Business Context and Reporting Period
Company: TCP Capital Corp. (TCP)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2018
Business Overview: TCP is an externally managed, closed-end, non-diversified management investment company operating 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 is managed by Tennenbaum Capital Partners, LLC.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total Assets | $1,665.6 million | $1,514.5 million (Dec 31, 2017) |
| Net Assets (Equity) | $876.6 million | $870.7 million (Dec 31, 2017) |
| Net Asset Value (NAV) per Share | $14.90 | $14.80 (Dec 31, 2017) |
| Investment Income | $44.2 million | $39.3 million |
| Total Operating Expenses | $22.6 million | $14.5 million |
| Net Investment Income | $21.6 million | $24.9 million |
| Net Realized and Unrealized Gain | $5.6 million | $(0.5) million |
| Net Increase in Net Assets from Operations | $27.2 million | $19.4 million |
| Earnings Per Share (Basic & Diluted) | $0.46 | $0.37 |
| Debt Outstanding (Net) | $768.7 million | $725.2 million (Dec 31, 2017) |
| Cash and Cash Equivalents | $13.7 million | $86.6 million (Dec 31, 2017) |
Material Changes vs. Prior Period
- Expense Structure Change: Total operating expenses increased significantly from $14.5 million in Q1 2017 to $22.6 million in Q1 2018. This is primarily due to a change in accounting treatment effective January 1, 2018, where incentive compensation (previously an allocation to the General Partner) is now recorded as an operating expense. Incentive fees for Q1 2018 were $5.4 million.
- Net Investment Income: Despite a $4.9 million increase in investment income, Net Investment Income decreased by $3.3 million year-over-year due to the aforementioned increase in operating expenses.
- Realized/Unrealized Gains: The company reported a net realized and unrealized gain of $5.6 million in Q1 2018, compared to a loss of $0.5 million in Q1 2017. This improvement was driven by unrealized gains of $1.9 million on the investment in NEG Parent (CORE Entertainment) and tighter market spreads.
- Liquidity: Cash and cash equivalents decreased from $86.6 million at year-end 2017 to $13.7 million at March 31, 2018, reflecting active deployment of capital into new investments ($169.1 million in acquisitions) and dividend payments.
Guidance, Outlook, and Risks
- Advisor Merger: On April 17, 2018, the Advisor (Tennenbaum Capital Partners) entered into a definitive agreement to merge with a subsidiary of BlackRock, Inc. The transaction is expected to close in Q3 2018, subject to stockholder and limited partner approval of new investment management agreements.
- Dividends: The company declared a regular quarterly dividend of $0.36 per share for Q1 2018. On May 9, 2018, the board declared a Q2 2018 regular dividend of $0.36 per share.
- Stock Repurchase Plan: The company has a $50.0 million repurchase plan. During Q1 2018, it repurchased 11,300 shares for approximately $160,600. The plan was re-approved on May 2, 2018.
- Portfolio Composition: As of March 31, 2018, 95.6% of the portfolio was invested in debt (86.8% senior secured loans) and 4.4% in equity. The weighted average effective yield of the debt portfolio was 11.3%.
- Risks: The company faces interest rate risk, with 87.6% of debt investments bearing floating rates. It also faces liquidity risks related to the illiquidity of its portfolio investments and the need to maintain asset coverage ratios under the 1940 Act and its credit facilities.
Investor Verification Checklist
- Incentive Fee Accounting: Verify the impact of the January 1, 2018 change in incentive fee treatment on Net Investment Income and operating expense ratios.
- BlackRock Transaction: Monitor the status of the Advisor's merger with BlackRock and the terms of the new investment management agreement to be voted on by stockholders.
- Portfolio Concentration: Review the top five portfolio companies, which comprised 13.1% of the portfolio, and assess credit quality, particularly for distressed assets like Real Mex (RM OpCo).
- Leverage Covenants: Confirm continued compliance with the 200% asset coverage test and covenants under the SVCP 2022 Facility and TCPC Funding Facility, especially given the reduction in cash reserves.
- Dividend Sustainability: Assess the ability to maintain the $0.36 quarterly dividend given the decrease in Net Investment Income and the reliance on unrealized gains to support total returns.