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spk01: Good morning. My name is Alan. I'll be your conference facilitator today for the BlackRock Capital Investment Corporation first quarter 2022 earnings call. Hosting the call will be James Keenan, Chairman and Interim Chief Executive Officer, Nick Singhal, President, Abby Miller, Chief Financial Officer and Treasurer, Lawrence DeParedes, General Counsel and Corporate Secretary, Chip Holliday, Managing Director, Marshall Merriman, Managing Director and member of the Company's Investment Committee, and James 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 lines for a question and answer session. In order to ask a question, you can press star 1 on your touchtone telephone. Today's call is being recorded. Thank you. Mr. Paredes, you may begin your call.
spk04: Good morning and welcome to the first 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 May 2022 investor presentation link in the presentation section of the investors page. I would now like to turn the call over to Jim.
spk07: Thank you, Larry. Good morning and thanks to all of you for joining our first quarter earnings call. I'll provide an overview and highlights from the quarter. Nick will then give an update on our portfolio activity and status, and Abby will follow with the discussion of our financial results in more detail. We will then open the call to questions. I'm pleased with the progress we have made in reconstructing and diversifying the portfolio with the goal of delivering a stable NAV and a competitive return on equity. We started the year on solid footing, building on the momentum we generated throughout 2021. we deployed $44 million of new capital in the first quarter. In keeping with our focus on senior secured debt, substantially all of this consisted of first lien loans. Approximately 72% of the portfolio now consists of first lien investments, up from 50% at the end of 2020 and up from 34% at the close of 2019. Additionally, We continue to broaden our investments to further diversify and strengthen the portfolio. We added nine new portfolio companies and ended the quarter with 93 portfolio companies, up from 55 at the end of 2020 and 47 at the end of 2019. We are firmly committed to a robust underwriting approach that focuses on the investment performance through economic cycles. We generally favor businesses in non-cyclical industries, with a growing revenue profile, ability to pass through cost increases, and strong equity support. We avoid over-leveraged capital structures that are more prone to pressures from rising inflation and rising interest rates. Our credit quality remains healthy as a result. There are no new non-accrual investments in the first quarter and all of 2021. Net leverage of 0.46 times was down from 0.56 times at the close of 2021, as repayments exceeded new investments. While there were only three portfolio company exits during the quarter, they included some of the larger names, such as St. George Logistics, which has previously the largest portfolio company at 8% of the total portfolio by fair market value. Our investment in St. George provided a 12.4% realized IRR over its four-year hold period. With many of the more concentrated investments now exited, we anticipate that the repayment impact of any single issuer on NII to be more muted going forward. We have ample leverage capacity as we pursue disciplined portfolio growth. We are confident we can identify compelling new opportunities that will be accretive to NII and drive solid risk-adjusted returns for our shareholders. We expect rising interest rates to be accretive to the company's NII. 99% of the debt investments in our portfolio have a floating rate coupon, of which 92% have a LIBOR or SOFR floor with a weighted average floor of 1%. As these rates rise above the floor level, we expect NII to increase by approximately 0.8 cents per quarter for every 100 basis points of benchmark rate increase. all else being equal. Before I pass it over to Nick, I want to take a moment to thank Abby for her contributions as CFO and Treasurer of BCIC. As we previously reported, Abby plans to step down from her roles on May 6th to pursue other career endeavors. We wish her all the best. The Board has appointed Chip Holliday to serve as Interim CFO and Treasurer, effective May 6th. Chip is the managing director with the advisor, having joined BlackRock in 2005. Chip is well-qualified to step into this role, and we have the utmost confidence in his abilities. I'll now turn the call over to Nick Segal to discuss our portfolio activity in further detail.
spk08: 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 first quarter, substantially all of our new deployments were in first-lane investments, consistent with this strategy. With respect to originations, we had gross deployments of $44 million in the quarter, primarily across nine new and six existing portfolio companies, with approximately 83% of the investment dollars going to new portfolio companies and the remaining 17% into existing relationships. Repayments during the quarter were $79 million. As Jim mentioned, this happened to be across three large names in the portfolio, leading to an elevated number for the quarter. As a result of these repayments, our total portfolio size declined quarter over quarter. Our pipeline of opportunities is healthy, and we continue to source opportunities from a wide range of industry sectors. In the second quarter so far, we're seeing good deployment momentum. While there can be no assurances that all transactions will close, quarter to date, investment committee approved transactions totaled approximately $55 million. The details of all of our investments this quarter can be found in the earnings release, with our more prominent investments including the following. In $9.4 million, SOFR plus 6% first lien term loan and $1.4 million of unfunded commitments to 4840, a provider of recycled wood pallet solutions. A $7.9 million SOFR plus 8.5% first lien term loan with an additional $7.3 million unfunded term loan as well as equity warrants to elevate brands. a consolidator of small to medium-sized brands that sell through Amazon's third-party platform. A $4.7 million SOFR plus 6.5% first lien term loan and a $6.7 million unfunded term loan to Greystone Select Company, a real estate investment firm. Importantly, BlackRock funds, including the company, were the sole lenders in two of these investments, highlighting the benefits to the company of proprietary access to deals from BlackRock's scaled platform. As previously announced, on April 21, 2022, we accessed the private placement market to issue notes in an aggregate principal amount of $92 million, which These notes have a funding date of June 9, 2022. We anticipate using the proceeds from the notes, as well as availability under our revolver, redeem our outstanding $144 million convertible debt, which is maturing on June 15, 2022. We are pleased with the execution we obtained on the notes, including the pricing and prepayment features, which are disclosed in our prior filings. we simultaneously entered into an interest rate swap to effectively convert the $35 million fixed rate tranche into a SOFR-based tranche for the first three years of its life. Our core deployment focus is consistent with our objectives of stable income and low NAV volatility. We are optimistic about our ability to grow our portfolio this year, given the broad funnel of opportunities that our extensive platform provides. We will continue to do so 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 having our core earnings fully cover our dividend, which we declared at 10 cents per share in cash for the sixth quarter in a row. I will 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 BCIC financial results for the first quarter. Before I get into the results, I want to thank Jim for his kind words. I have thoroughly enjoyed working with the entire team for the past five years and will help to ensure a similar transition. Now to the financial results. GAAP net investment income was $6.5 million, or approximately $0.09 per share, up 9% from the prior quarter. GAAP NII covered 88% of the $7.4 million distribution to stockholders, an increase from 80% coverage in the prior quarter. Included in the first quarter results was a reversal of $0.5 million in capital gains incentive fee previously accrued. With such reversal, at March 31, 2022, the balance of the accrued incentive fee on capital gains was approximately $1.1 million under a hypothetical liquidation basis required by GAAP. However, it should be noted that incentive fees on capital gains owning 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 nine-month period ended March 31, 2022, realized capital gains did not exceed realized and unrealized capital losses, excluding the reversal of previously accrued capital gains incentive fee Adjusted NRI was $6.0 million or $0.08 per share. Total gross investment income was $12.2 million, a slight decrease from $12.6 million in the prior quarter due to the net repayments in our portfolio. During the quarter, the company also had fees and other one-time income of approximately $0.7 million or $0.01 per share. Total net expenses decreased by $1 million quarter-over-quarter. Excluding the impact of the capital gains incentive fee, expenses decreased by $0.3 million quarter-over-quarter. Net realized and unrealized losses were $1 million for the quarter, primarily attributable to the modest portfolio depreciation due to spread whitening during the quarter. There were no new non-accrual investments during the first quarter. At the end of the first quarter, the portfolio had three non-accrual investments, representing 4.4% of total investments at fair value, relatively consistent with the December quarter end. Our weighted average internal portfolio rating at fair value also remained relatively consistent for the quarter, at 1.25 compared to 1.21 at the prior quarter end and improved from 1.72 compared to the March 2021 quarter end, demonstrating the robust portfolio credit quality and portfolio construction. At quarter end, we had a strong liquidity position of approximately $248 million between available funds under our credit facility and cash on hand. Our net leverage ratio was 0.46 times down from 0.56 times at the end of 2021 due to the net repayments during the quarter. 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. Additionally, we expect that the issuance of our unsecured notes during the second quarter will further optimize our cost of capital. During the first quarter, we repurchased approximately 106,000 shares of our stock for $440,000 at an average price of $4.14 per share, including brokerage commissions. As of March 31, 2022, approximately 7.8 million shares remained available for repurchase under the current buyback program. As announced earlier this morning, we declared a quarterly distribution of $0.10 per share payable on July 7, 2022, to stockholders of record at the close of business on June 16, 2022. With that, I would like to turn the call back to Jim.
spk07: Thank you, Abby. In closing, we continue to strengthen our financial foundation, emphasizing portfolio diversity and disciplined 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.
spk01: Thank you, sir. Again, to ask a question, please press star 1 on your telephone keypad. We'll take our first question from Finian O'Shea with Wells Fargo.
spk03: Hey, everyone. Good morning. Thanks for having me on. Jim, first question, can you talk about the investment pipeline in real time for both the volume of origination on the market and, and the terms if the spreads and covenants and so forth, if any of that is migrating.
spk07: Thanks, Ben. I would say, you know, obviously the Q4 was a pretty significant flow and was a very busy year, end of the year of 2021. There was a bit of a slowdown in January and early February. We've started to certainly see things pick up. both from the M&A volume as well as refinancing activity across the overall portfolio companies within our own book as well as within the market. So we see it as actually picking up pretty significantly relative to the early part of the quarter or the year and a little bit more similar to last year. From a terms perspective, Obviously, there's a lot more volatility in the public markets, and that takes a while and usually comes with a lag into the private markets. If you thought about last year, we were a little bit more concerned about degradation of structure and documents. I would say as we start to see the volatility in the market, we view that as an opportunity. Pricing does often up a bit, which is an opportunity for us to deploy. Structures and discipline in the market are getting better right now. With regards to our leverage numbers right now, we actually think we're in a really good position with a pretty robust calendar to deploy into the rest of the year here.
spk03: Great. Thanks. That's helpful. On that matter, on the St. George repay, obviously good news. Additionally, does that exit drive any portfolio allocation benefits, where the BDC would get better share given the more open, less concentrated, et cetera, portfolio?
spk07: Yeah, it's consistent with, you know, obviously where we've gone with the overall book and trying to add resiliency at the aggregate level. First and foremost, you know, the underwrite to the underlying issuers from a credit quality and structure and protection perspective. is our first line of defense. The second is really the diversification. And so, you know, as you know, we've moved from, you know, deploying in more concentrated fashion and that, you know, five to 8% like St. George was into kind of more core positions in that one and a half to 2%. And, you know, with regards to, you know, the engine that we have from an origination standpoint, we've been able to do that clearly with regards to the, the name count that we've had in the book. So you'll see us, you know, taking that repayment from St. George and really kind of being more consistent with what we've been doing over the course of the last two years and redeploying that into, you know, more core positions of 1.5% to 2% and just continue to increase the diversification across the book.
spk03: Okay, thank you. And just a final question, if I may, on portfolio company performance in in the environment with a little more inflation supply chain, et cetera, type issues. Um, are you, are you seeing anything yet overall or within certain, certain sectors on, on headwinds to, um, you know, what you underwrote to and so forth?
spk08: Yeah. Thanks for the question. Good morning. This is Nick. Um, Our underwriting philosophy is primarily to avoid structures which are overleveraged, avoid businesses which have reliance on commodity prices, and also businesses that are labor-intensive or do not have the ability to pass on cost increases. And I think that's the primary reason why our portfolio held up very well in 2021. And even in Q1, we have no new non-accruals. As we do our portfolio reviews across our entire portfolios, BDCs and outside of the BDCs, there are situations where we do see margin pressure a little bit on the margin, especially in companies where the labor component might be a little bit higher. In most of our portfolio companies, we're seeing a very good ability to pass through those cost increases. But inflation is here. It's real. And our goal has been and will always be to avoid companies that are at risk of getting disrupted when the cost structure goes upside down.
spk03: Great. That's all for me. Thanks so much.
spk06: Thank you, Finn.
spk01: Next question will come from the line of Melissa Weddle with JP Morgan.
spk05: Good morning, everyone. I appreciate you taking my questions today. Following on your answer just there, Nick, I'm curious if some of that margin pressure that some of the portfolio companies are seeing was related to a shift in the grade one levels versus grade two. Just looking at the queue, grade one came down quite a bit. I'm assuming most of that was just driven by the exit of St. George. And then grade two came up a little bit. I was just hoping to kind of dig into that a little bit and understand what you're seeing in the portfolio that might be driving those incremental changes.
spk08: Yeah, Melissa, great question. First of all, you're absolutely correct that a lot of that migration was not a huge migration. It's a very tiny migration. migration basically arose from St. George exiting which was a one rated name and obviously when the denominator goes down the percentage of two rated names go up. I think the very small number of migrations we had were really idiosyncratic issues. In our portfolio we are really not seeing any systemic credit concern arising from for margin compression. And again, to reiterate, I think that's really just a function of our core philosophy of avoiding situations that do not have pricing power, cannot pass through inflation, or just are over-levered. Overall, I would say, broadly speaking, our loan-to-values are very conservative with very strong equity support behind us in our portfolios. And I would also add that, look, our focus really has been in transitioning our book to first lane, which is now 72% of the portfolio. And that further adds to the resiliency in the book.
spk05: Okay, got it. I appreciate that. And then I'm not sure if I missed it. On the St. George exit, did that drive any particular outsized repayment fees or income?
spk08: Abby, can you chime in here?
spk02: Hi, Melissa. This is Abby. Thank you for the question. Yes, it did drive a little bit of a one-time fee income and just to recall for the quarter, the total one-time fee income or other one time income adds up to approximately one cent per share impact.
spk06: Got it.
spk05: And then final one from me. I appreciate the insight into at least the amounts that have been approved by the investment committee quarter to date. And definitely appreciate that a lot of repayment activity doesn't necessarily come with a lot of foresight or visibility into that. Is there anything that you are aware of at this point that we should be thinking about in terms of future repayments that might be more sizable and impact the portfolio like we saw in the March quarter?
spk08: Yeah, Melissa, so I would say just in a normal course, right? I mean, there are always some repayments every quarter. When you look at the long-term, you know, historical sort of performance, our average cold sizes have tended to be two to three years on average. So we don't expect that to change. You know, if anything, you know, in a rising rate environment, you know, refinancings probably become slower. And then the other benefit of, you know, having St. George and just incidentally the two other names that exited were also larger positions is that to the extent there are future repayments, their impact is going to be more muted. We haven't had any repayments in the quarter so far, okay? You know, there's always buzz around one or two names that may refinance. Sometimes the sponsor will give us feelers. As the business grows, the cost of capital becomes lower, and they have the opportunity to do that. But nothing significant that we are aware of right now.
spk06: Thanks, Nick. That's very helpful. Appreciate it.
spk01: All right. It looks like we have no further questions at this time, so I'd like to turn it back over to our speakers for any additional or closing remarks.
spk07: Thank you, and thanks, Finn and Melissa, for the questions. With that, obviously, we are seeing a lot of volatility in the market. We do think we're positioned well to kind of deploy into this and set up to continue to ramp the portfolio leverage up and continue to grow NII. So we appreciate everybody's support on the call and a huge thank you as well to our team as we continue to fully get through the transition of the overall portfolio. And with that, we can end the call.
spk01: Thank you, sir. That does conclude today's conference. We thank you all for your participation. You may now disconnect.
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