Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2017, for TCG BDC, Inc. (formerly Carlyle GMS Finance, Inc.). The Company is an externally managed, non-diversified closed-end investment company regulated as a Business Development Company (BDC) and a Regulated Investment Company (RIC). Its investment objective is to generate current income and capital appreciation primarily through debt investments in U.S. middle-market companies. During the period, the Company completed its Initial Public Offering (IPO) on June 19, 2017, and acquired NF Investment Corp. (NFIC) on June 9, 2017.
Key Financial Metrics
| Metric | Q3 2017 (Three Months) | YTD 2017 (Nine Months) | YTD 2016 (Nine Months) |
|---|---|---|---|
| Total Investment Income | $42.6 million | $115.5 million | $77.8 million |
| Net Investment Income | $25.1 million | $65.6 million | $41.3 million |
| Net Realized Gain (Loss) | $0.2 million | $(7.7) million | $(9.1) million |
| Net Change in Unrealized Appreciation (Depreciation) | $0.3 million | $(0.7) million | $20.2 million |
| Net Increase in Net Assets from Operations | $25.5 million | $57.2 million | $52.4 million |
| Earnings Per Share (Basic & Diluted) | $0.41 | $1.15 | $1.51 |
| Net Assets (Total) | $1.12 billion | $1.12 billion | $764.1 million (Dec 31, 2016) |
| Net Asset Value Per Share | $18.18 | $18.18 | $18.32 (Dec 31, 2016) |
| Total Investments (Fair Value) | $1.96 billion | $1.96 billion | $1.42 billion (Dec 31, 2016) |
| Secured Borrowings Outstanding | $578.8 million | $578.8 million | $421.9 million (Dec 31, 2016) |
| 2015-1 Notes Outstanding | $271.0 million | $271.0 million | $270.8 million (Dec 31, 2016) |
| Cash and Cash Equivalents | $35.1 million | $35.1 million | $38.5 million (Dec 31, 2016) |
Material Changes vs. Prior Period
- Portfolio Growth: Total investments at fair value increased to $1.96 billion from $1.42 billion at December 31, 2016, driven by the IPO proceeds, the NFIC Acquisition, and new originations. The portfolio consists of 89.6% secured debt, 9.6% in the Middle Market Credit Fund, and minimal structured finance and equity investments.
- Investment Income: Net investment income for the nine months ended September 30, 2017, increased to $65.6 million from $41.3 million in the prior year period. This growth was primarily due to an increased invested balance and higher interest rates (LIBOR increased from 1.00% to 1.33%).
- Realized Losses: The Company reported a net realized loss of $7.7 million for the nine months ended September 30, 2017, compared to $9.1 million in the prior year. A significant portion of the loss was related to the restructuring of TwentyEighty, Inc., where a realized loss of $7.7 million was recognized, partially offset by the reversal of $10.9 million in previously recorded unrealized depreciation.
- Expense Increases: Total expenses increased to $55.8 million (YTD 2017) from $40.9 million (YTD 2016), reflecting higher base management and incentive fees due to asset growth, as well as increased interest expense from higher debt utilization.
- Non-Accrual Status: As of September 30, 2017, one first lien debt investment with a fair value of $22.8 million (1.16% of total investments) was on non-accrual status, compared to $7.6 million (0.54%) at December 31, 2016.
Guidance, Outlook, and Risks
- Dividend Policy: The Company declared a quarterly dividend of $0.37 per share for the quarter ended September 30, 2017. Effective July 5, 2017, the dividend reinvestment plan was converted from "opt-in" to "opt-out."
- Capital Resources: The Company has significant liquidity with $136.7 million available under its credit facilities (SPV Credit Facility and Credit Facility) as of September 30, 2017. It also holds $35.1 million in cash.
- Interest Rate Risk: Approximately 98.8% of the debt portfolio bears floating interest rates. The Company is exposed to interest rate fluctuations, though most loans have interest rate floors. A 100 basis point increase in rates would increase net investment income by approximately $9.2 million annually.
- Valuation Risk: The Company values investments using significant unobservable inputs (Level 3). Fair value estimates may differ materially from values in a ready market. Significant changes in discount rates or EBITDA multiples could materially impact reported asset values.
- Regulatory Status: The Company ceased to be an "emerging growth company" as of December 31, 2017, due to the market value of its non-affiliate stock exceeding $700 million.
Investor Verification Checklist
- Fee Waiver Expiration: Verify the impact of the base management fee waiver termination effective October 1, 2017, on future expense ratios and net investment income.
- Non-Accrual Exposure: Review the specific details of the $22.8 million non-accrual loan (Product Quest Manufacturing, LLC) and the Company's recovery strategy.
- TwentyEighty Restructuring: Confirm the long-term performance of the new term loans and equity received in the TwentyEighty, Inc. restructuring.
- Debt Covenants: Monitor compliance with asset coverage ratios (currently 232.00%) and other covenants under the SPV Credit Facility, Credit Facility, and 2015-1 Notes.
- Unfunded Commitments: Assess the liquidity impact of $131.8 million in unfunded delayed draw and revolving commitments.