begin your call.

Laurence D. Paredes: Good morning and welcome to the first quarter 2022 earnings conference call at BlackRock Capital Investment Corporation, or BCIC.

Laurence D. Paredes: 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.

Laurence D. Paredes: 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.

Laurence D. Paredes: We call to your attention the fact that BCIC's actual results may differ from these statements.

Laurence D. Paredes: 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.

Laurence D. Paredes: BCIC assumes no duty to and does not undertake to update any forward-looking statements.

Laurence D. Paredes: 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.

Laurence D. Paredes: Please note, we've posted to our website and investor presentation that complements this call. Shortly Jim will highlight some of the information contained in the presentation.

Laurence D. Paredes: The presentation can be accessed by going to our website at www.blackrockbkcc.com and clicking the May 2022 investor presentation link in the presentation section of the Investors page. I would now like to turn the call over to Jim.

Speaker 3: In the presentation section of the Investors page. I would now like to turn the call over to Jim.

James Edward Keenan: Thank you, Larry. Good morning and thanks to all of you for joining our first quarter earnings call. I'll provide an overview and highlights from the quarter. Nick will then give an update on our portfolio activity and status, and Abby will follow with the discussion of our financial results in more detail.

James Edward Keenan: We will then open the call to questions. I'm pleased with the progress we have made in reconstructing and diversifying the portfolio, with the goal of delivering a stable NAV and a competitive return on equity.

James Edward Keenan: We started the year on solid footing, building on the momentum we generated throughout 2021. We deployed $44 million of new capital in the first quarter.

Speaker 4: We deployed $44 million of new capital in the first quarter.

James Edward Keenan: In keeping with our focus on senior secured debt, substantially, all of this consisted of first lien loans.

James Edward Keenan: Approximately 72% of the portfolio now consists of first lien investments, up from 50% at the end of 2020 and up from 34% at the close of 2019.

Speaker 4: Up from 50% at the end of 2020 and up from 34% at the close of two thousand and nineteen.

James Edward Keenan: Additionally, we continue to broaden our investments to further diversify and strengthen the portfolio. We added nine new portfolio companies and ended the quarter with 93 portfolio companies, up from 55 at the end of 2020 and 47 at the end of 2019.

James Edward Keenan: We are firmly committed to a robust underwriting approach that focuses on the investment performance through economic cycles.

James Edward Keenan: We generally favor businesses in non-cyclical industries, with their growing revenue profile, ability to pass through cost increases and strong equity support.

James Edward Keenan: We avoid overleveraged capital structures that are more prone to pressures from rising inflation and rising interest rates.

James Edward Keenan: Our credit quality remains healthy as a result. There are no new non-accrual investments in the first quarter and all of 2021.

James Edward Keenan: Net leverage of 0.46x was down from 0.56x at the close of 2021, as repayments exceed new investments.

James Edward Keenan: While there were only three portfolio company exits during the quarter, they included some of the larger names, such as St. George Logistics, which has previously the largest portfolio company at 8% of the total portfolio by fair market value.

James Edward Keenan: Our investment in St. George provided a 12% realized IRR over its four year holds period.

James Edward Keenan: With many of the more concentrated investments now exited, we anticipate that the repayment impact of any single issuer on NII to be more muted going forward.

James Edward Keenan: We have ample leverage capacity as we pursue disciplined portfolio growth. We are confident we can identify compelling new opportunities that will be accretive to NII and drive solid, risk-adjusted returns for our shareholders.

James Edward Keenan: We expect rising interest rates to be accretive to the company's NII. 99% of the debt investments in our portfolio have a floating rate coupon, of which 92% had a LIBOR or so far floor, with a weighted average floor of 1%.

James Edward Keenan: As these rates rise above the floor level, we expect NII to increase by approximately 0.008 cents per quarter per every hundred basis points of benchmark rate increase. All else being equal.

James Edward Keenan: Before I pass it over to Nick, I want to take a moment to thank Abby for her contributions as CFO and Treasurer of BCIC.

James Edward Keenan: As we previously reported, Abby plans to step down from her role on May 6th to pursue other career endeavors. We wish her all the best.

Speaker 4: The Board has appointed Chip Halliday to serve as interim CFO and Treasurer effective May 6th.

James Edward Keenan: Chip is a managing Director with the adviser having joined BlackRock in 2005.

James Edward Keenan: Chip is well qualified to step into this role and we have the utmost confidence in his abilities.

Multiple speakers: I'll now turn the call over to Nik Singhal to discuss our portfolio activity in further detail. Thank you, Jim.

Nik Singhal: We have effectively completed the derisking of our portfolio and are continuing to build a diversified bulk of primarily first lien investments.

Nik Singhal: During the first quarter, substantially all of our new deployments were in first lien investments, consistent with this strategy.

Nik Singhal: With respect to originations, we had growth deployments of $44 million in the quarter, primarily across nine new and six existing portfolio companies, with approximately 83% of the investment dollars going to new portfolio companies and the remaining 17% into existing relationships.

Nik Singhal: Repayments during the quarter were $79 million.

Nik Singhal: As Jim mentioned, this happened to be across three large names in the portfolio, leading to an elevated number for the quarter. As a result of these repayments, our total portfolio has declined quarter-over-quarter.

Nik Singhal: Our pipeline of opportunities is healthy and we continue to source opportunities from a wide range of industry sectors.

Nik Singhal: In the second quarter, so far, we're seeing good deployment momentum.

Nik Singhal: While there can be no assurances that all transactions will close, quarter-to-date investment committee approved transactions total approximately $55 million.

Nik Singhal: The details of all of our investments this quarter can be found in the earnings release with our more prominent investments including the following: a $9.4 million SOFR plus 6% first lien term loan and $1.4 million of unfunded commitments to 4840, a provider of recycled wood palate solutions, a $7.9 million SOFR plus 8.5% first lien term loan, with an additional $7.3 million unfunded term loan, as well as equity warrants to Elevate Brands, a consolidator of small to medium size brands that sell through Amazon's third-party platform, a $4.7 million SOFR plus 6.5% first lien term loan and a $6.7 million unfunded term loan to Greystone Select Company, a real estate investment firm.

Speaker 5: a $9.4 million SOFR plus 6% first lien term loan, And $1.4 million of unfunded commitments to 48 40 a provider. recyclcleed Wood palate solutions.

Speaker 5: And $1.4 million of unfunded commitments to 48 40 a provider. recyclcleed Wood palate solutions.

Speaker 5: A $7.9 million so far, plus 8% first lien interim loan.

Speaker 6: With an additional $7.3 million unfundital, as well as equity warrantants to elevate brands.

Speaker 5: a consolidator of small to medium size brands that sell through Amazon's third-party platform,. $4.7 million sooffar plus 6% firstly in term loan and a six point seven million dollarsar unfunded term loan to Greystone select company, a real estate investment for M.

Nik Singhal: Importantly, BlackRock funds, including the company, were the sole lenders in two of these investments, highlighting the benefits from the company of proprietary access to deals from BlackRock's scale platform.

Speaker 5: highlighting the benefits from the company of proprietary access to deals from BlackRock's scale platform.

Nik Singhal: As previously announced, on April 21, 2022, we accessed the private placement market to issue notes in an aggregate principal amount of $92 million.

Speaker 5: These notes have a funding date of June 9th, 2022.

James Edward Keenan: To open the call for questions.

Operator: Thank you, sir. Again to ask a question, please press star one on telephone keypad. We'll take our first question from Finean O'Shea with Wells Fargo.

Finian Patrick O'Shea: Hey everyone. Good morning. Thanks from having me on.

Finian Patrick O'Shea: Jim first question: can you talk about the investment pipeline in real time for both the volume of origination on the market and and the terms if the spreads and convenance and so forth, if any of that is migrating?

Speaker 4: for both the volume of origination on the market and and the terms if the spreads and convenance and so forth, if any of that is migrating?

Speaker 3: convenance and so forth, if any of that is migrating?

James Edward Keenan: Thanks, Fin. I would say obviously the Q4 was a pretty significant flow and was a very busy year end of the year 2021. There was a bit of a slowdown in January and early February. We've started to certainly see things pick up, both from the M&A volume as well as refinancing activity across the overall portfolio companies within our own book as well as within market. So we see it is actually picking up pretty significantly relative to the only part of the quarter or the year and a little bit more similar to last year. From a terms perspective, obviously, there's a lot more volatility in the public markets and that takes a while and usually comes with the lag, and for the private markets, if you thought about last year, we were a little bit more concerned about degradation of structure and documents. I would say as we start to see the volatility in the market, we view that as an opportunity. Pricing is often up a bit, which is an opportunity for us to deploy

Multiple speakers: structures and this is and in the market are getting better right now. So with the regards to our leverage numbers, right now we actually think we're a really a good position with a pretty robust calendar to deploy into the rest of the year here. Great. Thanks. That's helpful. On that matter, on the St. George repay, obviously good news. Additionally, does it does that exit drive any portfolio allocation benefits where the BDC would get better share, given the more open, less concentrated <unk> portfolio?

Multiple speakers: Yes it's consistent with obviously where we've gone with the overall book and trying to add resilience at the aggregate level. First and foremost the underwrite to the underlying issuers from a credit quality and structure and protection is our first line of defense, the second is really the diversification. So as you know we've moved from deploying in more concentrated fashion and that 5% to 8% like St. George was into kind of more core positions in that 1.5% to 2%. And with regards to the engine that we have from an origination standpoint we've been able to do that clearly with the regards to the name count that we've had in the book. So you'll see us taking that repayment from St. George and really kind of being more consistent with what we've been doing over the course of the last two years and redeploying that into you know more core positions of 1.5% to 2% and just continue to increase the diversification across the book. Okay, thank you. And as the final question, if I may, on portfolio company performance and the environment, with a little more inflation, supply chain, etc. type issues, are you seeing anything yet overall or within certain, certain sectors on headwinds to you know what you underwrote to and so forth?

Multiple speakers: you know more core positions of 1.5% to 2% and just continue to increase the diversification across the book. Okay, thank you. And as the final question, if I may, on portfolio company performance and the environment, with a little more inflation, supply chain, etc. type issues, are you seeing anything yet overall or within certain, certain sectors on headwinds to you know what you underwrote to and so forth?

Nik Singhal: Yeah, Fin, thanks for the question. Good morning, this is Nik. You know the way you know are underwriting philosophy is primarily to avoid structures which are over leveraged, avoid businesses which have reliance on commodity prices and also businesses that are labor intensive or do not have the ability to to pass on cost increases, and I think that's the primary reason why our portfolio held up very well in 2021 and even in Q1 we have no new non-accruals. As we do our portfolio reviews across our entire portfolios, BDC and outside of the BDC, you know there are situations where we do see margin pressure a little bit on the margin, especially in companies where the labor component might be a little bit higher. In most of our portfolio companies we're seeing a very good ability to pass through those cost increases, but inflation is here, it's real, and our goal has been and will always be to avoid companies that are at risk of getting disrupted when the cost structural goes upside down.

Speaker 7: we're seeing a very good ability to pass through those cost increases, but inflation is here, it's real, and our goal has been and will always be to avoid companies that are at risk of getting disrupted when the cost structural goes upside down.

Finian Patrick O'Shea: Alright, great. That's all for me. Thanks so much.

Multiple speakers: Thank you, Fin. Next question will come from the line of Melissa Wedel with JP Morgan.

Melissa Marie Wedel: Good morning everyone. I appreciate you taking my questions today. Following on your answer just there Nik, I'm curious if some of that margin pressure that some of the portfolio companies are seeing was related to a shift in the grade one levels versus grade two? Just looking at the Q grade one came down quite a bit I'm assuming most of that was just driven by the exit of St. George and then grade two came up a little bit. I just hoping to kind of dig into that a little bit and understand what you're seeing in the portfolio that might be driving those incremental changes.

Speaker 9: St. George and then grade two came up a little bit. I just hoping to kind of dig into that a little bit and understand what you're seeing in the portfolio that might be driving those incremental changes.

Nik Singhal: It's a great question. First of all, you're absolutely correct that a lot of that migration, was not a huge migration it's a very tiny migration, basically arose from St. George exiting, which was a one rated name. Obviously, when the denominator goes down, the percentage of two rated names goes up. I think the very small number of migrations we had were really idiosyncratic issues in our portfolio. We are really not seeing any systemic credit concern arising from margin compression. And again to reiterate I think that's really just a function of our core philosophy: avoiding situations that you know, that do not have pricing power, cannot pass through inflation or just overall, I would say, broadly speaking, our loan to values a very conservative with very strong equity support behind us in our portfolios. I would also add that look, our focus really has been in transitioning our book to first lien, which is now 72% of the portfolio, and that further adds to the resiliency in the book.

Speaker 7: with very strong equity support behind us in our portfolios. I would also add that look, our focus really has been in transitioning our book to first lien, which is now 72% of the portfolio, and that further adds to the resiliency in the book.

Melissa Marie Wedel: Okay got it. I appreciate that. Then I'm not sure if I missed it, on the St. George exit, did that drive any particular <unk> repayment fees or income?

Multiple speakers: Abby, can you chime in here? Hi Melissa, this is Abby. Thank you for the question. Yes, it did drive a little bit of one time fee income and just to recall for the quarter, the total one time fee income or other one time income adds up to approximately one cent per share impact.

Melissa Marie Wedel: Got it. And then I final one for me, I appreciate the insight into at least the amounts that have been approved by the investment committee quarter to-date and definitely appreciate that a lot of repayment activity doesn't necessarily come with a lot of foresight or visibility into that. Is there anything that you are aware of at this point that we should be thinking about in terms of future repayments that might be more sizeable and impact the portfolio, like we saw in the March quarter?

Speaker 9: and definitely appreciate that a lot of repayment activity doesn't necessarily come with a lot of foresight or visibility into that. Is there anything that you are aware of at this point that we should be thinking about in terms of future repayments that might be more sizeable and impact the portfolio, like we saw in the March quarter?

Multiple speakers: Yeah, Melissa, I would say just in a normal course right. I mean there is there are always some repayments every quarter. When you look at the long term historical performance or average core sizes have tended to be two to three years on average. So we don't expect that to change you know if anything in a rising rate environment refinancings probably become slower. And then the other benefit having St. George and just incidentally the two other names that exited were also some larger positions that to the extent there are future repayments, their impact is going to be more muted. We haven't had any repayments in the quarter so far, okay. You know there is always buzz around one or two names that may refinance. Sometimes, the sponsor will give us feelers as the business grows, the cost of capital becomes lower and they have the opportunity to do that but nothing, nothing significant that we are aware of right now. Thanks, Nik, that's very helpful. I appreciate it. All right, it looks like we have no further questions at this time, so I'd like to turn it back over to our speakers for any additional or closing remarks.

Speaker 7: nothing, nothing significant that we are aware of right now. Thanks, Nik, that's very helpful. I appreciate it. All right, it looks like we have no further questions at this time, so I'd like to turn it back over to our speakers for any additional or closing remarks.

James Edward Keenan: Thank you and thanks Fin and Melissa for the questions. With that, obviously we are seeing a lot of volatility in the market. We do think we're positioned well to kind of deploy into this and set up to - continue to ramp the portfolio, leverage up and continue to grow NII. So we appreciate everybody's support on the call and a huge thank you as well to our team as we continue to fully get through the transition of the overall portfolio.

Multiple speakers: And with that we can end the call. Thank you, so that does conclude today's conference. We thank you all for your participation. You may now disconnect.

Q1 2022 BlackRock Capital Investment Corp Earnings Call

Request a DemoDemo

BKCC

BlackRock Capital Investment

Earnings