BlackRock TCP Capital (TCPC) Q1 2019 Update

The following is a quick TCPC Update that was previously provided to subscribers of Premium Reports along with revised target prices, dividend coverage and risk profile rankings, credit issues, earnings/dividend projections, quality of management, fee agreements, and my personal positions on all business development companies (“BDCs”) please see Deep Dive Reports

 

Summary

  • On May 1, 2019, the Board re-approved its stock repurchase plan to acquire up to $50 million of common stock at prices below NAV per share. The stock is currently trading slightly above NAV and repurchases could be financed through increased leverage.
  • Management indicated that the shareholder approval to increase leverage will likely drive higher earnings and “will continue to assess our dividend policy going forward”.
  • NAV per share increased by $0.05 or 0.4% due to overearning the dividend by $0.04 and unrealized gains of $0.02 per share “primarily from generally tighter spreads” partially offset by a markdown on Green Biologics. There were no investments on non-accrual.
  • The overall credit quality of the portfolio remains strong, with 92% of the portfolio in senior secured debt (mostly first-lien positions) and low non-accruals and low concentration risk.
  • On February 8, 2019, shareholders approved higher leverage and reducing fees including management fee to 1% (on leveraged assets) and incentive fees to 17.5%.
  • The updated projections take into account the recently reduced rate on its SVCP Facility by 0.25% to LIBOR + 2.0%.

 

For the quarter ended March 31, 2019, TCPC reported between base and best case projections covering its dividend by 110% that included $0.04 per share of income related to prepayment premiums and accelerated original issue discount amortization. There was lower-than-expected portfolio growth but overall portfolio yield remained stable at 11.4%.

Howard Levkowitz, TCPC Chairman and CEO: “Our solid performance in the first quarter underscores what our shareholders have come to expect from TCPC: disciplined investing, strong credit quality and consistent dividend coverage. During the first quarter, we originated $150 million of new investments, further diversifying our portfolio and maintaining credit quality; none of our debt investments were on non-accrual as of March 31, 2019. Importantly, we covered our dividend for the 28th consecutive quarter as a public company. We will continue to leverage our expanded deal flow and resources that we are accessing as part of BlackRock to benefit our clients and to generate strong risk-adjusted returns for our shareholders.”

 

Prepayment-related income remained lower partially due to the vintage of investments that were repaid during Q1 2019.

 

On February 8, 2019, shareholders approved the reduced asset coverage ratio allowing higher leverage and reduced management fee to 1.00% on assets financed using leverage over 1.00 debt-to-equity, reduced incentive fees from 20.0% to 17.5% and hurdle rate from 8% to 7% as well as “continue to operate in a manner that will maintain its investment grade rating”.

“Regulatory leverage at year-end, which is net of SBIC debt, was 0.86 times common equity on a gross basis and 0.84 times net of cash and outstanding trades. In connection with our vote to reduce our fee rates in February, our shareholders also approved a reduction for minimum asset coverage ratio from 200% to 150%, which went into effect on February 9th. As a result, we now have additional flexibility to modestly increase our leverage, should it be prudent in the investment environment.”

TCPC continues to lower its cost of capital and in May 2019, expanded its credit facilities by $50 million each for a total increase in capacity of $100 million as well as reducing the rate on its SVCP Facility by 0.25% to LIBOR + 2.0% and extended its maturity to May 6, 2023. As of March 31, 2019, available liquidity was $245 million, including $229 million in available leverage capacity and $27 million in cash and cash equivalents, reduced by approximately $10 million in net outstanding settlements of investments purchased.

“We had total liquidity of $245 million at quarter end. This included available leverage of $228.5 million and cash of $26.8 million. We were pleased to expand both of our credit facilities by $50 million each for an aggregate increase of $100 million and to reduce the interest rate of our SVCP facility by 25 points to LIBOR plus $200 million. We also extended the maturity of our SVCP facility to May 2023. Increasing our credit facility capacity further expands our diverse leverage program, which includes two low cost credit facilities, two convertible note issuances, a straight unsecured note issuance and an SBA program.”

 

On May 1, 2019, the Board re-approved its stock repurchase plan to acquire up to $50 million of common stock at prices below NAV per share, “in accordance with the guidelines specified in Rule 10b-18 and Rule 10b5-1”. During Q1 2019, there were only 9,000 shares repurchased and in 2018, the company repurchased only 73,416 shares for a total cost of $1.0 million. There is a good chance that the company will repurchase additional shares if the stock price declines below NAV again (reduced asset coverage ratio can be used for accretive stock repurchases).

TCPC management continues to take a higher quality approach including selective portfolio growth, with adequate protective covenants, at higher yields for improved dividend coverage. I am expecting the company to maintain its portfolio yield over the coming quarters:

“Both new and exited investments during the quarter co-incidentally had a weighted average effective yield of 10.1%. The overall effective yield on our debt portfolio at quarter end remained unchanged from the prior quarter at 11.4%.”

TCPC currently does not have a “joint venture” or “senior loan program” that uses off-balance sheet leverage to increase its overall portfolio yield. BDCs are allowed a maximum of 30% of investments to be considered ‘non-qualified’ that would include these types of investments:

From previous call: “We may consider doing some other things with 30% bucket. We’ve just have a very cautious approach to how we use that and wanted to make sure that it’s something that really fit with our strategy. So, the way we think about it is, it really is a continuation of what we’ve been doing, albeit with the resources of the world’s largest asset manager in many ways to help us do what we’ve been doing.”

Previously, TCPC completed a direct equity offering of 2.3 million shares in an effort to increase the ownership of longer-term institutional investors similar to the converted $30 million note and institutional support from CNO Financial Investments Corp. (CNO). CNO is an NYSE listed insurance holding company with over $30 billion in assets and is committed to investing more than $250 million of capital that will be deployed over time in TCP’s managed funds.

Risk Profile Update:

The overall credit quality of the portfolio remains strong, with 92% of the portfolio in senior secured debt (mostly first-lien positions) and low non-accruals and low concentration risk:

“At quarter end, our portfolio had a fair market value of $1.6 billion, 92% of which was in senior secured debt. We held investments in 95 companies across a wide variety of industries. Our largest position represented only 3.4% of the portfolio and taken together, our five largest positions represented only 15.8% of the portfolio. Diversification always has been and always will be an important factor in how we construct our portfolio. To further demonstrate our emphasis on diversification. As you can see on the chart on the left side of Slides 6, our recurring income is distributed across a diverse set of portfolio companies. We are not reliant on income from any one portfolio company. In fact, on an individual company basis, well over half of our portfolio companies each contribute less than 1% to our recurring income.”

 

As mentioned earlier, management has been slowly growing the portfolio (or shrinking if needed) and only investing in “the right type of structures with protections including covenants”.

“The direct relationships we form with borrowers as part of this process help to protect TCPC and its shareholders. The BlackRock TCP team is structured so that deal team members source, structure and monitor investments to ensure interests are aligned over the life of an investment. And finally, our team has deep experience in both performing and distressed credit, and we draw upon this expertise to structure deals that are downside protected. In closing, we remain relentlessly focused on generating superior risk adjusted returns for our investors, while preserving capital with downside protection.”

For Q1 2019, net asset value (“NAV”) per share increased by $0.05 or 0.4% (from $14.13 to $14.18) due to overearning the dividend by $0.04 per share and net unrealized gains of $1.1 million or $0.02 per share “primarily from generally tighter spreads” partially offset by a $2.5 million markdown on Green Biologics.

“Net unrealized gains of $1.1 million or $0.02 per share resulted primarily from a partial recovery following the market volatility at year-end. This was offset in part by a mark down of $2.5 million on our investment in Green Biologics. Net realized losses were $0.3 million in the quarter.”

As mentioned in the previous report, its debt investments in Green Biologics were restructured into common equity and discussed on a previous call: “Green Bio missed projections, but received an equity infusion from its strategic owner during the quarter.”

As of March 31, 2019, there were no investments on non-accrual status. During Q4 2018, the company exited its pre-IPO legacy loan to Real Mex that resulted in $25.8 million of realized losses. As discussed in previous reports, its loan to Real Mex was part of the legacy pre-IPO strategy and had generated significant income prior to the disposition.

Kawa Solar Holdings was previously on non-accrual but restructured in Q3 2018 and is now in the process of “winding down”:

Q. “I just wanted to just touch a little bit on our Kawa Solar was marked down again. And you’ve got the one debt piece of revolver that’s marked to 27%. I’m just wondering if you see that as a risk of potentially going on non-accrual.”

A. “Right now, the loans been restructured, it’s a 0% coupon. So it’s effectively right now just a claim we have as the company winds down. It did get marked down a little bit. But the majority of the movement in the quarter was actually $8 million pay down, which we applied against cost. This is a lengthy wind down in the business where there’s some long term obligations that we want to be very careful and how we wind those out. So we get our pay downs. The $8 million was a good example of success a in that effort. And it will stretch over the length of time of those contracts, which are longer term. So we do expect more pay downs that actually is the focus of the wind down. And as we do it, we’ll try to discern the pay down from the markdown, because that’s an important distinction on each quarterly basis.”

From previous call: “The effort and going forward is just to harvest the remaining assets [of Kawa Solar Holdings] which are mostly comprised of cash if you will. The way I think about this is really it’s a receivable that we’re winding down versus an operating entity which also explains the change in the rate to effectively zero percent on the remaining assets. So that one is really wind down, then you will see that decreasing over time versus being an operating entity. But the Lion’s share of the effort to exit has been completed as of the latter part of Q3 last year.”

To be a successful BDC investor:

  • As companies report results, closely monitor dividend coverage potential and portfolio credit quality.
  • Identify BDCs that fit your risk profile.
  • Establish appropriate price targets based on relative risk and returns (mostly from regular and potential special dividends).
  • Diversify your BDC portfolio with at least five companies. There are around 50 publicly traded BDCs; please be selective.

For updated TCPC target prices, dividend coverage and risk profile rankings, credit issues, earnings/dividend projections, quality of management, fee agreements, and my personal positions on all BDCs please see Premium Reports.

 

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