Business Context and Reporting Period
Company: TICC Capital Corp. (formerly Technology Investment Capital Corp.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: TICC is a closed-end, non-diversified management investment company operating as a Business Development Company (BDC) and a Regulated Investment Company (RIC). Its primary objective is to maximize total return by investing in debt and equity securities of technology-related companies. The company is managed by TICC Management, LLC, controlled by BDC Partners, LLC.
Key Financial Metrics
| Metric | Q3 2008 (Three Months) | YTD 2008 (Nine Months) | YTD 2007 (Nine Months) |
|---|---|---|---|
| Total Investment Income | $8.80 million | $30.35 million | $31.59 million |
| Total Expenses | $3.09 million | $12.60 million | $11.28 million |
| Net Investment Income | $5.71 million | $17.75 million | $20.31 million |
| Net Realized (Losses) Gains | ($10.65 million) | ($9.76 million) | $0.09 million |
| Net Change in Unrealized Appreciation/Depreciation | $0.81 million | ($22.55 million) | ($21.74 million) |
| Net Decrease in Net Assets from Operations | ($4.14 million) | ($14.56 million) | ($1.34 million) |
| Net Asset Value (NAV) per Share | $9.38 | $9.38 | $12.79 (Sep 30, 2007) |
| Total Investments at Fair Value | $265.30 million | $265.30 million | $385.37 million (Dec 31, 2007) |
| Cash and Cash Equivalents | $11.83 million | $11.83 million | $7.94 million (Dec 31, 2007) |
| Loans Payable (Credit Facility) | $30.00 million | $30.00 million | $136.50 million (Dec 31, 2007) |
Material Changes vs. Prior Period
- Portfolio Valuation Decline: Total investments at fair value decreased from $385.4 million at December 31, 2007, to $265.3 million at September 30, 2008. This reduction was driven by debt repayments ($59.2 million), sales of securities ($48.5 million), net realized losses ($9.8 million), and net unrealized depreciation ($22.5 million).
- Significant Realized Losses: The company recorded a net realized loss of $10.65 million for the quarter, primarily due to an $8.3 million write-off of the debt and equity investment in Pulvermedia, Inc., and a $1.8 million loss on the sale of a portion of the AKQA, Inc. debt investment.
- Unrealized Depreciation: For the nine months ended September 30, 2008, the company recorded $22.55 million in net unrealized depreciation. Major contributors included write-downs of $12.6 million on CAPS Group notes and $14.9 million on syndicated loans, partially offset by write-ups on WHITTMANHART and Endurance International Group.
- De-leveraging: The company significantly reduced its leverage. Borrowings under the revolving credit facility dropped from $136.5 million at year-end 2007 to $30.0 million at September 30, 2008. Subsequent to the period end, the facility was further reduced to $7.5 million.
- Investment Income: Investment income decreased year-over-year due to a smaller debt portfolio and lower yields. The weighted average yield on debt investments fell to 10.4% from 11.6% in the prior year.
Guidance, Outlook, and Risks
- Market Conditions: Management notes that global credit markets have suffered stress, volatility, and illiquidity since mid-2007. While this may create opportunities for higher returns, it has also made raising capital difficult.
- De-leveraging Strategy: Due to the uncertainty in credit markets and the lack of a written offer to extend the credit facility, management is actively de-levering the portfolio. The credit facility was reduced to $30 million as of September 30, 2008, and further reduced to $7.5 million effective November 10, 2008. Management believes this is prudent until leverage can be obtained at appropriate pricing and terms.
- Portfolio Quality: The weighted average credit grade of the debt portfolio deteriorated slightly from 2.2 to 2.3. Investments graded as "5" (some loss of principal expected) increased to 11.9% of the principal value, up from 6.0% in the prior year.
- Distributions: The company declared a distribution of $0.20 per share for the fourth quarter. Management monitors taxable earnings to determine if distributions may be characterized as a return of capital. As of September 30, 2008, approximately $0.07 per share of distributions would have been a return of capital.
- Risks: Key risks include the potential failure to maintain RIC status, the impact of economic downturns on portfolio companies (particularly in the technology sector), and the risks associated with illiquid private investments. The company also faces conflicts of interest regarding investment allocation between TICC and other funds managed by its affiliates.
Investor Verification Checklist
- Credit Facility Status: Verify the final terms and availability of the revolving credit facility, given the significant reduction to $7.5 million and the January 2009 maturity date.
- Portfolio Concentration: Review the specific exposure to downgraded portfolio companies, particularly CAPS Group (downgraded to Grade 5) and Pulvermedia (written off), to assess future impairment risks.
- Return of Capital: Confirm the final tax characterization of 2008 distributions, as a portion may be a return of capital rather than income.
- Liquidity Position: Assess the company's ability to fund new investments and maintain distributions without access to significant leverage, given the current cash balance of $11.8 million.
- Valuation Methodology: Scrutinize the fair value determinations for Level 3 assets (bilateral investments), which constitute the majority of the portfolio, especially in a dislocated market.