OXSQ

Business Context and Reporting Period

Company: TICC Capital Corp. (f/k/a Technology Investment Capital Corp.)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2009
Business Model: Closed-end, non-diversified management investment company operating as a Business Development Company (BDC) and Regulated Investment Company (RIC). The company invests primarily in debt and equity securities of technology-related companies.

Key Financial Metrics

Material Changes vs. Prior Period

• Operational Turnaround: The company reported a net increase in net assets from operations of $15.02 million for Q3 2009, a significant improvement from a net decrease of $4.14 million in Q3 2008. This was driven primarily by $22.31 million in net unrealized appreciation, largely due to valuation reversals on realized investments.
• Investment Income Decline: Total investment income decreased 44% year-over-year for the quarter ($4.95M vs $8.80M) and 51% for the nine-month period ($15.0M vs $30.4M). This reduction is attributed to a smaller debt portfolio (principal value decreased from $310.1M to $257.0M) and lower weighted average yields (8.42% vs 10.4%).
• Expense Reduction: Total expenses dropped significantly due to the elimination of interest expense. The company fully repaid and terminated its revolving credit facility on December 30, 2008. Consequently, interest expense was $0 for the current period compared to $0.7 million in Q3 2008 and $4.5 million for the nine months of 2008.
• Realized Losses: Net realized losses of $10.46 million in Q3 2009 were primarily driven by a $9.5 million loss on the repayment of the Falcon Communications, Inc. debt investment.

Guidance, Outlook, and Risks

• Unlevered Strategy: Management intends to remain fully unlevered until credit can be obtained at appropriate pricing and terms. This strategy reduces net investment income compared to a levered portfolio but mitigates risk in the current credit environment.
• Portfolio Grading: The weighted average portfolio grade deteriorated slightly from 2.3 (Dec 2008) to 2.6 (Sep 2009). Approximately 28.9% of the principal value is in Grade 5 (loss of principal expected), though this represents only 7.7% of the portfolio at fair value.
• Non-Accrual Status: The investment in WAICCS Las Vegas, LLC was placed on non-accrual status in July 2009 due to the failure of the equity sponsor to pre-fund interest reserves. The maturity date remains July 31, 2009, with no revision as of the filing date.
• Dividends: The company declared a quarterly distribution of $0.15 per share for Q3 2009. Management expects 2009 dividends to be funded primarily from net investment income, with no tax return of capital anticipated as of September 30, 2009.
• Risks: Key risks include the potential for further unrealized depreciation due to market illiquidity, the inability to access capital markets for growth, and the impact of the economic recession on portfolio company repayment abilities.

Investor Verification Checklist

• Valuation Methodology: Verify the Board's "good faith" fair value determinations for Level 3 assets, which constitute the vast majority of the portfolio ($182.6 million), given the lack of active market data.
• Non-Accrual Assets: Monitor the status of WAICCS Las Vegas, LLC and other Grade 5 investments to assess potential future realized losses.
• Capital Deployment: Assess the company's ability to deploy its $29.4 million cash balance into new investments without leverage, given the stated strategy to remain unlevered.
• Dividend Sustainability: Confirm that net investment income remains sufficient to cover the $0.15 quarterly distribution rate, particularly as the portfolio yield is lower than historical levels.
• Related Party Fees: Review the Investment Advisory Agreement terms, noting that the base fee is payable regardless of asset value decline, and incentive fees may be payable on pre-incentive net investment income.