Business Context and Reporting Period
Company: TCG BDC, Inc. (formerly Carlyle Secured Lending, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2020
Business Overview: TCG BDC is an externally managed, non-diversified closed-end management investment company regulated as a Business Development Company (BDC). Its investment objective is to generate current income and capital appreciation primarily through debt investments in U.S. middle-market companies. The portfolio consists mainly of first and second lien senior secured loans, with a significant portion invested in the Middle Market Credit Fund, LLC (Credit Fund).
Key Financial Metrics
| Metric | Q3 2020 (Three Months) | YTD 2020 (Nine Months) | YTD 2019 (Nine Months) |
|---|---|---|---|
| Total Investment Income | $42.8 million | $138.6 million | $167.8 million |
| Net Investment Income | $21.2 million | $66.9 million | $82.3 million |
| Net Realized Gain (Loss) | ($0.2 million) | ($49.7 million) | ($17.7 million) |
| Net Change in Unrealized Appreciation (Depreciation) | $15.0 million | ($48.3 million) | ($30.5 million) |
| Net Increase (Decrease) in Net Assets from Operations | $33.6 million | ($31.3 million) | $34.5 million |
| Net Assets (Total) | $895.2 million | $895.2 million | $978.6 million |
| Net Asset Value (NAV) per Common Share | $15.01 | $15.01 | $16.58 |
| Weighted Average Interest Rate (Debt) | 2.70% | 3.30% | 4.55% |
| Asset Coverage Ratio | 174.96% | 174.96% | 181.16% |
Material Changes vs. Prior Period
- Investment Income Decline: Total investment income decreased by approximately 23% for the nine months ended September 30, 2020, compared to the prior year. This was primarily driven by a decrease in LIBOR, a lower average principal outstanding, and loans placed on non-accrual status.
- Net Loss for the Period: The Company reported a net decrease in net assets from operations of $31.3 million for the nine months ended September 30, 2020, compared to a net increase of $34.5 million in the prior year. This reversal was driven by significant net realized losses of $49.7 million and net unrealized depreciation of $48.3 million, largely attributed to unrealized losses on certain positions and higher market yields related to the COVID-19 pandemic.
- Interest Expense Reduction: Interest expense decreased significantly due to lower LIBOR rates, partially offset by higher average principal balances outstanding in the nine-month period.
- Portfolio Composition: The portfolio fair value decreased to $1.95 billion from $2.12 billion at year-end 2019. The weighted average yield on first and second lien debt decreased from 8.22% to 7.44% on an amortized cost basis.
- Non-Accrual Status: The fair value of loans on non-accrual status increased to $67.4 million (3.46% of total investments) from $52.4 million (2.47%) at December 31, 2019.
Guidance, Outlook, and Risks
- Management Commentary: Management notes that while economic activity improved in Q3 2020, uncertainty remains regarding the pace of recovery due to the COVID-19 pandemic, stimulus negotiations, and political factors. The Company is monitoring liquidity and balance sheet flexibility closely.
- Capital Actions:
- Preferred Stock: Issued 2 million shares of Cumulative Convertible Preferred Stock in May 2020 for $50 million in proceeds.
- Stock Repurchases: Repurchased 1.46 million shares of common stock for $16.0 million during the nine-month period. The Board expanded the repurchase authorization to $150 million in November 2020.
- Dividends: Declared a regular quarterly common dividend of $0.32 per share and a special dividend of $0.05 per share for Q3 2020. A subsequent dividend of $0.32 regular plus $0.04 special was declared in November 2020.
- Strategic Transaction: In November 2020, the Company formed a joint venture (Middle Market Credit Fund II, LLC) and contributed approximately $250 million of senior secured debt investments in exchange for 84% equity ownership and $170 million in gross cash proceeds to enhance balance sheet flexibility.
- Risks: Key risks include the impact of the COVID-19 pandemic on portfolio companies, fluctuations in interest rates (LIBOR), valuation uncertainty of illiquid investments, and the ability to access capital markets. The Company relies on borrowings under credit facilities, and a decline in collateral values could reduce borrowing availability.
Investor Verification Checklist
- Valuation Methodology: Verify the assumptions used in Level 3 fair value measurements, particularly discount rates and EBITDA multiples, given the significant unrealized depreciation.
- Non-Accrual Loans: Review the specific portfolio companies on non-accrual status and the Company's recovery expectations for these assets.
- Liquidity Position: Confirm the availability under the SPV Credit Facility and Credit Facility ($244.9 million available as of Sept 30, 2020) relative to unfunded commitments ($125.3 million).
- Preferred Stock Terms: Understand the conversion and redemption terms of the newly issued Preferred Stock and its impact on common shareholder dilution.
- Interest Rate Sensitivity: Assess the impact of potential LIBOR changes on net investment income, noting that 99.1% of debt investments are floating rate.