August 1, 2013

Equity Research
BlackRock Kelso Capital Corp.
BKCC: There is No "Plan C"; Fees Will Not Keep NOI Up Forever Summary. Q2 13 Quick Word: beat. BKCC reported Q2 13 NOI of $0.29, $0.01 ahead of our estimates and $0.02 above consensus estimates driven by strong fee income. NOI adjusted for a normalized incentive fee was $0.26/share. One time/fee related income totaled $0.05/share. Net portfolio growth was negative $13.3MM driven by originations of $185.8MM and $199.1MM. This limited portfolio growth was, in our view, driven by the frothy credit environment as repayments remained elevated. Quality of new originations is low in our view as a healthy amount of new investments (outside of the restructurings) were in more subordinated/2nd lien debt (this was mostly existing credits where BKCC chose to stay in the refi). Credit quality improved following Dial Global and Bankruptcy Management Solutions restructurings with marginalized assets at 4.5% of the portfolio at cost from 9.9%. NAV declined to $9.37/share, from $9.47 on deterioration in Advanced Lighting and Marquette offset by small gains across other portfolio companies. Leverage Capacity. Based on current leverage, we estimate BKCC has roughly $219mm of available credit capacity (around 24%) note this assumes an effective leverage cap of 0.70x Debt/Equity. An equity raise is possible as BKCC is now above book. That said, we would question the wisdom of raising equity capital only to be forced to deploy it in unattractive 2nd lien / sub debt opportunities in the market today. Moreover, in the event the frothy credit environment persists we may likely see elevated repayments and this could limit BKCCs ability to deploy newly issued equity capital. Estimates. We are lowering our 2013/2014 estimates to $0.90/$0.95 from $0.92/$0.98 in order to reflect downside pressures associated with spread compression and the lack of capital deployment. Moreover, we believe BKCC could be forced to reduce its dividend in the event fee income declines meaningfully and/or credit issues surface. There is no Plan C -- Best case Div. Flat. Worst Case Div. Cut. The current credit environment is frothy, in our view. As a result, we would expect repayment activity and subsequent spread compression to limit NOI growth and keep NOI trailing below the dividend (on a TTM basis). Note that BKCC continues to benefit from various one time fees associated with repayments/restructuring, but over time those fees subside and will expose a generally lower earnings profile. Essentially the current market environment (and aggressive dividend policy) gives BKCC two options: (1) they can dial up risk by chasing lower quality sub debt/second lien deals (Prepaid Legal / MediMedia) in order to cover the dividend from NOI (not a good idea long-term) or (2) they can reduce the current dividend to $0.95-1.00 to reflect economic reality (i.e. spreads are tighter on high quality investments and BKCCs book is likely to continue to experience meaningful repayments). There really is no Plan C.

Underperform
Sector: BDC Market Weight Earnings Estimate Revised Down
2012A CASH EPS Q1 (Mar.) Q2 (June) Q3 (Sep.) Q4 (Dec.) FY CY FY P/E Rev.(MM) $0.26 0.30 0.32 0.11 $1.00 $1.00 10.2x $147 2013E Curr. $0.22 A 0.29 A 0.26 0.13 $0.90 $0.90 11.3x $133 Prior NC 0.28 0.29 0.12 0.92 2014E Curr. Prior $0.27 NC 0.27 0.26 0.28 NC 0.14 0.16 $0.95 0.98 $0.95 10.7x $149

Source: Company Data, Wells Fargo Securities, LLC estimates, and Reuters NA = Not Available, NC = No Change, NE = No Estimate, NM = Not Meaningful V = Volatile, = Company is on the Priority Stock List

Ticker Price (08/01/2013) 52-Week Range: Shares Outstanding: (MM) Market Cap.: (MM) S&P 500: Avg. Daily Vol.: Dividend/Yield: LT Debt: (MM) LT Debt/Total Cap.: ROE: 3-5 Yr. Est. Growth Rate: CY 2013 Est. P/CASH EPS-toGrowth: Last Reporting Date:

BKCC $10.16 $8-11 73.4 $745.7 1,706.87 517,425 $1.04/10.2% $314.0 31.0% 10.0% 5.0% 2.3x 08/01/2013 Before Open

Valuation Range: $8.00 to $8.50 Valuation. Based on BKCC's Quartile 4 Valuation we estimate shares should trade between 10.8% and 11.4%, a 300 bps premium to our implied BDC yield range. This leads to a valuation of $8.00 to $8.50. Risks to our valuation range include a low dividend coverage, significant deterioration in credit quality or an extended period of capital markets illiquidity. Investment Thesis: We rate the stock Underperform as we believe downside risks associated with a potential dividend cut are not reflected in current valuations.

Source: Company Data, Wells Fargo Securities, LLC estimates, and Reuters

Jonathan Bock, CFA, Senior Analyst ( 4 43 ) 2 6 3 - 6 4 10 / j o n at h an . bo c k @ w el ls f a rgo . c o m Ronald Jewsikow, Associate Analyst ( 4 43 ) 2 6 3 - 6 4 4 9 / ron al d. j.j e w si ko w@ w e ll s fa r go. co m

Please see page 9 for rating definitions, important disclosures and required analyst certifications All estimates/forecasts are as of 08/01/13 unless otherwise stated.
Wells Fargo Securities, LLC does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of the report and investors should consider this report as only a single factor in making their investment decision.

BDC

WELLS FARGO SECURITIES, LLC EQUITY RESEARCH DEPARTMENT

Company Description:
BlackRock Kelso Capital Corp. (BKCC) is an externally managed BDC/RIC that invests primarily in senior and junior secured, unsecured, and subordinated loans and, to a lesser degree, equity, in private middle-market companies. It targets companies with annual revenue between $50 million-1 billion and its targeted investment size typically ranges between $10-50 million. BKCC is managed by its investment advisor, BlackRock Kelso Capital Advisors, and is advised by an investment committee consisting of senior executives from BlackRock, Inc. and Kelso & Company, L.P., two highly regarded firms specializing in asset management and middle-market private equity, respectively. There is no Plan C. As we mentioned previously, we believe competitive pressures in levered lending (i.e. not enough new loan supply vs. copious amounts of loan demand) will keep repayments elevated near-term and also limit the number of attractive investments on a risk adjusted basis. This environment essentially gives BKCC two choices (1) dial up risk (i.e. make unattractive investments in todays frothy environment) and/or (2) limit portfolio growth and lower near-term NOI. There is no third directionattractive investments (particular mezzanine) will refi in the current environment and this leaves those BDCs who hold a substantive amount of 2nd lien and mezzanine investments exposed to NOI / dividend downside. Originally, we were of the mindset that BKCC management was in the shrink / be conservative camp as evidenced by the reduction in the investment portfolio since Sep-12. See Figure 1. Note that we also expect net portfolio growth to be rather anemic for the remainder of 2014. Figure 1 Historical & Estimated Net Originations (as of 6/30/13) ($ in millions) Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 1Q 12A 2Q 12A 3Q 12A 4Q 12A 1Q 13A 2Q 13A 3Q 13E
Originations Repayments Net Originations $73 ($41) $33 $148 ($81) $68 $17 ($82) ($66) $79 ($111) ($33) $46 ($104) ($58) $186 ($199) ($13) $80 ($65) $15 Dec-13 4Q 13E $100 ($60) $40

Source: Company Reports, Wells Fargo Securities, LLC Estimates

Of course, our original thought of conservatism is slightly subdued when we saw the amount of 2nd/subordinated debt BKCC participated in in 2Q13 originations. As noted in Figure 2, roughly 63.5% of BKCCs originations were in 2nd/Subordinated Debt and thats after excluding BKCCs investment in the newly restructured Dial Global (which is also second lien). Now, we do understand that these were existing credits BKCC has familiarity with (and thats a plus). That said, we do believe general refinancings in this current environment are likely met with worse risk adjusted returns either through weaker covenants and/or lower spreads per unit of leverage. Thus, to the extent one is over exposed to 2nd lien / mezz at a frothy point in the cycle, wed say thats a negative. Further, we would point out that there is relatively little differentiation between 2nd lien recovery rates and rates on mezzanine investments (per Moodys). Figure 2 2Q13 New Investments (as of 6/30/13) ($ in millions)
Portfolio Com pany 2Q13 Selected New Investments AGY Holding Corp. BBTS Borrow er LP Dial Global Gastar Exploration USA Inc. KAGY Holding Company Pre-Paid Legal Services VSS-AHC Holdings LLC Wellbiz Brands MediMedia USA United Subcontractors Total / Weighted Average Industry Glass Yarns/Fibers Energy Media & Entertainment Energy Glass Yarns/Fibers Legal Services Printing/ Publishing Personal Fitness Information Services Building and Construction Investm ent Second Lien First Lien Priority Second Lien Second Lien Preferred Stock Second Lien LLC First Lien Subordinated First Lien Yield 12.0% 7.8% 12.0% 8.6% 20.0% 9.3% 11.5% 12.3% 6.3% 11.7% Maturity 09/15/16 06/04/19 07/21/17 05/15/18 07/01/20 11/10/13 11/20/19 06/30/15 Cost 7.96 12.84 32.13 1.59 4.52 24.63 6.15 4.53 38.92 0.45 133.71 FV 7.96 12.84 32.13 1.59 4.52 24.63 9.80 4.40 38.27 0.60 136.73 13.0% 63.5% 23.5%

Senior Suborinated/Other (ex Dial) Restructured (Dial)

Source: Company Reports, Wells Fargo Securities, LLC Estimates

BlackRock Kelso Capital Corp.

WELLS FARGO SECURITIES, LLC EQUITY RESEARCH DEPARTMENT

Additionally, if we examine the amount of true proprietary deal flow at BKCC, we also get a bit discouraged as both of BKCCs major investments were simply just part of relatively large, non-directly originated transactions. Recall, one way to limit the competitive pressures present in the middle market is to effectively get out and originate credit on ones own (soup to nuts). This would be akin to an Ares who will typically directly originate a transaction and work with a sponsor looking to finance a portfolio company. The antithesis of this model is buying off a banks loan desk. Now, lets be clear. Were not saying that every loan/bond brought off a syndication desk is a bad investment. That said, we do believe those more marketed deals may likely include higher leverage levels and poorer structures simply because they are (1) generally larger and (2) there is a greater competitive dynamic (as the deal is marketed to funds who are likely to bid up the price). In total, we see that 62% of BKCCs originations were considered non-proprietary (excluding the Dial restructuring). See Figure 3. Note that in Pre-Paid Legal transaction BKCC holds just $25mm of a $175mm tranche while in MediMedia BKCCs $38mm subordinated debt investment is behind roughly 240mm of RC and a term loan. Further, MediMedia is likely to have debt to EBITDA in the mid to high 5x range according to sources cited in an LCD article. Moodys noted that it expected the issuer to raise an asset-based loan at MediMedia Health to bolster liquidity, and to place that unit which is a free-cash-flow drag on the rest of the business in an unrestricted subsidiary that limits its access to cash from the borrower group. Pro forma for that change, leverage will be in the mid-to-high 5x range, sources noted. Assuming a 5.5x EBITDA, this loan is approximately 4x turns of EBITDA deep at the attachment. The loan has a credit rating of Caa2. Figure 3- BKCC Proprietary-Ness (as of 6/30/13) ($ in millions)
Portfolio Com pany Stats Purpose / Leverage / Cov Lite Total Debt / Spread RC TL (Tranche 1)TL (Tranche 2) 310/L+500 175/L+850 Corp. Purposes/Refi 25/L+425 215/L+600 100/L+1100 Refi 63 62% Loan Debt Arrangers* Morgan Stanly, RBC Goldman Sachs BKCC's Invesm ent BKCC BKCC Investm ent $ Invested TL Tranche 2 Subordinated 25 38

Nam e Pre-Paid Legal Services MediMedia

Total Non-Proprietary Deals Excluding Restructurings % of originations Source: Company Reports, Wells Fargo Securities, LLC Estimates

Overall, we believe BKCC will continue to experience the negative effects of a frothy lending environment as it relates to repayments and we fear management may consider dialing up risk in order to earn the dividend (once one-time fees subside). Note that this past quarter, BKCC experienced $199mm of repayments with a weighted average yield of 10.8%. See Figure 4. Note that two key repayments were MCCI and Progress Financial. At current price levels, we believe that yield is tough to replicate without taking additional credit risk. Figure 4- BKCC Repayments (as of 6/30/13) ($ in millions)
Portfolio Com pany Industry Investm ent Second Lien First Lien Second Lien Unsecured Debt Second Lien Second Lien Second Lien Second Lien Senior Senior First Lien Yield 8.8% 11.5% 7.0% 13.5% 10.8% 13.0% 10.8% 10.5% 7.3% 11.0% 16.0% 10.8% Maturity 08/17/15 11/10/13 01/31/14 10/01/15 01/29/18 06/18/15 10/01/19 04/29/18 08/15/14 12/31/16 07/01/14 Cost 23.79 4.54 10.00 4.92 57.00 34.71 2.45 8.57 4.29 4.79 1.66 156.71 FV 24.00 4.36 10.00 5.00 57.00 35.75 2.50 10.00 5.26 5.10 1.67 160.64 2Q13 Selected Investments (Repaid) Berlin Packaging L.L.C. Rigid Packaging Fitness Together Franchise Corp. Personal Fitness InterMedia Outdoors Printing/ Publishing Maple Hill Acquisition LLC Rigid Packaging MCCI Group Holdings Healthcare Services Progress Financial Corporation Financial Services Reddy Ice Corporation Food Service SOURCEHOV LLC Process Outsourcing MediMedia USA Information Services Pre-Paid Legal Services Legal Services The Bargain! Shop Holdings Inc. Discount Stores Total / Weighted Average
Source: Company Reports, Wells Fargo Securities, LLC Estimates

BKCC stable cash flow insufficient to cover dividend. We appreciate managements comments about dividend coverage from NOIand it is true, they are covering the dividend from NOI. Unfortunately, we respectfully disagree with comments about fundamental stability of the dividend because NOI isnt cash (and it never really was) and more important it is never stable cash because the one time fee income brought into NOI is tied to portfolio velocity (and that can change rapidly). Soif we examine the true stable cash components of BKCCs portfolio we continue see a steady deterioration in its stable cash flows (ex fees, and one time items) as a result of portfolio contraction and this continues to pressure dividend coverage. In our view,

BDC

WELLS FARGO SECURITIES, LLC EQUITY RESEARCH DEPARTMENT

BKCC will continue to experience this pressure as PIK income is likely to rise following the Dial Global restructuring. In addition, the negative portfolio growth in last 4 quarters will further stress net income going forward if fee income normalizes. Figure 5 shows that BKCC has been an underperformer in all the three measures of Wells Fargo Cash flow. In the most recent quarter BKCC covered only 50% of its dividend from stable cash sources which can be a sign of potential instability should credit issues rise. This relatively low margin of safety for the dividend relative to peers (many of whom are at 75%+) does leave room for concern. Think about it. In the event of a credit loss/non-accrual (and those happen at BKCC with some regular frequency), stable cash flow could further be pressured and effectively force a dividend reduction. In our view, it is likely best for the management team to consider a dividend reduction in order to (1) limit NAV decline as a result of paying a dividend as a return of capital and (2) avoid yield chasing behavior in a frothy credit environment. Figure 5 Stable Cash Flow Coverage of the Dividend TTM (as of 6/30/13) ($ in millions)
BKCC Dividends Paid in Cash Net Operating Income less Upfront/Prepayment Fees (net of incentive fee) less Amortization of Premium/Discount plus Amortiz. Of Deb t Issuance WF Adjusted Cash Flow (WFACF) + Fee Income / Amortization Received WFACF + Fees (1) +/- Realized Gains WFACF + Fees +/- G/L Dividend Coverage WF Adjusted Cash Flow (WFACF) WFACF + Fees WFACF + Fees +/- G/L
Source: Company Reports, Wells Fargo Securities, LLC Estimates
(1)

Sep-12 3Q12 $17.8 23.9 (7.2) (4.4) 0.6 $12.9 11.6 $24.6 2.8 $27.4 73% 138% 154%

Dec-12 4Q12 $17.9 8.3 (3.5) (4.9) 0.6 $0.5 8.4 $9.0 (15.7) ($6.7) 3% 50% -38%

Mar-13 1Q13 $17.9 13.0 (2.2) (3.1) 0.4 $8.0 5.3 $13.3 0.2 $13.5 45% 74% 75%

Jun-13 2Q13 $17.9 21.2 (4.1) (8.6) 0.5 $9.0 12.7 $21.7 (58.4) ($36.7) 50% 121% -205%

TTM Coverage $71.5 66.4 (17.0) (21.0) 2.1 $30.6 38.0 $68.6 (71.1) ($2.5) 43% 96% -3%

We add back up front prepayment as well as amortization of premium/discount

Equity Gains could help fill stable cash void, but monetization often is a process and BKCC lacks control of the sale. Many equity holdings in BKCCs portfolio trade at potential gain of 50% or greater giving BKCC the opportunity to potentially support the dividend through equity exits and redeployment into earning assets. Management mentioned their desire to sell equity stakes on the call. We believe that redeploying these assets into yielding investments could help enhance future cash flow and dividend coverage. Figure 6 outlines selected equity investments that have a substantial fair value gain in excess of 50%. In the event these equities are monetized and re-deployed at 10% yield, it could lead to an NOI pickup of roughly 11% (roughly equivalent to estimates for the dividend less NOI). See Figure 7. The issue with exiting equity investments is that the timing of these exits can be difficult to control as a buyer is sought. Whats more, it is often difficult to divest equity stakes when the BDC itself lacks control over the timing of sale. Recall, many BDCs are often along for the ride with regard to equity and the timing of exit is purely at the sponsors discretion. Stillwe believe if/when these investments are exited, BKCC could use the proceeds to help stabilize NOI around the dividend. However, we believe even with these equity investments, further credit declines would put the current dividend in jeopardy.

BlackRock Kelso Capital Corp. Figure 6- NOI Impact if equity is sold (as of 6/30/13) ($ in Millions)
BKCC FV of Profitable Equity Potential Spread Pick-up EOP shares NOI/share Pickup 2013 Consensus NOI % increase to 2013 Cons. NOI NOI impact of Profitable Equity $65.0 11% 74.1 $0.10 $0.91 11%

WELLS FARGO SECURITIES, LLC EQUITY RESEARCH DEPARTMENT

Source: Company Reports, Wells Fargo Securities, LLC Estimates

Figure 7- Potential equity asset considerations (as of 6/30/13) ($ in Millions)

Portfolio Company
Penton Business Media Holdings VSS-AHC Holdings LLC (Advans Arclin Cayman Holdings Ltd. Arclin Cayman Holdings Ltd. Arclin Cayman Holdings Ltd. Arclin Cayman Holdings Ltd. Progress Financial Corporation Tw in River Worldw ide Holdings PG Holdco Total

Origin Date
03/31/07 09/30/10 09/30/07 09/30/07 09/30/07 09/30/07 09/30/11 09/30/11 03/31/08

Industry
Information Services Printing/ Publishing Chemicals Chemicals Chemicals Chemicals Financial Services Gaming Healthcare Services

Investment
Limited Liability Comp Limited Liability Comp Equity Warrants Equity Warrants Equity Warrants Equity Warrants Equity Warrants Equity Warrants Limited Liability Comp

Cost
9.05 6.15 0.32 0.40 0.40 0.48 2.62 0.01 0.17 19.60

FV
33.63 9.80 4.67 4.66 4.09 4.08 3.40 0.35 0.33 65.02

% Mark
272% 59% 1345% 1054% 914% 742% 30% 6900% 97%

Source: Company Reports, Wells Fargo Securities, LLC Estimates

Strong equity markets continue to boost many investments for BKCC and we believe that monetizing these is the most direct catalyst to stable dividend coverage. As we have stated, this often takes time as these are often illiquid; we believe that many investments such as Penton Business Media and ECI would greatly benefit NOI in the event that they could be exited/ redeployed. See Figure 8. Additionally, we believe BKCC may become incrementally more comfortable utilizing leverage in a less volatile asset class (debt), relative to equity.

BDC

WELLS FARGO SECURITIES, LLC EQUITY RESEARCH DEPARTMENT

Figure 8- Selected Writeups (as of 6/30/13) (in $)

Origin Date Filing Date
06/30/10 06/30/10 03/31/07 03/31/07 09/30/07 09/30/07 06/30/07 06/30/07 09/30/07 09/30/07 09/30/07 09/30/07 09/30/07 09/30/07 09/30/07 09/30/07 03/31/13 06/30/13 03/31/13 06/30/13 03/31/13 06/30/13 03/31/13 06/30/13 03/31/13 06/30/13 03/31/13 06/30/13 03/31/13 06/30/13 03/31/13 06/30/13

Portfolio Company
ECI Holdco ECI Holdco Penton Business Media Holdings Penton Business Media Holdings Arclin Cayman Holdings Ltd. Arclin Cayman Holdings Ltd. M & M Tradition Holdings Corp. M & M Tradition Holdings Corp. Arclin Cayman Holdings Ltd. Arclin Cayman Holdings Ltd. Arclin Cayman Holdings Ltd. Arclin Cayman Holdings Ltd. Arclin Cayman Holdings Ltd. Arclin Cayman Holdings Ltd. Arclin Cayman Holdings Ltd. Arclin Cayman Holdings Ltd.

Industry
Electronics Electronics Information Services Information Services Chemicals Chemicals Sheet Metal Fabrication Sheet Metal Fabrication Chemicals Chemicals Chemicals Chemicals Chemicals Chemicals Chemicals Chemicals

Investment
Common Stock Preferred Stock Limited Partnership Limited Partnership Common Stock Common Stock Common Stock Common Stock Equity Warrants Equity Warrants Equity Warrants Equity Warrants Equity Warrants Equity Warrants Equity Warrants Equity Warrants

Yield

Maturity

Cost
19,027,697 19,027,671 (26) 9,050,000 9,050,000 0 9,722,203 9,722,203 0 5,000,000 5,000,000 0

FV
49,885,149 53,693,172 3,808,023 31,049,999 33,631,068 2,581,069 15,560,000 16,700,000 1,140,000 7,500,000 8,250,000 750,000 4,152,972 4,659,769 506,797 3,574,417 4,080,282 505,865 4,166,134 4,668,122 501,988 3,602,888 4,093,439 490,551

01/15/14 01/15/14 01/15/14 01/15/14 1/15/2015 1/15/2015 01/15/15 01/15/15

403,815 403,815 0 484,578 484,578 0 323,052 323,052 0 403,815 403,815 0

Source: Company Reports, Wells Fargo Securities, LLC Estimates

We are removing 2013 equity raise from our model as additional capital is not needed should BKCC exit equity investments / continue to show negative growth. We believe that any raise would further put the dividend in jeopardy and as a result we believe that BKCC management is likely to elect to remain slow with originations / not issue new equity. We believe it would be difficult to sell to the market that a raise is appropriately timed while portfolio growth has been flat to negative. While this slightly benefits our 2013 / 2014 estimates, we continue to see NOI running below the dividend. We estimate that BKCC has $219MM of available investment capacity and the ability to grow the portfolio by 24% to the 0.70x level. See Figure 10. However we believe that use of this leverage is likely limited in the near term as repayments remain elevated as market liquidity remains robust and new originations remain lumpy due to a lack of quality deal flow. Figure 9 BKCC Debt / equity position (as of 6/30/13) ($ in millions)
Mar-13 1Q 13A Liabilities Credit Facility #1 Term & Convertib le Notes Total Debt Total Assets Leverage Ratio Capital Raising Assumptions Price Issued Shares Issued Equity Issued Shares Outstanding 16 290 $306 $700 0.44x $9.5 0.0 $0.0 74 Jun-13 2Q 13A 25 290 $315 $694 0.45x $9.4 0.0 $0.0 74 Sep-13 3Q 13E 16 290 $306 $695 0.44x $9.4 0.0 $0.0 74 Dec-13 4Q 13E 55 290 $345 $685 0.50x $9.2 0.0 $0.0 74 Mar-14 1Q 14E 27 290 $317 $760 0.42x $9.3 8.0 $74.0 82 Jun-14 2Q 14E 130 290 $420 $761 0.55x $9.3 0.0 $0.0 82 Sep-14 3Q 14E 213 290 $503 $762 0.66x $9.3 0.0 $0.0 82 Dec-14 4Q 14E 209 290 $499 $843 0.59x $9.2 10.0 $91.6 92

Source: Company Reports, Wells Fargo Securities, LLC Estimates

BlackRock Kelso Capital Corp.

WELLS FARGO SECURITIES, LLC EQUITY RESEARCH DEPARTMENT

Figure 10 BKCC Investment Capacity (as of 6/30/13) ($ in millions)

Credit Potential Amount Amount Maturity Interest Capacity Accordion Drawn Available Date Cost 44 44 158 17 158 17 0 0 Jan-16 Jan-18 6.5% 6.6% Comments - Issued $158 MM senior notes in January 2011 through a private placement - Issued seven-year, senior notes worth $17 MM in January 2011 through a private placement - Issued $115 MM unsecured convertible senior notes in Feb 2013 (including $15MM as additional option to initial purchasers). Initial conversion rate is 86.0585 shares per $1,000 principal amount of the Notes. - In March 2013, BKCC amended and restated its Senior Secured Revolving Credit Facility that includes a ratable amortization in the final year - A $75 MM increase in revolving commitments - A 75 bps reduction from the prior facility

Cash Senior Secured Notes Senior Secured Notes

Convertible senior notes

115

115

Feb-18

5.5%

Revolving Credit Facility

350

750

16

175*

Mar-17 L + 250

Total Debt

$640

$350

$219 $920 24%

Total Investment Portfolio Deb t Capacity as a % of Portfolio

*Capacity is leverage to the 0.70x level

Source: Company Reports, Wells Fargo Securities, LLC Estimates

Credit Quality improves on Dial / Bankruptcy Management Restructurings. BKCC experienced an improvement in credit quality as both Dial Global and Bankruptcy Management Solution were restructured. With Dial Global restructuring we can see that BKCC is left with 4 distinct securities (2 of which are PIK). Marginalized assets saw a significant decline from 9.9% of the portfolio at cost to 4.5% as a result of these restructurings. See Figure 11. While credit quality improved, we remain concerned with the heavy reliance on fee income to drive results in the quarter and continue to believe that there is the potential for a dividend cut in 2013. One investment to watch in future is Advanced Lighting technologies which declined to 76.7% of cost in the quarter. See Figure 12. Figure 11 Marginalized Assets (as of 6/30/13) (in $)
6/30/13 Securities with 30+% Writedown

Portfolio Company

Industry

Investment
Equity Warrants Limited Liability Company Limited Liability Company Limited Liability Company First Lien(o) Equity Warrants Limited Liability Company First Lien(i) Limited Liability Company

Yield

Maturity
12/14/19

Cost
444,450 1,848,077 758,069 147,271 4,303,153 250,000 9,260,324 19,555,093 5,000,000 41,566,437

FV
29,441 40,855 14,317 590,832 80,415 4,182,500 15,000,000 3,868,000 23,806,360

$ Writedown % Writedown
(444,450) (1,818,636) (717,214) (132,954) (3,712,321) (169,585) (5,077,824) (4,555,093) (1,132,000) -100.0% -98.4% -94.6% -90.3% -86.3% -67.8% -54.8% -23.3% -22.6%

Marsico Parent Superholdco Financial Services Marsico Holdings Financial Services DynaVox Systems Augmentative Communication Sentry Security Systems Holdings Security Services Alpha Media Group Inc. Publishing Facet Investment Medical Devices Westw ard Dough Holdings Restaurants Advanced Lighting Technologies Lighting Marquette Transportation Company HoldinTransportation

12.00%

07/15/16 01/18/21 06/01/19

10.50%

3/31/13 Securities with 30+% Writedown

Portfolio Company
Bankruptcy Management Solutions Bankruptcy Management Solutions Marsico Parent Superholdco Marsico Holdings Sentry Security Systems Holdings Bankruptcy Management Solutions Alpha Media Group Inc. DynaVox Systems Facet Investment Westw ard Dough Holdings Dial Global

Industry
Financial Services Financial Services Financial Services Financial Services Security Services Financial Services Publishing Augmentative Medical Devices Restaurants Media & Entertainment

Investment
Common Stock Equity Warrants Equity Warrants Limited Partnership Limited Partnership Second Lien First Lien Limited Partnership Equity Warrants Limited Partnership Second Lien

Yield

Maturity

Cost
9,600,072 365,584 444,450 1,848,077 147,271 25,402,949 4,289,089 758,069 250,000 9,260,324 45,075,570 97,441,455

FV
114,306 11,012 2,439,274 458,602 149,803 80,415 4,011,000 37,332,559 7,264,412

$ Writedown % Writedown
(9,600,072) (365,584) (444,450) (1,733,771) (136,259) (22,963,675) (3,830,487) (608,266) (169,585) (5,249,324) (7,743,011) -100.0% -100.0% -100.0% -93.8% -92.5% -90.4% -89.3% -80.2% -67.8% -56.7% -17.2%

8.20% 12.00%

08/20/15 07/15/13

13.00%

07/21/17

Source: Company Reports, Wells Fargo Securities, LLC Estimates

BDC

WELLS FARGO SECURITIES, LLC EQUITY RESEARCH DEPARTMENT

Figure 12- Selected Writedowns (as of 6/30/13) (in $)

Origin Date Filing Date
06/30/12 06/30/12 09/30/10 09/30/10 09/30/06 09/30/06 06/30/12 06/30/12 03/31/12 03/31/12 12/31/12 12/31/12 09/30/06 09/30/06 12/31/07 12/31/07 09/30/07 09/30/07 03/31/13 06/30/13 03/31/13 06/30/13 03/31/13 06/30/13 03/31/13 06/30/13 03/31/13 06/30/13 03/31/13 06/30/13 03/31/13 06/30/13 03/31/13 06/30/13 03/31/13 06/30/13

Portfolio Company
Advanced Lighting Technologies Advanced Lighting Technologies VSS-AHC Holdings LLC VSS-AHC Holdings LLC Marquette Transportation Company Holdings Marquette Transportation Company Holdings SVP Worldw ide Ltd. SVP Worldw ide Ltd. BPA Laboratories Inc. BPA Laboratories Inc. American Piping Products American Piping Products DynaVox Systems DynaVox Systems Marsico Holdings Marsico Holdings Arclin US Holdings Inc. Arclin US Holdings Inc. Lighting Lighting

Industry

Investment
First Lien First Lien Limited Partnership Preferred Stock Limited Partnership Limited Liability Company Unsecured Debt Unsecured Debt First Lien First Lien Second Lien Second Lien Limited Partnership Limited Liability Company Limited Partnership Limited Liability Company Second Lien Second Lien

Yield Maturity
10.5% 06/01/19 10.5% 06/01/19

Cost
19,541,893 19,555,093 13,200 6,150,647

FV
19,200,000 15,000,000 (4,200,000) 6,904,802 4,844,573 (2,060,229) 5,744,000 3,868,000 (1,876,000) 43,835,567 43,397,211 (438,356) 34,727,220 34,376,440 (350,780) 20,000,000 19,800,000 (200,000) 149,803 40,855 (108,948) 114,306 29,441 (84,865) 3,478,511 3,469,546 (8,965)

Printing/ Publishing Printing/ Publishing Transportation Transportation Consumer Products Consumer Products Healthcare Services Healthcare Services Distribution Distribution Augmentative Augmentative Financial Services Financial Services Chemicals Chemicals

15.0%

4,844,573 (1,306,074) 5,000,000 5,000,000 0

14.0% 06/27/18 14.0% 06/27/18 12.3% 04/01/17 12.3% 04/01/17 12.9% 11/15/17 12.9% 11/15/17

43,835,567 43,835,567 0 34,050,203 34,114,159 63,956 19,622,169 19,637,958 15,789 758,069 758,069 0 1,848,077 1,848,077 0

7.8% 7.8%

01/15/15 01/15/15

3,164,251 3,200,117 35,866

Source: Company Reports, Wells Fargo Securities, LLC

BlackRock Kelso Capital Corp.

WELLS FARGO SECURITIES, LLC EQUITY RESEARCH DEPARTMENT

Required Disclosures
B lackR ock K elso C apital C orp. (B K C C ) 3-yr. P rice P erformance
$14.00

$13.00

$12.00 $11.00

$10.00

Security Price

$9.00

$8.00 $7.00

$6.00 5/3/11 5/1/12 5/31/11 6/28/11 7/24/12 1/8/13 3/6/12 8/24/10 8/23/11 5/28/13 2/8/11 3/8/11 4/5/11 2/7/12 2/5/13 4/3/12 3/5/13 7/27/10 7/26/11 6/26/12 4/2/13 6/25/13 10/18/11 10/16/12 12/14/10 11/13/12 12/11/12 10/19/10 12/13/11 11/15/11 11/16/10 7/23/13 9/20/11 5/29/12 9/18/12 9/21/10 1/11/11 1/10/12 8/21/12 4/30/13

Date
Date 7/27/2010 7/27/2010 11/5/2010 2/3/2011 3/9/2011 4/26/2011 5/10/2011 9/14/2011 1/12/2012 3/2/2012 5/4/2012 9/6/2012 12/18/2012 2/19/2013 6/14/2013 Publication Price ($) NA 12.05 11.13 9.91 9.90 8.72 8.76 9.83 10.02 9.93 10.78 9.84 Rating Code Harris 1 2 Houck 2 1 1 1 1 2 Bock 2 2 3 3 Val. Rng. Low 12.00 12.00 11.00 11.00 10.50 9.00 9.50 9.50 10.00 10.50 9.00 8.00 Val. Rng. High 13.00 13.00 12.00 12.00 11.50 10.00 10.00 10.00 10.25 11.00 9.50 8.50 Close Price ($) 10.61 11.86 10.33 9.91 9.97 8.75 8.71 9.63 10.02 10.04 10.49 9.56

Source: Wells Fargo Securities, LLC estimates and Reuters data Symbol Key Rating Downgrade Rating Upgrade Valuation Range Change

Initiation, Resumption, Drop or Suspend Analyst Change Split Adjustment

Rating Code Key 1 Outperform/Buy 2 Market Perform/Hold 3 Underperform/Sell

SR NR NE

Suspended Not Rated No Estimate

Additional Information Available Upon Request

I certify that: 1) All views expressed in this research report accurately reflect my personal views about any and all of the subject securities or issuers discussed; and 2) No part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by me in this research report.
Wells Fargo Securities, LLC maintains a market in the common stock of BlackRock Kelso Capital Corp. Wells Fargo Securities, LLC or its affiliates intends to seek or expects to receive compensation for investment banking services in

the next three months from BlackRock Kelso Capital Corp.

BKCC: Risks to our valuation range include a low dividend coverage, significant deterioration in credit quality or an extended period of capital markets illiquidity. Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions. Wells Fargo Securities, LLCs research analysts receive compensation that is based upon and impacted by the overall profitability and revenue of the firm, which includes, but is not limited to investment banking revenue.

BDC

WELLS FARGO SECURITIES, LLC EQUITY RESEARCH DEPARTMENT

STOCK RATING
1=Outperform: The stock appears attractively valued, and we believe the stock's total return will exceed that of the market over the next 12 months. BUY 2=Market Perform: The stock appears appropriately valued, and we believe the stock's total return will be in line with the market over the next 12 months. HOLD 3=Underperform: The stock appears overvalued, and we believe the stock's total return will be below the market over the next 12 months. SELL O=Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months. M=Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months. U=Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months.

SECTOR RATING

VOLATILITY RATING
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BlackRock Kelso Capital Corp.

WELLS FARGO SECURITIES, LLC EQUITY RESEARCH DEPARTMENT

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