|Operating Results for the Quarter Ended June 30, 2014:|
|Net investment income per share: $0.22|
|Distributions declared per share: $0.21|
|Earnings per share: $0.41|
|Net asset value per share: $9.79|
|Net investment income: $16.4 million|
|Net realized and unrealized gains: $14.4 million|
|Net increase in net assets from operations: $30.9 million|
|Net investment income per share, as adjusted 1: $0.23|
|Net investment income, as adjusted 1: $16.8 million|
|Earnings per share, as adjusted 1: $0.42|
|Net increase in net assets from operations, as adjusted 1: $31.3 million|
- We sold our largest equity investment, Electrical Components International (“ECI”), for proceeds of $71.5 million and a realized gain of $48.4 million. Proceeds represented a further increase of $1.7 million above our mark for this investment at last quarter end. Subsequent to our sale, we invested $3.2 million in the Class A partnership interests of ECI Cayman Holdings, LP for a 2.35% ownership interest. When taken in conjunction with our other exits during the quarter, we are pleased to report a blended IRR, or cash on cash return, in excess of twenty-one percent, largely driven by ECI.
- We funded $43.0 million of our $45.0 million commitment in the U.S. Well Services, LLC (“U.S. Well”) first lien term loan and earned a 2.2% upfront fee, or $1.0 million. We were also taken out of our investment in the senior secured notes for a cash on cash return of 1.27x our initial investment, inclusive of a $1.5 million prepayment fee. U.S. Well is a Houston, Texas based oilfield services provider.
- We invested $21.0 million in the New Gulf Resources, LLC (“New Gulf”) senior secured notes at 99.1% of par and $4.0 million in the senior subordinated PIK toggle notes and associated warrants for a 1.2% share of the common equity. New Gulf is based in Tulsa, Oklahoma and was formed to acquire and develop oil and natural gas assets.
|Three months ended June 30, 2014||Three months ended June 30, 2013|
|Exits of commitments||192.5||199.1|
|Number of portfolio company investments at the end of period||44||41|
|Weighted average (“WA”) yield of debt and income producing equity securities, at cost||11.9||%||12.1||%|
|WA yield of senior secured loans, at cost||11.4||%||11.5||%|
|WA yield of other debt securities, at cost||12.9||%||13.2||%|
|Average investment by portfolio company, at amortized cost (excluding those below $5.0 million)||$||25.8||$||29.1|
- The composition of our portfolio invested in senior secured loans and unsecured or subordinated debt securities increased a respective 4% and 2% to a respective 48% and 19%, while our concentration in senior secured notes declined 6% to 9%, as compared to the prior quarter. Although our sale of Electrical Components International during the quarter removed a significant amount of fair value from our equity investments, this was offset primarily by continued appreciation in our existing investments as well as a $42.9 million decrease in the size of our overall portfolio during the quarter, resulting in a modest 4% decline in our equity investments to 17% at quarter end.
- Net unrealized appreciation decreased $34.6 million during the current quarter, due primarily to $48.6 million of unrealized appreciation reversals on investment exits. Removing such reversals, the current portfolio appreciated $14.0 million in value during the quarter. Taken in conjunction with $49.0 million of realized gains during the period, our net realized and unrealized gains of $14.4 million helped to drive our net asset value per share up another $0.20 for the quarter to $9.79 per share at June 30, 2014. This was a further increase over our $9.37 net asset value per share at this time last year.
- For the quarter, fee income earned due to capital structuring, commitment, administration and amendment fees, as well as prepayment penalties and fees earned in connection with the early repayment of certain investments totaled $5.9 million, or $0.08 per share, as compared to $0.9 million, or $0.01 per share for the prior quarter. Although there were only $4.5 million more exits during the current quarter as compared to the prior quarter, all three of the exits were accompanied by a prepayment fee, accounting for $4.7 million of the $5.9 million for the quarter. Removing fee income, our remaining investment income decreased from $28.7 million to $27.9 million during the second quarter of 2014.
- There was an additional $3.0 million accrual during the quarter for incentive management fees based on gains, driven by a $14.8 million increase in net realized and unrealized gains for the twelve month measurement period ending June 30, over a net $146.1 million as of last quarter end. A hypothetical liquidation is performed each quarter end possibly resulting in an additional accrual if the amount is positive, however the resulting fee accrual is not due and payable until June 30, if at all. Taken in conjunction with $2.7 million of gross unrealized depreciation on a security by security basis over the same measurement period, $16.2 million of incentive management fees based on gains is earned and due at this time. Furthermore, while no incentive management fees based on income were earned and payable during the quarter, pro-forma incentive management fees earned were $2.6 million, had they been accrued ratably throughout the year.
- Our leverage, net of available cash, stood at 0.34 times at quarter end providing us with available debt capacity under our asset coverage requirements of $392.0 million and $380.0 million available under our senior secured, revolving credit facility.
- As compared to last year, our weighted average cost of debt decreased 49 basis points to 5.01% due to securing more favorable pricing with the amendment of our credit facility earlier this year. Average debt outstanding increased from $359.5 million last year to $449.6 million this year, resulting in a 7.4% increase in total borrowing costs during the quarter as compared to last year’s quarterly average.
- Our net investment income, as adjusted, was $0.23 per share, relative to distributions declared of $0.21 per share, resulting in net investment income dividend coverage of 108%. Realized gains during the quarter provided another $0.66 per share of earnings with no accompanying distribution requirement, resulting in $0.89 per share of combined net investment income and realized gains, for dividend coverage of 421%. We expect to reinvest these proceeds in attractive opportunities.
- Tax characteristics of all 2013 distributions were reported to stockholders on Form 1099 after the end of the calendar year. Our 2013 distributions of $1.04 per share were comprised of ordinary income of $0.60 and a $0.44 return of capital, bringing our return of capital distributions since inception to $1.70 per share. As part of our strategic tax planning, from time to time we are able to reduce our investment company taxable income by losses taken on ordinary assets, thus minimizing the amount of taxable income to be reported by our shareholders. For more information on our GAAP distributions, please refer to the Section 19 Notice that will be posted within the Distribution History section of our website.
- We intend to continue to make timely distributions sufficient to satisfy the annual distribution requirements to maintain our qualification as a RIC. We also intend to make distributions of net realized capital gains, if any, at least annually. We may, at our discretion, carry forward taxable income in excess of calendar year distributions and pay a 4% excise tax on this income. We will accrue excise tax on estimated undistributed taxable income as required. There was no undistributed taxable income carried forward from 2013.
Conference CallBlackRock Kelso Capital will host a webcast/teleconference at 4:30 p.m. (Eastern Time) on Thursday July 31, 2014 to discuss its second quarter 2014 financial results. All interested parties are welcome to participate. You can access the teleconference by dialing, from the United States, (800) 374-0176, or from outside the United States, (706) 679-3431, shortly before 4:30 p.m. and referencing the BlackRock Kelso Capital Corporation Conference Call (ID Number 44069084). A live, listen-only webcast will also be available via the investor relations section of www.blackrockkelso.com. Both the teleconference and webcast will be available for replay by 7:30 p.m. on Thursday, July 31, 2014 and ending at midnight on Thursday, August 7, 2014. To access the replay of the teleconference, callers from the United States should dial (855) 859-2056 and callers from outside the United States should dial (404) 537-3406 and enter the Conference ID Number 44069084. Prior to the webcast/teleconference, an investor presentation that complements the earnings conference call will be posted to BlackRock Kelso Capital’s website within the presentations section of the investor relations page ( http://www.blackrockkelso.com/InvestorRelations/Presentations/index.htm).
|BlackRock Kelso Capital Corporation|
|Consolidated Statements of Assets and Liabilities|
|June 30, 2014||December 31, 2013|
|Investments at fair value:|
|Non-controlled, non-affiliated investments (cost of $715,221,690 and $854,947,802)||$||718,809,908||$||881,305,181|
|Non-controlled, affiliated investments (cost of $92,939,052 and $75,514,208)||165,780,087||134,096,291|
|Controlled investments (cost of $133,767,736 and $154,038,211)||134,807,279||202,570,992|
|Total investments at fair value (cost of $941,928,478 and $1,084,500,221)||1,019,397,274||1,217,972,464|
|Cash and cash equivalents||77,839,232||18,474,784|
|Receivable for investments sold||11,809,820||22,756,286|
|Prepaid expenses and other assets||10,629,386||11,410,320|
|Payable for investments purchased||$||5,270,709||$||21,000,000|
|Base management fees payable||6,109,949||5,803,497|
|Incentive management fees payable||32,182,873||34,725,204|
|Accrued administrative services||132,660||270,000|
|Other accrued expenses and payables||6,057,251||4,921,681|
|Common stock, par value $.001 per share, 200,000,000 common shares authorized,|
|76,083,447 and 75,827,692 issued and 74,447,692 and 74,402,185 outstanding||76,083||75,828|
|Paid-in capital in excess of par||896,910,279||894,649,992|
|Distributions in excess of taxable net investment income||(26,857,496||)||(19,373,748||)|
|Accumulated net realized loss||(203,869,392||)||(286,693,363||)|
|Net unrealized appreciation (depreciation)||73,956,386||130,522,308|
|Treasury stock at cost, 1,635,755 and 1,425,507 shares held||(11,256,295||)||(9,476,676||)|
|Total Net Assets||728,959,565||709,704,341|
|Total Liabilities and Net Assets||$||1,131,023,302||$||1,281,646,915|
|Net Asset Value Per Share||$||9.79||$||9.54|
|BlackRock Kelso Capital Corporation Consolidated Statements of Operations (Unaudited)||Three months ended June 30, 2014||Three months ended June 30, 2013||Six months ended June 30, 2014||Six months ended June 30, 2013|
|Non-controlled, non-affiliated investments||$||23,223,780||$||26,914,678||$||47,311,844||$||51,746,787|
|Non-controlled, affiliated investments||1,107,545||1,134,866||2,209,557||2,082,871|
|Total interest income||27,304,204||30,444,541||55,401,496||58,768,202|
|Non-controlled, non-affiliated investments||5,789,805||4,807,160||6,597,305||7,548,819|
|Non-controlled, affiliated investments||—||—||—||—|
|Total fee income||5,889,805||5,075,093||6,797,305||7,837,499|
|Non-controlled, non-affiliated investments||37,183||542,750||71,858||586,185|
|Non-controlled, affiliated investments||530,567||73,839||1,057,978||73,839|
|Total dividend income||567,750||616,589||1,129,836||660,024|
|Total investment income||33,761,759||36,136,223||63,328,637||67,265,725|
|Base management fees||6,109,949||5,189,226||12,270,568||10,539,182|
|Interest and credit facility fees||5,614,533||4,915,024||11,615,741||9,673,040|
|Incentive management fees||2,968,924||2,069,605||6,428,789||7,333,715|
|Investment advisor expenses||576,468||482,745||1,109,274||1,040,843|
|Amortization of debt issuance costs||519,071||496,542||1,063,670||862,548|
|Net Investment Income||16,431,325||21,219,854||27,525,520||34,183,932|
|Realized and Unrealized Gain (Loss):|
|Net realized gain (loss):|
|Non-controlled, non-affiliated investments||565,806||(26,340,317||)||34,393,051||(26,287,812||)|
|Non-controlled, affiliated investments||—||—||—||21|
|Net realized loss||48,996,726||(58,394,366||)||82,823,971||(58,181,024||)|
|Net change in unrealized appreciation or depreciation on:|
|Non-controlled, non-affiliated investments||2,040,958||16,270,922||(23,299,061||)||22,003,879|
|Non-controlled, affiliated investments||11,583,803||9,604,746||14,258,952||24,019,143|
|Foreign currency translation||273,127||(635,863||)||(32,575||)||(385,833||)|
|Net change in unrealized appreciation or depreciation||(34,561,001||)||49,197,909||(56,565,922||)||65,817,628|
|Net realized and unrealized gain (loss)||14,435,725||(9,196,457||)||26,258,049||7,636,604|
|Net Increase in Net Assets Resulting from Operations||$||30,867,050||$||12,023,397||$||53,783,569||$||41,820,536|
|Net Investment Income Per Share – basic||$||0.22||$||0.29||$||0.37||$||0.46|
|Earnings Per Share - basic||$||0.41||$||0.16||$||0.72||$||0.56|
|Weighted-Average Shares Outstanding - basic||74,534,449||74,096,355||74,526,045||74,027,408|
|Net Investment Income Per Share - diluted||$||0.21||$||0.27||$||0.36||$||0.45|
|Earnings Per Share - diluted||$||0.39||$||0.16||$||0.68||$||0.54|
|Weighted-Average Shares Outstanding - diluted||84,431,176||83,993,082||84,422,772||81,190,233|
|Dividends Declared Per Share||$||0.21||$||0.26||$||0.47||$||0.52|
The Company records its liability for incentive management fees based on income as it becomes legally obligated to pay them, based on a hypothetical liquidation at the end of each reporting period. The Company’s obligation to pay incentive management fees with respect to any fiscal quarter is based on a formula that reflects the Company’s results over a trailing four-fiscal quarter period ending with the current fiscal quarter. The Company is legally obligated to pay the amount resulting from the formula less any cash payments of incentive management fees during the prior three quarters. The formula’s requirement to reduce the incentive management fee by amounts paid with respect to such fees in the prior three quarters has caused the Company’s incentive management fee expense to become, and currently is expected to be, concentrated in the fourth quarter of each year. Management believes that reflecting incentive management fees throughout the year, as the related investment income is earned, is an effective measure of the Company’s profitability and financial performance that facilitates comparison of current results with historical results and with those of the Company’s peers. The Company’s “as adjusted” results reflect incentive management fees based on the formula the Company utilizes for each trailing four-fiscal quarter period, with the formula applied to the current quarter’s incremental earnings and without any reduction for incentive management fees paid during the prior three quarters. The resulting amount represents an upper limit of each quarter’s incremental incentive management fees that the Company may become legally obligated to pay at the end of the year. Prior year amounts are estimated in the same manner. These estimates represent upper limits because, in any calendar year, subsequent quarters’ investment underperformance could reduce the incentive management fees payable by the Company with respect to prior quarters’ operating results. Similarly, the Company records its liability for incentive management fees based on capital gains by performing a hypothetical liquidation at the end of each reporting period. The accrual of this hypothetical capital gains incentive management fee is required by GAAP, but it should be noted that a fee so calculated and accrued is not due and payable until the end of the measurement period, or every June 30. The incremental incentive management fees disclosed for a given period are not necessarily indicative of actual full year results. Changes in the economic environment, financial markets and other parameters used in determining such estimates could cause actual results to differ and such differences could be material. For a more detailed description of the Company’s incentive management fee, please refer to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2013 on file with the Securities and Exchange Commission ("SEC").
Computations for the periods below are derived from the Company's financial statements as follows:
|Three months ended June 30, 2014||Three months ended June 30, 2013||Six months ended June 30, 2014||Six months ended June 30, 2013|
|Net Investment Income||$||16,431,325||$||21,219,854||$||27,525,520||$||34,183,932|
|Net Investment Income per share||0.22||0.29||0.37||0.46|
|Addback: GAAP incentive management fee expense based on Gains||2,968,924||1,695,021||6,428,789||5,415,747|
|Addback: GAAP incentive management fee expense based on Income||—||374,584||—||1,917,968|
|Pre-Incentive Fee 2 :|
|Net Investment Income||$||19,400,249||$||23,289,459||$||33,954,309||$||41,517,647|
|Net Investment Income per share||0.26||0.31||0.46||0.56|
|Less: Incremental incentive management fee expense based on Income||2,576,791||4,178,233||2,853,998||6,276,473|
|As Adjusted 1 :|
|Net Investment Income||$||16,823,458||$||19,111,226||$||31,100,311||$||35,241,174|
|Net Investment Income per share||0.23||0.26||0.42||0.48|
The Company's investment objective is to generate both current income and capital appreciation through debt and equity investments. The Company invests primarily in middle-market companies in the form of senior and junior secured and unsecured debt securities and loans, each of which may include an equity component, and by making direct preferred, common and other equity investments in such companies.Forward-Looking Statements This press release, and other statements that BlackRock Kelso Capital may make, may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act, with respect to BlackRock Kelso Capital’s future financial or business performance, strategies or expectations. Forward-looking statements are typically identified by words or phrases such as “trend,” “potential,” “opportunity,” “pipeline,” “believe,” “comfortable,” “expect,” “anticipate,” “current,” “intention,” “estimate,” “position,” “assume,” “outlook,” “continue,” “remain,” “maintain,” “sustain,” “seek,” “achieve,” and similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “may” or similar expressions. BlackRock Kelso Capital cautions that forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Forward-looking statements speak only as of the date they are made, and BlackRock Kelso Capital assumes no duty to and does not undertake to update forward-looking statements. Actual results could differ materially from those anticipated in forward-looking statements and future results could differ materially from historical performance. In addition to factors previously disclosed in BlackRock Kelso Capital's SEC reports and those identified elsewhere in this press release, the following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance: (1) our future operating results; (2) our business prospects and the prospects of our portfolio companies; (3) the impact of investments that we expect to make; (4) our contractual arrangements and relationships with third parties; (5) the dependence of our future success on the general economy and its impact on the industries in which we invest; (6) the ability of our portfolio companies to achieve their objectives; (7) our expected financings and investments; (8) the adequacy of our cash resources and working capital, including our ability to obtain continued financing on favorable terms; (9) the timing of cash flows, if any, from the operations of our portfolio companies; (10) the impact of increased competition; (11) the ability of our investment advisor to locate suitable investments for us and to monitor and administer our investments; (12) potential conflicts of interest in the allocation of opportunities between us and other investment funds managed by our investment advisor or its affiliates; (13) the ability of our investment advisor to attract and retain highly talented professionals; (14) fluctuations in foreign currency exchange rates; and (15) the impact of changes to tax legislation and, generally, our tax position.
BlackRock Kelso Capital’s Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC identifies additional factors that can affect forward-looking statements.Available Information BlackRock Kelso Capital’s filings with the SEC, press releases, earnings releases and other financial information are available on its website at www.blackrockkelso.com. The information contained on our website is not a part of this press release. 1 Non-GAAP basis financial measure. See Supplemental Information on page 6.