Company Overview
BlackRock TCP Capital Corp (NASDAQ:TCPC) is a leading business development company (BDC) that has weathered the ups and downs of various economic cycles with a steadfast commitment to its investors. Over its 12-year history as a public company, TCPC has navigated turbulent market conditions, leveraging its deep industry expertise and disciplined investment approach to deliver consistent returns.
BlackRock TCP Capital Corp. (TCPC) was formed on April 2, 2012 as an externally managed, closed-end, non-diversified management investment company. The company was created through the conversion of its predecessor, Special Value Continuation Fund, LLC, from a limited liability company to a corporation in a non-taxable transaction, marking the start of its journey as a publicly traded entity. TCPC elected to be regulated as a business development company (BDC) under the Investment Company Act of 1940.
The company's investment operations are conducted through several wholly-owned subsidiaries, including Special Value Continuation Partners LLC (SVCP), TCPC Funding I, LLC, TCPC Funding II, LLC, and TCPC SBIC, LP. SVCP was originally organized as a limited partnership and had elected to be regulated as a BDC through July 2018, at which point it withdrew its BDC election and converted to a Delaware limited liability company.
In June 2013, TCPC SBIC was organized as a Delaware limited partnership and received a license from the U.S. Small Business Administration in April 2014 to operate as a small business investment company. This provided TCPC with additional leverage capacity to support its investment activities.
Investment Portfolio
At the end of the third quarter of 2024, TCPC's investment portfolio consisted of 156 companies, with a total fair market value of approximately $1.9 billion and an average position size of $4.2 million. The portfolio was well-diversified, with 91% invested in senior secured loans and 81% in first-lien loans. Notably, 93% of the debt investments were in floating-rate loans, providing the company with a degree of protection against rising interest rates.
As of September 30, 2024, the investment portfolio was invested 90.9% in debt investments, with 87.4% in senior secured loans, 3.1% in senior secured notes, and 0.4% in unsecured debt. The remaining 9.1% was invested in equity securities. This composition underscores TCPC's focus on providing capital to middle-market companies and small businesses through various debt and equity investments.
Financials
TCPC's financial performance has been consistently strong, with the company reporting adjusted net investment income of $0.36 per share for the third quarter of 2024. This exceeded the regular quarterly dividend of $0.34 per share, highlighting the company's ability to generate sufficient income to support its shareholder distributions. Moreover, TCPC has now paid dividends for 50 consecutive quarters, a testament to its commitment to delivering value to its investors.
The company's portfolio quality remains a focus, with non-accrual loans declining from 4.9% to 3.8% of the portfolio's fair value during the third quarter. While TCPC has navigated some credit challenges, the management team has demonstrated its expertise in working with borrowers to find the best possible outcomes for shareholders.
For the third quarter of 2024, TCPC reported total investment income of $70.93 million, a significant increase from $54.21 million in the same period of 2023. This 30.7% year-over-year revenue growth was primarily attributed to higher interest income earned on investments acquired as a result of the merger with BlackRock Capital Investment Corporation (BCIC) and higher SOFR rates. Net investment income for Q3 2024 was $33.88 million, up from $28.32 million in Q3 2023.
The company's net income for Q3 2024 stood at $21.63 million, while operating cash flow (OCF) and free cash flow (FCF) were $101.63 million and $168.90 million, respectively. These figures demonstrate TCPC's ability to generate substantial cash flows from its investment activities.
For the full fiscal year 2023, TCPC reported revenue of $50.67 million, net income of $38.47 million, and both OCF and FCF of $92.45 million. The significant increase in financial metrics from 2023 to Q3 2024 reflects the company's growth and the positive impact of its strategic decisions, including the merger with BCIC.
Industry Exposure
One area that has garnered attention is TCPC's exposure to the Amazon aggregator industry, which has faced headwinds in recent years. The company currently has approximately 5.9% of its portfolio fair value invested in this sector, with the majority of the exposure in Parazio, Razor, and SellerX. TCPC believes that the leaders in this space will ultimately benefit from ongoing consolidation and improved capital structures, and it remains actively engaged with the management teams and lender groups to address the challenges.
Liquidity
TCPC's capital position remains robust, with $582 million in available liquidity at the end of the third quarter, including $478 million in undrawn capacity under its diverse leverage program. The company's net leverage ratio stood at 1.08 times, well within its target range of 0.9 to 1.2 times. This financial flexibility allows TCPC to continue deploying capital selectively, maintaining its disciplined approach to investing in middle-market companies.
As of September 30, 2024, TCPC held $104.18 million in cash. The company has significant available credit lines, including $178.75 million under the $300 million Operating Facility, $149 million under the $200 million Funding Facility II, and $140 million under the $265 million Merger Sub Facility. These credit lines provide TCPC with ample liquidity to pursue investment opportunities and manage its operations effectively.
The company's strong liquidity position is further reflected in its current ratio and quick ratio, both standing at 7.08, indicating a high level of short-term solvency and ability to meet its near-term obligations.
Outlook and Guidance
Looking ahead, TCPC remains cautiously optimistic about the market environment, noting the potential impact of recent interest rate cuts and the upcoming election. The company's management team believes that these factors could serve as catalysts for increased M&A and refinancing activity, which could present attractive investment opportunities. At the same time, TCPC is closely monitoring the portfolio companies' performance, focusing on sectors and businesses that are best positioned to navigate the evolving economic landscape.
TCPC's Board of Directors has declared a fourth quarter 2024 dividend of $0.34 per share, which implies a dividend coverage of 106% based on Q3 2024 adjusted net investment income. Additionally, the Board declared a special dividend of $0.10 per share for Q4 2024, further demonstrating confidence in the company's financial performance and commitment to shareholder returns.
The company's weighted average internal risk rating at the end of Q3 2024 was 1.55, compared to 1.5 at the end of Q2 2024, indicating that portfolio companies are generally performing in line with or exceeding base expectations. This suggests a stable outlook for TCPC's investment portfolio in the near term.
Legal Matters
It is worth noting that on September 13, 2023, TCPC was named as a defendant in a lawsuit related to a third-party sponsored collateralized loan obligation. The lawsuit alleges that TCPC knew or should have known of certain fraudulent activities of the third-party manager. TCPC is vigorously defending against these claims, and the outcome of this legal matter remains to be seen.
Conclusion
In conclusion, BlackRock TCP Capital Corp has demonstrated the resilience and adaptability that have become hallmarks of its operations. By maintaining a diversified portfolio, a strong balance sheet, and a seasoned management team, TCPC has navigated various market cycles, delivering consistent returns to its shareholders. The company's robust financial performance, highlighted by significant year-over-year growth in investment income and strong cash flows, underscores its ability to capitalize on market opportunities and manage risks effectively.
TCPC's commitment to disciplined investing, coupled with its substantial liquidity position and strategic focus on middle-market companies, positions it well to weather challenges and identify compelling opportunities in the evolving economic landscape. As the company continues to evolve and adapt to market conditions, investors can take comfort in TCPC's proven track record and its ongoing efforts to deliver value to shareholders through consistent dividends and prudent investment strategies.