BKCC - BlackRock Capital Investment Corporation (BKCC) Q3 2022 Earnings Call Transcript
BlackRock Capital Investment Corporation (BKCC)
Q3 2022 Earnings Conference Call
November 04, 2022, 10:00 AM ET
Company Participants
Laurence Paredes - General Counsel and Corporate Secretary
James Keenan - Chairman and Interim Chief Executive Officer
Nik Singhal - President
Chip Holladay - Interim Chief Financial Officer and Treasurer
Conference Call Participants
Finian O’Shea - Wells Fargo
Melissa Wedel - JPMorgan
Presentation
Operator
Good morning. My name is Keith and I will 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; Nik Singhal, President; Chip Holladay, Interim Chief Financial Officer and Treasurer; Laurence D. Paredes, General Counsel and Corporate Secretary; and 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 their line for a question-and-answer session. [Operator Instructions] Thank you.
Mr. Paredes, you may begin the conference call.
Laurence Paredes
Good morning, and welcome to the third quarter 2022 earnings conference call of BlackRock Capital Investment Corporation, or BCIC. 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 BCIC's actual results may differ from these statements.
As you know, BCIC has filed with the SEC reports, which list some of the factors, which may cause BCIC's results to differ materially from these statements. BCIC 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, BCIC 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.blackrockbkcc.com and clicking the November 2022 Investor Presentation link in the Presentations section of the Investors page.
I would now like to turn the call over to Jim.
James Keenan
Thank you, Larry. Good morning, and thanks to all of you for joining our third quarter earnings call. I'll provide an overview and highlights from the quarter. Nik 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 2020. 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, our NII more than covered our dividend this quarter.
Our net leverage increased 0.71 times, up from 0.64 times for the prior quarter, driven by $78 million of gross deployments in the third quarter. We added 60 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.
Our 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 as 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 proven underwriting approach that focuses on credit analysis through the cycle. We engage in a 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 team's 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 there SOFR or LIBOR floors in the current market. We expect the rising rate environment to further boost interest income.
I'll now turn the call over to Nik to discuss our portfolio activity in further detail.
Nik Singhal
Thanks Jim. 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 deployments in the quarter are primarily across 16 new and seven existing portfolio companies, proximately 74% of the investment dollars went into new portfolio companies and the remaining 26% into existing relationships.
Follow on investments and existing portfolio companies continue to be an important source of opportunity for us, as these are businesses we already know and understand well. Sales exit and repayments during the quarter were $61 million, including full repayments from five existing portfolio companies. Of particular note, we monetized our position in MBS Opco and MBS Parent, previously our largest non-core holding. This included the full exit of our $11.7 million debt possession at par and a $0.5 million distribution from our equity position unless we still hold a residual interest.
Additionally, we fully exited our debt investments in Juul, Metricstream, Dude Solutions and Power Home. In each of these, we realize principal at par with an 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: An $11.1 million SOFR the 6.75% first lien term loan and $4 million unfunded commitment to ICIMS, Inc., a cloud based human resources and recruiting software company, a $7.1 million SOFR, the 6.75% first lien term loan and $2 million unfunded commitment the Numerix is software provider for valuation and risk management of derivatives and structured products and a $5.4 million SOFR plus 6.25% first lien term loan and $1.6 million unfunded commitment to Accordion Partners LLC, a provider of financial consulting services to private equity owned portfolio companies.
Our NAV 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 will help the portfolio defend against a recessionary scenario.
Additionally, our modest leverage of 0.71 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 and in the third quarter, our NII exceeded our dividend level of $0.10 per share in cash.
I'll now turn the call over to Chip to further discuss our financial results for the quarter.
Chip Holladay
Thank you, Nik. I will now take a few minutes to review some additional BCIC financial results for the third quarter.
Net investment income was $7.7 million, or approximately $0.10 per share for the third quarter, an increase of 8% from the prior quarter, 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 $0.4 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 30th, up from 9.1% as of the prior quarter-end, driven by a rise in LIBOR and SOFR 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, coupled 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 $0.5 million due to a higher average debt balance from deployments during the quarter at an increase in LIBOR and SOFR rates.
Net unrealized losses were $2.4 million for the quarter, primarily attributable to the impact of general market declines on our portfolio and to evaluation decrease on our interest rate swap. Our net unrealized losses were partially offset by realized gains of $0.4 million during the quarter.
At the end of the quarter, the portfolio had three non-accrual investments, representing 3.3% of our portfolio's total fair value. And as stated previously, there were no new non-accrual investments during the quarter. Our weighted average internal portfolio rating at fair value declined slightly to 1.28 compared to 1.27 at the prior quarter-end, and improved from 1.33 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, subject to leverage and borrowing base restrictions. Our net leverage ratio was 0.71 times up from 0.64 times at the end of the prior quarter, due to $17 million of net deployments during the quarter, resulting in a higher ending debt balance.
During the quarter, we repurchased approximately 464,000 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 $0.10 per share, payable on January 6, 2023 the stockholders of record at the close of business on December 16, 2022.
With that, I'd like to turn the call back to Jim.
James Keenan
Thank you, Chip. In closing, we are committed to conservative underwriting, portfolio diversity and discipline 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.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions]
We'll take our first question from Finian O’Shea with Wells Fargo. Please go ahead.
Finian O’Shea
Hi, everyone. Thanks and good morning. Jim, can you talk about your appetite to invest into liquid opportunities, given your ability to do that not only with the smaller size of the BDC, you could likely meaningfully ramp into attractive assets. And obviously, your leverage position is conservative, and you have ample runway there as well. Just how do you look at that proposition today?
James Keenan
Thanks, and thanks for the question. Yeah. I think as you point 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 is obviously got higher yields associated with higher spreads, but more importantly, being able to get better structure and documents associated to our loans. And so that plays into the fact of our focus has been more on the private markets, where we are able to actually control the structure and the documents and the protections associated to them.
So, as outlined, we've talked about this, but we've had a key core focus of trying to create a little bit more NAV stability, and more diversification and resiliency with regards to that the NII, but also the NAV. And like I'd say obviously, the public market volatility is something that does create opportunities in the private market as well. Obviously, it makes the, I would say, capital a bit more tighter and for companies to access the public markets. And so, you're seeing more of those companies seek private solutions associated to that, even some ones that have public debt structures are going to the private market to try to get some refinancing or loans associated that. So, I don't think you'll see us go into the public market and look at that volatility. And also, because those documents may not be up 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 and pricing.
Finian O’Shea
Sure. That's helpful. And just to sort of follow-up there. It sounds like you want your proprietary structure, or just the private market structure. Understandably, the stability -- the NAV stability, but at -- given the market is slower there, and those terms aren't 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 you could give us there on how you think? Or is it maybe a never? Just how you think about that.
James Keenan
Yeah. No, thanks. But I don't think you can look at it in isolation, right? It's not the public market living, it's in relation to what you can get in the public markets versus what you can deploy into the private markets. And obviously, they are correlated, they may have a lag with each other, they move. But -- so if you saw the market move in the public side, 20 basis points wider doesn't necessarily mean that there would be great opportunities in the private market to better structure and pricing, as well. So, we have to take that all into account, I would say, the bar is very high for us to deploy money into the public space. But again, we would 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 is generally slowed, obviously, because liquidity has become tighter, and you see some of the M&A volumes go down. Our pipeline still is pretty robust. You can see that in the deployment for the last quarter. And even your forward pipeline is pretty robust. And that's not just because of the M&A deals. Obviously, there are embedded companies who in this environment are going to look to grow, right? Roll up 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's, obviously, some embedded companies both in our existing portfolio companies and others that are going to look to refinance to this market of uncertainty. And so, when you think about our sourcing network, it's fairly robust. And on any one year, we're looking at over 1000 deals. And so, you can see the, I would call, the style of those deals without the reasons for the use of proceeds vary in any one quarter. But in general, I don't think it's slowing down our kind of our views of what we're able to get to look into to deploy into this market. And again, I would say we certainly prefer being able to kind of structure our protections because there are a lot of unknowns from a macro perspective. And we're doing our kind of discipline underwrite, we want to be able to know that and we have covered with regards to the covenants that we put in place.
Finian O’Shea
Okay. That's helpful. Thank you for the color.
James Keenan
Thanks Fin.
Operator
We'll take our next question from Melissa Wedel with JPMorgan. Please go ahead.
Melissa Wedel
Good morning. Thanks for taking my questions today. I was hoping to start with just sort of earnings power and NII level. I was little bit surprised that despite the pickup in NII quarter-over-quarter that most of it seems to be driven by fee income despite 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 you're thinking about earnings power going forward?
Nik Singhal
Hey, Melissa, it's Nik. 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, fee income is certainly one of them. The fee income is just inherently unpredictable. We're going to have quarters with -- I think we're going to have quarters with no free income. But really another tailwinds. We're seeing one is rates, again, as you mentioned, rate. And not only are the rates continuing to rise, there's actually a lag effect. And when the Fed raises the rates, and when it actually flows through our portfolio, that could be anywhere from like a two to three month lag, okay? So that we expect to continue to provide tailwinds going forward.
And then finally spreads. We are seeing in the -- although the new deployments we're seeing, we're seeing wider spreads, whether it's coupon rate, whether it's 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 be deploying in these market conditions. So, we're saying that will be frankly another tailwind as we look at the future quarters.
So, we're actually pretty happy that, we're covering our dividend this quarter, adjust 0.71 times leverage, and there's plenty of room to grow and deploy into these very attractive market conditions.
Melissa Wedel
Okay. That actually takes me to my follow-up question on activity levels in 4Q. I know that sometimes it can be a seasonally busy quarter. When I look back at the last two years, it just happens that you guys had repayments and exits that actually exceeded capital deployment. Given the robustness of the pipeline, is your -- an opportunity set that you're seeing now, would you expect that to sort of reverse trend and expect net deployments this year or just too tough to tell?
Nik Singhal
Yeah. No. I mean, in some ways, it is impossible to predict with certainty, right? 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 or organic growth activity. We're still seeing deployable opportunities. And as of now, I think I don't have the exact numbers in front of me, but with Q4 so far is a positive net deployment month.
And the other thing I would add is that, we talked about seeing more than 1000 transactions in a year. And while at this point in time, the pace might be slower. I would say that the slowness is paid as more towards that part of that broad funnel, which some of them are like death kills, right, like half of those deals, we will spend more than an hour on not spend any time on right. So much of that kind of investment opportunities we're not seeing that hasn't been that big ahead 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 due to support our portfolio company's growth, whether that's organic or inorganic. So, Q4 might be a little bit slower than normal. But structurally, we feel we're very well positioned, as Jim had mentioned earlier, in terms of our ability to source and deploy.
James Keenan
And Melissa, just Jim 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 had far more concentrated size physicians, and as we've kind of exited those, we've kind of rebalanced that into kind of not just first name, but far more diversified. But we talked about the name count going up. So some of those prior quarters that you referenced, we were able to exit and had some, I would call it, chunky exits that are part of those repayments relative to taking those data into kind of smaller, single name investments.
Melissa Wedel
Okay. Thanks for that. If I could -- with one last question. I saw that you guys continued some repurchase activity in the $1.5 million to $2 million range per quarter, also saw that the Board authorized array up the authorization, fair to say that your outlook on the value add from repurchase at these levels is unchanged.
Nik Singhal
Yeah. Hi, Melissa. So, share repurchase plan has typically been a part of our strategy and we have used it in the past for two reasons. One is to buy stock at attractive levels, and the other is to provide instability in dislocated market conditions. Our share repurchase has always been conducted in accordance with 10b5-1 and 10b-18 plans and our Board every quarter review that plan. And if a plan is put into effect, they're generally set up by the Board.
Melissa Wedel
Okay. Appreciate that.
Operator
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.
End of Q&A
James Keenan
Thanks operator. No further remarks. Just want to thank all our shareholders, investors for their continued support, and we'll talk to you next quarter.
Operator
Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may now disconnect.
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BlackRock Capital Investment Corporation (BKCC) Q3 2022 Earnings Call Transcript