Business Context and Reporting Period
Company: TCP Capital Corp. (TCPC)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2017
Business Model: TCPC is an externally managed, closed-end, non-diversified Business Development Company (BDC) and Regulated Investment Company (RIC). It invests primarily in debt securities of middle-market companies (enterprise values $100M–$1.5B), focusing on senior secured loans. The company is managed by Tennenbaum Capital Partners, LLC.
Key Financial Metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Total Investment Income | $176.0 million | $148.2 million |
| Net Investment Income | $113.4 million | $95.3 million |
| Net Realized & Unrealized Gain/(Loss) | $(22.8) million | $0.1 million |
| Net Increase in Net Assets (Common) | $67.9 million | $76.3 million |
| Earnings Per Share (Basic/Diluted) | $1.19 | $1.50 |
| Total Assets | $1.63 billion | $1.39 billion |
| Total Investments (Fair Value) | $1.51 billion | $1.31 billion |
| Debt Outstanding (Net) | $725.2 million | $571.7 million |
| Net Assets | $870.7 million | $790.9 million |
| Cash and Cash Equivalents | $86.6 million | $53.6 million |
| Weighted-Average Effective Yield | 11.0% | 10.9% |
Material Changes vs. Prior Period
- Revenue Growth: Total investment income increased 18.8% to $176.0 million, driven by a larger portfolio size and higher prepayment income ($18.6M in 2017 vs. $10.6M in 2016).
- Expense Increase: Total operating expenses rose to $62.5 million from $52.4 million. This was primarily due to higher interest expense ($33.1M vs. $25.2M) resulting from increased debt levels and higher LIBOR rates, as well as increased management fees due to asset growth.
- Net Income Decline: Despite higher investment income, the net increase in net assets applicable to common shareholders decreased to $67.9 million from $76.3 million. This was primarily due to a net realized and unrealized loss of $22.8 million in 2017, compared to a negligible gain in 2016.
- Portfolio Composition: The portfolio grew to 96 companies with a fair value of $1.51 billion. Debt investments comprised 95.5% of the portfolio, with 86.3% in senior secured loans.
- Realized Losses: Significant realized losses of $20.7 million were recorded, primarily due to restructurings of loans to Iracore ($10.1M), Globecomm ($7.1M), and Avanti Communications Group ($3.5M).
Guidance, Outlook, and Risks
- Dividend Policy: The company declared a quarterly dividend of $0.36 per share for all four quarters of 2017, totaling $1.44 per share. A Q1 2018 dividend of $0.36 was declared in February 2018. The company intends to distribute substantially all taxable income to maintain RIC status.
- Liquidity and Leverage: The company maintains a leverage program with approximately $1.03 billion in total capacity. As of Dec 31, 2017, $733.8 million was outstanding. The SVCP Revolver matures in July 2018, and the TCPC Funding Facility matures in April 2021. Management expects sufficient funds to repay or refinance these obligations.
- Recent Developments: In February 2018, the company established a new $100 million revolving credit facility with ING Capital to replace the SVCP Revolver, bearing interest at LIBOR plus 2.25% (down from 2.50%).
- Risks:
- Interest Rate Risk: 89.2% of debt investments are floating rate. Rising rates increase income but also increase borrowing costs.
- Credit Risk: Investments in middle-market companies carry higher default risk. One debt investment was on non-accrual status as of year-end.
- Regulatory Risk: As a BDC, the company is subject to asset coverage tests (200%) and must maintain 70% of assets in qualifying assets. Approximately 11.4% of assets were non-qualifying at year-end.
- Valuation Risk: 91.4% of investments are Level 3 (unobservable inputs), creating uncertainty regarding fair value.
Investor Verification Checklist
- Debt Maturity Wall: Verify the status of refinancing for the SVCP Revolver (maturing July 2018) and the impact of the new ING facility on liquidity.
- Realized Loss Drivers: Review the specific terms and recovery prospects of the restructured loans (Iracore, Globecomm, Avanti) that drove the $20.7M realized loss.
- Non-Qualifying Assets: Monitor the 11.4% of assets classified as non-qualifying to ensure compliance with the 70% BDC requirement.
- Dividend Sustainability: Assess whether the $1.44 per share dividend is fully covered by taxable income, considering the impact of non-cash PIK interest and potential excise taxes.
- Level 3 Valuations: Scrutinize the unobservable inputs (discount rates, multiples) used to value the 91.4% of the portfolio categorized as Level 3.