BlackRock TCP Capital Corp. (TCPC) Q4 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, good afternoon. Welcome everyone to the BlackRock TCP Capital Corp. Fourth Quarter and Full-Year 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. [Operator Instructions] And now, I'd like to turn the call over to Katie McGlynn, Director of the BlackRock TCP Capital Corp. Global Investor Relations team. Katie, please proceed.

Thank you, Candice. 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 statement made on this call are made as of today and are subject to change without notice. This morning, we issued our earnings press release for the fourth quarter and full-year-ended December 31, 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.

Thank you, Katie. I'm here with our TCPC team, and we thank everyone for participating on our call today. I will begin with an overview of our key accomplishments for 2018, and then our CFO, Paul Davis, will review our financial results. After Paul's comments, I will provide some closing remarks before opening the call to your questions. As summarized on slide four of our presentation, 2018 was an active year for TCPC, as we continually look for opportunities to create value for our shareholders. Earlier this month, our shareholders voted overwhelmingly to approve an increase in our regulatory leverage limitation. This provides TCPC with additional operating and regulatory flexibility. Along with this change and in line with our commitment to maintaining an investor friendly fee structure, we lowered the management fee to 1% on assets financed with leverage greater than [indiscernible], and lowered our incentive fee to 17.5%. We also maintained our cumulative total return hurdle while lowering the hurdle rate to 7%. Second, we were pleased that S&P affirmed our investment grade rating after we adopted the modified asset coverage ratio. Moody's also initiated an investment grade rating for TCPC, making us one of only a few BDCs with investment grade rating from both Moody's and S&P. This is an affirmation of our strong long-term track record in private credit investing, and ensures we are well-positioned to maintain our diverse funding sources and low cost of financing. Third, we continue to seek debt financing on attractive and shareholder-friendly terms. Toward this effort, in February of last year, we refinanced our SVCP credit facility with a new ING facility at LIBOR plus 2.25%. And in June, we renegotiated the terms on our TCPC funding facility, reducing the interest rate by 50 basis points, and extending the mature date to 2022. Finally, on August 1, our advisor successfully merged with a subsidiary of BlackRock. As a result, TCPC shareholders benefit from the greater scale and resources available to our advisor, including an enhanced ability to source transactions. We also committed to lowering the administration expense ratio, and gained access to new technological capabilities as part of the transaction. Before moving on to highlights from the fourth quarter, I'd like to make a few comments on the market environment. As you are aware, there was significant market volatility across asset classes in the quarter. The S&P 500 fell 14%, and the NASDAQ lost nearly 18%, its biggest quarterly fall since 2008. Credit markets experienced similar volatility as traded leverage loan and high yield indices fell nearly 5%. While the underlying credit performance of our portfolio was strong, and the impact of the year-end volatility on middle market loans was less pronounced, the disciplined and comprehensive third-party evaluation process we have used since 1999 reflected the decline in valuations that occurred across asset classes between September 30 and December 31. Our NAV declined from $14.51 to $14.13 in the fourth quarter, with more than 90% of the markdowns resulting from the market disruption we saw in the fourth quarter. Our realized loss was from previously markdown positions. Although this market dislocation quickly reversed in January, it's worth remembering that while these periods can create a short-term mark-to-market volatility in our existing portfolio, when more extended, they can also present investment opportunities for long-term fundamental credit investors like BlackRock TCP. Now, on to highlights from the fourth quarter, as shown on slide six, we earned net investment income of $0.40 per share in the fourth quarter, out-earning our dividend by $0.04 and extending a record of net investment income covering our dividend to 27 consecutive quarters. This was accomplished despite a relatively low level of repayment income in the quarter. And today we declared a first quarter dividend of $0.36 per share payable on March 29 to shareholders of record as of March 15. We delivered another strong quarter of originations, totaling $176 million as new and existing borrowers sought our industry expertise, and our flexible and tailored financing solutions. Dispositions in the quarter were $117 million, resulting in net acquisitions of $59 million. Although 2018 was an active year for originations, we maintained our disciplined investment approach. We continue to review a significant number of investment opportunities that execute only a small fraction of those deals. Turning to our investment portfolio on slide seven, 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 3.3% of the portfolio, and taken together, our five largest positions represented only 15.5% of the portfolio. As you can see in the chart on the left side in slide seven, a recurring income is distributed across a diverse set of portfolio companies. We are not reliant on income from any one 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, 93% of our debt investments were floating rate as demonstrated on slide eight. Our successful efforts to position our portfolio have been further enhanced by our primarily fixed rate liabilities. Finally, we increased the capacity of our SVCP facility by $45 million, bringing the total capacity to $170 million. As I noted earlier, we deployed $176 million in the fourth quarter, substantially all of which was in senior secured loans and notes. These included investments in seven new companies and seven 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 also continue to focus on underwriting investments where we are the lead or co-lead underwriter, leveraging our industry expertise and allowing us to set deal terms with solid creditor protection. Our top five investments in the fourth quarter, evidence our commitment to maintaining a diversified portfolio and lending at the top of the capital structure. They include a $40 million senior secured asset backed loan to PSEB LLC, a multi-branded, multi-channel retailer, a $21 million senior secured loan to NEP Group, a broadcast and live events solution provider and a long time borrower that has performed well, and as a result refinanced its capital structure; a $16 million senior secured loan to certify an expense management solutions provider; a $15 million senior secured loan to support a refinancing of our existing borrower InMobi which is a global provider of enterprise platforms for mobile and marketing and a $12 million senior secured loan to Amteck a long time borrower and a provider of cloud-based risk management claims and safety software solutions. Our other investments in the fourth quarter provide exposure to a variety of industries, including business services, software, social media, marketing, and real estate. Dispositions in the fourth quarter were $117 million. These included a $24 million payoff of our loan to Sentinel, a $12 million payoff of our loan to NEP group associated with the refinancing mentioned above, and a $10 million payoff of our loan to Gladstone. New investments in the quarter had a weighted average effective yield of 11.4% and the investments we exit during the quarter had a weighted average yield of 10.9%. The overall effective yield on our debt portfolio at quarter end was 11.4%. TCP sees consistent strong performance, has been a function of our long-term relationships with deal sources, portfolio of companies and other constituents. Our deep industry knowledge and our disciplined approach to sourcing underwriting and managing our portfolio. As shown on slide nine, our dividends have returned $9.92 per share since our IPO in 2012. And as demonstrated on slide 10 TCPC has outperformed the Wells Fargo BDC Index by 52% 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 source deals and build upon TCP's successful 20 year track record in direct lending. Now I'll turn the call over to Paul who will discuss our financial results. Paul?

Thanks, Howard, and hello everyone. Starting on slide 15, we generated net investment income in the fourth quarter of $0.40 per share, exceeding our dividend of $0.36 per share. On an annual basis, net investment income was $1.59 substantially out-earning our dividends for the year. This extends our nearly seven-year record of covering our regular dividend every quarter since we went public. Over this period, on a cumulative basis, we've out-earned our dividend by an aggregate $34 million or $0.58 per share based on total shares outstanding at year-end. Investment income for the fourth quarter was $0.82 per share substantially all of which was interest income. This includes recurring cash interest of $0.67, recurring discount and fee amortization of $0.03 and recurring pick income of $0.08 as well as $0.04 per share 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 fourth quarter were $0.42 per share and included incentive compensation of $0.10 per share and interest and other debt expenses of $0.18 per share for net investment income of $0.40 per share. As Howard noted earlier this month on February 8, our shareholders approved a reduction to our fees reducing our incentive fee rate from 20% to 17.5% producing our management fee rate from 1.5% to 1% on assets financed using leverage of one-to-one and reducing our cumulative hurdle rate from 8% to 7%. These reductions became effective the day following the vote. Had the reduced incentive fee been in effect during the fourth quarter, the impact to our net investment income would have been additional net earnings of more than $0.01. Net markdowns during the quarter of $24.4 million came primarily from mark-to-mark adjustments in connection with year-end volatility as Howard noted. Although the non-traded middle-market tends to be more insulated from this market volatility, our consistent and disciplined valuation process factored in price movements from the traded markets and our comp sets. Our net realized loss of $30 million came primarily from the sale of our position Real Mex legacy special situations investment from before our IPO which had already been marked down on an unrealized basis in prior quarters. Our credit quality remains strong with none of our debt investments on non-accrual at year-end. Turning now to slide 19, we closed the year with total liquidity of $255.0 million. This includes available leverage of $228 million and net cash of $27 million. During the fourth quarter, we increased the capacity of our SVCP revolving credit facility by an additional $45 million to $170 million, further expanding our diverse lending program which includes two low cost credit facilities, two convertible note issuances, a straight unsecured note issuance and an SBA program. Outstanding draws on $150 million SBA program remained at $98 million at the end of the year. Regulatory leverage at year-end which is net of SBIC debt was 0.86 times common equity on gross basis and 0.83 times net of cash and outstanding trades. In connection with their vote to reduce our fee rates earlier this month, our shareholders also approved a reduction of our minimum asset coverage ratio from 200% to 150% which also went into effect on February 9. As a result, we now have additional flexibility to modestly increase our leverage should it be prudent in the investment environment. After considering this amendment to our asset coverage requirement Standard & Poor's reaffirmed our investment grade rating during the quarter and Moody's initiated coverage of TCPC also with an investment grade rating. Making us one of only three investment grade rated BDCs with 2:1 leverage. With our stock trading at a small discount to NAV during the quarter we made modest share repurchases under our algorithm based share repurchase program. I'll now turn the call back over to Howard.

Thanks, Paul. 2018 was a year of volatility with negative investment performance in almost all major asset categories. In this environment of idiosyncratic company and industry shifts we are reminded of the importance of our patient disciplined investment approach. We believe we are well-positioned for the current investment environment for several reasons. For 20 plus years of experience which spans several market cycles is a key advantage in attracting borrowers and deal sources as well as managing risk. Additionally, our robust platform gives us the ability to source unique and attractive investment opportunities. Joining the BlackRock platform has further enhanced our deal flow supporting our selective approach to underwriting. As a leader or co-lead on the majority of the loans we underwrite we take an active role in due diligence, deal structuring, establishing terms and monitoring investments. The direct relationship we form with borrowers is part of this process help to protect TCPC and its shareholders. BlackRock TCP's team is structured so that the deal team member source structure and monitor investments to ensure interests are aligned over the life of an investment. And finally the Blackrock TCP team has deep experience in both performing and distress credit and we use this experience to structure deals that are downside protected. Looking forward, we continue to leverage our risk mitigated platform to pursue attractive investment opportunities. In the first quarter to date including a loan we funded this morning, we have invested approximately $107 million primarily [enforce] senior secured loans. The combined effect of yield of these investments is approximately 10.2%. In closing, we remain relentlessly focused on generating superior risk adjusted returns for our investors while preserving capital with downside protection. 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.

Thank you. [Operator Instructions] And our first question comes from Chris Kotowski of Oppenheimer. Your line is now open.

Yes, good afternoon. I guess the quarter seemed fairly straightforward, but I guess, between covering the dividend 27 times in a quarter in a row and all else being equal, the reduction in the incentive fee should increase earnings and leverage would conceivably increase earnings, and your 30% bucket is underutilized, and could be utilized. And I guess just philosophically, is there room to drive up the base dividend, or is the philosophy that a 10+ percent yield is a darn good place to be, and no need to push that up and just keep generating it with less risk? Philosophically, how do you think about earnings and dividend in that -- in light of all that?

Chris, thanks for the question. Starting with the end of your question, we think your statement is spot on. The level of yield in an absolute low yield environment we think is attractive to investors on a risk-adjusted basis and an absolute basis. Having said all of that, the math you did was all very sensible. It's something that we are thinking about. As you're aware, our shareholders just voted overwhelmingly to give us the ability to increase leverage, and we've been earning our dividend very comfortably without that. So as we talk about our board we will continue to assess our dividend policy going forward.

Okay. And I guess, just secondarily on the market in general, I mean, I honestly cannot remember a December kind of quite like the one we just had. And I'm wondering if the transactions that you've closed in recent weeks, were they impacted by that at all, or are these -- is what you've closed mainly a function of what you were working on in October and November -- and December didn't really have an influence on it or did December change kind of the tone, outlook, pricing in your trend dealings with sponsors and other borrowers?

Hi, Chris, it's Raj, I'll take that one. I agree with you, December was an interesting, but very -- you know, in the scheme of things -- quick and finite period. At the margin, it probably helped a little bit in defending and sticking to certain terms, maybe improving them marginally, but I wouldn't characterize it as a long-lasting change -- fundamental change in the market, but that being said, I think we've always taken a bit more of a differentiated, defensive approach to stick to our knitting and stick to our guns on the things that are important to us. So it helped at the margin, but I wouldn't read more into it than that. And it was obviously a reasonably quick reversal on a number of things that will flow through Q1, I believe.

Okay. That's it from me, thank you.

Thank you. And our next question comes from Robert Dodd of Raymond James. Your line is now open.

Hi guys, one quick follow-up to that one. On the reversal of what happened in Q4, can you give us any color, a rough opinion of how much of the NAV markdown that you experience is kind of back if we would look at values today, obviously, the range referred as anywhere from here kind of 40% to two-thirds, I mean, where would you characterize your portfolio mix in that reversal?

Yes, there's been a substantial snapback. We're not going to give an absolute number for two reasons. One is the quarter is not yet over. And as we've seen volatility can continue, and the other thing is although we flow through prices on a lot of our marks on a very regular basis, they don't all flow through at the same time. So it would be a little bit of mixed and matched numbers if we did that -- and we like to whenever we give out any disclosure make sure that it is completely consistent. But directionally, what you're saying is absolutely accurate. The snapback has been dramatic and very noticeable and I think a lot of the markdowns, certainly on liquid securities in our book were not a function that anything was actually transacting at that level, but simply based on market spreads and comparables, moving down and on in some cases very low or no volume.

Got it, got it. Appreciate that. On the prepaid fee line and I realize obviously it could be volatile, it's really hard to kind of nail down. It was down slightly versus the prior quarter, but we've seen lower amounts even this year. So would you say that is there anything structural, you think, going forward in prepays that's going to result in it being lower levels in terms of is your portfolio relatively younger with higher rates, is that affecting it and/or did -- obviously, the market volatility deter people prepaying in Q4. I mean, any color on shifting dynamics in that number?

Yes, I'll try to give a little color there. I think it's hard to predict as the overarching point, it's always been episodic at a company by company level. I think when rates were falling or people were seeing that to be the case there might've been a little bit of an element of driving a higher prepaid, but I think the flipside is that we are able to monetize our precisions longer, I think, that's a good thing. I think you'd also see an element where the portfolio itself is generating its own opportunities from existing companies and if you ask me a preference of investing in a company you know and one that's performing, I think that's -- you know, for the sake of a one-off payment, the ability to have a longer stream of income, that's actually a good trade as well. But to answer your question of something structural or something that will change the dynamic, you know, I don't think that's the case. I think it's just the nature of these companies. Some will grow up and grow out of this segment into maybe a more efficient type of capital market. Some will have an organic or an event that drives a prepayment like a sale of the business, but it's very hard to predict those, and -- but I wouldn't call it any structural change other than the dynamics in the portfolio that have always existed.

Got it, got it. I appreciate that. And then one more if I can on -- in the fourth quarter, you formed a JV obviously with Newtek, it is public record. The purpose to originate loans -- commercial loans, middle market and small businesses, I mean, historically, and you emphasized it kind of on this call, Howard, your track record is really focused on originating and controlling your own originations. With this JV, particularly if it's smaller business, what expertise do you guys bring to the table for truly small business, given your historic track records, you know, in middle market, which I wouldn't exactly call small businesses? So can you give us any more color on what you're doing with that JV and what you bring to the table?

Sure. Yes, so I'll try that one as well. I would just say it's early days. I think we find that for select -- we haven't been active in sort of the -- what I'll use -- the phrase the run of the mill or the more normative senior loan JVs where we have deployed that approach or in that 30% bucket, it's trying to find an area where there is a good opportunity, where there is a partnership that makes sense versus doing it entirely ourselves, and really that -- where it makes sense is on something that hasn't added origination benefit, absolutely does not outsource control or a diligence or a discipline of making our own decision on capital deployment that I would characterize a new tech JV consistent with that approach. To answer your question on what expertise we have here, I think it's the same lens we apply to our companies. It's an industry based review. There's probably more of an asset-heavy whether it's real estate or operating assets in the nature of these loans that we will see coming through. And you know, we'll asses that as they come in. Again, it's early days, but it's really an additive origination channel deploying our same approach from a company or an asset collateral basis and keeping structures that are very conservative, maybe even more conservative given the segment of the companies we're talking about for downside protection. So I think all of that's very consistent with how we do things in the more traditional middle market, with the benefit of the source things that we may not normally source given the size and the location of these companies.

Okay. Got it, appreciate it. Thank you.

Thank you, and our next question comes from Fin O'Shea of Wells Fargo. Your line is now open.

Hi guys, good afternoon, thanks for taking my question. I will start a small question on the funding profile. It looks like you have about 228 available, which would bring you a -- correct me, if I'm wrong up to 125 to one and then within that you have converts due this year, so you know perhaps this sets the stage for a bit of change perhaps a larger facility for the private credit family there or on the other hand perhaps richer unsecured note profile if you're going to drive higher leverage, so can you give us some context on what's historically been a pretty diverse revolver notes and debentures split, if we can expect any change in the mold going forward?

Sure. Thanks for highlighting, Fin. And we should note actually, it's morning here, so good morning as well. Thanks for highlighting the diversity of funding on our balance sheet, which is comprised of two distinct, very distinct facilities and three bond yields, two of which converts in the SBA facility. We very intentionally have staggered our funding sources. None of them is overly large. They're from different sources, because we recognize the importance of the right side of the balance sheet and we don't want to be overly dependent on it. And so, we now have the ability or we've currently got aggregate leverage commitments of about a 1.40 billion, we now have the ability to take on more assets and more leverage on the balance sheet. And we plan to pursue the same process that we have, we have the additional benefit of having the double investment rate grade ratings from S&P and Moody's, which is great and as we look at our balance sheet going forward. I think it's fair to assume that we will use the same philosophies that is additions to our leverage profile will come from some combination of these different types of sourcings, leverage facilities bond deals depending on what we find to be most more attractive and what gives us the best mix both from a cost basis and a flexibility basis.

All right. Sure, thanks for the color. And then perhaps just another global question appreciating your comments earlier on the market disruption being very acute, can you kind of give us a higher-level view of what you think despite that it was acute, it was very sharp and felt in all other markets that I'm aware of. Can you give us your view on what that means for private credit? That's so many transactions went through at the same aggressive terms. It was like the whole episode never happened in our market. Can you give us kind of a view on how this changes your posture perhaps this year going forward?

So I think you're highlighting a fascinating issue. Historically, when markets have traded off and you can go back to whatever period of time you want, but in more recent times certainly '08, '09, 2011 with the debt ceiling and the '15, '16, you've seen movement in the private markets not nearly at the same amount or speed but they tracked what's going on in the traded markets but as people have pulled back on their terms and as I think you're highlighting the private deck markets seem to ignore that during the sell-off that year-end and you can reach one of several conclusions given the snap back in the market you can say those people who didn't change their terms were right and didn't get bothered by all this noise and people who thought the world was ending and it sure looks much more like it did in the fall today, you can also I think rightfully question why is it that people aren't getting more concerned when there is a sell-off in the market and adjusting their terms and keep proceeding simply because they have the liquidity and I guess the way we view it is we take all of that into account, we take pride in having been long-term providers with long-term locked up capital that don't change your terms. Having said that, we are always constantly assessing what's going on in the traded markets, because if there's truly much better value in the traded markets, we like to have the flexibility to go there. You lose some advantages and diligence and documentation, but things are really cheaper. And that's a question we were asking ourselves as we were pricing deals at year-end and going into the beginning of the year. Our activity wound up being a little slower than that, but we were looking at that at every deal, where are comparable things trading and what is the tradeoff there and it does seem that that was a little less important to a lot of other market participants.

Thank you.

Thank you. And our next question comes from Christopher Testa of National Securities. Your line is now open.

Hi, Howard. Thanks for taking my questions. Just you had mentioned the -- that your advisor merged with another BlackRock vehicle and obviously BlackRock itself is going to allow you to scale and get a lot more opportunities and sponsor relationships. But just curious given the volatility in the syndicated market, is this creating an environment where certainty of closes getting far more valuable for many different sponsors and I've also augmenting your sponsor relationships on top of BlackRock or do you expect that to be relatively the same?

I'll try that one. I think certainty of closes absolutely a value and it's -- I think, it's always been the case and certainly what was we approach the market in outsourcing relationships it's something that, I think we have credibility and lead with that certainty of close does stem from, the ability to point to a track record of points from, I think an ability to quickly and fundamentally understand the business or a situation. Certainly, within the BlackRock context that continues to exist for us and the broader team. I think it'd be what we can demonstrate and give that story to a broader audience, which we've been doing with some early signs of benefits, across the platform. So, the things like, timing like Q4 add to that message, even though it was a bit short lived, But to your point, certainty of close among other things is absolutely a value that was defined the prior legacy TCP platform and continue to define the platform today with a new and existing sourcing context.

Got it and would you say that, given the short bout of volatility that it had some obviously hung deals in the syndicated market or you seeing some of those participants come to you who may not have otherwise have done it yet or are you thinking more along the lines of we will need to see sustained volatility in the syndicated market before you're getting more calls from different sponsors that you may not have done business with in the past because they're very scared of about the syndicated market?

Well, it's some combination of those. So we have outside of TCPC been able to benefit from some of the hung deals, these are things we would look at in TCPC, but just given what we've done to-date, we didn't think the asset was appropriate for the kind of stability. I think it's a little bit more volatile than the kinds of things we're looking to originate in TCPC, so cross platform, we are able to take advantage of it, it's helpful to us, it's helpful to our market positioning. And I do think also that there are certainly borrowers who have seen this dislocation. And another situation, we've been involved with, again, outside of TCP capital, where I think a borrower waited too long and is now really paying a price for having waited for the public markets. People are realizing that, volatility can happen, and it can impact you. And there's real value to having a long-term counterparty. And this is something that before the acquisition by BlackRock, I think TCPC was known for being part of a manager that did what it said and having a long-term track record. There's also no question that now being part of the world's largest asset manager, there's a new group of people that is interested in doing business with us wanting a relationship with us over the long-term and seeing us as being part of a greater solution for their funding needs as they grow their businesses.

Got it, okay, that's great color, Howard. And then just I guess looking at basically your ability to source, you be incumbent borrowers, are you expecting maybe, fewer incumbent borrowers and more new companies as you keep expanding on BlackRock's ability.

We have a very nice record of renewing incumbent borrowers. If you look at our follow-on financings and our disclosures we talked to -- about half of the deals we've been doing have been to existing investors and then also when we highlighted our larger investments during this quarter, you will note that Ventiv, InMobi, and NEP, those were all existing borrowers. So, three out of the large five were deals that we were doing with these existing borrowers. So I would expect us to continue to have a balance of that going forward.

Got it. And one more if I may just, I appreciated the color you gave to Robert, on the new tech JV just wondering if you have an idea on, how big you think that might potentially be and also how about JV factors NCU going above one-to-one leverage given that for JV itself is going to increase your all and economic leverage wall?

Yes, I think it's probably early to try and find a spot even if we were well underway, I think it's always going to be opportunistic and making sure that assets work versus targeting a certain size. I think the market, is a big one in terms of that segment for companies, but will be very judicious and how we deploy into it. So, I don't want to quote something that is implied that we're targeting certain size versus economics. In terms of the leverage, the leverage on the JV are those will be, essentially at the JV level. So, for us, it will be very consistently the build equity portion of it in and the context of leverage in our balance sheet. I don't know that necessary changes that TCPC profile versus keeping the right level of leverage at the JV.

Okay, now. Yes, I was asking in terms of because obviously if you take a standard JV and we went two terms of leverage, if that does become a big part of your portfolio. Obviously, the economic leverage is higher than then what's shown on balance sheet. So I was just kind of getting out how you guys think about the math on that?

Yes, I think one other thing to think about is, is just how we approach risk management, which is none of our portfolio positions. Today are very large. And that's been the case historically. So we don't have as Raj was saying sort of a target on this thing. But as we think about constructing our portfolio, we're very cautious about getting letting anyone part of it get too big.

Got it. Okay. And, just a comment, not a question; congrats on being one of the best [indiscernible] to actually appropriately market book would spread widening. So I appreciate that and appreciate your time today.

Thank you. And thanks for the questions, Chris.

Thank you. And our next question comes from Nick Brown of Zazove Associates. Your line is now open.

Hi, I just have two questions actually. First, can you explain the sequential decline and interest income this quarter? I just was a little surprised, given that you seemed like you were originating new loans at a higher rate than what was getting paid off?

Primarily just a result of the decrease in prepayment income compared to prior quarter.

Okay, that makes sense. And then, the other question I have is really a clarification of a question. I think the first question that was asked. As far as your -- to the extent that you actually grew your portfolio and we're generating increased NII per share, wouldn't you -- so are you saying you would retain more of that income and pay taxes on that? Or would you -- should we expect that incremental profitability will be reflected in higher dividends?

Our dividend policy today is set on a quarterly basis in connection with our board. So you've been an investor for a long time, you may recall that we have raised the dividend. We have done special dividends. We have left it at its current level for a considerable period of time due to the low rate environment and what we thought was a very adequate yield and wanting people to feel very comfortable with our coverage which I think they do with 27 consecutive quarters of well covering the dividend. But as our balance sheet and income statement may change over time, we will continue to analyze that have discussions with our board reflect the views of other important constituents and continue to reassess our dividend policy.

But to the extent that you did that you were generating more income and not paying out as dividends then you would have to, would you have to pay in you got to pay income taxes, I assume on that?

Correct. Yes, there is a small excise tax.

At year-end.

Yes at year-end that you pay based on the formula of undistributed income.

Okay. All right, just want to make sure I understood that. Thank you very much.

Thank you for the questions.

Thank you. And our next question comes from Christopher Nolan of Ladenburg Thalmann. Your line is now open.

Hi, my questions been answered. Thank you.

Thanks.

Thank you. And our next question comes from Chris York of JMP. Your line is now open.

Good morning guys, and thanks for taking another Chris's question. In light of some movement in the valuation of your $83 million equity investment portfolio and then the new leverage capacity and then your partnership with BlackRock, can you provide us with a strategic update on how you are using your equity portfolio today to drive value for shareholders because it appears you have some a pretty cool investment and then you got some restructured investments in the portfolio but you also have some sizable non yielding equity investments in specialty finance company?

Are you talking about 36th Street Chris or what maybe you can give us more guidance on what you're pointing to?

Yes, it's Great America and 36th Street with a specialty finance company.

Yes, I think the way I will take 36th Street and maybe I'll ask Howard to touch on Great America, but the way we've structured that, that's a JV and the equipment leasing business that we've had for I think over a year now and that is yielding position. There is an equity component and a debt component that at the margin has a combined a 10% return on the aggregate position to us plus a participation and a dividend above that. So I think you have to look through all pieces of that position and how it was structured to be consistent with the JV -- GAAP JV requirements, but those are yielding positions, in fact they're quite well yielding because when you think about the levered return on that without giving exact numbers for each position they are, I believe in excess of the effective yield in the portfolio. So it's just you got to parse through that and we can take that more detail discussion offline but for that one at least, it is a well yielding position for the equity, the aggregate dollars invested.

And the other position, I think you're asking about Great American is quite simply, this is a group that we have worked with for many years. There are a handful of institutions that have liquidators that focus on hard assets liquidations including in retail. We've been doing these deals going back to 1999. We've partnered with them in deals. In this case, we're in a structure. It doesn't have a contractual return but it actually does have dividend income. So there is some yield coming out of that and from time to time, we will look at situations like this, we actually review a lot of them. I wouldn't expect to see a large number on the balance sheet. In this case, we've got a really great relationship and partnership with them and it's been symbiotic and it creates some other opportunities for us which is why we've done it and we still get yield out of it. So when we think about our ability to use our 30% basket and do some of these other things, what we're often trying to do is do something that's not just a yield generator but something that can have a broader impact, small dollars invested relatively speaking and have a broader impact on our business.

Yes, and I'll just add to that, Chris, even beyond the 30% basket, philosophically we have not really taken an approach of leading or supplementing the ability to win deals with a co-investment and a straight equity co-investment portion. You will see in some, in many quarters actually the ability to get warrants or some other capital gain potential component on top of a good yielding debt position that is different. And I think a little bit more consistent with a strategy than equity co-invest. Occasionally, they'll have to Howard's point something that has a variable component upon, upon a contractual return like 36th Street, like the GACP but again what we do, we think about as far as strategy and the portfolio, this is a credit yield oriented portfolio and opportunistically if we can take advantage of a situation to get something on top of that or where it's appropriate, we will look to do it. But I don't think you should expect us to be looking for a lot of equity co-invest as a substitute for the credit, the credit positions.

Got it. Yes, a comprehensive answer on all fronts and totally cognizant of that, note that 36th Street that's paying a coupon there. So this only other follow-up to that would be given that you are expanding leverage, you're going to have more capacity, would you want to add more to those type of investments with Great American 36th Street that could provide you other opportunities kind of piggybacks on the strategic opportunities that you entered into with Newtek as well?

Yes, when we do portfolio construction, we're very broad in what we look at. We are constantly seeing different ideas. And at the same time, we're very selective in what we do. So if you cut through it, most of the portfolio is still just straight off middle market loans. There are a few of these things we've talked about. There could be more of them over time. We don't have a strategic imperative or either or even go to necessarily do more things that are distinct to the extent that they make sense, that they're increasing by themselves and or have some larger benefits. You may see some of those on the balance sheet but they've got to make sense in comparison with just doing conventional middle market loans which are what comprise the vast bulk of our balance sheet today.

Got it. And then one additional question and I echoed some of the comments on fair value that Chris shared. But looking at one specific investment, the mark on your sub-debt to Edmentum was relatively unchanged and it remains an [accrue] investments. And the reason why I bring it up is it differs materially from another BDC view on the valuation for this investment. So could you explain maybe your confidence and the outlook for Edmentum and then if you do have differing views on the issue or is the reason why you don't potentially look at purchasing their position in Edmentum at this point of levels and then potentially picking up some value for shareholders?

Yes, good questions. And I'll try to answer those comprehensively. I think if you look back on the position mark for Edmentum going all the way back to when it was we first did the restructuring and took as a group which ownership of the business, there would not be a single quarter where you would see any of the marks including from the investment bank. That was a market maker across the various holders. Part of that results in very slight differences in the overall enterprise value of the business, not meaningful but for the majority of folks and certainly the majority owners, pretty consistent values, some folks have taken an approach where they will take a waterfall approach on the first or the second of the senior or the junior and some have taken meaning the senior will be marked higher and then the junior will be the residual value. Some have taken a more yield based approach where they are going to mark the senior at a discount based on a yield and then the junior as well. So I think like 36th Street, it's important to look at the aggregate capital structure which may or may not be easy from where you sit. But if you look at it, I think it will make more sense. From our point of view in the business, it has certainly been under our stewardship stabilized and actually growing and performing better. So we put out quoting an exact value or exit or timing directionally, it's going in the right direction. And then finally in terms of your last question of taking advantage of differences in value or perspective from other holders, we entirely agree with you and we have tried to do that in some cases successfully, meaning, if people don't have a different view from us proposing to buy it and so I would wholeheartedly agree with that statement and I think we've seen that come to fruition occasionally, when it's been available. Sometimes it's many times, it's not available at the price people will state but where it is and we feel there is value there we have taken advantage of that.

Got it. Great color, Raj. Thanks. And then last one I guess another portfolio company, your credit facility and I pronounce this right, Kawa Solar was written down and it's [Indiscernible] has had strengths historically in your portfolio. Can you give us some color maybe qualitatively on the performance and then comfort in the issuers ability to cover that?

Yes, I think we touched on that one. I want to say last quarter but if you as a reminder, we have that was a business we restructured and unlike in Edmentum our decision there was really to exit and wind it down given the float going forward prospects what we thought was the best way to defend our position. We did know sell effectively the operating business after taking ownership in Q3 and in Q4, really the effort and going forward is just to harvest the remaining assets which are mostly comprised of cash if you will. The way I think about this is really it's a receivable that we're winding down versus an operating entity which also explains the change in the rate to effectively zero percent on the remaining assets. So that one is really wind down, then you will see that decreasing over time versus being an operating entity. But the Lion's share of the effort to exit has been completed as of the latter part of Q3 last year.

So the 25 roughly fair value is secured by hard assets?

The fair value that is getting a exact breakup majority of that is against cash that will as it comes down and comes out will reduce the position. There are some residual components that have an income and earnings component that we will look to maximize. But beyond that, I don't think we've disclosed the breakout but could the components are essentially those components.

Sure. That's helpful. Just as you know investors trying to understand that there is fair value?

Yes, understood.

Okay, great. That's it from me. Thanks, guys.

Thank you. And that concludes our question-and-answer session. I'd like to turn the conference back over to Howard Levkowitz for any closing remarks.

We appreciate your questions and our dialog today. I'd like to thank our experienced, dedicated and talented team of professionals at 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 concludes the program. You may all disconnect. Everyone have a great day.