BlackRock TCP Capital Corp (TCPC) 2014 Q3 法說會逐字稿

Ladies and gentlemen, good afternoon. Welcome, everyone, to the TCP Capital Corp. third-quarter 2014 earnings conference call. Today's conference call is being recorded for replay purposes. (Operator Instructions). And now I would like to turn the call over to Jessica Ekeberg, Vice President of the TCP Capital Corp. Global 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, 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.

During today's call we will refer to a slide presentation, which you can access by visiting our website, www.tcpcapital.com. Click on the Investor 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 third quarter ended September 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 detail on our financial results. I will conclude by providing some additional perspective before we take your questions.

We will review the highlights of our third quarter, which are summarized on slide 4 of our presentation. First, we deployed a record $207 million in new investments during the quarter with net deployment of $184 million. Second, we delivered net investment income of $0.38 per share, almost all of which came from recurring income. Third, we reported earnings of $0.29 per share and an increase in net asset value to $15.43 from $15.31 at the end of the second quarter. Fourth, we declared a regular quarterly dividend of $0.36 per share and also declared a special dividend of $0.05 per share.

This is our fifth special distribution over the past nine quarters and demonstrates the strength of our investment portfolio and our rigorous underwriting process. Both dividends are payable on December 31, 2014, to shareholders of record on December 8. Finally, just this week, we increased our TCPC Funding Facility to $250 million, up from $200 million, and expanded the accordion feature to $300 million. This credit facility has an attractive interest rate of LIBOR plus 2.5%.

Our originations were strong, demonstrating the strength of our origination platform and our continued creation of attractive investment opportunities. Over the last four quarters, we have invested over $600 million on a gross basis and approximately $366 million on a net basis. In the quarter, we continued to focus on allocating capital primarily to income-producing securities. Over 98% of our you investments were in senior secured loans and less than 2% were in equity securities. For those viewing our presentation, please turn to slide 7.

At the end of the third quarter, our highly diversified portfolio had a fair value of approximately $1.1 billion invested in 82 companies across numerous industries. In the third quarter, we maintained our focus on investing in senior secured and floating-rate debt. At quarter end, approximately 97% of the portfolio was in debt securities, substantially all of which is senior secured debt. Approximately 80% of the debt positions were in floating-rate debt, 86% of which had interest rate floors. With most of our debt portfolio in floating-rate securities, we are well positioned for any meaningful rise in interest rates.

During the third quarter, we benefited from a strong existing pipeline in the market disruption, investing approximately $207 million in 14 different transactions, the highest level since our IPO. These investments included senior secured debt investments in 10 new and four existing portfolio companies. In addition, we received warrants in connection with two of these debt investments. In total, we invested $203.9 million in senior secured loans and we received $3.2 million in equity securities in connection with several of the financings.

Our five largest investments reflect our diversification strategy and include a $29 million senior secured loan to Arcserve, a software storage company; a $25 million senior secured loan to Kawa, a solar energy development company; a $22 million senior secured loan to Soraa, a vertically integrated LED lighting company which issued warrants in connection with the financing; a $21 million senior secured loan to Great Atlantic and Pacific, a leading food retailer in the Northeast; and a $19 million senior secured loan to Benton, a financial services company.

In the third quarter, we exited $22.6 million of investments, including a $7 million senior secured loan to CTV, a $4 million senior secured loan to Meta Media, and a $4 million senior secured loan to Livingston. New investments in the quarter had a weighted average effective yield of 10.9%. The investments we exited during the quarter had a weighted average effective yield of 9.8%. A 110 basis point increase in the investments we made during the quarter versus those we exited resulted in an overall effective portfolio yield of 10.7%.

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

Thanks, Howard. We were pleased with our results for the three months ended December 30, 2014 (sic - see press release, "September 30"). As you can see on slide 11, total investment income was approximately $27.2 million. Per-share total investment income was $0.68, which includes PIC income of $0.04 per share and prepayment income of $0.01 per share. As we've 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 $7.9 million, or $0.20 per share, including interest expense of $2.5 million or $0.06 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 5.5% 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 $3.8 million, or $0.09 per share. For purposes of computing 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 21, 2013, when the incentive compensation period began.

For book purposes, a 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.

As September 30, 2014, this reserve amount was approximately $0.7 million, a decrease of $0.9 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 $19.2 million, or $0.48 per share. Net investment income after preferred dividends and incentive compensation on net investment income was approximately $15.1 million, or $0.38 per share.

The difference between this amount and our net increase in net assets from operations of $0.29 per share was primarily comprised of two items. Net realized and unrealized losses of approximate $4.5 million, or $0.12 per share, offset by the change in reserve for incentive compensation of $0.9 million, or $0.02 per share.

Net realized gains were $0.9 million. Net unrealized losses were $5.4 million, primarily due to increases in market yield spreads, particularly at the end of the quarter. The value of our legacy investment in Real Mex was reduced and we've placed the 1% loan on nonaccrual, which had a negligible impact on net investment income due to its small size and rate. As of September 30, 2014, we had no other debt investments on nonaccrual. As a reminder, substantially the entire portfolio is priced using -- is priced every quarter using external sources, with only a de minimis amount being priced internally.

After paying our third-quarter dividend, which totaled $15.3 million, we closed the third quarter with tax basis undistributed ordinary income of approximately $27.5 million. Available liquidity at the end of the quarter totaled approximately $200.4 million, which was comprised of available leverage of $177.5 million, and cash and cash equivalents of $24.1 million, less net pending settlements of $1.2 million. Available leverage includes the unused portion of our $75 million leverage commitment from the Small Business Administration in connection with our SBIC license. Net combined leverage was approximately 0.66 times common equity at quarter end.

Since quarter end we have further increased our liquidity and capital availability through a $50 million expansion of our TCPC funding facility and a $50 million expansion of the facility's accordion feature, as well as the launch of an ATM program which allows us to conservatively raise equity on a gradual and accretive basis at market trading prices.

At the end of the quarter, our total weighted average interest rate on amounts outstanding on our combined leverage program, including both debt and preferred equity, was 2.8%. This reflects our preferred equity facility at a rate of LIBOR plus 85 basis points, our SBA debentures at an all-in rate of 3.37%, our convertible notes at 5.25%, and amounts outstanding on our revolving credit facilities at a rate of LIBOR plus 2.5%, subject to certain funding requirements.

I will now turn the call back over to Howard.

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

Fourth quarter is off to a good start. Through November 3, 2014, we have invested approximately $69 million, primarily in three new senior secured loans, with a combined effective yield of approximately 10.4%. Fourth quarter investments include our third investment in our SBIC subsidiary, which we partially funded with SBA debentures. We are pleased with the strong start to the quarter. However, we note that originations can be lumpy and neither the pace nor the yield should 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, and we continue to see strong demand for capital from middle-market companies that meet our investment criteria.

Over the past 12 months, we have originated more than $600 million of transactions from our traditional deal partners, as well as new sponsor and non-sponsor 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 companies we fund.

TCPC has built a strong market position by leveraging our growing platform to lend to establish, 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 for continued success 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. Over the past couple of years, we have continued to expand our origination platform to increase the number of potential opportunities we review. This allows us to take a highly selective approach to the investments we make.

In September, we added Carolyn Glick to our growing origination team. Carolyn has a strong track record of lending to middle-market companies and will be a great addition to the team. 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 focus on senior secured loans, the majority of which are floating-rate securities, has resulted in a lower overall risk profile and strong portfolio performance. This has enabled us to deliver a consistently strong dividend and to make special distributions five out of the nine last quarters to our shareholders as well.

Third, our lower cost of capital and diverse funding sources continue to be key competitive advantages for TCPC. In the third quarter, our weighted average cost of capital was below the average (technical difficulty). In addition, TCPC remains well-positioned with our attractively priced leverage, our convertible notes, and our 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 pre-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 fourth quarter, purchased shares in the open market.

We are pleased with our strong third-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 all our shareholders for your confidence and your continued support. And with that, operator, please open the call for questions.

(Operator Instructions). Greg Nelson, Wells Fargo Securities.

Howard, just briefly, I think you mentioned that the weighted average yield on new investments was 10.9% and those that were repaid during the quarter was 9.8%. But the portfolio yield I think remained flat at 10.7% sequentially. Can you run us through what were the drivers there? I would think that if that was the case, portfolio yield would actually increase.

Sure. The differential was significant, but the dollar amount of our prepayments was low. We had $22.6 million of prepayments and so in relationship to $207 million of originations. So, the math just wasn't that significant although the differential was. This was an unusually light quarter for prepayments, and we think that was partly attributable to some of the dislocation in the market. Some companies that we had expected to prepay I think pushed off the decision, given what was went on in the market.

Okay, great. And then I saw in your press release that you guys started utilizing the ATM program here in the fourth quarter. And you cited you have a fair amount of liquidity between the SBIC facility and cash on the balance sheet. I just want to see how you are balancing utilizing liquidity that you have with issuing new shares, and how you are thinking about growth of the ATM program from here.

Sure. Long term, our goal is to enhance shareholder value and to put good assets on the balance sheet and to grow the businesses we have been doing, and to balance out the right side of the balance sheet with a diversified set of liabilities which we have been adding to with -- during the last couple of quarters with our convertible bond and the SBA facility and expanding our leverage facility.

With respect to the equity side, we have attempted to do that over time in the most efficient way possible, waiting until when we need the equity to expand and trying to do it on a just-in-time basis. The ATM is a very efficient way of doing that, because you can raise equity dollars on a regular basis. It doesn't always allow you to do a significant amount, though, and so we have been very judicial in our use of it and raised it on an accretive basis and pretty small dollars since we put the program in place.

Sure. Do you see the program complementing the large equity raises that you have done in the past, or eliminating them?

We see it as the complement. The larger equity raises obviously enable you to do much more significant amounts over time. The ATM is a function of a number of things. Our goal in being able to have it is to use it efficiently on an opportunistic basis. But I suspect that going forward, we will probably be utilizing both.

Great. Thanks so much for taking my questions.

Troy Ward, KBW.

Good afternoon, gentlemen. As a little follow-up to Greg's prior question about the 110 basis point increase of new assets versus exits. That's great to see, and it seems like we haven't seen that. I just want to see, in the current environment do you anticipate that -- it's a small sample size, I know -- do you anticipate that that is a turn where we are actually going to be able to see a bit wider margins? Or was that just a one-off where maybe you culled some of the lower-yielding stuff in the portfolio, and that was the reason for the pick up?

Hey, Troy, it's Raj speaking. I will try and address that. In the business it really is -- it's hard to say. I think that when you look at the last nine quarters since we went public, we have generally exited -- we have generally put assets on at or above levels that we have exited. In some cases with higher prepayments than the current quarter, which did seem unusually light, as Howard pointed out.

And we have been focused on, at some level, in the market, if the opportunities aren't there, either on a discrete transaction basis or on a larger, quarterly volume basis, we just don't do the deal and we say no. We are not fixated on putting a certain amount to work for quarter. That being said, I think that historical experience is encouraging. We have seen, at least from what we've put on and versus what we've sold, a stabilization, if not some slight uptick in the quarters and in this current quarter, the new assets were at higher level than the overall portfolio.

But it is hard to say. The current volatility of the market does seem to be leading to good opportunities. We are seeing a good pipeline with a good, diverse set of opportunities at good returns. But it is hard to predict many quarters out, as you know, in this market, although the trends seem to be encouraging.

Great. Thank you. And then on slide 7, the industry segmentation of the portfolio, can you just speak to your direct or even your indirect impact, the recent energy volatility may have on your portfolio? And how does your underwriting protect against that volatility? And to what degree does it protect against volatility in the energy markets?

Sure. That's a good question. The direct portion of our portfolio that is impacted by energy is relatively small. Indirectly, it is going to be significant. If energy prices, and oil specifically, stays down and it is like a tax rebate for consumers, and a pretty significant one. That is going to benefit lots of companies in terms of freeing up spending power for people. At the same time, expenditures in the energy sector have driven a lot of growth in the economy. And to the extent that oil prices remain down and companies start to recalibrate their spending, there will be both less spending on some suppliers and on related services, particularly in a few geographic areas.

We don't have any particular geographic concentration. So it is something that we are monitoring very closely going forward and thinking about a lot, and trying to model a series of different scenarios with respect to how it is going to impact the portfolio.

Can you speak with a little bit more specificity on just the segmentation of oil and gas extraction? 3.6% of the portfolio?

Sure. Some of these categories are broad, and that doesn't mean that that is necessarily where all of the revenue is derived from these companies. And some of them have hedges in place, so they are not likely to be impacted in the near term. But clearly those companies in that sector are more likely to be directly impacted.

And then just a couple of clarifications. I apologize; I didn't get some of these numbers written down quickly enough. You were talking about your cost of capital, and I actually got all of the different pieces. The SBA is 3.37% and the convert at 5.25%, but what was the weighted average total leverage cost that you gave there?

Sure. The weighted average interest rate including both debt and equity was 2.8% at the end of the quarter.

Okay. And then, Howard, you talked about also quarter to date, the fourth quarter investments. What was -- can you repeat that information, what the dollar amount that you have done quarter to date, and what is the yield on those investments?

Sure. Quarter to date we have invested approximately $69 million in an effective yield of approximately 10.44%.

Great. All right. Thanks, guys.

Chris Kotowski, Oppenheimer.

Just as a follow-up on the energy side, do you have an energy team or an energy lender or a specialist that would enable you to take advantage of any dislocations that come our way in the next however many quarters? Or is that a capability you would need to build?

Thank you. Yes, we do. Energy is a sector that we focus on a lot here at the firm, more across our broader platform than we have in the TCP Capital Corp. And we also have a member of our advisory board who has significant experience in this area, and we've made a number of investments over the years. It is something we are spending a lot of time thinking about and studying.

Clearly, prices have come down a lot faster and farther than many people anticipated, and it is going to create a lot of winners, but also some losers. And so we are trying to make sure that we plan from a risk management standpoint, but also positioning ourselves to take advantage of this, through both existing relationships and some other ones we have been working on developing.

And then, secondly, kind of unrelated, I guess it has been a tough year for BDCs generally, starting with the Russell rebalance and then this quarter you had spreads widen out on most loans. And you now have a lot of BDCs trading below NAV and obviously I think that makes -- for most of the industry, it makes capital raises tougher. And I am just wondering if you have note -- has it had an impact on the competitive dynamics in the market?

It's a little hard to parse all of the factors that had been going on in the last couple of months. There has been dislocation in the capital markets, particularly in the credit markets, that have had an impact on particularly the trading markets. And although they are not directly connected, that certainly impacts the indirect markets.

The impacts of not being able to raise as much equity on some of the participants in the market is clearly something we are going to see going forward, but also there are a lot of private participants in the market that have capital that is not subject to the equity capital market, and they continue to participate in these markets and compete. So I think it is a lot more involved and complex than that. But clearly there's some impact, and I think Raj is going to add to that.

Yes, I just wanted to add to that. I think it's a little early to tell if that is a trend, if it sticks, or if it is a bit of a more recent market phenomenon, Chris. We have -- I would say we have seen a couple of situations where people have reassessed their bite size, or even the timing of something. It has been the exception more than the rule. But keep in mind that as repayments come in -- which, in our case this quarter it was slower than normal -- but as those come in, people I think have that capacity to decide whether to redeploy, reinvest, do buybacks, what have you. And that is a little bit of a decision-making process that's ongoing in real-time right now. And how that shakes out we will see.

Okay. All right. That's it for me. Thank you.

(Operator Instructions). Robert Dodd, Raymond James.

I wondered if you can give us a bit of color by market segment. Now you are participating in a somewhat broader range of company size than most BDCs, from SBA-eligible to larger companies. Are you seeing anything in terms of a dislocation between those markets right now? Obviously with the volatility we have seen some indications of a bit of widening spread, et cetera, in the somewhat larger end of the market. But at the smaller end it usually takes much longer for those kind of impacts to flow through. So, are you seen anything where it is moving positively in one end and not seeing it in the other? Or is there any other color you can give us by size segment, if you will?

Yes, I will take a crack at that and ask Howard to comment -- add commentary as he sees fit. But we've always said over the last, call it, one a half to two years, we have made the point that the larger, broadly syndicated loan market and high-yield tends to react quicker. Spreads have tightened in that market materially, but in our segment, call it the middle-market and even down to the SBA or SBIC size company, there just has been, at least from we have seen, more defensibility in maintaining a certain rate of return on the assets.

And you have seen that in the overall portfolio spread for us, as well as in the spread of assets we have deployed and acquired versus what we sold off. It just has been a little stickier, but directionally consistent from the larger cap market.

To your point, I think right now we are seeing -- we are certainly seeing some volatility. There has been a little bit of an impact in our portfolio, as Paul pointed out, not significant. And nothing that we think is, at the moment, correlated to the actual performance or fundamentals of the Company. So I think you are seeing a little bit of the reverse; that even though things are going the opposite direction in the larger cap market, the pace or the timing of that as it relates to our market will just, by nature, be a little slower.

Although we are seeing good opportunities. We are seeing some impact in terms of the supply of capital here and there being constrained, and the pipeline is good. We are focused on the right types of companies. Particularly defense -- as always, defensible in their franchise and in their cash flows. We are particularly cautious on cyclicals, but I think the timing of that, up or down, is consistent with what we have seen over the last couple of years in the opposite direction.

Okay. Thank you. That's helpful.

Christopher Nolan, MLV & Co.

Two questions. Howard, do you anticipate any sort of seasonal slowdown in the December period or the January period? In terms of deal volume?

Sure. Good question. Hard to know at this point. We have had both situations, where year-end winds up being a very busy time for us. We take pride in being available to do deals then and being available for our borrowers who want to do year-end transactions. But there are other times when it is just less significant, and it seems like people are more interested in going on vacation at year-end than getting deals done. And at this point, I don't think we are in a position to assess what is going to happen.

I think what is going on in the capital markets -- and maybe even to some extent people's perception whether there are going to be changes in the regulatory environment in a few situations -- it is probably going to be more impactful than the calendar itself. And we certainly know with some borrowers that have just decided they wanted to wait and see if things change to do some of their refinancings. And whether they conclude -- there has been a fast change between what the capital markets are like now and just three weeks ago -- whether they conclude that over the next several weeks it makes sense to go ahead and do -- go ahead with things, I think we will see in coming weeks.

Got you. And my follow-up would be on the ATM program. Given the share volumes that we saw in the last month, would you look at that volume sort of as a ramp up and the more steady state is going to be some level higher than that? Or do you look at that as being the normal volume of shares issued under the ATM?

The volume we issue under the ATM is going to be entirely dependent on what makes sense for our shareholders and our business. We are going to do it on an accretive basis. It is obviously a very helpful just-in-time funding tool, but what is going on with respect to the volumes and price in our stock and the capital markets generally, as well as what is going on on the business side, are going to dictate that.

Okay. Think you for taking my questions.

Christopher Doug, Crowell, Weedon.

It is Doug Christopher at Crowell, Weedon. I think I might have heard earlier on that you said you took advantage of some of the volatility in the markets to make some investments, right, over the last few months? Was that correct?

What happened was, particularly towards the end of the quarter, the capital market started to back up. And so our deals don't always track that. Many of the things we closed during the quarter were in the pipeline for many months, and pricing was agreed to before that. But in some cases people made decisions to get things done quickly and wanted to move before things got -- might get worse. And so that enabled us to price deals more attractively than we would have been able to in the last several quarters.

Okay. Thank you. And just as a follow-up to the energy question, I think on the last call you mentioned adding an energy team in San Francisco. Any color on that?

Yes, sure. That is a little bit different. That team is an energy technology -- more earlier stage, venture debt targeted at that sector. That being said, some of the -- there's some disconnect with what happens in oil, just because of the secular trends that are going on and the areas they focus on. A little more disruptive type investments in renewables or biochem, et cetera.

And in some cases, the impact of oil prices may be a positive on some of their companies, if it is an input, or it may actually be slow down to ramp to the extent there are substitutes for high-priced oil. But I would just distinguish that team and its focus, both on stage of company and type of credit product versus more the later stage, traditional energy business, where we do have the experience set both in-house and on our advisory board that Howard mentioned earlier.

Okay. So that would be in addition to the quote? Like, for example, the oil and gas extraction at about 3.6% of your current portfolio?

That would be distinct from that, correct.

Okay. Thank you.

That would likely be distinct from that, depending on how the coding works. I don't actually have an exact correlation between what is in that code and what they are focused on. But at a high level, later stage oil and gas or traditional energy segments would be different from what the energy tech folks are working on.

Thank you.

I am showing no further questions. I would now like to turn the call back over to Howard Levkowitz.

We appreciate your questions in 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.