Q1 2023 BlackRock Capital Investment Corporation Earnings Call
Yeah.
Good morning, My name is Karen and I will be your conference facilitator today for the Blackrock Capital Investment Corporation first quarter 2023 earnings Conference call.
Hosting the call will be James Keenan, Chairman and interim Chief Executive Officer, Nick Cingal, President Chip holiday interim Chief Financial Officer, and Treasurer, Laurence D. Paredes General Counsel and corporate Secretary, 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 your Touchtone telephone. Thank you. Mr. Paradis, you may begin the conference.
Good morning, and welcome to the first quarter 2023 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 the CIC as 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. These 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 our management team will highlight some of the information contained in the presentation.
The presentation can be accessed by going to our website at www Dot Blackrock BK C C dot com and clicking the May 2023, 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 thank you for joining our first quarter earnings call.
After I provide an overview of our performance and highlights for the quarter, Nick will give an update on our portfolio activity.
And then chip will discuss our financial results in more detail.
And then we will open the call to your questions.
Building on the momentum we've generated over the past couple of years.
We produced another strong quarter by further diversifying our portfolio and increasing net investment income.
We selectively identified several compelling investments during the quarter, while benefiting from higher LIBOR and sofa rates and an improved pricing environment for new originations to drive a nine 5% sequential increase in NII as compared to the prior quarter.
Our NII covered our 10 said dividend by 122% this quarter.
Up from 112% in the fourth quarter of 2022.
Marking our third consecutive quarter of full dividend coverage.
This is a reflection of our deliberate strategy to grow our loan portfolio with high quality investments.
As is evident from our results over the last several quarters.
We have made significant progress with this strategy.
We had no new non accrual investments in the first quarter.
The vast majority of our investments are in first lien positions, where we have extensive downside protection.
In the current market environment, we have been able to structure, new loans with improved pricing lower leverage and a more favorable documentation.
Our first quarter weighted average portfolio yield increased by 50 basis points from the fourth quarter to 12, 4% based on total portfolio of fair value.
We have a solid foundation to continue our pursuit of prudent growth.
Adding to our portfolio's, earning power and delivering consistent and favorable risk adjusted returns to our shareholders.
Our net leverage for the first quarter increased 2.81 times from seven seven times from the prior quarter.
Driven by a $37 6 million of new deployments nearly all in first lien loans.
We have added eight new portfolio companies boosting our total to 121.
As compared to 116 at the close of 2022.
86 at the end of 2021 and 55 at the end of 2020.
Notably our current leverage leaves us ample runway to further diversify the portfolio as we draw upon our team's deep expertise across multiple cycles in.
And the power of Blackrock platform to identify compelling income producing investment opportunities.
First lien investments now make up 82% of our portfolio.
Another record for BCE IC.
This marked a dramatic improvement from 50% at the end of 2020.
Junior capital investments now comprise only 5% of our portfolio.
Down from 23% at the end of 2020.
And another indicator of our substantial and ongoing improvement in the credit quality and positioning of our portfolio.
While the U S job market remains resilient amidst higher inflation and interest rates.
Mindful that such conditions have historically resulted in slower economic growth or contraction.
Tightening of financial conditions for borrowers.
We believe that the diversified nature of our portfolio.
With a prevalence of first lien loans as well as high quality of ownership support.
Our portfolio of companies.
Us to be defensively positioned in an economic downturn.
We communicate regularly with our portfolio companies to assess their financial health and outlook.
We are well equipped with the experience and resources to proactively engage with the management teams in the event of emerging challenges for.
For now our investments continue to perform well and our credit quality remains strong.
We are confident in our ability to succeed across economic cycles, while generating improved profitability on behalf of our shareholders.
I'll now turn the call over to Nick to discuss our portfolio activity in further detail.
Thanks, Jim.
We again made steady progress this quarter towards increasing our core earnings power.
We've provided capital to eight new and seven existing portfolio companies with a weighted average interest rate.
Seven 9% up from 11, 5% and no new deployments from the prior quarter.
Approximately 26% of investment dollars went into existing relationships.
First quarter investments in new portfolio companies, where nearly all in first lien loans consistent with our strategy, maintaining a lower risk profile, especially as the risk of a recession.
Lanes are ahead of us.
Exits and repayments during the quarter were $21 million. This included the full exits of our investments in Zest acquisition Corp, Camber and advanced lighting.
Camera and advanced lighting, where both legacy noncore positions and we realized approximately $3 million of proceeds from the exit of those investments.
Translating was also a prior nonaccrual investment.
So far in the second quarter, we're seeing a steady flow of opportunities across both new and existing names. Although we continue to be very selective about what we invest in.
Since the end of the first quarter, our investment Committee has approved transactions it was $12 million.
In the closed subsequent to the first quarter or are pending close although there can be no assurances that all such transactions will close.
Our three largest new portfolio company investments in the first quarter include.
Is 6.1 million, so far plus seven 5% first lien term loan.
0.7 million unfunded commitments, the short time acquisition LLC.
And then the attraction and family Entertainment operator.
At $5 9 million, so far plus 725% first lien term loan.
One 5 million unfunded revolver to binder.
Digital asset management provider.
And.
$5 1 million sulfur plus seven 5% first lien term loan and point $5 million unfunded revolver Duck Creek, it property and casualty software provider.
Our <unk> per share increased by 0.5% in the first quarter, largely driven by net investment income exceeding our dividend.
Folio marks were approximately flat from the fourth quarter.
As previously mentioned, we had no new non accruals during the first quarter.
We feel confident about our overall credit quality and believe that we're well positioned withstand the impact of a potentially deteriorating economic environment.
We're pleased to once again achieve more than full coverage of our dividend.
Even if we excluded the benefit of onetime fee income.
We remain conservative in underwriting new investments and vigilant in monitoring our existing portfolio.
We still have room to grow our portfolio towards our target leverage range.
As we continue to evaluate the pipeline of attractive opportunities in this market.
We'll remain disciplined in our approach.
I'll now turn the call over to chip 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 first quarter.
GAAP net investment income for the first quarter was $8 $9 million or approximately <unk> 12 per share.
An increase of over 9% from the fourth quarter and.
And up 36% from the first quarter of 2022.
NII provided first quarter dividend coverage of 122%.
This compared to 112% in the fourth quarter.
And up substantially from 88% coverage.
In the first quarter of 2022.
Our gross investment income was $18 8 million for the first quarter.
An increase of 7% from the prior quarter and up 54% from the first quarter of 2022.
The increase was driven primarily by the impact of a higher interest rate environment.
Net deployments of approximately $25 million over the past two quarters.
In our performing portfolio with no new non accrual assets.
Company's weighted average portfolio yield based on fair value increase.
Increased to 12, 4% at quarter ends.
Up from 11, 9% at December 31.
Total net expenses for the first quarter increased by approximately half a million dollars from the fourth quarter.
Merrily driven by an increase in interest and other borrowing costs.
So an uptick in our average outstanding debt balance quarter over quarter.
And an increase in LIBOR rates.
Portfolio valuations remained relatively flat quarter over quarter due to stabilizing credit spreads.
And a slight increase in the unrealized value of our interest rate swap.
We recorded total net unrealized gains of $23 million in the first quarter.
We also reported realized losses of $6 million in the quarter.
Upon exiting two noncore positions in.
Camera and advanced lighting.
At quarter end the portfolio had two nonaccrual investments representing two 7% of our portfolio's total fair value.
Down from four 4% as of March 31, 2022.
Our weighted average internal portfolio rating at fair value.
Fairly consistent at 135 as compared to 1.33 at year end.
At quarter end total available liquidity for deployment in general operating use was approximately $98 million, including cash on hand, and subject to leverage and borrowing base restrictions.
Our net leverage ratio was 281 times.
Up from <unk> 77 times at the end of the fourth quarter due.
Due to approximately $10 million and net borrowings during the quarter to fund new deployment.
As announced yesterday, we declared a quarterly dividend of <unk> 10 per share payable.
Payable on July six 2023 shareholders of record at the close of business on June 15th 2023.
With that I would like to turn the call back to Jim.
Thank you chip.
In closing our strategy of portfolio diversity, senior positioning and disciplined growth with <unk> in great shape for the year ahead.
And we are confident in our ability to drive strong profitability and strong returns for our shareholders.
With that we would now like to open the call for your questions.
Thank you if you would 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 that your mute function is turned off to allow your signal to retailers equipment.
Again, Thats star one to ask a question.
We will take our first question from Finian O'shea with Wells Fargo Securities. Please go ahead.
Hi, everyone. Good morning.
On the portfolio overall, we saw a couple so.
Borrowers migrate to.
Partial pik this quarter can you give us a sense.
Of your discussions with with borrowers.
If we should see more of this in the coming quarters or if you have any outlook on what what pick might reach.
A percent of revenue this year.
Hi, Good morning, this is Nick.
Let me let me first just give some overarching commentary on the portfolio and then I can address your specific question about the pig.
Overall, I would say that.
The portfolio, we feel has held up very well there were no new non accruals in the first quarter.
In certain sectors, we are seeing a slowdown in.
And revenue growth.
And needless to say persistent inflation.
Impacting margins.
At some companies.
What we're seeing are many of these borrowers or or their private equity sponsors.
Adjusting to this reality by right sizing their cost structure and or passing the <unk>.
Increased cost to their customers and much of this happened in the second half last year.
Those are the impact of those initiatives is starting to show up in the financials, albeit with a lag and we see more and more of that activity.
On an ongoing basis.
We take comfort in the fact that we are first lien heavy with a substantial capital behind us and the borrower's capital structure.
We structure and underwrite our loans to be resilient.
In down cycles like this one and importantly, most of our loans are financial covenants, which facilitate a seat at the table in the event of adverse performance.
Specifically I would note.
There was one name where the conversion to Pik was via an amendment.
That's our investment in razor.
And the other name where a part of the interest pick was actually contractual we have that feature in some of our more tech oriented names and we actually anticipated that debt.
Sort of conversion will be used from time to time. So that's.
That's the sort of overall commentary I would give our.
Our Pik income was approximately 6% of total income in the first quarter.
We are.
Where we engage with our portfolio companies almost on a continuous basis.
Throughout the quarter.
Again could you know over time as things progress.
Pik income increase overtime, that's a possibility.
We're also seeing on the other hand, a number of the companies taking all the actions that they need to take that.
Zero margins.
In this market.
That's very helpful color. Thank you and just as a follow up sort of related question.
If you have these numbers for the for the overall portfolio what's the.
Current.
Are forward looking.
Fixed charge coverage.
And then what.
What percent of the portfolio is underwater or under one.
Yeah.
And I don't have the exact numbers in front of me right now.
All I can say is that when we when we underwrite new loans at inception generally require the interest coverage ratios to be strong.
Call it two and a half to three times in many cases, even more than three times.
And largely because of LIBOR and sulfur having gone up we've seen contraction and and those ratios and I would say and an aggregate basis that maybe come down by a turn.
Turn so they look at the median interest coverage ratio.
That might be in there.
Hi ones or low twos at this point in time compared to you know going to have two to three times at origination and the one thing I would say that when we speak to our borrowers were very very focused on their liquidity.
Situations.
And we were starting to see.
Liquidity getting tighter or some of the names in Q3 and Q4.
Surprisingly in many of those named we're actually seeing the liquidity situation get better.
As the owners continue to take the right actions.
To manage their cash flow.
Ah Okay.
So Paul and just one more for me.
Can you talk about the.
Remaining securities related to.
Gordon brothers, how that portfolio is performing and any outlook for for that eventual off ramp.
And that's all for me thank you.
Yeah. So you know if you will recall.
We monetize most of our GBS the position back in November 2020, and UBS itself was left with certain additional asset.
That one have continued to provide a source for additional pay downs since that time.
And we expect <unk>.
We will continue to provide additional recovery.
Overtime.
The exact timing is just by its nature uncertain.
I would say it's not.
A few quarters I think it's gonna be over the next next several quarters.
And while we can talk about the underlying portfolio.
And specifically what.
We can tell you is that the.
The reference portfolio loans.
Towards the first loss plus lost not related.
Continues to shrink in size as colored I realize the exits and recoveries.
Oh things.
We'll take our next question from Melissa Wedel with JP Morgan. Please go ahead.
Okay.
Thanks, very much I appreciate you taking my questions today, and then covered a lot of it but I was hoping to oh on a couple of areas.
Nick I believe you gave an update on activity quarter to date of roughly 12 million of originations just wanted to make sure I heard that right and then.
I don't think I caught anything that you mentioned, perhaps on exits for the quarter to date or did I Miss it.
Yeah, no. So that is correct Melissa $12 million is the expected number but again keep in mind that that only first four weeks.
Of the quarter.
And so things can change right.
And the remaining two months ago.
I think the point I would enforce as that.
We are you know, we're seeing opportunities, even though overall M&A activity is very slow and the market it's not zero.
We're still seeing deal making activity. The one thing we can assure you is that it will continue to remain selective in the opportunities we invest and also every quarter.
Our existing portfolio of companies continue to be an important source of deployment opportunities and these are not defensive.
Deployments. These are good deployments that we want to make to help.
Or are companies grow.
And again I think we feel good about is we have enough dry powder to take advantage.
The market conditions, we are in right now.
Obviously rates are up.
Spreads are attractive and we're also seeing.
What sort of the borrower's market that used to be.
You know, we can get favorable documentation, we can get tight cushion on our covenants. So it's really a good period of time to redeploying capital and and and on the repayments are correct that we did not have any repayments or at least any material repayments in the quarter.
Sure.
It jumped out to us that you guys are finding opportunities in a lot of new portfolio companies, which is consistent with what your stated goal has been diversifying the portfolio.
Okay.
Just conceptually is that intention or is.
Is that diversification of the portfolio somehow intention with the idea of.
You know keeping your lending standards incredibly tight and arguably you know we see a lot of managers that you're deploying primarily to existing borrowers because they know them theres that sensor, we know the business better.
How do you guys approach that and is there a point at which you might feel like the diversification piece should take a backseat to.
Sort of deploying that two companies that you know better.
Hopefully that yeah. So.
Yeah, no it doesn't when I answer too is that first day.
Strategy to diversify is 100 per cent intentional right. We are focused on creating a V stability.
Victor will net investment income.
And we feel that the Chilean portfolio diversification.
As a key tool in delivering that for shareholders.
Secondly, the way our platform Blackrock direct lending platform has evolved and grown overtime it actually tremendously helps.
We see I see and achieving diversification and what I mean by that is that.
You know the team that supports me see I see.
<unk> also supports a much larger.
Direct lending platform, which enables us to be.
It player in scale inside so as an example.
Might be participating in an investment that's you know call it $100 million $200 million, even more inside and then we allocate it across multiple different funds, including the CIC right, So where we're getting the benefit of being a scaled lender.
At the same point of time, we see I see us getting the benefit of diversification right, but that's that's my respond from an overall strategy perspective, and then I think the second part of your question was you know new new investments versus the existing portfolio companies.
I think we have both pools open rate and you'll see that percentage vary from quarter to quarter.
I think in the past it does range from 20% to 50%, we don't necessarily have any preconceived notions there. It's all about putting our capital in the best the best available opportunities.
Opportunities.
But if you look at the number of portfolio company. That's 121 portfolio companies. That's a massive massive improvement from the 27 or so portfolio companies you guys. He had.
A few years ago right. So it's truly a diversified portfolio at this point in time.
Certainly at that.
Point taken.
I could follow on with and sort of my persistent question quarter over quarter, we did notice on repurchase activity that there wasn't any in this quarter.
Owen.
Decent track record I think the seven ish quarters prior to that at some share repurchase can.
Can you given that you do have plenty of room to increase leverage and that share repurchases are inherently elaborate activity can you update us on just how you're thinking about that now and what has changed if anything.
Yeah. So you know in terms of.
The share repurchases as being one of our tools to deliver shareholder value nothing.
Nothing has changed with respect to that.
We and the board assess the plan every quarter and any repurchases that we make.
Conducted pursuant to the provisions of rules can be five one and can be 18.
And once that program is in place reports are out of control. So you know you it's possible to see variability quarter over quarter and I'm just gonna.
Unfortunately, I can't comment anymore, so I'll leave it there.
Okay. Thank you Nick.
Yeah.
That concludes today's question and answer session and this concludes today's call. We thank you for your participation you may now disconnect and have a great day.
Okay.
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