Business Context and Reporting Period
Company: TCG BDC, Inc. (formerly Carlyle Secured Lending, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2019
Business Overview: TCG BDC is an externally managed, non-diversified closed-end investment company regulated as a Business Development Company (BDC). It primarily invests in U.S. middle-market companies through secured debt (first and second lien loans) and equity investments. The company is managed by Carlyle Global Credit Investment Management L.L.C.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 |
|---|---|---|
| Total Investment Income | $112,054 | $99,935 |
| Net Investment Income | $55,533 | $53,340 |
| Net Realized Gain (Loss) | $(6,782) | $1,646 |
| Net Change in Unrealized Appreciation (Depreciation) | $(5,268) | $(20,791) |
| Net Increase in Net Assets from Operations | $43,483 | $34,195 |
| Earnings Per Share (Basic & Diluted) | $0.71 | $0.55 |
| Total Assets | $2,172,756 | $2,084,743 |
| Total Investments (Fair Value) | $2,075,614 | $1,972,157 |
| Total Liabilities | $1,146,164 | $1,021,525 |
| Net Assets | $1,026,592 | $1,063,218 |
| Net Assets Per Share | $17.06 | $17.09 |
| Cash and Cash Equivalents | $62,324 | $87,186 |
| Secured Borrowings Outstanding | $649,397 | $514,635 |
| Notes Payable (Net) | $446,166 | $446,043 |
| Asset Coverage Ratio | 193.45% | 210.31% |
Material Changes vs. Prior Period
- Investment Income Growth: Total investment income increased by approximately 12% year-over-year, driven by an increased invested balance and higher LIBOR rates.
- Expense Increases: Total expenses rose to $56.4 million from $46.6 million. Interest expense increased significantly to $25.0 million (from $16.5 million) due to higher leverage deployment and rising interest rates.
- Realized Losses: The company reported a net realized loss of $6.8 million for the six-month period, compared to a gain of $1.6 million in the prior year. This was primarily due to a realized loss of $9.1 million on controlled/affiliated investments (SolAero Technologies Corp.).
- Unrealized Depreciation: Net unrealized depreciation improved significantly to $5.3 million compared to $20.8 million in the prior year, reflecting changes in valuation inputs and market spreads.
- Share Repurchases: The company repurchased 2.05 million shares for $30.4 million during the six-month period, reducing the share count from 62.2 million to 60.2 million.
- Non-Accrual Assets: Non-accrual loans increased to $42.2 million (2.03% of total investments) from $14.3 million (0.73%) in the prior year.
Guidance, Outlook, and Risks
- Dividend Policy: The Board declared a quarterly dividend of $0.37 per share on August 5, 2019, payable October 17, 2019. The company maintains an "opt-out" dividend reinvestment plan.
- Capital Deployment: Management continues to deploy capital into middle-market senior loans. Subsequent to June 30, 2019, the company borrowed an additional $132.7 million to fund new acquisitions.
- Portfolio Composition: As of June 30, 2019, the portfolio consisted of 89.4% secured debt (79.6% first lien, 9.8% second lien), 9.2% in the Middle Market Credit Fund, and 1.4% in equity investments. Approximately 99% of the debt portfolio is floating rate.
- Risk Factors:
- Interest Rate Risk: While 99% of the portfolio is floating rate, rising rates increase interest expense on borrowings. The company notes that a 100 basis point increase in rates would increase net investment income by approximately $7.8 million annually.
- Credit Risk: Exposure to below-investment-grade instruments involves risks regarding borrower capacity to pay. The number of investments on the "Watch List" (Internal Risk Ratings 4-6) increased to 18 investments ($251.1 million fair value).
- Liquidity: The company relies on borrowings under credit facilities and securitization. Asset coverage remains well above the 150% regulatory minimum.
Key Facts for Investor Verification
- Valuation Methodology: Verify the impact of Level 3 fair value measurements, which comprise 100% of the investment portfolio, on net asset value.
- Non-Accrual Status: Review the specific portfolio companies contributing to the $42.2 million in non-accrual loans and the likelihood of recovery.
- Realized Losses: Investigate the details of the $9.1 million realized loss on SolAero Technologies Corp. and its impact on future earnings.
- Debt Covenants: Confirm continued compliance with asset coverage and liquidity covenants under the SPV Credit Facility, Credit Facility, and 2015-1R Notes.
- Share Repurchase Program: Monitor the remaining capacity of the $100 million stock repurchase program (approx. $65.4 million remaining as of June 30, 2019).