BlackRock TCP Capital Corp. 2022 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
BlackRock TCP Capital Corp. is an externally managed, closed-end business development company and regulated investment company. It invests primarily in senior secured and other debt of middle-market and small businesses, with a secondary focus on equity investments. This filing covers the three and nine months ended September 30, 2022; the financial statements are unaudited.
At September 30, 2022, the portfolio comprised 132 portfolio companies with investments at fair value of $1.679 billion. Debt investments represented 87.1% of the portfolio and equity investments represented 12.9%.
Key Financial Metrics
| Metric | Three Months Ended September 30, 2022 | Nine Months Ended September 30, 2022 |
|---|---|---|
| Investment income | $48.2 million | $134.3 million |
| Operating expenses | $23.8 million | $68.9 million |
| Net investment income | $24.4 million | $65.4 million |
| Net realized gain (loss) | $0.3 million | $(18.2) million |
| Change in unrealized appreciation (depreciation) | $1.6 million | $(8.7) million |
| Net increase in net assets from operations | $26.2 million | $38.6 million |
| Earnings per share | $0.45 | $0.67 |
- Net assets were $815.9 million, or $14.12 per share, versus $829.5 million, or $14.36 per share, at December 31, 2021.
- Cash and cash equivalents were $105.8 million, compared with $19.6 million at December 31, 2021.
- Total investments at fair value were $1.679 billion, compared with $1.841 billion at December 31, 2021.
- Debt, net of deferred issuance costs, was $983.9 million, compared with $1.012 billion at December 31, 2021.
- Net cash provided by operating activities for the nine months was $168.5 million. Net cash used in financing activities was $82.2 million.
- The company paid $0.90 per share in regular dividends during the first nine months, totaling $52.0 million.
- The weighted-average effective yield was 11.3% on the debt portfolio and 10.5% on the total portfolio, compared with 9.2% and 8.7%, respectively, at December 31, 2021.
- Approximately 94.5% of debt investments were floating-rate, and 89.0% of floating-rate investments were subject to interest-rate floors.
- Two portfolio-company debt investments were on non-accrual status, representing 0.3% of the portfolio at fair value and 0.5% at cost.
Debt, Liquidity and Regulatory Capital
| Facility or Instrument | Carrying Value | Available Capacity | Maturity |
|---|---|---|---|
| Operating Facility | $164.2 million | $135.8 million | 2026 |
| Funding Facility II | $100.0 million | $100.0 million | 2025 |
| SBA Debentures | $150.0 million | $10.0 million | 2024–2031 |
| 2024 Notes | $248.9 million | None | 2024 |
| 2026 Notes | $326.3 million | None | 2026 |
- Total leverage before unamortized issuance costs was $989.4 million, with $245.8 million of additional stated capacity.
- The company repaid its $140.0 million convertible notes at maturity on March 1, 2022. The 2022 convertible notes were outstanding at December 31, 2021 but were not outstanding at September 30, 2022.
- The company reported a 197% asset coverage ratio, above its 150% regulatory requirement, and stated that it was in compliance with all financial and operational covenants.
- Approximately 84.6% of total assets were qualifying assets under Section 55(a) of the Investment Company Act. Approximately 15.4% were non-qualifying assets.
Material Changes Versus Comparable Periods
- Third-quarter investment income increased to $48.2 million from $42.7 million, primarily because of higher LIBOR and SOFR rates, partly offset by lower dividend income.
- Nine-month investment income increased to $134.3 million from $125.5 million, while net investment income increased to $65.4 million from $54.9 million.
- Nine-month operating expenses declined to $68.9 million from $70.6 million, primarily because of lower interest expense following the maturity of the 2022 convertible notes, partially offset by higher management fees.
- Nine-month net investment results declined materially: net realized and unrealized losses totaled $26.9 million in 2022 versus gains of $52.5 million in 2021. The primary 2022 realized losses related to the reorganization of Fishbowl and restructuring of Avanti.
- Net asset value per share declined to $14.12 from $14.36 at year-end 2021. The market price was $10.93 at September 30, 2022, representing a discount of approximately 22.6% to NAV.
- The portfolio declined in fair value by approximately $162.3 million from year-end 2021, while the number of portfolio companies increased from 115 to 132. Debt exposure declined as a percentage of the portfolio, while equity exposure increased.
- Nine-month investment acquisitions were $263.4 million and dispositions or repayments were $406.0 million, compared with approximately $575.1 million and $507.5 million, respectively, in the 2021 period.
Guidance, Outlook, Commentary and Risks
- The filing does not provide formal earnings or investment guidance. Management expects to continue distributing substantially all taxable income but states that future distributions are not assured.
- Management highlighted higher interest rates as a source of increased investment income, while noting that rising rates can increase portfolio-company borrowing costs, impair credit performance and increase the company’s own funding costs.
- Management identified market volatility, widening credit spreads, reduced liquidity, uncertain valuation of Level 3 investments, inflation, the Russia-Ukraine conflict, supply-chain disruption, COVID-19 effects and LIBOR transition as material risks.
- Approximately 95.8% of investments were classified as Level 3 using significant unobservable inputs, creating meaningful valuation uncertainty. The filing states that fair values may differ materially from amounts ultimately realized.
- The company had approximately $124.4 million of unfunded investment commitments at September 30, 2022.
- The company’s secured facilities are collateralized by substantially all of the relevant portfolio assets. A decline in portfolio values could reduce borrowing availability or affect compliance with asset coverage and other covenants.
- As a RIC, the company recognizes certain non-cash income, including payment-in-kind interest, before receiving cash. This may create pressure to fund required distributions through investment repayments, borrowings or other sources.
- There were no pending material legal proceedings, and management concluded that disclosure controls and procedures were effective.
- Subsequent to quarter-end, the board declared a fourth-quarter dividend of $0.32 per share payable December 30, 2022, and re-approved the $50.0 million share repurchase plan. No shares had been repurchased through September 30, 2022.
Investor Verification Checklist
- Verify the sustainability of net investment income as benchmark rates change and as portfolio-company credit quality evolves.
- Review the concentration and valuation of Level 3 investments, including the sensitivity of values to discount rates, EBITDA multiples and other unobservable inputs.
- Assess debt maturities, refinancing requirements and available capacity under the Operating Facility and Funding Facility II.
- Monitor asset coverage, secured-lender covenants and the effect of portfolio valuation declines on borrowing capacity.
- Review non-accrual investments, realized losses from restructurings, PIK income and the company’s ability to fund cash dividends.
- Evaluate exposure to floating-rate assets versus floating- and fixed-rate liabilities, including the potential effects of further rate increases or decreases.
- Confirm the company’s compliance with RIC and BDC qualification requirements, including the 70% qualifying-asset test and annual distribution obligations.