Business Context and Reporting Period
Company: BlackRock TCP Capital Corp. (TCPC)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Nine months ended September 30, 2020
Business Overview: TCPC is an externally managed, closed-end, non-diversified management investment company regulated as a Business Development Company (BDC). Its 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 is advised by Tennenbaum Capital Partners, LLC, a subsidiary of BlackRock.
Key Financial Metrics
| Metric | Sept 30, 2020 | Dec 31, 2019 |
|---|---|---|
| Total Assets | $1,688.8 million | $1,722.1 million |
| Total Investments (Fair Value) | $1,628.8 million | $1,649.5 million |
| Cash and Cash Equivalents | $35.4 million | $44.8 million |
| Total Debt (Net of issuance costs) | $931.8 million | $907.8 million |
| Net Assets | $734.3 million | $776.3 million |
| Net Assets Per Share | $12.71 | $13.21 |
| Weighted-Average Leverage Outstanding | $943.3 million | $882.0 million |
| Weighted-Average Interest Rate on Leverage | 3.9% | 4.7% |
Operating Results (Nine Months Ended Sept 30, 2020)
- Total Investment Income: $129.2 million (Decreased from $147.4 million in 2019 due to lower LIBOR rates and reduced prepayment income).
- Net Investment Income: $63.2 million (Decreased from $72.4 million in 2019).
- Net Realized and Unrealized Gain/Loss: $(37.4) million loss (Improved from $(40.7) million loss in 2019).
- Net Increase in Net Assets from Operations: $23.4 million (Decreased from $31.7 million in 2019).
- Earnings Per Share (Basic & Diluted): $0.40 (Decreased from $0.54 in 2019).
Material Changes vs. Prior Period
- Investment Portfolio: The portfolio decreased slightly in fair value from $1.65 billion to $1.63 billion. The number of portfolio companies decreased from 105 to 101. Debt investments comprised 92.3% of the portfolio at period end.
- Realized Losses: The nine-month period included a net realized loss of $13.5 million, primarily driven by the restructuring of AGY Holding Corp., partially offset by a $4.9 million gain on the disposition of STG-Fairway (First Advantage).
- Unrealized Gains/Losses: Net unrealized depreciation of $24.0 million was recorded, driven by spread widening related to the COVID-19 pandemic, partially offset by gains in Domo and Amteck.
- Expense Reduction: Total operating expenses decreased to $66.0 million from $74.9 million in the prior year. This was due to lower interest expenses (lower LIBOR) and the deferral of incentive fees related to Q1 2020 performance.
- Debt Facility Changes: Funding Facility I ($300 million) was terminated in August 2020 and replaced by Funding Facility II ($200 million). The Operating Facility was amended to extend maturity to 2024 and increase capacity to $300 million.
Guidance, Outlook, and Risks
Management Commentary: Management noted that the decrease in investment income was primarily due to the decline in LIBOR rates. The company recorded a $2.4 million loss on the extinguishment of Funding Facility I. Incentive compensation for the period included a "Catchup Amount" of approximately $0.6 million, representing 1/6 of the deferred Q1 2020 incentive fee.
Recent Developments (Post-Period):
- On October 2, 2020, the company issued an additional $50.0 million of 2024 Notes.
- On October 29, 2020, the stock repurchase plan was re-approved.
- On November 2, 2020, a fourth-quarter dividend of $0.30 per share was declared.
Risks and Contingencies:
- COVID-19 Impact: The pandemic has caused business disruptions, increased credit spreads, and impacted the fair value of investments. Three portfolio companies were on non-accrual status as of September 30, 2020 (0.6% of portfolio).
- Liquidity and Leverage: The company relies on its leverage program for liquidity. Unfavorable economic conditions could impact the ability to renew or replace debt facilities. The asset coverage ratio was 179% as of September 30, 2020, above the 150% requirement.
- Valuation Uncertainty: 94.1% of investments are Level 3 assets, relying on unobservable inputs, which introduces subjectivity to valuations.
Key Facts for Investor Verification
- Dividend Sustainability: Verify the company's ability to maintain quarterly distributions given the decline in Net Investment Income and the reliance on non-cash PIK income to meet distribution requirements.
- Debt Maturity Wall: Monitor the upcoming maturities of the 2022 Convertible Notes (March 2022) and 2022 Notes (August 2022) and the company's ability to refinance or repay them.
- Portfolio Credit Quality: Track the status of the three portfolio companies on non-accrual and the potential for further write-downs in the current economic environment.
- Stock Repurchase Activity: Assess the impact of the $50 million repurchase plan on Net Asset Value (NAV) per share, noting that 1 million shares were repurchased in the nine-month period at an average price of $6.10.
- Asset Coverage Ratio: Confirm continued compliance with the 150% asset coverage ratio required under the 1940 Act, especially given the volatility in portfolio valuations.