BlackRock TCP Capital Corp. (TCPC) has demonstrated its ability to consistently deliver strong financial performance and attractive returns to shareholders, even in the face of a dynamic and challenging market environment. With the successful completion of its merger with BlackRock Capital Investment Corporation (BCIC), the combined entity is poised to capitalize on the growing opportunities in the middle market lending space.

For the fiscal year ended December 31, 2023, TCPC reported annual net income of $38.5 million, annual revenue of $177.7 million, annual operating cash flow of $89.5 million, and annual free cash flow of $89.5 million. These robust financial metrics underscore the company's ability to generate consistent and reliable income for its shareholders.

In the first quarter of 2024, TCPC reported adjusted net investment income of $0.45 per share, an increase from $0.44 per share in the prior quarter. The company's annualized net investment income return on equity for the quarter was 14.7%, reflecting the benefits of relatively higher base rates and spreads.

During the quarter, TCPC's net asset value (NAV) declined 6.4%, primarily due to net unrealized losses on portfolio companies, including investments in Amazon aggregators Thrasio and Razor, as well as the equity investment in Edmentum. The write-downs were largely the result of circumstances specific to these companies, and the majority of TCPC's portfolio companies continue to report revenue and margin expansion.

Business Overview

TCPC is an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a business development company (BDC) under the Investment Company Act of 1940. The company's investment objective is to seek to achieve high total returns through current income and capital appreciation, with an emphasis on principal protection.

TCPC invests primarily in the debt of middle-market companies and small businesses, including senior secured loans, junior loans, mezzanine debt, and bonds. The company's investments may include an equity component, and it may also make direct equity investments. TCPC's investment operations are conducted through its wholly-owned subsidiaries, including Special Value Continuation Partners LLC (SVCP), TCPC Funding I, LLC, TCPC Funding II, LLC, TCPC SBIC, LP, and BCIC Merger Sub, LLC.

The company has a diversified portfolio of investments across a wide range of industries, providing diversification and minimizing concentration risk. As of March 31, 2024, TCPC's portfolio had a fair market value of approximately $2.1 billion, with 91% of the investments in senior secured debt. The portfolio consisted of investments in 157 companies, with an average portfolio company investment of $13.5 million.

Financials

TCPC's financial ratios demonstrate its strong financial position and ability to generate consistent returns. As of March 31, 2024, the company's current ratio was 5.91, and its quick ratio was 5.91, indicating ample liquidity to meet short-term obligations. The company's cash ratio of 4.43 further underscores its robust cash position.

TCPC's leverage program, which includes credit facilities, unsecured notes, and SBA debentures, provides the company with a diverse and flexible financing structure. As of March 31, 2024, the company had total liquidity of $409 million, including $286 million in available leverage and $121 million in cash. The company's net leverage, excluding SBIC debt, was 1.08x, well within its target range of 0.9x to 1.2x.

Investment Activity and Portfolio Performance

During the first quarter of 2024, TCPC invested $20 million, primarily in senior secured loans, across 4 new and 3 existing portfolio companies. The company's emphasis remains on companies with established business models and proven core customer bases, which it believes are more resilient across economic cycles.

TCPC's portfolio performance has been mixed, with the majority of its portfolio companies continuing to deliver revenue growth and margin expansion. However, the company's investments in Thrasio, Razor, and Edmentum have faced challenges, leading to net unrealized losses in the first quarter.

Thrasio, one of the largest Amazon aggregators, opted for a balance sheet restructuring via a Chapter 11 filing in February 2024, which TCPC supported. The company expects Thrasio to emerge with a lower and more manageable debt structure, as well as a leaner and more efficient operating profile, allowing it to remain a leader in the sector.

Razor Group, another Amazon aggregator, addressed its challenges through a strategic combination with Perch, solidifying the combined entity's position as a global leader in the space. TCPC believes that further consolidation and cost optimization are likely to continue in this industry, ultimately leading to fewer, larger-scale, and better-capitalized vendors.

Edmentum, an online learning provider, is navigating a reversion to a more normalized but still positive demand environment, as the spike in demand during the pandemic has since corrected. However, digital education and remote learning services continue to grow in popularity, and Edmentum remains well-positioned in this industry.

Outlook

The market environment has been evolving, with a broader repricing observed in 2024 so far. While the upper middle market or large-cap direct lending market has seen more borrower-friendly trends, such as tightening pricing and covenant-light deal structures, the core middle market, where TCPC focuses, has been less impacted by these trends.

TCPC continues to maintain a cautious approach to new investments, focusing on companies with strong market positions, experienced management teams, and multiple avenues for growth. The company remains well-positioned to capitalize on attractive investment opportunities in the middle market lending space, leveraging its expertise and strong balance sheet to generate value for shareholders.