Business Context and Reporting Period
Company: TCP Capital Corp. (TCP)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2016
Business Overview: TCP is an externally managed, closed-end, non-diversified management investment company operating as a Business Development Company (BDC) and a Regulated Investment Company (RIC). The company invests primarily in the debt of middle-market companies and small businesses, including senior secured loans, junior loans, mezzanine debt, and bonds, with a secondary focus on equity investments.
Key Financial Metrics
| Metric | Value (Nine Months Ended Sept 30, 2016) | Value (Nine Months Ended Sept 30, 2015) |
|---|---|---|
| Total Assets | $1,441.8 million | $1,239.1 million |
| Total Investments (Fair Value) | $1,276.4 million | $1,182.9 million |
| Cash and Cash Equivalents | $140.9 million | $35.6 million |
| Net Assets (Shareholders' Equity) | $787.1 million | $722.0 million |
| Net Asset Value (NAV) per Share | $14.84 | $14.78 |
| Net Investment Income | $71.7 million | $74.5 million |
| Net Realized and Unrealized Gain (Loss) | $(3.9) million | $(3.7) million |
| Net Increase in Net Assets from Operations | $67.7 million | $70.8 million |
| Earnings Per Share (Basic & Diluted) | $1.06 | $1.17 |
| Total Debt (Net of Issuance Costs) | $631.7 million | $498.2 million |
| Weighted-Average Leverage Outstanding | $528.6 million | $505.9 million |
| Weighted-Average Interest Rate on Leverage | 3.7% | 3.0% |
Material Changes vs. Prior Period
- Portfolio Growth: Total investments increased by approximately $93.5 million (7.9%) compared to December 31, 2015, driven by new acquisitions of $379.8 million and dispositions of $294.2 million during the nine-month period.
- Liquidity Position: Cash and cash equivalents surged from $35.6 million to $140.9 million, primarily due to proceeds from a registered direct public offering ($35.0 million), the issuance of $140.0 million in 2022 Convertible Notes, and net borrowings, partially offset by dividend payments and investment settlements.
- Debt Expansion: Total debt increased by approximately $133.5 million. This includes the issuance of $140 million in 2022 Convertible Notes and increased utilization of the TCPC Funding Facility. The weighted-average interest rate on leverage rose from 3.0% to 3.7%.
- Operating Expenses: Total operating expenses increased by $4.2 million (12.8%) to $37.0 million, primarily driven by higher interest expense ($17.6 million vs. $13.0 million) due to increased debt levels and higher LIBOR rates.
- Net Investment Income: Decreased by $2.8 million (3.8%) to $71.7 million. While investment income increased slightly to $108.7 million due to a larger portfolio, the increase was offset by the significant rise in interest and operating expenses.
Guidance, Outlook, and Risks
- Capital Deployment: Management continues to deploy capital into senior secured debt. In the three months ended September 30, 2016, the company invested $146.6 million, with 96.2% in senior secured debt. Recent developments (October-November 2016) indicate an additional $82.9 million invested in senior secured loans and equity interests.
- Dividend Policy: The company declared a quarterly regular dividend of $0.36 per share for the fourth quarter of 2016, payable December 30, 2016. The company intends to distribute substantially all taxable income to maintain RIC status.
- Stock Repurchase Plan: The board re-approved a stock repurchase plan on November 2, 2016, authorizing up to $50.0 million in aggregate repurchases, effective through two trading days after the Q4 2016 earnings release.
- Leverage and Liquidity Risks: The company relies heavily on its Leverage Program (SVCP Facility, TCPC Funding Facility, Convertible Notes, and SBA Debentures). Unfavorable economic conditions could impact the ability to renew or replace these facilities, potentially affecting liquidity and the ability to maintain distributions. The company is currently in compliance with all financial covenants.
- Interest Rate Risk: Approximately 80.5% of the debt portfolio bears floating interest rates. A 100 basis point increase in rates is estimated to increase net income by approximately $5.3 million, while a 100 basis point decrease would increase net income by approximately $0.7 million (due to floors on many assets).
- Valuation Uncertainty: 90.7% of the portfolio is classified as Level 3 assets, valued using unobservable inputs. Changes in valuation assumptions (e.g., discount rates, EBITDA multiples) could materially impact reported net asset value.
Key Facts for Investor Verification
- Debt Maturities: Verify the maturity schedule of the $631.7 million in debt, specifically the SVCP Facility (July 2018), 2019 Convertible Notes (Dec 2019), TCPC Funding Facility (March 2020), and 2022 Convertible Notes (March 2022).
- Portfolio Concentration: The five largest portfolio company investments comprised approximately 14.7% of the total portfolio value as of September 30, 2016. Review the specific issuers for concentration risk.
- Level 3 Valuations: Confirm the sensitivity of the $1.16 billion in Level 3 assets to changes in unobservable inputs, particularly discount rates and EBITDA multiples.
- Unfunded Commitments: The company had $62.3 million in unfunded commitments as of September 30, 2016, which may require future capital deployment.
- Convertible Note Conversion: Note that the 2019 and 2022 Convertible Notes are currently not in the money (conversion value is less than principal), meaning no dilution from conversion is currently expected.