Business Context and Reporting Period
Company: BlackRock TCP Capital Corp. (TCPC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2019
Business Overview: TCPC is an externally managed, closed-end, non-diversified management investment company regulated 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 company operates through wholly-owned subsidiaries, including Special Value Continuation Partners LLC (SVCP), TCPC Funding I, LLC, and TCPC SBIC, LP.
Key Financial Metrics
| Metric | Sept 30, 2019 | Dec 31, 2018 |
|---|---|---|
| Total Assets | $1,800.7 million | $1,659.5 million |
| Total Investments (Fair Value) | $1,681.3 million | $1,597.3 million |
| Cash and Cash Equivalents | $80.1 million | $27.9 million |
| Total Debt (Net of Issuance Costs) | $985.0 million | $805.2 million |
| Net Assets | $798.6 million | $830.5 million |
| Net Assets Per Share | $13.59 | $14.13 |
| Net Investment Income (9 Months) | $72.4 million | $70.0 million |
| Net Increase in Net Assets from Operations (9 Months) | $31.7 million | $46.5 million |
| Weighted Average Leverage Outstanding | $882.0 million | $751.8 million |
| Weighted Average Interest Rate on Leverage | 4.7% | 4.6% |
Material Changes vs. Prior Period
- Portfolio Growth: Total investments increased by approximately $84 million (5.3%) from year-end 2018, driven by aggregate acquisitions of $558.4 million against dispositions of $444.1 million for the nine months ended September 30, 2019.
- Leverage Expansion: Total debt outstanding increased by approximately $180 million. The company issued $150 million in unsecured notes due 2024 in August 2019 and expanded its credit facilities (SVCP and TCPC Funding) to increase total capacity.
- Net Asset Decline: Net assets decreased by approximately $31.9 million (3.8%) primarily due to net unrealized losses of $40.2 million for the nine-month period, partially offset by net investment income.
- Unrealized Losses: Significant unrealized depreciation was driven by markdowns on specific portfolio companies, including Fidelis Acquisitionco ($34.9 million), Green Biologics ($5.7 million), and AGY Holding Corp ($4.1 million).
- Fee Structure Change: Effective February 9, 2019, the management fee on assets exceeding 200% of NAV was reduced from 1.5% to 1.0%, and the incentive fee rate was reduced from 20% to 17.5%.
Guidance, Outlook, and Risks
Management Commentary:
- Investment Activity: The company invested in 19 new and 16 existing portfolio companies during the nine-month period. The portfolio yield was 10.0% at September 30, 2019, down from 10.9% at year-end 2018.
- Dividends: The company declared a quarterly dividend of $0.36 per share for the fourth quarter of 2019, payable December 31, 2019. Total dividends paid for the nine months ended September 30, 2019, were $63.5 million.
- Stock Repurchase: The Company Repurchase Plan was re-approved in October 2019. During the nine months ended September 30, 2019, the company repurchased 9,000 shares for approximately $126,000.
Risks and Contingencies:
- Asset Coverage: The company's asset coverage ratio was 193% as of September 30, 2019, well above the 150% requirement under the 1940 Act (following the 2019 stockholder approval to reduce the requirement from 200%).
- Interest Rate Risk: 92.3% of the debt portfolio bears floating interest rates. A 100 basis point increase in rates would increase net investment income by approximately $12.9 million annually, while a 100 basis point decrease would reduce it by approximately $12.1 million.
- Liquidity: The company relies on its leverage program and cash flows to fund operations and distributions. Unfavorable economic conditions could impact the ability to renew debt facilities or the ability of portfolio companies to repay loans.
Key Facts for Investor Verification
- Unrealized Loss Drivers: Verify the specific financial health and recovery prospects of the portfolio companies responsible for the $40.2 million in unrealized losses, particularly Fidelis Acquisitionco, Green Biologics, and AGY Holding Corp.
- Debt Maturities: Monitor the $108 million in 2019 Convertible Notes maturing in December 2019 and the company's strategy for refinancing or conversion.
- Asset Coverage Ratio: Confirm the company maintains the 150% asset coverage ratio required by the 1940 Act, especially given the high leverage levels relative to equity.
- Dividend Sustainability: Assess whether the $0.36 quarterly dividend is fully covered by taxable income, considering the impact of non-cash income (PIK) and unrealized losses on distributable earnings.
- Portfolio Concentration: Review the top five portfolio holdings, which comprised approximately 15.8% of the portfolio value, to understand concentration risk.