KCAP Financial Management Discusses Q2 2012 Results - Earnings Call Transcript

KCAP Financial (KCAP)

Q2 2012 Earnings Call

August 09, 2012 4:00 pm ET

Executives

Dayl W. Pearson - Chief Executive Officer, President and Director

Edward U. Gilpin - Chief Financial Officer, Principal Accounting Officer, Treasurer and Secretary

Analysts

Greg Mason - Stifel, Nicolaus & Co., Inc., Research Division

John Hecht - JMP Securities LLC, Research Division

John T. G. Rogers - Janney Montgomery Scott LLC, Research Division

Presentation

Operator

Good afternoon, ladies and gentlemen and welcome to the KCAP Financial Inc. Second Quarter 2012 Earnings Conference Call. An earnings press release was distributed on Wednesday, August 8, 2012. If you did not receive a copy, the release is available on the company's website at www.kcapfinancial.com in the Investor Relations section. [Operator Instructions] As a reminder, this conference is being recorded today, Thursday, August 9, 2012.

This call is also being hosted on a live webcast, which can be accessed at our company's website, www.kcapfinancial.com in the Investor Relations section under Events. In addition, if you would like to be added to the company's distribution list for news events, including earnings releases, please contact Denise Rodriguez at (212) 455-8300.

Today's conference call includes forward-looking statements and projections and we ask that you refer to KCAP Financial's most recent filings with the SEC for important factors that would cause actual results to differ materially from those projections. KCAP Financial does not undertake to update its forward-looking statements unless required by law.

I would now like to introduce your host for today's conference, Mr. Dayl Pearson, President and Chief Executive Officer, KCAP Financial. Mr. Pearson, you may begin.

Dayl W. Pearson

Thank you, all, for joining KCAP Financial for a review of its second quarter 2012 financial results. I will open the call with some broad commentary about important highlights and activities during the quarter, including the impact of our financial results of our acquisition of Trimaran Advisors earlier this year, and we'll then discuss our investment portfolio in more detail. I will then turn the call over to our Chief Financial Officer, Ted Gilpin, to provide a recap of our 2012 second quarter operating results and our financial condition at the end of the quarter. We will then open the line for your questions at the end of the call.

So let me first provide a brief recap of some important highlights in the second quarter. In the second quarter, our NII increased from $0.15 in the first quarter to $0.23. This resulted in an increase of our dividend by 33% to $0.24 per share. The second quarter marked our first full quarter following our February 29, 2012, acquisition of Trimaran Advisors, and the acquisition was an important factor behind our increased dividend and investment income.

As you will recall, as part of the acquisition, we purchased equity positions in 4 CLO funds managed by Trimaran for a cash purchase price of approximately $13 million. Distribution to us from these funds contributed approximately $1.4 million to our total investment income for the second quarter. Aside from the acquisition of the equity interest, we also purchased the Asset Management business of Trimaran Advisors, which was responsible for an increase in the periodic dividends we have received from our 2 asset manager affiliates, from $825,000 in the first quarter to $1.2 million in the second quarter of 2012. Our other asset manager affiliate is Katonah Debt Advisors.

Trimaran should generate approximately $3.6 million of base management fees over the remainder of the year. In addition, we expect to realize incentive fees from some of the CLO funds it manages, likely beginning in the fourth quarter 2012. The incentive fees could significantly increase income available for distribution to us beginning in 2013. While those incentive fees will reduce the distributions on the related CLO funds, the equities that we own, our ownership interest in the CLO funds managed by Trimaran only represents approximately 17% of the equity interest in these funds. Because Trimaran, which is wholly owned by us, is entitled to 100% of the incentive fees, the loss of these distributions on our CLO funds securities will be more than offset by a receipt of such incentive fees, be it distributions from Trimaran.

As we said last quarter, from a long-term strategic perspective, we believe that increasing the size of our Asset Management business in terms of both AUM and professionals will lead to a greater ability to access the new issue CLO market, and allow us to grow the platform internally. In fact, we recently signed a nonbinding engagement letter to start working on a new CLO fund.

I will now review our portfolio of middle market corporate loans and equity investments and our new origination activity. We continue to see repayment of lower yielding assets at par, which should allow us to further increase our net spread as we seek to reinvest these proceeds in higher-yielding assets. As always, we will continue to be focused on credit quality and will manage and monitor our risks appropriately. Since early February, deal flow has increased substantially. Since the beginning of 2012, we reviewed close to 60 new transactions with a turn-down rate of approximately 85%. We closed 4 new deals in the second quarter including 2 second lien and 2 senior note transactions. Three of these closed in June, and therefore, made a very limited contribution to our net investment income in the quarter.

In all 4 cases, these loans were originated with the financial sponsors and we partnered with Mezzanine Funds and/or other BDCs in each case. These 4 transactions totaled over $20 million and deployed at a yield of approximately 12%. Given the uncertain and economic environment involving the credit market, we have remained very cautious in terms of deploying capital and continue to maintain adequate liquidity.

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