United States | Equity Research

FinanciaIs | BDCs
August 6, 2013
BLACKROCK KELSO CAPITAL CORP.
BKCC | 10.27
OVERWEIGHT | TARGET PRICE: $11
Change in Earnings Forecast

Arren Cyganovich, CFA
212 497 0862
arren.cyganovich@evercore.com
BradIey BaII
212 497 0866
brad.ball@evercore.com



PIease see the anaIyst certification and important discIosures at the end of this report. Evercore Group L.L.C. and affiIiates do and
seek to do business with companies covered in its research reports. Investors shouId be aware that the firm may have a confIict of
interest that couId affect the objectivity of this report. Investors shouId consider this report as onIy a singIe factor in making their
investment decision.
Company Statistics

Shares Outstanding (M) 74
Market Capitalization (M) $761
52-Week Price Range $8.96 - $10.82
Book Value/Share $9.37
Debt/Equity (x) 0.45
Price/Book Value (x) 1.1
2013 Price/Earnings (x) 10.7
Dividend Yield % 10.1

Earnings Summary
2012A 2013E 2014E
EPS 1.00 0.96 0.99
Consensus EPS 1.00 0.90 0.94
Prior EPS 1.00 0.96 1.01

EPS: Q1 0.26A 0.18A 0.21E
Q2 0.30A 0.29A 0.27E
Q3 0.32A 0.30E 0.29E
Q4 0.11A 0.20E 0.21E
FY 1.00A 0.96E 0.99E

Prior Eps: Q1 0.26A 0.17A 0.22E
Q2 0.30A 0.30A 0.30E
Q3 0.32A 0.30E 0.30E
Q4 0.11A 0.18E 0.19E
FY 1.00A 0.96E 1.01E

2Q13 Review
Key takeaways: 1) dividend coverage by high fee income may
become a concern; 2) 2Q13 gross investments were strong; 3) the
environment remains challenging for middle market investors; and
4) BKCC has plenty of low-cost capital and available leverage
capacity to enhance returns and grow N ahead.
BIackRock KeIso CapitaI reported 2Q13 NII per share of $0.29
compared to our est of $0.30 and consensus of $0.26. Adjusted
N per share was $0.26, which removes incentive fee expenses
that are booked under GAAP but not earned. The miss vs. our
estimate was due to higher than expected expenses, mitigated by
a stronger top line that was fee heavy. NAV per share fell 1% to
$9.37 from $9.47 QtQ as BKCC restructured a few investments.
Top Iine aided by fees. nvestment income totaled $36.1 million,
$1.3 million higher than we forecast due to higher than expected
interest income as some prepaid loans were received late in the
quarter. nterest income was $30.4 mil, above our $28.4 mil due to
and up from $28.3 mil QtQ. The debt portfolio yield declined to
12.1% at cost from 12.4%, down 30 bps QtQ. Expenses totaled
$14.9 million, down from $18.2 mil in 1Q13 as timing of incentive
fee expense under GAAP causes fluctuation. Ex-the incentive fee,
expenses were $12.8 mil, above our $12.1 mil est.
SoIid investing, though net outfIows. BKCC invested $185.8
million in 2Q13, ahead of our $110 mil estimate. Exits and
repayments totaled $199.1 mil, which was above our $75 mil
estimate, resulting in net outflows of $13 mil compared to our
estimate of $35 mil in net outflows. Management remains cautious
regarding potential investment opportunities, but sees pockets of
attractive opportunities, as it did late in 2Q and early in 3Q.
StiII under-Ieveraged. Leverage was 0.45 times debt/equity
roughly flat QtQ from 0.44 times. At quarter-end BKCC had $7.6
mil in cash (net of payables) and $334 mil available under its credit
facility. BKCC issued a new $10 mil term loan in June at LBOR
plus 3.75%. With a low cost revolver, BKCC should be able to
invest in more senior secured loans without putting under pressure
on its net interest margin while taking on lower yielding loans.
Grinding it out. While the investment environment is not ideal,
BKCC has been able to find ways to enhance its returns and work
to cover its $0.26 quarterly dividend. t has no companies on non-
accrual status and restructured three troubled investments during
2Q13. Shares have some additional upside to our target price of
$11 and offer a 10% dividend yield.
1 Year Price History

Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul
9
9.2
9.4
9.6
9.8
10
10.2
10.4
10.6
10.8
1,300
1,350
1,400
1,450
1,500
1,550
1,600
1,650
1,700
1,750
Source: FactSet Prices
BIackRock KeIso CapitaI Corp. vs. S&P 500
03-Aug-2012 to 05-Aug-2013 Price (USD)
BlackRock Kelso Capital Corp. (Right) S&P500 (Lef t)

Source: FactSet

August 6, 2013


2

VaIuation
We apply two main valuation methodologies to derive our 12-month target price of $11 for
the shares of BlackRock Kelso Capital Corporation. We equally weight dividend and price-
to-book valuation methods to derive our price target. To arrive at our target price, we are
applying a 10.0% dividend yield to our annualized 12-month forward dividend of $1.04 per
share and applying a 1.1x price-to-book multiple to our 12-month forward book value
estimate of $10.07.
Risks
We believe BKCC faces risks including credit risk related to its underlying portfolio
company debt investments, interest rate risk from its fixed rate investment portfolio loans,
refinancing risk related to its credit facility and term debt, sensitivity to the U.S. economy as
most of its investments are domestic, reliance on capital markets to fund growth, and
illiquidity risk of private portfolio companies.


Figure 1: AnnuaI FinanciaI Summary
$ in millions 2008 2009 2010 2011 2012 2013E 2014E
ncome Statement Data % y/y % y/y % y/y % y/y % y/y % y/y % y/y
Investment Income
nterest income 140.0 11% 122.2 -13% 101.4 -17% 115.2 14% 123.3 7% 117.5 -5% 130.5 11%
Dividend income 3.0 51% 2.6 -14% 4.4 69% 4.1 -8% 3.2 -20% 3.3 1% 5.8 78%
Total investment income 143.2 12% 124.9 -13% 105.9 -15% 131.5 24% 147.3 12% 136.9 -7% 152.9 12%
Expenses
Base management f ees 22.7 19% 18.5 -19% 16.9 -9% 19.8 18% 22.5 13% 21.7 -4% 24.7 14%
Management f ee waiver - NM - NM - NM - NM - NM - NM - NM
ncentive management f ees - NM 16.8 NM 15.1 -10% 11.9 -21% 22.5 89% 15.0 -33% 17.9 19%
nterest and credit facility f ees 18.7 -8% 6.4 -66% 6.2 -3% 16.6 166% 19.6 18% 20.0 2% 21.0 5%
Total other expenses 6.3 22% 6.1 -3% 7.5 23% 10.3 38% 9.0 -13% 9.2 2% 8.2 -11%
Total Expenses 47.7 -8% 47.8 0% 45.7 -4% 58.6 28% 73.6 26% 66.0 -10% 71.8 9%
Pretax investment income 95.5 26% 77.1 -19% 60.1 -22% 72.9 21% 73.7 1% 70.9 -4% 81.1 14%
ncome tax expense (0.4) NM 1.0 NM 0.3 NM - NM - NM - NM - NM
Net operating income 95.1 26% 76.1 -20% 59.9 -21% 72.9 22% 73.7 1% 70.9 -4% 81.1 14%
Net realized gains/(losses) 6.1 (110.2) (90.2) (49.9) (89.1) (58.2) -
Net unrealized gains/(losses) (251.7) 327% 101.4 -140% 101.9 1% 53.9 -47% 72.8 35% 73.5 1% 17.2 -77%
Total (245.6) 312% (8.8) -96% 11.7 -233% 4.0 -65% (16.3) -504% 15.4 -194% 17.2 12%
Net income (150.5) NM 67.2 -145% 71.5 6% 76.9 8% 57.4 -25% 86.3 50% 98.3 14%
Basic and diIuted NOI per share 1.76 6% 1.36 -23% 0.96 -30% 1.00 4% 1.00 0% 0.93 -7% 0.96 3%
Net realized gains per share 0.11 (1.97) (1.44) (0.68) (1.21) (0.70) -
NO + net realized gains, per share 1.87 14% (0.61) -133% (0.48) -21% 0.31 -165% (0.21) -167% 0.22 -206% 0.96 329%
Basic and diluted EPS per share (2.78) NM 1.20 NM 1.14 -5% 1.05 -8% 0.78 -26% 1.04 34% 1.07 2%
Outstanding shares end of period 55.3 5% 56.5 2% 72.6 28% 73.2 1% 73.8 1% 74.1 0% 86.6 17%
Weighted average shares 54.0 18% 55.9 3% 62.7 12% 73.0 17% 73.6 1% 82.6 12% 91.8 11%
Dividend 1.72 2% 0.80 -53% 1.28 60% 1.10 -14% 1.04 -5% 1.04 0% 1.04 0%
Balance Sheet Data
Ending nvestments at Fair Value 926.8 -16% 846.7 -9% 880.1 4% 1,049.0 19% 1,061.6 1% 1,086.9 2% 1,244.1 14%
Average nvestments at Fair Value 1,079.1 6% 891.3 -17% 813.5 -9% 956.4 18% 1,102.5 15% 1,038.6 -6% 1,165.3 12%
Total Assets 966.2 -14% 879.5 -9% 915.6 4% 1,091.2 19% 1,090.0 0% 1,178.6 8% 1,336.5 13%
Debt Outstanding 426.0 12% 296.0 -31% 170.0 -43% 168.0 -1% 171.9 2% 91.0 -47% 81.0 -11%
Shareholders' Equity 510.3 -30% 539.6 6% 698.5 29% 701.0 0% 687.4 -2% 711.0 3% 872.5 23%
Book VaIue per share $9.23 -33% $9.55 4% $9.62 1% $9.58 -1% $9.31 -3% $9.60 3% $10.08 5%
Ratios
NO as % of dividend 102% 4% 170% 68% 75% -95% 91% 16% 103% 13% 93% -10% 95% 2%
Leverage Ratio (Debt/Equity) 0.83x 0.31x 0.55x -0.29x 0.24x -0.31x 0.49x 0.25x 0.50x 0.02x 0.54x 0.03x 0.43x -0.11x
Tax rate 0% 0% 1% 2% 0% -1% 0% 0% 0% 0% 0% 0% 0% 0%
Net interest margin 11% 1% 13% 2% 11.7% -1% 10.3% -1% 9.4% -1% 9.4% 0% 9.4% 0%
ROE -23% -25% 13% 36% 12% -1% 11% -1% 8% -3% 12% 4% 12% 0%
ROE(operating) 14% 3% 15% 0% 10% -5% 10% 1% 10% 0% 10% 0% 10% 0%
Opex as % of avg investments 3% 0% 5% 2% 5% 0% 4% 0% 5% 1% 4% 0% 4% 0%
ROA -13% -15% 7% 21% 8% 1% 7% -1% 5% -2% 8% 3% 8% 0%

Source: Company data, Evercore Group L.L.C. Research

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August 6, 2013


4

ANALYST CERTIFICATION
The analyst(s) , Arren Cyganovich, CFA, Bradley Ball primarily responsible for the preparation of this research report attests to the following: (1)
that the views and opinions rendered in this research report reflect his or her personal views about the subject companies or issuers; and (2)
that no part of the research analyst's compensation was, is, or will be directly related to the specific recommendations or views in this research
report.

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Suspended the company rating, target price and earnings estimates have been temporarily suspended.


Coverage Universe Investment Banking Services/Past 12 Mos.
Ratings Count Pct. Count Pct.
Overweight
137 42% 5 4%
Equal-Weight
155 48% 6 4%
Underweight
26 8% 0 0%
Suspended
7 2% 0 0%
For disclosure purposes, in accordance with FNRA requirement, our "Overweight, "Equal-Weight and "Underweight ratings may be viewed as
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As of June 30, 2013
Issuer-Specific DiscIosures & DiscIosure Legend (as of August 6, 2013)
Company DiscIosures
BlackRock Kelso Capital Corp. 11

Research DiscIosure Legend
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August 6, 2013


5

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6

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