Business Context and Reporting Period
Company: TCP Capital Corp. (TCP)
Filing Type: Form 10-Q (Unaudited)
Period Ended: March 31, 2017
Business Overview: TCP is an externally managed, closed-end, non-diversified management investment company operating 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. The company also makes equity investments and utilizes leverage to enhance returns.
Key Financial Metrics
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Total Assets | $1,414.1 million | $1,387.6 million |
| Total Investments (Fair Value) | $1,338.5 million | $1,315.0 million |
| Cash and Cash Equivalents | $56.0 million | $53.6 million |
| Total Debt (Net of Issuance Costs) | $608.4 million | $571.7 million |
| Net Assets (Shareholders' Equity) | $791.3 million | $790.9 million |
| Net Asset Value (NAV) per Share | $14.92 | $14.91 |
| Net Investment Income | $24.9 million | $22.9 million |
| Net Realized and Unrealized Loss | $(0.5) million | $(6.8) million |
| Earnings Per Share (Basic & Diluted) | $0.37 | $0.24 |
| Dividends Declared per Share | $0.36 | $0.36 |
Material Changes vs. Prior Period
- Investment Income Growth: Total investment income increased to $39.3 million from $34.6 million year-over-year. This was driven by a larger portfolio size and increased prepayment income ($3.3 million in Q1 2017 vs. $0.9 million in Q1 2016).
- Expense Increase: Total operating expenses rose to $14.5 million from $11.7 million. The increase is primarily attributed to higher interest expense due to increased outstanding debt and higher LIBOR rates following the issuance of 2022 Convertible Notes.
- Realized Losses: Net realized losses were $5.1 million, compared to $2.6 million in the prior year. Significant contributors included a $3.5 million loss on the restructuring of the Avanti Communications Group loan and a $1.5 million loss on the disposition of Integra Telecom Holdings. Most of these losses had been previously recognized as unrealized.
- Unrealized Gains: The company reported a net unrealized appreciation of $4.6 million, a reversal from the $4.2 million depreciation in Q1 2016. This was driven by tighter market spreads and the reversal of prior unrealized losses, partially offset by a $2.0 million markdown on Real Mex.
- Debt Levels: Total leverage increased to $616.2 million (gross) from $579.9 million, with the weighted-average interest rate on leverage rising to 4.4% from 3.6%.
Guidance, Outlook, and Risks
- Portfolio Composition: As of March 31, 2017, the portfolio consisted of 88 companies. 95.2% was invested in debt (86.7% senior secured loans, 8.5% senior secured notes) and 4.8% in equity. The weighted average effective yield on debt was 11.07%.
- Liquidity and Capital: The company maintains $344.0 million in available borrowing capacity across its credit facilities. Cash and cash equivalents stood at $56.0 million. The company is in compliance with all financial covenants.
- Recent Developments:
- On April 25, 2017, the company closed a public offering of 5.75 million shares for net proceeds of approximately $93.6 million.
- On April 26, 2017, the TCPC Funding facility maturity was extended to April 26, 2021.
- On May 9, 2017, a second-quarter dividend of $0.36 per share was declared.
- Risks: Key risks include interest rate fluctuations (83.5% of debt portfolio is floating rate), the illiquidity of private credit investments, and the ability of portfolio companies to service debt. The company relies on external financing to meet distribution requirements and fund new investments.
Investor Verification Checklist
- Debt Covenants: Verify continued compliance with the 200% asset coverage test and other covenants under the SVCP and TCPC Funding facilities, especially given the increase in leverage.
- Portfolio Concentration: Review the top five portfolio companies, which comprised 15.4% of the portfolio, to assess concentration risk.
- Realized Losses: Investigate the specific terms of the Avanti Communications Group restructuring and the Integra Telecom disposition to understand the impact on future cash flows.
- Interest Rate Sensitivity: Assess the impact of rising LIBOR rates on net investment income, noting that 74.6% of floating rate debt has interest rate floors.
- Dividend Sustainability: Confirm that net investment income continues to cover the $0.36 per share quarterly dividend, considering the increase in interest expenses.