Business Context and Reporting Period
Company: TCP Capital Corp. (TCP)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Six months ended June 30, 2017
Business Overview: TCP 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 by investing in the debt of middle-market companies and small businesses. The portfolio consists of senior secured loans, junior loans, mezzanine debt, and bonds, often with an equity component.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2017 | Six Months Ended June 30, 2016 |
|---|---|---|
| Total Investments (Fair Value) | $1,445,947,856 | $1,314,969,870 |
| Cash and Cash Equivalents | $41,573,835 | $53,579,868 |
| Total Assets | $1,525,708,418 | $1,387,598,461 |
| Total Debt (Net of Issuance Costs) | $586,724,110 | $571,658,862 |
| Net Assets (Shareholders' Equity) | $883,941,540 | $790,935,991 |
| Net Asset Value (NAV) per Share | $15.04 | $14.91 |
| Net Investment Income | $55,918,211 | $46,004,104 |
| Net Realized and Unrealized Gain (Loss) | $(5,071,480) | $(4,147,892) |
| Net Increase in Net Assets from Operations | $50,846,731 | $41,856,212 |
| Earnings Per Share (Basic & Diluted) | $0.72 | $0.67 |
| Dividends Declared per Share | $0.72 | $0.72 |
Material Changes vs. Prior Period
- Portfolio Growth: Total investments increased by approximately $131 million (10%) compared to December 31, 2016, driven by new acquisitions of $406.7 million and draws on existing commitments, partially offset by dispositions of $276.0 million.
- Revenue Increase: Net investment income rose by $9.9 million (21.5%) year-over-year. This was primarily due to a larger portfolio size and increased prepayment income ($11.7 million in 2017 vs. $2.9 million in 2016), partially offset by higher operating expenses.
- Expense Increase: Total operating expenses increased by $5.5 million (22.6%) to $29.7 million. The increase was driven by higher interest expense ($15.7 million vs. $11.4 million) due to increased leverage and higher LIBOR rates following the issuance of 2022 Convertible Notes.
- Realized Losses: Net realized losses increased to $6.9 million from $3.3 million. Significant losses included a $10.1 million realization on the restructuring of the Iracore loan and a $3.5 million loss on the restructuring of the Avanti Communications Group loan. These were partially offset by gains on the sale of equity in Blackline ($7.0 million) and Soasta ($1.7 million).
- Capital Raise: The Company completed a public offering on April 25, 2017, issuing 5.75 million shares for net proceeds of approximately $93.6 million.
Outlook, Risks, and Management Commentary
- Portfolio Composition: As of June 30, 2017, the portfolio consisted of 94 companies. 95.3% was invested in debt (86.5% senior secured loans, 8.8% senior secured notes) and 4.7% in equity. The weighted average effective yield on debt was 11.06%.
- Leverage: Total leverage outstanding was $594.4 million. The Company has $366.0 million of available capacity under its credit facilities and SBA program. The weighted-average interest rate on leverage was 4.03%.
- Dividends: The Company declared a regular quarterly dividend of $0.36 per share for the third quarter of 2017, payable September 29, 2017.
- Stock Repurchase Plan: The Board re-approved the $50.0 million stock repurchase plan on August 2, 2017. No shares were repurchased during the six months ended June 30, 2017.
- Risks: Key risks include interest rate fluctuations (85.4% of debt is floating rate), liquidity constraints due to the illiquid nature of private credit investments, and the ability of portfolio companies to service debt. The Company relies on external financing to meet distribution requirements as a Regulated Investment Company (RIC).
Key Facts for Investor Verification
- Valuation Methodology: 89.4% of the portfolio is classified as Level 3 assets, valued using significant unobservable inputs by independent third-party valuation firms. Investors should review the sensitivity of these valuations to changes in discount rates and multiples.
- Concentration Risk: The five largest portfolio company investments comprised approximately 13.9% of the total portfolio value. The largest single investment was approximately $46.5 million.
- Restructuring Impact: Verify the ongoing performance of restructured loans, specifically Iracore and Avanti Communications Group, which contributed significantly to realized losses in the period.
- Liquidity Coverage: Confirm the Company's ability to meet its $40.3 million dividend obligation and debt service requirements given the $41.6 million cash balance and reliance on portfolio repayments.
- Debt Maturities: Monitor the maturity profile of the leverage program, specifically the SVCP Facility maturing in July 2018 and the 2019 Convertible Notes maturing in December 2019.