Business Context and Reporting Period
Company: TCG BDC, Inc. (formerly Carlyle Secured Lending, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2020
Business Overview: TCG BDC is an externally managed, non-diversified closed-end investment company regulated as a Business Development Company (BDC). Its investment objective is to generate current income and capital appreciation primarily through debt investments in U.S. middle-market companies. The portfolio consists mainly of first and second lien senior secured loans, with a balance in higher-yielding investments including mezzanine debt and equities.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 |
|---|---|---|
| Total Investment Income | $95.8 million | $112.1 million |
| Net Investment Income | $45.7 million | $55.5 million |
| Net Realized Gain (Loss) | $(49.5) million | $(6.8) million |
| Net Change in Unrealized Appreciation (Depreciation) | $(63.3) million | $(5.3) million |
| Net Increase (Decrease) in Net Assets from Operations | $(64.9) million | $43.5 million |
| Net Assets (Total) | $883.3 million | $1,026.6 million |
| Net Asset Value (NAV) per Common Share | $14.80 | $17.06 |
| Basic EPS | $(1.15) | $0.71 |
| Cash and Cash Equivalents | $29.9 million | $62.3 million |
| Total Debt Outstanding | $1,038.6 million | $1,180.7 million |
| Asset Coverage Ratio | 176.55% | 193.45% |
Material Changes vs. Prior Period
- Portfolio Valuation Decline: Total investments at fair value decreased from $2.12 billion at December 31, 2019, to $1.91 billion at June 30, 2020. This was driven by a net unrealized depreciation of $63.3 million for the six-month period, primarily attributed to higher market yields related to the COVID-19 pandemic and valuation adjustments.
- Realized Losses: The Company recorded a net realized loss of $49.5 million for the six months ended June 30, 2020, compared to a loss of $6.8 million in the prior year period. This was due to realized losses on 17 investments totaling approximately $50.2 million, offset by gains on 6 investments.
- Investment Income Reduction: Total investment income declined 14.5% year-over-year. The decrease was driven by lower LIBOR rates, loans placed on non-accrual status, and lower income from the Middle Market Credit Fund.
- Non-Accrual Status: The fair value of loans on non-accrual status increased to $71.3 million (3.74% of total investments) from $52.4 million (2.47%) at the end of 2019.
- Capital Activity: On May 5, 2020, the Company issued 2 million shares of cumulative convertible preferred stock to an affiliate of Carlyle for $50 million in proceeds. The Company also repurchased 1.46 million shares of common stock for $16.0 million during the period.
Guidance, Outlook, and Risks
- Management Commentary: Management noted that while economic activity improved into June 2020, the pace of recovery remains uneven due to the COVID-19 pandemic. The Company observed an unprecedented level of calls for revolver fundings in March, which moderated in the second quarter. Credit markets rebounded in Q2, resulting in valuation appreciation relative to March 31, 2020.
- Liquidity: As of June 30, 2020, the Company had $29.9 million in cash and $241.0 million in available borrowing capacity under its credit facilities. Management believes current resources are sufficient to meet obligations and support investment objectives.
- Risks: Key risks include the impact of the COVID-19 pandemic on portfolio company performance, fluctuations in interest rates (99.1% of debt is floating rate), and the speculative nature of below-investment-grade instruments. The Company is subject to asset coverage requirements under the Investment Company Act, currently maintaining a ratio of 176.55% against a 150% minimum.
- Dividends: On August 3, 2020, the Board declared a regular quarterly common dividend of $0.32 plus a special dividend of $0.05, payable October 16, 2020.
Investor Verification Checklist
- Valuation Methodology: Verify the impact of Level 3 fair value inputs (discount rates, EBITDA multiples) on the $63.3 million unrealized depreciation, as these rely on significant management judgment.
- Non-Accrual Exposure: Review the specific portfolio companies contributing to the $71.3 million in non-accrual loans and the likelihood of recovery.
- Preferred Stock Terms: Confirm the conversion price ($9.50) and dividend rate (7.00% cash or 9.00% in-kind) of the newly issued preferred stock and its impact on common shareholder dilution.
- Debt Covenants: Monitor compliance with asset coverage ratios (176.55%) and interest coverage ratios, particularly given the potential for further economic disruption.
- Unfunded Commitments: Assess the $117.6 million in unfunded commitments to delayed draw and revolving loans and the Company's liquidity to fund them if called.