Q3 2023 BlackRock Capital Investment Corp Earnings Call

Please standby we're about to begin.

Good morning, everyone. My name is Glenn and I will be your conference facilitator today for the Blackrock Capital Investment Corporation third quarter 2023 earnings Conference call.

This call is being recorded.

Well, it's been the call today will be James Keenan, Chairman and interim Chief Executive Officer, Nick Cingal, President Yep holiday interim Chief Financial Officer, and Treasurer, Laurence D. Paredes Corporate Secretary Diana Hoffman General Counsel.

Based on my right managing director and member of the company's been passed Me Committee.

All lines have been placed on mute after the speakers complete their update they will open the lines for question and answers in order to ask a question you May press the star key followed by the digital wallet on your Touchtone telephone.

At this time I would like to turn the conference over to Mr. Paradis, you may begin the conference call.

Good morning, and welcome to the third 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 called 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 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 Vaca <unk> dot com and clicking the November 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 third quarter earnings call.

I will begin the call with a review of the reminder of our proposed merger with our affiliated BDC Blackrock TCP Capital Corp, or <unk> that was announced in September.

He will provide an overview of our performance and highlights for the quarter.

Nick will then discuss our portfolio activity and chip will address our financial results in more detail.

We'll then open the call to your questions.

On September six 2023, we announced a proposed merger of <unk> with <unk>.

As highlighted at the time of the announcement of the proposed transaction is a very logical and natural strategic next step in the growth and evolution of Blackrock BDC platform.

And the broader 81 billion dollar global private debt business at Blackrock.

With <unk>, having successfully transformed its portfolio the investment portfolios of the two bdcs are now very similar to each other.

Currently our collective investment team has been managing both portfolios for many years now.

We believe the proposed merger positions the combined company for sustained growth and will create meaningful value for <unk> shareholders.

<unk> combined the operational cost synergies enhanced scale better access to capital on improved terms and potential for improved trading dynamics.

We also anticipate that the transaction will be accretive to NII.

As an added reminder, Blackrock the company's advisor is supporting the transaction with several shareholder friendly measures, including a reduction of the management fee. After closing of the merger from one 5% to $1 two 5% for assets equal to or below 200% of net.

Yes.

Coverage of NII via a waiver of advisory fees for any of the first four quarters. After the merger in the event NII for the combined company in any such quarter is less than 32 cents per share.

To a maximum of the advisory fees earned during such quarter.

And coverage by Blackrock up 50% of the merger cost for both companies up to a combined cap of $6 billion subs.

Subject to closing of the transaction.

The transaction will be in a really for any exchange that will result in an ownership split of the combined company that is proportional to each of <unk> and <unk> respective net asset values.

<unk> shareholders will receive newly issued shares of <unk> common stock based on the ratio of <unk> net asset value per share divided by the TCP C net asset value per share each determined shortly before the closing.

We expect the transaction to close in the first quarter of 2024 subject to each company's shareholder approvals.

Customary regulatory approvals and other closing conditions.

I'll turn now to our third quarter performance.

We again generated strong results covering our tencent dividend for the fifth consecutive quarter with solid net investment income that was up 7% compared to the prior quarter and 24% year over year.

Our dividend coverage of 131% for the quarter was up from 123% for the previous quarter.

This marked the 10th consists successive quarter of increased dividend coverage.

With the successful portfolio transformation behind us we have substantially diversified our portfolio over the past few years identifying compelling first lien opportunities that align with our unwavering focus on prudent underwriting and sound credit quality.

We are in an excellent position to continue deploying capital into attractive investments, while navigating through this period of economic uncertainty and global market volatility.

First lien investments now make up 85% of our portfolio are.

A record high level for <unk> and up from 50% at the end of 2020.

Junior capital investments now make up only 4% of our portfolio.

A fraction of the 23% proportion that junior positions comprised at the close of 2020.

We ended the third quarter was 120 portfolio companies.

We have more than doubled this number over the past three years, creating significant diversity across multiple sectors with a focus on companies that are defensively positioned to weather downturns.

Of note.

We had just one new non accrual investments in the third quarter.

For a total of three this quarter.

Even in the middle of a soft dealmaking in origination environment. We added three new portfolio companies this quarter each of which was a first lien loan.

Overall, we remain disciplined and continue to pass on a substantial number of the less attractive opportunities coming to market.

Particularly when we believe that the pricing does not appropriately reflect the current marketing conditions or when terms do not provide adequate lender protections.

Our third quarter weighted average portfolio yield was 12, 8%.

Up from 10, 5% year over year supported by increases in sulfur rates as well as marginally wider spreads negotiated on new investments over the past few quarters.

Our net leverage for the third quarter was 28, four times down slightly from the prior quarter.

As we had modest debt repayments during the quarter.

September we also amended our credit facility, which among other terms extended the maturity of the loans made under the credit facility to September 2028, and reduced the applicable interest margin by 25 basis points per annum.

We are in regular communication with our portfolio companies to assess their financial health and we are confident in the overall strength of our borrowers.

In a small number of situations, where there might be emerging challenges. We're also highly confident in our team's experience and resources to proactively engage with these management teams.

We believe we are well positioned to withstand the impact of the economic downturn, while driving toward improved profitability on behalf of our shareholders.

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

Thanks, Jim.

<unk> delivered solid results this quarter growing net investment income and increasing our NAV per share.

We provided $40 million in capital with <unk>.

<unk>, new companies and six existing portfolio companies.

Substantially all of the third quarter deployments were in first lien loans consistent with our strategy, maintaining a lower risk profile, especially in this uncertain macroeconomic environment.

Total exits and repayments during the quarter with $44 million, including three portfolio company exits.

These prepayments drove a total of $1 million.

Three and other one time income.

Generated on these transactions.

Some of our new portfolio companies during the quarter included.

A $4 5 billion.

So far that's 9% first lien term loan for Nephron Pharmaceuticals Corp.

And pharmaceutical company specializing in manufacturing generic respiratory medications.

Is it $2 million sulfur plus six 5% first lien term loan.

$8 2 million revolver, the Trintech, Inc.

Software provider of cloud based reconciliation and financial close solutions.

Additionally, and the Amazon brand aggregator space seller.

One of our portfolio companies.

Elevate which was also one of our portfolio companies.

As a result of this transaction our prior investments in these respective companies were repaid.

These proceeds in the combined seller entity.

As a result of these transactions.

Funded exposure to these companies remains substantially the same quarter over quarter.

Whereas our unfunded exposure reduced by $11 $6 million.

These transactions are included in our deployment and repayments figures for the quarter respectively.

Our deployment and repayment numbers also include new investments in three existing portfolio companies, namely Bluefin Holdings Cole Haan Andrew vehicle.

These new investments refinance our prior investments in these portfolio companies.

Each of these investments demonstrate our ability to stay invested with or upsize, our exposure well performing portfolio company.

With respect to our current investment activity.

Despite a slow private credit market, we're seeing a slight uptick in the flow of opportunities across both new and existing names.

We remain selective in allocating capital to those investments, where we see attractive pricing coupled with good lender protections.

Since the end of the third quarter. Our investment Committee has approved transactions of $17 million that is either closed subsequent to the third quarter or are pending.

Although there can be no assurance that all such transactions once those.

As of the end of the quarter, we designated our $6 $5 million first lien loan to perch as a non accrual position due to a continued decline in the operating performance.

This brought total non accrual investments at quarter end.

Companies, representing three 4% of our total portfolio at fair value.

Our NAV per share increased in the quarter.

Roughly 1% from the second quarter, driven by $2 3 million.

NII in excess of the declared dividend.

One $3 million of net realized and unrealized gains on the portfolio during the quarter.

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

With a diverse portfolio of senior secured first lien loans, we believe that we're well positioned withstand the impact potentially deteriorating economic conditions.

I'll now turn the call over to Chet 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 third quarter.

GAAP net investment income for the third quarter was $9 $5 million or <unk> 13 per share up from $8 9 million or <unk> 12 per share in the second quarter.

And an increase of 24% from the third quarter of 2022.

This quarter marked our 10th consecutive quarter of net investment income growth.

Our gross investment income was $21 $3 million for the quarter.

An increase of 7% from the prior quarter.

And up 33% from the third quarter of 2022.

The increase from the prior quarter was driven primarily by additional income earned on $11 million of net deployment into portfolio company investments over the last two quarters.

As well as the $1 million in fee and other one time income earned on investment exits during the quarter.

The company's weighted average portfolio yield as of quarter end based on fair value was 12, 8% consistent with the second quarter.

Total expenses for the third quarter increased by approximately $800000 from the second quarter.

Attributable to higher accrued incentive fees due.

Due to higher pre incentive NII and net unrealized depreciation on the portfolio.

An increase in borrowing costs due to higher sofa rates.

And an increase in professional fees incurred during the period.

Net unrealized depreciation during the quarter was $1 $1 million due to higher valuations across the majority of our holdings.

Partially offset by markdowns on other portfolio positions.

And by $200000 of unrealized depreciation on our interest rate swap position.

The company also had realized gains of approximately $200000 during the quarter.

As Nick noted earlier the portfolio had three nonaccrual investments at quarter end, including the addition of our first lien loan position in perch.

Up from two non accrual investments in the prior quarter.

The three positions represented three 4% of our portfolio's total fair value at quarter end.

Our weighted average internal portfolio rating was one four or five a quarter and changed slightly from 144 at June 30th.

At quarter end total available liquidity for deployment and general operating use was approximately $90 million, including cash on hand, and subject to leverage and borrowing base restrictions.

Our net leverage ratio was <unk> eight four times down slightly from <unk> 86 times at the end of the second quarter.

Due to net repayments of our credit facility during the quarter.

As announced yesterday, we declared a quarterly dividend of <unk> 10 per share payable on January eight 2024 to shareholders of record at the close of business on December 15th 2023.

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

Thank you chip in summary, our transformed portfolio, coupled with prudent portfolio management and strong credit quality.

Has led to increase return on equity as well as improved NAV stability.

Furthermore, we are excited about the merger with <unk> and believe that the transaction will bolster the combined company's ability to generate strong returns for our shareholders with that we would like to now open the call for your questions.

Thank you again as a reminder, ladies and gentlemen that is the star followed by the digit wanted if you have a question or comment we'll pause for a moment.

We do have a caller in the queue, we'll hear from Melissa Wedel from Jpmorgan. Please go ahead.

Good morning, Thanks for taking my questions today.

Wanted to.

Get your thoughts on the amount of repayment activity that you're seeing in the portfolio.

Are you surprised especially in the rate environment that we're in with base rates remaining two high are you surprised to see the kind of repayment activity sort of outpacing new deployments.

Yes, Hi, Melissa Thank you for the questions.

In general I would say that repayment activity can tend to be very lumpy quarter over quarter and just inherently unpredictable.

Comedically I would say in the rate environment that you referred to.

It's not easy for companies to get refinancings done so we're definitely seeing a slower pace of repayment.

In the third quarter, there were some idiosyncratic items and I would note.

The existing portfolio companies for example.

John.

Real.

The company, where we actually provided in new financing these.

Healthy well performing companies.

They all have the idiosyncratic circumstances, one situation, where the company consolidated their first and second lien loan into a new unit tranche facility. Another was an acquisition add on so what youll see is that.

Many of these repayments also corresponding entries as deployments.

And our schedule of investments and so that's contributing to a is somewhat elevated.

The weighted gross repayment number this quarter overall I would say.

Repayment activity is still below historical levels.

Sure that makes sense.

And then in terms of the opportunities that you're seeing in existing name.

In particular.

Can you I mean, what would the nature of those opportunities be similar to what you just described in terms of.

Sort of add on financing or are you seeing some sort of extension an amendment potential as well.

Yes, so melissa predominantly in the <unk>.

Women into existing companies has been a huge source of deploy.

I mean for us and it's predominantly.

The nature, where we're helping our companies grow these are healthy companies.

We are the incumbent lender, we have informational advantage, we have a relationship advantage and that gives us an opportunity.

Deploy additional capital into these companies the I would say that if I just look at the last four to five quarters. The actual dollars deployed in terms of defensive capital have been very very small compared to just normal course business as usual.

Deployments and two existing portfolio companies.

Okay I appreciate that context, if I could sneak in one more question related to the overlap portfolios between <unk> and T. C. P C.

To extent that there is a lot of name overlap and similarity among.

Physicians in investments, but there might be some discrepancies arent portfolio marks.

On a variety of names the extent that that exist would you expect those marks to converge.

As you get further along in the process.

You very much.

Yeah. So.

Melissa.

The difference that you're seeing valuation arises from a slightly different way.

<unk> policy, adding one BDC uses the midpoint.

And the other uses the big side, if there is a two way.

<unk> quarter available it is our intent that for the purposes of the combination and the final will be struck we will align the approach.

For both Bdcs for the overlapping positions.

And so with that.

I guess the natural follow on question would be does that imply a shift in the approach at BK CEC could merge into sort of the T. P C.

T C P C.

<unk>.

Yes.

<unk> will be the surviving entity again, we expect the <unk> valuation policy.

It will carry forward to the combined entity.

Okay. Thank you Nick.

And at this time there are no additional callers in the queue I would like to thank everyone for their participation today for today's conference and you may now disconnect.

Yeah.

Okay.

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