BCP Investment Corp. (BCIC) Earnings Call Transcript & Summary

Thank you. 2026 earnings conference call. An earnings press release was distributed yesterday, August 6th, after market closed. A copy of the release along with an 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 guaranteed of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described in your company's filings with the SEC. BCP Investment Corporation assumes no obligation to update any such forward-looking statements unless required by law. Joining us 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 Schaefer, Chief Investment Officer. With that, I would now like to turn the call over to Ted Goldthorpe, Chief Executive Officer of BCP Investment Corporation. Please go ahead, Ted.

Good morning, and welcome to our second quarter 2026 earnings call. I'm joined today by our Chief Financial Officer, Brandon Satoren, and our Chief Investment Officer, Patrick Schaefer. Following my opening remarks on the company's performance and activities during the second quarter, Patrick will provide commentary on our investment portfolio and the broader market and Brandon will discuss our operating results and financial condition in greater detail. During the second quarter, we continued the execution against our plan as we strengthened our balance sheet and improved our asset coverage. We continued to reposition the portfolio, and we saw further improvement in our non-accrual profile. Subsequent to quarter end, we amended and upsized our KeyBank facility and used it to refinance and retire our Great Lakes Revolving Credit Facility with JPMorgan. Net asset value declined during the quarter, driven predominantly by unrealized mark-to-market movements across the portfolio, which I will discuss in more detail. Taken together, the actions we took during the quarter have improved our financial flexibility and reduced near-term refinancing risk. During the quarter, we generated total investment income of $15.2 million and core investment income of $12.9 million, both above the second quarter of 2025. Net investment income of $5.5 million, or $0.45 per share, which exceeded our distribution for the period, with core investment income of $0.27 per share covering our base distribution. We also saw further improvement in underlying credit performance, with non-accruals declining on a net basis to 5.7% of the portfolio at amortized cost from 6.2% in the prior quarter, and the number of portfolio companies on non-accrual declining to 7 from 9. We paid total distributions of $0.30 per share during the second quarter, comprised of our $0.27 base distribution and $0.03 supplemental distribution declared on our first quarter earnings. We're also paying monthly base distributions of $0.09 per share for July, August and September as declared in May. The Board has now approved a fourth quarter 2026 base distribution of $0.27 per share, payable in monthly installments of $0.09 per share in October, November, and December. With our monthly dividend structure now well established, we believe this framework provides shareholders with a regular cadence of cash distributions while maintaining the flexibility to declare supplemental distributions when supported by earnings. We also continue to enhance our capital structure through proactive liability management. During the quarter, we used proceeds from the $50 million of 7.5% notes due 2029 that we issued in March to redeem $40 million of our 2026 notes at par, and we further reduced outstanding borrowings under our revolving credit facility. In total, par borrowings declined by $56 million during the quarter to $286 million. Our asset coverage ratio improved to 162% from 156%, and gross leverage declined to 1.6x from 1.8x. Subsequent to quarter end, we amended our KeyBank credit facility, reducing applicable borrowing spreads during the reinvestment period by 30 basis points, extending the facility's reinvestment period and maturity, and increasing committed borrowing capacity from $75 million to $150 million. In connection with the amendment, we used borrowings under the upsized facility to repay in full all outstanding borrowings under our Great Lakes Revolving Credit Facility with JPMorgan, and the commitments under that facility were terminated. This consolidates our secured revolving borrowings into a single facility with a longer runway, improves our overall cost of capital, and provides greater financial flexibility as we continue to execute our investment strategy. Net assets per share declined to $14.49 per share this quarter, driven primarily by unrealized mark-to-market declines across the portfolio. Approximately 34% of this quarter's unrealized markdowns were attributable to investments classified as software in our consolidated schedule of investments, and approximately 47% when including software-exposed names, compared with approximately 40% and 70%, respectively, in the first quarter. We believe the majority of these markdowns continue to reflect sector-specific valuation pressure and broader market dislocation rather than fundamental credit deterioration. Approximately 93.5% of our software exposure is rated low to medium AI impact under our internal review, concentrated in mission-critical, vertically specialized businesses with proprietary data, embedded workflows, and high switching costs. And these are unrealized marks against senior secured positions with contracted cash flows and covenant protection. Our approach to deployment has not changed, but the environment has. Transaction volumes across the broader market were meaningfully lower this quarter, and in a slower market, we would rather be selective than compromise on structure. What we are finding is our best opportunities continue to come from smaller, more complex situations and from borrowers and sponsors we already know, where we can dictate terms rather than respond to a process. That is the same discipline we describe in our private credit portfolios. And the difference this quarter is we are applying it to a narrower set of transactions. As we look to the second half of 2026, we remain focused on active portfolio management, disciplined underwriting, and prudent capital allocation with a goal of driving long-term value for our shareholders. We are not relying on a market-wide recovery in M&A transaction activity. Our focus is on the opportunities we are sourcing directly and on the pipeline we've built in our core market. With that, I will turn the call over to Patrick Schaefer, our Chief Investment Officer, for a review of our investment activity.

Thanks, Ted. Before turning to the quarter, a few comments on our core market. Our core market has not changed. We continue to focus on companies with $15 million to $50 million of EBITDA in industries or business models where we have an edge, and ideally non-sponsor or non-traditional sponsor situations where we have the ability to drive pricing and structure. Given the continued uncertain macro environment, overall activity in our market has remained low, and terms on new deals have generally moved in our favor, with spreads on new issuance modestly wider than at year-end, as our clients value certainty of execution over pricing. More importantly, credit markets were generally stable during the quarter. The B-rated loan index improved modestly, and the loan benchmarks we used in our valuation process ended the quarter flat to slightly tighter. Software was the exception, with spreads widening further to a level several hundred basis points wide of the broader B-rated index. That divergence is an important context for our marks this quarter. Within software, our exposure continues to be concentrated in businesses with proprietary data, embedded workflows, and vertical market positioning. Markets have generally differentiated between these credits in a positive way relative to those without these characteristics. We're still in a world where the syndicated markets view all software as a four-letter word. As a result of that lower activity level during the second quarter, our investment activity remains measured and selective. We completed 3 new portfolio company investments and 4 follow-on investments during the period. Repayments and sales remained elevated for the quarter, reflecting a mix of borrowers refinancing or being acquired and the resolution of 2 non-accrual positions. As a result, originations for the quarter were $20.9 million, and repayments and sales were $34.9 million, resulting in net repayments and sales of approximately $14 million. A little over half of our originations by dollar amount came through increasing exposure to existing portfolio companies that we know and that are performing well. Overall, we are constantly evaluating our deployment levels relative to leverage levels and desire to repurchase stock. Turning to slide 10, the overall yield on par value of new debt investments during the quarter was 13.3%. This compares to 12.2% weighted average annualized yield excluding income from non-accruals and collateralized loan obligations as of June 30, 2026, and a weighted average annualized yield of 12.8% as of March 31, 2026. Our focus remains on credit quality, structure, and overall risk-adjusted returns. Our investment portfolio as of June 30, 2026, remained highly diversified. We ended the quarter with a debt investment portfolio of $349.7 million at fair value, excluding our investments in CLO funds, equities, and joint ventures, spread across 71 different portfolio companies and 33 different industries, with an average par balance of $3.2 million per investment. Turning to slide 11, our non-accrual profile continued to improve on a cost basis during the quarter. At the end of the second quarter, we had 11 investments on non-accrual status attributable to 7 portfolio companies, representing 3.1% and 5.7% of the portfolio at fair value and amortized cost, respectively. This compares to 12 investments attributable to 9 portfolio companies on non-accrual status as of March 31, 2026, representing 2.6% and 6.2% of the portfolio at fair value and cost. The number of investments and companies on non-accrual, along with the amortized cost percentage, both improved, though the fair value percentage increased, reflecting 1 additional investment placed on non-accrual during the quarter, alongside a lower total portfolio value. On slide 12, excluding our non-accrual investments, we had an aggregate debt investment portfolio of $335.6 million at fair value, representing a blended price of 88.6% of par value and 79.4% of that portfolio was comprised of first-lien loans at par value. During the par recovery, our June 30, 2026, fair value, implied approximately $43.2 million of incremental NAV value, or a 24.1% increase to NAV. Applying an illustrative 10% default rate and 70% recovery rate, the debt portfolio would imply approximately $2.57 per share of incremental NAV, or a 17.7% increase as the portfolio rotates. I'll now turn the call over to Brandon to further discuss our financial results for the period.

Thanks, Patrick. For the quarter ended June 30, 2026, the company generated $15.2 million in investment income as compared to $17.6 million reported for the quarter ended March 31, 2026. The decrease was largely due to net portfolio repayments and sales over the past several quarters, including $14 million in the second quarter, the impact of placing 1 investment on non-accrual status and lower corporate paydown and non-recurring fee income. For the same period, expenses were $9.6 million, or $1.1 million below the $10.7 million reported for the prior quarter. The decrease in expenses was primarily due to the absence of performance-based incentive fees during the quarter, as compared to approximately $0.9 million of incentive fees incurred in the first quarter of 2026. Accordingly, our net investment income for the second quarter of 2026 was $5.5 million, or $0.45 per share from $6.9 million, or $0.55 per share reported for the prior quarter. Core net investment income for the second quarter was $3.3 million, or $0.27 per share, compared to $4.1 million, or $0.33 per share, for the first quarter of 2026. As of June 30, 2026, our net asset value, or NAV, totaled $179.5 million, as compared to the prior quarter's NAV of $193 million. On a per share basis, NAV was $14.49 as of June 30, 2026, as compared to the prior quarter's NAV of $15.60. As Ted noted, the decline in NAV during the quarter was driven predominantly by unrealized mark-to-market declines across the portfolio. We also recorded a $10.5 million net realized loss relating primarily to the resolution of 2 positions that had been on non-accrual and were carried at a significant discount to cost. So those losses were substantially reflected in the net asset value reported in prior periods. Separately, the partial redemption of our 2026 notes resulted in a $0.4 million realized loss on extinguishment of debt from the write-off of unamortized deferred financing costs. As of June 30, 2026, our gross and net leverage ratios were both 1.6x, respectively, compared to 1.8x and 1.5x in the prior quarter. The increase in net leverage reflects the use of cash on hand to reduce borrowings and a lower net asset value. At quarter end, our total outstanding borrowings were $286.1 million, with an asset coverage ratio of 162%, compared to $342.2 million and 156%, respectively, as of March 31, 2026. As Ted mentioned, we redeemed $40 million of the 2026 notes during the quarter and reduced our outstanding borrowings under our revolving credit facilities. As of June 30, 2026, our total borrowings carried a weighted average contractual interest rate of approximately 7%, and we finished the quarter with $86 million of available borrowing capacity under our senior secured revolving credit facilities, subject to borrowing-based restrictions. Subsequent to quarter end, we amended the credit facility, reducing the spread by 30 basis points, extending the reinvestment period and maturity by 2 years, and increasing committed capacity from $75 million to $150 million. We also reduced the unfunded fee. In connection with the amendment, certain portfolio investments previously securing the JPMorgan Great Lakes Revolving Credit Facility were transferred into the KeyBank collateral pool and borrowings under the amended KeyBank credit facility were used to repay all outstanding borrowings under the JPMorgan Great Lakes Revolving Credit Facility, which was then terminated. This will be reflected in the third quarter and provides us with greater financial flexibility as we continue to execute our investment strategy. With that, I will turn the call back over to Ted.

Thank you, Brandon. Ahead of questions, I'd like to re-emphasize our commitment to our shareholders. Our focus remains on active portfolio management, disciplined underwriting, and diligent capital management with a goal of delivering sustainable long-term value creation for our shareholders. Thank you once again to all of our shareholders, employees, and partners for your ongoing support. This concludes our prepared remarks and I'll turn the call over for any questions.

[Operator Instructions] Your first question comes from the line of Eric Zwick with Lucid Capital Markets. Your line is open.

You've made some nice progress on deleveraging the balance sheet and bringing the leverage ratio down. I think there still may be, I'm curious if you agree, a little bit more room to go in terms of maybe reaching the target that you had laid out before. You know, to some degree, I think, you know, the valuation marks worked against you this quarter and, you know, who knows where those go. Hopefully, maybe next quarter reverse to some degree. But from what you can control, curious, do you expect to continue using, you know, cash flow from the investments and repayments potentially to continue paying down some of the borrowings at this point, or what are your kind of current thoughts on leverage and, you know, where it goes from here?

Yes, thanks, Eric. So I think, as you mentioned, we are still a little bit above kind of what we view our kind of long-term average to be. And so I think kind of consistent with the last couple of quarters, you know, you saw us be in a net repayment position, you know, repayments relative to deployments. I think you could probably reasonably expect that to kind of continue going forward, which is, you know, we do see a lot of good opportunity or good opportunities in the market, and we're being well, we believe we're being relatively prudent in terms of, you know, being selective on those new investments. But generally speaking, you know, trying to take advantage of repayments to overall reduce leverage.

It is also nice to see that the non-accrual count go down quarter over quarter. That are still on non-accrual, any noteworthy updates there of things that are, you know, maybe you've been working on for a little while, maybe getting a little closer to resolution that could potentially return to the accrual list at some point in the near future?

Yes, good question. I would say there's definitely like a couple of them are in various different stages. I would say probably on the margin between, you know, of the names in the list, I would say like what you'll generally see probably more likely is sort of a resolution and repayment of some amount of value, which again, we believe were kind of like recently marked relative to what we think a resolution would be. And then to reinvest those proceeds into something new or pay down debt, et cetera, relative to, again, for the most part, sort of like either resetting, and kind of continue to be invested in these particular portfolio companies. If you go down the list of them, most of them are legacy positions from different portfolios, and they're generally speaking on the longer end, and you've got a number of different lenders within these different portfolio companies and kind of everyone is, everyone in the groups, generally speaking, are sort of looking to, looking to sort of move on from a, and focus on new investments as opposed to kind of continuing to stay in these capital structures. So it's not just us, but I think, again, when you kind of scan through the list of them, by and large, you've got lender groups who are probably more excited to exit and replace that with a new portfolio company as opposed to continuing on as a lender.

Just thinking about the pipeline for new originations. You mentioned seeing some wider spreads and seeing some opportunities. I'm curious if there's any themes there in terms of industries where you're seeing stronger opportunities and then also just in terms of I guess kind of the opportunities, are they more towards growth or M&A? I'm guessing not refinancing at this point given kind of wider spreads and where rates are, but just kind of curious what you're seeing from that perspective.

Yes, good question. I would say, as you would imagine, so I'm not going out on a limb with a hot take, a lot of the companies that we are seeing are companies that would believe to be quote-unquote AI-proof, right? Business services, right? You know, things of that, you know, distribution businesses, things of that nature where you obviously don't have or have a much lower component of the, of AI risk that tends to be more of what we are seeing. But having said that, you do still see, and we are still seeing software deals being done in the private markets at reasonable leverage levels and not wider, but not insanely wide pricing with a good bid from private lenders. We haven't done a lot of that and certainly haven't done any of that in BCIC, but you are still, you know, I would say that the software market in private credit is not completely shut down. In terms of use of proceeds, again, I think generally speaking, it is for M&A as opposed to refinancing. Again, I know we said activity level is low and it is lower, but it still exists out there. And again, particularly in our size of the market where you're looking at $15 million to $50 million, a sponsor I think are a lot more willing to, you know, write a, you know, $100 million to, you know, $300 million check than, you know, if we were trying to fish in a, you know, $150 million to $400 million EBITDA business. I think there's a lot more, um, reticence from the sponsor community to be writing a $1.5 billion, $2 billion equity check or something, kind of given a little bit of the macro uncertainty. So I think in general, our market has fared a little bit better from an activity level. So again, to your point, most of what we are seeing is, I'd say, new purchase, just a minority investor that they've had in there, or, you know, a flip from a founder to a sponsor, or just kind of, again, a new founder, or a founder who is kind of looking to do a dividend recap and growth for the first time. Those tend to be the majority of our deals.

Your next question comes from the line of [ Frances Lau ] with [ Lucidia Capital ]. Your line is open.