BlackRock TCP Capital Corp. (TCPC) Q4 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, good afternoon. Welcome, to the TCP Capital Corp. Fourth Quarter 2015 Earnings Conference Call. Today's conference call is being recorded for replay purposes. During the presentation, all participants will be in a listen-only mode. A question-and-answer session will follow the company's formal remarks. [Operator Instructions]. I will repeat these instructions when management completes their prepared remarks. And now I would like to turn the call over to Jessica Ekeberg, Vice President of TCP Capital Corp. Global Investor Relations team. Jessica, please proceed.

Thank you. Before we begin, I would like to note that this conference call may contain forward-looking statements based on the estimates and assumptions of management at the time of such statements and are not guarantees of future performance. Forward-looking statements involve risks and uncertainties, and actual results could differ materially from those projected. Any forward-looking statements made on this call are made as of today and are subject to change without notice. During today's call, we will refer to a slide presentation, which you can access by visiting our website, www.tcpcapital.com. Click on the Investor Relations link and select Events and Presentations. Our earnings release and 10-K are also available on our site. I will now turn the call over to Mr. Howard Levkowitz, Chairman and CEO of TCP Capital Corp.

Thanks, Jessica. We would like to thank everyone for participating in today's call. I'm here with our President and COO, Raj Vig; our Chief Financial Officer, Paul Davis; and other members of the TCPC team. This morning we issued our earnings release for the fourth quarter and year ended December 31, 2015. We also posted a supplemental earnings presentation to our website which we will refer to throughout this call. We will begin our call with an overview of TCPC's performance and investment activities and then our CFO, Paul Davis will provide more detail on our financial results. Next I will provide some additional perspective on the market before we take your questions. We invite you to turn to Slide 4 of our presentation. Before discussing fourth quarter 2015 results, we will review some of our key accomplishments for 2015. First we paid dividends of $1.44 per share. Second, our stable earnings enabled us to substantially out earn our dividends as we've done each quarter since inception. Our net investment income for the year after incentive compensation and excise taxes out earned our dividends by $0.19 per share. Third we extended the maturity date of our SVCP credit facility to July 31, 2018. Fourth, we increased our TCPC funding facility to $350 million up from $300 million, expanded the accordion feature to $400 million and extended the maturity date to March 6, 2020. Lastly we received an investment grade rating from S&P. Now onto the highlights of our fourth quarter. We deployed $78 million in investments during the quarter and maintained almost 80% of our portfolio employing rate instruments. We also had $151 million in repayments. We deliberately slowed our rate of deployment despite strong yield flow as we anticipate increasingly attractive opportunities and think the balance sheet flexibility is important in the current environment. As noted on Slide 5, which details our history since our IPO of consistent dividend coverage, we delivered fourth quarter net investment income after taxes of $0.43 per share out earning our dividend of $0.36 per share. We are also declaring today a first quarter dividend $0.36 per share. Turning to Slide 6, our NAV declined during the quarter as yield spreads on most of our investments widened. The impact of increased mark-to-market spreads was partially offset by significant prepayment income and stronger positive credit performance in a number of investments. Also on Slide 6 you can see that our cumulative dividends plus NAV appreciations since going public less than four years ago have delivered a total gain to our shareholders of almost 40% of our IPO value. Lastly we made a number of share repurchases when our shares traded below NAV and again renewed our $50 million share repurchase program at our Board meeting last week. For those viewing our presentation please turn to Slide 7. At the end of the fourth quarter our highly diversified portfolio had a fair value of $1.2 billion invested in 88 companies across numerous industries, our largest position represents approximately 3.7% of the portfolio. Slide 8 shows the increase in our portfolio since our IPO and particularly in our floating rate debt investments. As noted before we intentionally allowed our balance sheet to shrink at year end to position ourselves opportunistically. As you can see on Slide 9, at quarter end senior secured debt comprised over 95% of the portfolio with floating-rate debt comprising 80% of our debt positions. As shown in the chart at the bottom of the page with most of our debt portfolio employing rate instruments we're well-positioned if interest rates ever rise materially. Turning to Slide 11, during the fourth quarter we continue to focus on allocating capital primarily to senior secured income-producing securities and deployed approximately $78 million in 11 investments. These included investments in seven new and four existing portfolio companies. Our investments in existing portfolio companies continue to be a strong source of risk-adjusted returns for our shareholders given our pre-existing relationships with these firms and our knowledge of their business and operating models. Our five largest investments in Q4 reflect our diversification strategy and focus on the top of the capital structure. These include; $20 million senior secured loan to Broder Bros., a distributor of imprintable apparel and accessories, a $9 million investment in senior secured loans to our partnership with GA Partners, a $6 million senior secured loan to iPayment, a provider of credit and debit card credit payment processing and related services, a $6 million senior secured loan to BlueHornet Networks a turnkey provider of email marketing services, and a $5 million senior secured loan to Simmons Research, a leading consumer research marketing provider. In the fourth quarter investment exits totaled $151 million. This is comprised of a $34 million senior secured loan to OneSky for which we still hold our warrants received from the initial financing and which paid a distribution as part of the refinancing. It also included a $21 million senior secured loan to Great Atlantic & Pacific and a $21 million senior secured loan to Arcadia Biosciences. New investments in the quarter had a weighted average effective yield of 11.2% and the investments we exited during the quarter had a weighted average effective yield of 11.3%, which was significantly impacted by the repayment of OneSky. Our overall effective portfolio yield at quarter end was 10.95%. Our direct energy exposure continues to represent only a small portion of our portfolio, comprised of two investments totaling less than 2% of the fair value of the portfolio at the end of the fourth quarter. Overall we are pleased with the performance of our few energy investments. Jefferson issued a municipal bond in Q1 and we anticipate that the proceeds will be used to repay us. MD America paid down 20% of its loan in Q4 and has stated the intent to repay the remainder early as well. We continue to carefully and selectively evaluate opportunities in the sector. Now I will turn the call over to Paul for a more detailed report of our fourth quarter financial results. After Paul's comments, I will provide some additional perspective on what we are seeing in the market, then we will take your questions.

Thanks, Howard. We are pleased to report another strong quarter as shown on Slide 13. Interest income increased to $39.2 million for the fourth quarter. This equates to $0.81 per share of which $0.59 per share was recurring cash interest, $0.04 was recurring PIK income and $.04 was recurring discount and fee amortization. The remaining $0.13 per share came from prepayment income including both prepayment fees and unamortized OID. Our results reflect our general policy of amortizing upfront economics over the life of the investment rather than recognizing all of the income at the time the investment is made. Earnings for the quarter also included cash income from aircraft leases of $0.02 per share offset by depreciation expense of $.01 per share or $0.4 million net. Turning back to Slide 10, net investment income was $0.55 per share before excise taxes and incentive compensation or $0.43 per share after which -- earned our dividend by $0.07 and continues our track record of more than covering our dividend each quarter since our IPO. On an annual basis net investment income after incentive compensation and excise taxes was a $1.63 per share out earning our dividends by $0.19. After paying our fourth quarter dividend of $0.36 per share we closed the quarter with tax basis, undistributed ordinary income from over earning our dividend of approximately $23.3 million or $0.48 per share which provides us with a significant reserve for the future. Back on Slide 13, total operating expenses for the quarter were approximately $12.7 million. The increase in interest and other debt expenses of $5.4 million primarily reflected our higher average outstanding leverage during the quarter, even as ending leverage lower than at [930] following our significant prepayments. Incentive compensation from net investment income for the quarter was $5.2 million or $0.11 per share which is computed by multiplying after-tax net investment income by 20%. As noted in Slide 14, all incentive compensation is subject to the company meeting a cumulative total return hurdle of 8% annually. Net realized and unrealized losses of $18.7 million were primarily attributable to fair market valuation -- fair valuation markdowns across the portfolio as market yield spreads widened as well as a specific markdown on Securus following an adverse regulatory decision. Despite the markdown we the company continues to have significant cash flow and will meet all of its obligations. Credit quality in our portfolio remains strong and our fair value markdowns were mitigated by credit improvements in a number of investments. As a reminder our entire portfolio is mark-to-market each quarter using independent third-party pricing evaluation sources for substantially the entire portfolio. Realized losses were primarily attributed to the sale of Marsico and investments that have generated substantial cash interest income as part of our pre-IPO legacy distressed debt strategy and which we sold at approximately our prior quarter end mark. There were no new investments on nonaccrual. The two investments currently in the non-accrual represent 0.2% for the portfolio of fair value and the impacts of the nonaccruals and quarterly net investment income was less than a penny per share. We closed the quarter with substantial available liquidity. Our total liquidity of $274.4 million included available average of $245.2 million and cash and cash equivalents of $35.6 million, less net pending settlements of $6.4 million. Available leverage includes the remaining $33.3 million available on our $75 million leverage commitment from the small business administration, but excludes an additional $75 million which we expect will become available once our initial commitment is fully funded. Combined leverage net of cash and SBIC debt was approximately 0.60 times common equity at quarter end. We continue to repurchase shares under our 10b5-1 program when our stock is traded below NAV and acquired over 0.25 million shares from the beginning of the quarter -- beginning the fourth quarter through Friday. Turning to Slide 15, at the end of the quarter our total weighted average interest rate on amounts outstanding on our leverage program was 3.2%. This reflects our TCPC funding facility at a current rate of LIBOR plus 2.5%, our SVCP revolver and term loan at a rate of LIBOR plus 1.75%, our convertible notes of 5.25 and our SBA debentures at a blended rate of 2.84%. I will now turn the call back over to Howard.

Thanks, Paul. In addition to our 10-K, we filed our preliminary proxy this morning. Similar to many of our BDC peers we included our annual proposal for shareholder approval to issue up to 25% of our common shares on any given day at a price below NAV over the next 12 months. We included this proposal to provide flexibility for future scenarios. To be clear, at this time we do not intend to issue equity below NAV and certainly not unless it is accretive to shareholders. This is basically an insurance policy our shareholders have approved every year since we went public. In addition if this proposal is approved and we hope that it will be, no action would be taken unless our Independent Directors determine that it would be in best interests of our shareholders. I will briefly cover what we are currently seeing in the market and then open the lines for questions. We have previously pointed out that the post credit crisis regulations have substantially reduced liquidity in credit markets, a trend that has continued into 2016. As a result we are seeing numerous origination opportunities across many sectors. Our deal flow remains good but we continue to take a highly disciplined and selective approach to new investments and are passing on many opportunities. Through February 26, 2016, we have invested approximately $51 million primarily in four senior secured loans and a note with a combined effective yield of approximately 11.4%. Our primary focus remains on preservation of shareholder capital and maintaining a recurring earnings stream by effectively putting our diversified liquidity sources to work to optimize our portfolio. TCPC has built a strong market position by leveraging our platform to lend to established middle-market companies with sustainable competitive advantages that generate significant cash flow and/or have a significant asset coverage or enterprise value. Our co-investment exemptive relief from the SEC which was granted nine years ago enables TCPC to partner with the numerous private institutional funds we manage to provide comprehensive capital solutions to borrowers. Looking to the future we are uniquely qualified for continued success for several reasons. First we have scale and depth in our origination and servicing platforms and terrific people. We have a highly experienced team of more than 80 people firm-wide with our investment professionals organized into 19 discrete industry groups. We believe this structure and our distinctive investment process provides us with the tremendous competitive advantage in closing transactions and gaining the trust of management team's owners and their advisors. Second, our focused on senior secured loans most of which are floating rate has resulted in a lower overall risk profile and strong portfolio performance. This has enabled us to consistently out earn our dividend and our portfolio is well positioned for a meaningful increase in interest rates. Third, our low cost of capital and diverse funding sources continue to be key competitive advantages for TCPC. TCPC remains well-positioned with our attractively priced leverage and financing flexibility which includes our convertible notes, a term loan, revolving credit facilities and long-term SBIC unsecured notes. Finally our interests are closely aligned with our shareholders. Our origination income recognition practices are conservative and we have one of the most shareholder friendly fee structures in the industry. We continue to invest alongside our shareholders and members of the management team and the Board of Directors have continued to purchase shares in the open market including during both the fourth quarter of 2015 and the first quarter of 2016. In closing we are pleased with our many accomplishments in 2015 and our ability to generate high levels of recurring income. We are optimistic about our prospects for delivering continued growth and returns based on our opportunity set and our growing origination platform. And we remain committed to our rigorous investment process that delivers high risk adjusted returns while preserving capital over the long-term. We would like to thank all of our shareholders for your confidence and your continued support. And with that operator please open the lines for questions.

[Operator Instructions]. Our first question comes from the line of Leslie Vandegrift of Raymond James. Your line is now open.

I just wanted to ask about -- talk about market -- mark-to-market spreads widening basically. You had a few investments that were actually marked out, not really a credit issue so much for you guys, but kind of what were the numbers you sold between first lien and second lien investments in the fourth quarter and how have you seen that continue in the first quarter of 2016?

The vast majority of our Q4 investments have been in first lien, that's been our primary focus. We've made point I think on several occasions that not all second liens are created equally. Some of them are really weak instruments and some of them only have a small working capital facility in front of them, are in much more stable businesses. So we do continue to invest in those as well but in this environment we tend to focus more on first liens.

And so how much -- if you could quantify how many basis points you still have on average if the spreads widened for first lien last quarter and then how much have you seen that continue into the first quarter?

Yes. We wouldn't quantify it on an individual basis like that. The portfolio is very distinct. In terms of the marks that's done off of spreads done by our third party marking services and they look at each individual credit. They look at the credit quality to the extent that there are no markets available. They look at them individually and price them off of a curve. And so there is a lot of distinction. Not all first liens are treated equally and not all second liens are treated equally. They look at the credit quality of each. Now in general though the market has widened a fair amount particularly at year end.

And then on a different check, I know you guys are still at the very beginning of your first SBIC license, you are still working through that one. But obviously now the ultimate range of that program has increased to 350. Has there been a change in your long term for utilization of those licenses?

I will take that one. Thanks for the question. Generally our plans for the licenses is to utilize them. If there is more capacity well that's a positive and we have been utilizing it at a reasonably steady pace maybe not as quickly as we would have liked, but there is a importance to be disciplined particularly for some of these companies that qualify. So to answer your question, we are appreciative of the regulatory change. We anticipate it to be a additional positive on top of when we can't utilize SBIC and we had now to change our view that we would like to utilize it where appropriate and when appropriate. Again not compromising our investment process or our general view of being disciplined for underwriting.

Our next question comes from Chris Kotowski of Oppenheimer. Your line is now open.

First of all I am just curious why such a heavy dose of prepays in what one would generally consider to be a tight market for refinancing opportunities for most borrowers?

We are very pleased with it, ultimately as a lender your goal is to be repaid. We don't like to lose those credits but in the environment you just impliedly described, having those loans repay, getting the extra interest income, the addition to NAV and being able to redeploy in new investments is attractive. We will some of these loans particularly some of the higher-yielding ones. On the other hand I think it's simply an indication of the quality of our credit underwriting and some of it is simply coincidental. We've always that we are in a lumpy business. The relationship between these individual loans is limited, each one repaid for distinct reasons and Raj will probably comment a little bit more on what we are seeing.

Yes. I think just to echo Howard's comment, he said it pretty much what I was going to say and this is not -- our portfolio tends not be an index to the overall market. Directionally if credit is improving and companies graduate to the next type of capital you will see more prepayments on that basis, refinancings. But there is always going to be an underlying element of improving credit or a company for very specific reasons exiting -- maybe they are acquired or something along those lines. I think generally speaking as you look at our portfolio historically few things go to maturity and that's not necessarily a surprise even though hitting one quarter maybe lumpier.

Then secondly, Howard you are still sounding very guarded about the environment even though obviously spreads have opened up a lot and seem to be reflecting. And just should we expect to see further shrinkage in your balance sheet in the next quarter or two?

Let's parse the statements -- questions Chris. First of all we always tend to be guarded here. We are lenders. So I think we are naturally cautious. It is clear from what's going on in the capital markets and in some of the macro headlines also. That is generally in an environment in which additional caution is warranted. Certainly rather be in our position as a senior secured lender than most other businesses at the moment. And so we feel good about what we are doing good. We feel good about the portfolio. We like the opportunities. And it would have been very easy to have had more assets on the balance sheet. But fortunately we have earnings power at the current level that covers the dividend and so we are being opportunistic and not just doing deals because they are out but doing what we think are the best deals and what works best with diversifying the portfolio on a risk-adjusted basis, taking advantage of that. And also leaving some dry powder available for our share repurchase program which we've established. So we like having a little bit more balance sheet flexibility in this environment and it enables us to do all of those things.

And then last question for me is, your stock has held up very well by comparison to the rest of the industry and a good portion of the industry now is trading at deep discounts to NAV and just given that does it make sense to consider acquisitions or are you just in the motive that you much rather eat your own cooking than deal with somebody else's?

We like our own cooking. We are also open to food prepared elsewhere. But our job first and foremost is making sure that we are maximizing shareholder value. And if we see an opportunity that we think would be accretive to our shareholders over the long run to engage in a transaction or a portfolio purchase that's certainly something we would welcome and we certainly are looking at various things from time to time. But at the same time just because other things are trading at a discount doesn't mean we are going to rush out and try and do something. It's got to make sense for the business and for our existing shareholder base.

Our next question comes from the line of Chris Testa of National Securities Corporation. Your line is now open.

Thank you for taking my questions. Just a housekeeping item, with the prepayment fees you cited, was other income down and you had the interest income up significantly with mostly of that prepayment accelerated OID?

A good chunk of it was accelerated OID. I would say probably of the 13 I should say about half and half, a little more of it was accelerated OID, the rest was prepayment fees.

Just given that you guys have consistently out earned the dividend and the earnings power and the NII basis has been pretty significantly above the regular distribution. You didn’t pay the special this year. What are your thoughts on potential dividend increase when if a slight one going forward into 2016?

We continue to review the dividend policy with our Board every quarter. It's something that we are actively involved in talking about. We believe that our shareholders take a lot of comfort from knowing that it is well covered that's something that we believe is very important. We would call your attention to the chart in the presentation that shows our historical dividend coverage. It's on Page 5. We will continue to look at that given the current yield on the stock also, given the alternatives available to people we think that this yield is very attractive and so we are focused on making sure the people continue to have absolute comfort with our dividend coverage. But we will continue to have that discussion as we go forward.

And you cited the originations thus far in the quarter as of the 26th of February. What have been the prepayments so far this quarter? Have you had some regular -- somewhat outsized prepayments as the caller cited or has this backed up more with the credit spread environment?

We normally don’t give that number because it may not be representative. We would note that the prepayments we had in Q4 as we have alluded to with one of the prior questions was significant and unusual and we wouldn't necessarily expect to have them at that size or that rate on a regular basis.

And I know you have mentioned spreads widening and you have earned much higher effective yields in the quarter thus far with the capital you have deployed. But what else are you seeing in terms of the structure of these loans in terms of covenants, cash flow suites, have you been able to implement tighter covenants, get more cash flow suites or is this generally in line with what you have seen historically?

Yes. I will take that one. I think generally it is a -- it feels like a more lender friendly environment overall. In terms of comparatives, structural protections, cash flow suites, covenants, in our document segment, importantly documentation specific. We have really been -- the last quarter and the quarter before that you have seen a lot of first lien but really to go back for longer periods prior than that we have been focused on having those rate protections and covenants for a while now and it's just been part of the DNA of our business. So from a relative change point of view while the market may be catching up a little bit, in terms of what we underwrite to I would say we are still maintaining a pretty good discipline. Where we can improve it we will but we are not starting from a lower base as compared to the more broadly syndicated loan markets if you will.

And given the stock at a relatively small discount to NAV, if you were to get above by a significant amount say 5% to 8% or so would you characterize your pipeline as strong enough or you would issue accretively above NAV this year?

I won't comment on issuance that will not be a wise thing. But I will say that the pipeline is good and admit it's a function of our direct efforts on sourcing. We don't have concentrated channels, very diverse and the environment is helpful in that sense as well. We are seeing a lot of good things. We are saying no to a lot for different reasons. But I would characterize the pipeline is good.

And last one for me. Are you going to continue to include the commitment fees and amortization of debt issuance within the interest expense and financing cost going forward or will those be separate line items like it was in the previous quarters?

You noticed we did combine those this quarter. That was primarily just to be consistent with the most -- rest of the market that also combined. So this quarter instead of last we did combine the interest expense, deferred debt costs and commitment fees into the interest expense line to be consistent with others and we will be doing that going forward.

Our next question comes from the line of Jonathan Bock of Wells Fargo Securities. Your line is now open.

Thank you for taking my questions. Howard maybe start on some of the newer verticals that you built out, maybe it was clear in the earlier part of last year that venture lending was an area of relative opportunities for the TCPC platform. And I think you made an investment in that area and in particular investment in both human capital as well as with your actual capital in the form of InMobi. Curious to your view on that technology lending vertical in light of the technology tumult that has occurred amongst the venture community as valuations have become compressed?

John thanks for the question. The venture lending and technology lending is as you know something we have expanded into. It is also something that we've been doing here for many years, financing earlier stage companies. And there's no question that there's a lot of capital that's poured into technology investments at very high valuations. You can pick up the paper any day or whatever your news feed service is and see it and a lot of that is pulled back. Those are not the kinds of companies that we have been focused on. We have been focusing on companies that we think have some unique products and unique technology, some unique assets and funding at a very low attachment point to their value with senior secured instruments and in lieu of the next round of equity funding on a less dilutive to the existing investors. But as I point its clearly well within the range of values for those companies. So we won't say that a pull back in valuations or funding doesn't impact us. Obviously everything is interrelated. On the other hand with respect to our portfolio of things we are focusing on we have not to-date seen any impact from that pull back in funding. In fact cost to portfolio we are seeing continued support and success.

I would just add that the dynamic that is existing what you point out now is not something that we just talk about now that is happening. We talk about this and the more fruitful times as a potential -- more look at these companies, to Howard's point, the attachment point of our paper even with a big decompression in valuations is good and covered as we see it and there is a lot of structural nuances that we focus on including heavy amortization, including a fairly good if not positive net cash position when you take your account to debt position. So we think about that not only to rely on a market dynamic, which is helpful, we have some seen some exits in that context that have been good upside, but there really is a focus on the downside even before that environment is characterized as a little tougher as it is today.

Now the smaller let's say investment, but if you look at Core Entertainment which I believe is a name that perhaps would experience some stress, I am just curious if you believe that right now terms of operating cash flow et cetera, the ability to service debt, that you are not looking at an impairment, but perhaps just a discussion on Core if you have a moment?

We are a little bit more limited on what we can say on this one due to the sensitive nature of the discussions with the company. Clearly the company has struggled. We are continuing to work actively with the lender group and which were one of the larger participants and with a company to maximize the value on this one.

The last question, it's more of an overarching one, because you guys are considered good allocators of capital, conservative, the market has appreciated that and as a result has awarded a premium valuation, now overall valuation is ebb and flow but generally relative to your peers it was mentioned that the premium valuation is there. The question relates to your payment channel prepaid congratulations. I am also sad that I don’t get to follow that investment any more, it was quite interesting. You are receiving a significantly amount of capital so that was just a $32 million in that loan, forget the others and so now you have an opportunity. I see that you have repurchased 250,000 shares quarter to-date, which are not subject to 10b5-1 [great]. The question that I believe your investors would ask Howard, in an environment where you eat your own cooking and have the ability to also fund across other parts of your platform, why would you not want to take a good -- the lion's share portion of that and reinvest back in your business or your portfolio at a deeper discount to NAV?

Sure. Thanks for the question. A couple of answers. The first one is on a very current and mechanical basis we set up the 10b5-1 program and it is set up to purchase at whatever rate its set up to purchase. So we cannot go in on a daily basis and all through that simply because we got some more liquidity or because we have less liquidity. The function of those programs is the Board makes an estimate of what we think we can get [indiscernible] in the quarter. You are looking at your cash projections. We are looking at where trading is and we put the program in place. And we have tweaked it several times since we put it in. When we initially put it in it never kicked in because we are trading for most of our history above NAV. Then it kicked in during the selloff in the fall of last year and we have revised it a couple of times. You can't always predict trading patterns in the stock but we were trying to balance that with also having the ability to take advantage of the opportunities we are seeing in the market, a number of which are either at higher spreads or better risk adjusted rewards than we have seen over the last few years. And so we are taking a long-term view. I think you can see our conviction not only with having this program in place that has been operating on a very regular basis, also personally with our own purchases of shares across the management team and a number of members of our Board of Directors. So we have got it in place and there will be a balance. We think the position we are in today with a somewhat more liquid balance sheet than we had going into the beginning of Q4 is attractive. It's one that we have done intentionally but this is a permanent capital business, it's not just there for a single trade. So we are continuing to think about how to best optimize the returns to our shareholders over the long-term with the platform we have in place and we like the ability to buying stock and capture that discount but we are also taking advantages of other uses of that liquidity as well.

Not to take away the fact that Howard, everyone does appreciate the way you have allocated capital thus far, they appreciate the buybacks. They always just continue to ask questions in order to further solidify their beliefs. But to-date everyone is very pleased. So congratulations and those are my questions. Thank you.

Our next question comes from the line of David Chiaverini of Cantor Fitzgerald. Your line is now open.

Thanks, a couple of questions for you. First on your net leverage, I know that your target is 0.5 to 0.75 to 1 of equity. Given your guarded [stature] where on the spectrum or in that range do you prefer to be in this environment?

Yes. We have never given a hard target for our leverage. I am not sure what the source of those numbers are. We have historically operated in a reasonably tight range other than right after equity offerings, when that's reduced our leverage. But we don’t have a hard and fast target and we do that intentionally. We like to take advantage of our leverage, but we also don’t want to artificially target some number. Ultimately we are in the lending business. We do good loans when we see them and we don't want to feel like we should put on something to hit some target or exit something to hit some target. So we just tend to operate in a range and think at the moment we are in a very appropriate position.

So even though you are guarded at we shouldn't necessarily think that you should be at the closer to 0.5 than up to 0.7 and granted it's not an official range. But for the most recent quarter I am calculating you guys were at 0.64. So one way to think of it should I -- would you say that your content at 0.64 or that fact could -- if you see the right opportunities you could take that up and vice versa if you are happy to get prepayments then that could be lower and you kind of -- would just take it quarter-to-quarter?

Yes. I think that last comment that you just made is probably the most appropriate. It's hard to look at it on a static, given where we ended up at the end of the quarter is a function of so many things. Some you can control, some you can't to see a good opportunity and you move quickly. You look to close that out if you get a repayment all of a sudden of unreasonable size or a few of them like we did this quarter you will see it move. So I think the overall comment is we are comfortable where we are. The numbers you cited are kind of the historical range but by no means do you manage it only for that range or that metric versus managing it to the right top opportunities and how those come in and go out is just function of things you really can't control other than good underwriting and sort of the output is anything reported number. That's at the end of any quarter.

And then shifting to your two oil and gas investments. You mentioned that both Jefferson and MV America you expect potentially to get early repayments. Are you able to comment on the timing of when those expected repayments could possibly occur?

We can't give you any specificity. In the case of Jefferson it's public that the entity has issued a municipal bond and it is our expectation that the proceeds will be used for repayment. In the case of MV America they have publicly said that the equity that they are raising which is subject to regulatory approval will be used to pay down the loan, they did that with 20% of it in Q4. If we anticipate that happening with the remainder although with any regulatory process it's never entirely predictable and obviously it's not repaid till the proceeds come in.

Then lastly on…

What I will say on that though is that we have been very cautious with the energy portfolio and we've said all along we thought these names were distinct and to-date we have been pleased with their performance.

Yes. I think it's great that you could get paid back early on those. And then lastly Securus Technology can you provide some comments on the outlook for that investment?

Sure. There has been a fair amount of press on it. They have a business that was subject to an adverse regulatory determination. They and the rest of the industry are challenging that. We will see how the challenge comes out. In addition to that there's another part of the business that provides a substantial contribution to earnings which is un-impacted. Management has been very clear that they believe that the credit will continue to perform. Based on our understanding of it and what we know today we believe what they're saying and in prior independent verification. So we -- notwithstanding the fact that we have got a mark-to-market hit in the markdown on it we believe that the company is in a position to continue meeting its obligations.

Our next question comes from the line of Ryan Lynch of KBW. Your line is now open.

Thank you for taking my questions. I only have one this afternoon. Just in today's environment there has been definitely a heightened interest around fair value marks and valuation in the BDCs portfolio. This is not TCPC specific but just generally there has been heightened consideration in the market. So can you just walk through, I think it would be helpful to walk through the typical valuation process TCPC goes through on a quarterly basis to value its portfolio of companies?

Sure. Paul you want to take that one.

Sure, happy to. We just started early. We get inputs from our deal teams. We consult with our third party valuation services and consolidate information from the companies themselves and from the market, to the extent market information is available. Our valuation committee generally meets twice before quarter end to assess the information. We go through, compile all this have a healthy discussion to make sure that we are getting valuations that are fair value. The Board of Directors is actively involved has specific questions and we have a robust discussion at the Board of Directors as well. So at the end of the day substantially all of the portfolios is marked using external third party sources whether from broker bids or from aggregated by pricing services or from valuation service providers, they are respected names you know. Also I had add on top of that our auditors have been extremely thorough. We have robust discussions with their valuation teams around these marks and have never had an adjustment proposed passed or otherwise to our valuation marks. We are very, very confident in our ability to mark our investments to fair value.

I would just like to emphasize something to Paul just said. This is Howard. The third parties determine the valuations, we do not and so we approve them but they are ultimately -- we get the valuations from the third parties, which I think is a distinction with some other folks. One other thing that I think is really worth emphasizing is because we have been running leveraged credit funds that employ these requirements we've been using this kind of a process since 1999, across our business. So we it has evolved over the years but we've been basically using the same third-party mark-to-market pricing going back a very long time. We had it through the financial crisis. We had it through the downturn of 2000 and 2001 and it’s a system that's really part of the fabric of what we do here.

Great. Yes. I think that's good color. I think investors appreciate hearing all the details that you guys put in on a quarterly basis to determine these fair value marks. So that's all for me.

Our next question comes from the line of Christopher Nolan of FBR & Co. Your line is now open.

Howard, given your background look in the distressed finance, looking ahead for like six months, where do you see the markets are shaking out on that front? I mean are you -- is there some historical perspective in terms of where you can -- things are going.

I appreciate the question. We try not to be market prognosticators here. I think if you look across the group of economists and market strategists over the last couple of years, most of them have been far off in their projections. There is just a lot of exogenous things going on and so what we are trying to focus on is the companies from a bottoms up basis. It's not to say that we don’t focus on the markets. We obviously look at them a lot. We think about them. In the near term we think there is a risk for continued volatility both because of the interest rate environment and macro as well as the political noise that's been going on and things abroad. But we sort of cut through all of that and today people still need to put money to work. They still need to get high current yield and investing in senior secured floating-rate loans is the best place to do it. And so when we look at investments we ask ourselves the questions; what could go wrong with the company, what could go wrong with the markets, but ultimately look for things that we think will be able to sustain themselves through that.

Also Paul, spillover income per share, I think it was $0.48 a share last quarter, can you give us an update on that?

Absolutely yes. At the end of December we had spillover income of $23.3 million, once again $0.48 per share.

Final question. Is it correct that the lower -- the unrealized losses, the depreciation charges is due to market spreads widening and not lower EBITDA at your companies in general?

We are actually very pleased with the credit migration trends in our portfolio. The markdowns this quarter were primarily due to the spreading yields -- to yield spreads widening. We actually saw credit improvements in a number of our investments.

On the equity, equity investments have risen over the year, is that a function of the venture debt lending or is that just basically you are able to get some more from better terms and conditions?

For this quarter we did make an investment in a partnership that invested in loans. And so the underlying investment there is lending. It does show up as equity though.

Our next question comes from the line of Jim Young of West Family Investments. Your line is now open.

I just want to follow up Howard with respect to the comment you made about the conservative accounting practices you have had on your origination policies. And my question is can you be a little bit more specific about the nature of these accounting practices and if you were more aggressive could you give us a sense as to what would be the impact on NII per share on a quarterly basis? Just trying to get a feel for how conservative today it is and how much of a flexibility there is in GAAP? And again we do appreciate your conservative approach to capital allocation and the way you run your business. Thank you.

Jim, thanks. This is Paul. Appreciate the question. Practice, there is a variety of practices in the industry but we do tend to be conservative. Up front economics are fairly common. We have taken a view that those to be amortized over the life of the instrument and in almost all cases we do that. Most of the very specific reason to recognize the fee up front. But yes, there is diversity of practice. Nonetheless we are confident in our treatment pursuant to GAAP. We have obviously been talked about with our auditors and feel that they are -- we are also consistent with a lot of others problem, majority of others out there although a lot of people do tend to recognize things at the front end. I suppose there is some flexibility in GAAP in that sense, that some might say, we tend to be conservative in our interpretation.

And just to add on to that as part of impact. As you know it's hard to define any impact but if you go back to Paul's earlier comments in this quarter of the gains about half -- a little over half I think was the comment more related to those to catching up on amortized discount. So in any given quarter to the extent that you are underwriting, the greater the underwriting, the greater that upfront capture is, so it's hard to predict what a static number is, but it is certainly more conservative to spread as we have.

Jim and maybe just to add one other comment on that. This obviously makes our earnings less lumpy. When you are going into an investment you have the flexibility sometimes of deciding how much you want to grade, how much want in OID and our view is we try and maximize the economics and this way its spread out over the life of the investment and makes our P&L a lot less lumpy than it otherwise would be.

And then Howard are there other accounting metrics with respect to either other revenue issue recognition or expense recognition policies then you could demonstrate that are -- then you reaffirm are more conservative than the overall industry or other companies in the industry?

I think we are fairly consistent with -- through with the industry. I think the biggest one is the upfront revenues, where you know some people recognize them upfront, we tend to recognize over time. Other than that can't really think of anything where there is that much variety in the industry at that time. Although I might also emphasize valuations, as far as the biggest thing out there and we can be very conservative, make sure we are marking the market. We are very careful to make sure our investments are fair valued and I know there has been some press on different folks with different valuation practices. But I think we have demonstrated that we are very conservative and very careful to make sure we are marking to market.

Our next question comes from the line of Derek Hewett of Bank of America Merrill Lynch. Your line is now open.

Howard could you talk about that sidecar fund that you received exemptive relief back in I think late 2014? And what is the dollar value of the remaining potential purchases? Since I believe that that fund was scheduled to terminate sometime late this year.

The exemptive relief that we received from the SEC enabling us to engage in those transactions has largely ran its course at this point. There might be a few remaining eligible transactions but at this point very few.

Great. Thank you very much.

Thank you. I am showing no further questions at this time. I would like to turn the call back over to Howard Levkowitz for closing remarks.

We appreciate your questions and your dialog today. I had like to thank our experienced, dedicated and talented team of professionals at TCP Capital Corp. Thank you again for joining us. This concludes today's call.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Have a great day, everyone.