Business Context and Reporting Period
Company: TCP Capital Corp. (TCP)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2017
Business Overview: TCP is an externally managed, closed-end, non-diversified management investment company operating as a Business Development Company (BDC). Its investment objective is to achieve high total returns through current income and capital appreciation, primarily by investing in the debt of middle-market companies and small businesses. The company also holds equity securities and warrants.
Key Financial Metrics
| Metric | Value (Nine Months Ended Sep 30, 2017) | Value (Nine Months Ended Sep 30, 2016) |
|---|---|---|
| Total Investments (Fair Value) | $1,528,750,487 | $1,314,969,870 |
| Total Assets | $1,642,115,123 | $1,387,598,461 |
| Net Assets (Shareholders' Equity) | $877,396,967 | $790,935,991 |
| Net Asset Value (NAV) per Share | $14.92 | $14.91 |
| Net Investment Income | $83,485,938 | $71,669,157 |
| Net Realized and Unrealized Gain (Loss) | $(12,507,714) | $(3,939,136) |
| Net Increase in Net Assets from Operations | $70,978,224 | $67,730,021 |
| Earnings Per Share (Basic & Diluted) | $0.96 | $1.06 |
| Total Debt (Net of Issuance Costs) | $665,378,107 | $571,658,862 |
| Cash and Cash Equivalents | $71,929,885 | $53,579,868 |
| Weighted Average Leverage Outstanding | $599,740,024 | $528,593,078 |
| Weighted Average Interest Rate on Leverage | 4.5% | 3.7% |
Material Changes vs. Prior Period
- Portfolio Growth: Total investments increased by approximately $213.8 million (16.2%) compared to December 31, 2016, driven by aggregate acquisitions of $652.4 million against dispositions of $434.1 million during the nine-month period.
- Revenue Increase: Net investment income rose by $11.8 million (16.5%) year-over-year, primarily due to a larger portfolio size and increased prepayment income ($13.5 million in 2017 vs. $5.9 million in 2016).
- Expense Increase: Total operating expenses increased by $8.4 million (22.7%), largely attributed to higher interest expense ($23.9 million vs. $17.6 million) resulting from increased debt levels and higher LIBOR rates.
- Realized Losses: Net realized losses increased significantly to $11.5 million from $4.0 million in the prior year. Key contributors included a $10.1 million loss on the restructuring of the Iracore loan and a $3.5 million loss on the restructuring of the Avanti Communications Group loan.
- Unrealized Depreciation: The portfolio experienced a net change in unrealized depreciation of $0.97 million, compared to a negligible gain in the prior year, driven by markdowns on Kawa Solar Holdings and Real Mex.
- Capital Raise: The company completed a public offering in April 2017, issuing 5.75 million shares for net proceeds of approximately $93.6 million.
Guidance, Outlook, and Risks
- Management Commentary: Management noted that the increase in net investment income was partially offset by higher expenses and realized/unrealized losses. The company remains focused on deploying capital into senior secured debt, which comprised 95.7% of the portfolio at period end.
- Recent Developments:
- Issued an additional $50 million of 4.125% notes due 2022 on November 3, 2017.
- Re-approved the stock repurchase plan (up to $50 million) on November 2, 2017.
- Declared a fourth-quarter regular dividend of $0.36 per share on November 7, 2017.
- Liquidity and Capital Resources: The company maintains a leverage program with approximately $311 million in available capacity across its revolving credit facilities and SBA debentures. Cash and cash equivalents stood at $71.9 million.
- Risks and Contingencies:
- Interest Rate Risk: 88.8% of debt investments bear floating interest rates. A 100 basis point increase in rates would increase net investment income by approximately $15.2 million, while a decrease would reduce it by approximately $4.0 million.
- Concentration Risk: The five largest portfolio company investments comprised approximately 13.6% of the portfolio.
- Valuation Risk: 89.9% of investments are categorized as Level 3, relying on unobservable inputs and independent third-party valuations.
- Regulatory Risk: The company must maintain qualification as a Regulated Investment Company (RIC) and Business Development Company (BDC), requiring specific asset diversification and distribution thresholds.
Key Facts for Investor Verification
- Dividend Sustainability: Verify the company's ability to maintain the $0.36 quarterly dividend given the increase in realized losses and the requirement to distribute 90% of taxable income to maintain RIC status.
- Debt Maturity Wall: Review the maturity schedule of the leverage program, specifically the SVCP Revolver maturing in July 2018 and the 2019 Convertible Notes maturing in December 2019.
- Portfolio Quality: Investigate the specific details of the restructured loans (Iracore, Avanti, Real Mex) that contributed to the $11.5 million in realized losses to assess potential future credit risk.
- NAV vs. Market Price: Note the trading premium/discount. As of September 30, 2017, the market price was $16.49 per share compared to a NAV of $14.92 per share (approx. 10.5% premium).
- Unfunded Commitments: The company has $75.2 million in unfunded commitments to portfolio companies, which may impact future liquidity if drawn.