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spk01: Good morning, my name is Jennifer and I will be your conference facilitator today for the BlackRock Capital Investment Corporation fourth quarter 2021 earnings call. Hosting the call will be James Keenan, Chairman and Interim Chief Executive Officer, Nick Singel, President, Abby Miller, Chief Financial Officer and Treasurer, Lawrence Paredes, General Counsel and Corporate Secretary, Marshall Merriman, Managing Director and member of the Companies Investment Committee, and Jason Merring, Managing Director and member of the Companies 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 touch-tone telephone. Thank you, Mr. Paredes. You may begin the conference.
spk04: Good morning and welcome to the fourth quarter 2021 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. Recall 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 March 2022 investor presentation link in the presentation section of the investors page. I would now like to turn the call over to Jim.
spk06: Thank you, Larry. Good morning, and thanks to all of you for joining our fourth quarter and full year 2021 earnings call. I'll provide a company update as well as highlights from our 2021 performance, Nick will then give an update on our portfolio activity and status, and Abby will follow with a discussion of our financial results in more detail. We will then open the call to questions. 2021 was a strong year in which we completed our strategic rotation out of non-core legacy assets. We repositioned the portfolio with well-diversified income-producing investments. And we culminated a very active year by deploying $275 million for the full year on a gross basis, including $68 million in the fourth quarter. We focused on senior secured debt, first lien loans in particular. For all of 2021, 82% of our deployment dollars were in first lien term loans. Approximately 74 percent of the portfolio now consists of first lien investments, up from 50 percent at the end of 2020 and 34 percent at the close of 2019. In 2021, we exited $124 million of junior capital and non-core investments, including $32 million in the fourth quarter. Junior Capital now comprises only 7% of our portfolio, down from 23% at the end of 2020 and 43% at the end of 2019. We ended the year with a modest leverage ratio of 0.56 times. This gives us significant operating flexibility to continue to build our portfolio in a disciplined manner. which could be accretive to NII and ROE and provide increased dividend coverage for our stockholders. Given the breadth of the BlackRock platform and the extensive middle market expertise of our investment team, we are confident that we can identify compelling new opportunities with solid risk-adjusted returns into the year ahead. And we intend to further diversify the portfolio to capitalize on a broader range of sectors and opportunities, building on the momentum we generated in 2021. We ended the year with 86 portfolio companies, up from 55 at the end of 2020. We've seeded the target we set two years ago. The overall size of the portfolio also grew in 2021, increasing by 15% at fair value to $553 million at year end. I would also like to touch upon the stable credit quality of our portfolio. We did not have any new non-accrual positions during 2021. The weighted average internal rating of our portfolio improved from 1.9 at the beginning of 2021 to 1.21 at year end. Our underwriting approach focuses on credit analysis through the economic cycle. We generally avoid businesses that have material exposure to commodity prices or have inability to pass through cost inflation, whether they're on the material side or on the labor front. We monitor our companies to evaluate inflationary and supply chain impacts. And overall, we believe that our portfolio is well positioned to withstand the current inflationary environment. We expect rising interest rates to be accretive to the earning power of our portfolio. 99% of the debt investments in our portfolio have a floating rate coupon, of which 93% have a LIBOR or SOFR floor with a weighted average floor of 1%. While we cannot predict the timing and magnitude of rate hikes by the Fed, we anticipate rate increases in excess of approximately 80 basis points to be accretive to our NII. Lastly, as we have sufficient flexibility on our credit facility, and as we may approach the capital markets for a new bond issuance, we believe we are well positioned to redeem or refinance our existing convertible bonds on or prior to their June 2022 maturity. I'll now turn the call over to Nick to discuss our portfolio activity in further detail.
spk07: Thank you, Jim. We have effectively completed the de-risking of our portfolio and are continuing to build a diversified book of primarily first-lane investments. During the fourth quarter, nearly 80% of new deployments were in first-lane investments, consistent with our strategy. With respect to originations, we had gross deployments of $68 million in the quarter across 13 new and 13 existing portfolio companies with approximately 75% of the investment dollars going to new portfolio companies and the remaining 25% into existing portfolio companies. The ability to support our portfolio companies with follow-on investments continues to be an important source of deployment of our capital. This gives us the opportunity to invest in businesses that we already know and have a proven history with. For 2021, Follow-on investments represent approximately 26% of our total gross investment dollars. Our total investment portfolio grew modestly during 2021, as gross deployments of $275 million were offset by repayments or other exits of $251 million during the year. We note that $124 million, or almost 50% of these repayments, consisted of exits from non-core and other junior positions, consistent with our strategy. Repayments during the quarter were $76 million, including $32 million from BCIC Senior Loan Partners, our joint venture with Windward Capital, which has now been completely exited. The return of capital from our JV also included $5 million of cash previously held by that entity. Details of our investments this quarter can be found in our earnings release with some of our more prominent investments, including the following. A $15.2 million LIBOR plus 8% first lien commitment to Seller X, a consolidator of small to medium-sized brands that sell through Amazon's third-party platform. Initial funded amount on the loan is $5.5 million, with the remaining being a delayed draw tranche. BlackRock funds were the lead lender on this facility. a 10.8 million LIBOR plus 7% first lien delayed draw term loan to SumUp Holdings, a UK-based global mobile point-of-sale provider. At quarter end, 5.4 million, or half of the commitment, was funded. The investment in SumUp was made possible by the combination of BlackRock's global sourcing reach combined with our sector expertise. BlackRock funds were influential lenders in this club deal. A $7.2 million LIBOR plus 8.88% second lien term loan to Astra Acquisition Corp, also known as Anthology, a provider of educational software to higher education in K-12 institutions globally. We were comfortable making a second lien investment here based on the fundamentals of the business, strong sponsor support, and relatively conservative leverage ratio and loan-to-value ratio. We are able to co-invest with other funds in the BlackRock private credit platform, enabling us to participate in larger transactions without taking on too much concentration risk. We are optimistic about our ability to grow our portfolio this year, given the range of opportunities that our extensive platform provides. We will continue to invest in a disciplined manner, and as a result, we expect to gradually increase leverage to more normalized levels over the next several quarters. We believe that this will enable us to grow NII with the goal of eventually covering our dividend, which we declared at 10 cents per share in cash for the fifth quarter in a row. I'll now turn the call over to Abby to further discuss our financial results for the quarter.
spk02: Thank you, Nick. I'll take a few minutes to review some additional financial results for the fourth quarter. GAAP net investment income was $5.9 million, or approximately $0.08 per share, up 21% from the third quarter. GAAP and I covered 80% of the $7.4 million distribution to stockholders and improvement from 66% coverage in the prior quarter. included in the fourth quarter results with an accrual capital gains incentive fee of $0.3 million compared to $1.3 million in the third quarter. GAAP requires that the capital gains incentive fee accrual consider the unrealized capital gains that would be payable if such unrealized gains were realized on a hypothetical liquidation basis. However, it should be noted that incentive fees on capital gains only become payable to the extent that realized capital gains exceed realized and unrealized capital losses for the annual measurement period ending June 30, 2022. For the six-month period ending December 31, 2021, realized capital gains did not exceed realized and unrealized capital losses, excluding the accruals capital gains incentive fee adjusted net investment income with $6.2 million, or $0.08 per share, and would have yielded dividend coverage of 84%, consistent with the third quarter. Total investment income was $12.6 million, a slight increase from $12.5 million earned in the prior quarter. During the quarter, the company had fees and other one-time income of approximately $1 million, or 1.4 cents per share. Total net expenses decreased by $0.9 million quarter over quarter. Excluding the accrual for capital gains incentive fee, expenses remained relatively flat compared to the prior quarter. Net realized and unrealized gains were $0.7 million for the quarter, primarily attributable to appreciation in portfolio valuations. There were no new non-accrual investments during the fourth quarter. At year end, the portfolio had three non-accrual investments representing 4.1% of total investments at fair value, relatively consistent with the September quarter end. our weighted average internal portfolio rating at fair value also improved to 1.21 compared to 1.33 at prior quarter end and 1.90 at the end of 2020, demonstrating the ongoing improvement in portfolio credit quality. At December 31, 2021, we had a strong liquidity position of approximately $224 million between available funds under our credit facility and cash on hand. Our net leverage ratio was 0.56 times up from 0.51 times at the end of 2020. As Nick mentioned, we expect to gradually return to normalized leverage levels as we continue to deploy capital and selectively grow our portfolio over time. During the fourth quarter, we repurchased approximately 120,000 shares of our stock for $489,000 at an average price of $4.09 per share, including brokerage commissions. For the full year during 2021, we repurchased approximately 590,000 shares at an average price of $3.72 per share. As of December 31st, 2021, approximately 7.9 million shares remained available for repurchase under the current buyback program. As announced yesterday, we declared a quarterly distribution of 10 cents per share payable on April 7th, 2022 to stockholders of record at the close of business on March 17th, 2022. With that, I would like to turn the call back to Jim.
spk06: Thank you, Abby. In summary, we achieved many strategic portfolio objectives in 2021 and have built a strong financial foundation. We are well positioned to grow and diversify the portfolio with discipline and producing reliable income, NAV stability, and solid results for our shareholders. We thank our shareholders for their continued support. This concludes our prepared remarks. We would now like to open the call for questions.
spk01: Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. And we'll go first to Finian O'Shea with Wells Fargo Securities.
spk05: Hi, everyone. Good morning. Jim or Nick, any relevant information for us to think about on the BlackRock private BDC, if that will be a similar strategy to the public we're on now? and if that's potentially a private to public. It's just any update you could provide, given that looks like it's off the ground and running.
spk06: Thanks, Ben. This is Jimmy. I'll take that one. I appreciate that. Yes, we just filed for the private BDC. That will take some time to get up and running. The filing is out there, but it will take some time to get up and running. As you know, and we've talked about on this forum, is the BlackRock's aggregate U.S. private capital as a variety of different funds, both in the BDC format as well as private funds that this BDC does co-invest alongside with. So the new private BDC that is getting it up and running will be similar in the sense that of investing across the overall platform. I would say it will have some differences and it probably has a a broader remit with regards to the scope of investments that might fit that versus this. And so there probably will be differences when you think about the goals from an NII perspective, some of the types of assets that will fit into that. But it will give another opportunity for a fund on the platform to jointly co-invest alongside with and be able to grow.
spk05: Great. That's helpful. And one of the financing side, I think you mentioned that you would refinance the convert with the new bond. Correct me if I'm wrong there. Also, I recall you dropped the rating from I forget which agency a year or two ago. Correct me if I'm wrong there as well. But all that considered, What are your sort of options you have to replace the upcoming convert?
spk07: Yeah, Finn, this is Nick. Thanks for the question. So I would just note that, first of all, we have sufficient flexibility under our bank revolver to redeem the bonds in full. Additionally, opportunistically, between now and the June 22 maturity, we might access the capital markets in either the public issuance form or private placement form, there's an established template for that already. Many BDCs have tapped that market, and that's a very realistic option for BKCC as well.
spk05: Okay, sure. That's helpful. And just a final one.
spk07: Yeah, and just on your rating point, yeah, so we dropped Fitch in December, okay? And again, I think other BDCs have issued bonds using private placement route, for example. So we have no concerns about our ability to redeem or refinance our notes.
spk05: And on a potential post-quarter name, we saw in the press that BlackRock Private Credit was involved in a financing to root If you're familiar with that, we're wondering if that sort of deal would make its way into the senior direct lending BDC franchises. Obviously, your franchise has evolved and the strategy is different than the past, but we're wondering if that's something that would fit within the desired allocation for BKCC.
spk06: Thanks, Ann. It's Jimmy. I'll jump in. Yes, as you know, the broader platform is a variety of different strategies associated to that. Ruth is one that fits more of our opportunistic strategy base. When it comes to the BDC, I think we've been consistent with what we've been trying to restructure this BDC in, and so we generally are focused more on first lean performing assets to try to create that stability of NAV and that resiliency from an income standpoint. So some of those things that might be a little bit more complex and opportunistic generally may not fit the BDC format for what we've been describing just because there may be a higher level of volatility associated to some of those types of assets. And that's where we're just trying to stay consistent from what we're putting into this BDC.
spk05: Makes sense. All for me. Thanks so much.
spk00: Thank you.
spk01: We'll go next to Melissa Weddle with JP Morgan.
spk03: Good morning. Appreciate you taking my questions today. I was hoping to start with the portfolio yield at cost which saw a nice jump up quarter over quarter to 8.4%. I wanted to understand sort of the driver of that increase given that some prepayment income was pretty flat sequentially and it looks like maybe some of the yields on newer investments may be sort of in line with potentially some that were exited. Just want to understand that better and then the potential impact of the SLP exit on the yield and how you're thinking about that going forward.
spk07: Hi, Melissa. This is Nick. Thank you for the question. So, you know, before I address your specific questions, you know, I want to make a general comment that, you know, we've spent a lot of time over the last three years exiting out of the non-core portfolio, which is substantially complete. And that's what's led to the deleveraging of the book. And we've very carefully constructed a well-diversified first lien heavy portfolio. As we've disclosed in our materials, the first lien percentage in the book is up to 74 percent now. It used to be less than 50 percent not too long ago. And we have 86 portfolios in the book. Again, it's a significant increase. from three years ago. Additionally, the percentage of equities in the book has declined significantly. It's now down to just 7% of the book. So I think it's been a tremendous sort of, you know, success story in what we set out to do two years ago. In terms of the yield, look, we're, you know, we've been able to maintain our yields at a portfolio level despite the overall markets being tighter than before. And that's really a function of the strength of our platform, the breadth of the funnel at the top, our industry expertise, our sourcing channels that bring us proprietary deal flow. All of these things have really helped us maintain our yield levels without really taking on too much incremental risk, either at the individual security level or at the portfolio level. Specifically, the reason for the yield increase quarter over quarter was actually the exit of our BCIC senior loan partners, JV, that you mentioned. You know, it was essentially an equity security with no yield, even though it was paying some level of dividend and that was low. So, you know, the exit of that vehicle effectively makes our portfolio even more efficient because some cash was trapped in that vehicle that was received.
spk03: Okay, so as I'm hearing that, it sounds like your view with the exit from SLP is that that increase in the portfolio yield should be sustainable. That's not a one-time pop. differently?
spk07: Yeah, I mean, look, I mean, over the next several quarters, it's hard to predict how credit spreads land, right? But we do have a very well diversified portfolio. You know, our deployment pipeline is very strong. Additionally, you know, 99% of our loans are floating rate loans. And with the, you know, with the anticipation of Fed hikes, okay, all of that provides tailwinds to, you the yield that the portfolio can generate. And additionally, at 0.56 times leverage, we have the potential to grow the portfolio from here on. You know, the markets have been volatile, which may play out in our favor, especially given our operating flexibility here allows us to deploy more capital at the prevalent spread. So that's our goal. That's what we're focused on.
spk03: Okay. Thanks, Nick. That's helpful. And then, obviously, contributing to some of the repayment activity in the fourth quarter was SLP. Looking forward, I'm curious if you're seeing any sizable repayment activity upcoming or if you have any expectations around that that we should be thinking about.
spk07: Yeah, Melissa, again, that's a good question. Look, gross deployments is something we can control. Repayments are generally, you know, not controllable by us. Look, long-term, our average hold period has been in the two and a half to three-year range for any given investment. You know, in the short-term, repayments can be lumpy and unpredictable. Fundamentally, we actually don't see any reason why, on average, hold periods are going to change. You know, I'd also add that, you know, almost a quarter of our deployments are follow-on deployments in our existing portfolio companies. And, you know, that gives us really the advantage of incumbency in these investments that help us, you know, mitigate some of the repayment pressure that we see from time to time. The other thing I would note is that if you look at 2021, half of our repayments, approximately half, came from really non-core assets or junior capital that we were trying to exit. Most of that pressure is behind us. In fact, all of that is behind us. So we feel like we're going to operate in a more normalized deployment versus repayment scenario. Having said that, any individual quarter is just inherently unpredictable.
spk03: Sure. Understood. And then if I could, one final question. It seems you've been using the repurchase authorization at a pretty stable rate over the last two quarters. Is that something, was that by design? Is that how you're thinking about anticipating using that repurchase authorization throughout the remainder of 2022? Thank you. Yes.
spk07: Yeah, so our share repurchases are conducted pursuant to 10b-5-1 and 10b-18 plans, which are sort of pre-decided and automated. And look, we view share repurchases as one of many tools to deliver shareholder value. And, you know, we view the two goals basically to share repurchase program. One is to buy shares at creative prices. And the other is to provide some protection in periods of market volatility. So we expect our forward share repurchases to be consistent with our current approach.
spk03: Thanks, Nick.
spk01: And at this time, there are no further questions. This does conclude today's conference. We thank you for your participation.
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