BlackRock TCP Capital Corp. — Form 10-Q Summary
Business Context and Reporting Period
BlackRock TCP Capital Corp. is an externally managed, non-diversified business development company that invests primarily in senior secured loans, junior debt, mezzanine debt, bonds and equity securities of middle-market and small businesses. This filing covers the three and nine months ended September 30, 2023, with comparative periods ended September 30, 2022.
At September 30, 2023, the portfolio included 143 companies with investments at fair value of $1.59 billion. The portfolio was 88.7% debt investments and 11.3% equity investments; 85.5% of total investments consisted of senior secured loans.
Financial Performance and Key Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Total investment income | $54.2 million, versus $48.2 million | $158.5 million, versus $134.3 million |
| Net investment income | $28.3 million, versus $24.4 million | $81.3 million, versus $65.4 million |
| Net increase in net assets from operations | $12.8 million, versus $26.2 million | $51.8 million, versus $38.6 million |
| Earnings per share | $0.22, versus $0.45 | $0.90, versus $0.67 |
| Net realized gain (loss) | $(0.1) million, versus $0.3 million | $(31.2) million, versus $(18.2) million |
| Net unrealized appreciation (depreciation) | $(15.4) million, versus $1.6 million | $1.6 million, versus $(8.7) million |
Net investment income represented approximately 52.2% of investment income in the third quarter and 51.3% for the first nine months. The filing does not provide a conventional operating-company revenue or EBITDA margin.
- Operating expenses were $25.9 million in the third quarter and $77.1 million for the first nine months, including debt expenses of $12.1 million and $36.0 million, respectively.
- Interest income increased primarily because of higher LIBOR/SOFR rates. Dividend income declined year over year.
- Debt investments had a weighted-average effective yield of 14.1% at quarter-end; the total portfolio yield was 13.2%.
- Approximately 94.9% of debt investments used floating rates, and 94.8% of floating-rate investments were subject to interest-rate floors.
- Three portfolio-company debt investments were on non-accrual status, representing 1.1% of the portfolio at fair value and 1.7% at cost.
Financial Position, Cash Flow and Liquidity
- Total assets were $1.72 billion and net assets were $735.0 million at September 30, 2023, compared with $746.8 million at December 31, 2022.
- Net asset value per share declined to $12.72 from $12.93.
- Cash and cash equivalents were $91.7 million, up from $82.4 million at year-end 2022.
- Net debt outstanding was $970.4 million, compared with $944.0 million at year-end. Total leverage outstanding before issuance costs was $974.2 million, with $261.2 million of additional capacity.
- Debt consisted primarily of a $250 million 2024 note issuance, $325 million of 2026 notes, $148.8 million outstanding under the Operating Facility, $100.0 million under Funding Facility II and $150.0 million of SBA debentures.
- The combined weighted-average interest rate on debt increased to 4.24% from 3.90% at December 31, 2022.
- Operating cash flow for the first nine months was $52.1 million. Financing activities used $42.9 million, primarily reflecting $66.4 million of dividends, partly offset by net credit-facility draws of $24.9 million.
- The company reported an asset coverage ratio of 189% and stated that it was in compliance with all financial and operational debt covenants.
Material Changes Versus Prior Comparable Period
- First-nine-month investment income increased 18.0% to $158.5 million, while net investment income increased 24.3% to $81.3 million.
- Debt expenses increased by approximately $7.1 million for the first nine months because of higher borrowing rates. Incentive fees increased to $17.3 million from $13.9 million, while management fees declined to $18.1 million from $19.9 million.
- Net realized losses increased to $31.2 million, primarily due to a $30.7 million loss related to the reorganization of the AutoAlert investment.
- Quarter-end fair value of investments decreased to $1.59 billion from $1.61 billion despite portfolio-company count increasing from 136 to 143.
- Investment activity moderated: acquisitions were $185.5 million for the first nine months versus $263.4 million in the prior-year period, while dispositions and repayments declined to $176.5 million from $406.0 million.
- The company declared $1.10 per share of dividends during the first nine months of 2023, including a $0.10 special dividend, compared with $0.90 per share in the prior-year period.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings or investment guidance. Management indicated that higher base rates supported investment income but also increased borrowing costs and may pressure portfolio-company debt service capacity.
- The company entered into a September 6, 2023 merger agreement with BlackRock Capital Investment Corporation. Closing was anticipated during the first quarter of 2024, subject to stockholder, regulatory and other conditions. The transaction is expected to reduce the base management fee from 1.50% to 1.25% on assets at or below 200% of NAV and includes a fee waiver intended to support adjusted net investment income of at least $0.32 per share during the first four post-closing quarters, subject to available advisory fees.
- The company was named in a lawsuit filed in the U.S. Bankruptcy Court for the Southern District of New York concerning a third-party collateralized loan obligation. Plaintiffs seek approximately $15 million from the company, plus interest and other costs. Management stated that the outcome and potential loss cannot presently be predicted.
- Approximately 95.7% of investments were classified as Level 3, requiring significant unobservable valuation inputs. Fair values may differ materially from amounts ultimately realized.
- Unfunded portfolio commitments totaled $57.2 million at quarter-end.
- The company identifies risks from interest-rate movements, credit losses, illiquidity, systemic financial-market stress, refinancing needs, LIBOR transition, regulatory requirements, RIC qualification and conflicts involving the investment adviser.
- On November 2, 2023, the board declared a fourth-quarter regular dividend of $0.34 per share and a special dividend of $0.25 per share, payable December 29, 2023.
Most Important Facts for Investors to Verify
- Completion timing, required approvals, exchange ratio and final terms of the proposed merger with BlackRock Capital Investment Corporation.
- Refinancing or repayment plans for the $250 million of 2024 notes maturing in August 2024 and other near-term debt maturities.
- Credit performance and valuation trends for the three non-accrual investments and other materially discounted positions.
- Whether higher interest income continues to exceed the effect of rising debt costs and portfolio-company credit stress.
- Potential exposure and legal developments related to the approximately $15 million CLO-related lawsuit.
- Sustainability and tax characterization of regular and special dividends, particularly given PIK income and the requirement to distribute RIC taxable income.
- Changes in Level 3 valuations, asset coverage, covenant compliance and available borrowing capacity.