Earnings Labs

BlackRock TCP Capital Corp. (TCPC)

Q4 2023 Earnings Call· Thu, Feb 29, 2024

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Transcript

Operator

Operator

Ladies and gentlemen, good afternoon. Welcome, everyone, to BlackRock TCP Capital Corp's Fourth Quarter and Full Year 2023 Earnings Conference Call. Today's conference call is being recorded for replay purposes. [Operator Instructions] And now I would like to turn the call over to Katie McGlynn, Director of the BlackRock TCP Capital Corp. Investor Relations team. Katie, please proceed.

Kathleen McGlynn

Analyst

Thank you, Emily. 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. Additionally, certain information discussed and presented may have been derived from third-party sources and has not been independently verified. Accordingly, we make no representation or warranty with respect to such information. Earlier today, we issued our earnings release for the fourth quarter and full year ended December 31, 2023. We also posted a supplemental earnings presentation to our website at www.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 and Presentations. These documents should be reviewed in conjunction with the company's Form 10-K, which was filed with the SEC earlier today. I will now turn the call over to our Chairman and CEO, Raj Vig.

Rajneesh Vig

Analyst

Thanks, Katie, and thank you all for joining us for TCPC's Fourth Quarter and Year-End 2023 Earnings Call. I will begin the call with an overview of our fourth quarter and full year results and then provide an update on our proposed merger with our affiliate BDC BlackRock Capital Investment Corporation or BCIC. Phill Tseng, our President and Chief Operating Officer, will then review the investment environment and our portfolio activity. Erik Cuellar, our Chief Financial Officer, will review our financial results as well as our capital and liquidity and pertindetail. Finally, I will wrap up with a few comments on the outlook and opportunities we see ahead before taking your questions. Let's begin with a review of highlights of our fourth quarter and full year results. I am pleased to report that for the full year 2023, TCPC delivered net investment income of $1.84 per share, an increase of 20% over 2022. Our annualized net investment income return on equity for the year was 14.5%. Given our predominantly floating rate portfolio and higher proportion of fixed rate liabilities, our net investment income for the period benefited from strong credit performance, higher base rates and marginally wider spreads. Net investment income for the fourth quarter was $0.44 per share, and our run rate NII at the end of the quarter again remained among the highest in TCPC's history as a public company. During the fourth quarter, our NAV declined 6.4%, reflecting in part the special dividend of $0.25 we paid on December 31, in addition to our regular dividend. Excluding this special dividend, NAV declined 4.5%, primarily due to net unrealized losses on 3 portfolio companies, Edmentum, Thrasio and Securus. We will discuss each of these companies in more detail, but I would like to emphasize that the write-downs in…

Philip Tseng

Analyst

Thanks, Raj. I'll start with a few comments on the investment environment before providing an update on the portfolio and highlights from our investment activity during the fourth quarter. Starting with the [indiscernible] environment. While economic uncertainty resulted in a slowdown in private credit transactions in the first half of 2023, we saw a modest pickup in the fourth quarter. This was driven by pockets of activity in both sponsor and nonsponsor opportunities, refinancing and follow-on financings to support existing portfolio companies. Over the past 9 months or so, we've seen an increased bifurcation within the direct lending market. Many have observed more borrower-friendly trends such as tightening pricing and covenant light deal structures. These are especially prevalent in the upper middle market, given the robust return of banks. However, the core middle market where we focus, has been less impacted by this trend, but we continue to leverage our industry expertise to opportunistically source and invest in the scope fuels that present attractive risk reward opportunities. We remain disciplined and continued path on a substantial number of less attractive opportunities, particularly when we believe that pricing does not [indiscernible] reflect the corresponding risk or terms don't provide adequate lender protections. In the fourth quarter of 2023, we invested $40 million primarily in [indiscernible] loans, deployment in the quarter included loss of 5 new and 1 existing portfolio company. Consistent with our strategy, our emphasis remains on companies with established business models and proven core customer bases that make them more resilient. In reviewing the opportunities, we emphasized transactions where we are positioned as a lender of influence. That is where we have a direct relationship with the borrower and the ability to leverage our more than 2 decades of experience in negotiating deal terms and conditions that we believe…

Erik Cuellar

Analyst

Thank you, Phil. As Raj noted, our net investment income in the fourth quarter benefited from the increase in base rates over the last 18 months as well as wider spreads on new investments. Net investment income of $0.44 was up 10% versus the fourth quarter of 2022. On an annual basis, net investment income was $1.84 per share, an increase of approximately 20% over 2022. Today, we declared a first quarter dividend of $0.34 per share. We remain committed to paying a sustainable dividend that is fully covered by our net investment income regardless of the interest rate environment, as we have done consistently over the last 12 years. Investment income for the fourth quarter was $0.88 per share. This included recurring cash interest of $0.76, recurring discount and fee amortization of $0.03 and pick income of $0.06. Pick income remains in line with the average of our history. Investment income also included $0.02 per share of dividend income. Operating expenses for the fourth quarter were $0.35 per share and included $0.20 of interest and other debt expenses. Incentive fees in the quarter totaled $5.3 million or $0.09 per share. Net realized losses for the quarter were $16,000 or less than $0.01 per share. Net unrealized losses in the fourth quarter totaled $38 million or $0.66 per share, primarily reflecting unrealized markdowns on 3 investments, which Raj discussed earlier. The net decrease in net assets for the quarter was $13.3 million or $0.23 per share. As Raj noted, the credit quality of our overall portfolio remains strong. As of December 31, we had 4 portfolio companies on nonaccrual, representing 2.0% of the portfolio at fair value and 3.7% at cost. Turning to our liquidity. Our balance sheet positioning remains solid, and our total liquidity increased to $349 million at the end of the quarter. Relative to our total investments of $1.6 billion. This included available leverage of $247 million and cash of $112 million. Unfunded loan commitments to portfolio companies at year-end equals 4% of total investments were approximately $55 million, of which only $35 million were revolver commitments. Our diverse and flexible leverage program includes 2 low-cost credit facilities, 2 unsecured issuances and an SBA program. Our unsecured debt continues to be investment-grade rated by both Fitch and [indiscernible]. Given the modest size of each of our debt issuances, we are not overly reliant on any single source of financing and our debt maturities remain well laddered. Additionally, we are comfortable with our current mix of secured and unsecured financing and do not have any immediate financing needs. Combined, the weighted average interest rate on our outstanding borrowings modestly increased during the quarter to 4.29% and is also up only 138 basis points since March of 2022, while base rates have increased more than 500 basis points during this period. This is the result of having over 73% of our borrowings from fixed rate sources. Now I'll turn the call back over to Raj.

Rajneesh Vig

Analyst

Thanks, Erin. Reflecting on our historical performance since we took TCPC public in 2012, we've delivered a 10.1% annualized return on invested assets and an annualized cash return of 9.7%. We are very proud of these results, which include performance during periods when base rates were substantially lower than they are today. We believe this performance remains at the high end of our peer group and speaks to our ability to consistently identify attractive middle market opportunities, have premium yields and to deliver exceptional returns to our shareholders across market and economic cycles. Looking ahead, we see significant opportunity to continue to build upon our track record of success. Traditional lenders continue to retreat from lending to the middle market. At the same time, more borrowers view private credit at an attractive and stable source of long-term capital. Middle-market borrowers are increasingly turning to private credit for their financing needs, given certainty of execution, flexibility and close partnerships that can provide value beyond what bank financing has historically offered. As a pioneer in direct lending, we believe TCPC is uniquely positioned to benefit from growing demand for private credit. Additionally, we are excited about our combination with BCIC and the opportunity we see ahead to deliver solutions to our borrowers and to structure transactions to deliver attractive returns to our shareholders. And with that, operator, please open the call for questions.

Operator

Operator

[Operator Instructions] Our first question today comes from Christopher Nolan with Ladenburg Thalman.

Christopher Nolan

Analyst

I guess turning on to new investments in the quarter. Was most of these investments for sponsors who are investing in new companies or just to support a sponsor's existing portfolio company.

Philip Tseng

Analyst

Yes. Thanks, Chris. This is Phil. It's both. It's about, I'd say, close to about half and half. We did support some new platforms. I mentioned with [indiscernible] in the prepared remarks, the gain is but there are a number of add-ons to existing portfolio companies.

Christopher Nolan

Analyst

Okay. And then are you seeing a decrease in dividend income from portfolio companies in general.

Rajneesh Vig

Analyst

Sorry, you mean, In terms of our NII, Chris?

Christopher Nolan

Analyst

Yes, the dividend income that you guys would receive from a portfolio company, are you seeing that decrease?

Rajneesh Vig

Analyst

No, we've seen it go the other direction. We've had -- if I'm -- if I'm understanding the question correctly, keep in mind, our spreads are fixed and the base rate is the reference rate generally through '23 has been quite positive. I think we -- and we've seen obviously enough to give results that drive a couple of specials on a couple of dividend increases. I think the only company I can -- or not in company, but investment that I can highlight has had a little bit of a different experience has been our JV at 36th Street, in part because, unlike the rest of our portfolio they are doing fixed rate leases with some duration that they have been higher on average on a return on asset level, but also have the ability to get some quite good advance rate at the JV level. But I wouldn't call it material. Obviously, that's the 1 area I carve out. But other than that, as a results highlight, there's been quite positive dividend -- sustained dividend improvements increases, and I think we've really tried our best to send that out to shareholders in a responsible manner.

Christopher Nolan

Analyst

All right. I'll follow that offline. Last question. The 2024 notes, how are you guys thinking about refinancing that, given your comments higher for longer, is your inclination to finance that with bank borrowings or to do another fixed rate issue?

Erik Cuellar

Analyst

Thanks, Chris. I'll take that question. We're definitely keeping a close eye on the market. We're very happy with the way the market has opened up for the BDC sector, and we like what we're seeing. We also are happy that we have flexibility in our credit facilities. But certainly, we're going to be looking to address that need in the next couple of quarters.

Operator

Operator

[Operator Instructions] Our next question comes from Paul Johnson with KBW.

Paul Johnson

Analyst · KBW.

On the new nonaccrual ratio, I know it's a nonaccrual. It's been couple of other BDC portfolios. But I'm just wondering if you can kind of give some color as to kind of the storyline there maybe? And then how much approximately would you say -- you said -- you mentioned that you've had other winners in that space. Now how much of your portfolio are these e-retailer or e-commerce roll up.

Erik Cuellar

Analyst · KBW.

Yes. Thanks for the question. I'll try to work several questions. I'll answer them. Just to remind everyone, the exposure of [indiscernible] in the portfolio is approximately 1%. So by no means [indiscernible] but every company is important. We'll come back to you on the broader exposure, but it will be significantly more than that. The history here is I think maybe not that different in other areas of high growth -- you have seen an industry or some industry, I would say, emerge from a dramatic movement to online spending and I would call the amortization -- Amazonization of the world where people have moved from buying things and source to online with significant spend and the ability to support several letters of scale with a dramatically exciting long-term equity opportunity. As in other areas of fast growth, the companies, I think the valuations got a little bit ahead of the companies. And then you had a serious NSX company Cogen, where supply chains were and supplies were a little constrained due to COVID, then ordered in a little bit of access to provide for buffer for anticipated spend and then spend being a little bit impressed because of recessionary issues. So the way I would describe it is good businesses but stretched balance sheets as a result. And -- but exactly that will absolutely support several companies and leaders of scale and long-term winners. I think my comment of our exposure here as we do in every other industry, we spend a lot of time thinking about industry dynamics and ultimately, the types of players you wanted to finance. And I would call the current period a little bit of indigestion stemming from those issues. But indigestion in the context of the long-term set of successful businesses that can exist here. That may have needed a little bit of a push in some cases, lender-led to fix the balance sheet, provide some financing or consolidation, which is -- for both, which is happening. And I think we're fortunate that we're in a position of being able to do that with both knowledge and the skill set that we have many prior examples of in this portfolio and others that we manage. So I'll pause there. The aggregate across the sector is closer to -- but as states reiterate it's 1%.

Paul Johnson

Analyst · KBW.

Got you. That's 7% you said for sort of that retail roll-up strategy? Across the participants in that sector.

Rajneesh Vig

Analyst · KBW.

And there are other -- by no means is the only activity around addressing those issues. I think some other specifics will be released and other companies in the next maybe this week earlier this week. Stay tuned.

Paul Johnson

Analyst · KBW.

Got it. Okay. That's very good color. And then if you kind of take out [indiscernible], Securus or rise sort of decline you take those 3 out, what were the marks on the reps of the portfolio was stable? Was there any sort of broad markdown elsewhere in the portfolio or [indiscernible]

Rajneesh Vig

Analyst · KBW.

Yes. I would say I would characterize it as generally stable. There are a lot of companies that have movement. I don't want to put any numbers about it being accurate. But I think you can see from the general performance that it's pretty stable. And to put the NAV movement in context, 75% of it is tied to these 3 businesses. Some of it is tied to the dividends going out the door and then the remainder of Bottarini tied to a very stable low performing portfolio.

Paul Johnson

Analyst · KBW.

And then last question just on the pipeline bigger picture, activity picking up, curious on your thoughts where the pipeline sort of stand today versus maybe 6 months ago? And high-quality deals? Or is the market still sort of looking on this return of the M&A market.

Rajneesh Vig

Analyst · KBW.

Yes. It's a good question, Paul. So -- so I would say that the pipeline is seeing a pick up and we start seeing a pickup in activity last quarter in Q4 of last year. I would say that the pickup continues to be gradual rather than a step function higher. So I think that there is still more to come in terms of buyers and sellers willing to transact more refinancing activity and so on. I think we're still early days on that research end. But I'd say, based on what we're hearing and talking to the market participants, both intermediaries, business owners, sponsors and so on. And we do expect that activity to be being fully higher this year than last year. And whether that's more weighted towards back half, it's still TBD, but we're hopeful.

Operator

Operator

Our next question comes from Robert Dodd with Raymond James.

Robert Dodd

Analyst · Raymond James.

Going back to [indiscernible] question first. [indiscernible] the file bankruptcy, lender-led financing, can we presume that there will be incremental capital deployed to Sao maybe Q1, Q2, but in kind of the first half of the year that there will be additional financial support provided to that business to to work it to.

Rajneesh Vig

Analyst · Raymond James.

Correct. And just to be specific, look, when we go through these things, these types of challenged credits, you have a -- I guess I'll add some more color. You have an array of tools to facilitate a fix. When it's a good business in a challenged balance sheet and a good sector, I would say that's something that's workable and then you decide what is the best way within which to facilitate the changes or the fundings that you're providing on the lender. In the case of a bankruptcy, a lender-led bankruptcy, I should say, that is -- provides benefits that you want to offset to what to do to the company if anything. And here, the benefits of this process were felt to outweigh any challenges of the bankruptcy, and I would call it a 1 that can be done very efficiently including protecting the nature and the terms of financing provided, particularly because there were other discussions being had around this and given interest in the company and the sector, and this was helped to be something that I think we net-net benefit from. But to answer your question, jointly, yes, there will be additional funding support as the bankruptcy filing will highlight which is for document now.

Robert Dodd

Analyst · Raymond James.

Got it. Got it. And I mean, Perch, I believe, is another 1 of [indiscernible] now as the fair value deteriorated over a few quarters. Is it looking likely to be following the same kind of past for ratio? Or is that 1 being handled differently by you and the sponsor.

Erik Cuellar

Analyst · Raymond James.

Yes, no. I wish I could be specific, but I can probably be specific in another year. So the answer in many of these will need to just think about scaling and consolidating and addressing balance sheet issues that are a result of some macro issues. So I think ultimately, all of them will have -- we'll look at and maybe utilize a set of these tools, whether it's funding, clean up balance sheets and maybe even consolidating, I would include perch in that content. And I think stay tuned for something for a part year on those comments. But the answer is essentially yes.

Operator

Operator

[Operator Instructions]. We have no further questions registered. So I will hand back to the management team for any closing comments.

Erik Cuellar

Analyst

Thank you. We appreciate your participation on today's call. I would like to thank our team for all their hard work and dedication and our shareholders and capital partners for their confidence and continued support. Thanks for joining us. This concludes today's call.

Operator

Operator

Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.