Business Context and Reporting Period
Company: TCP Capital Corp. (formerly Special Value Continuation Fund, LLC)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2013
Business Overview: TCP Capital Corp. is an externally managed, closed-end, non-diversified management investment company that has elected to be treated as a Business Development Company (BDC) under the Investment Company Act of 1940 and a Regulated Investment Company (RIC) for U.S. federal income tax purposes. The Company's investment objective is to achieve high total returns through current income and capital appreciation, with an emphasis on principal protection. It primarily invests in debt securities of middle-market companies (enterprise values between $100 million and $1.5 billion), focusing on senior secured loans.
Management: Investment activities are managed by Tennenbaum Capital Partners, LLC (the "Advisor"). The Company operates through a Holding Company and an Operating Company (Special Value Continuation Partners, LP).
Key Financial Metrics
| Metric | 2013 | 2012 |
|---|---|---|
| Total Investment Income | $69.6 million | $52.2 million |
| Net Investment Income | $54.3 million | $40.3 million |
| Net Realized and Unrealized Gain (Loss) | $9.1 million | $(12.8) million |
| Net Increase in Net Assets from Operations | $49.5 million | $25.9 million |
| Total Assets | $803.3 million | $549.2 million |
| Investment Portfolio (Fair Value) | $766.3 million | $517.7 million |
| Net Assets (Common Shareholders) | $549.6 million | $316.0 million |
| Net Asset Value (NAV) per Share | $15.18 | $14.71 |
| Weighted-Average Yield on Debt | 10.9% | 11.3% |
| Debt Outstanding | $95.0 million | $74.0 million |
| Preferred Interests Outstanding | $134.0 million | $134.0 million |
| Cash and Cash Equivalents | $23.0 million | $18.0 million |
Material Changes vs. Prior Period
- Portfolio Growth: The investment portfolio grew by approximately 48% from $517.7 million in 2012 to $766.3 million in 2013, driven by $471.1 million in acquisitions across 34 new and 10 existing portfolio companies.
- Income Increase: Net investment income increased by 35% to $54.3 million, primarily due to a larger portfolio and a higher percentage of income-producing assets. Interest income rose to $67.0 million from $49.3 million.
- Realized Losses: The Company reported a net realized loss of $47.4 million in 2013, compared to $16.0 million in 2012. This was primarily driven by a $45.1 million charge related to the tender of Bally Total Fitness Holding Corporation common stock and a $7.0 million charge on the recapitalization of AGY Holding Corp. Excluding these charges, net realized gains were $4.7 million.
- Expense Increase: Total operating expenses increased to $14.3 million from $10.4 million, reflecting higher management fees due to asset growth, increased interest expense, and the commencement of incentive compensation.
- Incentive Compensation: For the first time, the Company incurred incentive compensation of $12.4 million (distributable to the General Partner) as performance exceeded the 8% total return hurdle established in the management agreement.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
Management continues to focus on originating senior secured loans to middle-market companies. The Company raised approximately $224.6 million in net proceeds from three public offerings of common stock in 2013. The Company intends to distribute substantially all of its taxable income to maintain RIC status and avoid corporate-level taxes.
Risks and Contingencies
- Leverage and Liquidity: The Company utilizes a leverage program consisting of revolving credit facilities ($216 million total capacity) and preferred limited partner interests ($134 million). Failure to comply with covenants could accelerate debt repayment. The Operating Company Facility matures in July 2016, and the Preferred Interests are subject to mandatory redemption in July 2016.
- Market Volatility: Capital market disruptions could impact the valuation of illiquid investments and the ability to refinance debt on favorable terms.
- Credit Risk: Investments in middle-market companies carry a high degree of credit risk, particularly during economic downturns. The portfolio includes lower-grade obligations.
- Regulatory Compliance: As a BDC, the Company must maintain at least 70% of assets in "qualifying assets." As of December 31, 2013, 87.4% of assets were qualifying assets.
Unusual Items
- Bally Total Fitness Charge: A $45.1 million realized loss was recognized due to the tender of shares, which had previously been recorded as an unrealized loss.
- AGY Holding Corp. Charge: A $7.0 million charge was taken on the recapitalization of AGY Holding Corp.
- Excise Tax: The Company recorded a $1.0 million expense for U.S. federal excise tax related to 2013 income.
Important Facts for Investor Verification
- Dividend Sustainability: Verify the Company's ability to generate sufficient cash flow to cover distributions, given the requirement to distribute 90% of taxable income to maintain RIC status and the impact of non-cash income (e.g., PIK interest) on cash needs.
- Leverage Covenants: Confirm continued compliance with asset coverage ratios (minimum 200%) and other covenants under the revolving credit facilities and preferred interest agreements, particularly as maturities approach in 2016.
- Portfolio Valuation: Review the valuation methodology for Level 3 assets (79% of the portfolio), which rely on unobservable inputs and independent third-party valuations, as these are subject to significant estimation uncertainty.
- Incentive Compensation Structure: Understand the impact of the 8% total return hurdle and the 20% incentive fee on net assets available to common shareholders, noting that incentive compensation is paid before common dividends.
- Concentration Risk: Note that the five largest portfolio investments comprised approximately 13% of the portfolio at year-end, and the largest single investment was approximately $21.3 million.