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spk04: Three 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. A question and answer session will follow the company's formal remarks. To ask a question, please press the star key followed by the digit one. I will repeat these instructions before we begin the Q&A session. And now I'd like to turn the call over to Katie McGlynn, Director of the BlackRock TCP Capital Corp Investor Relations Team. Katie, please proceed.
spk02: Thank you, Alex. 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 third quarter ended September 30, 2023. We also posted a supplemental earnings presentation to our website at www.tcpcapitals.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 Vey.
spk08: Thanks, Katie, and thank you all for joining us for TCPC's third quarter 2019 earnings call. I will begin the call with a review and reminder of our proposed merger with our affiliate BDC, BlackRock Capital Investment Corporation, that was recently announced in September. I will then cover the overview of our third quarter results before turning the call over to our President and Chief Operating Officer, Phil Tseng, who will provide an update on our portfolio and investment activity. Our CFO, Eric Cuellar, will then review our financial results as well as our capital and liquidity positioning in greater detail. I will then close out our prepared remarks with a few final comments before we take your questions. On September 6, 2023, we announced a proposed merger of TCPC with BlackRock Capital Investment Corp, or BCIC. As highlighted at the time of the announcement, the proposed transaction is a very logical and natural strategic next step in the growth and evolution of BlackRock's BDC platform and the broader $81 billion global private debt business at BlackRock. What's especially compelling about the merger is that it combines two very similar portfolios that we know well, as our collective investment team has been managing both portfolios for many years now. We believe the proposed merger positions the combined company for sustained growth and will create meaningful value for TCPC shareholders. As a reminder, the transaction is expected to result in a combined company that benefits from operational cost synergies, enhanced scale, and better access to capital on improved terms. We also anticipate that the transaction will be accretive to NII. Importantly, our proven investment strategy and overall approach to investing will not change, and the officers of TCPC will remain officers of the combined company following the close of the transaction. The transaction will be a NAV for NAV exchange that will result in an ownership split of the combined company that is proportional to each of TCPC's and BCIC's respective net asset values, subject to each company's shareholder approvals. Customary regulatory approvals and any other necessary closing conditions. BCIC shareholders will receive newly issued shares of TCPC common stock based on the ratio of BCIC's net asset value per share, divided by the TCPC net asset value per share, each determined shortly before closing. As an added reminder, TCPC's advisor, BlackRock, is supporting the transaction with several shareholder-friendly measures, including a reduction in the management fee from 1.5% to 1.25% for assets equal to or below 200% of net assets. Net investment income coverage via a waiver of advisory fees for any of the first four quarters ending following the merger closing in the event net investment income in any such quarter is less than 32 cents per share up to a maximum of the advisory fees earned during such quarter. And finally, BlackRock has agreed to cover 50% of the merger costs for both companies up to a combined cap of $6 million assuming shareholder approval for the transaction. We expect the transaction to close in the first quarter of 2024, subject to shareholder and regulatory approvals and customary closing conditions. Now let's get back to the normal programming in a review of highlights from the current quarter. For the third quarter 2023, TCPC delivered net investment income of 49 cents per share, representing a 17% increase year over year and an approximate 15.3% annualized net investment income return on equity. Given the floating rate nature of our portfolio and the higher proportion of our liabilities at our fixed rate, our net investment income continues to benefit from higher base rates as well as marginally wider spreads. Our run rate NII at the end of the third quarter was again among the highest in TCPC's history as a public company. Our Board of Directors today declared a fourth quarter dividend of $0.34 per share, which is consistent with the third quarter and inclusive of the two dividend increases declared by the Board over the last four quarters. The fourth quarter dividend is payable on December 29th to shareholders of record on December 15th. In addition, as an acknowledgement of TCPC's strong earnings to date, the Board announced an additional $0.25 per share special dividend, also payable on December 29th to shareholders of record on December 15th. We have always taken a disciplined approach to the dividend with an emphasis on stability and strong coverage from our recurring net investment income. And as a reminder, throughout TCPC's history, we have consistently covered our dividends with recurring net investment income. In a few minutes, Phil will discuss our third quarter investment activity in more detail. But in summary, we saw a modest pickup in transactions toward the end of the quarter, although volumes remain muted in this uncertain environment. We remain disciplined and consistent with our historical activity, invested in only a small percentage of the opportunities we reviewed in the quarter. And given the slowdown in private equity deal volumes, we are reminded of the benefits of our channel agnostic approach to deal sourcing. Our pipeline benefits from our direct relationships with management teams and other industry participants developed over our more than 23 years of lending to the middle market across various cycles and our ability to draw upon the power of the BlackRock platform. Our NAV declined 1.7% during the quarter, primarily reflecting unrealized markdowns on six positions, which Eric will discuss in more detail. The majority of these unrealized marks in this quarter reflect general market volatility and some isolated performance challenges. Importantly, we remain confident in the long-term performance of these investments and our portfolio in general. The credit quality of our portfolio remains solid, with loans to just three portfolio companies on non-accrual as of the end of the third quarter, totaling 1.1% of total investments at fair value. We believe we are well positioned to continue to deliver solid results given that our team has one of the longest track records in direct lending of any of the publicly traded BDCs. While we do not have an explicit forward beyond rates, we do believe we will be in a slower growth and elevated rate environment for the foreseeable future with a range of macroeconomic uncertainties persisting. It is in periods like this that our historical experience and deep industry knowledge continue to provide us an advantage and have resulted in strong results throughout various market cycles. As a reminder, our team has also had direct experience in special situations investing, which we believe positions us well to navigate more complex market environments as we have demonstrated in prior periods of market volatility. Looking back at our historical performance as a public company, since 2012, we have generated a 10.3% annualized return on invested assets and a total annualized return of 9.6%, much of which we have delivered while base rates were substantially lower than they are today. We believe this performance remains at the high end of our peer group, and it reflects our ability to consistently identify attractive opportunities at premium yields and deliver exceptional returns to our shareholders across market cycles. Now, let me turn it over to Phil to discuss our investment activity and portfolio positioning.
spk05: Thanks, Raj. I'll start with a few comments on the investment environment before providing an update on our portfolio and highlights from our investment activity during the third quarter. the fourth quarter today. We are seeing pockets of activity, including in non-sponsor opportunities and refinancing to support existing portfolio companies. However, we've remained disciplined and continue to pass on the substantial number of less attractive opportunities coming to market, particularly when we believe that pricing does not appropriately reflect the current market conditions or when terms do not provide adequate lender protections. In the third quarter, TCPC invested $92 million, but significantly from the $17 million invested in the second quarter. Deployment of the quarter included loans to four new and four existing companies, primarily in senior secured loans. In reviewing new opportunities, we emphasize transactions where we are positioned as a lender of influence, which enables us to leverage our two decades of experience in negotiating yield terms, and conditions that we believe provide meaningful downside protection. We believe this has been a key factor in the low realized loss rates over our long-term track record. In addition, our industry specialization, which our borrowers value as well, provides two key benefits. First, it bolsters our ability to assess and effectively mitigate in our underwriting and when we negotiate terms in credit documentation. And second, it expands our deal sourcing capabilities with sponsors and non-sponsors who value our industry experience, which lends itself to more reliable execution. Follow-on investments in existing holdings continue to be an important source of opportunity for us. About half of dollars deployed over the last 12 months and in the third quarter were with existing portfolio companies. TCPC's largest new investment during Nefron Pharmaceuticals to support the company's future growth initiatives. Nefron developed safe, affordable, generic inhalation solutions and suspension products. We view this investment as being aligned with our overall approach to healthcare lending, that is, focusing on companies that are lowering the overall cost of healthcare or building efficiencies in the system. New investments in the third quarter were offset by total disposition Our emphasis is on companies with established business models and proven core customer bases that make them more resilient. We continue to closely monitor and engage in dialogue with our existing portfolio companies. As a result, we assess both current and projected performance relative to our original underwriting assumptions, enabling us to get ahead on many potential credit issues. The majority of our portfolio companies are successfully navigating the higher rate environment. inflation, and a general uncertainty in the economy, and they continue to deliver revenue growth and margin expansion. We are working closely with the Managing Team and owners of the handful of companies that are facing slower revenue growth or margin pressure. However, we recently completed our quarterly review process and are pleased to report that the portfolio remains in good shape. At quarter end, our portfolio had a fair market value of approximately $1.6 billion, Eighty-nine percent of our investments were senior secure debt spread across a wide range of industries, providing portfolio diversity and minimizing concentration risk. We also continue to emphasize companies in less cyclical industries. The portfolio quarter end consisted of investments in 143 companies, and our average portfolio company investment was $11 million. As the chart on slide seven of the presentation illustrates, not relying on income from any one company. In fact, more than 90% of our portfolio companies each contributed less than 2% to our recurring income. 86% of our debt investments are first lien, providing significant downside protection. And 95% of our debt investments are floating rate, an important benefit in this higher rate environment. The overall effective yield with 11.3% one year ago, reflecting the benefit of higher base rates and wider spread on new investments. Investments in new portfolio companies during the quarter had a weighted average effective yield of 14.8%, exceeding the 12.7% weighted average effective yield on exited positions. While we observed some contraction in market spread in the third quarter relative to earlier months ago. Post-quarter end, we have seen a modest pick of an activity and have been investing selectively, maintaining our underwriting discipline while being mindful of the lingering inflationary environment. We emphasize companies that provide a necessary service or product to their customers such that they are more resilient across market cycles. It's also important to note that we do not interact with perfection. We seek to build in sufficient buffers to ensure including higher costs, without impairing the ability to service our loans. Our pipeline is building, and the yield on investments in our pipeline are generally in line with our current portfolio. To date, we have had no prepayment income in the fourth quarter. Let me now turn it over to Eric to walk through our financial results, as well as our capital and liquidity position.
spk07: Thank you, Phil. As Rash noted earlier, Our net investment income in the third quarter benefited from the increase in base rates over the last 18 months. Net investment income of 49 cents was up 17% versus the third quarter of 2022 and exceeded the third quarter dividend of 34 cents per share. Today, we declared a fourth quarter dividend of 34 cents per share and a supplemental dividend of 25 cents per share. We remain committed to paying a sustainable dividend that is fully covered by net investment income, regardless of the interest rate environment, as we have done consistently over the last 11 and a half years. Investment income for the third quarter was $0.94 per share. This included recurring cash interest of $0.82 per share, recurring discount and fee amortization of $0.03, and pick income of $0.02. Paid income remains in line with the average of our history. Investment income also included $0.02 of dividend income. Operating expenses for the third quarter were $0.34 per share and included interest and other debt expenses of $0.21 per share. Incentive fees in a quarter totaled $6.0 million for $0.10 per share. Net realized losses for the quarter worth $129,000, or less than a penny per share. Net unrealized losses in the third quarter totaled $15 million, or 27 cents per share, primarily reflecting unrealized march-ons on our investments in Inventum, Corus, McAfee, 36th Street Capital, Highland, and CIBT. As Raj noted earlier, Unrealized losses in the quarter were primarily driven by overall market volatility, coupled with a few isolated company-specific performance challenges. Unrealized losses were partially offset by a $3.2 million unrealized gain on our investment in Astra acquisition. The net increase in net assets for the quarter was $12.8 million, or 22 cents per share. As a reminder, we have a robust valuation process and 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 this process is also subject to rigorous oversight, including back testing of every disposition against our valuation. As Raj noted, the credit quality of our overall portfolio remains strong. Only three portfolio companies were on non-accrual at the end of the third quarter, representing 1.1% of the portfolio at fair value and 1.7% at cost. Turning now to our liquidity, our balance sheet positioning remains solid, and our total liquidity increased to $353 million at the end of the quarter. relative to our total investments of $1.6 billion. This included available leverage of $261 million and cash of $92 million. Unfunded loan commitments to portfolio companies at quarter end equaled 4% of total investment for approximately $57 million, of which only $35 million were involved Our diverse and flexible leverage program includes two low-cost credit facilities, two unsecured health insurances, and an SBA program. Earlier this month, Moody's reaffirmed PCPC's investment-grade rating with a stable outlook. Our unsecured debt continues to be investment-grade rated by both Fitch and Moody. Given the modest size of each of our debt insurances, we are not overly reliant on any single source of financing, and our maturities remain well-laddered. Additionally, we are comfortable with our current mix of secure and unsecured financing and do not have any immediate financing needs. Combined, the weighted average interest rate on our outstanding borrowings decreased during the quarter to 4.24%. That is an increase of only 98 basis points over the last 21 months. while base rates increased more than 525 basis points during that same period. This is the result of having over 70% of our borrowing from fixed rate sources. Now, I'll turn the call back over to Ronnie.
spk08: Thanks, Eric. Even as market volatility persists, we are confident in our proven strategy and approach to investing. We believe we have demonstrated a consistent ability to execute in both periods of economic growth and contraction, which has enabled us to deliver outstanding long-term returns to our shareholders and also makes us a reliable partner for our borrowers. Furthermore, we are excited about the merger with BCIC and believe the transaction will further amplify our strengths and provide numerous benefits. And with that, operator, please open the call for questions.
spk04: Thank you. As a reminder, if you'd like to ask a question, you can press star followed by 1 on your telephone keypad. If you'd like to remove your question, you may press star followed by 2. Please ensure you're unmuted locally when asking your question. Our first question for today comes from Robert Dodd of Raymond James. Robert, your line is now open. Please go ahead.
spk03: Hi, guys. On the pipeline, I mean, you talked about a little bit of pickup activity after quarter end, but that's actual investing. What about the more preliminary stages of the pipeline? Are you seeing that build towards maybe closing in Q4, or are you seeing any evidence of an increase in activity at the moment?
spk05: Yeah, thanks, Robert. This is Phil. So I'd say in the earlier stage of the pipeline, we are definitely seeing that more robust than in the prior quarters. Whether that means deals will close in Q4 or spill into the early parts of 24 is still TBD. But I think what it does pose is a good, solid pipeline for 24. I think that you can assume. And that's something that we've been thinking more about. as as we see you know the rate certainty be a little bit more visible given you know what the fed just communicated yesterday and has been alluding to in terms of you know started to really hitting a ceiling whether rates come up you know once or twice more obviously depends but i think the certainty over far worse feeling like now maybe a good opportunity to start investing in growth again. But I think that should be encouraging for our pipeline going to 24.
spk03: Got it. Thank you. And then on the kind of the credit and maybe sponsored discussions, et cetera, I mean, Perch, a new non-employer this quarter, obviously got marked down a bit. You've talked about Highland in the past, but then on the flip side, Astra, which was got marked up a decent chunk this quarter. So could you give us any color on where things are struggling and to your point where a handful of companies are seeing slow revenue growth? Are the sponsors responding as normal or is there any change in the dynamics in your discussion with sponsors where they exist for companies that might be having a little bit more of a difficult time?
spk08: Yeah, Robert, it's Raj. I'm going to try to take that as one question because there's a lot in there, but we'll try to cover a bunch of those. So big picture, there's no thematic. The names you mentioned are all very individual stories. We can cover them. There's no sort of thematic portfolio-wide issue that is a general theme, even though there are obviously thematic issues in the macroeconomy. The sponsor question is a good one. And I will tell you that we've mentioned this in the past couple of times, and I think we continue to see this. For the most part, the sponsors have been doing a good... There's been a good collective and constructive dialogue. And again, I think this stems from everyone really looking at the environment as with some uniform view, which is higher rates and lower growth. And in that environment, You know, it's all about promoting liquidity and longevity, either organically or supplementing it, you know, where it's needed. And I think there has been a good general, you know, observation of sponsors doing the right things by their companies, whether that's cost cutting more aggressively, certainly reducing discretionary items on the investing side if the ROI and the growth isn't, you know, coming from that. And it has meant, in numerous cases, infusions of liquidity. And so I think we've, broadly speaking, we've had a good dialogue with the sponsors we work with. But keep in mind, we're not sort of a broad sponsor shop. It's more folks that we've done a lot of deals with over the years. I think for the names you mentioned, there are very, very, very idiosyncratic things in general. I would say the Perch and the Amazon aggregators is a little bit more of a general industry weakness, kind of in a consumer discretionary realm. It doesn't make us change our view on the long-term prospects and the thesis. It just means that in certain cases, these companies that had a certain expectation of growth, where that may not be to their expectations, have to do different things individually or in a collective fashion. And we're sort of going to stay tuned on that. We kind of leave it there, but generally, I think they're all looking at trying to mature, scale, and cost cut in a way that's expected and proactive. Hyland, we've talked about a number of times. Astra, just for your information, is a publicly traded name, so that valuation move is really just a quote. And then other names like Inventum, 36th Street, and others. We can talk about, but I think there's very much a similar story that's company specific, not necessarily portfolio, you know, portfolio wide.
spk03: Got it. Thank you.
spk04: Thank you. As a reminder, if you'd like to ask a question, you can press star by one on your telephone keypad. Our next question comes from Christopher Nolan of Leidenberg Foreman. Christopher, your line is now open. Please go ahead.
spk01: Hey, guys. For the acquisition in the deck, the pro forma net leverage was, following the deals, 0.96. Given the change of the market, do you expect that to continue? Are you standing by that projection, or has market conditions changed that?
spk07: Yeah. Chris, your question on the – our disclosures on the pro forma numbers, those are based off of 630 leverage levels for both TCBC and BCIC. If you notice, TCBC's leverage level came down at 930, right about what that pro forma number was. So on a pro forma level right now, it would be a little bit lower. However, our video – our leverage – our range at which we plan to run leverage for the combined company doesn't change. It will fluctuate quarter to quarter, but likely to stay within the range that it's been for TCPC over time.
spk01: Great. And then I guess a follow-up question. That's unusual holding. It's sort of been zero coupon for a long time. And I noticed that it's maturing and these pieces of it are maturing in the fourth quarter. Is the plan simply to extend that investment? And if so, you know, it's zero coupon. So what's the state status there, please?
spk08: Yeah, that's a that's quite an old one. And it's a residual position on something that we've that we've generally exited uh but has a longer tail of um it's kind of just a liability participation and they just have to run out so there's no plan to extend it there's no entity there other than um these obligations that are going to run their course uh in a staggered fashion they run through i want to say 24 but you should see that exposure continue to whittle down to. It's pretty de minimis now, but continue to whittle down and run off. But there's no plan on re-upping or extending at all.
spk01: Great. That's it for me. Thank you very much.
spk05: Thank you.
spk04: Thank you. At this time, we currently have no further questions. My apologies. We do have a question from Ryan Lynch of KBW. Your line is now open. Please go ahead.
spk06: Okay, thanks for taking my questions. First one I just had was, was there any material amendments made in the quarter that were performance-related for any of the sponsors? And I'd just love to, if there were, could you just talk about what was the nature of those amendments, and was there any support in conjunction with those amendments from the private equity sponsor?
spk08: Yeah, I'm going to try to answer that in a generalist because a lot of these tend to be confidential items. But keep in mind, for us, covenants are really built to be kind of risk mitigating, circuit breakers. When things are a little weaker and growth is slower, whatever the case is, we expect them to either get close to or breach. That doesn't mean that we at those levels where viewing the credit as challenged. It's just structured to be a chance to get back in and discuss and review the situation. So in numerous cases, that's happening as it's supposed to. And as I mentioned in the answer earlier, in some cases that has led to not doing very much because it's not an issue, it's just a reset and we're comfortable. some cases that has led to infusions where we think that's appropriate um and discussions with the you know the owner whether it's a sponsor or not in some cases we may reset the covenants you know take an economic view if so long as the credit is you know considered not compromised and so it ranges quite a bit inclusive of cash infusions but i think that it all stems from the ability to Think about structuring these at the front end in a defensive way and then leveraging Covenant as one of the tools to allow us to do our job of protecting principal. Ultimately, that's our main and most important job in this type of business.
spk06: Okay, understood. And then your prepared comments. You mentioned about approximately half of the dollars deployed over the last 12 months, which also included in the third quarter. were two existing portfolio companies. Could you kind of just give a ballpark of generally what are those proceeds being used for? Are they to just refinance existing debt packages you have in these borrowers? Are they for new growth or dividend recaps? Just love to kind of get a good framework of when you're investing in the existing borrower over the last 12 months, what have been the use of those proceeds?
spk05: Yeah, thanks, Brian. This is Bill. So in In every single one of those cases where we do provide additional financing for portfolio companies, there are always healthy situations, obviously, because we're willing to, based on the performance that we've observed over the years that these companies have been in our portfolio, we feel very comfortable extending additional credit. And in large part, it's for add-on acquisitions, primarily. There are some situations where there If they're continuing to grow their business, invest in organic growth rather than inorganic acquisitions. And then in a very small sense, probably some dividend recap capacity. But again, these are all for performing situations or very well performing where we feel like they have additional tech capacity. A good example of that is our companies that have delivered substantially over the time that they've been in our portfolio. And based on our analysis, we view that they have additional debt capacity that we're very willing to participate in and help facilitate.
spk06: Okay. My final question I had was sizable special dividend made in the third quarter, a very large in the fourth quarter. I would just love your dividend cover to remain really strong, you know, over your core dividend next year, bar estimates and consensus. Is it an expectation that you will continue to pay out some level of special dividend on a quarterly basis if earnings stay within this range, and that special dividend will obviously vary from time to time, or is this more of a year-end sort of true-up you did the last two quarters?
spk08: So, let me try to take that one. I think the – certainly we don't want people to take the special as a forecast of a repeating special because then it's not a special anymore. So I do think we are looking at this as one way to give value back to the shareholders in a more concentrated fashion. Obviously we've – it's not the only thing we've done. We've also done some dividend raises, which should be seen as recurring. Every – and we are more frequently and periodically and more frequently assessing the dividend and other tools to return, you know, value to the shareholders. The merger is actually, you know, another form of that as well, as we think about benefits that accrue from that. But our board, you know, we do a review, a thorough review at our board around the business, where it's going, the current prospects, and maintaining a dividend that is, you know, healthy, but also very well covered so we don't, you know, find ourselves in a position to take it up and then to take it down, which I think will be not received well. So it's a long way of saying we're going to continue to assess. The conditions are very good. Obviously, you can tell by the NII over the last several quarters. Portfolio looks like it's in good shape, and the market is pretty attractive. I think you can just – and obviously, we have a transaction that we're looking to close, and we'll revisit all of it as we do every quarter. under the NUCO dynamic versus just TCP as a standalone. And as we do that, we will come back and convey our thoughts to the market and where we can give more to the shareholders. We're going to continue to focus on that. I would just encourage you not to take any one-time item as a recurring item. It's the reason we put it as a one-time. And in part, there is a year-end dynamic that ties to our over-earning the dividend quite a bit through the year that ties into this one as well.
spk06: Okay. Understood. I appreciate the time today.
spk07: Thanks, Ryan.
spk04: Thank you. At this time, we currently have no further questions, so I'll hand back to Rajvig for any further remarks.
spk08: We appreciate your participation on today's call. I would like to thank our team for all of 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.
spk04: Thank you for joining today's call. You may now disconnect your lines.
spk08: Today's call.
spk04: Thank you for joining today's call.
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