Business Context and Reporting Period
Company: BlackRock TCP Capital Corp. (TCPC)
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2021
Business Overview: TCPC is an externally managed, closed-end, non-diversified management investment company regulated as a Business Development Company (BDC). Its objective is to achieve high total returns through current income and capital appreciation, primarily investing in the debt of middle-market companies and small businesses.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 |
|---|---|---|
| Total Investments (Fair Value) | $1,826,056,622 | $1,629,564,482 |
| Net Assets | $820,637,593 | $705,142,304 |
| Net Asset Value (NAV) per Share | $14.21 | $12.21 |
| Net Investment Income | $36,208,572 | $43,105,299 |
| Net Realized and Unrealized Gain | $54,102,800 | $(66,235,442) |
| Net Increase in Net Assets from Operations | $90,311,372 | $(23,130,143) |
| Earnings Per Share (Basic & Diluted) | $1.56 | $(0.40) |
| Total Debt (Carrying Value) | $998,089,643 | $856,324,371 |
| Cash and Cash Equivalents | $17,881,467 | $20,647,828 |
| Dividends Paid per Share | $0.60 | $0.72 |
Material Changes vs. Prior Period
- Portfolio Growth: Total investments increased by approximately $196.5 million (12.1%) compared to December 31, 2020, driven by net acquisitions of $418.3 million against dispositions of $280.3 million.
- Profitability Reversal: The Company reported a net increase in net assets of $90.3 million for the six months ended June 30, 2021, a significant improvement from a net decrease of $23.1 million in the same period in 2020. This was primarily driven by a $54.1 million net realized and unrealized gain, compared to a $66.2 million loss in 2020.
- Investment Income Decline: Total investment income decreased to $82.8 million from $86.4 million year-over-year. This decline was attributed to lower interest income due to declining LIBOR rates and reduced other income, partially offset by higher dividend income.
- Expense Fluctuation: Total operating expenses increased to $46.6 million from $43.3 million. The increase was largely due to the recognition of deferred incentive fees from the first quarter of 2020, partially offset by lower interest expense.
- Debt Expansion: Total leverage increased by approximately $141.8 million, primarily due to the issuance of $175.0 million in 2026 unsecured notes in February 2021.
Outlook, Commentary, and Risks
- Management Commentary: The Company highlighted a recovery in the credit markets related to the impact of COVID-19. Significant unrealized gains were driven by the Edmentum investment ($46.8 million) and spread tightening. The Company maintains a weighted average effective yield of 9.0% on its total portfolio.
- Dividend Policy: The Company declared a quarterly dividend of $0.30 per share for the third quarter of 2021, payable September 30, 2021. The Company intends to distribute substantially all taxable income to maintain Regulated Investment Company (RIC) status.
- Liquidity and Capital Resources: As of June 30, 2021, the Company had $388.8 million of available capacity under its leverage program. The asset coverage ratio was 189%, well above the 150% requirement.
- Key Risks:
- Interest Rate Risk: 94.3% of the debt portfolio bears floating interest rates. While 87.3% of these have floors, rising rates could impact portfolio company ability to pay.
- Cybersecurity: The filing highlights risks related to cyber-attacks on the Advisor, service providers, or portfolio companies, which could disrupt operations or cause financial loss.
- Valuation Uncertainty: 98.2% of investments are Level 3 assets, valued using unobservable inputs, introducing subjectivity to fair value measurements.
- Recent Developments: Leadership changes occurred in Q2 2021, with Rajneesh Vig appointed as CEO and Philip M. Tseng as President/COO, effective August/September 2021.
Investor Verification Checklist
- Debt Maturities: Verify the repayment schedule for the $140 million 2022 Convertible Notes and $175 million 2022 Notes maturing in 2022.
- Incentive Fee Structure: Review the "Catchup Amount" mechanism for incentive fees, which caused a spike in Q2 2021 expenses due to deferred fees from Q1 2020.
- Level 3 Valuations: Scrutinize the valuation methodologies for the 98.2% of the portfolio classified as Level 3, particularly the significant unrealized gains in Edmentum.
- Asset Coverage Ratio: Monitor the ratio (currently 189%) to ensure it remains above the 150% regulatory threshold, especially given the high leverage ratio (approx. 121% of net assets).
- Dividend Sustainability: Assess whether net investment income ($36.2M for six months) is sufficient to cover the dividend payout ($34.7M for six months) without eroding capital, given the reliance on unrealized gains for total return.