Q3 2022 BlackRock Capital Investment Corp Earnings Call

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Good morning, My name is Keith and I'll be your conference facilitator today for the Blackrock Capital Investment Corporation third quarter 2022 earnings call hosting the call will be James Keenan, Chairman and interim Chief Executive Officer, Nick single President Chip holiday in term.

<unk> financial Officer, and Treasurer, Laurence D credits General Counsel, and corporate strategy and James Mirroring manager 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 question and answer session and order you ask a question you can press star one on your Touchtone telephone.

Thank you.

Mr. Paradis, you may begin the conference.

Good morning, and welcome to the third quarter 2022 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, certain information discussed and presented May have been derived from third party sources and has not been independently verified accordingly, <unk> 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 November 2000.

22, Investor presentation link in the presentations section of the investors page.

I'd now like to turn the call over to Jim.

Larry.

Morning, and thanks to all of you for joining our third 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 chip will then discuss our financial results in more detail.

We will then open the call to questions.

We again produced solid results sustaining and building upon the momentum we generated in the first half of 2022.

We continue to demonstrate the strength of our increasingly diversified portfolio and our commitment to delivering solid risk adjusted returns.

Rising interest rates stronger pricing on new originations and solid fee income during the third quarter combined to drive a 27% increase in adjusted quarterly net investment income importantly.

Importantly, our NII more than covered our dividend this quarter.

Our net leverage increased to <unk> 71 times up from six four times for the prior quarter.

Driven by $78 million of gross deployments in the third quarter.

We added 16, new portfolio companies and now have 111 portfolio companies.

An all time high up from 86 at the end of 2021 and 47 at the end of 2019.

Notably our leverage remains relatively modest and we have ample room to take advantage of the current attractive market conditions for deployment.

We expect to continue to grow and diversify the portfolio and further increase our earnings power.

A core tenant of our underwriting is the emphasis on seniority in the loans we originate.

First lien investments now make up 77% of our portfolio.

More than doubling the 34% we reported at the end of 2019.

Junior capital investments now comprise only 6% of our portfolio down from 43% at the end of 2019.

We also reduced our non core portfolio to less than 2% of our entire portfolio by the close of the third quarter.

We now view the transition away from the legacy portfolio is largely behind us.

Even as we grow we are mindful of the impact on our portfolio companies of the rising interest rates stubbornly high inflation as well as lingering global supply chain constraints.

We remain committed to selective investing based on our time tested and prudent underwriting approach that focuses on credit analysis through the cycle.

We engage in regular dialogue with our portfolio companies to assess the impact of the current macroeconomic environment on their financial performance.

While we are seeing indications of an economic slowdown we believe that our portfolio is relatively well positioned to withstand broader economic slowdown.

As a result of our focus on investing in well structured first lien loans in less cyclical businesses.

We had no new non accrual loans in the quarter.

In the quarter to date, our pipeline is healthy and we continue to draw upon the Blackrock platform and our teams deep expert experience to identifying compelling opportunities.

Pricing and deal structures also continue to improve as the market shifts and becomes more lender friendly.

99% of our yielding debt investments in our portfolio carry a floating rate coupon.

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

We expect a rising rate environment to further boost interest income.

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

Thanks, Tim.

We made good progress this quarter growing the portfolio and increasing our core earnings power during the third quarter, our new deployments were almost entirely in first lien investments consistent with our strategy of maintaining a lower risk profile, especially as we enter uncertain economic times, our gross deploying.

In the quarter were primarily across 16, new and seven existing portfolio companies.

Approximately 74% of the investment dollars went into new portfolio companies and the remaining 26% into existing relationships.

Follow on investments in existing portfolio companies continue to be an important source of opportunity for us as these are businesses, we already know and understand well.

Sales exits and repayments during the quarter were $61 million.

During full repayments from five existing portfolio companies.

Of particular note, we monetize our position in MBS Opco and MBS parent previously our largest noncore holdings.

This included the full exit of our.

11, 7 million debt position at par.

And a half million distribution from our equity position and risk we still hold a residual interest.

Additionally, we fully exited our debt investments in juul metric stream, good solutions and power one.

And each of these we realized principal at par.

Aggregate realized IRR of 11, 6% over the holding period across these four names.

Some of the more prominent new portfolio company investments include the following.

And $11 $1 million Sulphur, plus 675% first lien term loan and $4 million unfunded commitment to <unk>, Inc. A cloud based human resources and recruiting software company.

Is $7 1 million sulfur the 675% first lien term loan.

And $2 million unfunded commitment the new metrics is software provider for valuation and risk management derivatives and structured products.

And a $5 4 million sulfur plus 625% first lien term loan and $1 $6 million unfunded commitment to accordion partners LLC a provider of financial consulting services.

Private equity owned portfolio companies.

Our <unk> per share.

Was relatively consistent with the second quarter with wider market spreads modestly impacting the market value of our holdings.

As previously mentioned, we had no new non accruals during the third quarter.

While being mindful of the broader economic softening.

We are excited about the positioning of our portfolio.

We believe that the underlying diversity and the emphasis on senior secured investments with <unk>.

The portfolio defend against a recessionary scenario.

Additionally, our modest leverage of <unk> 71 times still leaves room to grow and take advantage of attractive market conditions to deploy new capital.

The impact of the repositioning of our portfolio is already playing out in terms of our earnings growth.

In the third quarter, our NII exceeded our dividend level of <unk> per share in cash.

I will now turn the call over to chip to further discuss our financial results for the quarter.

Okay.

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

GAAP net investment income was $7 $7 million or approximately <unk> <unk> per share for the third quarter.

The increase of 8% from the prior quarter providing.

Providing dividend coverage of 105%.

Compared to 97% in the prior quarter.

Our gross investment income was $16 million, an increase of 31% from the prior quarter.

During the quarter. The company had one time fees and other income of $1 $3 million against <unk> 4 million in the prior quarter.

Excluding one time fees, our gross investment income grew 24% quarter over quarter.

This increase was driven primarily by the impact of a higher interest rate environment on top of net deployments of $66 million over the past two quarters.

The company's weighted average portfolio yield based on fair value increased to 10, 5% as of September 30.

Up from nine 1% as of the prior quarter end.

Driven by a rise in LIBOR and silver rates during the quarter.

Total net expenses increased by $3 $2 million from the second quarter.

Primarily driven by a $1 $5 million increase in incentive fees on income.

Due to NII exceeding our performance hurdle.

With a $1 $1 million reversal of our capital gains incentive fee accrual in the prior quarter.

The company did not incur any incentive fee based on capital gains during the third quarter.

Additionally, interest and debt related expenses increased by $5 million.

Due to a higher average debt balance from deployments during the quarter.

At an increase in LIBOR and so for rates.

Net unrealized losses were $2 4 million for the quarter, primarily attributable to the impact of general market declines on our portfolio.

And two evaluation decrease on our interest rate swap.

Our net unrealized losses were partially offset by realized gains of <unk> $4 million during the quarter.

At the end of the quarter the portfolio had three nonaccrual investments representing three 3% of our portfolio's total fair value.

And as stated previously there were no new nonaccrual investments during the quarter.

Our weighted average internal portfolio rating at fair value declined slightly to $1 two weeks.

Compared to $1 two seven at the prior quarter end and improved from 133 as of the September 2021 quarter end.

Total available liquidity for investment deployment, and general operating use including cash on hand.

Was $124 9 million at quarter end <unk>.

Subject to leverage and borrowing base restrictions.

Our net leverage ratio was <unk> 71 times up from six four times at the end of the prior quarter.

Due to $17 million of net deployment during the quarter.

<unk> and a higher ending debt balance.

During the quarter, we repurchased approximately 464000 shares of our stock for $1 7 million at an average price of $3 68 per share including brokerage commissions.

As announced yesterday, our board declared a quarterly dividend of <unk> 10 per share.

Payable on January six 2023.

Stockholders of record at the close of business on December 16th 2022.

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

Yes.

Thank you chip in closing we are committed to conservative 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 with that we would now like to open the call for questions.

Thank you, ladies and gentlemen, if you'd like to ask a question. Please signal by pressing star one on your telephone keypad using a speaker phone. Please make sure. Your mute function is turned off to let your signal to reach our equipment.

Again, Please press star one to ask a question, we'll pause for just a moment to allow everyone an opportunity to signal for questions.

We'll take our first question from Finian O'shea with Wells Fargo. Please go ahead.

Hi, everyone, Thanks, and good morning.

Jim can you talk about your appetite.

To invest into liquid opportunities.

Kevin.

Your ability to do that not only with the smaller size of the BDC you could.

Likely meaningfully ramp.

Two attractive assets and obviously your leverage.

Our position is.

Conservative in.

You have ample runway there as well.

Just how do you look at that proposition.

Good day.

Thanks, and thanks for the question.

Yes, I think as you pointed out obviously I think we're in a really good position from a leverage standpoint going into.

Kind of today's market volatility.

It's allowing us to take advantage of the opportunity to lend into.

An environment that has obviously got higher yields associated with higher spreads, but more so being able to.

Get better structure documents associated to our our allowance so that plays into the fact of our focus has been more on on the private markets.

Where we are able to actually control the structure and the documents and the protections associated to that so as outlined we've talked about this but we've had a key core focus.

Trying to create a little bit more.

NAV stability.

Sure.

And more diversification and resiliency with regard to that.

The NII, but also the NAV.

Yes.

Honestly the public market volatility.

Is something that does create opportunities in the private market as well.

Obviously it makes the.

Save capital a bit more tighter on that end.

The company's.

Companies to access the public markets and so you are seeing more of those companies seek private solutions associated to that even some ones that are public debt structures are going to the private market to try to get.

Some refinancing or alarms.

Associated debt. So I don't think Youll see us go into the public market and look at that volatility.

And also because those documents may not.

B.

To the standard that we want to deploy money into so we will look at those companies that they are looking for private solutions, where we can kind of control docs in pricing.

Sure.

Helpful and just to sort of.

For a follow up there it sounds like <unk>.

Do you want.

Your your proprietary structure.

Or is it or just the private market structure.

Understandably the the.

Stability the NAV stability.

But.

Yeah.

Given the market is slower there in those terms arent moving as quickly.

At what point does the liquid proposition.

Become more attractive for shareholders do you need to see say another.

200 basis points or.

Any sort of handle that you could give us there on how you think or is it maybe never.

Just just how you think about that.

Yes, no. Thanks, but I don't think you can look at it in isolation right, it's not that the public market.

In relation to what you can.

What you can get in the public market markets versus what you could deploy into the private markets and obviously.

They are correlated they may have a lag between how they are they move but so if you saw the market move and the public side 200 basis points wider it doesn't necessarily mean that that would be great opportunities in the private market did better structure and pricing.

As well so we have to take that all into account I would say the bar is very high cross team deployed by the end today the public space.

But again, we'd look at that general relative to what does that mean.

On the private side and.

So for that standpoint, when we look even though the M&A volume has generally slowed obviously because.

Liquidity has become tighter and you see some of the M&A volumes slow down our pipeline is pretty robust and you can see that in the deployment for the last quarter.

And our forward pipeline is pretty robust and thats not just because of the M&A deals obviously.

Our embedded companies who in this environment are going to look to grow right.

A lot of acquisitions and transactions like that might be more attractive than today because.

You can make acquisitions at a much better multiple so we do see those deals there is obviously some embedded companies that are.

Just some portfolio of companies and others that are going to look to refinance it.

This market uncertainty.

And so when you think about our.

Sourcing network its fits fairly robust in on any one year, we're looking at over a thousand deals.

And so you can see the I would call it.

Those deals are that the reasons for the use of proceeds are very at any one quarter, but in general I don't.

Think it's slowing down our views of what we're able to kind of look into to deploy into this market.

And again I would say, we certainly before being able to kind of.

Our structure our protections because there are a lot of unknowns from a macro perspective.

During our kind of disciplined underwriting we want to be able to know that.

We have covered with regards to the covenants that we put in place.

Okay. That's helpful. Thank you for the color.

Thanks, Ed.

We'll take our next question from Melissa Wedel with Jpmorgan. Please go ahead.

Good morning, Thanks for taking my questions today.

Hoping to start with just sort of earnings power and NII level.

It was little bit surprised that despite the pickup in NII quarter over quarter that most of that seems to be driven by an increase in base rates and sort of the yield on the portfolio can you.

Kind of unwrap that a little bit and talk about how youre thinking about earnings power going forward.

Hey, Melissa it's Nick Thank you for the question so.

Our NII this quarter in Q3 was clearly a meaningful increase.

From Q2, and there are many factors there as you pointed out.

Certainly one of them. The fee income is just inherently unpredictable we're going to have quarters that I think we're going to have quarters that low fee income, but really the tailwind we're seeing.

One is rates again, as you mentioned and not only are the rates continuing to rise there is actually a lag.

In fact and when.

It really is the race and when it actually flows through our portfolio that could be anywhere from two to three month lag.

So that we expect to continue to provide tailwind going forward and then finally spreads.

We are seeing in the all of the new deployments were seeing were seeing latest spreads whether it's coupon rate OID or some combination thereof.

We're seeing pricing roughly 100 bps higher than say six months ago right and we're in the fortunate position that our leverage is still modest and we have the dry powder to redeploying.

These market conditions. So we think that there'll be frankly, another another tailwind as we look at the future quarters.

So we're.

We're actually pretty happy that we're covering our dividend this quarter at just <unk> seven one times leverage and there is plenty of room to grow and deploy into this very attractive market conditions.

Okay that actually takes me to my follow up question on activity levels for Q1.

Claims that can be a seasonally busy quarter.

I look back at the last two years. It just happened, but you guys had repayments and exits that actually exceeded capital deployment.

Given the robustness of that.

Pipeline and the opportunity set that you are seeing now would you expect that to sort of reverse trend and expect net deployment.

Year or two.

Yes.

In some ways it is impossible to predict with certainty right now.

<unk>.

How deployments or prepayments will be quarter over quarter, but historically I would say Q2, and Q3 have been very strong growth deployment months, even by our own historical levels right and we are seeing a little bit of slowdown in the market in terms of M&A activity our organic growth.

We're still seeing the global opportunities and.

As of now I think I don't have the exact numbers in front of me, but but Q4, so far as a positive.

Net net deployment.

Months.

And the other thing.

I would add is that we've talked about.

You're seeing more than a thousand transactions in a year and while at this point in time, the pace might be slower than.

I would say that the stillness as pace is more towards that path.

Broad funnel with cement.

Desk right like half of those deals.

We can spend more than an hour on the occupant anytime right. So much of that kind of investment opportunities we are not seeing.

There hasnt been that big of a hit to the real deployable opportunities that we're seeing in the market.

We also every single quarter, we also have been able to deploy additional capital into existing portfolio companies and these are not defensive investments. These are truly incremental investments to.

To support our portfolio companies growth, whether that's organic or inorganic.

So Q4 might be a little bit slower than normal but structurally.

Phil we're very well positioned as Jim had mentioned earlier in terms of our ability to source.

And deployed.

And Melissa Jimmy just jumping in here too I think if you compare it to prior years.

Just to kind of reference.

When we were transitioning the legacy book, if you remember that legacy book.

Walmart kind of concentrated position.

Physicians.

And as we've kind of exited those we've kind of rebalanced.

Rebalanced that anticipated.

Just first thing, but a far more diversified thought when we talked about the band count going up so some of those prior quarters that you referenced we were able to exit and you had some I would call it chunky.

It's that are part of those repayments relative to.

Taking those data to kind of smaller.

Single named investments.

Okay. Thanks for that.

Ted with one last question.

That you guys continue.

Repurchase activity in the one $5 million to $2 million range per quarter.

I also saw that the board authorized.

The authorization.

Fair to say that your outlook on the value add from repurchase at these levels is unchanged.

Yeah, Hi, Melissa.

Share repurchase plan has typically been a powder for strategy and we have used it in the past for two reasons one is to buy stock at attractive.

And the other two.

Provide stability and dislocated market conditions.

Our share repurchase has always been conducted in accordance with <unk>, one and <unk> plans and our board.

Every quarter reviews that plan and.

Our plan is for them to effect.

They are generally set up by the board.

Okay I appreciate that.

We have no further questions in the queue at this time I'd like to turn the conference back to your presenters for any additional or closing remarks.

Thanks, operator.

No further remarks, just wanted to thank you all our shareholders and investors for their continued support.

I'll talk to you next quarter.

Ladies and gentlemen. This concludes today's conference. We appreciate your participation you may now disconnect.

Yes.

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