Business Context and Reporting Period
Company: TCP Capital Corp. (TCP)
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2016
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 | Six Months Ended June 30, 2016 | Six Months Ended June 30, 2015 |
|---|---|---|
| Total Investments (Fair Value) | $1,231.5 million | $1,182.9 million |
| Total Assets | $1,315.6 million | $1,239.1 million |
| Net Assets (Shareholders' Equity) | $747.2 million | $722.0 million |
| Net Asset Value (NAV) per Share | $14.74 | $14.78 |
| Net Investment Income | $46.0 million | $50.2 million |
| Net Realized and Unrealized Gain (Loss) | ($4.1 million) | ($1.8 million) |
| Net Increase in Net Assets from Operations | $41.9 million | $48.4 million |
| Earnings Per Share (Basic & Diluted) | $0.67 | $0.81 |
| Debt Outstanding (Net of Issuance Costs) | $516.7 million | $498.2 million |
| Cash and Cash Equivalents | $38.3 million | $35.6 million |
| Weighted-Average Leverage Outstanding | $529.7 million | $503.4 million |
| Weighted-Average Interest Rate on Leverage | 3.6% | 3.0% |
Material Changes vs. Prior Period
- Investment Income Decline: Total investment income decreased to $70.2 million from $71.8 million in the prior year period. This was primarily due to lower non-recurring income from prepayments ($2.9 million vs. $5.0 million) and lower other income, partially offset by an increase in lease income.
- Expense Increase: Total operating expenses rose to $24.2 million from $21.5 million. The increase was driven by higher interest expense ($11.4 million vs. $8.4 million) due to increased outstanding debt and higher LIBOR rates following the issuance of Convertible Notes.
- Net Investment Income Reduction: Net investment income fell to $46.0 million from $50.2 million, reflecting the combined impact of lower investment income and higher operating expenses.
- Realized Losses: Net realized losses were $3.3 million for the six months ended June 30, 2016, compared to $9.4 million in the prior year. The 2016 loss was primarily due to the taxable reorganization of the Boomerang Tube, LLC investment, whereas the 2015 loss was driven by the restructuring of the Edmentum loan.
- Unrealized Depreciation: The portfolio experienced a net unrealized depreciation of $0.8 million for the six months ended June 30, 2016, contrasting with an unrealized appreciation of $7.7 million in the prior year period.
Guidance, Outlook, and Risks
Management Commentary:
- Portfolio Composition: As of June 30, 2016, the portfolio consisted of 89 companies, with 95.5% in debt investments (79.8% senior secured loans, 15.7% senior secured notes) and 4.5% in equity. The weighted average effective yield on debt securities was 11.00%.
- Liquidity: The company maintains significant liquidity with $38.3 million in cash and $227.0 million in available borrowing capacity under its leverage program (SVCP Facility, TCPC Funding Facility, and SBA Debentures).
- Dividends: The company declared regular quarterly dividends of $0.36 per share for both the first and second quarters of 2016. A third-quarter dividend of $0.36 per share was declared on August 9, 2016.
Risks and Contingencies:
- Interest Rate Risk: 79.6% of debt investments bear floating interest rates. While 70.1% of these have interest rate floors, rising rates could increase borrowing costs faster than investment yields if floors are not triggered.
- Leverage and Covenants: The company is subject to asset coverage tests and covenants under its credit facilities. Unfavorable economic conditions could impact the value of collateral and the ability to borrow or renew facilities.
- Valuation Uncertainty: 93.2% of investments are Level 3 assets valued using unobservable inputs, introducing subjectivity to fair value measurements.
- Regulatory Compliance: As a BDC and RIC, the company must maintain specific asset diversification and distribution requirements to avoid corporate-level taxation.
Key Facts for Investor Verification
- Debt Conversion: Verify the impact of the June 7, 2016, conversion of the $30.0 million CNO Note into 2,011,900 shares of common stock on share count and dilution.
- Boomerang Tube Restructuring: Review the specific terms and valuation impact of the taxable reorganization of the Boomerang Tube, LLC investment, which drove the realized loss for the period.
- Interest Rate Sensitivity: Assess the company's exposure to rising interest rates given that 79.6% of the portfolio is floating-rate, though 70.1% has floors.
- Unfunded Commitments: Note the $66.1 million in unfunded commitments as of June 30, 2016, which represents potential future capital deployment.
- Stock Repurchase Plan: Confirm the status of the $50.0 million stock repurchase plan, under which $1.9 million was spent in the first half of 2016.