BlackRock TCP Capital Corp (TCPC) 2014 Q2 法說會逐字稿

Ladies and gentlemen, good afternoon. Welcome, everyone, to the TCP Capital Corp.'s second-quarter 2014 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. (Operator Instructions) I will repeat these instructions after management completes their prepared remarks.

And now, I would like to turn the call over to Jessica Ekeberg, Vice President of the TCP Capital Corp. Digital Investor Relations team. Jessica, please proceed.

Thank you. Before we begin, I would like to note that this conference call may contain forward-looking statements based on the estimates and assumptions of management at the time of such statements. They 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. During today's call, we will refer to our slide presentation, which you can access by visiting our website, www.tcpcapital.com. Click on the Investors Relations link, and select Events and Presentations. Our earnings release and 10-Q are also available on our site.

I will now turn the call over to Mr. Howard Levkowitz, Chairman and CEO of TCP Capital Corp.

Thanks, Jessica. We would like to thank everyone for participating in today's call. I am here with our President and COO, Raj Vig; our Chief Financial Officer, Paul Davis; and other members of the TCPC team.

This morning, we issued our earnings release for the second quarter ended June 30, 2014. We also posted a supplemental earnings presentation to our website, which we will refer to throughout this call. We will begin our call with an overview of TCPC's performance and investment activities, and then our CFO, Paul Davis, will provide more details on our financial results. Then, I will provide some additional perspective before we take your questions.

We will begin by reviewing our recent significant achievements on slide 4, followed by a brief review of our financial highlights, which are summarized on slide 5 of our presentation.

In May, we received a $75 million leverage commitment from the SDA. In June, we increased our TCPC funding facility to $200 million and expanded the accordion feature to $250 million. In June, we closed $108 million private placement of 5 1/4% convertible senior unsecured notes due in December 2019. In July, we opened a new office in San Francisco, anchored by our new Energy Technology team, which is led by Todd Jaquez-Fissori. This strategic extension of our platform will be valuable in expanding our investment opportunities. At the end of July, we completed our fourth follow-on equity offering of 5.4 million shares. We raised net proceeds of $90.4 million. And consistent with our previous follow-on offerings, this offering is accretive to our net asset value.

Now, turning to the highlights of our second quarter. First, we deployed $169 million in new investments during the quarter, with net deployments of $81 million. Second, we delivered net investment income of $0.40 per share. Third, we reported earnings of $0.33 per share and a net asset value of $15.31. Fourth, we declared a quarterly dividend of $0.36 per share, which is payable on September 30, 2014 to shareholders of record on September 16. In the second quarter, our originations increased, as we continue to leverage our platform and create attractive investment opportunities.

Over the last four quarters, we have invested over $575 million on a gross basis, and approximately $300 million on a net basis. In the second quarter, we continued to focus on allocating capital, primarily to income-producing securities. 93% of our new investments were in senior secured loans, and 7% were in senior secured notes. For those viewing our presentation, please turn to slide 8.

At the end of the second quarter, our highly diversified portfolio had a fair value of $894.7 million invested in 74 companies across numerous industries. In the second quarter, we continued to focus on investing in senior secured and floating-rate debt. At quarter-end, approximately 97% of the portfolio was in debt securities, 98% of which were senior secured debt. 77% of the debt positions were in floating-rate debt, 89% of which had interest rate floors. With most of our debt portfolio in the floating-rate securities, we are well-positioned for any meaningful rise in interest rates.

During the second quarter, we continued to deploy capital at a strong pace, investing approximately $169 million in 14 different transactions. These investments included senior secured debt investments in nine new and five existing portfolio companies. In total, we invested approximately $157.1 million in senior secured loans, and approximately $11.5 million in senior secured notes. Our new investments were in companies across a wide variety of industries, including healthcare, consumer products, retail, chemicals, software, aircraft financing, and business services.

In the second quarter, we exited $87.9 million of investments, including a $16 million senior secured loan to ConvergeOne; a $15 million senior secured loan to Isola, and a $10 million senior secured loan to MCM. New investments we made in the quarter had a weighted average effective yield of 9.9%, and investments we exited during the quarter had a weighted average effective yield of 9.8%. Our overall effective portfolio yield was 10.7% compared with 10.8% in the previous quarter. Despite margin compression in the broad market during Q2, we were able to deploy capital in new investments at a slightly higher yield than the investments we exited during the quarter, while continuing to emphasize senior secured investments.

Now, I will turn the call over to Paul for a more detailed report of the second-quarter financial results. After Paul's comments, I will provide some additional perspective on what we're seeing in the market; then, we will take your questions.

Paul?

Thanks, Howard. We are pleased with our results for the three months ended June 30, 2014. As you can see on slide 12, total investment income was approximately $24.6 million. Per-share total investment income was $0.68, which includes PIC income of $0.04 per share and prepayment income of $0.02 per share. As we mentioned in prior calls, it is our general policy to amortize upfront economics on debt investments rather than recognize all the income at the time the investment is made. Cash income from aircraft leases of $0.03 per share was offset by depreciation expense of $0.02 per share, reducing the Company's taxable income.

Total operating expenses for the quarter were approximately $6.2 million or $0.17 per share. We also accrued dividends on the preferred leverage facility of $0.4 million or $0.01 per share. Our annualized operating expense ratio, including interest expense and preferred dividends, but excluding incentive compensation, was 4.7% of average net assets. Incentive compensation, which is subject to a total return hurdle of 8% annually, is calculated by multiplying net investment income after preferred dividends, and net realized gains reduced by any net unrealized losses by 20%.

Incentive compensation from net investment income for the quarter was $3.6 million or $0.10 per share. For purposes of imputing incentive compensation, realized gains on investments acquired before January 1, 2013 are measured by comparing investment disposition proceeds to the fair value of the investments at January 1, 2013 when the incentive compensation period began. For book purposes, our reserve amount is also calculated based on any additional incentive compensation that would have been payable had we liquidated at net asset value on the balance sheet date. This reserve is not payable unless the associated gains are actually realized, and is subject to reversal.

At June 30, 2014, this reserve amount was approximately $1.6 million, a decrease of $0.6 million, or $0.02 per share from the end of the prior quarter. Net investment income before dividends on the preferred equity facility and incentive compensation was approximately $18.4 million or $0.51 per share. Net investment income after preferred dividends and incentive compensation on net investment income was approximately $14.6 million or $0.40 per share. The difference between this amount and our net increase in net assets from operations of $0.33 per share was primarily comprised of two items: net realized and unrealized losses of approximately $3.0 million or $0.08 per share; and the reduction in reserve for incentive compensation of $0.6 million or $0.02 per share.

Net realized gains were $0.9 million or $0.03 per share. Net unrealized losses were $3.9 million or $0.11 per share, almost half of which came from Marsico, an investment made prior to our initial public offering as part of our legacy to stress strategy, and which has yielded significant income for many years. We also had an unrealized mark-to-market adjustment on certain of our aircraft leased to United Airlines. As a reminder, when we mark our portfolio at the end of the quarter, each quarter, substantially the entire portfolio is priced using external sources with only a de minimis amount being priced internally.

As of June 30, 2014, the quality of our portfolio remains strong with no debt investments on nonaccrual status. After paying our second-quarter regular dividend and special dividend, which totaled $14.8 million, we closed the second quarter with tax [bases] undistributed ordinary income of approximately $27.7 million.

Available liquidity at the end of the quarter totaled approximately $284 million, which was comprised of available leverage of $246 million, and cash and cash equivalents of $29.4 million plus net pending settlements of $8.8 million. Available leverage included our $75 million leverage commitment from the Small Business Administration in connection with our SBIC license. Net combined leverage was approximately 0.63 times common equity at quarter-end and 0.69 times common equity immediately prior to our July 27 equity offering.

TCP Capital continues to benefit from an attractive operating expensed structure. As noted, total second-quarter expenses, including all costs of leverage and excluding incentive compensation, were 4.7% of average net assets on an annualized basis. This is due in part to TCP Capital's low cost of leverage, as highlighted on slide 13.

Our total weighted average interest rate on an outstanding -- on our combined leverage program, including both debt and preferred equity, was 2.6% at the end of the quarter. Amounts drawn on a preferred equity facility accrued dividends at a rate of LIBOR plus 85 basis points. Amounts drawn on the TCPC funding facility accrue interest at a rate of LIBOR plus 250 basis points, subject to certain funding requirements; and borrowings on our continuing original credit facility bore interest at a rate of LIBOR plus 44 basis points, as of June 30, 2014. Starting August 1, 2014, the rate on our original credit facility increased to LIBOR plus 250 basis points.

I will now turn the call back over Howard.

Thanks, Paul. I will briefly cover what we are currently seeing in the middle market, and then open up the line for questions.

So far, in the third quarter of 2014, through August 5, 2014, we have invested approximately $99.2 million in seven senior secured loans, with a combined effective yield of approximately 11.3%. In conjunction with one of the new loans we made in Q3, TCPC also received [the forms]. The Q3 investments include our second investment in our SBIC subsidiary, which we partially funded with SBA debentures. We caution that our originations can be lumpy and should not be annualized.

Our primary focus remains on expanding our earnings by effectively putting our recently expanded and diversified liquidity sources to work to optimize our portfolio. We are focused on capitalizing on the many attractive opportunities we are seeing to provide much-needed growth capital to middle market companies.

Our pipeline remains robust. We continue to evaluate a wide range of investment opportunities across a variety of industry sectors. Over the past 12 months, we have originated more than $575 million of transactions from our traditional deal partners, as well as new sponsor and non-sponsored relationships. We are especially proud of the progress we have made in expanding our origination platform and referral sources. We view these relationships as a validation of our business model, and the value we bring to the Company's refund. We are excited about our new San Francisco office, and believe our team there will further expand our opportunities.

TCPC has built a strong market position by leveraging our growing platform to lend to established middle market companies, with sustainable competitive advantages that generate significant cash flow and/or have significant asset coverage or enterprise value. Looking to the future, we are uniquely qualified to capitalize on new opportunities for several reasons.

First, we have scale and depth in our origination and servicing platform, and a highly experienced team to identify investment opportunities from a broad range of sources, and to play an integral role in structuring and investing in complex investment opportunities. We believe our rigorous investment process and highly diversified portfolio will enable us to continue to achieve high risk-adjusted returns over time, while preserving our investors' capital.

Second, our lower cost of capital and diverse funding sources continue to be key competitive advantages for TCPC. In the second quarter, our weighted average cost of capital was below the average for BDCs. In addition, TCPC remains well-positioned with our attractively priced leverage, our recently issued convertible notes, and our new long-term unsecured notes from the SBIC facility, which adds another source of low-cost funding.

Finally, our interests are closely aligned with our shareholders. Our origination income recognition practices are conservative, and we have a shareholder-friendly fee structure. We are personally invested alongside our shareholders with approximately $10 million of our free IPO holdings voluntarily locked up. And members of the management team and the Board of Directors have, on a number of occasions, including during the second quarter, purchased shares in the open market.

We are pleased with our strong second-quarter results, and we remain committed to our rigorous investment process that delivers high risk-adjusted returns while preserving capital. We manage our portfolio with a long-term view, and we are optimistic about our prospects for continued growth and returns. We would like to thank our new shareholders for your participation in our recent offerings, and our existing shareholders for your continued support.

And with that, operator, please open the call for questions.

(Operator Instructions) Chris Kotowski, Oppenheimer & Co.

Yes, I wonder if you could talk a little bit about -- well, first of all, the SBIC and how you planned -- is there -- if you can give us a flavor for how you deployed that capital? And then -- well, I guess start with that.

Sure. Thanks. It's Raj here, and I will touch on that. We are very pleased, obviously, to have received the approval and also to have made our first draw under the SBIC, just as far as a process goes, if that's what you're asking.

What we have set up internally is a review team, you know, people with specific responsibility to review every pipeline opportunity as it comes down -- comes through the platform, to determine if it qualifies or not. And if it qualifies, while there is no hard and fast rule of having it be the draw against the SBA facility, we generally are looking to draw it, obviously, because it's attractive -- it's an attractive facility, both in terms of costs and term, and all the reasons we look to get in the first place. But we know as the pipeline deals come through, which qualifies and which do not.

We obviously -- as we mentioned in a prior call, had preapproval for an investment before the facility was available. We have a second investment that qualified that was made in Q3. And, as Howard mentioned, we've already made our first draw on the facility.

One of the things, just as a reminder, whether it's unique to us or not, it's very attractive -- we are not required by the SBA to post equity against the facility versus as we drive down, which is very good from a point of view of no drag on our equity capital, versus putting it to work as it -- deals qualify and close.

Okay. All right. And then I guess just more generally, either for you or for Howard. Obviously, the high-yield markets have been under stress, and a number of BDC's have traded off sharply in recent weeks. And so, the market obviously has concerns, but we keep seeing just great credit numbers. And I guess -- I wonder if you have an opinion about to what extent the market stress that we are seeing reflects a real buildup of potential problems in the next six to nine months? Or is it just market volatility, in your opinion?

Well, with respect to the market volatility, I think we will defer to the analysts and experts on where markets trade. And on any given day, stocks may move up and down quite a bit, which doesn't necessarily indicate a fundamental change in the value of the underlying companies. And it is clear that there's a lot more volatility and nervousness in the market. And high-yield also clearly got ahead of itself to the point where it was no longer high-yield; simply low-rated credit.

With respect to how that's impacting us, we think, generally, that's a good thing for our business. We are not competing directly with the broadly syndicated markets, but there is a chilling effect on financings generally when the market is back up. And our markets are a little stickier; they don't move exactly with the syndicated markets. Some borrowers still think they should be able to get two terms as if the markets hadn't changed.

But on the whole, it's helpful. And I don't think it's necessarily having an impact on credit. I think these were more market-related events.

All right, that's it for me. Thank you.

Thank you.

Jonathan Bock, Wells Fargo.

Thank you for taking my question. Just one quick item as it relates to the SBIC. And I believe you kind of outlined this prior, so it would be a good refresher. The percentage of the portfolio that you have today that would qualify for the SBIC?

So, we have said in the past -- thanks for the question -- what we have said in the past, Jonathan, is, we have looked historically before we applied as to whether we would have had companies that qualified, and we saw a fair bit that would. So, it encouraged us to take advantage of the facility and the terms to pursue that. And this is sort of the pre-registration period.

We have not disclosed, I don't believe, what the -- how the existing portfolio would -- what would qualify or not. I think -- we have to decide whether we will disclose that. We know the number and it's not immaterial. But it's -- there is a fair bit of portfolio that would qualify, but I don't know if we disclose that. So let me come back to you on that number if, in fact, we sort of approve internally to do that.

I mean, the number is appreciated. And two (multiple speakers) --

And just one more point -- sorry to cut you off. Before we applied, obviously, we did not have the team in San Francisco. And just inherently, a lot of their companies that they look at, including the one on Q3, enhances that sort of overall profile on top of what our traditional platform has sourced and generated.

Are you going to make it a -- I mean, obviously, everybody wants to grow their SBIC facility, but are you kind of looking -- trying to maybe perhaps maximize the types of loans that qualify through the SBIC funnel, to have them maybe overemphasize near-term prior to the potential SBIC rate lock?

You know, we, as I said on the first answer, we don't have a hard and fast rule as to having to use it if something qualifies. I believe we are looking to leverage it. It is an attractive rate, obviously, in term and structure, but we also have attractive other facilities, which I guess have a bit of a high-class problem.

We are looking to leverage it. I don't know that maximizing it is sort of an explicit agreement, but we feel that we will have some good opportunities. We've seen some already come through. We've already drawn on it, but it will be a sort of quarter-by-quarter assessment on what's the best approach -- with a bias towards leveraging it.

Got it. And then another item in your portfolio that we found attractive and interesting. Gogo was in the markets for an add-on and an extension of the term loan. Now, one, I mean, this is kind of a two-part item, do you -- if you're looking at trends today, are you expecting kind of a continued uptick in portfolio velocity, as you [restrict] to with Gogo was a very attractive investment?

And then also, that's just broadly speaking. And then on the investment in specific, could one expect to see any type of amendment or fees coming off this transaction, just given its notoriety within the portfolio?

Sure. I think that's starting to get into a little bit into Q3 as opposed to Q2, so we're happy to take up the specifics on the next call. But generally speaking, we have been very pleased with the continued deal flow that we are seeing across the platform. Our pipeline is robust. There are a lot of deals that we're doing on a sole basis also. And really, they are across the sectors that we focus on.

Okay, great.

Thanks, Jonathan.

Troy Ward, KBW.

Howard, could we just get a little bit of color on the addition of the Energy Tech team? Can you kind of give us some color on what kind of an Energy Tech's specific focus is? What's kind of an average EBITDA, a company of that focus, I guess I would say? So what does that entail, an Energy Tech investment?

Sure. I'm going to let Raj talk a little bit more about the specifics, but I think in terms of thinking about what they mean for the team, and your prior question about what the SBA means for the team, we are continuing to run the business in the way that we have run it before. The SBIC license enables us to have another financing tool. The team in San Francisco is synergistic to what we have been doing. You know, they are focusing on slightly different kinds of companies. And Raj will give you a little bit more color on that. But we think it's really just expanding on the kinds of business we've been doing.

Sure. Thanks for the question. I think we went over this a little bit in prior quarters, but I will try to reiterate some of the color. In a sense, we had already been looking at I guess what would qualify as Energy Tech deals in our portfolio across some overlapping industries, whether it was technology or energy or even chemicals.

We have done some solar, we had done some renewables. But very much similar to the way we -- our platform sources deals, there is certainly a concentrated set of sourcing parties in this sector, particularly the DC's, as well as some strategic parties. So I guess one criteria I would highlight is, there is an element -- there's a higher element of venture capital parties or constituents in Energy Tech fields. And generally, these are earlier stage, but very high-growth companies; but most importantly, these are very well-funded companies with well-funded parties behind them. That is a big element of the protection that we see in Energy Tech on top of all the collateral and the structural protections that we seek.

There's no sort of specific hard or fast answer as to what is an Energy Tech deal, because there are a lot of subsectors that qualify -- from renewable, across the board, wind, solar, other sectors that are sort of high growth and replacing or complementing fossil fuels. There are segments that would include energy storage. This is a very well-funded area that we are seeing activity in. We are seeing ag-bio and other elements around the pharma and the chemical and the bio landscape.

So, in many ways, there is not a -- unlike other sectors, it's not a hard and fast list of things, and there is some movement in the subsectors that our team looks at. They take a very thought-led approach. They are very focused on whose investing, what the capital structure protections are, and what the TCP specific structure protections are.

And at some point, I think we might have them talk to some of their deals as we are making these investments, including the one we have already made in Q3, to give more color. But those are some of the characteristics that highlight -- that attracted us to the team and to the sector in specific.

Thanks, Raj. That's helpful. But in generalities, would you say that these investments -- you would typically get an equity investment -- co-investment alongside of this or (multiple speakers) --?

So I would say typically, there's a couple of things that we look for and get, or we'll be getting. One is certainly the backend fee that seems to be a bit of a market standard in that sector. It's a fee you get upon exit repayment or maturity regardless of the form of that return of capital. We often see -- and we are seeing this in the pipeline as well -- equity or warrants alongside the credit investment.

And you know, if you really ask us our preference, we're getting warrants; that tends to be preferable than co-investment equity dollars, and a bias. There may be occasional equity co-investment, but I would tell you that the preference and what we're seeing more the case than not is a warrant participation, or just very good rate OID and back-end exit fee as part of the structure.

Great. That's helpful. Thank you. And then, Howard, can you just talk briefly -- I don't think you touched on this, kind of just what you saw in the trailing 12 for the Company's EBITDA in your portfolio? Obviously, with the size of your portfolio, you do have a broad swath and kind of some very good insights maybe into the underlying economy. So I would appreciate any color you can provide on what you've see on a broad perspective from your EBITDA.

Sure. Generally, our portfolio is healthy and the companies are doing well. Having said that, I think in the broader economy, although it is clearly recovering, there's a lot of lumpiness, and some sectors aren't recovering at the same rate. And I think on a more company-specific basis, there's a lot of change going on, both in terms of regulatory changes and competitive changes, they're having a big impact on businesses out there.

Do you think prospective borrowers in a leverage financed transactions, do you think they are thinking about the impact of higher interest rates through floating-rate borrowings one, two, three years down the road? Is that an active conversation that happens when you are speaking with potential borrowers?

I'll take that. This is Raj again. It is. At some level, I think borrowers are not unsophisticated even in the middle market, and there's a reasonable treasury and structuring mentality, and many of these do have a sponsor or concentrated institutional backers. If the management teams aren't thinking about it, certainly their owners are cognizant of it.

I would say perhaps more importantly, we think about it a lot. So when we structure an instrument in terms of both the level of leverage and just the coverage of that cash payment is something we look at as having good coverage, good buffer, and tailored to the Company. So whether it's thought about or not by the issuer, we think about it all the time and talk about it quite frequently to make sure it's appropriate.

Is there a meaningful amount of your borrowers or borrowers out there that are using -- that are swapping out and fixing their instruments even if they are at the floating-rate?

I would say not -- occasionally, but it's not the common or the -- it's certainly not the majority of times. Occasionally that happens and that made it happen in the backend in their own treasury departments. But generally, these are -- these seem to be fixed -- floating-rate liabilities for them and they keep it that way, from what we've seen.

Great. Thanks, Raj.

Robert Dodd, Raymond James.

You gave a good bit of color on the energy tech space in terms of pricing differences and potential for warrants, et cetera, maybe higher rates. Can you expand that a bit to the SBIC space, where typically, in a broader sense -- obviously, energy and tech sometimes falls within that -- we see higher total returns. What kind of -- before risk adjustment, obviously -- what kind of expectation should we have there in terms of what coupon versus warrant participation? And whether you trade one off versus the other, we should expect to see, as you ramp the SBIC side of the portfolio? Basically, I mean, is it going to be higher-yield? Or are you going to maintain yields and go for more equity participation?

So, the cheeky answer, to use a proverbial term, is that we'll look for both when we can get it. There is definitely higher yield. These are -- again, without making it a hard and fast rule or absolute rule, we'll look for double-digit coupons, reasonable issuance discount, and then the additive fee on the back-end, which maybe Paul wants to touch on how we are treating that from an accounting point of view, we can clarify that.

But these are higher returning instruments. And just to correlate it to the SBIC, again, it's not always the case -- or I suppose it doesn't -- you can't say with absolute certainty that it's always the case that we will qualify. But a lot of these companies are a little younger, a little earlier, and the criteria tends to match up from an SBIC criteria perspective as to -- that you are qualifying for the draw.

So the warrants -- and again, it will be up to our team, who is very thoughtful on the sectors, the exit opportunities, the growth outlook, as to whether they will take any trade-off if it's available for warrants versus coupon. But generally speaking, they are not looking to sort of subsidize the contractual return -- nor are we across our platform for an equity position. But, in many cases, it's available, it's appropriate, and we will seek it out.

Okay, I appreciate that. Thanks a lot.

Doug Christopher, Crowell Weedon.

Thanks for the color on that last question. I have a question regarding the kind of hypothetical., let's say the interest rate increase where short-term rates move up, let's say, 50 basis points. How might we think about that? How might the portfolio react? Is there much of a lag in terms of the adjustment? Or just from the kind of 20,000 foot view, how might we think about that?

We are actually -- in our 10-Q -- let me -- I have the page number on that. On page 53, we have that disclosure.

Okay. Okay, very good. And then, secondly, so SBA, going back to the SBA question, let's say if 15% of the current portfolio was under that structure currently, does that improved margins noticeably?

The way we view the SBA is a wonderful tool to provide financing. And I wouldn't think of it as dramatically changing our business. As Raj discussed earlier, when we made the decision to apply for the license, we looked back at our portfolio on a historical basis, and reached the conclusion that much of what we were doing would qualify to be financed through the SBIC. And so we decided to apply for the license. We are planning to run our business in the same way.

We will, from time to time, do investments that have much higher returns -- not necessarily always different risks associated with those; sometimes it's simply a function of what we are able to structure in a given circumstance with the given borrower. More of those may be weighted to going into the SBIC facility. The Energy Tech investments tend to fall more into that category, but I wouldn't view it as being a significant change in how we are running the business or the kinds of investments that we're going to do.

Okay. And then lastly -- and thank you for that -- when we -- the overall stock market has given back out of its gains and some volatility, and the high-yield market has shown a little reaction. I think one of the first callers discussed that regarding BDCs. Are you -- has the market, I guess, in terms of price or the attractiveness overall generally of investments, has -- have the opportunities, I guess, increased as prices have come back down? Or has it been more stable?

Sure. We had a very robust Q2, which was coming in a period when the capital markets were -- the debt markets -- or the syndicated debt markets were quite frothy. If you look at the originations we disclosed for Q3 so far, they are at a higher yield and they are at a robust pace. Now if we want to caution, please don't annualize five weeks. This is 7 data points. And what we wind up doing for the rest of the quarter may be significantly different. It's hard to generalize five weeks into the quarter, particularly when it's in the summer when things often slow down for many people.

Having said that, disruptive capital markets are generally better for our business. It may mean that there is less M&A activity, but our business isn't dependent on M&A activity. We have a broad base of both sponsored and non-sponsored transactions. And generally, when it's harder for things to get done in the broadly syndicated markets, that creates a certain amount of angst among other capital providers as well. And that tends to be a better condition for making loans in our business. But again, I caution you that it's not linear, and the relationship moves somewhat slowly sometimes.

That's great. Thank you very much for taking the question.

Thank you. Appreciate the question.

Christopher Nolan, MLV & Co.

Thanks for taking my questions. Howard, just a follow-up on the prior question just now. Should we read that as indicating that you are seeing improved pricing trends for many of your investments?

No, I wouldn't read into that too much. We are pleased with quarter-to-date. Our pricing has been higher. Now the Q2 was certainly below our effective yields, although on a risk-adjusted basis, we were very happy with the deals we did. And we're seeing a lot of variety. But I wouldn't say that after five weeks into this quarter, or maybe six or seven weeks of some choppier markets, that it's fair to make a generalization that's going to apply through the rest of the year.

Now, I do think there's a little bit more caution out there, which is certainly a good thing for our business generally. And we like the variety and type of transactions that we're seeing. But I think it's too soon to say that there has really been a fundamental change in our pricing environment.

Right. And then the follow-up. I noticed the percentage of floating-rate investments in the quarter increase to 77% versus 73% in the prior quarter. I mean, is that just sort of normal volatility? Or is this reflecting people's expectations that short-term rates may stay low for a while?

We have, over the last several years, shifted an increasingly large portion of the loans that we are making to floating-rate. We acknowledge that in the short-term, we are giving up some current income and lowering our earnings as a result.

But as a matter of risk and positioning, we would prefer to have the portfolio positioned to benefit from higher rates. It's hard to see rates going lower. They have basically gone down for over 30 years. There are lots of people who try and predict where rates are going to go, for a living; we don't. Our job as Risk Managers is to position our portfolio in what we think is the most sensible way. And if rates stay low, we are earning great yields and out-earning the dividend. And if they start to go up, we'll benefit.

Got you. And final question. For the SBIC, Raj indicated that you do not have to put up the $75 million or so in equity capital, at least on a deal-for-deal basis? Or do you have to put it up later on? (multiple speakers) there.

Yes. Just to clarify. In general, I think it has been the policy of the SBA to have people pre-fund the vehicle. In our case, we don't have to pre-fund. We are able to do it on a deal-by-deal basis.

Great. Okay, thanks for taking the questions.

Thank you.

Chris Kotowski, Oppenheimer & Co.

Thanks for coming back to me. I guess what I was trying to get (multiple speakers) --

Welcome back.

(laughter) What I was trying to get at with before is, how should we think about your weighted average cost of leverage, say, in the back half of this year and next year? Because, right, there were a couple of moving parts in there now. And this quarter, you grew the loan portfolio by about $80 million, but you issued $105 million of converts. And then it looked like the cash stayed pretty even and you paid down the partnership facility, which is actually your lowest cost of borrowing, right? That's the L plus 44.

So, I guess, do you have a preferred order in which you fund things? I mean, I guess, if you fund something in the SBIC, then it's higher cost money near-term, but long-term may be great. And is there an order in which you have to -- do you have to use the L plus 250 facility before you use the L plus 44 basis point facility? Or can you mix and match it any way you want?

The short answer is mix and match any way we'd like.

Okay.

We have had what we think is the lowest cost of funding of any public BDC. We still have a very low cost of funding. The $108 million of converts is obviously outstanding, as is the preferred $134 million at LIBOR plus 85 basis points. Our other sources of funding, the two facilities that we have, which, on a going forward basis, are both at effectively LIBOR plus 250, can be drawn at various times, and will go up and down for various reasons having to do with how we allocate our borrowing.

And the SBA loans are going to get drawn over time. As you know, those are based off the treasuries -- 10-year treasuries, which is currently at a very attractive rate. So, those will get set over time. But for 10-year fixed rate money, we are pleased at the rate at which we can currently borrow under that facility. So I think if you put all of those things together, you will see that we still have a very low cost of borrowing.

All right. And just to understand the process, you paid down the L plus 44 facility this time before the L plus 250 facility? Is there a reason behind that?

Yes, please remember that the L plus 44 went up to LIBOR plus 250. So (multiple speakers) --.

Oh, okay.

It ceased being as inexpensive as it was.

Oh, okay. Thank you.

Thank you.

At this time, I show no further questions. I would now like to turn the call back over to Howard Levkowitz for closing remarks.

We appreciate your questions and our dialogue today. I would like to thank our experienced, dedicated, and talented team of professionals at TCP Capital Corp. Thanks again for joining us. This concludes today's call.

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day.