Business Context and Reporting Period
Company: BlackRock TCP Capital Corp. (TCPC)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Six months ended June 30, 2019
Business Overview: TCPC is an externally managed, closed-end, non-diversified management investment company regulated as a Business Development Company (BDC). Its objective is to achieve high total returns through current income and capital appreciation, primarily by investing in the debt of middle-market companies and small businesses.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 |
|---|---|---|
| Total Investments (Fair Value) | $1,689.2 million | $1,597.3 million |
| Net Investment Income | $47.1 million | $45.5 million |
| Net Realized and Unrealized Loss | $(33.8) million | $(14.2) million |
| Net Increase in Net Assets from Operations | $13.3 million | $31.3 million |
| Earnings Per Share (Basic & Diluted) | $0.23 | $0.53 |
| Net Assets per Share | $13.64 | $14.61 |
| Total Debt Outstanding (Carrying Value) | $913.6 million | $812.0 million |
| Cash and Cash Equivalents | $21.9 million | $27.9 million |
| Weighted Average Effective Yield (Total Portfolio) | 10.5% | 10.9% |
Material Changes vs. Prior Period
- Portfolio Growth: Total investments increased by approximately $91.9 million (5.7%) compared to December 31, 2018, driven by net acquisitions of $382.4 million against dispositions of $263.5 million.
- Operating Results: Net investment income increased by $1.6 million year-over-year due to a larger portfolio size and higher prepayment income. However, the net increase in net assets from operations decreased significantly by $18.0 million, primarily due to a $19.5 million increase in net unrealized losses.
- Unrealized Losses: The $33.8 million net unrealized loss for the six months ended June 30, 2019, was driven largely by specific portfolio company impairments, including approximately $28.6 million related to Fidelis Acquisitionco, LLC and $5.7 million related to Green Biologics, Inc.
- Leverage: Total leverage outstanding increased by $101.6 million to $913.6 million. The company expanded its SVCP Facility capacity to $220.0 million and its TCPC Funding Facility to $350.0 million during the period.
- Expense Management: Total operating expenses increased by $1.5 million to $48.6 million. This was driven by higher interest expense ($2.1 million increase) due to increased debt, partially offset by a decrease in incentive compensation ($1.2 million decrease) following a fee reduction approved in February 2019.
Guidance, Outlook, and Risks
- Fee Structure Change: Effective February 9, 2019, the management fee on assets exceeding 200% of NAV was reduced from 1.5% to 1.0%, and the incentive compensation rate was reduced from 20% to 17.5% with the cumulative total return hurdle lowered from 8% to 7%.
- Dividends: The company declared a regular quarterly dividend of $0.36 per share for the second quarter of 2019. A third-quarter dividend of $0.36 per share was declared on August 8, 2019.
- Stock Repurchase Plan: The company maintains a $50.0 million repurchase plan. During the six months ended June 30, 2019, it repurchased 9,000 shares for approximately $125,700. The plan was re-approved in August 2019.
- Key Risks:
- Valuation Risk: Approximately 89.8% of the portfolio is classified as Level 3 (unobservable inputs), making valuations subjective and sensitive to changes in market conditions.
- Concentration Risk: The five largest portfolio companies comprised approximately 14.9% of the portfolio at fair value.
- Liquidity and Leverage: The company relies on its leverage program (SVCP Facility, TCPC Funding Facility, Convertible Notes, and SBA Debentures) to fund investments. Failure to renew or replace these facilities upon maturity could materially impact liquidity.
- Interest Rate Risk: 91.2% of debt investments bear floating interest rates. While 62.3% of these have floors, rising rates could increase borrowing costs faster than investment yields if floors are not triggered.
Investor Verification Checklist
- Impairment Details: Verify the specific financial status and recovery prospects of Fidelis Acquisitionco, LLC and Green Biologics, Inc., which accounted for the majority of the period's unrealized losses.
- Debt Maturities: Review the maturity schedule of the $108 million 2019 Convertible Notes (maturing December 2019) and the company's refinancing strategy.
- Asset Coverage Ratio: Confirm the company's compliance with the 150% asset coverage requirement (reduced from 200% in February 2019) and the impact of recent portfolio write-downs on this ratio.
- PIK Income: Assess the proportion of investment income received as Payment-In-Kind (PIK) versus cash, as high PIK levels can strain liquidity required for dividend distributions.
- Unfunded Commitments: Review the $62.4 million in unfunded commitments to portfolio companies and the company's ability to fund these without additional leverage.