Business Context and Reporting Period
TCP Capital Corp. (TCP) is an externally managed, closed-end, non-diversified business development company (BDC) and regulated investment company (RIC). The company invests primarily in the debt of middle-market companies, including senior secured loans, junior loans, mezzanine debt, and bonds, with a secondary focus on equity investments. This Form 10-Q covers the quarterly and six-month periods ended June 30, 2015.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2015 | Six Months Ended June 30, 2014 |
|---|---|---|
| Total Investments (Fair Value) | $1,211,975,049 | $1,146,535,886 |
| Total Assets | $1,280,879,871 | $1,205,866,797 |
| Net Investment Income | $50,209,816 | $36,216,865 |
| Net Realized and Unrealized Gain (Loss) | $(1,779,437) | $2,168,080 |
| Net Increase in Net Assets from Operations | $39,509,937 | $30,135,396 |
| Earnings Per Share (Basic & Diluted) | $0.81 | $0.83 |
| Net Assets Per Share | $15.10 | $15.31 |
| Total Debt and Preferred Leverage | $517,400,159 | $462,696,830 |
| Cash and Cash Equivalents | $36,706,214 | $27,268,792 |
Material Changes vs. Prior Period
- Portfolio Growth: Total investments increased by approximately $65.4 million (5.7%) compared to December 31, 2014, driven by new acquisitions of $302.8 million and proceeds from dispositions of $240.2 million during the six-month period.
- Income Growth: Net investment income rose by $14.0 million (38.6%) year-over-year, primarily due to a larger investment portfolio generating higher interest income.
- Expense Increase: Total operating expenses increased to $21.5 million from $11.0 million in the prior year period. This was driven by higher management fees (due to asset growth), increased interest expense from expanded leverage, and higher professional fees.
- Realized Losses: The company reported a net realized loss of $9.4 million for the six months ended June 30, 2015, compared to a loss of $5.9 million in the prior year. The 2015 loss was primarily attributed to the restructuring of the loan to Edmentum, Inc.
- Leverage Expansion: Total leverage outstanding increased by approximately $54.7 million. The company expanded its TCPC Funding Facility to $300 million and repurchased $31.8 million of Series A preferred interests.
Guidance, Outlook, and Risks
- Dividends: The company declared regular quarterly dividends of $0.36 per share for the first two quarters of 2015. On August 6, 2015, the Board declared a third-quarter regular dividend of $0.36 per share.
- Stock Repurchase Plan: A $50 million stock repurchase plan was approved in February 2015. No shares were repurchased under this plan during the six months ended June 30, 2015.
- Recent Developments: In July 2015, the company received SEC exemptive relief to exclude SBA-guaranteed debt from its 200% asset coverage test, increasing borrowing flexibility. In August 2015, the TCPC Funding Facility commitment was increased to $350 million with an accordion feature expanded to $400 million.
- Risks: Key risks include the impact of interest rate fluctuations (77.5% of debt investments are floating rate), the liquidity of the credit markets, and the ability of portfolio companies to meet payment obligations. The company relies on external financing to maintain distributions and fund new investments.
Investor Verification Checklist
- Edmentum Restructuring: Verify the specific terms and future cash flow implications of the Edmentum loan restructuring that caused the $9.4 million realized loss.
- Leverage Covenants: Confirm continued compliance with the 200% asset coverage test and other covenants under the Revolving Facilities and Convertible Notes, especially given the maturity of the Operating Company Facility in July 2016.
- Unfunded Commitments: Review the $177.1 million in unfunded commitments as of June 30, 2015, to assess future capital deployment requirements.
- Valuation Methodology: Note that 86.1% of the portfolio is classified as Level 3 (unobservable inputs), requiring reliance on independent third-party valuations and management estimates.
- Preferred Interest Redemption: Monitor the mandatory redemption date of the remaining Series A preferred interests in July 2016 and the company's liquidity position to meet this obligation.