BlackRock TCP Capital Corp (TCPC) 2012 Q2 法說會逐字稿

Ladies and gentlemen, good afternoon. At this time, I would like to welcome everyone to the TCP Capital Corporation second-quarter 2012 earnings conference call. During the presentation, all participants will be in a listen-only mode. A question-and-answer session will follow the Company's formal remarks.

(Operator Instructions)

Today's conference call is being recorded. And now I would like to turn the conference over to Wendy Webb, Managing Director and Chief IR Officer of TCP Capital. Wendy, please proceed.

Thank you, operator, and welcome to the investors and analysts joining us for the call today. Please 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 statement made on today's call are made as of today and are subject to change without notice.

On our last conference call, we provided you with a result and financial statement from our pre-IPO first quarter. Today, we are pleased to provide TCP Capital second-quarter results. We will start with commentary from our Chairman and CEO, Howard Levkowitz, followed by more detail on the numbers from our CFO, Paul Davis. Howard will then return with some further perspective before we take your questions. Howard?

Thank you, Wendy. Thank you to everyone for joining us for the TCP Capital Corp. quarterly conference call. This is our second quarterly conference call, and our first earnings call with results as a public Company. Before we discuss the second-quarter markets, and our activities and performance during the quarter, we would like to highlight two accomplishments.

First, our portfolio generated significant net investment income that exceeded the size of our second-quarter dividend and enables us to increase our third-quarter dividend to $0.35 per share. Second, we effectively deployed a significant portion of our IPO proceeds due largely to the experience and relationships of our established investment team and advisor.

I will elaborate on these points, but first, here's the backdrop to what we saw In our markets in the June quarter. At the macroeconomic level, the second quarter was largely characterized by concerns about the underlying risks of the global economy and declining growth expectations in the US. Given the concerns about slowing global growth, it was no surprise that the second quarter created significant capital markets volatility. The negative sentiment put pressure on many asset classes and deferred some corporate expenditure decisions and certain M&A activity.

However, despite the volatile environment, we continue to find attractive investment opportunities. Our investments were primarily comprised of senior loans to companies that were looking to refinance their existing debt facilities to meet maturities or to increase their flexibility for acquisitions and for other corporate purposes. Even with the subpar economic growth, we continue to see middle-market corporate debt providing one of the best risk-adjusted investment opportunities, especially given the constraints on traditional sources of credit.

In our view, the return opportunities for middle-market lending remain attractive with spread and covenant packages better than those in the large leveraged loan market. Most importantly, we continue to carefully analyze each investment opportunity through our intensive due diligence process and to examine the most appropriate place to invest in the capital structure. During the quarter, we continued to mostly focus our investments in secured debt.

Turning now to TCP Capital's second-quarter performance. The Company generated $0.40 per share in net investment income. As we announced earlier today, we are pleased to be able to increase the amount of our quarterly dividend to $0.35 per share, close to a 3% increase, payable at the end of September. We would like to emphasize that the second-quarter net investment income more than covers our third-quarter dividend. This margin of coverage demonstrates the earnings power of our portfolio, even while we retain significant liquidity for new investments.

Also in the second quarter, net assets from operations increased by $0.28 per share. Paul Davis, our CFO, will cover this in more detail shortly. Our portfolio is in good shape at the end of the second quarter, with a fair value of $452 million from investments in a total of 44 companies. During the second quarter, we increased the percentage of debt investments in our portfolio as well as the percentage of our portfolio invested in senior secured debt and a percentage of our portfolio invested in floating rate investments as we focused on opportunities with the best risk-adjusted rewards in the current environment.

At the end of the quarter, 84% of the portfolio was invested in debt securities, 95% of which were senior secured. The portfolio's debt positions carried an average effective yield of 11.5%. The portfolio's debt positions were 51% in fixed rate debt and 49% in floating rate debt, more than 85% of which had interest rate floors.

Less than 1%, or more specifically, 0.5% of our investments in the quarter were on non-accrual status. We had no new non-accruals. Available liquidity at the end of the quarter including net cash and unused capacity under our credit facility totaled approximately $108 million. Our net leverage was approximately 0.45 times net debt-to-capital.

During the second quarter, we invested over $90 million in 11 different transactions comprised of 8 new and 3 existing portfolio company positions. $82.9 million was invested in senior secured floating rate debt and $7.5 million was invested in a series of airplane financings.

Our new investments included -- $19.5 million in senior secured loans to a provider of business process outsourcing services, which we committed in connection with the repayment of our loans to NCO. NCO is now a part of our new larger borrower. $15 million in a senior secured loan to a provider of online education solutions; $11 million in a senior secured loan to a venue management group; $10 million in a senior secured loan to an in-flight Internet provider; $10 million in a senior secured loan to a local media and broadcasting company.

$10 million in a senior secured loan to a premier global supplier of digital display solutions; $7.5 million in a series of airplane financings comprised of debt and equity; and $2.6 million in a senior secured loan, which we are currently in discussions to increase, to an owner and operator of wireless spectrum and network.

We are also pleased to have been able to invest additional dollars into follow-on investments, which are typically attractive opportunities in our existing portfolio of companies where we are already comfortable with the borrower's business prospects. I would note that our approach to investing can be lumpy, and that the $90 million quarterly investment pace should not be annualized.

A number of investments we have thought would be completed in the third quarter were completed early, significantly increasing our second-quarter deployment. We exited $40 million in investments during the second quarter, largely due to refinancings. The exits included $12 million in notes of NCO Group; $10.4 million from a senior secured loan to [Aircap], $7.7 million from a senior secured loan to Gundle Environmental; and $3.8 million in senior secured notes of Alion Science and Technology.

The new second-quarter investments had a weighted average effective yield of 11.6% in comparison to an 11.2% yield for the investments we exited during the quarter. In comparison to our exits, our new investments had a 40 basis point increase in quarter-over-quarter effective yields. Now I will turn the call over to Paul for a more detailed second-quarter financial report. I will come back with some additional perspective on what we're seeing in the third quarter before we open it up for questions. Paul?

Thanks, Howard. As Howard mentioned, we're pleased with our results for the three months ended June 30, 2012. Total investment income was approximately $11.1 million. Per-share total investment income was $0.52, which includes original issue and net market discount accretion of $0.03 a share, and [PIC] income of $0.02 per share. Total investment income was net of depreciation expense from aircraft we own and lease of $0.4 million, or $0.02 per share, which is helpful from a tax perspective.

Total operating expenses for the quarter were approximately $2.2 million, or $0.10 per share. We also accrued dividends on the preferred leverage facility of $0.4 million, or $0.02 per share. After-tax net investment income before dividends on the preferred equity facility was approximately $8.9 million, or $0.42 per share.

Net investment income after preferred dividends was approximately $8.5 million, or $0.40 per share. This amount significantly exceeded our second-quarter dividend of $0.34 per share, and exceeds the amount needed to cover our declared third-quarter dividend of $0.35 per share. The difference between our net investment income and the increase in net assets resulted primarily from a Company-specific markdown on one debt position plus a number of mark-to-market yield adjustments.

At this point, we would like to highlight several accounting topics of interest to our shareholders. The first is our income recognition policy. We record interest income adjusted for premium amortization and discount accretion on accrual basis.

Origination, structuring, closing, commitment, and other upfront fees received as compensation for debt investments are generally not recorded at the time of the loan but are amortized or accreted into interest income over the life of the respective debt investments. This means we generally recognize less upfront fee income and more income over the life of the loan, which has the effect of a more predictable income stream.

The second is our evaluation process. As described in more detail on our 10-Q, we obtained prices for each and every portfolio investment from independent third-party sources at every quarter end, with the exception of generally less than 5% of the portfolio, usually comprised of a few very small positions that we mark internally.

These pricing sources include prices as provided by independent third-party pricing services, independent valuation services, and market quotations as applicable. Furthermore, all of the pricing we receive from our independent third-party valuation providers are affirmative valuations of our investments.

Third, we'll begin reporting the cost basis for all investments in our portfolio at year-end. Historically, we limited the disclosure to what was required by regulation because of the needs of some of the portfolio companies in which we invested under our legacy distressed strategy. We are no longer emphasizing the distressed strategy in our investing going forward.

Back to our results. After paying our second-quarter dividend of $7.3 million, we currently estimate that we ended the quarter with tax basis undistributed ordinary income of approximately $19 million, including approximately $13.5 million of undistributed income from 2011. Our total weighted average interest rate on amounts outstanding on our combined leverage facility at quarter end was 1.0%.

Amounts drawn on our preferred equity facility accrued dividends at a rate of LIBOR plus 85 basis points. And borrowings on our revolving credit facility, their interest at a rate of LIBOR plus 44 basis points. Now I'll turn it back over to Howard.

Thanks, Paul. I'm going to conclude with some comments on what we're seeing in the third quarter and for the remainder of the year. So far in the third quarter --

Ladies and gentlemen, please stand by. Your conference will begin momentarily. Again, ladies and gentlemen, please stand by. Your conference call will continue momentarily. You're on now. We can hear you.

Thank you operator. We're not sure of the source of that disturbance but we apologize for it. During the third quarter, through August 3, we invested approximately $19 million in two new senior loans with an effective yield of approximately 11.3%. The yield excludes warrants issued by the borrowers in one of these transactions. With $108 million in liquidity at the end of the second quarter, we have significant capacity to grow our portfolio and to expand our earnings power.

We have an extensive history of investing in companies with long-term value and competitive advantages that generate significant cash flow and/or have significant asset coverage. We emphasize setting the bar high in our intensive due diligence process and remain selective in our choice of investments with a focus on both achieving high-risk adjusted returns and preservation of capital.

In the face of disarray in many international markets, and despite the uncertainty in anticipation of our national elections in November, we reaffirm our commitment to TCP Capital's investment focus on senior secured US middle-market loans, which generally seemed to us to offer the best value and opportunities for stable investment income. The uncertainty surrounding the capital markets plays to our origination strengths and flexibility. We continue to see a steady flow of recapitalizations, refinancing and other new loan activity motivated by maturities and the need for more flexibility.

Before we take some questions, I would like to spend a moment highlighting some of the attractive structural features of our Company. TCP Capital benefits from an attractive operating expense structure. Total Q2 expenses, including all costs of leverage but excluding non-recurring professional fees were 3.4% of average net assets; this is due in part to TCP Capital's low cost of leverage. As Paul mentioned, our marginal cost of leverage is LIBOR plus 44 basis points.

With respect to fees, the base management fee of 1.5% is calculated on the initial value of our total assets excluding cash and cash equivalents. Incentive compensation is incurred on net investment income, aggregated together with the net realized gains reduced by any unrealized losses. Also, incentive compensation is subject to an 8% preferred return to common shareholders on TCP Capital's performance as a whole. And as a reminder, TCP Capital is not being charged incentive compensation on any income prior to the first quarter of 2013.

In addition, we have voluntarily locked up our own personal pre-IPO holdings of approximately $10 million in investments in TCP Capital for three years from the IPO. And several members of the management team and the Board of Directors bought shares in the market after our IPO. Management's interests are clearly aligned with those of TCP Capital shareholders.

Most importantly, we have an experienced, dedicated and talented team of professionals that's committed to prudently growing the TCP Capital portfolio with the goal of expanding its earning power by deploying the Company's liquidity. In closing, we would like to thank you for your time today and for your investment and confidence in us. We are now happy to take your questions.

We are ready for the first question, operator.

(Operator Instructions)

Greg Mason, Stifel Nicolaus.

I wondered if you could talk a little bit about the investments you've made this quarter. How many of those were lead-arranged by you versus being a part of a small club deal versus syndicated transactions?

Thanks for the question.

In terms of the ones that were lead-arranged by us, there are two that were exclusively lead-arranged by us, and three which were part of a very small club, meaning two of us. And the others had a smaller number of participants in each one.

Okay. Great.

And then you may have said this during the disruption -- but what does the pipeline look for the remainder of this year? I know you said a lot of third quarter activity got pulled here into the second quarter. How should we be thinking about that portfolio growth for the third and fourth quarter?

We're cautiously optimistic about it. As you noted, we did have a lot of our pipeline pulled into this quarter and we don't think that it is appropriate to annualize our first-half run rate. That said, we're working on a number of exciting opportunities; scheduled to fund another one on Monday, in fact. And we are seeing a number of interesting things in the market.

The reason that we're cautious is, one, this is a lumpy business. Certainly our approach to it is. We focus on good situations as opposed to trying to meet some targeted level of investment activity. And the other thing is, there are just a lot of geopolitical events and also domestic events that may have an impact on companies and the market. Generally, those are good for us in times of uncertainty. We tend to see better deal flow, but in any given transaction, it may cause a company to hold off on its execution.

Okay. Great. And then diving into a couple portfolio companies -- I'm just curious if you could maybe give us an update on Marsico. It got marked down again this quarter, and I believe it's marked at about 30% of par, so we are a little concerned about that going on non-accrual status. Is there anything you can tell us about that investment?

As you noted, it was marked at down actually 29% at the end of the quarter. The company is currently on accrual. We are restricted in some of the things that we can say. There's been a series of headlines on the company, citing potential restructuring transactions for the company. This is an investment that we made under our distressed strategy, which we've noted we are deemphasizing going forward, so our cost basis in it is considerably below par. And currently, where the investment is fair value, it's actually at a very low leverage point in connection with the company's earnings. We should be able to say more about it next quarter.

Okay. Great. And then one additional portfolio company, AGY -- it actually was up a little bit in this quarter but I think it's still at 44%. I think Marsico and AGY were the two that we had a little bit of concerns about. Can you talk about AGY?

The company has made a series of moves. It's changed management. It's reevaluating some of its business -- all things that we have encouraged the company's sponsor to do and which we applaud. They're generating much more liquidity with some of the steps that they've taken, and brought back some of the efficiencies. I won't say that the Company's earnings are quite normalized, but they're significantly improved and we're encouraged with the steps they've been taking.

Okay. Great. And then one final thing on the pipeline -- as you're looking at some new investments, are you seeing any changes in yields or leverage points or covenants so far in the third quarter?

So far I would say there aren't dramatic changes. We've been pleased in general with the covenant structures that we've been able to negotiate. I think borrowers understand in this market that, although the high yield market may be on fire, that in the middle market, covenants today are to be expected and reasonable covenants are to be expected, and we are pleased with that.

Now of the two transactions that we closed through August 2, one of them contained warrants, which we were pleased with. We think that this gives us a nice high current yield in a senior secured loan and also some very interesting equity upside in a growth company that we've been working with for a significant period of time on this financing. They needed to move quickly on a closing.

So in general, I think there aren't huge changes in our portfolio in this regard.

Okay. Great. And then one final question -- you've got some chunky equities in your portfolio. Do you have any further insight into when may be a good time to exit some of those?

As I think you are aware, we've taken down the percentage of equity in this portfolio quite significantly over time. A year-and-a-half ago, it was 29%, then 19% at year end, and now it's down to about 16%. We continue to actively manage each of those in all cases, but we are the largest or one of the largest shareholders for all of the material positions. And we're working on them to improve values, and ultimately we'll look for a timely exit in them. [But] we would also note that occasionally some of these companies do send out some cash, as we had a significant dividend from one of them in the first quarter.

Okay, great. Thank you Howard.

Thank you.

Thanks Greg. Operator, we're ready for the next question, please.

Stephen Laws, Deutsche Bank.

You just hit on most of my questions.

One topic I wish you guys could provide a little bit of color on is -- I know probably won't talk about future dividends but maybe just dividend philosophy. Is this something you're going to evaluate quarterly? Is it something you've put in place that you think is a full run rate support? So really, how do I look at the back half? Was this dividend level put in place as something that you feel the portfolio can sustain even after the incentive fees begin hitting income statement in the first quarter? Or is the dividend going to be reviewed quarterly, implying that we'd revisit this again in Q1 after the incentive fee kicks in?

All good questions on the same subject. Our intent is to pay dividends out of net investment income. We're pleased to have been able to raise our quarterly dividend from $0.34 to $0.35 per share this quarter. We believe that the current $0.35 per share dividend will be covered by net income investment income, and it's sustainable. We're focused on deploying the proceeds from our offering and are using our leverage facilities. We're also pleased that we've got undistributed income year-to-date, in addition to that, in a spillover.

We are looking at what happens next year when the incentive fees kick in. You can see that there is a fairly significant difference between our net investment income at $0.40 and the $0.35 per share we distributed. We think that's prudent at this point. Our goal is to be able to continue paying at a steady rate as we increase the earnings and deploy capital going forward.

Great. I appreciate the color there, and look forward to next quarter results. Thank you.

Likewise. Thanks for the question.

Operator, we'll take the next question, please.

Chris Kotowski, Oppenheimer.

As you noted, you don't disclose the cost, but only the principal amounts. But when we look at Marsico and we see that the principal amount went up $2 million from the prior quarter to this, does that mean that, that was restructuring and one had to put in additional cash?

No. It means in this case we added to the position during the quarter.

You added to the position? Okay.

Correct.

And then, secondly, it said in the press release the yield of the portfolio at the end of the period was 11.5%. When we calculated the yield for the average, it looked like it was a bit below that. And I was wondering, is it that a lot of these new investments closed late in the quarter?

Sure. Our effective yield does include OID.

Okay.

I'd just like to reiterate the comment that Paul made on our accounting policy and the fact that we amortized upfront fee in over time. This reduces our fee income but also gives us much more stability going forward.

Okay. All right. That's it for me. Otherwise, my questions have been asked. Thank you.

Thank you.

Thanks, Chris. Operator, do we have any more questions on the line?

I'm showing no further questions at this time.

We appreciate your questions and our dialogue today. In closing, our objective is to strive for high risk-adjusted returns that can generate net investment income to provide a current return to TCP Capital shareholders in the form of quarterly dividends. We remain confident in our ability to grow our portfolio and to expand our earnings power through our experience investing in the attractive opportunities presented by our established deals [closed] sources and enhanced by TCP Capital's controlled expense overhead, low cost of leverage and shareholder friendly fee structure. Thank you again for joining us. This concludes today's call.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.