425: BlackRock TCP Capital Corp. Announces Q4 and Full Year 2023 Results, Provides Update on BCIC Merger

BlackRock TCP Capital Corp. reports a 20% increase in net investment income for 2023 and discusses the proposed merger with BlackRock Capital Investment Corporation.

Summary

• BlackRock TCP Capital Corp. (TCPC) held a conference call on February 29, 2024, to discuss its financial results for the quarter and year ended December 31, 2023, and to provide an update on the proposed merger with BlackRock Capital Investment Corporation (BCIC).
• For the full year 2023, TCPC reported net investment income of $1.84 per share, a 20% increase over 2022, with an annualized net investment income return on equity of 14.5%.
• Net investment income for the fourth quarter was $0.44 per share.
• TCPC's NAV declined by 6.4% during the fourth quarter, which included a $0.25 special dividend; excluding the special dividend, the NAV declined by 4.5%, primarily due to net unrealized losses on Edmentum, Thras.io, and Securus.
• The Board of Directors declared a first quarter dividend of $0.34 per share, payable on March 29 to shareholders of record on March 14.
• The company is working towards closing the proposed merger with BCIC, pending shareholder votes.
• Investments in new portfolio companies during the quarter had a weighted average effective yield of 13.4%, exceeding the 12.5% weighted average effective yield on exited positions.
• Total liquidity increased to $349 million at the end of the quarter, relative to total investments of $1.6 billion.

Sentiment

Score: 6

Explanation: The sentiment is moderately positive due to the increase in net investment income and the potential benefits of the merger, but it is tempered by concerns about the NAV decline and challenges faced by certain portfolio companies.

Positives

• Net investment income increased by 20% year-over-year.
• The company has a history of covering dividends with recurring net investment income and paying special dividends.
• The merger with BCIC is expected to create meaningful value for shareholders.
• The majority of portfolio companies are successfully navigating the higher rate environment and delivering revenue growth and margin expansion.
• The overall effective yield on the debt portfolio increased to 14.1% from 12.7% at the end of 2022.
• Total liquidity increased to $349 million at the end of the quarter, relative to total investments of $1.6 billion.

Negatives

• NAV declined by 6.4% in the fourth quarter, primarily due to unrealized losses on three portfolio companies: Edmentum, Thras.io, and Securus.
• Thras.io filed for bankruptcy to accelerate objectives and incorporate lender-led financing.
• Securus is facing liquidity tightness due to an elevated cost structure, CapEx requirements, and upcoming debt maturities.
• As of December 31, four portfolio companies were on nonaccrual, representing 2.0% of the portfolio at fair value and 3.7% at cost.

Risks

• Economic uncertainty could impact portfolio company performance.
• Higher interest rates and inflation could pressure middle-market borrowers.
• The company faces risks associated with the proposed merger with BCIC, including the possibility that the merger may not be completed or that the anticipated benefits may not be realized.
• The company is exposed to risks related to specific portfolio companies, such as Thras.io's bankruptcy and Securus's liquidity issues.

Future Outlook

The company sees significant opportunity to build upon its track record of success, given the growing demand for private credit and the potential benefits from the combination with BCIC. They believe they are well positioned to continue to deliver attractive returns, given that their team has one of the longest track records in direct lending in any of the publicly traded BDC.

Management Comments

• Management believes that their portfolio companies are successfully navigating the current environment.
• Management emphasizes their team's expertise in working through challenging credits.
• Management is excited about the potential of the merger with BCIC to create meaningful value for all shareholders.
• Management believes TCPC is uniquely positioned to benefit from growing demand for private credit.

Industry Context

Traditional lenders are retreating from lending to the middle market, creating opportunities for private credit firms like TCPC. Middle-market borrowers are increasingly turning to private credit for financing needs due to certainty of execution, flexibility, and close partnerships.

Comparison to Industry Standards

• TCPC's historical performance since 2012 includes a 10.1% annualized return on invested assets and a 9.7% annualized cash return, which management believes is at the high end of its peer group.
• The company's focus on senior secured debt and less cyclical industries aligns with common strategies for managing risk in the BDC sector.
• The challenges faced by Thras.io reflect broader issues in the Amazon aggregator space, where companies are dealing with excess inventories and over-leveraged balance sheets.

Stakeholder Impact

• Shareholders will be impacted by the dividend payments, the NAV performance, and the potential benefits of the merger.
• Portfolio companies will be impacted by TCPC's investment decisions and ongoing engagement.
• Employees of TCPC and BCIC may be impacted by the merger.

Next Steps

• Shareholder votes on the proposed merger with BCIC.
• Continued monitoring and engagement with existing portfolio companies.
• Addressing the refinancing of the 2024 notes.
• Working through the challenges faced by Thras.io and Securus.

Key Dates