Q2 2023 BlackRock Capital Investment Corporation Earnings Call

[music].

Good morning, My name is Jenny and I will be your conference facilitator today for the Blackrock capital investment corporations second quarter 2023 earnings call.

Leading the call will be James Keenan, Chairman and interim Chief Executive Officer, Nick single precedent chip holiday in term Chief Financial Officer, and Treasurer Laurence Peretti.

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 lines for question and answer session in order to ask a question. Please press star.

One on your touch tone telephone. Thank you Mr. Paradis, you may begin the conference call.

Good morning, and welcome to the second quarter of 2023 earnings Conference call Blackrock Capital Investment Corporation or <unk>.

Before we begin our remarks today I would like to point out that certain comments during this conference call and within corresponding documents.

Any 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.

Been derived from third party sources and has not been independently verified accordingly be 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 <unk> dot com and clicking the August 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 Laurie good morning, and thank you for joining our second 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.

Chip will discuss our financial results in more detail and then we will open up the call to your questions.

We produced another solid quarter of results continuing our strong level of net investment income by successfully executing our strategy of prudent portfolio management.

Gaining strong credit quality.

For the fourth consecutive quarter, our NII covered our 10 cent dividend with a robust coverage of about 123% up.

Up from 112% at the close of 2022.

Our careful approach to portfolio diversity, and our ongoing focus on senior positions in our investments complement our robust credit culture and positions us well to navigate the current market uncertainty.

Potential economic downturn.

First lien investments now makes up 84% of our portfolio.

<unk> for <unk> and up from 50% at the end of 2020.

Junior capital investments now make up only 4% of our portfolio down from 23% at the end of 2020.

We ended the quarter was 121 portfolio companies, which is more than twice the number of portfolio companies. We had at the end of 2020.

We are proud of the substantial progress we've made in the last few years under the Blackrock platform and diversifying our portfolio and enhancing its credit positioning.

<unk> had no new non accrual investments in the second quarter.

We have also been able to structure, new loans that benefit from our lender friendly environment with improved pricing and better structural protections.

Our second quarter weighted average portfolio yield increased to 12, 8% up from 12, 4% in the prior quarter.

This was driven by increases in LIBOR and so far our risks.

Our net leverage for the second quarter increased to <unk> 86 times from eight one times from the prior quarter.

Driven by $28 million of new.

New gross deployments.

All in first lien loans.

This was our fifth consecutive quarter of net portfolio growth.

Paying in excess of $100 million on a net basis over that period.

We believe that our results demonstrate the benefits derived from our comprehensive repositioning of our portfolio.

Notably, we have room to methodically increase leverage and improve our Roe.

As we identify compelling investments and further diversify the portfolio.

Total available liquidity for deployment, including cash on hand was $85 million at quarter end.

As we move into the second half of the year, we continue to be mindful of macroeconomic conditions.

Inflation coming down has the potential to remain a headwind for certain pockets of the economy.

You're right with the potential for further increases they also continue to create tighter financial conditions for borrowers.

We communicate directly with our portfolio companies to assess their financial health and outlook.

And we are well equipped with the experience and resources to proactively engage with management teams in the event of emerging challenges.

We believe that the diversified nature of our portfolio with a prevalence of first lien loans as well as high quality of ownership support in our portfolio companies.

Help us as being defensively positioned in an economic downturn.

We continue to emphasize less cyclical companies that are relatively well positioned to withstand recessionary pressures we are.

We're 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 the portfolio activity in more detail.

Thanks, Jim.

We again made steady progress this quarter growing the portfolio and delivering consistently strong earnings power.

We provided capital to three new and five existing portfolio companies.

Similarly, 43% of investment dollars went into existing names to facilitate further growth.

Nearly all of our second quarter deployments were in first lien loans consistent with our strategy, maintaining a lower risk profile.

Especially as the risk of a recession remains.

Total exits and repayments during the quarter were $6 $5 million.

This included the full exit of our investments in Sunderland asphalt and construction fusion risk management and rig with a combined realized IRR of 10, 1%.

We also received a $500000 partial repayment from our unsecured debt position in Gordon Brothers Finance company and nonaccrual investment.

In the case of fusion risk management, we received full repayment of our remaining 400000.

First lien term loan.

And then participated in a new financing with the company.

Our portion of the new deal was a four and a half million dollars sulphur plus 7% first lien term loan.

$6 million unfunded revolver.

Our other two new portfolio company investments in the quarter include a $6 $1 million or so for the six 5% first lien term loan.

And 0.6 million unfunded commitment the sumo logic.

Native software provider.

Observe mobility and security management.

And at $2 $2 million Sulphur, plus seven 5% first lien term loan.

0.3 million unfunded commitment.

The payments.

If payment services provider the gaming sector.

With respect to our current investment activity.

Seeing a steady flow of opportunities across both new and existing names, but we remain very selective about what we invested.

At the end of the second quarter, our investment Committee has approved transactions of six and a half million dollars.

Either closed subsequent to the second quarter or are pending close although there can be no assurances that all such transactions will close.

As previously mentioned, we had no new non accrual positions during the second quarter.

Our <unk> per share decreased by one 8% in the second quarter, largely driven by a 7 million unrealized valuation decline in the portfolio that was primarily concentrated in three days.

62% of this valuation decline or $4 4 million was attributable to equity and Stitch Holdings L. P.

The markdown was driven by deterioration in the Companys underlying financial performance.

We note that this equity position was.

<unk> in connection with the prior modernization event in 2021 related to our legacy SVP singer investment.

Following the markdown stitch equity to zero the legacy noncore investments in the portfolio.

The minimum in Sweden.

Overall, we feel confident about the credit quality of our portfolio.

With a heavy emphasis on senior secured loans, especially first liens. We believe we are well positioned to withstand the impact of a potentially deteriorating economic environment.

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 second quarter.

Net investment income for the second quarter was $8 9 million or.

Or <unk> 12 per share consistent with our strong NII levels from the first quarter of 2023.

And an increase of 25% from the second quarter of 2022.

Our gross investment income was $19 9 million for the second quarter.

An increase of 6% from the prior quarter and.

And up 63% from the second quarter of 2022.

The increase was driven primarily by the impact of a higher interest rate environment.

And if you'd like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again press star one to ask a question.

Ed.

And our question is going to come from Melissa Wedel.

From Morgan Stanley . Please go ahead.

Hi, good morning, Thanks for taking my questions today.

Was hoping to start with just some commentary or your outlook in terms of new.

New deployment.

There were very few startup repayments or exits during the quarter.

And while you put their money.

The money to work in new investments it seems to be a very gradual process of ramping sort of leverage towards the target level.

Taking now with your comments about macro.

I guess wariness about the macro environment.

How do you think about ramping portfolio leverage since we have heard that the.

Terms on new investments are particularly attractive right now.

Yes, as I said this is Nick single Thanks for your question. So let me just.

Take a step back here.

So approximately two years ago going back to large or June of 2020.

We have made tremendous progress in exiting our legacy portfolio and we were at a leverage ratio of <unk>.

Three eight times.

With 50, or so portfolio companies back then.

Since then we have ramped up.

Our portfolio 2.86 times.

Leverage as well as we have 121 portfolio companies thats more than twice the level. So from a trend perspective, we view that as a very.

Very very solid progression.

Towards where we want to be.

Last year, we had a very very healthy gross deployment volume.

Obviously this year because rates have behaved they've gone up by 500 basis points over the last few quarters that has had its impact on LBO activity generally speaking refinancing opportunities growth capital et cetera. So.

As we progress towards our target leverage ratio.

Hey, Melissa this is Jamie I'll, just add on today Nick's comments there.

I think youre right, obviously, what we're seeing in the market and then.

<unk> heard this is that the the terms are fairly favorable from a lender perspective.

Just with everything that has gone on that being said as Nick said volumes are lower and I would say, we probably tightened up our own.

Okay, and just as well as we are seeing some volatility and concerns with regards to the overall market and some of the earlier comments that Nick had so.

And generally just lower volumes, but just remind us standpoint at the at the portfolio level. Some of this kind of a slow methodical ramp up is if you remember what we've tried to shift the portfolio was.

Three four years ago, it was a far more concentrated portfolio.

You could have one or two names creates idiosyncratic risk of volatility would you see now is we're being very disciplined with kind of.

Of 1% to 2% positions and so on the deals that were closing.

Each deal is going to be an additional 1% to 2% and we think that's important and as Nick said, that's kind of ramped up to diversity to 125, plus names de risk the portfolio.

In a major way, but that being said that means the ramp is more of a methodical.

Okay and I appreciate the comments from both of you.

And take those points.

Also wanted to follow up if I could on the partial repayment from Gordon brothers I know it was a small.

Partial repayment, but interesting nonetheless, just wondering if you could kind of update us on.

What's going on there any path to further repayments or any line of sight that you have on that would be great. Thanks.

Yes Melissa.

As we've mentioned in the past too cheap sources of potential recovery.

Our remaining investment one of them is a first class note held by Gordon Brothers Finance company, which refers to the portfolio that it's sold to <unk> and.

And the other is a profit participation note.

So in Canada and the <unk>.

This specific half a million dollar payment that we received was related to a payment from the profit participation note.

And this note entitles UFC two a share of the purchasing entities in earnings through 2027.

This specific payment related to our share for last years.

<unk>.

Sure.

Profits into buyer.

So our expectation is still remains.

That we will continue to receive.

Paydowns over a period of time and I would again reiterate that it's.

It's multiple years, just given the nature of the first loss note and the profit participation versus just a few quarters and I would also note that since November 2020, when <unk> actually sold the portfolio. We have received in excess of.

$15 million in pay downs on our.

The residual position.

Thank you Nick.

Yeah.

And this will conclude today's question and answer session as well as today's call. Thank you for your participation you may now disconnect.

Okay.

[music].

Yeah.

[music].

Alright.

[music].

Sure.

[music].

Yes.

[music].

Okay.

[music].

Yes.

Okay.

Okay.

[music].

Okay.

Okay.

Okay.

Okay.

[music].

Yes.

Okay.

[music].

Yes.

Uh huh.

Yes.

Yeah.

Okay.

Okay.

Yes.

[music].