Disappointing Q1 discussed by BlackRock BDC

BlackRock Capital Investment Corporation (BKCC) executives defended what they labelled as a mixed performance in their quarterly earnings call yesterday (28 April). The BDC's management encouraged analysts to view the company's Q1 results as driven by investments in legacy assets rather than systemic issues at the BDC. BKCC chairman and chief executive officer Steven Sterling also said that the company's view of its investments and portfolio were shaped by a low growth and high risk economy.

BKCC reported a 7 percent decline in net asset value to $9.46 per share resulting from $55.7 million in net unrealized depreciation, related largely to legacy assets.

Drawing a distinction between operations of the company under the current management team over the past year and the approximately 70 percent of the portfolio that the group inherited from previous management, Sterling said he has been particularly pleased with the tone of conversations with sponsors and borrowers. He touted BlackRock's second consecutive quarter of nearly $100 million in origination as evidence of the company's growing relevance to mid-market borrowers.

On the call, BlackRock reported that it had repurchased $12 million in its own stock in the first quarter of 2016. The company's net leverage ratio stands at 0.63x.

The challenging legacy businesses resulting in the three new markdowns discussed on the call were ShoreLine Energy, Hunter Defense Technology and Vertellus Specialties. BKCC said that the BDC was part of the ad hoc group exploring a path forward for Vertellus, a specialty chemicals and plastics provider. Regarding ShoreLine, BlackRock reported that its view of the company and its reserves remains generally positive, but that ShoreLine had run into production challenges and related liquidity issues.

“Having trafficked in oil and gas for many years back in the 90s, these things can happen and they can play out in a lot of different ways,” Sterling said. “You are in an environment for which there is more uncertainty associated with valuations and borrowing bases and certainly companies can encounter issues in their various drill programs,” he added.

Conversely, with regard to Hunter, Sterling said there was no choice but to restructure the company, an outcome he said was unfortunate.

The company reported that and that it has $154.5 million in total liquidity as of the end of March and approximately $300 million in capacity under its borrowing base with which to take advantage of new opportunities as they come.

In response to questions from Jonathan Bock, a senior analyst with Wells Fargo Securities, about whether the company might consider changes to the BKCC incentive payment scheme and including unrealized losses, Sterling replied that while they would not commit to anything specific, they would always be open to reconsidering fee structures.

Head of investments for BlackRock's US private capital group Michael Zugay reported that the overall market had turned from the tentative, price discovery phase on its last earnings call to a more positive, stable tone. Sterling said that while the overall results for the quarter were disappointing, the management team remained focused on utilizing the resources within the overall BlackRock platform in meeting challenges posed by legacy investments.