Q2 2022 BlackRock Capital Investment Corp Earnings Call

August 4, 2022

Please standby.

Good morning, My name is Justin and I will be your conference facilitator today for the Blackrock Capital Investment Corporation second quarter 2022 earnings call.

Hosting the call will be James Keenan, Chairman and interim Chief Executive Officer, Nick single, President Chip Holiday interim Chief Financial Officer, and Treasurer, Laurence D. Paredes General Counsel and corporate Secretary Marshall Merriman, managing director and member of the company's investment Committee.

And Jason May ring, 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 your Touchtone telephone. Thank you.

Mr. Paradis, you may begin the conference call.

Okay.

Earnings Conference call of Blackrock Capital investment Corporation or <unk>.

Before we begin our remarks today I would like to point out that certain comments made during this conference call and within a corresponding documents contain forward looking statements subject to risks and uncertainties.

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.

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.

Additionally, certain information discussed and presented May have been derived from third party sources and has not been independently verified accordingly, BCE IC 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. The presentation can be accessed by going to our website at www Dot Blackrock <unk> dot com and clicking the AGA.

In 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 second quarter earnings call.

I will provide an overview and highlights on the quarter.

Nick will then give an update on our portfolio activity and status.

Jeff will then discuss our financial results in more detail. We will then open the call to questions.

We delivered another quarter of strong results highlighted by our ongoing deployment momentum and solid progress in building a diversified portfolio that generates favorable risk adjusted returns for our shareholders.

Our net leverage increased to six four times up from four six times at prior quarter.

Driven by $73 million of deployments in the second quarter.

We added 11, new portfolio companies during the quarter with the portfolio, reaching a milestone of 100 portfolio companies.

Up from 86 at the end of 2021 and 47 at the end of 2019.

We are also pleased to report metrics that demonstrate significant advancement towards our portfolio construction goals.

Approximately 74% of our investment portfolio consists of first lien investments.

High point for Pcie and up substantially from 34% at the end of 2019.

Junior capital investments now comprised of only 6% of our portfolio.

Down from 43% at the end of 2019.

Let's turn now to our portfolio positioning amidst the current backdrop of the economy and markets.

While some measures indicate the U S economy remains on sound footing, including a robust job market and increased consumer spending year over year.

We are mindful of the concerns about an impending slowdown or a possible recession, driven by rising inflation and interest rates and.

And potentially increasing unemployment levels.

Our underwriting emphasis on less cyclical companies that are better able to withstand inflationary pressures.

Rising rates and broader economic slowdowns, along with our focus on seniority in the capital structure.

This is as well in the current macroeconomic scenario.

We remain committed to selective investing.

Just on our time tested and prudent underwriting approach that focuses on credit analysis through the cycle.

We are engaged in regular dialogue with our portfolio companies to understand and evaluate how the evolving macro landscape is impacting their business.

Well, we are seeing signs of a slowdown in revenue growth.

<unk> margin contraction in some names.

Not seen evidence of a broad based credit deterioration.

Notably we had no new non accrual loans in the quarter and no amendments, resulting in the deferral of payment terms.

In the third quarter. So far we are seeing a continuation of the level of deployment activity that we saw during the first half of the year.

We are also seeing pricing instruction is more favorable to lenders and the private credit market.

Additionally, 99% of the yielding debt investments in our portfolio has a floating rate coupon.

Definitely all which are above their LIBOR or so far floors in the current market.

We expect a rising rate environment to be accretive to portfolio income as.

As we proceed we will pursue compelling new opportunities, while remaining true to our underwriting discipline.

Believe this will be accretive to NII and provide increased dividend coverage for our stockholders as we progress through the coming quarters.

I'll now turn the call over to Nick to discuss our portfolio activity in further detail.

Thanks, Tim.

We're seeing good momentum towards our goal of re levering the portfolio by building a diversified book of primarily first lien investments during the second quarter, 85% of our new deployments were in first lien investments consistent with the strategy.

Gross deployments in the quarter were primarily across 11, new and six existing portfolio companies.

62% of the investment dollars went into new portfolio companies and the remaining 38% into existing relationships.

On investments in existing portfolio companies continue to be an important source of opportunity for us as these are businesses.

I already know and understand well.

Repayments during the quarter were $25 million.

This was driven by four realized investments with an average realized IRR of 10, 1%.

All with a $4 $2 million pay down on the legacy Gordon Brothers Finance company investment.

We continue to have a healthy pipeline of opportunities across a wide range of industries. So far in the third quarter, we're seeing a steady deployment pace, whilst there can be no assurance that all transactions will close our investment committee has approved transactions over $15 million.

Either closed subsequent to the second quarter or are pending close.

Our three largest new portfolio company investments included the following.

11 4 million.

<unk> plus seven 5% first lien term loan.

Moment, Inc. A provider of customer experience management software and analytical solutions.

$104 million.

So far plus 575% first lien term loan and $1 million unfunded commitments.

A provider of cloud based management solution.

$5 5 million sulfur plus 6% first lien term loan and $26 million unfunded revolver to become a global provider of compensation management software.

Importantly, the company and other Blackrock funds, where the solar terminal lenders and two of these investments highlighting.

Highlighting the benefits of the company.

Proprietary access to deals from Blackrock scale platform.

Our NAV per share declined by two 8% in the second quarter, largely driven by the valuation impact of wider credit spreads in the market.

As previously mentioned, we had no new non accruals or payment modifications during the second quarter.

Our core department focus remains consistent with our objective of stable income and low volatility.

We're seeing the opportunities that become more attractive in this market.

As we deploy capital re lever the portfolio.

As a result, we expect gradually increased coverage to more normalized levels over time.

We believe this will enable us to grow NII with the goal eventually having our core earnings.

Fully our argument.

Which we declared a <unk> 10 per share in cash.

I'll now turn the call over to Chad further discuss our financial results for the quarter.

Thank you Nick I will now take a few minutes to review some additional <unk> financial results for the second quarter.

GAAP net investment income was $7 1 million or approximately <unk> <unk> per share.

Up 10% from the prior quarter.

GAAP NII covered 97% of the $7 4 million distribution, we declared to our stockholders this quarter.

An increase from 88% coverage in the prior quarter.

Included in our second quarter results was a reversal of $1 $1 million in capital gains incentive fee previously accrued under a hypothetical liquidation basis required by GAAP.

With such reversal of the balance of accrued incentive fee on capital gains was zero.

Measurement period, ending June 32022.

And no incentive fee on gains was payable to the advisor.

Excluding this reversal adjusted NII was approximately $6 million for the second quarter or.

<unk> per share.

In line with our adjusted NII results for the prior quarter.

Total gross investment income was $12 3 million a slight increase from $12 2 million earned in the prior quarter.

During the quarter. The company had one time fees and other income of approximately <unk> $4 million against $7 million in the prior quarter.

Excluding one time fees, our gross investment income grew approximately 3% quarter over quarter.

The company's weighted average portfolio yield based on fair value increased to nine 1% as of June 30th.

Up from eight 4% as of the prior quarter end.

This increase was driven by a rise in LIBOR LIBOR and so for rates.

As well as slightly wider spreads on new originations, we made during the quarter.

Total net expenses decreased by <unk> $5 million for the first quarter.

Largely by the reversal of capital gains incentive fee accrual.

Excluding the impact of such reversal expenses were roughly unchanged.

Net unrealized losses on the portfolio were $9 $7 million for the quarter primarily.

Attributable to spread widening and general market declines.

The company had no realized gains or losses during the quarter.

At the end of the quarter the portfolio had three nonaccrual investments representing three 5% of our portfolio's total fair value.

An improvement from four 4% as of the March quarter end.

This reduction was due to the partial repayment of $4 $2 million.

Our unsecured debt position in Gordon Brothers Finance company.

There were no new nonaccrual investments during the second quarter.

Our weighted average internal portfolio rating at fair value declined slightly to $1 $2 seven.

Compared to $1 two five at the prior quarter and an.

That improved from 137 compared to the June 2021 quarter end.

At quarter end total available liquidity for deployment was approximately $141 million, including cash on hand, and subject to leverage and borrowing base restrictions.

Our net leverage ratio was six four times up from four six times at the end of the prior quarter due to strong net deployments during the quarter.

As previously announced we issued $92 million of senior unsecured notes in a private placement on June 9th 2022.

We use the notes proceeds as well as availability under the credit facility to repay our $143 7 million of outstanding unsecured convertible notes on June 15th 2022 maturity date.

During the second quarter, we repurchased approximately 420000 shares.

Of our stock for $1 6 million at an average price of $3 78 per share <unk>.

Including brokerage commissions.

As of June 30th approximately seven 4 million shares remained available for repurchase.

Our current buyback program.

As announced yesterday, we declared a third quarter distribution of <unk> 10 per share to be paid on October six 2022 to stockholders of record at the close of business on September 15th 2022.

With that I would like to turn the call back to Jim.

Thank you chip.

In summary, we continue to emphasize prudent underwriting portfolio diversity and disciplined growth to produce reliable income NAV stability and solid results for our shareholders.

We thank our shareholders for their continued support.

We would now like to open the call for questions.

Thank you thank.

If you would like to signal with questions. Please press star one on your Touchtone telephone. If you are joining us today using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again that is star one for questions Star one.

And we will go to Melissa Wedel with JP Morgan.

Thanks for taking my questions. This morning.

I think first to start I'd like to follow up on what was an active quarter and a.

Little bit of re leveraging in the portfolio it sounds like youre seeing that pace startup continue in Q.

Back half of the year at least to start.

I was hoping to get your thoughts on.

Yeah.

Our net origination what that could mean for the trajectory of leverage in the port at the portfolio level.

And how that will drive some incremental earnings how do you think about that driving some incremental earnings power.

Thanks, Paul.

On dividend coverage.

Yes, Hi, Melissa this is Nick.

Look that's a great and very relevant question is.

Just to take a step back.

We've spent the last several quarters and repositioning the book as we had.

<unk> mentioned that it would.

As a result.

Our portfolio construction is really starting to look like.

What we said.

The unsecured and equity portion is now just 6% of the portfolio noncore.

Is 4%.

Firstly, and secondly, combined or 94% of the book of which 74% is first lien ratio really accomplishing everything we set out to do and where.

Seen some good deployment momentum in the first half of the year.

Recall that.

We had $45 million.

Repayments from St. George in Q1.

We were able to redeploy that in.

And really grow our leverage.

<unk> hundred 66 four times.

Which still gives us plenty of room.

Grow the portfolio.

We're also fortunate to do so at a time when the market conditions are becoming more lender friendly.

We're seeing improved pricing in the market I think if you take it.

And the main basis, we're seeing 50 to 100 basis points of incremental return on new investments and Thats before any benefit of LIBOR, So far increase.

<unk>, we are seeing fewer interest rate step downs more lender friendly documents, so really a good environment to be deploying into.

And <unk> really benefits from the scale of the Blackrock platform, we have a very broad funnel deep industry expertise, which allows us to be very selective.

And not abandon our our prudent credit underwriting discipline, so I would say.

We also mentioned in the prepared remarks that.

We have about $50 million of deals that you have either closed.

Since the end of the quarter or approved pending close not not all of them necessarily come to close, but I guess directionally I can.

I'm going to have that.

We are trending to a very similar deployment pace.

We did in the second quarter.

When it comes to yields.

LIBOR and so for.

<unk> gone up.

At the end of.

June quarter.

I would say so far is up about 60 to 65 basis points.

And yields as I mentioned are on the margin better than say the last 12 to 15 months that we've seen in the market, so hopefully that sort of.

Addresses your question.

We're happy to hit up on any other.

Aspects of your question as well.

Thanks, Nick that that is helpful.

I'd actually like to pick up on a comment that was made earlier in the call in your prepared remarks actually around things.

Existing portfolio companies.

And attractive and likely fruitful source, new investment opportunities going forward can you elaborate on that and what might be driving it.

<unk> distinguished between sort of incremental needs for capital versus.

Maybe more of a bridge financing through a tough environment and how how you'll make that distinction.

Think about allocating between new and existing investments.

You expand on that a little bit.

Yes, absolutely and again to provide more context here historically, roughly two thirds, maybe actually more than two thirds more like 70% of our portfolio companies tend to be in a sponsor bad businesses.

We worked with a lot of sponsors they records to answer that.

Often they will buy.

One or two businesses due to startup platform and then make subsequent acquisitions to grow that platform. That's been a proven strategy for private equity and it's really been a day.

Good risk.

Leverage strategy for the private credit book also.

Most of our incremental opportunities come from places like that.

Where.

We have sponsor relationships.

We financed the initial investments and then the sponsored thesis is to grow that platform.

By making incremental acquisitions.

And that's really been when you look at percentages. We mentioned this quarter. It was 38% that was in follow on investments I think typically there is some 25% to 50% and thats really a good sort of source.

Our deployment opportunities for us.

We have the advantage of incumbency in these situations and then we've also had a chance to look at these investment businesses up close having invested in them.

So that's how I would contextualize.

Before investments here.

Okay. So Nick if I could just recap what I heard there what you are talking about is.

<unk> portfolio of companies taking advantage of.

That's already in the environment.

Sort of bolt on M&A type deals.

Financing rather than Sir.

I have a stress scenario where companies might need from amendment with the bridge financing.

Yes.

I think this works not necessarily in a larger market actually works in most markets right. So if you're a private equity sponsor.

Your consolidate.

Sub sector or niche place, where there are many smaller players.

I will start off with maybe one or two acquisitions.

And then keep making additional acquisitions to sort of create sort of a roll up play it actually works very well in all cycles not not just don't cycles. In fact, it could tend to slow down a little bit in down cycles as maybe sellers are not listening to.

Well, even though buying opportunities become more attractive. So we really view this as an ongoing benefit.

Has not necessarily a feature of the current volatility in the marketplace.

Okay. Thanks, Nick.

Thank you once again, if you would like to signal with questions that is star one again star one we'll pause for just a moment.

And that does conclude the question and answer session I will now turn the conference back over to you for any additional or closing remarks.

Thank you operator, if there are no further questions I'd just like to continue to thank our shareholders for their continued support.

And we can end the call.

Thank you and that does conclude today's conference. We do thank you for your participation have an excellent day.

Yeah.

[music].

Good morning, My name is Justin and I will be your conference facilitator today for the Blackrock Capital Investment Corporation second quarter 2022 earnings call.

And Jason May ring, managing director and member of the company's investment Committee.

Mr. Paradis, you may begin the conference call.

Okay.

Earnings Conference call of Blackrock Capital investment Corporation or <unk>.

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 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.

Additionally, certain information discussed and presented May have been derived from third party sources and has not been independently verified accordingly, PCI makes no representation or warranty with respect to such information.

2022, Investor presentation, Mike 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 second quarter earnings call.

I will provide an overview and highlights on the quarter.

Nick will then give an update on our portfolio activity and status.

And chip will then discuss our financial results in more detail.

We will then open the call to questions.

Our net leverage increased to six four times up from four six times the prior quarter.

Driven by $73 million of deployments in the second quarter.

We added 11, new portfolio companies during the quarter with the portfolio, reaching a milestone of 100 portfolio companies.

Up from 86 at the end of 2021 and 47 at the end of 2019.

We are also pleased to report metrics that demonstrate significant advancement towards our portfolio construction goals.

Approximately 74% of our investment portfolio consists of first lien investments.

High point for Pcie and up substantially from 34% at the end of 2019.

Junior capital investments now comprised of only 6% of our portfolio.

Down from 43% at the end of 2019.

Let's turn now to our portfolio positioning amidst the current backdrop of the economy and markets.

While some measures indicate the U S economy remains on sound footing, including a robust job market and increased consumer spending year over year.

We are mindful of the concerns about an impending slowdown or a possible recession, driven by rising inflation and interest rates and potentially.

Increasing unemployment levels.

Our underwriting emphasis on less cyclical companies that are better able to withstand inflationary pressures.

Rising rates and broader economic slowdowns, along with our focus on seniority in the capital structure.

Visions as well in the current macroeconomic scenario.

We remain committed to selective investing.

Just on our time tested and prudent underwriting approach that focuses on credit analysis through the cycle.

We are engaged in regular dialogue with our portfolio companies to understand and evaluate how the evolving macro landscape is impacting their business.

Well, we are seeing signs of a slowdown in revenue growth.

<unk> margin contraction in some names yes.

Not seen evidence of a broad based credit deterioration.

Notably we had no new non accrual loans in the quarter and no amendments, resulting in deferral of payment terms.

In the third quarter. So far we are seeing a continuation of the level of deployment activity that we saw during the first half of the year.

We are also seeing pricing instructions more favorable to lenders and the private credit market.

Additionally, 99% of the yielding debt investments in our portfolio has a floating rate coupon.

Definitely all of which are above their LIBOR or so far floors in the current market.

We expect a rising rate environment to be accretive to portfolio income as.

As we proceed we will pursue compelling new opportunities, while remaining true to our underwriting discipline.

Believe this will be accretive to NII and provide increased dividend coverage for our stockholders as we progress through the coming quarters.

I'll now turn the call over to Nick to discuss our portfolio activity in further detail.

Thanks, Tim.

We're seeing good momentum towards our goal of re levering the portfolio by building a diversified growth primarily first lien investments during the second quarter, 85% of our new deployments were in first lien investments consistent with the strategy.

Gross deployments in the quarter were primarily across 11, new and six existing portfolio companies.

62% of their investment dollars went into new portfolio companies and the remaining 38% into existing relationships.

On investments in existing portfolio companies continue to be an important source of opportunity for us as these are businesses.

Already know and understand well.

Repayments during the quarter were $25 million.

This was driven by four realized investments with an average realized IRR of 10, 1%.

All with a $4 2 million pay down on the legacy Gordon Brothers Finance company investment.

We continue to have a healthy pipeline of opportunities across a wide range of interest rates. So far in the third quarter, we're seeing a steady deployment pace, while there can be no assurances that all transactions will close our investment committee has approved transactions over $15 million.

Either closed subsequent to the second quarter or are pending close.

Yes.

Our three largest new portfolio company investments, including the following.

11, 4 million sulfur plus seven 5% first lien term loan to in a moment Inc.

Provider of customer experience management software and analytical solutions.

Seven $4 million, so far plus 575% first lien term loan.

And $1 million.

Unfunded commitments.

Yeah.

<unk> a provider of cloud based management solution.

And $5 5 million Sofa, plus 6% first lien term loan.

And <unk> 6 million of unfunded revolver to become a global provider of compensation management software.

Importantly, the company and other Blackrock funds, where the solar terminal lenders and two of these investments highlighting the benefits of the company.

Gregory access to deals from Blackrock scaled platform.

Our NAV per share declined by two 8% in the second quarter.

Largely driven by the valuation impact of wider credit spreads in the market as.

As previously mentioned, we had no new non accruals or payment modifications during the second quarter.

Our core deployment focus remains consistent with our objective of stable income and low volatility.

We're seeing the opportunities that become more attractive in this market.

As we deploy capital to re lever the portfolio.

As a result, we expect to gradually increase leverage to more normalized levels over time.

We believe additional enabled us to grow NII, but the goal eventually having a core earnings fully our R&D.

Which we declared a <unk> 10 per share in cash.

I'll now turn the call over to Chad to further discuss our financial results for the quarter.

Thank you Nick I will now take a few minutes to review some additional <unk> financial results for the second quarter.

GAAP net investment income was $7 1 million or approximately <unk> <unk> per share.

Up 10% from the prior quarter.

GAAP NII covered 97% of the $7 $4 million distribution, we declared to our stockholders this quarter.

An increase from 88% coverage in the prior quarter.

Included in our second quarter results was a reversal of $1 1 million in capital gains incentive fee previously accrued under a hypothetical liquidation basis required by GAAP.

With such reversal of the balance of accrued incentive fee on capital gains was zero for the annual measurement period ending June 32022.

And no incentive fee on gains was payable to the advisor.

Excluding this reversal adjusted NII was approximately $6 million for the second quarter or.

<unk> per share.

In line with our adjusted NII results for the prior quarter.

Total gross investment income was $12 3 million a slight increase from $12 2 million earned in the prior quarter.

During the quarter. The company had one time fees and other income of approximately <unk> $4 million against <unk> 7 million in the prior quarter.

Excluding onetime fees, our gross investment income grew approximately 3% quarter over quarter.