Earnings Call Transcript - BCIC Q3 2025

Operator, Operator

Welcome to BCP Investment Corporation Third Quarter Ended September 30, 2025 Earnings Conference Call. An earnings press release was distributed yesterday, November 6, after the market closed. A copy of the release along with the earnings presentation is available on the company's website at www.bcpinvestmentcorporation.com in the Investor Relations section and should be reviewed in conjunction with the company's Form 10-Q filed yesterday with the SEC. As a reminder, this conference call is being recorded for replay purposes. Please note that today's conference call may contain forward-looking statements, which are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in forward-looking statements as a result of a number of factors, including those described in the company's filings with the SEC. BCP Investment Corporation assumes no obligation to update any such forward-looking statements unless required by law. Speaking on today's call will be Ted Goldthorpe, Chief Executive Officer, President and Director of BCP Investment Corporation; Brandon Satoren, Chief Financial Officer; and Patrick Schafer, Chief Investment Officer. With that, I would now like to turn the call over to Ted Goldthorpe, Chief Executive Officer of BCP Investment Corp. Please go ahead, Ted.

Edward Goldthorpe, CEO

Good morning. Welcome to our third quarter 2025 earnings call. I'm joined today by our Chief Financial Officer, Brandon Satoren, and our Chief Investment Officer, Patrick Schafer. Following my opening remarks on the company's performance and activities during the third quarter, Patrick will provide commentary on our investment portfolio and our markets, and Brandon will discuss our operating results and financial condition in greater detail. We are pleased to report strong results for the third quarter, our first earnings as a combined company on the completion of our merger with Logan Ridge on July 15, 2025. This milestone marks the beginning of a new chapter for BCIC, as we continue to leverage our expanded scale, broader portfolio diversification, and enhanced operating efficiency to drive long-term value for shareholders. I'm pleased to report meaningful progress on the value creation initiatives we announced in June 2025. Notably, consistent with our previously stated intentions, the company plans to commence a modified Dutch auction tender for approximately $9 million, combined with the daily share repurchases executed by the company under the buyback program as well as open market purchases by management, the adviser, and its affiliates. We anticipate total repurchases, when combined with management's, adviser, and its affiliates' ownership of BCIC's outstanding stock, can approximate 10% by year-end. These actions underscore our continued focus on driving shareholder value and narrowing the discount to NAV. During the quarter, we generated net investment income of $8.8 million or $0.71 per share compared with $4.6 million or $0.50 per share in the prior quarter. We expect to realize further benefits of our expanded scale and broader investment platform. For the fourth quarter of 2025, the Board of Directors approved a base distribution of $0.47 per share, which when annualized based on the November 6, 2025 closing price of $12.13 per share represents a yield of 15.5%. Before handing over the call, I'd like to take a moment to address recent commentary in the broader private credit markets. While recent high-profile collapses of certain borrowers have understandably drawn market attention, we firmly believe the full scale of concern for the overall private credit market is unwarranted. Echoing sentiment from other leaders in our industry, in the case of First Brands, for example, only 2% of its nearly $12 billion balance sheet was linked to private credit, highlighting that events like this aren’t signs of systemic weakness, even if the sector has been subject to disproportionately heightened scrutiny despite its limited involvement in these high-profile bankruptcies. Looking ahead, our focus remains on disciplined capital allocation, maintaining a high-quality portfolio, and delivering attractive risk-adjusted returns to our shareholders. With a larger, more diversified platform and a stronger balance sheet, we believe we are well positioned to drive continued earnings growth and long-term value creation. With that, I will turn the call over to Patrick Schafer, our Chief Investment Officer, for a review of our investment activity.

Patrick Schafer, CIO

Thanks, Ted. Overall M&A activity in our core markets continued to increase during the quarter as a combination of easing benchmark rates and a more settled tariff framework gave sponsors more confidence in the macro environment. To illustrate this, over 80% of our new fundings during the quarter were new borrowers, a significantly higher percentage than what has historically been the case over the last several quarters. With the renewed activity has also come renewed competition on deals and an overall tightening of spreads. As we've noted in the past, our focus on companies with less than $50 million of EBITDA and our sourcing of nonsponsor-backed companies provides some insulation to these trends. We continue to be selective from a credit quality perspective and are focused on maximizing risk-adjusted returns for our shareholders. Turning to Slide 10. Originations for the third quarter were $14.2 million and repayments of sales were $43.8 million, resulting in net repayments and sales of approximately $29.6 million. Overall yield on par of the new debt investments during the quarter was 12.5%. This compares to a 13.8% weighted average annualized yield, excluding income from nonaccruals and collateralized loan obligations, as of September 30, 2025. Excluding the impact of purchase discount accounting, the weighted average annualized yield, excluding income from non-accruals and collateralized loan applications, was approximately 10.3% as of September 30, 2025. Our investment portfolio at year-end remained highly diversified. We ended the third quarter with a debt investment portfolio, when excluding our investments in CLO funds, equities, and joint ventures, spread across 79 different portfolio companies and 28 different industries, with an average par balance of $3.2 million per entity. Turning to Slide 11. At the end of the third quarter of 2025, we had 10 investments on nonaccrual status, representing 3.8% and 6.3% of the portfolio at fair value and cost, respectively. This compares to 6 investments on nonaccrual status as of June 30, 2025, representing 2.1% and 4.8% of the portfolio at fair value and cost, respectively. I would note that the quarter-over-quarter increase includes investments acquired through the Logan Ridge transaction that were on nonaccrual at the time of that transaction. It's further worth noting that for 2 of the investments currently on nonaccrual status, we continue to recognize interest income on a cash basis, but only when payments are actually received. On Slide 12, excluding our nonaccrual investments, we have an aggregate debt investment portfolio of $429.5 million at fair value, which represents a blended price of 93.1% of par value and is 84.4% comprised of first-lien loans at par value. Assuming the par recovery, our September 30, 2025 fair values reflect a potential of $31.2 million of incremental net value or a 13.7% increase to NAV. But applying an illustrative 10% default rate and 7% recovery rate, our debt portfolio would generate an incremental $1.36 per share of NAV or a 7.8% increase. I'll now turn the call over to Brandon to further discuss our financial results for the quarter.

Brandon Satoren, CFO

Thanks, Patrick. For the quarter ended September 30, 2025, the company generated $18.9 million in investment income, an increase of $6.3 million compared to $12.6 million reported for the quarter ended June 30, 2025. Core income for the same periods was $15.3 million and $12.6 million, respectively. The increase in investment income from the prior quarter was primarily driven by the Logan Ridge acquisition, which contributed $7.4 million of GAAP income and $3.8 million of core. For the quarter ended September 30, 2025, gross expenses were $10.3 million, and net expenses were $10.1 million, which includes the $0.2 million performance-based incentive fee waiver. This represents a $2 million increase compared to $8.1 million for the prior quarter. The increase in expenses compared to the prior quarter reflects the larger combined company. Accordingly, our net investment income for the quarter ended September 30, 2025, was $8.8 million or $0.71 per share, which constitutes an increase of $4.3 million or $0.21 per share from $4.6 million or $0.50 per share for the second quarter of 2025. Core net investment income for the third quarter of 2025 was $5.3 million or $0.42 per share compared to $4.6 million or $0.50 per share for the second quarter of 2025. As of September 30, 2025, our net asset value totaled $231.3 million, an increase of $66.6 million from the prior quarter's NAV of $164.7 million. The increase in total NAV on a gross dollar basis was primarily driven by net realized and unrealized gains of $14.8 million, the $49.6 million impact on a GAAP basis of the Logan Ridge acquisition, partially offset by the third quarter distribution exceeding core net investment income compared to the prior quarter's distribution of $1.1 million. On a per-share basis, NAV was $17.55 per share as of September 30, 2025, representing a $0.34 decrease compared to $17.89 as of June 30, 2025. The decline in NAV per share was primarily due to core net investment income, which excludes purchase discount accretion, not fully covering the dividend for the quarter and approximately $4 million of mark-to-market losses across the portfolio. As of September 30, 2025, our gross and net leverage ratios were 1.4x and 1.3x, respectively, compared to 1.6x and 1.4x, respectively, in the prior quarter. Specifically, as of September 30, 2025, we had a total of $324.6 million of borrowings outstanding with a current weighted average contractual interest rate of 6.1%. This compares to $255.4 million of borrowings outstanding as of the prior quarter with a weighted average contractual interest rate of 6%. The company finished the quarter with $110 million of available borrowing capacity under the senior secured revolving credit facilities, subject to borrowing base restrictions. Consistent with our long-term capital approach, we proactively extended and laddered our unsecured debt maturities, issuing a $75 million, 7.75% note that is due in October 2030 and a $35 million, 7.5% note due October 2028, while at the same time, initiating the redemption of our 4.875% notes due in April 2026, expected to be completed on or about November 13. These actions diversify funding, reduce near-term refinancing risk, and enhance financial flexibility. With that, I will now turn the call back over to Ted.

Edward Goldthorpe, CEO

Thanks, Brandon. Other questions, I'd like to reemphasize how excited we are about the opportunities the newly combined company is already creating. As we move forward, our focus remains on disciplined capital allocation, maintaining a high-quality portfolio, and delivering attractive risk-adjusted returns for our shareholders. With a more diversified platform and a strengthened balance sheet, we believe we are well positioned to drive the continued earnings growth and value creation in the quarters ahead. Thank you once again to all of our shareholders for your ongoing support. This concludes our prepared remarks, and I'll turn over the call for any questions.

Operator, Operator

Your question comes from the line of Erik Zwick with Lucid Capital Markets.

Erik Zwick, Analyst

To start first, I wanted to start first in terms of your announcement of potentially repurchasing 10% of the shares. Just want to make sure, is that relative to the 9.30 million outstanding balance of about 13.96 million?

Brandon Satoren, CFO

It's relative to the transaction closing shares, which was about 13.2 million off the top of my head. Let me...

Edward Goldthorpe, CEO

Yes, when we announced and closed the transaction, we committed to shareholders that we would buy back a significant amount of stock as soon as practically possible. And obviously, we were in a blackout period until today. So the intention is to buy back 10% of the closing amount of shares.

Patrick Schafer, CIO

But Erik, the short answer is there weren't many days in Q3 that we could do anything because of some of the rules around the 6-day pull-off period, things like that. So it's off a slightly higher number than September 30, but that's going to be a decent approximation.

Brandon Satoren, CFO

That's right. If you recall, we had to wait 60 days after closing before we could turn the buyback back on, but we did provide some color on post-quarter end. Daily repurchases in our subsequent events totaled about $1.2 million.

Erik Zwick, Analyst

Actually, yes, I did see that, too. So great. Yes. That's helpful. And then secondly, looking at Slide 11 and just noticing the quarter-over-quarter improvement in your internal ratings performing versus underperforming. Was the majority of that change from June 30 to September 30, the result of the combination as well? Or is there any additional kind of upgrades going on within the combined portfolio?

Patrick Schafer, CIO

Yes. I mean, the short answer is both. There were certain upgrades going into the portfolio, but the reality is we added a significant chunk through Logan, and kind of using those internal ratings gives you that insight. So again, it’s a little bit of both, but my hunch is, without giving the specifics, it's probably the assets from Logan coming onto the balance sheet that have influenced those ratings more so than a broad swath of increases.

Edward Goldthorpe, CEO

Yes, probably the biggest surprise for us over the last 6 months is we really haven't had a lot of negative portfolio surprises. And we've had a bunch of positive portfolio surprises. Our LPs and our shareholders are a little rattled by some of the recent headlines out there around First Brands, Tricolor, and this telecom name last week. The reality is a lot of those are really idiosyncratic. Many of them are related to fraud, and a lot of the underperformance has been in their asset-based parts of their business as opposed to their cash flow-based parts. So this BDC sell-off, we think, is probably overdone. It is beginning to correct a little bit, but we're not seeing broad-based weakness in our portfolio.

Erik Zwick, Analyst

I appreciate the commentary there. And I would echo that sentiment just from the number of portfolios I've reviewed so far this earnings season. And just with respect to the 10 credits that are on nonaccrual at this point. Could you just kind of maybe walk through your strategy and methodology for resolving those, if there's any potential for restructurings or sales or resolutions in the near term for any of those?

Patrick Schafer, CIO

Yes, Erik, I mean, the short answer is they're all very company specific. So there's one name that we're in the process of restructuring, and that hopefully is going to get resolved in Q4, it may flip into Q1, but that's a relatively near-term thing that we'll get resolved out. There's one of them that is sort of for sale in the market and hopefully has a couple of provisions, and we hope it gets resolved in Q4. Other than that, the rest of them are again on a case-by-case basis, focusing on what's the best return by either putting a little bit more capital to growing the businesses, looking for restructuring the balance sheet, or just kind of an outright sale. Each opportunity is unique and has its own trajectory. But there are again probably 2 or 3 companies that we would hope to have a near-term resolution on.

Edward Goldthorpe, CEO

Erik, it's worth highlighting. Last quarter, you may have noticed there were 2 assets we put on cash basis income recognition, that's generally a good indicator when you start recognizing some income on the assets. And again, when those assets are current on the debt and paying their coupon interest.

Operator, Operator

Your next question comes from the line of Steven Martin with Slater Capital.

Steven Martin, Analyst

Congratulations on getting the deal done and starting the cleanup process. With respect to the buyback, which we applaud, how is that going to affect your ability to continue to do deals going forward? And can you also talk about what the Q4 activity level looks like?

Edward Goldthorpe, CEO

Yes, I'll address the first comment. This quarter, we entered with substantial cash as we were preparing for this. If you take a broad view, considering the spreads in the middle market relative to our stock price, it remains beneficial for us to repurchase shares. There's a considerable pipeline that I should really let Patrick discuss, but it largely consists of what I would characterize as generic sponsored finance. The opportunity for premium pricing or wider spreads in that area might not be as strong, as our supply is somewhat limited, similar to L475, L500. Currently, we're not encountering many wider spreads that meet our criteria. Patrick, do you agree with that?

Patrick Schafer, CIO

No, those are right. I've kind of said this several times on our calls. But from our perspective, it's around getting the right pipeline in the portfolio as opposed to, as I said, that we could load up on S475, and L500 unitranches. I'm not sure that that ultimately yields the right return on equity for our shareholders. So we're being careful and judicious with how we actually deploy our capital, but we do have a very, very large pipeline of opportunities to the extent that we feel like the credit and pricing are aligned.

Steven Martin, Analyst

I applaud both, and we have been a proponent of management increasing its stake as well. Just out of curiosity, has there been any further realizations? I assume most of what's in the legacy LRFC portfolio is still a lot of equity?

Patrick Schafer, CIO

No, I don't think that's a fair statement. I don't have the number off the top of my head to be honest, Steve. But it's probably disproportionate relative to the rest of our book. But I would have to run the math, but maybe it's 1/3 to 1/2 of it, so around $20 million or so in equity. But I would not say it's the majority of it.

Steven Martin, Analyst

Okay. On that same page, just out of curiosity on Page 10, the weighted average yield on debt investments at par is 13.8%. Does that have something to do with the purchase accounting because it jumped up from 10.7% to 13.8%?

Edward Goldthorpe, CEO

Yes, that's exactly right. So on a core basis, it's about 10.3%, Steve. But that is the impact of purchase accounting accretion. You may note when you do an asset acquisition, the Board negotiates everything on a NAV-for-NAV basis, but the actual accounting for it, when you issue the equity, it is issued at the market price or closing stock price on the issuance date. So because of the discount to NAV on the issuance date, that creates a large disconnect between the NAV you're bringing on and the dollar value of the purchase reflected in your financials, which is accretive.

Steven Martin, Analyst

Got that. You might want to consider either footnoting that or putting a second number there?

Patrick Schafer, CIO

Yes, good call. Again, putting the two portfolios together was slightly dilutive on a yield at par basis. But as I mentioned on the call, our new origination was about 12.5% yield. So obviously, we're being thoughtful and selective about our new investments to work on increasing that yield despite sort of where spreads are going in the market in general.

Steven Martin, Analyst

Okay. Can you talk about PIK this quarter? It didn't move too much, and what's going on with the PIK side of the portfolio?

Brandon Satoren, CFO

Steve, it actually did come down quite a bit as a percentage of the book. It's down to about 14.3%, and it was quite a bit higher than last quarter, north of 20%, I believe, around 19.5%.

Edward Goldthorpe, CEO

Yes, that's right. Yes, I mean, it has come down quite materially, Steve. It's come down on a combined basis by a quarter.

Patrick Schafer, CIO

Yes, by 5 points. And again, we are, as I said, in our strategy, we have a mix of cash and PIK; we have investments that we look at a first-lien and a preferred equity investment together for the same company, and that preferred is PIK and the first lien is cash. So again, as you've kind of noted before, not all PIK are bad PIK, but we are certainly actively working to reduce that number and are conscious of market perception of that and are being careful as we think about new deals to ensure that we are overweighting cash opportunities versus those that have a blend of cash impact.

Brandon Satoren, CFO

Regarding overhead expenses and the expense side of the income statement. Is this quarter exemplary, or does this quarter still contain merger-related costs that are going to come out? So, this is actually a pretty decent run rate. Most of the transaction costs don't flow through the income statement here; they hit NAV on the closing date. There were some elevated expenses for time spent integrating the portfolios, et cetera. However, we closed on July 15. So there's next quarter, we'll have 15 days of extra expenses. However, we think that $1.9 million, $1.8 million number is a reasonable run rate for the combined.

Steven Martin, Analyst

Got it. Professional fees were elevated. Is that still residual?

Brandon Satoren, CFO

Yes, exactly.

Operator, Operator

Your next question comes from the line of Christopher Nolan with Ladenburg.

Christopher Nolan, Analyst

Steve, just asked all my questions.

Operator, Operator

Your next question comes from the line of Erik Zwick with Lucid Capital Markets.

Erik Zwick, Analyst

Just a quick follow-up. On the topic of the purchasing accounting accretion, was all of the discount recorded in 3Q? Or I suspect there may still be potentially more. So what is that balance and over what kind of time period will the remaining amount be recognized?

Brandon Satoren, CFO

Yes. Brandon here. It's generally recognized over the duration of the underlying assets themselves. So it's tough to tell you exactly when that would be. The decline curve, if you will, is going to be based on how those assets get monetized and what their maturity dates are, et cetera.

Erik Zwick, Analyst

In terms of, go ahead.

Brandon Satoren, CFO

I was going to say, Erik, there was about just north of $21 million of purchase accounting accretion. There's about $18 million left. I would just say, generally speaking, a lot of the purchase accounting increase tends to work its way through the book in the first couple of quarters after closing. It is recognized over time, but obviously, you have assets with shorter maturities and things like that and natural portfolio rotation as a result of the integration. That again, this quarter, we had $3.6 million on effectively a stub quarter.

Erik Zwick, Analyst

Yes. Okay. So a greater amount up front and it will kind of trail off as that portfolio matures and pays down over time. That's very helpful.

Operator, Operator

There are no further questions at this time. I will now turn the call back over to Ted Goldthorpe for closing remarks.

Edward Goldthorpe, CEO

Thank you all for attending our call. As always, please reach out to us with any questions, which we're happy to discuss. We look forward to speaking to you again in March when we announce our fourth quarter and full year 2025 results. Have a good weekend, and thank you very much.

Operator, Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.