Prepared remarks
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 the 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, 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. 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. 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 levels several hundred basis points wider than 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 negatively. As a result of that lower activity level during the second quarter, our investment activity remains measured and selective. We completed three new portfolio company investments and four 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 two 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 a 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 one 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 one 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 two positions that had been on non-accrual and were carried at a significant discount to cost. 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 two 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.
Questions and answers
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. To some degree, the valuation marks worked against you this quarter and 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 cash flow from the investments and repayments potentially to continue paying down some of the borrowings at this point, or what are your current thoughts on leverage and where it goes from here?
Thanks, Eric. I think, as you mentioned, we are still a little bit above what we view as our long-term average. Consistent with the last couple of quarters, you saw us be in a net repayment position, repayments relative to deployments. You could reasonably expect that to continue going forward, as we do see good opportunities in the market and we're being prudent and selective on new investments. Generally speaking, we are trying to take advantage of repayments to overall reduce leverage.
It is also nice to see that the non-accrual count went down quarter over quarter. For those still on non-accrual, any noteworthy updates there of things that you have been working on for a little while, maybe getting closer to resolution that could potentially return to the accrual list in the near future?
Good question. A couple of them are in various stages. On the margin among the names in the list, you will probably see more likely a resolution and repayment of some amount of value, which we believe were recently marked relative to what we think a resolution would be. Then we would reinvest those proceeds into something new or pay down debt. For the most part, these are legacy positions from different portfolios and are generally on the longer end. There are a number of different lenders within these portfolio companies and, generally speaking, lender groups are looking to move on from these capital structures and focus on new investments rather than continuing to stay in these structures. So it's not just us; there is broader lender interest in exiting.
Just thinking about the pipeline for new originations. You mentioned seeing some wider spreads and seeing some opportunities. Are there any themes in terms of industries where you're seeing stronger opportunities and are the opportunities more toward growth or M&A? I'm guessing not refinancing at this point given wider spreads and where rates are, but I'm curious what you're seeing from that perspective.
Good question. A lot of the companies we are seeing are ones we would consider to be 'AI-proof'—business services, distribution businesses, and the like, where there is a much lower component of AI risk. That is more of what we are seeing. Having said that, you still see software deals being done in the private markets at reasonable leverage levels with a good bid from private lenders. We haven't done much of that in BCP Investment Corporation, but the software market in private credit is not completely shut down. In terms of use of proceeds, generally it is for M&A as opposed to refinancing. Activity levels are lower, but transactions still exist, particularly in our size of the market where sponsors are more willing to write checks. Most of what we are seeing is new platform purchases, minority investments, founder-to-sponsor transactions, or dividends and growth financings 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.
On the back of the software question, I want a little more clarity on the unrealized depreciation. Half of that came from software this quarter. How do you get comfortable that this is not going to weigh on the NAV in future quarters?
I will speak first, then I'll turn it over to Patrick. Software is now less than 13% of our portfolio. Almost all of it is mission-critical with structural protections. There is a big split in valuations between software valuations that have liquid securities in the capital structure versus ones that do not. Our average dollar price tends to be in larger, more scaled software assets, which is good, and those tend to be marked lower because they have a liquid benchmark people can point to. We feel like we've taken the vast majority of our pain in this space. We think our assets are fundamentally good and there is potential upside in valuations here, though there remains uncertainty. Deals in the private markets are still getting done at attractive levels, and yet we're marked at discounts to par, so there is a disconnect between public valuations and where things are getting done in private markets.
Widening spreads are good for capital deployment. Two questions: how do you feel about the cadence of deploying capital in this market? Do you want to wait or go faster? Second, given where the stock is trading at a massive discount to NAV, is deployment into new deals better than buying back the stock here, being cognizant of the stock's liquidity?
We think spreads may widen given redemption pressure and a slowdown in fundraising, and the M&A market is not robust. Our pipeline is okay. In this environment, it makes sense to be selective. Regarding buybacks, during open windows where we're not blocked out, it often makes more sense to buy back our stock where it trades versus deploying new capital. There are limitations on how much we can buy, so it's always a balance between originating accretive assets and buying back stock. We are buying as much as we can personally and for our funds. We believe the stock doesn't reflect what we think is fair market value.
Your next question comes from the line of Christopher Nolan with Ladenburg Thalmann. Your line is open.
Should we expect the KeyBank facility to absorb the borrowings in the Great Lakes facility in the third quarter?
Yes, that's right. We'll have incremental borrowing capacity above and beyond what the two standalone facilities would otherwise have. You should think of it as absorbing the assets in the JPMorgan facility.
As a broader question about AI, how has that affected your diligence? When underwriting an investment, how do you gauge management's handling of AI and data risk?
That's an important and evolving question. Generally, as Patrick said earlier, we try to avoid sectors with AI risk. For any deal we do, we perform full IT diligence, historically focused on cyber. The area you mention is evolving rapidly. We have a team at BCP that applies AI expertise to our portfolio companies and we try to reflect this in our diligence, but the landscape is changing on a weekly basis.
I will now turn the call back over to Ted Goldthorpe for closing remarks.
Great. Thank you all for attending our call. As always, please feel free to reach out to us with any questions, which we're happy to discuss. We look forward to speaking to you again in November when we announce our third quarter of 2026 results and have a great end of the summer. Thank you.
Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.