Business context and reporting period
BlackRock TCP Capital Corp. is an externally managed, non-diversified business development company and regulated investment company focused primarily on debt investments in middle-market companies. The filing is a Form 10-K for the year ended December 31, 2023, filed February 29, 2024; it does not present a standalone fourth-quarter income statement.
At December 31, 2023, the portfolio comprised 142 companies and $1.555 billion of investments at fair value, including 89.3% debt investments, primarily senior secured loans. The largest industry exposures were Internet Software and Services at 14.7%, Diversified Financial Services at 12.5%, Diversified Consumer Services at 10.7% and Software at 9.1%.
Key financial metrics
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Total investment income | $209.3 million | $181.0 million | 15.6% increase |
| Operating expenses | $102.5 million | $92.6 million | 10.8% increase |
| Net investment income | $106.6 million | $88.4 million | 20.5% increase |
| Net realized gain (loss) | $(31.6) million | $(18.2) million | Greater loss |
| Net unrealized appreciation (depreciation) | $(36.4) million | $(79.4) million | Smaller loss |
| Net increase (decrease) in net assets from operations | $38.5 million | $(9.2) million | Returned to positive |
| Basic and diluted earnings per share | $0.67 | $(0.16) | Improved |
| Net asset value per share | $11.90 | $12.93 | 8.0% decrease |
| Net cash provided by operating activities | $92.5 million | $203.9 million | Decrease |
| Cash and cash equivalents | $112.2 million | $82.4 million | Increase |
Investment income increased primarily because higher LIBOR/SOFR rates increased interest income. Interest and fees on debt investments were $205.1 million, compared with $172.8 million in 2022. Dividend income declined to $3.8 million from $7.2 million.
Operating expenses included $47.8 million of interest expense and related fees, $24.0 million of base management fees and $22.6 million of incentive fees. Interest expense increased from $39.4 million in 2022, while base management fees decreased from $26.3 million.
The portfolio’s weighted-average effective yield was 14.1% for debt investments and 13.3% for the total portfolio at year-end, compared with 12.7% and 11.9%, respectively, in 2022. Approximately 95.6% of debt investments were floating rate, and 94.0% of floating-rate debt investments had interest-rate floors.
Debt investments in four portfolio companies were on non-accrual status, representing 2.0% of the portfolio at fair value and 3.7% at cost, compared with three companies, 2.0% at fair value and 4.2% at cost, in 2022.
Debt, liquidity and distributions
- Total assets were $1.699 billion and net assets were $687.6 million at December 31, 2023, compared with $1.719 billion and $746.8 million, respectively, in 2022.
- Debt outstanding was $988.6 million, or $985.2 million net of issuance costs, compared with $949.1 million outstanding in 2022. The weighted-average interest rate on debt was 4.29%, compared with 3.90%.
- The Company had $246.8 million of available borrowing capacity under its credit facilities and SBA program. The asset coverage ratio was 164%, above the statutory 150% minimum, and the Company reported compliance with all leverage covenants.
- Debt maturities include $250.0 million of 3.900% notes due in 2024, $325.0 million of 2.850% notes due in 2026, the $300.0 million Operating Facility maturing in 2026 and the $200.0 million Funding Facility II maturing in 2027. SBA debentures outstanding were $150.0 million.
- Cash flow from operations was $92.5 million. Financing activities used $62.6 million, including $100.5 million of dividends paid and $39.3 million of net credit-facility draws.
- The Company declared and paid $1.69 per share of regular and special dividends in 2023, totaling $97.6 million, compared with $1.27 per share and $73.4 million in 2022. A regular dividend of $0.34 per share was declared for the first quarter of 2024.
Material changes versus the prior comparable period
- Investment income and net investment income increased materially as higher floating rates benefited portfolio yields, despite higher borrowing costs.
- Net asset value declined by $59.2 million, reflecting dividends and net realized and unrealized losses. The 2023 net realized loss was driven primarily by a $30.7 million loss on the reorganization of AutoAlert.
- Net unrealized depreciation improved substantially from 2022, but remained negative. Significant 2023 unrealized losses included Edmentum, Thras.io, Hylan, Magenta Buyer, Astra, 36th Street Capital, Khoros and Perch.
- Portfolio fair value decreased to $1.555 billion from $1.610 billion, while the number of portfolio companies increased to 142 from 136. Acquisitions declined to $226.1 million from $338.3 million, and sales or repayments declined to $218.7 million from $481.5 million.
- Debt exposure increased, while cash increased. The Operating Facility and Funding Facility II were transitioned from LIBOR-based pricing to SOFR-based pricing; Funding Facility II maturity was extended to August 2027.
- The percentage of investments classified as Level 3 increased to 96.9% from 94.0%, highlighting continued reliance on unobservable valuation inputs.
Guidance, outlook, risks, contingencies and unusual items
Management did not provide quantitative earnings or dividend guidance. The Company expects to continue distributing substantially all taxable income, but states that future distributions are not assured and may include non-taxable return of capital. Higher interest rates can support investment income but also increase the Company’s funding costs and may pressure portfolio-company coverage ratios and credit quality.
The proposed merger with BlackRock Capital Investment Corporation was amended and restated on January 10, 2024 and was anticipated to close during the first quarter of 2024, subject to stockholder, regulatory and other conditions. Based on December 31, 2023 NAVs, the filing illustrated an exchange ratio of approximately 0.3658 shares of TCPC common stock for each BCIC share, with pro forma ownership of approximately 68.5% for existing TCPC stockholders and 31.5% for existing BCIC stockholders. The merger would reduce the base management fee rate from 1.50% to 1.25% on assets up to 200% of NAV and includes a fee waiver intended to support adjusted net investment income of $0.32 per share for the first four post-closing fiscal quarters, subject to available advisory fees.
A lawsuit filed in September 2023 names the Company, the Advisor and other defendants in connection with a third-party sponsored collateralized loan obligation. Plaintiffs seek approximately $15 million from the Company, plus interest and other costs. The Company intends to defend the claims, but management cannot predict the likelihood or amount of any unfavorable outcome.
- Credit, default, restructuring and non-accrual risks remain significant because the portfolio consists largely of below-investment-grade or unrated private-company debt.
- Leverage magnifies gains and losses. A decline in portfolio values could impair asset coverage, restrict distributions or require asset sales under unfavorable conditions.
- Most investments are illiquid and valued using fair-value estimates; $1.507 billion of investments were Level 3 at year-end.
- PIK interest and original issue discount can create taxable income without corresponding cash receipts, potentially complicating distributions and RIC compliance.
- The Company faces refinancing risk from the 2024 notes and other debt maturities, as well as risks associated with floating-rate debt and continued elevated interest rates.
- Cybersecurity, geopolitical, inflationary, regulatory and macroeconomic risks could adversely affect portfolio companies, valuations, liquidity and financing access.
Important facts for investors to verify
- Review the 2024 notes maturity and the Company’s refinancing or repayment plan.
- Assess non-accrual exposures, workout status and recovery assumptions for the four affected portfolio companies.
- Evaluate the sensitivity of net investment income to interest rates; management estimates that a 100-basis-point rate change would affect annual net investment income by approximately $11.7 million, or $0.20 per share, before incentive-fee effects.
- Review Level 3 valuation assumptions, including discount rates, revenue and EBITDA multiples, and the potential effect of valuation changes on NAV and asset coverage.
- Confirm the status, closing conditions, exchange ratio and fee-waiver terms of the proposed BCIC merger.
- Monitor the pending CLO-related litigation and any disclosure of potential loss or settlement.
- Determine whether the elevated 2023 dividend level is supported by recurring net investment income rather than realized gains, PIK income or capital.