Business Context and Reporting Period
Company: BlackRock TCP Capital Corp. (formerly TCP Capital Corp.)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Six months ended June 30, 2018
Business Overview: The Company is an externally managed, closed-end, non-diversified management investment company operating 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. Investment operations are conducted through Special Value Continuation Partners, LP (the Operating Company) and its subsidiaries.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2018 | Six Months Ended June 30, 2017 |
|---|---|---|
| Total Investments (Fair Value) | $1,613,830,758 | $1,514,532,703 |
| Net Assets (Common Shareholders) | $859,182,290 | $870,728,126 |
| Net Asset Value (NAV) per Share | $14.61 | $14.80 |
| Net Investment Income | $45,511,341 | $55,918,211 |
| Net Realized and Unrealized Gain (Loss) | $(14,204,911) | $(5,071,480) |
| Net Increase in Net Assets from Operations | $31,306,430 | $50,846,731 |
| Earnings Per Share (Basic & Diluted) | $0.53 | $0.72 |
| Total Debt (Net of Unamortized Costs) | $802,094,230 | $725,200,281 |
| Cash and Cash Equivalents | $27,592,081 | $86,625,237 |
Material Changes vs. Prior Period
- Net Investment Income Decline: Net investment income decreased by approximately $10.4 million (18.6%) compared to the prior year period. This decrease is primarily attributed to the inclusion of incentive compensation as an operating expense beginning January 1, 2018, rather than as an allocation to the General Partner. Additionally, interest expense increased due to higher outstanding debt levels and higher LIBOR rates.
- Unrealized Losses: The Company recorded a net unrealized depreciation of $14.3 million for the six months ended June 30, 2018, compared to a net unrealized appreciation of $1.8 million in the prior year. Significant unrealized losses were driven by markdowns on investments in Kawa Solar Holdings Limited ($7.4 million), RM OpCo, LLC (Real Mex) ($5.8 million), AGY Holding Corp. ($4.1 million), and Green Biologics, Inc. ($2.7 million).
- Portfolio Growth: Total investments increased by approximately $99.3 million (6.6%) to $1.61 billion. The portfolio consists of 97 portfolio companies, with 95.0% invested in debt (primarily senior secured loans) and 5.0% in equity.
- Liquidity Position: Cash and cash equivalents decreased significantly from $86.6 million to $27.6 million, reflecting net cash used in operating activities of $88.9 million, primarily due to net investment purchases.
Guidance, Outlook, and Risks
- Management Commentary: Management notes that the increase in investment income was driven by a larger portfolio size and higher LIBOR rates, partially offset by a decrease in prepayment income. The Company remains in compliance with all financial and operational covenants under its leverage program.
- Recent Developments: On August 1, 2018, the Company's Advisor merged with a subsidiary of BlackRock, Inc. Consequently, the Company changed its name to BlackRock TCP Capital Corp. The Operating Company withdrew its election to be regulated as a BDC and converted to a Delaware limited liability company.
- Dividends: The Company declared a third-quarter regular dividend of $0.36 per share on August 8, 2018. For the six months ended June 30, 2018, total dividends paid were $42.4 million ($0.72 per share).
- Risks and Contingencies:
- Interest Rate Risk: 91.6% of the debt portfolio bears floating interest rates. While 75.1% of these have interest rate floors, rising rates could increase borrowing costs and impact portfolio company ability to pay.
- Liquidity Risk: The Company relies on its leverage program (total capacity ~$994 million) and external financing to fund new investments and maintain distributions. Inability to renew or replace debt facilities could adversely impact liquidity.
- Valuation Risk: 93.3% of investments are categorized as Level 3, relying on unobservable inputs. Fair value estimates may differ materially from amounts ultimately realized.
Key Facts for Investor Verification
- Incentive Fee Accounting Change: Verify the impact of the January 1, 2018 change where incentive compensation moved from a distribution to the General Partner to an operating expense, which significantly reduced reported Net Investment Income.
- Specific Portfolio Markdowns: Review the specific financial health and restructuring status of Kawa Solar Holdings Limited, Real Mex, AGY Holding Corp., and Green Biologics, which drove the majority of the $14.3 million unrealized loss.
- Debt Maturities: Confirm the Company's ability to refinance or repay significant debt maturities, including the 2019 Convertible Notes (maturing Dec 2019) and various credit facilities maturing in 2022.
- Post-Period Name Change: Acknowledge the August 2018 merger with BlackRock and the subsequent name change to BlackRock TCP Capital Corp., which may affect future reporting structures and advisor relationships.
- Asset Coverage Ratio: Monitor the Company's asset coverage ratio to ensure continued compliance with the 1940 Act requirements (currently 200%, potentially reducible to 150% with shareholder approval).