Business Context and Reporting Period
Company: TCP Capital Corp. (TCP)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2013
Business Overview: TCP is an externally managed, closed-end, non-diversified management investment company elected to be treated as a Business Development Company (BDC) and a Regulated Investment Company (RIC). The Company invests primarily in the debt of middle-market companies, including senior secured loans, junior loans, mezzanine debt, and bonds, with a secondary focus on equity investments. Operations are conducted through Special Value Continuation Partners, LP and its subsidiary, TCPC Funding I, LLC.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2013 | Six Months Ended June 30, 2012 |
|---|---|---|
| Total Investments (Fair Value) | $571.8 million | $517.7 million |
| Cash and Cash Equivalents | $40.1 million | $18.0 million |
| Total Assets | $623.4 million | $549.2 million |
| Total Debt Outstanding | $33.0 million | $74.0 million |
| Preferred Equity Facility | $134.0 million | $134.0 million |
| Net Assets (Common Shareholders) | $398.2 million | $316.0 million |
| Net Asset Value (NAV) per Share | $14.94 | $14.71 |
| Net Investment Income | $25.5 million | $17.7 million |
| Net Realized and Unrealized Gain (Loss) | $3.0 million | $(7.4) million |
| Net Increase in Net Assets from Operations | $22.2 million | $9.5 million |
| Earnings Per Share (Basic & Diluted) | $0.98 | N/A |
Material Changes vs. Prior Period
- Portfolio Growth: Total investments increased by approximately $54.1 million (10.5%) compared to December 31, 2012, driven by aggregate acquisitions of $170.9 million against dispositions of $121.0 million during the six-month period.
- Debt Reduction: Total debt outstanding decreased significantly from $74.0 million to $33.0 million. This reflects a reduction in the Partnership Facility from $74.0 million to $8.0 million, partially offset by the new $25.0 million TCPC Funding Facility established in May 2013.
- Liquidity Improvement: Cash and cash equivalents more than doubled from $18.0 million to $40.1 million, bolstered by a secondary public offering of common stock in May 2013 which raised net proceeds of approximately $78.2 million.
- Income Growth: Net investment income increased by $7.8 million (44%) year-over-year, primarily due to a larger investment portfolio and a higher percentage of assets in income-producing investments.
- Realized Losses: The Company reported a net realized loss of $3.6 million for the six months ended June 30, 2013, compared to a loss of $2.4 million in the prior year. The 2013 loss was primarily driven by a restructuring charge on the AGY Holding Corp. investment.
Guidance, Outlook, and Risks
- Management Commentary: Management highlighted active investment activity, deploying $170.9 million across 12 new and 6 existing portfolio companies. The portfolio yield remained robust at 10.9% weighted average effective yield.
- Dividends: The Company declared a third-quarter cash dividend of $0.36 per share on August 8, 2013. For the six months ended June 30, 2013, total dividends declared were $0.76 per share.
- Incentive Compensation: Beginning January 1, 2013, the Company became subject to incentive compensation (20% of net investment income and net realized gains above an 8% hurdle). Approximately $5.2 million in incentive allocation was distributed to the General Partner for the six-month period.
- Liquidity and Capital Resources: The Company expanded its leverage program with the TCPC Funding Facility, which automatically increases to $50 million in August 2013. The Company remains in compliance with all financial covenants.
- Risks: Key risks include the illiquidity of private debt investments, the impact of interest rate fluctuations (73.6% of debt is floating rate), and the ability to renew or replace the leverage program upon maturity. The Company relies on external financing to meet distribution requirements as a RIC.
Investor Verification Checklist
- Debt Covenants: Verify continued compliance with asset coverage ratios (300% total assets to total indebtedness) required by the Revolving Facilities.
- Portfolio Concentration: Review the top five portfolio company investments, which comprised approximately 15% of the portfolio at June 30, 2013.
- Valuation Methodology: Note that 71.9% of investments are Level 3 (valued using unobservable inputs), requiring scrutiny of the independent valuation firm reports and management's fair value assumptions.
- Realized Loss Drivers: Investigate the specific terms and future outlook of the AGY Holding Corp. restructuring that generated a significant realized loss.
- Dividend Sustainability: Assess the Company's ability to maintain dividend distributions given the requirement to distribute 90% of taxable income and the impact of incentive compensation on distributable cash flow.