Business Context and Reporting Period
Company: BlackRock TCP Capital Corp. (TCPC)
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2020
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 investing in the debt of middle-market companies and small businesses.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 |
|---|---|---|
| Total Investments (Fair Value) | $1,607.6 million | $1,649.5 million |
| Net Assets | $705.1 million | $801.3 million |
| Net Asset Value (NAV) per Share | $12.21 | $13.64 |
| Net Investment Income | $43.1 million | $47.1 million |
| Net Realized and Unrealized Gain (Loss) | $(66.2) million | $(33.8) million |
| Net Increase (Decrease) in Net Assets from Operations | $(23.1) million | $13.3 million |
| Earnings (Loss) per Share (Basic & Diluted) | $(0.40) | $0.23 |
| Weighted-Average Leverage Outstanding | $957.3 million | $827.4 million |
| Weighted-Average Interest Rate on Leverage | 4.0% | 4.8% |
| Cash and Cash Equivalents | $20.6 million | $21.9 million |
Material Changes vs. Prior Period
- Portfolio Valuation: Total investments decreased by approximately $41.9 million (2.5%) compared to December 31, 2019, and $42.9 million compared to June 30, 2019. This decline is primarily attributed to net unrealized losses of $70.8 million for the six months ended June 30, 2020, driven by spread widening and volatility related to the COVID-19 pandemic.
- Investment Income: Total investment income decreased to $86.4 million from $95.7 million in the prior year period. This reduction reflects lower interest income due to declining LIBOR rates and reduced non-recurring prepayment income, partially offset by an increase in other income (amendment fees) of $3.8 million.
- Operating Expenses: Total operating expenses decreased to $43.3 million from $48.6 million. The decrease was driven primarily by lower incentive fees ($5.2 million vs. $10.2 million) and lower interest expense due to reduced LIBOR rates.
- NAV Decline: NAV per share decreased from $13.21 at the beginning of the period to $12.21 at period end, a decline of 7.6%, compared to a 3.7% decline in the prior year period.
Guidance, Outlook, and Risks
- Management Commentary: Management noted that the change in net unrealized appreciation/depreciation for the six months ended June 30, 2020, was primarily driven by net spread widening and volatility across the portfolio related to the market impact of COVID-19. However, the three months ended June 30, 2020, saw a recovery with a $25.7 million unrealized gain due to spread tightening.
- Dividends: The Company declared a third-quarter dividend of $0.30 per share on August 4, 2020, payable September 30, 2020. This is a reduction from the $0.36 per share paid in the first two quarters of 2020.
- Stock Repurchases: The Company repurchased 1,000,000 shares for approximately $6.1 million during the six months ended June 30, 2020. The repurchase plan was re-approved in July 2020.
- Risks and Contingencies:
- COVID-19 Impact: The pandemic has caused business shutdowns and economic instability, increasing the risk of default by portfolio companies and impacting the ability to value investments accurately. Three portfolio companies were on non-accrual status as of June 30, 2020.
- Liquidity and Leverage: The Company relies on its Leverage Program (SVCP Facility, TCPC Funding Facility, SBA Debentures, and Notes) to fund investments. Unfavorable economic conditions could limit the ability to renew or replace this leverage. As of June 30, 2020, the asset coverage ratio was 188%.
- Valuation Uncertainty: 97.6% of investments are Level 3 assets valued using unobservable inputs. The values assigned may differ materially from amounts ultimately realized.
Key Facts for Investor Verification
- NAV vs. Market Price: Verify the trading discount of the stock price ($9.14) to the reported NAV ($12.21) as of June 30, 2020.
- Dividend Sustainability: Monitor the reduction in the quarterly dividend from $0.36 to $0.30 and the Company's ability to maintain distributions given the decline in net investment income and unrealized losses.
- Portfolio Quality: Review the specific portfolio companies on non-accrual status and the magnitude of unrealized losses in specific sectors (e.g., Airlines, Hotels, Restaurants) exposed to the pandemic.
- Leverage Renewal: Track the maturity dates of the Company's debt facilities (SVCP Facility, TCPC Funding Facility, Notes) and the terms of any refinancing, particularly given the recent replacement of the TCPC Funding Facility in August 2020.
- Incentive Fee Structure: Note the "Catchup Amount" of approximately $3.9 million included in Q2 2020 incentive fees, which relates to Q1 2020 performance, and the Advisor's voluntary deferral of a portion of this amount.