Business Context and Reporting Period
Company: TCP Capital Corp. (TCP)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2015
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 invests primarily in senior secured loans, junior loans, mezzanine debt, and bonds, with a smaller portion in equity.
Key Financial Metrics
| Metric | Amount (Nine Months Ended Sep 30, 2015) | Amount (Nine Months Ended Sep 30, 2014) |
|---|---|---|
| Total Investments (Fair Value) | $1,269,160,639 | $1,146,535,886 |
| Total Assets | $1,333,837,117 | $1,205,866,797 |
| Total Debt | $575,305,233 | $328,696,830 |
| Cash and Cash Equivalents | $34,582,869 | $27,268,792 |
| Net Assets (Common Shareholders) | $738,899,630 | $731,129,028 |
| Net Asset Value (NAV) per Share | $15.10 | $15.01 |
| Net Investment Income | $74,464,782 | $55,417,059 |
| Net Realized and Unrealized Gain (Loss) | $(3,665,639) | $(2,337,098) |
| Net Increase in Net Assets from Operations | $56,977,873 | $41,601,674 |
| Earnings Per Share (Basic & Diluted) | $1.17 | $1.11 |
Material Changes vs. Prior Period
- Portfolio Growth: Total investments increased by approximately $122.6 million (10.7%) compared to December 31, 2014, driven by new investments in 16 new and 22 existing portfolio companies during the nine-month period.
- Leverage Expansion: Total debt increased significantly from $328.7 million to $575.3 million. This increase was primarily due to the expansion of the TCPC Funding Facility and the Partnership Facility, alongside the issuance of SBA Debentures. Notably, the company fully repurchased and retired all $134 million of Series A Preferred Interests on September 3, 2015.
- Income Growth: Net investment income rose by $19.0 million (34.4%) year-over-year, attributed to a larger investment portfolio and increased other income from amendment and structuring fees.
- Expense Increase: Total operating expenses increased by $13.8 million (72.5%) to $32.8 million, driven by higher management fees (due to asset growth) and increased interest expense and commitment fees associated with higher leverage.
- Realized Losses: The company reported a net realized loss of $3.7 million for the nine months ended September 30, 2015, compared to $4.9 million in the prior year. This was primarily due to the restructuring of the Edmentum loan, partially offset by a $5.9 million gain on the partial disposition of the NEXTracker investment.
Guidance, Outlook, and Risks
- Capital Allocation: The company continues to deploy capital into senior secured debt, which comprised 97% of the portfolio at fair value. The weighted average effective yield of debt securities was 10.9%.
- Liquidity and Financing: The company maintains significant borrowing capacity with $172.2 million available under its leverage facilities. Management expects to have sufficient funds to repay outstanding balances from net investment income, portfolio repayments, and anticipated capital raises.
- Dividends: The company declared a regular quarterly dividend of $0.36 per share for the fourth quarter of 2015. It aims to distribute at least 90% of investment company taxable income to maintain Regulated Investment Company (RIC) status.
- Stock Repurchase: The board re-approved a stock repurchase plan allowing for the acquisition of up to $50 million of common stock when trading below NAV thresholds.
- Risks: Key risks include the impact of interest rate fluctuations (78.4% of debt is floating rate), the liquidity of the credit markets, the financial condition of portfolio companies, and the ability to renew or replace leverage facilities upon maturity.
Investor Verification Checklist
- Debt Maturities: Verify the maturity dates of the Partnership Facility (July 2018), Convertible Notes (December 2019), and TCPC Funding Facility (March 2020) to assess refinancing risks.
- Portfolio Concentration: Review the top five portfolio companies, which comprised 15.6% of the portfolio, to understand concentration risk.
- Preferred Interest Repurchase: Confirm the impact of the $132.3 million repurchase of Series A Preferred Interests on the balance sheet and future dividend obligations.
- Level 3 Valuations: Note that 88.6% of the portfolio is categorized as Level 3 (unobservable inputs), requiring scrutiny of the valuation methodologies and assumptions used by independent third parties and the Advisor.
- Unfunded Commitments: Check the $139.0 million in unfunded balances to understand future capital deployment obligations.