Business Context and Reporting Period
Company: TCG BDC, Inc. (formerly Carlyle Secured Lending, Inc.)
Filing Type: Form 10-Q
Reporting Period: Quarter and nine months ended September 30, 2018
Business Overview: TCG BDC is an externally managed, non-diversified closed-end management investment company regulated as a Business Development Company (BDC). It invests primarily in secured debt (first and second lien senior secured loans) of U.S. middle-market companies. The company also invests in an affiliated fund, Middle Market Credit Fund, LLC ("Credit Fund").
Key Financial Metrics
| Metric | Q3 2018 (3 Months) | Q3 2017 (3 Months) | YTD 2018 (9 Months) | YTD 2017 (9 Months) |
|---|---|---|---|---|
| Total Investment Income | $51.28 million | $42.65 million | $151.22 million | $115.49 million |
| Net Investment Income | $25.69 million | $25.08 million | $79.03 million | $65.64 million |
| Net Realized Gain/(Loss) | ($4.63 million) | $0.17 million | ($2.99 million) | ($7.72 million) |
| Net Change in Unrealized Appreciation/(Depreciation) | ($14.97 million) | $0.29 million | ($35.76 million) | ($0.69 million) |
| Net Increase in Net Assets from Operations | $6.08 million | $25.54 million | $40.28 million | $57.22 million |
| Earnings Per Share (Basic & Diluted) | $0.10 | $0.41 | $0.64 | $1.15 |
| Net Assets (Total) | $1.10 billion (as of Sept 30, 2018) | |||
| Net Asset Value Per Share | $17.66 (as of Sept 30, 2018) | |||
| Cash and Cash Equivalents | $112.91 million (as of Sept 30, 2018) | |||
| Total Debt Outstanding | $1.00 billion (as of Sept 30, 2018) | |||
| Asset Coverage Ratio | 210.09% (as of Sept 30, 2018) |
Material Changes vs. Prior Period
- Investment Income Growth: Total investment income increased by 20.2% for the three months ended September 30, 2018, compared to the same period in 2017. This was driven by an increased invested balance, rising LIBOR rates, and higher income from Credit Fund.
- Net Income Decline: Despite higher investment income, the net increase in net assets from operations decreased significantly (from $25.54 million in Q3 2017 to $6.08 million in Q3 2018). This was primarily due to a net change in unrealized depreciation of $14.97 million in Q3 2018, compared to appreciation in the prior year.
- Expense Increases: Interest expense and credit facility fees rose due to increased leverage deployment and higher LIBOR rates. Base management fees increased as the fee waiver that existed in 2017 terminated.
- Portfolio Composition: The portfolio fair value increased to $2.02 billion from $1.97 billion at year-end 2017. The weighted average yield on first and second lien debt increased to 9.25% (amortized cost basis) from 8.86% in the prior year.
- Debt Refinancing: On August 30, 2018, the company refinanced its 2015-1 Debt Securitization, redeeming old notes and issuing new 2015-1R Notes totaling $449.2 million.
Guidance, Outlook, and Risks
- Stock Repurchase Program: On November 5, 2018, the Board approved a $100 million stock repurchase program effective until November 5, 2019. Repurchases will be made at prices not exceeding the Net Asset Value (NAV) per share.
- Dividend Policy: The Board declared a quarterly dividend of $0.37 per share on November 5, 2018, payable January 17, 2019. The company maintains an "opt-out" dividend reinvestment plan.
- Regulatory Change: The company successfully reduced its minimum asset coverage ratio requirement from 200% to 150% effective June 7, 2018, allowing for increased leverage capacity (up to 2:1 debt-to-equity).
- Key Risks:
- Valuation Risk: A significant portion of the portfolio (Level 3 assets) relies on unobservable inputs. Unrealized depreciation in Q3 2018 was driven by specific portfolio company issues (e.g., Product Quest Manufacturing bankruptcy) and changes in valuation inputs like market spreads and leverage multiples.
- Interest Rate Risk: Approximately 99.2% of the debt portfolio bears floating interest rates. While rising rates increase investment income, they also increase borrowing costs. The company has a net positive interest rate sensitivity.
- Leverage Risk: The company utilizes significant leverage ($1.0 billion outstanding). A decline in asset values could disproportionately impact NAV and restrict the ability to pay dividends or maintain RIC status.
Investor Verification Checklist
- Unrealized Loss Drivers: Verify the specific impact of the Product Quest Manufacturing bankruptcy and other downgrades on the $35.76 million unrealized depreciation for the nine-month period.
- Debt Covenants: Confirm continued compliance with the 210.09% asset coverage ratio and other financial covenants under the SPV Credit Facility, Credit Facility, and 2015-1R Notes.
- Fee Structure Impact: Review the impact of the terminated management fee waiver and the new fee structure effective July 1, 2018, on future expense ratios.
- Stock Repurchase Execution: Monitor the execution of the newly authorized $100 million share repurchase program and its effect on share count and NAV.
- Credit Fund Performance: Assess the performance of the Middle Market Credit Fund, LLC, which represents 11.1% of the portfolio, and its contribution to overall income.