BlackRock TCP Capital Corp. (TCPC) Q3 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, good afternoon. Welcome everyone to the BlackRock TCP Capital Corporation Third Quarter 2018 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 before we begin the Q&A session. And now, I'd now like to turn the call over to Katie McGlynn, Vice President of the BlackRock TCP Capital Corporation Global Investor Relations team. Katie, please proceed.

Thank you, Heather. Before we begin, I'll 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 third quarter ended September 30, 2018. 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. I am here with our TCPC team, and we thank everyone for participating on our call today. I will begin, with a review of our third quarter highlights, followed by an overview of our portfolio of activity. Our CFO, Paul Davis, will then review our financial results for the third quarter. After Paul's comments, I will provide some closing remarks before opening the call to your questions. Now, let's begin with highlights from the third quarter, which are summarized on slide four of our presentation. We delivered another strong quarter of originations, totaling $164 million as new and existing borrowers seek our industry expertise and our flexible and tailored financing solutions. It was also an active quarter for dispositions, which totaled $211 million, resulting in net dispositions in the third quarter of $48 million. Despite our platform's robust pipeline of potential deal flow, we continue to deploy capital and are willing to let our balance sheet shrink when appropriate as we did this quarter. As shown on slide five, we earn net investment income of $0.42 per share in the third quarter out-earning our dividend by $0.06 and extending a record 26 consecutive quarters in which investment income exceeded our dividend. And today, we declared a fourth quarter dividend of $0.36 per share payable on December 31st to holders of record as of December '17. Turning to our investment portfolio on slide six, at quarter end, our portfolio had a fair market value of $1.6 billion, 92% of which was in senior secured debt. We held investments in 95 companies across a wide variety of industries. Our largest position represented only 3.4% of the portfolio, and taken together our five largest positions represented only 15.4% of the portfolio. As you can see in the chart on the left side of Slide 6, a recurring income is distributed across a diverse set of portfolio companies. We are not reliant on income from any individual portfolio company. In fact, on an individual company basis, over half of our portfolio companies contribute less than 1% to our recurring income. Additionally, over the last several years we have positioned our portfolio to benefit from a rising rate environment. At quarter end, 92% of our debt investments were floating rate as demonstrated on Slide 7. Our successful efforts to position our portfolio have been further enhanced by our predominantly fixed rate liabilities. On August 1, Tennenbaum Capital Partners joined the BlackRock credit platform. As part of the world's largest asset manager we have access to an even larger origination network, additional proprietary investment opportunities and a deep risk management platform. Together, we are able to add more value to our borrowers and deal sources by providing a full range of strategies and risk profiles across the global credit platform. This allows us to remain highly selective in our investments and to continue to focus on transactions where we have a competitive advantage and can add more value to our clients. Lastly, after careful consideration and input from our stakeholders including our shareholders, lenders and rating agencies, our board has approved a reduction of our minimum asset coverage ratio from 200% to 150% effective November 7, 2019. Additionally, we plan to seek shareholder approval to reduce our asset coverage ratio at a special meeting of shareholders which we anticipate holding at the earliest practical date. We weighed a number of factors including potential risks associated with increased leverage, added flexibility to optimize risk/reward for shareholders in a variety of market environments and the increased regulatory headroom that a higher asset coverage ratio provides. Ultimately, we determine that having the flexibility to modestly increase our leverage will be beneficial. We are also committed to maintaining our investor friendly fee structure. As such, contingent upon receiving the required consents in conjunction with the reduced asset coverage ratio, we plan to lower our base management fee on assets in excess of 1x leverage to 1% from the current rate of 1.5%. Lower the incentive fee rate to 17.5% from the current rate of 20% and lower the hurdle rate for incentives to 7% from the current rate of 8%. Our cumulative annualized hurdle on a total return basis will remain unchanged. Regardless of any incremental changes in our regulatory leverage, we remain focused on fundamental credit analysis and generating superior risk adjusted returns for our shareholders as we have done since inception. We are also pleased to report that S&P has affirmed our investment grade rating after our adoption of a modified asset coverage ratio. And Moody's has initiated an investment grade rating for TCPC. Having an investment grade rating with two of the top rating agencies is an affirmation of our strong long-term track record managing private credit and allows us to continue to pursue diverse funding sources and maintain our low cost of financing. Moving onto our portfolio performance, while the overall portfolio remained strong NAV declined from $14.61 to $14.51 in the third quarter due to three legacy positions that we mentioned last quarter, Real Mex, Green Biologics and AGY. As we discussed on prior calls, we continue to work through each of these positions to maximize value. In the case of Real Mex, we exited the position post quarter end in line with where the position was marked as of 9:30. AGY continues to be a fundamentally good company despite earnings volatility and Green Bio missed projections, but received an equity infusion from its strategic owner during the quarter. These positions aside the credit quality of our portfolio remains strong. As of September 30, we did not have any loans on non-accrual other than loans associated with our investment in Real Mex, which is now sold. Of the $164 million deployed, substantially all was in senior secured loans. These include investments in seven new companies and five existing portfolio companies. Follow-on 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. We are able to understand our borrower's businesses and offer them creative financing solutions, which ultimately allows us to set deal terms that include solid creditor protections. 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 $39 million senior secured loan in connection with refinancing of our long-term borrower Dodge Data & Analytics, a company that provides information and insights on construction projects, a $27 million senior secured loan to Eratech Group, a network of independent broker dealers providing a range of services to financial advisors across the U.S., a $25 million senior secured loan to Webdotcom, a provider of value-added web services, a $13 million senior secured loan to TEAM Software, a leading SaaS platform for security contractors and building service companies and an $11 million senior secured loan to Donuts Inc, a registry of top-level web domains. Our other investments in the third quarter provide exposure to a variety of industries including construction and payment processing, automotive and publishing. Dispositions in the third quarter totaled $211 million and included a $36 million payoff of our loan to Nephron Pharmaceuticals, a $36 million payoff of our loan to Actifio and a $22 million payoff of our loan to Enerwise. Although it was an active quarter for dispositions we remain disciplined in redeploying the capital. New investments in the quarter had a weighted average effective yield of 9.8% and the investments we exited during the quarter had a weighted average effective yield of 11.3%. The overall effective yield on our debt portfolio at quarter end increased to 11.7% as the portfolio continues to benefit from modest increases in LIBOR. TCPC's consistent strong performance has been a function of our long-term relationships with fuel sources portfolio companies and other constituents, our deep industry knowledge and our disciplined approach to sourcing underwriting and managing our portfolio. As shown on slide eight, our dividends have returned at $9.56 per share since our IPO in 2012 and as demonstrated on Slide 9, TCPC has outperformed the Wells Fargo BDC index by 23% over the same period. Over the past few years, we have seen many new entrants into direct lending and substantially more capital seeking investment opportunities in the middle market. Against this backdrop, being part of the world's largest global asset manager greatly enhances our ability to build upon TCP's successful 20-year track record in direct lending. While we benefit significantly from BlackRock scale informational advantages and resources our leadership strategy and disciplined underwriting process remain unchanged. Now, I will turn the call over to Paul who will discuss our third quarter financial results. Paul.

Thanks, Howard, and hello everyone. Starting on slide 14, net investment income was $0.42 per share exceeding our dividend of $0.36 per share. This continues our more than six-year record of covering our dividend every quarter since we've gone public. Over this period on a cumulative basis, we have out-earned our dividends by an aggregate of $32 million or $0.54 per share based on total shares outstanding at quarter end. Investment income for the quarter was $0.84 per share substantially all of which was interest income. Recurring cash interest was $0.65, recurring discount and fee amortization was $0.07 and recurring PIK income was $0.05. The remaining $0.06 per share was from prepayment income, including both prepayment fees and unamortized OID. 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 for the second quarter were $0.42 per share, and included incentive compensation of $0.10 per share and interest and other debt expenses of $0.17 per share for net investment income of $0.42 per share. We realized net gains during the quarter of $1.1 million or $0.02 per share primarily from the payoff of our IGN loans. As Howard noted, our unrealized losses of $10.4 million or $0.18 per share were primarily comprised of write-downs on three positions we've discussed in the past, one of which we exited post quarter end. Partially offsetting these losses is a gain on our investment in 36th Street, as the company reported record deployment in the third quarter. 36th Street is an equipment financing company in which we made a non-controlling investment in about two years ago, which has been successfully ramping its portfolio, and which has helped to diversify our portfolio into a niche area of specialty finance. Our credit quality remains strong, with debt from only one portfolio company, a non-accrual at quarter end, representing 0.01% of the portfolio fair value. Turning to slide 18, we closed the quarter with total liquidity of $260.3 million. This includes available leverage of $223 million, and cash and cash equivalents of $90.3 million, and is net of pending settlements of $53 million. Outstanding draws on our $150 million FPA program remained at $98 million. Regulatory leverage at quarter end, which is net of SBIC debt, was 0.79 times common equity on a gross basis, and 0.75 times net of cash and outstanding trades. With our stock trading at a slight discount NAV during the quarter, we made modest share repurchases under our share repurchase program, which is based on an algorithm. I'll now turn the call back over to Howard.

Thanks, Paul. We continue to see strong demand for our lending solutions from middle-market companies across a wide variety of industries. We recognize that there continue to be increasing amounts of capital targeting middle-market lending. That said, the middle market is broad and there are many fundamentally good companies that need access to creative borrowing solutions we provide. We continue to see demand from borrowers for our unique and nimble financing solutions. And as I mentioned earlier, the breadth of products available across the BlackRock platform make us an attractive partner to our deal sources. At this point in the quarter, our pipeline is robust and includes many transactions that are well within our historical yield range. In the fourth quarter to date, through November 7, we have invested approximately $102.7 million primarily in five senior secured loans, with a combined effective yield of approximately 11.9%. Looking ahead, we believe we're well positioned for continued growth for several reasons. First, our nearly two decades of experience investing in middle-market companies across multiple market cycles. Second, our long-term relationships with deal sources and portfolio companies which provides us with the ability to source unique investment opportunities. Third, our focus on credit quality and downside protection. Fourth, our low cost of capital and diverse funding sources which provide access to a variety of attractively priced equity and debt financing alternatives. Fifth, our interests have always been and will remain closely aligned with our shareholders. A finally, our partnership with BlackRock has expanded our market-leading private credit platform with significant scale, resources, and geographic research that provide enhanced opportunities for our shareholders. Looking to the future, our leadership strategy and robust underwriting process remain unchanged. We'll 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 where we focus on capital preservation. In closing, we're excited about the future. We would like to thank all of our shareholders for your confidence and your continued support. And with that, operator, please open up the call for questions.

Thank you. [Operator Instructions] Your first question comes from Fin O'Shea with Wells Fargo Securities. Your line is open.

Good afternoon or morning guys. Thank you for taking my question. Just to start out on the fee structure reform. Appreciating the, of course, the lower base and incentive rates. With leverage going higher, I would think that the hurdle would also go higher, if anything. So do you view this as sort of an exchange or is there another philosophy driving the lower hurdle rates that you propose?

Thanks for the question, Fin. The proposal that we're brining forth to our shareholders has several components to it. It's a reduction in the management fee to the extent that our assets exceed one-to-one leverage. It's a reduction in our incentive fee. And then, as you point out, also a reduction in the hurdle rate. We viewed it all as being part of a process of continuing to focus on having an industry-leading fee structure. We will retain something that we have that's unique, which is a cumulative lookback, which is something we introduced and believe is very important. It's an institutional structure. And the fact that we're putting all of these changes together is really an effort on our part to make sure that we are continuing to have, in all aspects, an industry-leading structure. The 7% hurdle rate seems to be most common. If we'd had it in the past it wouldn't have made any different in our earnings. In fact, if we'd had this retroactively the big difference would've been that our incentive fee would've been lower with the proposed 12.5% reduction from the current levels, from 20% to 17.5%. But we just think that it makes sense as long as we're going to make the change to have this going forward on a long-term basis. We've clearly been in a world where spreads have been compressed for a long time, and rates have been lower. And we think this is a good industry-leading structure.

Sure, agreed. That's -- shareholders would've benefitted from this format from the start given your actual return on equity. One more question, on generally deal flow, assuming that those pipelines are sort of merging at this point between you and BKCC, can you give us some color on the, say, just quantity and quality of the expanded funnel that you are now seeing.

Sure, Fin. It's Raj, I'll take that one. I guess I would say a couple of things. One is, keeping in mind that the gestation period for these deals sometimes can be lengthy, and that we've just -- we've been closed for several months now. Meaning, things that are rolling through now have been things we've been working on for several months. They all have their own lifecycle. But to answer your question more directly, the quantity certainly is incremental. We have been seeing more opportunity as a joint platform. And that benefit, I think, is going both ways. We're seeing more through their side. They are benefiting from things that we see. So I think that the early days of the thesis, the data points are positive. How and when those close on things have a natural lifecycle that is not immediate, we do expect more data points going forward that we can talk about. But in terms of the quantity and the quality, both are up and additive and we're excited about the ongoing prospects.

Thank you for that color. I'll jump back in the queue. Thank you.

Thank you. Your next question comes from Robert Dodd with Raymond James. Your line is open.

Hi. So kind of following up on the fee, so I think, Howard, you said that the new fee is contingent on shareholders who -- the leverage adjustment, obviously. So, as it stands right now, you have Board approval as of November of next year. So just hypothetically, if the shareholders do not give approval would it be your plan to not use the additional leverage, or would it be the plan to -- fee structure when you see incremental leverage whether that's shareholder approval or the Board timing coming up a year from now. Can you give us just more color on how those things will interact?

Sure. Robert, that's a good question and an interesting question. Our focus right now is on putting this in front of the shareholders. We think it's the right thing to do. We are strong believers in doing things for the shareholders that benefit them over the long period of time. And so we're going to be putting this forth in front of the shareholders and giving them a change to vote on it. And it is our hope that they will do so, and expectation. And we'll be happy to visit after that anything that's going to happen in the future. I think at this point it's a little premature to address that though.

Okay, fair enough. So one way or the other, if this goes through what would be the new target leverage for your business in terms of not just -- I mean obviously ratios of the leverage, which is what's the discussion here, but then there's also total leverage when you take your SBICs into account. I presume obviously the rating agencies have historically had, not just regulatory leverage guidance, but also total. Have they given you any guidance on what's acceptable to them under this new framework and what actually is your target going to be?

Sure. This is Paul, I'll take that one. Historically, we've never had a target leverage ratio. And we'll continue to manage our leverage consistently as we've done in the past, which has been very conservatively. Just because we have the ability to take on additional leverage doesn't necessarily mean we'll use it. For example, we've had the SBIC program in place a long time, and are still not fully drawn on that because we continue invest as is appropriate, not necessarily just because we can. The rating agencies have put in targets. If we exceed those leverages then we'll have conversations with them again about the rating. Both of them came out at about 1.3 times. S&P came at 1.25 and Moody's was at 1.3 times.

Okay, got it. I appreciate that. And then one more, if I can, just on the originations and dispositions in the quarter, Howard, I mean obviously you've got a good track record of not doing deals just to do deals. But what were kind of the drivers, if any, were particularly material this quarter on, and just -- exits are hard to predict. But was there anything changed in terms of prior terms this quarter that you didn't like or decision to exit certain -- or reduce exposure to certain industries or anything that stood out over Q3 and maybe into Q4 about the decision making on which deals you're going versus not doing, and dispositions if you had any, say, in those because sometimes you don't.

Yes, it's Raj, and I'll try to take that. I think the short answer, Chris, is that no there really isn't. We've always said -- sorry, Robert. We've always said that the deal cycle is very chunky and it's hard to predict. I think sometimes you've seen that in a larger amount of refinancings or prepayment, sometimes you've seen it in a lower amount. And so we've really not tried to make that linear. This quarter, there were a couple of deals that were a little larger in size that repaid with good outcomes to us. And that may or may not happen again next quarter, it's hard to predict. But in terms of your question, there really isn't anything dramatically different that we've looked for or tried to avoid other than really just trying to stay disciplined on the deployment itself and looking for good risk-adjusted opportunities.

And maybe even to just give you a little follow-on granularity. Our largest investment, Q3, was an amended financing and an expansion of an existing lender albeit at a lower rate, so that brought down our rate a little bit. Our largest finance in Q4 were our financings to date, as we disclosed, are over $102 million for five weeks, and at 11.9%, was a larger loan that was originally scheduled to be in Q3. And timing got moved a couple of times. And so this is just the lumpiness of the business. It is coincidental, not driven by any identifiable meaningful factor. Q – Robert Dodd: Okay, got it, I appreciate it. Thank you.

Thank you, Robert.

Thank you. Your next question comes from Chris Kotowski with Oppenheimer. Your line is open.

Hi, yes, good afternoon. Thank you. Just on the fee structure change, I just want to make sure I have it right obviously the base management fee that just apply a reduction applies just to the amount above one times debt but the incentive fee would presumably apply to the entire amount, right?

That's correct, yes, the entire incentive fee would now be 17.5% over or 7% total return cumulative hurdle.

Okay, so that's quite a give up for you. Next does not happen right as this passes or only once you cross the 100% leverage threshold?

Yes, that would be the adjustment in the fee structure is what happened at the same time that that our change in leverage, our change in leverage requirement would go into effect.

But what I'm asking is if you stay below the one to one does your incentive fees stay at 20 or does it go down to 17.5 anyway?

If we're staying below as a mechanical matter but this has been approved, it goes into effect.

Okay, all right. And then I guess sort of the more big picture question is throughout 2015 and 2016, you're kind of regularly growing the portfolio and quite rapidly I thought at the time and now we've had three or four more flattish quarters I guess and I'm wondering is that just the kind of natural lumpiness in variability or is it that the environment is riskier or pricing not there or some combination of all the above or?

I think it's like a multiple test question, it's probably Selection D, it's a combination of all the above. We've always said, we've never really targeted growth for the sake of growth maybe it's a bit of a smaller dollar function as well but we've been doing the same things and I think positioning the portfolio to be defensive over that same timeframe. There is definitely more, more competition at the margin today than in a few years past. I think we've always said, we don't look in the mainstream areas for the deal flow versus trying to find pockets that are interesting in the sourcing channel. So I think it's a little bit of all the above but again each quarter the dynamic of whether we grow or shrink a little bit driven by the lifecycle of an individual deal that aggregate up tends to be the outcome that is hard to predict. So I don't think this is a change in the opportunity set, I do think each quarter has its own character given the underlying deal flow and you've seen that go both ways in the past.

Okay. And I guess we've been reading a lot about increasingly weaker covenants and leveraged lending, Janet Yellen is talking about, Jim Grant writes about it. It's discussed by the regulators and all that, I'm going to assume not so much of an effect for you but I think the view is generally having highly structured loans.

Correct, I mean when Janet Yellen talks about our portfolio, it'll be interesting day but there's a lot of names in there that no one really recognizes and I think that's a function of where we're seeing the deal flow from and the true middle market, it also is an area that I think we have a little better ability than the more syndicated loan market to hold the line, that may mean there are a few more deals that go a different route, if they have that option but to answer your question, we are certainly holding line on the right type of structures with protections including covenants but also the documents which are maybe not financial measure but certainly an area that contains a lot of rights that we put a priority on.

All right, that's it from me. Thanks.

Thanks, Chris.

Thank you. Your next question comes from Ryan Lynch with KBW. Your line is open.

Good afternoon, and thanks for taking my questions. The first one has to do with the other credit ratings you guys obviously now have credit ratings. Investment grade rating from Moody's and I believe you're only one of 3 BDC's to do that and then S&P maintain your investment grade rating I believe your only one of 2BDC is to do that, so can you maybe just give us some background on how you're able to achieve this because I think that's a pretty impressive feel and what this really means for you guys going forward?

Ryan, thanks for calling that out and for acknowledging that. We have a long history of managing, investment grade rated leveraged vehicles we at TCP as a manager and clearly now as part of BlackRock but going back to the first fund that we operated in 1999. We've worked with the rating agencies over the years and developed a long term track record and organization and operations that I think they appreciate and as we thought about the decision to increase our leverage or put us in the position to be able to do so and give us more regulatory headroom. It was something that we were very careful about and I think we've discussed this in a number of forms which is that we didn't rush to do this. We wanted to make sure that if we were going to do it, we had the proper conversations with all of our important counter parties in the rating agencies are included in that group and so to us making sure, that we understood where they were coming from in this process was a key part of making the decision and we were pleased to be able to have S&P continue with their view and Moody's added to that most recently and for those to happen concurrent.

This is Paul. I would add to that, some of the things on which the rating agencies were focused strong obviously we've been doing this for 20 years that was very helpful to them the fact we've covered our dividend every quarter since inception was a very helpful to them. Our stable portfolio value has been was very helpful. We have very diversified right side of the balance sheet. We've got great access to capital markets. All of these things came together and we're very pleased to have an organization that has been performing strongly and as well positioned for growth and for continued stability and dividend coverage and I'm glad the rating agencies saw those things and were pleased to be able to have both Moody's and S&P giving us investment grade ratings now.

Got it. That's helpful and that's great. Now that the BlackRock transaction is has officially been closed. I know it's still pretty early on you guys really been on that platform for about three months but I know you gave a couple things that you thought, reasons for things you'd benefit from now that you're actually on that platform been operating on there, can you just talk about maybe what is the biggest change is the biggest benefit you guys have seen in this early period from being on the platform?

Sure, I can try to touch on that and others can jump in. I think part of it we touched on which was, that their footprint and brand is second to none if you will. I think leveraging that in the context of our day-to-day for new relationships whether it's through intermediaries or other constituents that are tied to the platform or to be honest even existing folks that we have relationships with that we can broaden and deepen certainly on the opportune widening the funnel side of it there is a clear early benefit and I think ongoing benefit. I would say the other thing that we have seen some benefits on early on and will deepen is you have a platform to here with BlackRock that is a meaningful holder across just about every asset class with a very deep and intensive risk management system that can track you know track things across sectors, across markets, industries and to extent you can benefit from leading indicators by even down to company. There's a there's an insight here that we haven't fully leveraged, I think we're still learning, but whether it's a risk management benefit or just the ability to find additional opportunities because of changes and the external environment, there's a ability to, there's, I think of a good potential to harness that on our platform and our asset class that is kind of more on the com then we can really define today. Obviously the resources from compliance you know, risk management as I mentioned, just a very deep middle and back office platform is all additive there's a mentorship and an excitement from our folks on growing with them over the years as professionals that we've seen some qualitative elements on so there are numerous and they're early it so it's hard to pinpoint a lot of exact items, but those are some of the categories I would highlight that we know we expect to put more meat on the bone to as years ago by quarters go by.

That's helpful, and then with the passage of the increased leverage, did you guys mentioned? Did you guys plan on changing your strategy and I know some guys have targeted moving up to a little more senior strategy. Have you guys decided whether you guys are going to do that have that approach or just the business has as it's always been which has been really successful?

We don't currently have any plans to make a significant change in our business as you pointed out, the business works very well the way it is and so our current thinking is that we will keep executing in the manner that we have been.

Okay. And then, one last one I guess it's maybe more of just a comment may be following up on Robert Dodd's question with the leverage, I would just say, I know you guys haven't provided leverage guidance in the past. But I would say with the increased leverage, I mean there's a wide range of leverage now that you could run at and I would say not providing leverage or any sort of rain, you put a very wide range. I think it makes it really hard for investors to really understand how you plan on running the business going forward. I mean, leverage has a major impact on the ROEs and the risk of your BDC, so I think not providing any sort of guidance on that, I think leaves a lot of uncertainty about how you guys are going to operate the business going forward, so I would just encourage you know going forward as you guys think about this I think any sort of guidance you could you could provide even if it's a wide range of leverage guidance I think would be very helpful for investors and myself going forward?

Thank you for the comment, we will take it under advisement. Yes, we have historically stayed away from that because we think if you set it as a floor it can create some artificial incentives, which a something we would definitely not do. In fact, you've seen us let our balance sheet shrink the last two quarters. And if you set a ceiling, you can sometimes be in a position where you think you're getting some payoffs that don't happen or really wanting to do a deal that you ought to do, but bouncing up against it. And so, we've been hesitant to create artificial constraints that would have an impact on how we run the business day-to-day. We have been very focused on investing in loans one at a time that makes sense being very careful about our risk, not at any time putting ourselves in a position where we're close to a regulatory max or didn't have sufficient liquidity and it's absolutely our intent to continue to run the business with those same principles in place, we now do have more flexibility, which is a nice thing to have both from an operating and just from a headroom perspective. With respect to the regulatory capture the extent the markets become more volatile, but we're not expecting to do anything sort of significantly different with respect to leverage in this in a short period of time.

And Ryan, I might add to that. I know some of the -- our peers have given some pretty wide ranges, we did say and we did announce in our release, that we intend to continue to operate in a manner that keeps us investment grade, which is I think, also consistent with those periods that have made similar announcements.

Yes, that makes sense. I understand those comments and those constraints and why you don't provide just -- it just leads to a lot of uncertainty of a major component of your business, so that's all my questions. Thanks for the time today.

Thank you, Ryan.

Thank you. Your next question comes from Christopher Testa with National Securities Corporation. Your line is open.

Hi and thank you for taking my questions today. I would just wanted to ask does BlackRock seem to take into account the overhang TCPC stock seems to be primarily around the uncertainty surrounding what might happen in the future with BKCC, has there been any discussion about this, do they seem inclined to make an announcement on the future of what they want to do with this vehicle?

Chris, thanks for the question. BKCC is a separate distinct legal entity and they make their own announcements and have their own independent board and investment committee. So I think it might be appropriate to direct that comments to them. We are getting organizational synergies on deal flow and with our exemptive order, but as of today the entities are distinct.

I understand. I guess maybe a better way to phrase it is, does BlackRock see that, TCP's stock price is, really under a lot of pressure, despite the company's performance being, still, very strong and understanding that there's something outside of the performance that's weighing on that.

So we will share your comments and invite you to do the same.

Yes. All right, that's fair enough. And I know you said, there's currently no plans to make any significant change in the business with regards to the originations you now have the lower hurdle rate and the ability to go above one-to-one, is there a potential for maybe some new product offerings and possibly your lower yielding investments coming from, new sponsor relationships or new products at BlackRock will enable you to offer that would make that feasible and only feasible to put on the balance sheet over one-to-one?

We don't currently plan to make any huge changes in the way we're operating the business. If you look at our originations in Q3, there's a pretty broad range of the yields on there from high to low, the difference is about maybe 400 basis points and some quarters, it's wider than that. And so, yes, this gives us a little bit more flexibility and an environment where we notwithstanding the recent increases, rates have been low for a very long time, and then quickly has been some yield compression in the market. And so, some deals that in the past might have been priced at one level are probably a little tighter today, you wouldn't see that from our book, where are effective yields have been in a very tight range for the last six, almost seven years, taking up really slightly this year with the increase in LIBOR and so, yes, this gives us a little bit more flexibility which can be helpful with respect to any given loan or investment, but we are not planning to have some significant change.

Okay, yes. That's fair. And I just want to just ask a question on green biologics, if I can, the fair value of the cost was mark down to 28 from 52 on the overall position, especially the convertible notes on the senior secured term loan mark down to 13 and 17. Just wondering, what specifically in quarter drove these pretty historically negative marks? So if there was anything new any new headwinds that are better facing a company, that are different from past quarters?

Yes, the company has struggled to make its numbers and that's continued and it's gotten an equity infusion and in connection with the equity infusion and the reevaluation of the various securities in the capital structure the position was marked down.

Got it. Okay. All right, those are all my questions. Thanks for your time.

Thank you.

Thank you. Your next question comes from Chris York with JMP Securities. Your line is open.

Good afternoon guys, and thanks for taking my questions. So the fee change associated with the pursuit of additional leverage is nice representation of alignment from BlackRock, but I'm curious whether the manager has considered directly investing in GDP, which has become common from leading alternative asset managers to show alignment with BDC shareholders?

We as management and our Board of Directors have been frequent buyers of the stock. And so, that has been true since we've gone public with respect to BlackRock itself, that's a different discussion. But I think, we have shown our alignment from those people that are most directly involved, you also see in connection with the decrease in the incentive fee rate, which by the way was not prompted by any outside inquiry, but was something that we decided to do internally when we decided to go to the shareholders with their request increase leverage, we thought it and we're going to make a change in the fee, we looked at all components of it and that's always been our view that we ought to try and stay a shareholder friendly as practical in that regard. And so that is a, significant current give up in that that I think, shows a real commitment with respect to other investments in the shares we'll see what happens.

Okay, sounds good. And then Howard or maybe even Raj, this question is on strategy. You've had your equity investment 36 street for about three years, which is appreciated nicely and curious, what is your willingness or likelihood that you become a controlling equity investor in the portfolio company and where you could start putting some of these loans on your balance sheet?

I would say at the moment, that's pretty limited, the business has been slow to start, if you will, but it was a de novo initiative with an operating team that, comes out of the industry, we thought it was an interesting way to enter into a space that we think has very good risk adjusted opportunities but from a bite size and from a sourcing arrangement a little different than what we do. So, we I think we kind of approached it a little risking the cat a little differently, which seems to be picking up and working now. So, I know both because of a strategy no change of strategy and not breaking what seems to be working concept I think we would rather just let it run its course continue to grow as it has been doing and support it, in a way that we think is versus making any change to into their it's kind of operations today.

And then, can you remind me, is that a yielding or non-yield investment?

I'm sorry, can you repeat that question?

Is it provided? Is that investment 36 three, providing income today.

It is, this is Paul Davis. There are two components, there's a debt component and equity component and it's definitely growing income for us.

Okay. Is the equity component accruing?

Yes.

Okay. And then Paul, you said, you activated a troubled investment post quarter, and what was that investment and then the mark on that investment?

That was a real mix?

And then, do you have the market to exit?

We exited about the double, where we marches at 930.

Okay, that's it from me. Thanks yes.

Thank you.

Thank you.

Thank you. And your next question comes from Derek Hewett with Bank of America Merrill Lynch. Your line is open.

Good morning, everyone. Howard or Paul, could you discuss your thoughts on your capital structure going forward since the BlackRock deal has closed now and given the potential for higher leverage at this point, would you fund any sort of incremental portfolio growth with your revolving credit facility? Or would you want additional flexibility with some sort of bond issuance giving your investment grade rating and then also the BlackRock affiliation.

Derek. Thanks for joining us, and it's good to have somebody on this coast who realizes its still morning out here. I think what you suggested highlights are alternatives. If you look at page 18 of our presentation, which shows our diversified sources of funding, we have six different sources of funding. We've got the SBA, we have two different credit lines, and three different note issues, and it's intentional. We've diversified our sources of funding by type, by size, so that we have the flexibility to optimize our balance sheet, both our cost and liquidity, and also our risk, and so that we are not dependent on any one source. And clearly, the confirmation of the investment grade rating, the addition of Moody's are helpful from the perspective of a number of lenders, and so, today we have adequate liquidity, but as we think about it for the future, we have a series of options, and we will keep you posted along with rest of the market as soon as we are ready to make a decision on going forward with something new.

Okay, great. Thank you.

Thank you.

Thank you. And I'm showing no further questions at this time. I would like to turn the call back over to Howard Levkowitz for 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 BlackRock 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, and you all may disconnect. Everyone have a wonderful day.