Business Context and Reporting Period
Company: TCG BDC, Inc. (formerly Carlyle GMS Finance, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2017
Business Overview: TCG BDC is an externally managed, non-diversified closed-end investment company regulated as a Business Development Company (BDC). Its objective is to generate current income and capital appreciation primarily through debt investments in U.S. middle-market companies. The company completed its Initial Public Offering (IPO) on June 19, 2017, issuing 9,000,000 shares at $18.50 per share. It also completed the acquisition of NF Investment Corp. (NFIC) on June 9, 2017.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2017 | Six Months Ended June 30, 2016 |
|---|---|---|
| Total Investment Income | $72,843 | $48,858 |
| Net Investment Income | $40,555 | $25,426 |
| Net Realized Gain (Loss) | $(7,896) | $(9,599) |
| Net Change in Unrealized Appreciation (Depreciation) | $(985) | $7,416 |
| Net Increase in Net Assets from Operations | $31,674 | $23,243 |
| Earnings Per Share (Basic & Diluted) | $0.72 | $0.70 |
| Dividends Declared Per Share | $0.78 | $0.80 |
| Total Investments (Fair Value) | $1,719,473 | $1,422,759 |
| Total Net Assets | $1,113,743 | $764,137 |
| Net Assets Per Share | $18.14 | $18.32 |
| Secured Borrowings Outstanding | $331,597 | $421,885 |
| 2015-1 Notes Payable | $270,950 | $270,849 |
| Cash and Cash Equivalents | $28,159 | $38,489 |
Material Changes vs. Prior Period
- Portfolio Growth: Total investments at fair value increased by approximately 20.9% to $1.72 billion, driven by new originations, the NFIC acquisition, and the IPO proceeds.
- Revenue Increase: Total investment income rose 49.1% year-over-year, primarily due to a larger invested balance, increased syndication/prepayment fees, and income from the Middle Market Credit Fund.
- Expense Growth: Net expenses increased to $32.288 million from $23.432 million. This was driven by higher base management fees and incentive fees due to asset growth, as well as increased interest expense from higher debt utilization.
- Unrealized Losses: Unlike the prior year which saw significant unrealized appreciation ($7.4 million), the current period recorded a net unrealized depreciation of $0.985 million. This was largely influenced by the restructuring of TwentyEighty, Inc., which resulted in a realized loss of $7.7 million and the reversal of $10.9 million in previously recorded unrealized depreciation.
- Capital Activity: The company raised significant capital through the IPO ($161.5 million net proceeds) and the NFIC acquisition, increasing shares outstanding from 41.7 million to 61.4 million.
Guidance, Outlook, and Risks
- Management Commentary: Management attributes the increase in investment income to portfolio expansion and higher yields. The weighted average yield on first and second lien debt increased to 8.63% (amortized cost) from 8.19% in the prior year, partly due to rising LIBOR rates.
- Fee Waivers: The Investment Adviser waived a portion of the base management fee (0.50%) and agreed to a temporary reduction in the incentive fee calculation (17.5% instead of 20%) following the IPO. These waivers are scheduled to terminate or be subject to shareholder vote by October 1, 2017.
- Dividend Policy: The company converted its dividend reinvestment plan from "opt-in" to "opt-out" effective July 5, 2017. A quarterly dividend of $0.37 per share was declared on August 7, 2017.
- Risks and Contingencies:
- Interest Rate Risk: Approximately 99% of the debt portfolio bears floating interest rates. While rising rates increase income, they also increase borrowing costs. Sensitivity analysis suggests a 100 basis point increase in rates would increase net investment income by approximately $9.5 million annually.
- Valuation Risk: A significant portion of the portfolio (Level 3 assets) relies on unobservable inputs and management judgment. Changes in market spreads or borrower ratings could materially impact fair value.
- Liquidity: The company maintains significant unused capacity under its credit facilities ($220.9 million available) and holds $28.2 million in cash.
Key Facts for Investor Verification
- Asset Coverage Ratio: Verify the asset coverage ratio of 284.21% as of June 30, 2017, ensuring compliance with the Investment Company Act requirement of at least 200%.
- Fee Structure Changes: Confirm the status of the base management fee waiver and the proposed amendment to reduce the incentive fee to 17.5%, scheduled for a shareholder vote in September 2017.
- Non-Accrual Status: Review the $13.2 million (0.77% of total investments) in loans on non-accrual status, specifically the TwentyEighty, Inc. restructuring impact.
- Debt Maturity Profile: Note that the $273 million in 2015-1 Notes are due in 2027, while secured borrowings under the credit facilities are due between 2020 and 2022.
- Unfunded Commitments: Verify the $107.6 million in unfunded commitments to fund delayed draw and revolving loans, which represents a potential future cash outflow.