Business Context and Reporting Period
Company: TCP Capital Corp. (TCP Capital)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2013
Business Overview: TCP Capital is an externally managed, closed-end, non-diversified management investment company elected to be treated as a Business Development Company (BDC) and a Regulated Investment Company (RIC). The company invests primarily in the debt of middle-market companies, including senior secured loans, junior loans, mezzanine debt, and bonds, with a focus on principal protection and high total returns. Operations are conducted through Special Value Continuation Partners, LP and its subsidiary, TCPC Funding I, LLC.
Key Financial Metrics
| Metric | Sept 30, 2013 | Dec 31, 2012 |
|---|---|---|
| Total Assets | $729.3 million | $549.2 million |
| Total Investments (Fair Value) | $704.1 million | $517.7 million |
| Cash and Cash Equivalents | $12.6 million | $18.0 million |
| Total Debt | $150.0 million | $74.0 million |
| Preferred Equity Facility | $134.0 million | $134.0 million |
| Net Assets (Common Shareholders) | $401.5 million | $316.0 million |
| Net Asset Value (NAV) per Share | $15.06 | $14.71 |
| Shares Outstanding | 26,654,802 | 21,477,628 |
Operating Performance (Nine Months Ended Sept 30, 2013)
- Total Investment Income: $48.6 million (vs. $35.0 million in prior year period)
- Net Investment Income: $39.0 million (vs. $27.3 million in prior year period)
- Net Realized and Unrealized Gain (Loss): $6.0 million (vs. $(7.0) million in prior year period)
- Net Increase in Net Assets from Operations: $35.1 million
- Earnings Per Share (Basic & Diluted): $1.47
Material Changes vs. Prior Period
- Portfolio Growth: Total investments increased by approximately $186.4 million (36%) from year-end 2012, driven by new acquisitions of $354.5 million and a secondary public offering in May 2013 raising $78.2 million in net proceeds.
- Leverage Expansion: Total debt increased from $74.0 million to $150.0 million. This includes the activation of a new $100 million revolving credit facility (TCPC Funding Facility) in May 2013, with $48 million drawn as of period end.
- Income Increase: Net investment income rose significantly due to a larger portfolio and a higher percentage of income-producing assets, partially offset by the absence of dividend income from equity securities in the current period.
- Realized Losses: The company reported a net realized loss of $2.8 million for the nine-month period, primarily due to a charge on the recapitalization of AGY Holding Corp., contrasting with a $6.0 million realized gain in the prior year period.
- Incentive Compensation: Beginning January 1, 2013, the company became subject to incentive compensation. For the nine months ended Sept 30, 2013, $7.9 million was allocated to the General Partner, compared to $0 in the prior year.
Guidance, Outlook, and Risks
- Capital Markets: The company closed a public offering of 4.37 million shares on October 1, 2013, raising approximately $66.5 million in net proceeds. A dividend of $0.41 per share ($0.36 regular + $0.05 special) was declared on November 7, 2013.
- Liquidity: As of September 30, 2013, the company had $12.6 million in cash and $66.0 million available under its revolving credit facilities. The company remains in compliance with all financial covenants.
- Interest Rate Risk: 76.3% of debt investments bear floating interest rates. The company utilizes interest rate floors (88.3% of floating rate debt) and derivatives (interest rate caps and cross-currency swaps) to mitigate risk. A 100 basis point increase in rates would result in a net income decrease of approximately $2.0 million, while a decrease would increase net income by approximately $0.6 million.
- Regulatory Risks: As a BDC and RIC, the company must maintain asset coverage ratios and distribute at least 90% of taxable income to avoid corporate-level taxation. Failure to meet these requirements could impact liquidity and tax status.
- Portfolio Concentration: The top five portfolio company investments comprised approximately 13% of the portfolio. The largest single investment was approximately $21.1 million.
Investor Verification Checklist
- Debt Covenants: Verify continued compliance with asset coverage ratios (300% total assets to total indebtedness) required by the credit facilities.
- Valuation Methodologies: Review the fair value hierarchy; 74.1% of the portfolio is Level 3 (valued by independent third parties) and 1.5% is Level 3 (valued by the Advisor), requiring scrutiny of unobservable inputs.
- AGY Holding Corp. Impact: Assess the long-term implications of the AGY recapitalization charge and the performance of the new debt/equity structure.
- Dividend Sustainability: Confirm that net investment income continues to support the declared dividend rate of approximately $1.44 per share annualized, considering the new incentive compensation structure.
- Refinancing Risk: Monitor the maturity dates of the Operating Company Facility (July 2016) and TCPC Funding Facility (May 2016) for potential refinancing needs.