Business Context and Reporting Period
Company: BlackRock TCP Capital Corp. (a Delaware corporation and Business Development Company)
Reporting Period: Nine months ended September 30, 2018 (Quarterly Report on Form 10-Q)
Overview: The Company invests primarily in the debt of middle-market companies and small businesses, including senior secured loans, junior loans, mezzanine debt, and bonds. Investment operations are conducted through wholly-owned subsidiaries, including Special Value Continuation Partners LLC (the Operating Company). On August 1, 2018, the Operating Company withdrew its election to be regulated as a BDC and converted to a Delaware limited liability company. The Advisor, Tennenbaum Capital Partners, LLC, merged into a BlackRock subsidiary on August 1, 2018.
Key Financial Metrics
| Metric | Sept 30, 2018 | Dec 31, 2017 |
|---|---|---|
| Total Assets | $1,685.2 million | $1,629.4 million |
| Total Investments (Fair Value) | $1,560.1 million | $1,514.5 million |
| Cash and Cash Equivalents | $90.3 million | $86.6 million |
| Total Debt (Net of issuance costs) | $764.3 million | $725.2 million |
| Net Assets (Shareholders' Equity) | $853.0 million | $870.7 million |
| Net Asset Value (NAV) per Share | $14.51 | $14.80 |
| Weighted Average Effective Yield (Total Portfolio) | 11.3% | 10.5% |
Operating Results (Nine Months Ended Sept 30, 2018)
- Total Investment Income: $142.1 million (Interest: $135.8M, PIK: $9.7M, Other: $6.6M)
- Total Operating Expenses: $72.1 million (Interest: $29.8M, Management Fees: $18.1M, Incentive Fees: $17.5M)
- Net Investment Income: $70.0 million
- Net Realized and Unrealized Loss: $(23.5) million
- Net Increase in Net Assets from Operations: $46.5 million
- Earnings Per Share (Basic & Diluted): $0.79
Material Changes vs. Prior Period
- Investment Income: Increased by $13.2 million (10.3%) compared to the nine months ended Sept 30, 2017, driven by a larger portfolio size and higher LIBOR rates, partially offset by a decrease in prepayment income.
- Operating Expenses: Increased by $26.7 million (58.9%) year-over-year. The primary driver was the inclusion of incentive fees ($17.5 million) within operating expenses starting Jan 1, 2018, whereas previously they were treated as an allocation to the General Partner. Higher interest expense due to increased debt and rates also contributed.
- Net Investment Income: Decreased by $13.5 million (16.2%) due to the significant increase in operating expenses (specifically incentive fees) outweighing the growth in investment income.
- Unrealized Losses: The Company recorded a net unrealized depreciation of $24.7 million for the nine months ended Sept 30, 2018, compared to $1.0 million in the prior year. Significant markdowns occurred in investments in Kawa Solar ($7.4M), Real Mex ($9.8M), Green Biologics ($6.9M), and AGY Holdings ($6.7M).
- Debt Levels: Total leverage outstanding increased to $771.7 million from $733.8 million. The Company replaced the SVCP 2018 Facility with the SVCP 2022 Facility and increased SBA Debentures.
Guidance, Outlook, and Risks
- Asset Coverage Election: On November 7, 2018, the Board approved the "Asset Coverage Ratio Election" under the Small Business Credit Availability Act. Effective November 7, 2019 (unless earlier shareholder approval is obtained), the asset coverage requirement will reduce from 200% to 150%. This allows for increased leverage.
- Fee Reductions: Upon effectiveness of the Asset Coverage Ratio Election, the Company plans to reduce the management fee on leveraged assets from 1.5% to 1.0%, the incentive fee from 20% to 17.5%, and the total return hurdle from 8% to 7%.
- Dividends: The Board declared a fourth-quarter regular dividend of $0.36 per share, payable December 31, 2018. The Company intends to distribute substantially all taxable income to maintain RIC status.
- Stock Repurchase: The Company Repurchase Plan (up to $50 million) was re-approved on November 1, 2018. During the nine months ended Sept 30, 2018, the Company repurchased 47,818 shares for $0.7 million.
- Risks: Key risks include the impact of interest rate fluctuations (91.8% of debt portfolio is floating rate), liquidity constraints in credit markets, and the financial condition of portfolio companies. The Company is subject to regulatory limitations under the 1940 Act and the Internal Revenue Code.
Investor Verification Checklist
- Unrealized Loss Drivers: Verify the specific financial health and restructuring status of the four major portfolio companies (Kawa Solar, Real Mex, Green Biologics, AGY Holdings) that drove the $24.7 million unrealized loss.
- Incentive Fee Structure: Confirm the impact of the new fee structure (post-Asset Coverage Election) on future Net Investment Income and EPS, specifically the reduction in the hurdle rate and fee percentages.
- Leverage Utilization: Monitor the Company's ability to utilize the increased leverage capacity permitted by the 150% asset coverage ratio and the associated impact on risk profile.
- Dividend Sustainability: Assess whether Net Investment Income ($70.0M for 9 months) remains sufficient to cover the quarterly dividend rate of $0.36/share ($1.08 annualized) given the recent increase in operating expenses.
- Portfolio Concentration: Review the top 5 portfolio companies, which comprised 15.4% of the portfolio at fair value, to assess concentration risk.