BlackRock TCP Capital Corp. (TCPC) Q4 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, good afternoon. Welcome everyone to TCP Capital Corp. Fourth Quarter and Full Year 2017 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] And now, I will turn the call over to Katie McGlynn, Vice President of TCP Corp. Global Investor Relations team. Katie, please proceed.

Thank you, Valerie. 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. This morning, we issued our earnings release for the fourth quarter and full year ended December 31, 2017. We also posted a supplemental earnings presentation to our Web-site at tcpcapital.com. To view 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.

Thanks, Katie, and thank you to everyone for participating on our call today. For those of you who have not yet met Katie McGlynn, she joined us at the beginning of the year and we are pleased to have her here with other members of our TCPC team on this call. I will begin with an overview of our key accomplishments for 2017 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. To begin, we will review our key accomplishments for 2017. Please turn to Slide 4 of our presentation. First, our dividend continues to be a key part of our total return to shareholders. In 2017, we paid dividends totaling $1.44 per share. We continue to cover our dividends, as we have done each of the 23 quarters since our inception. In 2017, we outearned the dividend for the year by $0.15 per share or 10%. Second, despite the competitive market environment, we continue to find attractive investment opportunities, driving record levels of deployment in 2017. We deployed a total of $865 million during the year, resulting in net deployments of $210 million, despite record dispositions of $656 million. Third, we continued to prudently raise equity and debt financing on attractive and shareholder-friendly terms. Fourth, last month, S&P reaffirmed our investment grade rating, reflecting our conservative leverage structure focused on senior secured investments and the quality of our broadly diversified investment portfolio. Fifth, our Board of Directors renewed our $50 million share repurchase plan at our most recent Board meeting, which provides for repurchases of up to $50 million, to the extent our stock declines below NAV. Sixth, on a cumulative total return basis, we returned 78% since our IPO, outperforming the Wells Fargo Business Development Company Index by nearly 50% over this period, as shown on Slide 7. And finally, our investment advisor, Tennenbaum Capital Partners, continued to expand its operations and geographic presence with the opening of a new office in Atlanta, which further strengthens our pipeline of investment opportunities. Now, onto highlights from our fourth quarter; we delivered another strong quarter of originations in the fourth quarter, totaling $213 million. Dispositions for the quarter were $222 million, resulting in net dispositions of $9 million, demonstrating our willingness to shrink the balance sheet when appropriate. As shown on Slide 5, we earned net investment income of $0.41 per share, outearning our dividend by $0.05 per share, and today we declared a first quarter dividend of $0.36 per share payable on March 30 to holders of record as of March 16. For those viewing our presentation, please turn to Slide 8. We continue to hold a diverse portfolio of investments. At quarter end, our portfolio, which had a fair market value in excess of $1.5 billion, was invested in 96 companies across a wide variety of industries. Our largest position represents only 2.9% of the portfolio and our five largest positions together represent only 13.3% of the portfolio. As you can see on Slide 8, at quarter end the vast majority of our assets were senior secured debt instruments. In addition, as shown on Slide 9, 89% of our debt investments were floating-rate, up from approximately 80% at the beginning of 2017. We have discussed the potential for rates to rise for a number of years and have positioned our portfolio accordingly. To the extent LIBOR continues to increase, we expect to benefit from higher interest rates in future quarters as our floating rate investments reset, potentially providing significant upside which is enhanced by our predominantly fixed-rate liabilities. Turning to Slide 10, we deployed $213 million in the fourth quarter in 13 investments, all but one of which were senior secured. These include investments in ten new companies and three existing portfolio companies. Our investments in existing portfolio companies continue to be an important source of investment opportunities and reflect our strong borrower relationships and the value we deliver to them. Our top five investments in the third quarter reinforce our commitment to maintaining a diversified portfolio and lending at the top of the capital structure. They include; a $32 million senior secured loan to Datto, a provider of data protection and continuity services; a $27 million asset-backed note to Caribbean Financial, a consumer lending company which we have financed since 2012; a $25 million senior secured loan to Domo, a data management company specializing in business intelligence tools and data visualization; a $20 million senior secured loan to Lithium Technologies, a provider of social media management software; and an $18 million senior secured loan to American Broadband, a provider of telephone broadband and cable services in rural markets. Our other investments in the fourth quarter were spread across a variety of industries including insurance, manufacturing, and an ABL retail deal. In the fourth quarter, our dispositions of $222 million included the repayment of $30 million of Caribbean Financial notes, the payoff of a $20 million loan to NILCO, and the aggregate payoffs of $18 million of loans to Asset International. Our investment in NILCO provides a good example of our ability to leverage our deep relationships and industry knowledge to source and structure unique deals. NILCO was a fourth-generation family-run building products distributor that was acquired in a buyout. We structured a first lien term loan with the company, which provided the borrower with the needed flexibility by leveraging our prior experience in the building products industry. The company was ultimately acquired by a strategic investor and our loan was repaid at a premium. New investments in the quarter had a weighted average effective yield of 10% and the investments we exited during the quarter had a weighted average effective yield of 10.9%. Our overall effective portfolio yield at quarter end remained at 11% as the increase in LIBOR effectively offset the slightly lower rate on newer loans. Given the competitive pricing environment, we are very pleased to be able to continue to generate consistently strong yields on our investments. Now, I will turn the call over to Paul, who will discuss our fourth quarter financial results. Paul?

Thanks, Howard, and hello everyone. Starting on Slide 12, net investment income after incentive compensation was $0.41 per share, or $0.05 above our dividend of $0.36 per share. On an annual basis, net investment income after incentive compensation was $1.59 per share, substantially outearning our dividends of $1.44 for the year. This continues our nearly six-year record of covering our dividend every quarter since our IPO. Since the IPO, we have outearned our dividends by an aggregate of $25.5 million or $0.43 per share at year-end. Investment income for the quarter was $0.80 per share of that amount. Interest income comprised $0.79 per share, of which recurring cash interest was $0.64, recurring discount and fee amortization was $0.04, and recurring PIK income was $0.02. The remaining $0.09 per share came from prepayment income, including prepayment fees and unamortized OID and exit fees. 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 an investment rather than recognizing all of it at the time the investment is made. Operating expenses of $0.29 per share included interest and other debt expenses of $0.15 per share for total net investment income of $0.51 per share before incentive compensation. Incentive compensation was $0.10 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 $10.3 million or $0.18 per share were comprised primarily of markdowns of $2.8 million on Green Biologics, $2.3 million on Real Mex, and $2.3 million on the sale of our Contextmedia loan. Realized losses of $9.1 million are primarily comprised of $7.1 million related to the reorganization of Globecomm, which had previously been marked down. Our credit quality remained strong with only one loan on non-accrual at quarter end, a loan to Real Mex which we have discussed in the past and which continues to be marked at zero. Turning to Slide 15, we closed the quarter with total liquidity of $371.6 million. This includes available leverage of $301.0 million and cash and cash equivalents of $86.6 million, less net pending settlements of $16.0 million. Available leverage includes the remaining $67 million on our $150 million leveraged commitment from the SBA. We drew down another $8 million of SBA leverage during the quarter. Regulatory leverage at quarter end, which is net of SBIC debt, was 0.75x common equity on a gross basis and 0.67x net of cash and outstanding trades. As noted on our third quarter earnings call, we issued an additional $50 million par of our 2022 notes as a follow-on to the $125 million par issuance in Q3. And yesterday we refinanced our SVCP revolver with a new revolving credit facility through ING Capital with total capacity of $100 million at a rate of LIBOR plus 2.25%. We are pleased to be able to continue raising debt financing on attractive and shareholder-friendly terms. Our ATM program remains a shareholder-friendly way to raise equity, as opportunities arise. During the fourth quarter, we reactivated our ATM in a small and judicious way, raising approximately $0.9 million. With our stock trading at a premium to NAV throughout 2017, we did not repurchase any shares under our share repurchase program during the quarter or the year. However, our buyback program remains in effect and in fact was activated during the first quarter as our share price dipped below NAV. At the end of the quarter, the combined weighted average interest rate on our outstanding debt was 4.13%. This reflects our TCPC funding facility and SVCP revolver at a rate of LIBOR plus 2.5%, our convertible note issuances at rates of 4.625% and 5.25%, our senior unsecured notes at 4.125%, and our SBA debentures at a blended rate of 2.57%. I'll now turn the call back over to Howard.

Thanks Paul. Now, I will briefly cover what we are currently seeing in the market. In the first quarter through February 26, we have invested approximately $81 million, primarily in four senior secured loans. The combined effective yield of these investments is approximately 10.2%. At this point in the quarter, our pipeline includes many transactions that are well within our historical yield range. Today, given the wealth of M&A activity and accessibility to cheap financing, both of which have propelled asset values to all-time highs and credit spreads to recent lows, we are increasingly cautious. Despite the market fervour and intense competition, we remain relentlessly focused on generating superior risk-adjusted returns for our investors while preserving capital with downside protection. Our focus on appropriate risk-reward means we are prepared to let our balance sheet shrink when appropriate, as we did during the fourth quarter. We believe that even in a highly competitive market, TCPC is well positioned for growth in 2018 for several reasons. First, we have been investing in middle-market companies for nearly two decades, which has allowed us to deliver consistent returns across multiple market cycles. Second, over this time we have developed long-term relationships with deal sources and portfolio companies, which provides us with the ability to source unique and interesting investment opportunities, a key advantage in today's market. The vast majority of our new transactions in 2017 were either small clubbed deals or deals where we have acted as a sole or co-lead, due in part to the relationships we have developed. Third, we have maintained our focus on credit quality and downside protection by taking a highly selective approach to investments and staying true to our disciplined underwriting standards. Fourth, our co-investment exemptive relief from the SEC, which we obtained in 2006, affords us the opportunity to co-invest alongside Tennenbaum Capital's other clients to provide larger and more comprehensive capital solutions to our borrowers than TCPC could pursue on its own. Fifth, our low cost of capital and diverse funding sources provide us with access to a variety of attractively priced equity and debt financing alternatives. Our follow-on issuance of 4.125% five-year notes and the revolving credit facility we entered into earlier this week are just two examples. 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 Board of Directors continue to purchase TCPC shares in the open market, as was evidenced on a number of occasions, as recently as this month. Looking to the future, our strategy remains the same. We will continue to focus on effectively deploying capital from our diverse and attractively priced funding sources to optimize our portfolio performance by generating a strong recurring earnings stream, while focusing on capital preservation. In closing, we are pleased with our performance and achievements in 2017 and we are optimistic about our prospects for delivering continued growth and returns to our shareholders in 2018. We would like to thank all of 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 Robert Dodd of Raymond James. Your line is open.

A few questions. On your rate sensitivity, obviously you mentioned it would potentially, in your comments, potentially provide upside. And obviously we've seen over a year ago today your portfolio yield was 10.9, now it's 11, obviously [LIBOR] [ph] has moved up. How much of the kind of snapshot sensitivity, this in the presentation, the Q, based on the balance sheet today, how much of that do you think the positive sensitivity LIBOR will actually stick versus get competed away in the environment we're in right now? Not easy question, but…

Robert, thanks for the question. I think it's a good one. We don't ultimately know what is going to happen to competition in this market. But as you know, we've been doing this a long time, for two decades, and we are not trying to be all things to all people and we continue to try and look for more unique opportunities, which is why I think we've been able to maintain a lot of our spread despite a compressing spread environment. In this past quarter, it was roughly, as you pointed out, netted out. We do think though that we've positioned our balance sheet very well for the future with the vast majority of it almost 70% in fixed-rate versus the vast majority almost 90% of our assets being in floating-rate assets, and that should benefit us particularly if we see the kind of rate moves we've seen the last two quarters, which were very significant. Of course there is also a lag in timing. The presentation is mechanical. When these flow through on the asset/liability side, it doesn't always match up quarter over quarter.

I appreciate that. Thank you. Also based on a comment, you said increasingly cautious, obviously shrank the portfolio in the fourth quarter, which I think obviously time to time that it actually the right thing to do. Do you think, pulling out your crystal ball, I mean is it still in the first quarter and what you're seeing in pipeline, is it still kind of the time to be shrinking the portfolio given how aggressive the competitive environment is, or do you think net you are going to be growing in 2018?

Robert, let me take that question. It's Raj. And what I will do is first caveat that we are reluctant to give 2018 forecast because it is relatively, as Howard always says, a lumpy business. I also would just remind you that the portfolio didn't shrink because we didn't deploy. We actually deployed a fair amount. It shrank because there were a lot of repayments and I think that's partly a function of the nature of our business where a lot of these companies have a transitional piece of capital that tends to repay, refi or a company gets sold in the interim. It also may be partly a function of the competition where I don't have an exact count but as I go through the exits, a number of them were companies that we just had I think a good view on and a good position as a lender that someone else came in and priced down that we didn't want to participate in, because I think clearly we chose the right piece of the private credit cycle versus the repricing. How that plays out in 2018 it remains to be seen. There is a fair bit of competition. But I would just also remind you, when you look at our Q4 and our year-to-date, the breakout of where we were, a sole lender or part of a small club, i.e., a solution, a financing solution versus just a participant, for Q4 it's about 70% of the investments we made and for the year-to-date 2017 it's roughly 75%. So an overwhelming majority where we think we were driving structure, driving terms, really being a lead financing or a sole financing party versus a participant and a price taker to some degree. I think as that positioning continues or even expands, given the ability to be well-positioned as a capital partner, that to me is the best way to drive the business forward, and how the competition takes us out or drives pricing down remains to be seen, but from our point of view, if we shrink as a function of that, that's okay. If we're able to continue to continuously deploy in good size, and in at least the net deployment that's okay as well as long as we're staying kind of true to form and disciplined in the deployment side of it.

Okay, I appreciate that color. Thank you much. One more if I can, about the nonaccrual, obviously zero, you discussed zero fair value on one nonaccrual asset. When I look through the schedule, [power solo] [ph], which is marked at basically the revolving credit piece of that, it's got a zero-coupon now, right. But obviously there's nothing to accrue, but a couple of quarters ago it was 9.5 all-in, L plus 8.20. Without obviously spilling beans on exactly what's going on there, but what's the outlook for that, and also, is there a potential that that becomes a non-zero coupon, because it kind of feels like a nonaccrual to me, not a big one, but…?

Let me take that and we talked a little bit about this at the end of last quarter, right on the heels of the time of the earnings call of closing a restructuring on that business, which is now closed and we are doing what we normally do in a situation to harvest recovery and value. It's hard to look at that position in isolation of all the other pieces for Conergy and Kawa. They are really a collective set of securities around the business that was restructured a couple of times. The Kawa piece is really the ongoing operating business that we put a little bit of a funding into at the beginning of Q1 to effectuate the restructuring and ultimately think about the best way to exit here. So, you're looking at one piece which I think has a restructured interest rate as part of a broader restructuring that is hard to sort of isolate. But we have put some money in and we do have a fair bit of equity ownership of the operating business, and to me that was the way to participate in recovery dollars because the equity instrument moves up and down but the credit instrument only moves down. So we thought that was the best way to proceed on the assets. There's probably more news coming post that funding. We are very active in working with the business and the team which is based in Asia predominantly now versus the U.S. assets which we have generally been exiting. And I think it's probably a broader storyline there that will make more sense as we go through the year.

I appreciate that. Thanks. That's my questions and congratulations on the quarter.

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

Good morning. Joe Mazzoli filling in for Jonathan Bock today. Or excuse me, good afternoon. So the first question, in 2018 we've kind of outlined in some of our research that we think there's going to be M&A activity or potential consolidation in the BDC space and we think that the established platforms, best in class management teams like TCP, will certainly benefit from that. So, as forward potential combinations is, is this something that could be considered below net asset value?

Joe, let's start with the first part. The good morning was correct. It is still morning out here in California. With respect to that question, we are continuously focused on making good investments in TCPC that are consistent with our long-term strategy. As we think about other things going on in the industry and with respect to other players and participants, we are constantly looking at things and seeing if things make sense, but our goal is to do what makes sense for the shareholders over the long term here, and that's really where we're focused.

Okay. I certainly appreciate that, Howard. Thank you. And the next question just relates to an item that we picked up on, a slight adjustment from last year's K to this year's K, we see that on January 29, 2018, effective January 1 to convert the existing incentive compensation structure from a profit allocation and distribution to the GP into a fee payable to the Advisor. So as we read that, it kind of seems like that might actually be negative from a tax perspective to the management company. So, we're just kind of curious what might be driving that.

Great question. The first thing I just want to make sure is absolutely clear is, this will not affect the amount of compensation paid. It doesn't affect the computation. It doesn't affect the services we receive from the Advisor. As you know, it simply converts the form of the incentive compensation from a carried interest allocation to a fee, which puts us in line with most, if not all, of the other BDCs that receive incentive compensation as a fee. There is a tax impact just in that all of the tax effects of the underlying portfolio operating company now flow to TCPC. I don't see that as being a negative at all. It means that all the capital losses and gains go to TCPC, which means there are capital gains and we get to use that against our capital loss carryforward. If there are capital losses, we get to retain those for future use as well. So, I see this as a fairly neutral or a positive thing for TCPC from a tax perspective. But just once again to be clear, it does not impact our incentive compensation structure in any way. We continue to retain the cumulative look-back and total return hurdle rate percent going all the way back to just after our inception.

Okay, thank you very much for that. Those were all my questions. Thank you.

Our next question comes from George Bahamondes of Deutsche Bank. Your line is open.

So repayment activity was higher than usual in 4Q. I'm wondering if you guys could provide any color on year-to-date repayment activity.

So, we don't provide interim during the quarter details like that or forward-looking guidance. If you look back historically, our prepayment income is lumpy, and that is because we can't predict when entities are going to repay. And as Raj pointed out earlier, we had a higher level of prepayments during this quarter in general than we do. But I think the best way to look at it is probably to look back over a long period of time because it really will vary by quarter.

Got it, okay. Next question, I was wondering if you could disclose any share repurchases that were completed year-to-date, if any.

Once again, we don't do disclosures intra-quarter. I do think it's important to note that we have, our Board has reapproved our share purchase plan up to $50 million and it is formulaic. And so, it is driven by an algorithm which is designed to acquire more shares if the price falls below NAV more significantly. And we haven't had this go into effect for a while, but that's the way it's designed. So if we are only slightly below NAV, it's not going to wind up buying in very many shares. If share prices drop down lower, it will buy more shares. Now, I would also note that during this time members of management and our outside Board of Directors acquired shares on a number of occasions during this quarter. That though is in the public filings.

Got it, okay. Those were all my questions. Thank you.

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

Just I appreciate the color on where you guys are the sole or lead agent on the deal versus when you are kind of clubbing up. Just wondering, is there any discernible difference between kind of the average borrower EBITDA on the sole or lead agented deals versus the more clubbed deals?

It's Raj again. I mean I don't have a sign about company by company study, but I would say on the margin we don't necessarily distinguish in the profile one versus the other. It's really a function of sometimes it's reciprocation of club members, sometimes it's that club members are bringing us into the deal. So I wouldn't think about the sole or club, small club as a different nature or type of company or EBITDA level necessarily.

I would just add one thing to that. We look at it company by company and sole or lead number of businesses, and we have the advantage of our exemptive order. But there is a limit to what we can do internally. Although we've got very significant lending power, there are some deals on the larger side of what we do, whether we're going to be clubbing up with other people by definition or somebody else maybe agenting it, because we can't do it all. And we are not in the business of taking syndication risk on deals. We are in the principal business, in the lending business, we are not in the fee business, so we are not out committing to things that are busier than we can hold or take down ourselves.

Great. I appreciate the detail, guys. And kind of sticking with that topic, I know Howard, you're excited obviously that there would be intense competition still in the market. Are you seeing more of that competition kind of in the core middle market or kind of the upper middle market? In other words, are there fewer people who are still able to write large checks like you guys can with the exemptive relief, is that more kind of the sweet spot where you're getting pricing power? I'm just curious to your thoughts there.

I think we view ourselves as upper middle market at some level as well. Of course, I'm not sure how you're discerning core versus upper. But I think the point is that there is broader competition, people are able to do larger checks, or to Howard's just recent point, commit to larger deals and then syndicate down as a business model. So I would say competition is grown and it's broader-based versus distinguishing between the core and upper. People are able to do bigger checks and they are using that, as we've seen on the refinancing of our size or pricing deals down that we may just decide not to participate in a process.

Okay, great. And just curious, I was interested, with the opening of the Atlanta office, if you could just provide any additional detail on how many employees you have there and if there's going to be any specific verticals that that office is going to focus on?

It's a small office and we hired someone to cover the region. What we've tried to do over time is, on the investment side and also on the origination side find pockets that are a little less picked over. That sometimes may include industries or may also include regions, and we feel like having a local presence in the southeast is very helpful. It's already led to some good opportunities. But to be clear, it's not a – I wouldn't consider it a broad-based office. There's an individual down there that's been a resident in the area and has a lot of local contacts that we think is the right way to approach the regional coverage.

Got it. So this was more geographical in focus. Was that primarily driven by the favorable migration trends to States within that kind of proximity there?

I wouldn't say exclusively that but we do think the region has got a lot of opportunities. There are a lot of non-sponsor businesses and family-owned businesses. But I would say, it's just broadly thinking about where can we extend the footprint and the brand to leverage good opportunities.

Got it, okay. That's all for me. Thanks for taking my questions, guys.

Our next question comes from Paul Johnson of KBW. Your line is open.

When I look at total leverage, it's not unreasonably high by any means, but you're definitely levered probably more near the high end where you've been historically. So a little bit of room left to grow on the SBIC, but I'm wondering if you could tell us, I mean in the absence of any equity issuance that you might do, are you pretty comfortable with leverage where it is today, you think you could take that higher? Any color there would be great.

One thing that's very important to note is we have $87 million in cash on our balance sheet at year-end. And so, when you're looking at leverage, the way we think about it is net leverage, because the timing of cash flows is unpredictable and it happens that at year-end we got a fair amount of cash back including some literally the last business day of the year. And so, we think about it with respect to our cash liquidity as well, which when you do that makes the number a lot lower than what you are suggesting. We are comfortable here. We are comfortable within a range. We have always declined historically to put an exact range on it because of the way we think about it is, we invest one loan at a time and we don't want to create any artificial incentive to maintain some minimum level of leverage, and at the same time we recognize that you can get to the end of the quarter and have an unpredictable situation where you think something may pay off that doesn't or vice versa. And so, we're very comfortable with our leverage where it is. It's moved around in a range. It can go certainly a little higher than where it is and it can definitely be lower, where it's been most of our existence. But we always operate with a significant cushion and have never approached sort of the upper end of what is permitted.

Sure. Is there any portion of that cash balance that's in the SBIC?

There was approximately 15 million in the SBIC.

Okay, thanks. And then my last question just has to kind of do with the dividend. I mean you guys have obviously nicely earned that over the years. Prepayment income has been a big driver there recently and naturally I think we would expect that start to wane a little bit over time. And while you guys have done a great job covering the dividend, does the JV or some sort of off-balance sheet arrangement begin to make sense to help you sustain the ROE at the current level? I know you mentioned it on the last call but I was just wondering if that's still something you're considering.

We continue to look at JV opportunities and other opportunities. We have a significant portion of our non-qualifying asset bucket available for use. But we are not going to do something just because we can or because other people are doing it. Our focus is on doing things that we feel comfortable with, that we've done historically, or that fit in on an adjacent basis with the kind of business we've been running. And so, it may be that at some point we introduce that or some other structure, but to date we haven't seen the need to do so.

Okay. Thanks for taking my questions. That's all I have.

Our next question comes from Christopher Nolan of Ladenburg Thalmann. Your line is open.

What do you anticipate to be the impact – excuse me, want to back up. According to K, 83% of your floating-rate investments are below their floors. So what impact would a Fed tightening of 25 bps have on earnings for the spread?

This is Paul. At 12/31, and maybe I'm looking at a different number than you are looking at, but all of our assets were over their floors except one, and now it's just a matter of a lag. So at this point, any movement in LIBOR is accretive to us fortunately.

Great. Now thank you for the clarification. And then, is the investments more priced on three-month LIBOR, one year LIBOR, I mean where should we think about where the investments are more sensitive to rate changes on the yield curve?

Most of our assets are three-month LIBOR. There's some variety, one month, three month and some others that are predominantly three-month.

Final question is, given the tax law changes some, how does that change the appetite for first lien debt? I mean, are companies looking to lever up or they are looking to raise more equity? I mean, just trying to get a little flavor in terms of how the tax law affected your market.

The short answer is, we haven't yet seen a big change. There was a lot written starting right after the election in November 2016 about what might happen, theoretical math changes on how people might elect to have different capitalization structures, and I think the theory of that has been interesting and it quite apply to big cap companies. But in our markets where we might have an entrepreneur, a family business, a management team, or even sponsors, generally speaking people don't have unlimited access to equity and they've been managing their balance sheets from what we've seen in a very similar fashion to what they were doing before. And that doesn't mean that there won't be some changes and that there won't be some impacts, but we haven't to date seen any significant changes in the market based solely on the tax change.

Right. Okay, thank you Howard. Thanks Paul. That's it for me.

Our next question comes from Doug Christopher of D.A. Davidson. Your line is open.

I have just a couple regarding the expense levels. I might have missed this. The administrative and advisory kind of fee expense continues increases there. Was that related to the expansion, the new office?

No, it's not. It's just a matter of our allocation of expenses across the various businesses. But I would point out that for a long time we were waiving a portion of those fees. So that might be part of the difference.

The reason I ask is, is there a point where BDCs, we talk about the lumpiness, the potential net dispositions over acquisitions and how that can change, we think about the uncertainty of the borrowing potential, financing markets, interest rate spreads, the administrative and the fee basis which seem to be under the control, is there a point where there is some type of leverage to that, is there a point of I guess we would call it optimization in those expenses where they might be leveraged or more consistent?

Sure. It's a good question. Historically, ours has been on a percentage of assets, and as Paul just pointed out, we waived a percentage of them. As we've ramped up, we've gone back to charging for them. But as we get bigger, there is certainly potentials for synergy, but also in our case there hasn't been huge growth in our loan size. So we have increased the number of loans, each of which increases the amount of work and administrative activity surrounding it. And so, there's a lot of components that go into that, but sometimes the growth alone doesn't create efficiency, but if we continue to grow, it certainly might in the future.

All right, thank you.

Our next question comes from Robert Dodd of Raymond James. Your line is open.

Just a follow-up, probably for you Paul, a follow-up to Joe's question about changing from allocation to fee on the tax consequences, just to get on that like one way or another, are there any implications for this change to investment company taxable income which pays the dividend or to allocation of any accrued spill-over income, spill-over and undistributed income to the BDC shareholders?

Sure. I'll take that in two parts. Now, in the carried interest allocation format, which was a structure we just inherited from our predecessor entity, all of the tax attributes across up and down the Operating Company were allocated effectively 20%-80% roughly to the GP and to the Holdco. Now with this change, all of the tax attributes are being allocated to the Holdco. This puts us in line and is consistent with of course the structure of most if not all the BDCs out there which receive incentive compensation as a fee. But from the Holdco's perspective, really the only effective change I think is just the allocation of capital losses and gains, which I talked about, because those kind of pass through the shareholders as a consequence of the BDC tax law. The rest gets taken up into the ordinary income dividend.

Okay. Appreciate it. Thank you.

I'm showing no further questions from the phone line. I'd like to turn the call back over to Howard Levkowitz for any closing remarks.

Thank you. We appreciate your questions and our dialog today. I would 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.

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you for your participation. You may all disconnect.