Negative Points
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Net asset value declined to $14.49 per share from $15.60 in the prior quarter, driven predominantly by unrealized mark-to-market declines across the portfolio.
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Unrealized markdowns were heavily concentrated in software investments, with 34% of the quarter’s markdowns attributable to software and 47% when including software-exposed names.
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Investment income decreased to $15.2 million from $17.6 million in the prior quarter, due to net portfolio repayments and sales, non-accrual placements, and lower fee income.
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The company recorded a $10.5 million net realized loss relating to the resolution of two non-accrual positions, which negatively impacted NAV.
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Net leverage increased to 1.6 times from 1.5 times in the prior quarter, reflecting the use of cash to reduce borrowings and a lower net asset value.
Q & A Highlights
Q: Given the stock’s massive discount to NAV, is deploying capital into new deals better than buying back the stock here, being cognizant of the stock’s liquidity?A: CEO Ted Goldthorpe stated that the company should be buying back stock during open windows when not blacked out, as it makes more sense than deploying new capital given the stock’s trading level. He noted there is a limitation on how much they can actually buy, so it’s a balance between originating new assets that are accretive to shareholders and buying back as much stock as possible, as they believe the stock doesn’t reflect fair market value.
Q: How do you get comfortable that the unrealized depreciation from software investments is not going to weigh on the NAV in future quarters?A: CEO Ted Goldthorpe explained that software is now less than 13% of the portfolio, and almost all of it is mission-critical with structural protections. He noted a big split in valuations between software with liquid securities in the capital structure versus those without, with their larger, more scaled assets being marked lower due to liquid benchmarks. He believes they’ve taken the vast majority of the pain in the space and sees decent upside in valuations, citing that private market software deals are still getting done at L+550 at par while their positions are marked at significant discounts to par, creating a disconnect between public valuations and private market transactions.
Q: Do you expect to continue using cash flow from investments and repayments to pay down borrowings, and what are your current thoughts on leverage going forward?A: CIO Patrick Schaefer confirmed that the company is still slightly above its long-term average leverage target. Consistent with the last couple of quarters, they expect to remain in a net repayment position, being selective on new investments while taking advantage of repayments to overall reduce leverage.
Q: For investments still on non-accrual, are there any noteworthy updates on positions that could potentially return to the accrual list in the near future?A: CIO Patrick Schaefer indicated that a couple of non-accrual positions are in various stages of resolution. He noted that more likely outcomes would be resolution and repayment of some amount of value, which they believe are fairly marked relative to resolution expectations, rather than resetting or restructuring. He characterized most as legacy positions where lender groups are generally looking to exit and replace them with new portfolio companies.
Q: What themes are you seeing in the pipeline for new originations, and are opportunities more toward growth or M&A?A: CIO Patrick Schaefer stated that many companies they are seeing are “AI proof” businesses like business services and distribution with lower AI risk. He noted software deals are still being done in private markets at reasonable leverage levels with good bids from private lenders, though they haven’t done any in BCIC. Most opportunities are for M&A rather than refinancing, particularly in their market size of $15-50 million EBITDA, where sponsors are more willing to write smaller equity checks compared to larger transactions.
Q: Should we expect the KeyBank facility to just absorb the borrowings from the Great Lakes facility in the third quarter?A: CIO Patrick Schaefer confirmed this is correct, noting they will have incremental borrowing capacity above and beyond what the two standalone facilities would otherwise have. He said to think of it as the KeyBank facility absorbing the assets from the JP Morgan facility as of now.
Q: How has AI affected your diligence process, particularly regarding management’s intelligence in dealing with AI risks like data leakage?A: CEO Ted Goldthorpe acknowledged this is an evolving area. He noted they try to avoid sectors with AI risk and conduct full IT diligence focused on cyber and cyber insurance. He mentioned that BC Partners has a big team of AI experts that they apply to portfolio companies, and they try to pick up AI-related risks in IT diligence, though the landscape is evolving on a weekly basis.
Q: How do you feel about the cadence of deploying capital in the current market, and do you want to wait or go faster given widening spreads?A: CEO Ted Goldthorpe responded that they believe spreads are going to widen given redemption pressure in the space and the slowdown in fundraising. He noted the M&A market is not robust, so their pipeline is okay but not large. He emphasized the balance between originating new assets that are accretive versus buying back stock, reiterating their preference for buybacks given the stock’s discount to NAV.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
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