Business Context and Reporting Period
Company: BlackRock TCP Capital Corp. (formerly TCP Capital Corp.)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2018
Business Model: The Company is an externally managed, closed-end, non-diversified management investment company regulated as a Business Development Company (BDC) under the Investment Company Act of 1940. It is also taxed as a Regulated Investment Company (RIC). Its primary objective is to achieve high total returns through current income and capital appreciation, with an emphasis on principal protection, by investing primarily in debt securities of middle-market companies.
Key Corporate Events: On August 1, 2018, the Company's investment advisor, Tennenbaum Capital Partners, LLC, merged into a wholly-owned subsidiary of BlackRock, Inc. Additionally, the Company's subsidiary, SVCP, withdrew its BDC election and converted to a limited liability company on August 2, 2018.
Key Financial Metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Total Investment Income | $190.5 million | $176.0 million |
| Total Operating Expenses | $97.0 million | $62.5 million |
| Net Investment Income | $93.4 million | $113.4 million |
| Net Realized and Unrealized Gain (Loss) | ($47.9 million) | ($22.8 million) |
| Net Increase in Net Assets from Operations | $45.5 million | $67.9 million |
| Net Assets (Total) | $830.5 million | $870.7 million |
| Net Assets Per Share | $14.13 | $14.80 |
| Total Debt Outstanding (Principal) | $812.0 million | $725.2 million (carrying value) |
| Asset Coverage Ratio | 216% | 200% (prior to SBCAA amendment) |
| Portfolio Yield (Weighted Average Effective) | 11.4% | 11.0% |
| Distributions Per Share | $1.44 | $1.44 |
Material Changes vs. Prior Period
- Expense Structure Change: Total operating expenses increased significantly from $62.5 million in 2017 to $97.0 million in 2018. This increase is primarily due to the reclassification of incentive compensation. Beginning January 1, 2018, incentive fees were recorded as an operating expense ($23.3 million) rather than as an allocation/distribution to the general partner as in prior years.
- Net Investment Income Decline: Despite a $14.5 million increase in total investment income (driven by a larger portfolio and higher LIBOR rates), Net Investment Income decreased by $20.0 million year-over-year due to the aforementioned increase in recorded expenses.
- Realized and Unrealized Losses: The Company reported a net realized and unrealized loss of $47.9 million in 2018, compared to $22.8 million in 2017. Significant realized losses included a $25.8 million loss on the disposition of a loan to RM OpCo, LLC ("Real Mex") and a $4.1 million loss on Globecomm Systems, Inc. Unrealized losses were driven by mark-downs on investments in AGY Holdings Corp., Kawa Solar Holdings Limited, and Green Biologics Inc.
- Portfolio Composition: The investment portfolio grew to $1.597 billion (fair value) with 95 portfolio companies. Debt investments comprised 94.9% of the portfolio, with 87.3% in senior secured loans.
Guidance, Outlook, and Risks
Management Commentary & Outlook:
- The Company maintains a focus on origination of leveraged loans to performing middle-market companies.
- Management expects to continue distributing substantially all taxable income to maintain RIC status.
- Recent developments (as of Feb 2019) include the approval of an amended investment management agreement reducing the management fee on leveraged assets from 1.5% to 1.0% and the incentive fee from 20% to 17.5%, effective February 9, 2019.
Key Risks and Contingencies:
- Leverage and Liquidity: The Company utilizes significant leverage ($812 million outstanding). Risks include the inability to refinance debt upon maturity (notably the 2019 Convertible Notes) or the acceleration of debt due to covenant breaches.
- Asset Coverage: While the Company approved a reduction in the asset coverage requirement from 200% to 150% (effective Feb 2019), it remains subject to regulatory limits on borrowing.
- Valuation Uncertainty: 95.6% of the portfolio is categorized as Level 3 (fair value based on unobservable inputs), creating uncertainty regarding the realized value of investments.
- Interest Rate Risk: 92.7% of debt investments bear floating interest rates. While rising rates increase income, they also increase borrowing costs and may decrease the value of fixed-rate assets.
- Concentration Risk: The software sector represents the largest industry concentration at 19.8% of the portfolio.
Investor Verification Checklist
- Incentive Fee Reclassification: Verify the impact of the 2018 accounting change where incentive fees moved from equity allocation to operating expenses, which artificially inflated expenses and reduced reported Net Investment Income compared to 2017.
- Realized Loss Drivers: Review the specific details of the $25.8 million loss on Real Mex and the $4.1 million loss on Globecomm to understand the credit quality of the portfolio.
- Debt Maturity Wall: Confirm the refinancing status of the $108 million 2019 Convertible Notes maturing in December 2019.
- Fee Reduction Impact: Assess the financial impact of the new investment management agreement (effective Feb 2019) which lowers management and incentive fees.
- Level 3 Valuations: Scrutinize the unobservable inputs used to value the 95.6% of the portfolio classified as Level 3, particularly regarding the significant unrealized losses in 2018.