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BlackRock Capital: Shareholders Say Yes But Should Have Said No

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On May 4, 2018 in a Special Meeting of BlackRock Capital (BKCC) the shareholders agreed to allow the BDC to raise capital at a price below book, if deemed necessary by the Board. See the SEC filing above. The vote was not even close with the Yeas outnumbering the Nays by 3:1. This approval is valid for a year and is “limited” to the issuance of new shares equal to 25% of the current number outstanding.

Frankly, we’re a little surprised that BKCC’s shareholders would take this risk. The Investment Advisor – an affiliate of BlackRock – has not made any promises to co-invest with shareholders. Moreover, the ownership by the officers of the BDC is unusually light. See page 18 of the Proxy which shows that of 5 officers or officers/Directors, NONE own any shares in BKCC. (Independent Director ownership is a little more impressive, ranging between 29,500 shares and 133,625 shares per individual). BCIA – the Investment Advisor to the BDC – owns no shares in the company which it manages. (However- as mentioned on page 30 of the latest 10-Q– “other entities” affiliated with BlackRock and BCIA own 402,000 shares. That’s a paltry 0.6% of total shares outstanding, and is LOWER than the number owned a year ago by 15%). In fact, the Independent Directors own more shares than BlackRock and its managers several times over. Yet, the Board is still headed by a BlackRock officer rather than an “independent director”. (The only concession BlackRock has allowed shareholders is the creation of a “lead independent director” role in 2017, more than 10 years after BKCC became public.

Moreover, there’s also the issue of the revolving door for senior managers. Still listed in the Proxy as a shareholder is Donna Milia, but she resigned as CFO and Treasurer back in October 2017. More recently – and as we covered in an earlier article – the CEO of the BDC Michael Zugay resigned in the middle of the whole Proxy process, which required more communications with shareholders to swap out Director nominees. (There was also a Director resignee, but that was back in February 2017). Shareholders, by voting for the equity issuance proposal, are giving wide latitude to senior managers that they do not even know. (The current CEO is only listed as Interim).

With BKCC trading at a (22%) discount to book value (which dropped in the first quarter 2018 for a third quarter in a row) shareholders have voted themselves a major dilution risk. If BKCC was to pull the lever new shares would probably be offered at a 25%-30% discount to book ($5.4-$5.7 a share versus $5.94 currently). Maybe BKCC’s shareholders have convinced themselves that BlackRock would not presume to issue stock at such a low price. However that could be a dangerous presumption. The vote leaves the BDC Reporter – never a proponent of offering managers a blank cheque in this way without some appropriate concession of their own – is surprised and confused. We have no position in BKCC given the myriad uncertainties associated with its investment performance; whether the BDC will be merged with TCP Capital (TCPC) or managed by its principals (see our April 18, 2018 article) and if the current dividend is “sustainable”. This latest possible invitation to sell shares at a huge discount which the shareholders have foisted on themselves is just one more reason that we will stay away.

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