BlackRock TCP Capital Corp. (TCPC) Q2 2017 Earnings Report, Transcript and Summary

Welcome, everyone, to the TCP Capital Corp.'s Second Quarter 2017 Earnings Conference Call. Today's conference call is being recorded for replay purposes. [Operator Instructions]. And now, I would like to turn the call over to Jessica Ekeberg, Vice President of the 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 involves 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. This morning, we issued our earnings release for the second quarter ended June 30, 2017. We also posted a supplemental earnings presentation to our website at tcpcapital.com. To get the slide presentation which we will refer to on today's call, please click on the Investor Relations link and select Events & Presentations. I will now turn the call over to our Chairman and CEO, Howard Levkowitz.

Thank you, Jessica. On behalf of our TCPC team, we would like to thank everyone for participating on our call today. I will begin with an overview of our second quarter performance and investment activities and then, our CFO, Paul Davis, will review our financial results. After Paul's comments, I will provide some perspective on the market and then, we will take your questions. I will begin with a review of our second quarter highlights. Our $267 million of originations in Q2 was our strongest to date. At the same time, we increased the percentage of floating rate loans in our portfolio to 85% and also significantly increased our number of investments and our diversification. Dispositions for the quarter were $159 million, resulting in net deployments of $108 million. As shown on Slide 4, we earned net investment income of $0.43 per share, out-burning our dividend by $0.07 per share. And today, we declared a third quarter dividend of $0.36 per share. As you can see on Slide 5, on a market value basis, we have generated a total return of almost 88% since our IPO. Turning to Slide 6, our NAV increased to $15.04 at June 30 from $14.92 at March 31. Also on Slide 6, you can see that our cumulative dividends plus NAV appreciation have generated above 50% over the same period. Finally, in April, we completed a follow-on offering of 5.75 million shares at $16.84 per share, a substantial premium over our NAV. This offering raised gross proceeds in excess of $93 million. For those viewing our presentation, please turn to Slide 7. In the second quarter, we further diversified our portfolio. At quarter end, our portfolio had a fair market value of $1.44 billion and was invested in 94 companies across numerous industries. Our largest position represented only 3.2% of the portfolio and taken together, our 5 largest positions represented only 13.9% of the portfolio. As you can see on Slide 8, at quarter end, the vast majority of our debt was senior secured and 85% was floating rate. To the extent that LIBOR continues to increase, we anticipate benefiting from higher interest rates in future quarters as our floating rate instruments reset. Most of them are already above their interest rate floors. Turning to Slide 9. During the second quarter, we deployed a record $267 million of capital, primarily in 14 investments, most of which were senior secured loans. These included investments in 9 new companies and 5 existing portfolio companies. Our investments in existing portfolio of companies continue to be an important source of new investment opportunities and reflect our strong borrower relationships and the value we deliver to them. Our top 4 investments in the second quarter reinforce our commitment to maintaining a diversified portfolio and lending at the top of the capital structure. They include, a $35 million senior secured loan together with warrants to [indiscernible], a provider of data management software. The company provides software to enable customers to leverage their existing assets in cloud infrastructure. A $26 million senior secured loan to Bond International Software, a global provider of staffing and recruiting software. A $25 million senior secured follow-on loan to Greystone, a commercial real estate lender focused on multi-family and senior housing. And a $25 million senior secured loan to Pacific Union, a nonbank mortgage originator and servicer. Our other investments in Q2 span a variety of industries, including Telecom, data centers, advertising and chemicals. In the second quarter, we exited $159 million in portfolio investments. These included the repayments of a $20 million senior secured loan to TravelClick, a $16 million senior secured loan to Greystone which we refinanced and $22 million from our investments in Soasta. The investments in the quarter had a weighted average effective deal of 10.1% and the investments we exited during the quarter had a weighted average effective yield of 10.6%. Our overall effective portfolio yield at quarter end remained consistent at 11.1%. Given the competitive pricing environment, we're very pleased to be able to continue to generate such consistently strong yields on our investments. Now, I will turn the call over to Paul, who will discuss our second quarter financial results. Paul?

Thanks, Howard and good morning, everyone. Starting on Slide 11, net investment income after incentive compensation was $0.43 per share compared to our dividend of $0.36 per share. This continues our 5-year record of covering our dividend every quarter since our IPO. Since then, we've out-earned our dividends by cumulative $21.9 million. Investment income for the quarter was $0.81 per share. Interest income comprised $0.80 per share, of which recurring cash interest was $0.54, recurring PIK income was $0.06 and recurring discount and fee amortization was $0.05. The remaining $0.15 per share came from prepayment income, including both prepayment fees and unamortized OID. We also earned $0.01 per share of other income. Our income recognition follows our conservative policy of generally amortizing upfront economics over the life of the investment rather than recognizing all of it at the time the investment is made. Operating expenses of $0.27 per share included interest and other debt expenses of $0.14 per share for a net investment income of $0.54 per share before incentive compensation. Incentive compensation was $0.11 per share or 20% of net investment income, as our all-in performance continued to exceed our cumulative total return hurdle rate of 8%. Net realized and unrealized losses of $4.6 million or $0.08 per share were comprised of realized losses of $1.8 million and unrealized losses of $2.8 million. Realized losses came primarily from a $10.1 million realization on the restructuring of our loan to Iracore, a position from which we've already received significant cash interest. This was significantly offset by a $7.0 million realized gain on the sale of our Blackline equity position which we received in connection with our acquisition financing from the company prior to its successful IPO. And a $1.7 million gain from the sale of our equity position in Soasta. Unrealized losses were primarily comprised of $5.3 million markdown of our Kawa revolver. While Kawa was current in its interest payments during the quarter, the revolver was markdown due to challenges the company is facing and we since restructured the business. Net unrealized losses were reduced by unrealized gains from spread compression. Our credit quality remains strong, with only one loan on nonaccrual status at quarter end, representing just 0.1% of the portfolio at both cost and fair value. Turning to Slide 14. We closed the quarter with total liquidity of $381.3 million. This includes available leverage of $366.0 million and cash and cash equivalents of $41.6 million, less net pending settlements of $26.3 million. Available leverage includes the remaining $75 million available on our $150 million leverage commitment from the SBA. Regulatory leverage at quarter end which is net of SBIC debt, was 0.59x common equity gross or 0.57x common equity net of cash and outstanding trades. Given that our stock has been trading at a premium to NAV, we did not repurchase any shares under our share repurchase program during the quarter. At quarter end, the combined weighted average interest rate on our outstanding debt was 4.03%. This reflects our TCPC funding facility, SVCP revolver and term loan, each at a rate of LIBOR plus 2.5%. Our convertible note issuances at rates of 4.625% and 5.25% in the quarter, respectively. And our SBA debenture at a blended rate of 2.58%. I'll now turn the call back over to Howard.

Thanks, Paul. Now I will briefly cover what we're currently seeing in the market. We continue to see strong demand for our lending solutions from middle market companies across wide variety of industries. At the same time, we recognized that there are many new competitors, some of whom are being aggressive. We continue to take a highly disciplined and selective approach to new investments. And while we're passing on many opportunities, we have a strong pipeline of potential investments that meet our standards. Third quarter through tomorrow, we will have invested approximately $52 million, primarily in 4 senior secured loans. The combined effective yield of these investments is approximately 10%. At this early point in the quarter, our pipeline includes several transactions that are well within our historical yield range, including at least one that we expect to close in the very near future. Our ATM program has been a shareholder-friendly way to raise equity to fund new lending opportunities. And we may reactivate it this quarter. As in the past, to the extent shares are issued pursuant to the ATM, it will be in a manner that we believe is shareholder-friendly. TCPC has built a strong market position by leveraging our platform to lend to established middle market companies with sustainable competitive advantages that generate substantial cash flow and/or have significant asset coverage or enterprise value. Our co-investment exempted really from the SEC which was granted a decade ago, affords us the opportunity to co-invest alongside 10 capital -- Tennenbaum Capital's private funds to provide larger and more comprehensive capital solutions to our borrowers than TCPC could pursue on its own. Looking to the future, our strategy remains the same. We will continue to focus on effectively deploying capital from our diverse lending sources to optimize our portfolio performance by effectively preserving capital and generating a strong recurring earnings stream. We believe we're uniquely qualified for continued success for several reasons. First, our focus remains squarely on managing our portfolio to deliver consistent returns and a well-covered and attractive dividend to our shareholders. We've done this in great part by taking a highly selective approach to investments, staying true to our disciplined underwriting standards and maintaining strong credit quality. While we invest in many different industries and in companies we know and understand well, we continue to focus on businesses with sustainable competitive advantages and significant cash flow and/or enterprise value. Second, the vast majority of our investments are in senior secured loans, most of which are floating rate. This reduces our overall risk profile, enhances our portfolio performance, allowing us to consistently cover our dividend each quarter. Our portfolio is well positioned for any meaningful rise in interest rates and even a 25 basis point increase in rates would be accretive. Third, our low cost of capital and diverse funding sources are key competitive advantages for TCPC. We remain well positioned with attractively priced leverage and access to a variety of equity and debt financing alternatives, including convertible notes, 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 more 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 frequently purchased TCPC shares in the open market. In closing, we're pleased with our performance for the first half of 2017. And we're optimistic about our prospects for delivering continued growth and returns to our shareholders for the remainder of the year. We'd like to thank all our shareholders for your confidence and your continued support. And with that, operator, please open the call for questions.

[Operator Instructions]. Our first question comes from the line of Chris Kotowski from Oppenheimer.

I guess, I'd like to start with Page 9 of the slide that just on the investments. So I look at the $267 million of commitments and it's a number that's like well above what we've seen from your historically and its -- looking at the public closed M&A data, you wouldn't think that it was a bonanza quarter. And so, I guess, the question is, how are you accomplishing that? Is it bigger hold sizes? Is it new verticals? Is it -- or was it just a flurry of things that you had in pipeline?

Chris, thank you for the question. It's really some combination of things. But I think with the greatest emphasis on your last item, we're running the business the way we have always run the business. Taking advantage of our 2 decades in the business and our strong sourcing model and this was, I think, more coincidental in terms of the timing than anything else. And if you look at the originations that we recorded to date in Q3 at $52 million which is well below our historical norm for 4 or 5 weeks into the quarter, that is coincidental too. We run a lumpy business. We do good deals when we see them. We've got a lot of flow. We're passing on a lot of things. The fact that we were able to close so many deals in Q2, I think, is a credit to the platform, but probably more a function of coincidence and timing. Some of those could have just as easily gotten pushed into Q3 or Q1. And so we don't derive too much from it having been a record quarter.

Okay. And I wonder, on the Kawa restructuring, it looked like you'd provided additional capital to that company. But the one tranche is marked down quite significantly and I wonder if you can -- whatever you can say about -- whatever color you can now give about that transaction and the prospects for recovery?

Yes. It's a fair question. And so let me -- this is Raj speaking. Let me just begin by reiterating that as of Q2, the position was current, it did pay its obligatory interest. That being said, to your point, Chris, through 2017, there've been a number of unexpected business challenges that accelerated, I would say. And that resulted in a combination of the stretch -- stressed working capital. So to correlate to your revolver, there was little bit of a funding need to go through that and ongoing weakness in its primary operating unit which has value, but I would say, a lower value at a current mark, just on the current business dynamic for that business unit. So when we looked at it, we saw a -- the business as it was set up was, capital structure was unsustainable in our perspective to run it effectively. And so we pushed and led a proactive restructuring effort, balance sheet restructuring as well as some business restructuring that concluded earlier this week. But that's not the end of the effort. There is going to be an ongoing business plan review. There are a number of other initiatives to de-risk the position that are in process, but premature to kind of highlight versus maybe next quarter and then an ongoing potential review for recapitalization to allow that ongoing business to be sustained and hopefully thrive. So I think we've taken our best crack at the mark based on what we know today. We're certainly not idle and have moved quite quickly and effectively on the restructuring. There's probably more comments to come in the coming quarters, but that would be some of the background, I think, that explains the movement that you highlight.

Okay. And then last from me. Howard Marks, I guess, issued a letter a while back and he is always cautionary, but seem particularly so and has got quite a bit of traction. I wonder, Howard, if you could share your outlook, whether you currently see any traction -- broad-based traction economic strength and any systematic credit worries?

I don't think we're going to focus on other peoples' communications or their asset purchases or people getting into our business at the moment. We're focusing on the job that we've been doing here for very long time which is making middle market loans. And there is no question that if you look across the capital markets, people struggle to identify instruments that are traded [indiscernible] instruments that they think are cheap. The equity markets have gone up. The loan market has been strong. And it's very natural for people to say when will descend. If you use historical patterns, you would, of course, reach a conclusion that things should change. And nothing continues forever. Our view is that our job quarter after quarter, day after day is to continue to look for good investments. We're always cautious about individual companies and the environment. We recognize that there's certainly more speculative excess, in general, in the capital markets and more people involved in direct lending. Many of them new participants, certainly new firms or firms that have raised a lot of money, particularly on the private side, some of which are putting it out at a very rapid clip and this makes us more cautious. At the same time, there are a lot of good fundamental companies out there that need access to create borrowing solutions. And that's how we focus our business.

Our next question comes from the line of Robert Dodd of Raymond James.

Housekeeping one, if I can, first on just the prepay income, obviously, very high. The more normal level I would guess, looking back at prior quarters, I mean, I think, is something more like $0.05, I mean, obviously, theoretically can be 0. It tends to happen semi-regularly just not at this scale. So can you give us a ballpark kind of long run average that -- I mean, I'm using 5 right now, but it's clearly long this quarter, am I too low, in general?

Sure. This is Paul. Over the last 5 quarters, it's ranged -- except for this quarter, has ranged between, say, $0.04 and $0.09 -- $0.04, $0.06, $0.09, $0.06. So this quarter is a little higher than usual. But we were, as Howard often says, this business is lumpy. We're pleased with the prepayments we have right now. But it is higher than our usual run rate.

Got it. And then, Howard, on the competitive front, obviously, like you say, I mean, some new entrants, new players. Is this creating or do you expect it to create in the future any kind of lack of attempt -- fight for people? Obviously, human capital in this business competent experienced underwriters are relatively there and there's increasing demand for them. So do you think that's going to create any issues in terms of, for you, maybe for the -- obviously, for the management like loss of expertise, risk or anything like that people coming around and poaching your staff?

Yes, I'll take that one. I mean, I think, that's natural. I mean, it's hard to say that there's more competitors and more places for people to go and find that. They're not going to look for competent professionals. I think we take that -- it's a little bit of a complement to the extent people like our people and think they're good. Even without the dynamics you see in the marketplace today, our approach is to create a good reason and good opportunity set for people to say. And part of that is, I think, driven by the sourcing and opportunity set that people can work on. Our people are very busy. They're busy on interesting stuff. It's not just with a big catcher's mitt on taking what comes at you. I think there's a little more of a tactical approach to try and do a range of deals and types of deals. I also think the broader platform that we have here which is not just focused on direct lending, although whatever other stuff we do, I think, is additive to do direct lending well, has a little bit more of an interest to the types of folks we hire and have been successful in retaining. So just having a place in capital shouldn't be sufficient for the right type of professional versus the opportunity set and the type of work they're doing. And so far, our approach has been more to create a good place to stay versus worrying about what people have created outside of our platform. It seems to be an effective approach.

Robert, one thing I might add to my prior comment. Last few quarters, of course, we've had little more prepayments than usual, I'd be careful about making the run rate of the last few quarters. It is lumpy and can be as low as $0.02 or $0.04, but ranges all across the board.

Our next question comes from the line of Jonathan Bock of Wells Fargo Securities.

We'll start with the lumpiness of prepayments because at times, it's lumpy and heavily driving earnings and at another times, it doesn't. But if you look at the current environment, more importantly, look at some of the loans that you have, their share value is well ahead of par kind of generally a good indication as to a loan that can likely prepay. There's a decent amount of embedded, we'll call it, fee upside that could easily keep earnings close to, if not, may be just a few cents shy of what you're generating. So my first question is pretty easy. Do you know of any publicly stated prepayments that are going to occur this quarter that have been announced by LCD or the company's themselves in the portfolio?

Jon, we're looking at each other. Nobody is thinking about one, I think, of the top of our heads, but we will go back and double check that.

Got it. Then, I mean, just only what's publicly available. The second point is, if we look at some of the names like, I don't know, in LCO or new cycle or I can think of 16 deals earlier others. In some cases, these are names with meaningful marks to their Gogo meaningful premiums relative to their par. And they were originated at the time when spreads were much, much wider than they are today. And so if I am a private equity sponsor or I'm a smart CFO, I'm looking to refinance. And so, would it be hard to make an assumption that names like that or others that were originated in the early 2016/Gogo with 6/30/15 time frame are fairly right candidates to be prepaid over the next 6 to 12 months?

Jon, I appreciate the question. And it's an interesting granular one. Each individual loan is a little bit different. In some cases, the loans are not prepayable for a period of time. And so regardless of what the owner of the business or its financial management team would like to do, they can't. In other cases, it's subject to grid mechanism, whereby those payments go down lower over time. And in some cases, there is a fixed amount at the end. So we structure each of our deals somewhat differently depending on the situation. So generally speaking, if they're marked at a higher level, your assumption that there is some back-end fee or prepayment premium success fee styled differently for different deals is a good one. It's also our accounting practices that we don't take these fees upfront, but rather amortize them over the course of the loan. So lot of that, if the loan goes to maturity, may get taken into income upfront. When it gets paid off early though that income gets accelerated. And so that's what we have across the portfolio, but each situation is a little bit different.

Yes, I would just add, Jon, that I think you're hitting on an important point and one that ours is not just an academic mathematical exercise. These aren't the types of companies that have a need for sort of an intermediate piece of patient capital. But often times, more often than not, they don't need that type of capital for the term the capital is underwritten. We often see these companies prepay, refinance, get bought, et cetera. So for us, operationally, the prepayment schedule or concept is a very important one, one we fight hard to keep in structure, because it does have an economic value. And it does often translate into a monetize value that we believe is an important part of this business. So aside from the comments Howard made, you will see us trying to preserve that as we do with covenants and other structural items. Because there's a value to it that may not show up day 1, but does show up in position by position.

Got it. Another question. So Howard when you talked about the potential reintroduction of an ATM which is you can either do big deals or you can lead them out over time, we understand. I guess, the question is, when you think about what truly generates ROE and you have lower cost credit facility capacity available to leverage up to your target to generate a higher return for shareholders. Why wouldn't you do that first and then discuss equity market or equity issuance via ATM or other means once you achieve that target leverage?

Sure. We may do just that. We have not employed the ATM in a long period of time. And to be very open about it, we didn't raise very much when we did. In fact, we employed it several quarters and we were so cautious in our issuance that we concluded -- that we hadn't been cost effective in it and turned it off because we were so concerned about the amount of stock we were willing to sell and the price at which we were willing to sell it. And so we haven't used it in a longtime. And it may be that our deployment this quarter is such that it doesn't make sense to use it. Last quarter, we had significant net deployment. We were able to effectively raise equity, an amount that coincided with that. We have historically followed a process of trying to do things that benefit our shareholders over the long term and using equity and leverage both together, using leverage when it makes sense. We're probably a little more cautious in some others on how leverage we're willing to be. But we would only use the ATM if we thought it made sense. And our historical pattern has been to be very cautious on it. We announced that we might do it. We've gotten several increase from people asking us whether we would deploy it over time. For a long time, we've responded no. But given the fact that we were able to successfully have such strong net deployment so far, we thought it would be prudent to simply announce that we've considered doing it.

Understand. And glad to see that you and Raj and the board are all kind of thinking about that way. Turning to new investments, if we take a look at, perhaps, maybe a few new ones that showed up. So Pac Union, right which came through the KKR capital markets complex, it's large. It's -- I mean, there's at least I'd imagine it is still a little bit more syndicate than clubby and then, of course, Securus, a name that you've known, but which is now in complete syndication through Deutsche Bank at a covenant-lite second lien. Howard, we contrast that with Tango which is completely proprietary and back-end levered. I mean, so lots of, what we'll say, very proprietary-driven Tango like originations. And then you couple that with sometimes maybe the, I don't know, if they are situational, I don't know what you're seeing, somebody else isn't. But walk us through how we should gauge the risk in something like a Securus or a Pac Union which have more of a syndicate flavor than perhaps what you'd originated with Tango?

Maybe I'll start, Jonathan, try to bring some clarity to that and others can comment, as you said. But just to reiterate the -- and volume of Q1, we had 4 sole or co-led deals. The 2 largest were sole-led, 3 small clubs which includes the Pac Union, as you referred to. And then 2 syndicated. And in the syndicated, as an example, one of them was syndicated -- it syndicated eventually, but it really started as a private intro through a deal from a CFO, who was a former CFO of one of our companies that we actually hired, that ultimately went to a syndicated process, but was really an example of how we may end up in the syndicated deal with something more than a syndicated-type access or process to it. So something like Securus is another example, where we have a lot of history with the business. I think we showed some conviction when there was little more questions around some of the regulatory risk to it, stay true and saw an opportunity to continue our capital working for us in a slightly different structure, but one that we still thought was economically appropriate and not the exact private-type deal structure we would normally deploy in. But acceptable for the risk because of extending the economics for knowing the business, having some ability to, if we needed to take more active approach, do that because of history with the business. And then Pac Union is an example of we've been doing a lot in certain areas of specialty finance. But I'm trying to take inventory risk versus businesses that have a good franchise and sustainability, just happen to come through a relationship that led to a small syndication. But again, economics were appropriate for business that we felt like okay, if we get our hands around. So it is that -- the net of it is, we will always work on things that we feel we can understand, that we can be influential or in the most cases, drive or actually be the only lender to come to the right conclusion. Occasionally, there will be something that has -- ends up in a syndicated or a likely syndicated-type group. But there's typically a story around that, that isn't obvious on the final outcome of the statement of positions that lets us get more access, little more diligence insight, perhaps, influential even in that type of syndicated or other syndicated structure that ends up in the portfolio that tend to be more the exception in the rule, but an acceptable exception, if you will, based on the process we look to employ.

Jon, it's Howard. Just to follow up one additional point on what Raj has said. As I know, you are aware, we have exempted relief and invest across our platforms. So the positions you're seeing there are a portion of what we've done. And in some of these cases, we're a much larger participant in these deals. And so, although they maybe club syndications, we're often among the largest, if not, the largest participant in them.

Our next question comes from the line of Ryan Lynch with KBW.

First one has to do with, as the market is becoming more and more competitive and we're seeing an increase in refinancings across space. We're seeing market yields come down, middle market yields come down as well as we've seen that trend in the BDC's portfolio, so BDC portfolio yields come down. Your guy's portfolio yield has really buck that trend. It's really been steady and the fact year-over-year, your portfolio yield is actually up. So how should -- how you get investors comfortable that you guys are not taking on excess credit risk in order to halt yield compression, in fact, actually increase your portfolio yield?

Sure. It's a good question. I think there are few things going on. We've maintained some of our overall yield as a result of the increase in LIBOR. If you look at our -- the delta between the new loans that we made last quarter and those that we exited during the period, we exited credits at a higher spread than those that we entered. So you did see some of that. But it doesn't flow through the overall numbers because of the increasing LIBOR rate that flows through. And so -- and I think, also, if you look across the portfolio, you'll see a combination of things. You will see some loans at lower yields, a number of them. And we're able to offset those with some other situations, whereby, a function of getting warrants, equity kickers, additional enhancements. Because these situations are more unique, not necessarily because they are more risky, but because they involve a different process of committing to maybe speed, maybe its industry knowledge, maybe certainty, something else that we're able to provide, we're able to get some offsetting yields over there. So we're clearly not functioning in a vacuum. We're subject to market forces here. But we've been able to, I think, really take advantage of the broad platform that we have that sources deals in many different industries and types and maintain, I think, some pretty good yields. But we're clearly subject to market forces.

Okay. Got it. And as following up on that, as you mentioned LIBOR, LIBOR has been above the critical 1% threshold for a few months now. Are you seeing any pushback with borrowers now looking to -- as their cost start to go up every time LIBOR goes up. Are you seeing any pushback with borrowers, looking to come to the market, increase frequency to refinance out some of these rates that are now above the 1% threshold that now seen their interest rates go up. Is that -- are you seeing any sort of increase in the frequency of those guys coming to the market?

So Raj, do you want to respond to that one?

Yes. I don't think that it's -- this is Howard, I'll take it. Yes, I don't think it's so clear-cut. There are certainly, if you look in the syndicated market, plenty of people out there that are refinancing every chance they get. And there's a version of that in the private markets. But I think, usually, when people go to the private markets, they're expecting to have their facility in place for a little bit longer. There's -- they may not be eligible for syndication for size, structure or other reasons. They may want more flexible lender. And so I think they tend to probably run a little less quickly to refinance. And sometimes, they may be expanding or need additional facilities.

Okay. That's helpful. And then just one last one. You guys have typically run with a fair amount or fairly high amount of spillover income. You guys have done a good job of earn your dividend as well as over earning the dividend which is built to that spillover income. Over Q1, you guys, again, over earned in this last quarter significantly over earned the dividend which is further building that spillover income. In the past, you guys have paid out some special dividends. Are we getting to the point, where you guys have been very successful in over earning the dividend and continue to build up that spillover income, where some form of special dividend make sense?

If you have specifics on the spillover, Paul, Paul will address. With respect to dividend policy, we continue to discuss this with our board every quarter and actively in an environment, where I think there are some questions about dividend sustainability. And certainly, in the past, we've seen people cut their dividends. Our focus has been on making sure that people are comfortable with our dividends. If you look at the presentation we posted, we're very pleased that we have been able to earn and outearn our dividend every quarter since we've been public. And our focus really is on making sure that people are comfortable with that. We will, however, continue to discuss the dividend policy with the board and see if at some point the change makes sense.

Our next question comes from the line of Chris York with JMP.

Howard, so last quarter you talked a little bit about your strategy within venture lending and how you've been more interactive in the past. My understanding that one of your venture lending indeed left Tennenbaum recently. So I'm curious whether there has been any recent changes in your venture lending strategy or maybe even de-emphasis of loans or underlying business models within venture lending?

I'll take that Chris. The short answer is no. The way we've -- the team was more than 1%, the way we operate here, there is a very broad and deep set of folks and experience. And so, as I talk about sourcing and origination, it never is really centralized around any one person and it ended up being the firms that's doing the deal, although the individuals are obviously very important. So the way we think about it is, it's a natural -- it was a very different type of institution and situation that individual went for and we wish him all the best. But there is a team in place. We have since sourced some good deals in this quarter. There have been a couple that have closed which allowed us to take advantage of the SBA facility. And we expect more of the same coming. So I think that -- it's a short answer of no, no change. No longer explanation around that.

It's a great color. And then maybe, so if it some either in the process of closing, so maybe can you remind us of the size of the portfolio today and then it seems like your growth outlook for that portfolio hasn't changed as a result of [indiscernible] just curious on what you're thinking for maybe growth on a gross basis or maybe on a percentage basis of the total portfolio?

Yes, I don't think we've disclosed the exact details on that sub-portfolio. So I'll avoid creating that president today. I do think it's helped us although in a choppy fashion to take advantage of the SBA facility. We're fully funded on the first piece and that's a nice accomplishment. And we expect that to continue. But it's hard to predict when they come in or the empirical sort of specifics you're looking for other than saying, we're going to continue on in the process of looking for those deals. It will not become the majority of this business. This is not a venture debt, BDC, although we do think venture debt is a very nice additive piece of it. So I'll avoid the specifics, but just give you the sort of qualitative color on that basis.

Yes, Chris, this is Howard. Let me just add something to that. We've been doing newer company, whether you apply a venture debt or newer stage business label to it for very long time here and there are a number of people that do that. And so the way we think about it, it's a little bit more of a continuum than a completely distinct asset class because some of the companies we finance, you could argue what category they are to fit in, particularly when it's a rapidly growing company, spending a lot of its cash flow on growth, that certainly could be cash flow positive that's ratcheted back some. And so we just have a somewhat more nuance feel of how we define those companies. But it's clearly a sector in which we see a lot of activity in the economy overall and we intend to continue to be active.

Great. That's very helpful to think about. And then maybe some of your other peers, I guess, that have BDC peers that have SBA licenses have had trouble with new originations. So maybe then how would you characterize the competitive environment in venture lending in the early-stage companies today?

Yes, I mean, I'll take that in two pieces. Because I don't want you to think that only venture lending is what applies to SBA. We have done it for a variety of types of companies. And we talked about this in the past. It certainly has gone a little slower than we would have liked. But at the same time, we're not going to sort of cut corners or change an underwriting discipline just to utilize the SBA, but utilize it where we can with the right underwriting criteria. As far as the venture lending environment, I think, we look at it a little differently and that our bite-size has been larger than most of the other participants out there. I think there is a fair bit of white space in between where others can fund and where we have funded historically on the types and the size of companies that would fall into that category, not just venture lending per se, but to Howard's point, the range of maybe fast-growing, but not necessarily high current earning businesses. So like everything else, we feel like we can find our pockets of distinction. We try to distinguish ourselves to the sourcing counterparts for some other form of value, whether it'd be knowledge of business, speed of execution, structure flexibility, et cetera. And I think we have a bite-size of that isn't as crowded, doesn't imply as crowded the market as the number of participants would imply. And that's how we're going to continue on with that effort.

Our next question comes from the line of Christopher Testa with National Securities.

Most of have been asked and answered, but just curious for the originations during the quarter, just how the uses of capital for those originations were broken out?

I don't think we breakout per se, but it's a range of acquisition financings. I think refinance -- it's the same sort of buckets. I don't think we actually breakout a percentage of -- which falls into each bucket, but it's very much consistent with how it's been in the past, refinancing acquisition financings, some growth financings for the earlier-stage companies, et cetera.

Okay. And just curious to, obviously, sponsors have been aggressive in terms of deal structures and leverage. Just curious kind of year-over-year, how many deals are you passed on now due to structures relative to what you were passing on a year ago, just curious how that's kind of changed out from top of your funnel?

A lot. I don't have a number, but it's a lot. I mean, we're certainly seeing a lot of deals. But I would say, we're certainly -- we're absolutely passing on a lot. That some fall into others portfolio and some just come back in a more -- in line with the original structure or feedback we give. And on the later, we engage on the former. We wish others luck with them.

Got it. And just how much of a portfolio roughly is co-invested across the TCP platform and are you finding that you are doing more and more kind of co-investments taking on larger bite-sizes and that's kind of what's helping you, maintain some of your pricing power?

We have had the ability to co-invest since 2006. And so it's something we're accustomed to doing. We've used it as a part of our business for a long time. A significant portion of the loans that we make are -- grew loans through various vehicles here. So using your terminology, co-invest it.

Our next question comes from the line of Jim Young with West Family Investments.

I recognize there has been a lot of questions regarding the competitive landscape in your markets. And what I'm just kind of curious about is, can you share just with us a little more about what issues are being focused on, I guess, a little bit more so with the new competitors that have entered into the market? Is it primarily just solely price-based? Or are there issues pertaining to covenants and like that we should be aware of?

Yes, I'll take that Jim. It's both. I think we've always just thought about the private -- the true private market as more insulated or distinct and your ability to preserve price and to have protected structures and documentation than the syndicated loan market. I think some folks are approaching that with a little more gray lens and that one is directionally influential to the other that the -- people take their, at least, the issuers. The sponsors will try to take their cue from the syndicated loan market, especially, if they are an informed customer, if you will. And they will try in their own interest to employ those structures in the private market. And that comes down to, as you pointed out, really price and issuer-friendly structures. And that's how people are, at least, some of the new folks seem to be competing. And so there is pressure on that. But again, we look to try to preserve our pricing structures by not just competing on those parameters versus providing some other form of value, whether it's certainty of financing or speed or just knowledge of a business that may not lend itself to a very broadly syndicated set of lenders.

Okay. And can you just share with us a little bit about some of the discussions how they unfolded this quarter today where you've originated $52 million in 4 senior secured loans at about a 10% yield? Can you give us a flavor as to how these discussions and how you're able to get those over the finish line and how those discussions again in this quarter would compare with your prior quarter's negotiations?

Jim, this is Howard. I would say that they were remarkably undifferentiated. And I don't say that perfectly. The fact is, some of the deals that we've done this quarter could be very easily have been in last quarter. There are some things that we were looking on -- working on that very could have easily have closed at the end of July and didn't. And so I don't think there's any single thing that's going on in the business that you would identify and saying, this is truly a groundbreaking shift in the way we're doing business or the discussions. There's no question that borrowers are aware out there that they're in actively financing market and that there are lot of places they can go for financings. At the same time, there are always some borrowers who prefer to have a lender who gives uncertainty, who understands their business, who understands that not all businesses function like an upward sloping spreadsheet. And that there ebbs and flows in their business and like to have somebody that has the [indiscernible] we do being both for lender and on the equity side, they've some other businesses and they value it. And so we found that typically that gives us an advantage in some of the deals that we do. And there are others, where simply people are insisting on either terms of processes that don't work for us and those we're choosing not to compete on.

Our next question comes from the line of Nick Brown with Zazove Associates.

I just want to understand on the Kawa restructuring. Can you just go through the flow of funds? It may looks like you put more money in, but the revolver was marked down significantly and other facility was prepaid. Did you put in new money to the revolver at a discount? Or did it get mark down after you put in new money? How did that exactly work?

Yes, let me try to walk through what I can and again, not to be [indiscernible]. There's some element of the switch that just spilling over on the quarter into this quarter that may just be a better explanation at end of the current quarter. But the business, as I mentioned, after it's paid its coupon for 630, it was in the midst of facing challenges. Part of that challenges there essentially stretched a working capital dynamic. There was a capital expenditure element of this business, that's very important. And so even if it means a mark down on a fund investment, the actual enterprise value and some timing difference for the back-end realization of the capital investment is very important. So it did draw more on the revolver. To your point that there was more funds put in. But the value of the revolver that we're taking for this quarter is based on underlying collateral. And simultaneously, because of challenges that the underlying collateral has a different current mark than in a more robust environment that we're reflecting because that's the right thing to do. So there is a funds flow element and there is also a markdown element that coincide. But as you highlight, it wasn't necessarily -- there is an issuance at a slight discount, but it wasn't an issuance at the mark of the position for this quarter. And again, that may change quarter-to quarter and how we end up. Valuation providers proceed the mark which we will update you on.

I'm sorry. I'm showing no other further questions at this time. I would like to turn the call back over to Howard.

We'd like to thank our experienced, dedicated and talented team of professionals at TCP Capital Corp. Thanks again for joining us. This concludes today's call.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a wonderful day.