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spk02: Katie McGlynn, Director of the BlackRock TCP Capital Corporation's Investor Relations Team. Katie, please proceed.
spk00: Thank you, Jason. 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. Earlier today, we issued our earnings release for the third quarter ended September 30, 2021. We also posted a supplemental earnings presentation to our website 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 and Presentations. These documents should be reviewed in conjunction with the company's Form 10-Q, which was filed with the SEC earlier today. I will now turn the call over to our Chairman and CEO, Raj Veg.
spk06: Thanks, Katie, and thank you all for joining us today for TCP's third quarter earnings call. Before we begin, I wanted to take a moment to thank our team for all of their hard work and dedication through this challenging period. As many of you know, I have served as TCPC's president and COO since our IPO almost 10 years ago and have been a senior member of the investment team for over 15 years. It has been very rewarding to be a part of a group that has consistently delivered for our investors, and I look forward to serving as TCPC's chairman and CEO going forward. Also, I'm excited to formally welcome my longtime partner, Phil Tsang, as president and COO and reiterate my congratulations to our CFO, Eric Cuellar, for his new role. As part of my commentary, I will be continuing our quarterly tradition and begin with a few comments on the market environment as well as highlights from our third quarter. I will then turn the call over to Phil, who will provide an update on our portfolio and investment activity. Eric will then review our financial results and our capital and liquidity positioning in greater detail. After our prepared remarks, we will all be available to take your questions. Now, turning to the current market environment. Overall, activity levels in the middle market remain very robust. Direct lending and broader private capital markets have clearly emerged from the global pandemic as a reliable and well-positioned source of financing for a broad spectrum of businesses. This has typically been the case at times other avenues of financing have been less accessible, but appears now to be an even more systemic shift as a wider array of companies are looking to private credit as a primary source of capital. We continue to work with a broad range of businesses as they seek to finance growth, make acquisitions, or simply refinance existing debt. We also believe that our investors benefit from these efforts as our direct lending investments continue to deliver a reliable and resilient source of income. I'd now like to review our third quarter earnings and discuss some highlights from the quarter. In summary, TCPC delivered another solid quarter of results. First, net investment income in the quarter was $18.7 million, or 32 cents per share, which again exceeded our dividend of 30 cents per share. Second, portfolio credit quality remained strong. While we added one additional portfolio company to our non-accruals during the quarter, non-accruals remain low at just 1% of the portfolio at fair value. Third, and as Phil will discuss in more detail, investment activity continued to be robust. We deployed more than $150 million in capital during the quarter and continued to identify attractive opportunities across our target sectors. Direct lending remains a relationship business, and we continue to benefit from the more than two decades of developing and cultivating strong relationships. We also continue to benefit from the extensive resources of the broader BlackRock platform. In the third quarter, we also experienced an elevated level of refinancing activity with approximately $227 million of repayments, resulting in prepayments and exits that outpaced deployment and slightly reduced our total portfolio size quarter over quarter. Fourth, we continue to manage our balance sheet and liability profile. In August, we issued a $150 million add-on to our existing February 2026 notes, at a yield to maturity of 2.475 percent, bringing the total issuance to $325 million. In conjunction with this financing, we redeemed $175 million of outstanding notes that were due next August, which had a much higher coupon of 4.8 percent. We will continue to seek ways to diversify and enhance our strong balance sheet and liquidity positioning given overall market conditions. And finally, we have maintained NAV stability. Although our NAV declined 80 basis points during the quarter, this was primarily a result of a $6.2 million loss associated with prepayment charges on the early redemption of the August 2022 notes. Excluding the impact of this charge, NAV was essentially flat quarter over quarter, and year over year is up approximately 11%. It's also worth noting that we continue to exceed our total return hurdle. As a reminder, TCPC maintains a 7% hurdle rate with a cumulative look back based on total returns, including realized and unrealized gains and losses. Since 2012, we have generated a 10.7% annualized return on invested assets and a total annualized cash return of 9.7%, consistently outperforming the Wells Fargo BDC index. And in the last 12 months alone, TCPC has delivered a 19% ROE. Outside of performance and financial results, and as an indication of our commitment to strong corporate governance, TCPC's Board of Directors recently elected Eric Drout to serve in the newly created role of Lead Independent Director, effective October 28th. Eric's outstanding commitment to serving TCPC shareholders throughout his more than 10 years of service on the Board has been invaluable, and we look forward to his continued contributions as Lead Independent Director. In conjunction with this appointment, the Board also appointed existing Board members Peter Schwab as Chair of the Governance and Compensation Committee and Freddie Reese as Chair of the Audit Committee. Now I will turn it over to Phil to discuss our investment activity and portfolio positioning.
spk03: Thanks, Raj. As a member of the TCP and now BlackRock U.S. private capital team for more than 16 years, I've had the benefit of getting to know many of you, and I look forward to getting to work with you more closely. As Raj noted earlier, we are capitalizing on the scale of our platform and breadth of our team's experience to capture an increasing share of this expanding market. At quarter end, our portfolio had a fair market value of approximately $1.8 billion. 90% of our investments are senior secure debt and are spread across a wide range of industries, providing portfolio diversity and minimizing concentration risk. Our portfolio is also weighted towards companies established business models in less cyclical industries. The portfolio at quarter end was made up of investments in 106 companies. As the chart on the left side of slide six of the presentation illustrates, our recurring income is distributed broadly across our portfolio and is not reliant on income from any one company. In fact, Over half of our portfolio companies each contribute less than 1% to our recurring income. Additionally, 86% of our debt investments are first lien, providing substantial downside protection. And 94% of our debt investments are floating rate, positioning us well for when rates eventually rise. Now, moving on to our investment activity. In our view, many of the competitive market dynamics that existed prior to the pandemic have resurfaced. However, we remain one of a small group of reputable lenders that are able to provide complete and customized financing solutions. As such, we act as a lead or co-lead lender in the majority of our transactions. Also of note, while the environment is competitive, our team continues to find attractive opportunities to invest at higher spreads than the average market transaction. We continue to source a wide range of investment opportunities, and while we have been actively deploying capital in this market, we maintain a very disciplined approach to investing. We regularly review a substantial number of opportunities, but we end up investing in only a small percentage of them. Investment activity in the third quarter was robust for both new deployments and repayments. We invested $157 million, primarily in 16 investments, including loans to seven new portfolio companies and nine existing companies. Follow-on investments in existing holdings continue to be an important source of opportunity for us, accounting for more than 40% of our total investments over the last 12 months alone. Incumbency clearly has become a differentiator. And from a risk management perspective, these are companies we already know and we understand them very well. And therefore, we're comfortable making these follow-on investments. As we analyze new investment opportunities, we continue to emphasize seniority in the capital structure, portfolio diversity, and transactions where we can act as lead or co-lead. Our largest new investment during the third quarter was a first lien loan to James Peirce. a founder-owned luxury fashion apparel brand with a strong long-term operating history and a growing e-commerce presence. BlackRock acted as the sole lender and our loan was structured with a low leverage profile and strong collateral protections. Our second largest investment in the quarter was a first lean term loan to InfoBip. InfoBip offers a mobile-first omni-channel customer engagement platform that leverages direct connections to a global network of over 650 telecom operators. The company has a diversified customer base with strong blue-chip representation. And the investment represents a new loan, sorry, a low loan to value with structured downside protection and the proceeds will support the company's growth initiatives. New investments in the third quarter were offset by disposition and repayments totaling $227 million. These included the partial sale of our equity investment in Inventum the payoffs of our loans to sphera paula's choice global trans as well as apex our investment in sphera is a great example of how our team leverages our industry expertise to identify opportunities in situations that may not be widely understood sphera software helps energy companies ensure that they are complying with environmental regulations despite serving some of the largest global energy companies we did not believe Shvera's business is directly impacted by energy price volatility, which was a perceived market concern actually at the time of our investment in 2016. As a result of our team's software expertise, we identified this unique opportunity to invest in a strong company that performed well throughout our five-year investment period and which was ultimately acquired at an attractive valuation in September of this year. The overall effective yield on our portfolio was 9.4% as of September 30th. Investments in new portfolio companies during the quarter had a weighted average effective yield of 8.5%, in line with the 8.6% weighted average yield on exited positions. Since December 31st, 2018, LIBOR has declined by 268 basis points, or by 95%, which has pressured our overall portfolio yield However, 94% of our loans are floating rate with approximately 90% of them operating with LIBOR floors. Therefore, we believe that we're well positioned to benefit when rates eventually rise. So we continue to invest selectively, as I noted, in maintaining our discipline and focusing on companies with established business models that are well positioned in the current economic environment. Our investment activity in the fourth quarter to date totals approximately $32 million, primarily in two senior secured loans with a combined effective yield of approximately 10%. While it is still early in the quarter, we remain encouraged by the opportunities in our pipeline and continue to source from a broad range of industry sectors. The yields on investments in our pipeline are generally in line with our current portfolio. And to date, we have had limited prepayment income in the fourth quarter. I'll now turn it over to Eric to walk through our financial results as well as our capital and liquidity positioning.
spk04: Thanks, Phil. Turning to our financial results for the third quarter, we generated net investment income of $0.32 per share, which exceeded our dividend of $0.30 per share. We continue to be committed to paying a sustainable dividend that is fully covered by net investment income, as we have done every quarter since our IPO in 2012. Today, we declared a third quarter dividend of $0.30 per share. Investment income for the third quarter was $0.74 per share. This included recurring cash interest of $0.60, recurring discount and fee amortization of $0.03, and PIC income of $0.02. Notably, our PIC income continues to be at the lowest level in more than three years. As a reminder, 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. Investment income included $0.03 of dividend income and $0.06 from accelerated OID and exit fees. Dividend income in the third quarter included $1.2 million for $0.02 per share of dividend income from our equity investment in Edmentum, including $600,000 from the portion of our investment that was sold during the quarter. Operating expenses for the third quarter were 33 cents per share and included interest and other debt expenses of 18 cents per share. Incentive fees in the quarter, which included $600,000 of previously deferred fees, totaled $4.7 million, or 8 cents per share. As we have previously noted, we voluntarily deferred incentive fees related to our income from 2020 over a period of six quarters, amounting to one penny per share per quarter, with the final catch-up amount having been recognized this quarter. Our net increase in net assets for the quarter was $10.9 million, or 19 cents per share. which included net realized gains of $7.9 million, or $0.14 per share, unrealized losses of $9.5 million, or $0.16 per share, and a $6.2 million realized loss associated with the early redemption of the August 2022 notes. Unrealized losses during the third quarter primarily reflected a $6.8 million reversal of previously unrealized gains on admittance and a $3.7 million unrealized loss on our investment in Highland, partially offset by a $5.1 million unrealized gain on our investment in Razor Group. Realized gains of $7.9 million were primarily due to the partial sale of our equity investment in Edmentum. Substantially, all of our investments are valued every quarter using prices provided by independent third-party sources. These include quotation services and independent valuation services. And our process is also subject to rigorous oversight, including backtesting of every disposition against our valuations. We placed two of our loans to Hyland on non-accrual during the third quarter. Hyland is an engineering and construction company that provides electrical, telecom, and utility services in New York City. Highland operates in a strong sector, but has faced operational challenges, and our team is working closely with the sponsor to navigate these challenges. As Raj noted earlier, our overall credit quality remains strong, with non-accrual loans limited to three portfolio companies that represent just 1% of the portfolio fair value and 1.8% at cost at September 30th. Turning to our liquidity position, we ended the quarter with total liquidity of $396 million, relative to our total investments of $1.8 billion. This included available leverage of $379 million and cash of $37 million, net of trades pending settlements of $20 million. Unfunded loan commitments to portfolio companies at quarter end equaled 3.8% of total investments, or approximately $67 million, of which $32 million were revolver commitments. We continue to opportunistically take advantage of the favorable bond market environment to refinance higher-cost debt. In August, we successfully issued an additional $150 million of our notes due February 2026, at a yield to maturity of 2.475%, bringing the total issuance of the 2026 notes to $325 million. Additionally, we redeemed $175 million of outstanding 4.18% notes due August 2022, as we continue to reduce our overall cost of capital. Our diverse and flexible leverage program now includes two low-cost credit facilities, a convertible note issuance, two unsecured note issuances, and an SBA program. Our unsecured debt continues to be investment-grade rated by both Moody's and Fitch. Additionally, given the modest size of each of our debt issuances, we are not overly reliant on any single source of financing, and our maturities are well laddered. Our nearest maturity is March of 2022, and given the success of our latest bond issuance, we are very well positioned to redeem or refinance those notes. Combined, the weighted average interest rate on our outstanding liabilities decreased to 3.22% from 3.54% at the beginning of the year. Now I'll turn the call back over to Raj.
spk06: Thanks, Eric. I'll conclude now with a few comments on the market environment. We are pleased with our strong third quarter results and remain confident in our team's ability to deliver strong risk adjusted returns for our shareholders. We also remain cautiously optimistic on the investment environment. On the one hand, transaction volumes remain at historically high levels and revenue and EBITDA growth trends are strong across the middle market. However, we remain cognizant of the broader market risks and are closely monitoring inflation trends, supply chain disruptions, and energy market volatility as we analyze our pipeline of investment opportunities. In this environment, we are leveraging our team's competitive advantages, including over two decades of experience lending to middle market companies. Our industry specialization makes us a unique and valuable partner to our borrowers and deal sponsors, as well as our special situations experience to structure loans that are downside protected. These advantages enable TCPC to deliver a 19% ROE over the last 12 months and a 16.4% ROE since the start of the pandemic in March of last year. Additionally, excluding the impact of the early redemption of the August 2022 notes, our NAV is up 7.5% since the start of 2020. And with that, operator, please let's open the call for questions.
spk02: Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Devin Ryan from J&P Securities. Please go ahead.
spk05: Hi, good morning. This is Kevin on for Devin. Touching on quarter-to-date investment activity, can you give us a sense how originations are tracking so far, as well as your expectation for portfolio growth in the fourth quarter?
spk06: Yeah, maybe I'll turn it over to Phil to just touch on just originations, activity, and process. And then I'll touch on expectations for the portfolio and growth.
spk03: Yeah, thanks for the question. So our originating activity continues to be quite robust. The pipeline, you know, as we've seen in past quarters, it continues to show substantial growth year over year, and we're tracking that very closely. We think we've made great progress in a number of industries in terms of our mind share with it, with private equity sponsors, with advisors, with other lenders and management teams. So Our origination pipeline continues to be robust, and we think it goes well for our Q4 deployment.
spk06: Yeah, and just in terms of overall growth, Kevin, I think we've said numerous times in the past, we really are credit-focused on making the right decision and being disciplined versus being oriented for growth for growth's sake. We obviously have grown successfully. I expect that we will continue to, just given the overall market dynamics, just a number of companies that are looking for private credit solutions and are, to use Phil's phrase, mindshare within that dynamic. But we will not be compromising the credit view or the credit decision to do that as a mandate. But I do expect that we'll continue to be able to grow just given the overall secular story.
spk05: Okay, that's helpful, and I appreciate the color there. And then just on the competitive environment, obviously, deal pricing has been a prominent conversation over the past quarters. Are you still seeing continued downward pressure, or has that began to normalize a bit recently?
spk06: Yeah, let me take that one and just provide a little context. We obviously had a little bit lower effective yield in the portfolio this quarter. I would highlight, though, that it was around flat, if not slightly below the yield on the exits for the same quarter. So I think when you look at the overall portfolio yield, it hasn't really changed. That's also not taking into account the benefit on the right side of the balance sheet that we've been able to create through the debt refinancing. And I think what that does is it lets us be very strategic in our pipeline, where we want to spend time, who we want to work with, and make some strategic decisions without compromising the portfolio yield. And it is more competitive. But to highlight or reiterate a point Phil made earlier, 40% of our volume is from existing deals. So while it is competitive, incumbency and the ability to stay relevant with your deal sources is absolutely imperative. And what we can do with the portfolio, I think, allows us to have some flexibility there. Overall, things do seem to be settling out, but, you know, no one quarter makes a trend, as we say. But the quarter-to-date activity has been encouraging, you know, with a roughly 10% effective yield on deployments, although it's still early.
spk05: Okay, that's it for me, and thank you for taking my questions.
spk02: The next question comes from Ryan Lynch from KBW. Please go ahead.
spk08: Hey, good morning. Thanks for taking my questions. I just had a had a follow up because, you know, on the last question, you talked about kind of a robust pipeline, which I believe you guys also had, you know, going with spoken about last quarter. Now, obviously, there's a lot of market activity, which which, you know, increased repayments and prepayments in the third quarter. You also talked about kind of, you know, some caution out there in what you guys are looking to deploy, you know, and new opportunities being pretty cautious of the environment. So trying to kind of, you know, square all that away, you know, with a robust environment and robust pipeline this quarter versus what I think you guys said was kind of the same thing last quarter that resulted in pretty meaningful net repayments this quarter. Is there Is there expectation that that should flip going into the fourth quarter?
spk06: Yeah, let me try to start and add a little context. Keep in mind that a decent part of our repayments was actually an exit from the admin position, which is kind of a one-off. It's a good one to exit because we got a lot of value, picked up a lot of gain, and redeploy equity into credits. But that being said, repayments were high. through the quarter. In any one quarter, it's hard to tell. So far, they're low. And so I think if you took that as an indication, maybe they level off. But really, it's just hard to predict. The nice thing is when we do get the repayments, we typically pick up some fees and unamortized discount, which shows up, as it did this quarter, as a benefit. But I don't want to predict anything to make it a sort of forward-looking statement and then have it reverse enough. But thus far, the prepayments have been low. We benefit from them when we get them. But I would also adjust our current quarter's repayment level for the one-off item, which was the admentum exit.
spk08: Okay. That's fair. The only other question I had was – The $6 million loss, you know, prepayment penalty loss from calling the August 2022 notes, that was very high. I mean, that's a 3.5% loss on those notes or acceleration of fees. I mean, those notes in total have just over a 4% coupon. So why was that number so high? And why did you choose to repay those early to incur that loss when the cost actually wasn't that much higher just to have it sit on your balance sheet and still use that as a source of funding for the next nine months?
spk04: Yeah. Thanks, Ryan. I'll take that question. Yeah, the prepayment fee really was a function of the MAKO provision within the venture itself. But it was a decision that we did make both to take advantage of the current rate environment and to lock in the rates longer term. As you saw, the execution on our new deal was – we were very happy with it. Overall, we think it's a good tradeoff on a long-term basis.
spk06: And I would just add, you know, I think Eric highlights, you know, we can't predict where rates go. It feels like they're more inclined to go up than down. And, you know, we were able to lock in the lowest level we've seen for our business. I also would highlight that the benefit of that, you know, aside from the one-time $6.2 million that's incurred, The run rate benefit of that new financing does not show up, you know, really given the timing of it in the quarter. So on a go-forward basis, we do anticipate that to be a benefit just to NII.
spk08: Okay. So what was the nature of the $6.2 million make-hole? Was that you paying out the remaining interest that would have been due if you held to maturity, or what was the composition of that $6.2 million?
spk04: Yeah, it's basically the remaining interest payments discounted.
spk06: Yep, that's standard make whole structure.
spk08: All right, that's all I have. I appreciate the time today. Thank you.
spk02: The next question comes from Robert Dodd from Raymond James. Please go ahead.
spk07: Hi, guys. Congrats on the quarter. I mean, sticking with the capital structure for a second. I mean, on the convert, which, I mean, it matures in March next year. I mean, based on... You know, where you stand today, would you expect to just refi that into your revolvers? I mean, on a blended basis, your fixed plus convert plus SBA, I mean, your fixed rate funding, unsecured funding, so to speak, is a pretty high proportionate mix. Would you like to keep it that high, or should we expect that the convert most likely scenario is? for that to rotate into or get paid down with the revolvers and increase your floating rate liability mix a little bit.
spk04: Yeah, this is Eric. I'll take that. And the latest deal that we did really put us in a very good position to do either one. We certainly have plenty of liquidity and room under our credit facilities to just pay those off and march when they come due. However, we're comfortable with where we are in terms of secured versus unsecured debt. So we're planning on exploring both options, and we have the ability to do either one.
spk07: I appreciate that. Thank you. You certainly have the flexibility. If I can, I know you don't like to answer questions about specific assets, but on Highland, Can you give us any color? I mean, you say operate. I think it was operational challenges. I mean, are those challenges related to supply chain issues, which I can imagine are a lot easier to rectify, or personnel challenges? Any color you can give us on how we should think of that in terms of how fixable it is per se?
spk06: Yeah, thank you for the question. I'll try to take that. And on Hyland, I will be a little, you know, obviously given the stage, the early stage of what's going on there, we have to be a little careful, you know, not to just be sensitive to the discussions and the nature of them. But overall, this is a very isolated incident. It is not a supply chain issue as their work is really more – implementing and you know it's a installing it's an enc business essentially um with good growth trends in the market in a in a market in the northeast that is experiencing uh the need and and dollars flowing towards their services so we believe it's a good business in a good sector and that's a good place to start and we've had you know obviously based on prior experience uh you know We have done this before. We've done it effectively. An extreme example is Admentum, for instance. But operationally, I would say, is just the nature of implementing and carrying out their service wasn't run as well as it could have been. And in the meantime, the impact of that, with the level of debt they've had, put challenges on them in terms of liquidity. So those seem to be resolvable issues. Obviously, it's going to be a longer tail process to get to the right outcome. We feel like we know what we're doing there, and we have a good asset with which to start with, but I think we'll just provide updates as we can quarter over quarter. We just emphasize that this is kind of a one-off versus anything systemic or characteristic of the broader portfolio, including supply chain. Just given our sectors, we just really don't have a lot of traditional supply chain exposure on working capital or tangible assets when you look at our end market and industry that we focus on. And that also is the case for Highland. Got it. Got it. I appreciate it. Thank you.
spk02: Again, if you have a question, please press star, then one. Our next question comes from Christopher Nolan from Ladenburg, Falman. Please go ahead.
spk01: Raj, by the way, guys, congrats on your first quarter as senior management team. Thank you. Thank you. Can you share with us your perspective in terms of where you think interest rates will be, how they'll change in 2022?
spk06: Boy, if I could do that effectively, I might be in a different role, but I think I said it earlier. It feels like the trend is to be higher. You know, I don't know that we can predict that or, you know, I think all we can do is really position the portfolio to benefit from it. And between the level of fixed rate debt on the right side of the balance sheet that, you know, we've reduced the cost of and the positioning of floating rate assets on the left side of the balance sheet, you know, even with floors that protect us, I feel like we're well positioned for rising rates. We just can't predict, you know, how quickly or how much. But it feels like that's more likely than not. But it's just not our business to, you know, make explicit rate predictions versus being positioned for something that we can benefit from.
spk01: Raj, given that, you know, it seems like the possibility of the Fed will tighten and also the long end of the curve could go up just from the Fed starting to taper. Would that impact your book value insofar as your quarterly valuation of your investment portfolios are done on a discounted cash flow and the discount rate used would necessarily go up as well?
spk06: You know, I think it's possible, I guess. But when we look at how our valuations are done, you know, it's not only discounted cash flows. There is a fair bit of market comp value. data uh being incorporated and obviously those multiples have benefited both portfolio and loan to value coverage on a market value basis there are transaction comps and again those have all been moving up into the right and then there is discounted cash flow um as sort of a and they triangulate so at the end of the day and then there's always back testing you know which we do frequently that shows our book, I think, is marked quite well and accurately on realized exits. So I think the providers, and they should probably answer for themselves, do try to take a more balanced approach and triangulate it around the nature of the asset and the fundamental business value. So I don't anticipate that any one is going to disproportionately impact us even if there is, as you say, a mechanical change in DCF.
spk04: Yeah, and with that mostly floating rate portfolio, that should absorb most of the impact from rates as far as evaluation goes. Thank you.
spk02: Thank you. There are no more questions in the queue. This concludes our question and answer session. I'd like to turn the conference back over to Raj Vig for any closing remarks.
spk06: Thank you. We appreciate your participation on today's call. I would like to thank our team for all the continued hard work and dedication. I would also like to thank our shareholders and capital partners for your confidence and your continued support. Thanks for joining us. This concludes today's call.
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