BlackRock TCP Capital Corp. (TCPC) Q1 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen, good afternoon. Welcome everyone to the TCP Capital Corp First Quarter 2016 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 after management completes their prepared remarks. I would now 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-Q are also available on our site. I will now turn the call over to Mr. Howard Levkowitz, Chairman and CEO of TCP Capital Corp.

Thank you, Jessica. We’d 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 first quarter ended March 31, 2016. We also posted supplemental earnings presentation to our website which we will refer to throughout this call. We will begin our call with an overview of TCPC 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; I will begin with the review of the highlights from our first quarter. We had strong originations totaling $114 million during the quarter and maintained 80% of our portfolio in floating rate instruments. We also had $66 million in dispositions for total net deployments of $48 million. The slide details our history of consistent dividend coverage since our IPO. In the first quarter of 2016, we continued our track record of out-earning our dividend by delivering net investment income after taxes of $0.38 per share, out-earning our dividend of $0.36 per share despite limited prepayments. Today, we are also declaring a second quarter dividend of $0.36 per share. Turning to slide 5, our NAV declined less than 1% during the quarter as yield spreads generally widened on the majority of the portfolio unrelated to credit. The impact of increased mark to market spreads was partially offset by strong net investment income and certain unrealized gains from improved credit including a significant unrealized gain on our investment in Securus. Also on slide 5, you can see that our accumulated dividends plus NAV have delivered a total gain and value to our shareholders of more than 40% since going public four years ago. 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. Last week, we announced that Tennenbaum Capital Partners, the advisor to TCPC received a non-controlling minority investment from CNO Financial Group, an NYSE listed insurance holding company with over $30 billion in asset. Additionally, CNO committed to invest more than $250 million of capital that will be deployed over time in TCP's managed funds and strategies. This includes the $30 million convertible bond TCPC issued after quarter end, which is at the same interest rate as our existing convertible bonds, yet designed to be converted into equity very efficiently at or above TCPC’s net asset value. CNO is a terrific institutional partner and we appreciate their confidence in us. For those viewing our presentation, please turn to slide 6. At the end of the first quarter, our highly diversified portfolio had a fair value of $1.2 billion invested in 90 companies across numerous industries. Our largest position represented 3.7% of the portfolio. Slide 7 shows the growth of our portfolios since our IPO and particularly the increase in our floating rate debt investments. As you can see on slide 8, at quarter end, senior secured debt comprised approximately 95% of the portfolio with floating-rate debt comprising over 80% of our debt position. As shown in the chart at the bottom of the page with most of our debt portfolio in floating-rate instruments, we are well positioned if interest rates ever rise materially. Turning to slide 9, during the first quarter, we continued to focus on allocating capital primarily to senior secured income-producing securities and deployed approximately $114 million in six investments. These included investments in four new and two existing portfolio companies. Our investments in existing portfolio of companies continue to be a source of strong risk adjusted returns for our shareholders given our pre-existing relationships with these firms and our knowledge of their businesses and operating models. Our five largest investments in Q1 reflect our diversification strategy and continued focus on the top of the capital structure. They include $18 million senior secured loan to SOASTA, a leading cloud-based testing and performance monitoring technology company. A $17 million senior secured loan to DealerSocket, an automotive dealer software provider. A $14 million draw on our senior secured loan to Cargojet to fund the acquisition and conversion from passenger aircraft to freighter of a Boeing 767-300ER, and a $11 million senior secured loan to Pacific Coast Holdings, a regional hospital chain, and a $9 million funding of our $15 million commitment to our joint venture with 36th Street Capital Partners, which provides financing solutions to the equipment leasing industry. In the first quarter, investment exits totaled $66 million; this included the repayment of our $33 million senior secured loan to The Tennis Channel; our $15 million senior secured loan to Jefferson Gulf Coast Energy, and our $2 million senior secured loan to Metamedia. New investments in the quarter and a weighted average effective yield of 11.2% and the investments we exited during the quarter had a weighted average effective yield of 9.7%. Our overall effective portfolio yield at quarter end increased to 11%. Our direct energy exposure has decreased only one investment representing less than 1% of the fair value of our portfolio at the end of the first quarter. Overall, we are pleased with the performance of our few direct energy investments. Our loan to Jefferson was paid in full during the quarter and MD America paid down 20% of its loan in Q4 and has stated the intent to repay the remainder early as well. Now, I will turn the call over to Paul for a more detailed report of our first-quarter financial results. After Paul’s comments, I will provide some additional perspective on what we're seeing in the market, and then we will take your questions. Paul?

Thanks Howard, we are pleased to report another strong quarter in which we increased our investment yield and out earned our dividend even with limited prepayment income. This continues our history of more than covering our regular dividend every quarter since our IPO in 2012. As shown in slide 10, interest income was $32.9 million for the first quarter. This equates to $0.67 per share of which $0.58 per share was recurring cash interest, $0.03 were recurring PIK income, and $0.04 was recurring discount and fee amortization. The remaining $0.02 per share came from prepayment income including both prepayment fees and unamortized OID. Our results reflect our conservative policy of generally 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 and other income of $0.02 per share. Turning to slide 11, net investment income was $0.47 per share before incentive compensation or $0.38 per share after, which out earned our dividend by $0.02. After paying our first quarter dividend of $0.36 per share, we closed the quarter with tax basis undistributed ordinary income from out earning dividend of approximately $24.7 million or $0.51 per share, which provides us with a significant reserve for the future. Incentive compensation which is subject to a cumulative 8% total return hurdle was $4.6 million for the quarter or $0.09 per share, which is purchase by computed by multiplying net investment income by 20%. Net realized and unrealized losses included net unrealized markdowns of $4.2 million primarily attributable to generally wider market yield spreads and $1.4 million markdown on our BPA debt to just above par on the expiration of call protection. These were partially offset by certain unrealized gains from improved credits including a significant unrealized gain on our loan to Securus as that company benefited from positive regulatory developments. As a reminder, our entire portfolio is mark to market each quarter using independent third-party pricing and evaluation sources for substantially the entire portfolio. Realized losses of $2.6 million were primarily attributable to the taxable restructuring of Boomerang Tube. Our second lean loan to core entertainment remained on non-accrual as did our Boomerang debt as the company went through its restructuring. We also placed our first lien loan to CORE on non-accrual as that company goes through a restructuring as well. Our non-accrual debt represents 0.4% of the portfolio at fair value. Turning to slide 14, we closed the quarter with substantial available liquidity, our total liquidity of $221.4 million included available leverage of $204 million and cash and cash equivalents of $22.7 million less net pending settlement of $5.3 million. Available leverage includes the remaining $26 million available on our $75 million leverage commitment from the SBA but excludes an additional $75 million which we anticipate will become available once our initial committed is fully funded. Combined leveraged net of cash and FDIC debt was approximately 0.66 times common equity at quarter end. As of today, we’ve drawn $61 million on our initial $75 million FDA commitment. Once our initial commitment is fully drawn, we expect to supply and receive approval for the additional $75 million. During the quarter, we repurchased 141,000 shares of our common stock under our 10b5-1 program for a cost of approximately $1.7 million, when our stock traded below NAV. And have acquired approximately 265,000 shares since the inception of the program to quarter end. Following quarter-end, on April 18 we issued a five-year $30 million convertible bond to the CNO Financial Group which by its terms was the only convertible at or above our then then-current NAV. The note incurs interest at 5.25%, the same rate as our existing convertible bonds. The bond is convertible by the holder at any time but it will automatically convert after our stock trades at or above our last reported NAV for any 10 of the previous 20 trading days. In issuing the bond directly, we eliminated the transaction costs typically associated with raising capital making the issuance equivalent to an equity rate at a price significantly above NAV. At the end of the quarter, the combined weighted average interest rate of our outstanding debt was 3.3%. This reflects our TCPC funding facility at a rate of LIBOR plus 2.5%, our SVCP revolver and term loan at a rate or LIBOR plus 1.75%, our convertible bonds at 5.25% and SBA debentures at a blended rate of 2.81%. I’ll now turn the call back over to Howard.

Thanks Paul, our annual shareholder meeting is on May 19 and all of our shareholders are welcome to attend. In our proxy we have included a proposal for shareholder approval to issue a 25% of our common shares on any given date over the next 12 months at a price below NAV. The proposal is similar to many of our BDC peers, however to be clear, at this time we do not intend to issue equity below NAV and certainly not unless it is accretive to shareholders. The reason we included this proposal is to drive flexibility for future potential scenarios. It is basically an insurance policy, our shareholders have approved every year since we went public. If this proposal is approved and we hope it will be, no action would be taken unless our independent directors determine that issuing equity below net asset value would be in the best interest of shareholders. If you have not already voted, please do so. Now, I will briefly cover what we are currently seeing in the market and then open the line for questions. As we have previously pointed out, post-credit crisis regulations have substantially reduced liquidity in the credit market. And this trend 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. In the second quarter, through May 6, 2016, we have invested approximately $36.3 million, primarily in four senior secured loans, which includes $21.5 million funded through our SBIC. The combined effective yield is approximately 10.7%. Our primary focus remains on optimizing our portfolio by preservation of shareholder capital and maintaining a recurring earnings stream through effective deployment of our diversified liquidity sources. 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 significant asset coverage or enterprise value. Our co-investment exempted release from the SEC, which was granted over 10 years ago enables TCPC to co-invest alongside 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 platform 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 provide us with tremendous competitive advantages in sourcing transaction and gaining the trust of management team's owners and their advisors. Second, our focus 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 any meaningful increase in interest rates. Third, our low cost of capital and diverse funding sources continue to be key competitive advantages for TCPC. The recent investment from CNO is the latest example of our commitment to accessing new sources of capital in ways that are advantageous to our shareholders. TCPC remains well-positioned with 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. In closing, we are pleased with our performance in the first quarter of 2016 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 in 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 call for questions.

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

Hi, guys. Good afternoon. Just wanted to ask quick question on the prepayment income first. Obviously, you talked about it $0.02 this quarter, little bit lower than expected. Was that driven by no prepayment pay down from MD America this quarter?

The prepayment income if you look quarter-over-quarter is generally lumpy. We see a lot of variation and that’s partly a function of how many loans are prepaying and the amount of prepayment premium they have. Some of our loans have far more than others and some of them prepay earlier in their lifecycle. Generally those prepayment premiums go down over the life of the loan. The MD America isn’t – really wasn’t a material factor in this during the quarter.

Okay. Do you expect – I mean, I guess you say it's lumpy, but do you expect to see more from MD America throughout the year? I know you said it was going to prepay, at least expected to. But do you have a timeline for that at all?

We do not have a timeline on that. Generally speaking, prepayments were light during Q1. We have always tried to make clear to people that the business is lumpy. These even in Q4 when the capital markets were in a fair amount of dislocation, we saw large prepayments, we didn’t see that carry over into Q1 and maybe a small seasonality element to that in Q1, but also there was a lot of disruption. But a lot of these events are also idiosyncratic, that is credit specific and both in good markets and in bad markets, some of our borrowers simply elect to prepay their loans early.

All right. And then on just base originations, you said $36.3 million so far this quarter, with the run rate, it would be a little bit lighter for the second quarter, are you seeing that or do you think this quarter will be a bit back-end loaded from what you’re seeing down the pipeline right now?

Yes, I will take that, Leslie, thanks for the question. I am not sure if I heard the number that you quoted properly, but obviously we had a good quarter of deployment, $114 million in aggregate, and we’ve seen an amount that is $36 million for the quarter-to-date, which might be what you refer to. I think I would echo Howard’s comment and we make it quite frequently that the business is lumpy, it’s not linear necessarily within the quarters themselves. The fact at this time last quarter, I came up with the exact number, but it wasn’t anywhere near $114 million. So we are constantly working on deals, the pipeline is robust and sometimes those deals come in in a flurry in the latter part of the quarter, sometimes they may slip over into the following quarter. But right now, we are seeing good activity. How that plays out and closes will be a function of absolutely sticking to the discipline and getting what we need to or passing on the deal even if we take it far down the line. But to answer your question, we are seeing good activity, the pipeline is strong, and in many cases, we are passing on things if it’s not the right credit quality or as we saw last quarter not the right level of return as we are seeing a better level of return in the current environment than even late last year.

And Leslie, just to add one other point on what Raj was saying, I wouldn’t extrapolate too much from four investments at a slightly different yield. There is a wide variance in our yields typically, although on a blended basis, they have been remarkably consistent quarter-over-quarter over the last few years. But the fact that they are slightly lower based on small number of investments in the quarter does not indicate some fundamental change or shift.

Okay. All right. And then last one, I know you guys are still working on the first half of the first SBIC license. So we have seen a few other competitors in the space start to get an additional $75 million on the end of the second license that they were previously kept [ph] out on. Are you seeing that competition come back from players that were previously kept out on these smaller SBA type loans that they are eligible for those? And is that affecting any pricing you are seeing there?

Not really. I think the – our system I think focuses in general on a different size and I would argue, quality of deal. We were a little surprised in the initial stages of the ramp, but it wasn’t a little quicker from what we have seen historically before we apply for the license. In this current quarter, we have seen a bit of a catch-up and we are pretty close to the completion of the first license through quarter-to-date. But to be honest, the things that come to our system, we are not really focused on – it’s not really that we are competing with a host of smaller SBIC lenders. They are things that are coming through our relationships that sometimes qualify for the SBIC criteria and sometimes don’t, but it’s less of an issue of pricing competition or competing against folks who are more pure SBIC lenders.

Okay. All right. Perfect. Well, that’s it for me. Thank you.

Thanks for the questions, Leslie.

Thank you. Our next question comes from the line of Allison Taylor Rudary of Oppenheimer. Your line is now open.

Hi, good morning guys or afternoon, I guess at this point. Leslie, actually touched on a lot of the issues that I was concerned with, but I guess I would ask maybe one more question as a follow-up for the SBA. Once you guys hit that $75 million cap, do you know roughly how long it’s going to take to get the second piece of that completed? Is it like – do you have to go through another multi-month process, I guess is what I am driving at?

Yes, I can take that. I don’t have an exact number of days, but I would highlight that it’s – I think days is the right or maybe weeks in the right time process versus months. We are led to believe in direct discussions with the SBIC who – SBA who we have good and active dialog where that it’s quick process. So I would not think about it as months, hopefully it’s not weeks, but it’s on the shorter timeframe.

Okay, great. Then I guess, and you guys can please correct me if I'm wrong, but it seems basically from what you've said on this call and in past calls that rather than go out and specifically look for deals that fit into the SBIC sleeve that you use your typical deal flow; and if it works, it works. But that your underwriting criteria and process hasn't really changed much, given – with the inclusion of the SBA. And given that, I mean, do you -- is this a -- with the law changes or the regulation changes that allow for expanded sleeves, is this a line of like financing that you would like strategically pursue once you're finished with the first – in the future, once you're finished with the first sleeve?

Yes, let me take that. I think maybe we’ll use your quotes in our market materials one day, because you have summarized it quite well. We did not change our criteria to fit things to the SBIC, we did expect to have a lot of things qualify and they have as you can see based on things that come through the normal channel. And by the way, I think over the past several years, our funnel has certainly widened, so by consequence we are going to see I think more things that will fit that criteria. I will say that, as a footnote to that, there is – the change in regulation aside, we have made I believe some strategic enhancements to the platform that we are not driven by the need to fit to the SBA license, but in fact have had a good fit with the SBA license, in particular, some of our venture debt initiatives, which as you can imagine, inherently have a little bit more of a sweet spot around some of the SBA criteria. As we go forward and that regulation changes, we will do what we do across the business and assess those changes and determine how we want to operate to the current environment. That may mean, we think about different forms of sourcing or broadening what we already have in the platform. But it will not change how we think about underwriting discipline or force-feeding if you will things to a funding source even if that funding source is attractive. We just think that’s a little bit more of slippery slope than what we have been able to do thus far, which has had good underwriting and credit performance today.

Okay, great. And then the final one for me will be on the $30 million CNO notes. I guess, so the conversion is automatic, and if I watch the stock for the next month and it's above $14.66 [ph], which is your last reported NAV, we can automatically assume that that just converts to equity at either -- is it at NAV, is it at an average price that it trades above NAV?

Yes, this is Paul. The bond is designed to convert at the closing price of our stock now, provided that price is at or above our last reported NAV. And as you noted, as of today, we are releasing an NAV $14.66 and that’s – that becomes the benchmark going forward. But once we cross 10 days in which the stock closes above our last reported NAV, it will automatically convert.

Okay, so then that just goes right into the share count. And then that cash, did you – like the cash that you received from the note, did you use that to pay back debt or are you just deploying it, like what's the idea to do with that little extra capital, please?

We will use that to repay debt.

Okay. All right. That’s it for me. Thanks so much.

Thank you, Allison.

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

Mr. Bock.

I think he is disconnected. Our next question comes from line of Ryan Lynch of KBW. Your line is now open.

Good afternoon, guys and thank you for taking my questions. First one relates to Securus Technologies. You guys wrote that up pretty significantly in the quarter, had a nice gain. You guys quoted that it was written up due to favorable regulatory developments, however that investment is still marked at about a 15% discounts to your guys’ cost bases, so can you go into any more details of what was the favorable regulatory development and why -- even with that positive news, why the investment still has a significant discount to your guys’ costs?

Sure. The FCC had promulgated some rules that were very controversial at the time they were made, both within the FCC itself, because it was a split decision, and within the industry that heavily criticized them. Ultimately, they were deemed to be ineffective and reversed. And so when the rules first came out, there was a lot of concerned about what would happen to the company and we had noted at the time two things. One is, they have a significant part of their business that was unimpacted and even under a worst-case scenario, we still thought we’d be fine, albeit earnings would probably be lower. But clearly having that ruling out there created a cloud over the company and a lot of uncertainty in the industry and the fact that it has now been in effect thrown out I think lifted that cloud and has made people feel much better about it. The fact that it’s still at a discount I think is simply a function of it being a market quote. This is -- we don't have a lot of deals in our portfolio that are syndicated. This is a sort of a likely syndicated club deal, more narrowly held and so this is based on the quotes that we have from the market. There has not been trading activity in it. I think people generally feel a lot better about it than they did because this cloud was lifted, we always thought we were going to be okay. We're happy it's lifted also. We think the credit is fine. We think that it gets repaid, but the fact that it’s marked at a discount probably is a little bit more associated with the history of what it’s just gone through. Often when companies have negative headlines, they don't bounce back exactly to where they were beforehand. Sometimes, there's a little bit of a process there.

Okay, great. Yeah. It sounds good. There could even be potentially more upside in that mark in the future. So we’ll watch out for that one. So in the Q1, there was a pretty big disruption in the liquid credit markets, did you guys see any of that volatility trickle down into the middle market where you guys play, which may provide better deal pricing, leverage levels or covenants, or was that disruption that we saw mainly in the liquid markets didn't really affect the middle markets where you guys play in?

It did. I mean, we've always commented that the market, the liquid market is not where we play, but directionally, it’s important to be aware of it and to acknowledge it. You may recall at this time last quarter, we had essentially decided to hold off on a few deals and really take advantage, although it’s a lumpy business, see some of that benefit roll through and I would just point to the level of return, level of rate on our deployments this quarter of 11.2% versus the amount on our exits of 9.7%. That is one of the wider deltas, although we've done I think a good job consistently of putting on capital at a slightly better rate than what we've exited. This is a little wider than normal, and I just point that out because to your question, I think we were able to take advantage a little bit of -- on the right side. In terms of covenants and documentation into non-economic elements, we’re always fixated on having the right protections and not sacrificing that even when liquid markets may be tighter, how that rolls through in a quarter-by-quarter basis, it remains to be seen, I would not extrapolate that delta or the timing of things, but we did see a little bit of disruption. We did, I think tried to take advantage of it, but the private market just inherently moved slower, even if directionally trailing the liquid market, than the liquid market does as you can imagine.

Okay, great. And then just one more. I'm not sure if you guys provided this in the past, but I don't seem to have it. Can you provide some sort of leverage target? I don't know how you guys view leverage going forward as far as your guys' regulatory leverage levels, which excludes the SBIC debt; or GAAP leverage, which includes the SBIC debt. Where do you guys plan on running leverage going forward?

Ryan, we actually don't provide a leverage target and for very specific reason, which is we’re in the business of making loans to companies to our borrowers and we do so when we see good opportunities and so trying to manage our loan pipeline to reach a target number to us isn’t the way we think we ought to be running the business. So there is clearly a range in which we are comfortable. You see a fair amount of consistency there, although you did see a pullback, the prior quarter on 12/31 and that was very deliberate. We decided to reserve liquidity for different opportunities, whether share repurchases or better loans in a volatile environment, but we don't try and hit some target leverage number because I think that creates an incentive to maybe do some deals or not do some deals that we otherwise think would make sense for the business.

Sure, that makes sense. That's all from me.

Thanks for your questions.

Thank you. Our next question comes from the line of Christopher Testa of National Securities. Your line is open.

Hey, good afternoon, guys; thanks for taking my questions. Just wondering if you can provide some color on the lease income being up pretty big quarter-over-quarter?

Sure. One of the deals that Howard mentioned was related to our investment in 36th street. I'm not sure if that's what you're pointing to or if it’s to the plain leasing income, which Paul can address.

That's correct. And just, I'm sorry.

I’m sorry, because lease income, I didn't see it increase quarter-over-quarter, so it was actually fairly consistent.

Oh, I'm sorry. I had the wrong -- that's my mistake; sorry. Just over the second half of the year, are you expecting a pickup in prepayments? Are you anticipating an increased M&A environment driving this? Just curious what your outlook is for that.

Yeah. Look, clearly Q1 had much lower activity in M&A. We were able to put on a number of good loans. Despite that environment, the capital markets are far stronger Q2 than they were in Q1, I mean Q1 particularly, the first 6, 7 weeks of the year were really tough, and so I think in a more normal environment, we are going to see more M&A activity. That said, there is a lot of things on the environment that might cause some more disruption in the capital markets and the way we try and run our business is over the long term. Clearly, we are beneficiaries of M&A, but we also do a lot of financings that aren’t related to M&A and in some cases, when there is more disruption, that creates better opportunities for us, as borrowers decide that it makes sense to use alternative lenders and focus on people who are long-term minded and flexible and not focused on the short-term nature of the capital markets.

And Christopher, this is Paul. I'll go back to your prior question. I think I know what you're talking about, we had a smaller tax adjustment in the depreciation, so the net number was probably a little higher this quarter versus last quarter, but overall, the gross income was fairly consistent.

Okay, got it. Yes, I just wanted to make sure I was looking at that right. And just with the unrealized losses, how much of that came from spread widening, approximately?

Sure. This is Paul again. Most of it was from spread widening. We actually, on a net basis, had some credit improvement in the portfolio primarily in Securus, but overall, other than the BPA, trading down to just above par, it was pretty much all spread widening.

Great. And just on the sponsor side of things, just curious what you're seeing in terms of the sponsor community, what structures they want, how much attachment point leverage. Do they seem to be kind of I guess more in tune with where we are in the credit cycle now relative to the fourth quarter? Just your thoughts there are appreciated.

Yes. I think the broader answer is, for sponsors, they want more for less, but I think you have to parse that into different folks sponsor orientation, sponsor business. We have never really been a sponsor shop where that is our main or only sourcing channel and to be honest, the sponsors we work with, we’ve tend to be a bit more of a repeat client relationship where they come to us in certain situations, where something else other than price, although price is important. I think it is important and that maybe speed to close and maybe being a little creative on thoughts around the structure where there is some value add that translates into, I think, good pricing. But sponsors are pursuing the traditional unit tranche or first, second lien type structure. There is a little bit of back and forth in each deal on the right covenants and protections, depending on who else is in the capital structure. So I don't think it’s changed dramatically. I think they are aware of the liquid markets and how that will roll into private deals, particularly where private deals are a more appropriate form of financing. So I don't think it's a sea change, I do think they are generally aware of the environment, and as such, we've seen that translate where we do work with sponsors into some of the improvements that show up in the portfolio, although I think we’ve always had a slightly different sponsor orientation than a traditional sponsored business where the volumes are quite a bit larger than ours.

Got it. And last one for me, just on the dividend. You guys out-earned it again with almost very little fee income. You've been out-earning it for a significant amount of time. [Technical Difficulty]

[Technical Difficulty] as I know you are aware, in our history, we’ve increased it a couple of times, we've done special dividends at current yield depending on where the stock is trading at around 9.8%. It's certainly a very healthy dividend and we like the fact that investors feel very comfortable with our dividend coverage, an environment where people are looking for yield and really looking to make sure that they have dividend stability. We think out-earning the dividend on a regular basis sets us aside from many and that's something that's very important. So we will continue to look at the policy and evaluate it. Right now, the board is, I think, very happy with where it is.

Great. That's all from me. Thank you.

Thanks for your questions.

Thank you. Our next question comes from the line of Chris York of JMP Securities. Your line is now open.

Good afternoon, guys, and thanks for taking my questions. So Howard, you talked a little bit in your prepared remarks about the lending opportunities in the middle market and now your recent investment here from CNO. I'm curious is there other complementary lending products or geographies that you would want to expand into that we could fund on the -- that we'd end up seeing on the balance sheet in the form of assets or even nonqualified assets?

Sure. We continue to look at various opportunities. We have been a middle market lender now throughout our long history. We’ll be celebrating our 20th anniversary as a firm next month and we've been running institutional money since 1999. And so I think we’ve been very focused on doing what we do well. From time to time, we do add other things. We've added the leasing, we've added various other sectors. I think we were the first BDC to do aircraft financings, something we do opportunistically. We funded the conversion of 767-300 AR to a freighter this quarter. We have a long history as a firm doing asset based retail financings together with various industry partners and liquidators. That's something I suspect we will be seeing more of in the interruption in that industry. It's an area that we hadn’t done much in the last couple of years because there had been as many of those opportunities. We think we're going to see more during this year. And we're going to continue to look at things that are synergistic with what we do in our 19 industry groups in ways to expand the platform in ways that makes sense for the business we're operating.

Great, that's helpful. Then kind of as a follow-up to that, so I would think that growing the origination platform, your fund performance would attract some prospective lenders from other BDCs and maybe some traditional lenders. Has the manager been active in adding to its staff in your core middle-market business?

Sorry, can you repeat that question? We'll make sure we understand. Are you talking about the manager level or at the BDC level?

At the manager level.

I think at the manager level, as you probably are aware, it's the same team that we utilized across our various funds which we believe and when I think about the size of our BDC about $1.2 billion or past quarter is a little larger, there simply isn’t a way we would be able to have access to the resources we have if we were a standalone BDC given our managers’ breadth and depth. Look, we have made occasional additions at the manager level, which I think are additive to the BDC over the past couple years, we've added in the new origination arena. We have three offices now in San Francisco and New York and LA. There is always going to be some activity at the manager level that is I believe additive to our direct lending efforts. But I think we are properly staffed for our business and our opportunity set and as we see things needing resources, we will do that. But as part of the - if your question is do we need to add at the manager level, I think we are fine at that level today.

Got it, yes. That’s the genesis of the question. And then lastly here, so thinking about a lower marginal cost of equity at TCPC than peers, I would presume that the breakeven on assets is achievable in today's environment. So could you help me understand how you're thinking about new equity, given you just raised some money here with CNO? And then maybe, Raj, tying your comments on the track of pipeline.

We continue to think about new equity in the way that we always have which is it is our duty to do what's in the interest of shareholders over the long term, so we've raised new equity when we can do so on an attractive accretive basis and the transaction with CNO we think is unique in that it enables us to sell equity assuming it needs a conversion criteria on a very attractive basis without the cost normally associated with a typical secondary raise. So it's very shareholder friendly and we will continue to look for growth opportunities in the future that's consistent with that which is we are seeing a lot of opportunities. Expansion, when we can do it in an accretive way makes sense, but only when we can do it in a way that benefits our shareholders over the long term.

Great. That’s it from me. Thanks guys.

Thanks for your questions, Chris.

Thank you. Our next question comes from Jon Bock of Wells Fargo. Your line is now open.

Hi, guys. Fin O'Shea in for Jon Bock, and I apologize for the previous connection issues and also if this topic was also addressed. But looking at the volatility the last few quarters and the incentive fee still looks to be fully earned, are you still just legs above that on a cumulative basis? Or has this been impacted at all?

Thanks. This is Paul. We're still well above the hurdle fortunately. It’s a cumulative 8% hurdle and we've been out earning just on the income fortunately.

Awesome. Thank you. And also interested to see the investment ramp in 36th Street Capital, and noticed the equity was marked slightly above cost or par there. Can you remind us if there are target total returns beyond that of your subordinated notes? And then also the potential size for that going forward.

Yeah, I'll address the activity and I will defer to Paul on where the market - I didn’t – on cost relative to the market. But it is an interesting area for us. We do think there is a bit of an underserved community and it is important to us to have the right both relationships and skill set. We think it's an interesting area but it wouldn’t make sense to go into it uninformed or inexperienced so we did this JV with a team that we like and they have been getting active. As you probably highlight the structure is a drop down into a JV and I will defer to Paul to talk about how that's marked and if there is any other questions, we can come back around.

Could I ask you restate the question on valuation if you don’t mind?

Yes, I'm pulling it back up, but it looked like the equity piece was above – I'm pulling it up now. It looked like it was marked at a premium, making me think there would be some form of an excess dividend income to that beyond that of your debt financing.

Yeah, just to be clear. The way that’s structured is there is a draw down against commitment as deals qualify, but there was also a small investment in the beginning which is an investment we believe is I think at least at fair value if not better, but I don't think we've marked it up. So you may be looking at two different components versus – if that’s what you are referring to. There is a 13 – and then there is a small investment into the JV for startup cost which arguably has equity value to it, but it wasn’t a markup on the spend into the business.

Okay. So then just if and as this grows, there is not expected income beyond the senior note?

That’s not true either. And maybe given the details we're happy to take it offline for more discussion, but there will be a – we have equity in the business. We have an investment in the form of a note into the business. So to the extent that business performs and generates residual income, which we believe it can do then that will also accrete to the equity value of our holdings.

Okay, very well. Then just last one. The first lien, I believe, on CORE was put on nonaccrual, but not much of an incremental markdown there. Can you give us some color on that holding?

Sure. The company has announced that it’s going through a restructuring and I think the value of the assets had been pretty well disclosed to the holders in advance in the last quarter. So although that it's gone under restructuring and it had been paying up until this quarter, there wasn’t a big surprise to people I think in the change of the value of the assets themselves notwithstanding the fact that it went on nonaccrual. It had already been marked down to where people believe the assets should be valued.

Very well. I appreciate it guys. Thank you.

Certainly. Thanks for your questions.

Thank you. And our next question comes from the Doug Christopher of DA Davidson. Your line is now open.

Great. Thank you for taking my question. Regarding previous comment you talked about no leverage target but you do have a comfort range, is that comfort range, is that the 60% equity, 40% debt range?

We have run both lower and higher than that. Generally we are higher than that including this past quarter, but the range hasn't been huge.

Okay. So is that – so 60% to 70% then is that what you're saying or –

We are saying that we’ve had a historical variance in our leverage. We intentionally don't target hard and fast numbers because it's conceivably might fall below those. If we don't see opportunities that are appropriate or we might go slightly over if we really like the deals we're seeing, we have a wide range of comfort around where we're operating the business and a little bit of incremental leverage we think is fine from a risk and operating basis. We also have the earning power that it if goes down for a quarter or two, that’s fine as well. And so if you look at it historically setting aside expansion from incremental capital, it’s been a fairly narrow band and we are very comfortable with that, but it could go up or down a little bit based on the opportunities that we seeing.

Okay, thank you. And then regarding your funding sources and this goes back to original - some of the first questions on the call. Have you run through the kind of the lower-cost funding sources in that 3% to 4% area or how should we think about the future funding? Should we get a new normal of, let's say, 4% to 5% kind of rates or is that 3% to 4% area, your average cost being that 3.28%, is that still possible?

We're pleased with the fact that we have a diversified set of funding sources. We have our credit facilities that are on the lower end along with our SBA debentures and then on the upper end is the convertible securities that we've issued. And we think that it's important and helpful to diversify our funding sources. Each one has advantages. Clearly it's attractive to have the lowest cost of leverage, but that tends to a come with some requirements and be shorter term in nature. And there is some advantages to having longer fixed rate debt as well. And so having a blend to us makes sense. And I would have expected as we go forward we are going to continue due to try and diversify the right side of the balance sheet and keep it diversified.

And then finally, regarding that SBA question earlier in the call as well, is it possible that that SBA facility can be expanded?

You mean from the first tranche to the second?

Yes.

Yes.

Okay. All right. Thank you.

Thanks for your questions.

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

We appreciate your questions and our dialog today. I'd 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. That does conclude today’s program. You may now disconnect. Have a good day everyone.