TEXT-Fitch on BlackRock Kelso Capital Corp
Feb 12 - Fitch Ratings has published a 'BBB-' Long-term Issuer Default Rating (IDR) and secured debt rating for BlackRock Kelso Capital Corporation (BKCC). The Rating Outlook is Stable. KEY RATING DRIVERS Fitch also expects to assign an unsecured debt rating of 'BBB-' to the company's planned unsecured convertible note issuance. The equalization of the ratings with the secured debt reflects the company's relatively low leverage, its focus on secured debt investments, and Fitch's expectation that proceeds from the issuance will be used to repay a portion of secured debt outstanding. As such, Fitch does not believe the new issuance will have a material impact on BKCC's overall leverage. Fitch believes the unsecured issuance will improve BKCC's funding flexibility. BKCC's ratings reflect the company's solid management team, strong asset quality, relatively consistent core operating performance, improved earnings coverage of the dividend, relatively low leverage, and the strength of the company's relationships with BlackRock, Inc. and principals of Kelso & Company. BlackRock and Kelso have a variety of capabilities from which BKCC may benefit, including access to middle market deal flow, research and investment expertise, risk management capabilities and administrative functions. Since its initial public offering in July 2007, BKCC has focused on generating current income through its debt portfolio and capital appreciation through equity investments by investing in middle-market companies with annual revenues between $50 million and $1 billion. The majority of BKCC's investments have been in the form of senior secured debt. Senior secured portfolio investments accounted for approximately 74.9% of the total portfolio at Sept. 30, 2012. Portfolio investment concentrations in BKCC's portfolio are at the high-end of the peer-BDC average. At Sept. 30, 2012, the top ten portfolio investments as a percentage of assets and equity were 40.4% and 64.7%, respectively. This compares to the peer-rated BDC average of 40.8% and 59.9%, respectively. Non-accrual levels have declined since year-end 2011 and remain significantly below the peer-rated BDC average of 2.49%. BKCC's non-accrual loans as a percent of the debt portfolio at value was 0.14% at Sept 30, 2012, compared to 0.52% at Dec. 31, 2011. The company had one position on non-accrual status as of Sept. 30, 2012. BKCC's leverage, as measured by debt-to-equity was 0.55x at Sept. 30, 2012, which was below management's long-term target of 0.75x. Leverage increased slightly from 0.49x at Dec. 31, 2011, due to increased borrowings on the credit revolver to fund portfolio growth. While Fitch expects leverage to increase over time, driven by opportunistic origination volume, Fitch would expect the firm to consider accessing the equity markets as leverage approached the long-term target. BKCC's liquidity profile is considered adequate. At Sept. 30, 2012, balance sheet cash amounted to approximately $3.0 million, borrowing capacity on the secured revolver was $165.4 million, and portfolio sales and repayments generated $203.5 million of cash during the nine months ended Sept. 30, 2012. Net investment income coverage of dividends was 126.9% at Sept. 30, 2012, compared to 90.9% at Dec. 30, 2011, and the peer-rated BDC average of 104.7%. Fitch views the improved earnings coverage of the dividend favorably. Core operating performance was solid during the nine months ended Sept. 30, 2012, driven by a 14.5% increase in investment income to $109.4 million, as a result of the larger portfolio. Fee income during this period totaled $16.3 million, of which 53% represented non-recurring prepayment fees. Total expenses climbed 29.8% due to an increase in interest expense and base and incentive management fees as a result of increased borrowings under the credit facility and growth in the investment portfolio during this same time period. Net investment income for the nine months ended Sept. 30, 2012, was up 6.1% compared to the same period a year earlier. Investment income and net investment income yields on the portfolio have steadily risen since year-end 2010 and were 15.30% and 9.00% at Sept. 30, 2012, respectively. RATING SENSITIVITIES A negative rating action could result from: --A meaningful deterioration in operating performance; --A decline in asset quality; --An increase in leverage beyond management's articulated target; --Weaker cash earnings coverage of the dividend; --An inability to access the capital markets, and; --A significant increase in portfolio equity exposure without a commensurate decline in equity, which Fitch believes can create more volatility in the portfolio, given the need to fair value the portfolio on a quarterly basis. In addition, a negative rating action on the unsecured debt could be driven by an increase in secured debt outstanding, which would result in a decline in asset coverage on an unsecured basis. Positive rating momentum is likely limited over the near term given BKCC's limited funding flexibility and portfolio concentrations, but could be influenced over the longer term by consistent operating performance, increased portfolio diversification, and economical access to the unsecured markets. BKCC is headquartered in New York City, organized in April 2005, and completed its initial public offering in July 2007. BKCC is an externally managed BDC, with BlackRock Kelso Capital Advisors LLC serving as its investment adviser. The company has approximately $1.1 billion of assets as of Sept. 30, 2012, and its stock is listed on NASDAQ under the ticker BKCC. Fitch has published the following ratings with a Stable Outlook: BlackRock Kelso Capital Corporation --Long-term IDR 'BBB-' --Secured debt 'BBB-' Fitch expects to assign the following rating: BlackRock Kelso Capital Corporation --Senior unsecured debt 'BBB-' Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and Related Research: --'Global Financial Institutions Criteria' (Aug. 15, 2012); --'Investment Manager and Alternative Funds Criteria' (Dec. 17, 2012); --'Business Development Companies - A Comparative Analysis 1Q12' (June 26, 2012). Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria Investment Manager and Alternative Funds Criteria Business Development Companies - A Comparative Analysis 1Q12
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