BlackRock TCP Capital Corp (TCPC) 2017 Q4 法說會逐字稿

Ladies and gentlemen, good afternoon. Welcome, everyone, to TCP Capital Corp. Fourth Quarter and Full Year 2017 Earnings Conference Call. Today's conference call is being recorded for replay purposes. (Operator Instructions)

And now I will turn the call over to Katie McGlynn, Vice President of TCP Corp. Global Investor Relations team. Katie, please proceed.

Thank you, Valerie. 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.

This morning, we issued our earnings release for the fourth quarter and full year ended December 31, 2017. We also posted a supplemental earnings presentation to our website at tcpcapital.com. To view the slide presentation, which we will refer to on today's call, please click on the Investor Relations link and select Events and Presentations.

I will now turn the call over to our Chairman and CEO, Howard Levkowitz.

Thanks, Katie, and thank you to everyone for participating on our call today. For those of you who have not yet met Katie McGlynn, she joined us at the beginning of the year, and we are pleased to have her here with other members of our TCPC team on this call.

I will begin with an overview of our key accomplishments for 2017 and then our CFO, Paul Davis, will review our financial results. After Paul's comments, I will provide some perspective on the market and then we will take your questions.

To begin, we will review our key accomplishments for 2017. Please turn to Slide 4 of our presentation.

First, our dividend continues to be a key part of our total return to shareholders. In 2017, we paid dividends totaling $1.44 per share. We continue to cover our dividends, as we have done each of the 23 quarters since our inception. In 2017, we outearned the dividend for the year by $0.15 per share or 10%.

Second, despite the competitive market environment, we continue to find attractive investment opportunities, driving record levels of deployment in 2017. We deployed a total of $865 million during the year, resulting in net deployments of $210 million, despite record dispositions of $656 million.

Third, we continue to prudently raise equity and debt financing on attractive and shareholder-friendly terms.

Fourth, last month, S&P reaffirmed our investment-grade rating, reflecting our conservative leverage structure, focus on senior secured investments and the quality of our broadly diversified investment portfolio.

Fifth, our Board of Directors renewed our $50 million share repurchase plan at our most recent board meeting, which provides for repurchases of up to $50 million to the extent our stock declines below NAV.

Sixth, on a cumulative total return basis, we returned 78% since our IPO, outperforming the Wells Fargo Business Development Company Index by nearly 50% over this period, as shown on Slide 7.

And finally, our investment adviser, Tennenbaum Capital Partners, continue to expand its operations and geographic presence with the opening of a new office in Atlanta, which further strengthens our pipeline of investment opportunities.

Now on to highlights from our fourth quarter. We delivered another strong quarter of originations in the fourth quarter totaling $213 million. Dispositions for the quarter were $222 million, resulting in net dispositions of $9 million, demonstrating our willingness to shrink the balance sheet when appropriate.

As shown on Slide 5, we earned net investment income of $0.41 per share, outearning our dividend by $0.05 per share. And today, we declared a first quarter dividend of $0.36 per share, payable on March 30th to holders of record as of March 16.

For those viewing our presentation, please turn to Slide 8. We continue to hold the diverse portfolio of investments. At quarter-end, our portfolio, which had a fair market value in excess of $1.5 billion, was invested in 96 companies across a wide variety of industries. Our largest position represents only 2.9% of the portfolio, and our 5 largest positions together represent only 13.3% of the portfolio. As you can see on Slide 8, at quarter-end, the vast majority of our assets were senior secured debt instruments.

In addition, as shown on Slide 9, 89% of our debt investments were floating rate, up from approximately [80%] at the beginning of 2017. We have discussed the potential for rates to rise for a number of years and have positioned our portfolio accordingly. To the extent LIBOR continues to increase, we expect to benefit from higher interest rates in future quarters as our floating rate investments reset, potentially providing significant upside, which is enhanced by our predominantly fixed rate liabilities.

Turning to Slide 10. We deployed $213 million in the fourth quarter in 13 investments, all but one of which were senior secured. These include investments in 10 new companies and 3 existing portfolio companies. Our investments in existing portfolio companies continue to be an important source of investment opportunities and reflect our strong borrower relationships and the value we deliver to them.

Our top 5 investments in the third quarter reinforce our commitment to maintaining a diversified portfolio and lending at the top of the capital structure. They include: a $32 million senior secured loan to Datto, a provider of data protection and continuity services; a $27 million asset-backed note to Caribbean Financial, a consumer lending company, which we have financed since 2012; a $25 million senior secured loan to Domo, a data management company specializing in business intelligence tools and data visualization; a $20 million senior secured loan to Lithium Technologies, a provider of social media management software; and an $18 million senior secured loan to American Broadband, a provider of telephone broadband and cable services in rural markets.

Our other investments in the fourth quarter were spread across a variety of the industries, including insurance, manufacturing and an ABL retail deal.

In the fourth quarter, dispositions of $222 million included the repayment of $30 million of Caribbean Financial notes, the payoff of a $20 million loan to NILCO and the aggregate payoffs of $18 million of loans to Asset International. Our investment in NILCO provides a good example of our ability to leverage our deep relationships and industry knowledge to source and structure unique deals.

NILCO is a fourth generation, family-run building products distributor that was acquired in a buyout. We structured a first lien term loan with the company, which provided the borrower with the needed flexibility by leveraging our prior experience in the building products industry. The company was ultimately acquired by strategic investor, and our loan was repaid at a premium.

New investments in the quarter had a weighted average effective yield of 10%. And the investments we exited during the quarter had a weighted average effective yield of 10.9%. Our overall effective portfolio yield at quarter-end remained at 11%, as the increase in LIBOR effectively offset the slightly lower rate on newer loans. Given the competitive pricing environment, we are very pleased to be able to continue to generate consistently strong yields on our investments.

Now I will turn the call over to Paul, who will discuss our fourth quarter financial results. Paul?

Thanks, Howard, and hello, everyone.

Starting on Slide 12. Net investment income after incentive compensation was $0.41 per share or $0.05 above our dividend of $0.36 per share. On an annual basis, net investment income after incentive compensation was $1.59 per share, substantially outearning our dividends of $1.44 for the year. This continues our nearly 6-year record of covering our dividend every quarter since our IPO. Since the IPO, we've outearned our dividends by an aggregate of $25.5 million or $0.43 per share at year-end.

Investment income for the quarter was $0.80 per share. Of that amount, interest income comprised $0.79 per share, of which recurring cash interest was $0.64, recurring discount and fee amortization was $0.04 and recurring PIK income was $0.02. The remaining $0.09 per share came from prepayment income, including prepayment fees and unamortized OID and exit fees. We also earned $0.01 per share of other income.

Our income recognition follows our conservative policy of generally amortizing upfront economics over the life of an investment rather than recognizing all of it at the time the investment is made.

Operating expenses of $0.29 per share included interest and other debt expenses of $0.15 per share for total net investment income of $0.51 per share before incentive compensation. Incentive compensation was $0.10 per share or 20% of net investment income as our all-in performance continue to exceed our cumulative total return hurdle rate of 8%.

Net realized and unrealized losses of $10.3 million or $0.18 per share were comprised primarily of markdowns of $2.8 million on Green Biologics, $2.3 million on Real Mex and $2.3 million on the sale of our Contextmedia loan. Realized losses of $9.1 million were primarily comprised of $7.1 million related to the reorganization of Globecomm, which had previously been marked down.

Our credit quality remains strong with only one loan on nonaccrual at quarter-end, a loan to Real Mex, which we've discussed in the past and which continues to be marked at 0.

Turning to Slide 15. We closed the quarter with total liquidity of $371.6 million. This includes available leverage of $301.0 million and cash and cash equivalents of $86.6 million, less net pending settlements of $16.0 million. Available leverage includes the remaining $67 million on our $150 million leverage commitment from the SBA. We drew down another $8 million of SBA leverage during the quarter. Regulatory leverage at quarter-end, which is net of SBIC debt, was 0.75x common equity on a gross basis and 0.67x net of cash in outstanding trades.

As noted on our third quarter earnings call, we issued an additional $50 million par of our 2022 notes as a follow-on to the $125 million par issuance in Q3. And yesterday, we refinanced our SVCP revolver with a new revolving credit facility through ING Capital, with total capacity of $100 million at a rate of LIBOR plus 2.25%. We are pleased to be able to continue raising debt financing on attractive and shareholder-friendly terms.

Our ATM program remains a shareholder-friendly way to raise equity as opportunities arise. During the fourth quarter, we reactivated our ATM in a small and judicious way, raising approximately $0.9 million.

With our stock trading at a premium to NAV throughout 2017, we did not repurchase any shares under our share repurchase program during the quarter or the year. However, our buyback program remains in effect and, in fact, was activated during the first quarter as our share price dipped below NAV.

At the end of the quarter, the combined weighted average interest rate on our outstanding debt was 4.13%. This reflects our TCPC funding facility and SVCP revolver at a rate of LIBOR plus 2.5%, our convertible note issuances at rates of 4 5/8th and 5 1/4%, our senior unsecured notes at 4 1/8% and our SBA debentures at a blended rate of 2.57%.

I'll now turn the call back over to Howard.

Thanks, Paul. Now I will briefly cover what we are currently seeing in the market.

In the first quarter through February 26, we have invested approximately $81 million, primarily in 4 senior secured loans. The combined effective yield of these investments is approximately 10.2%. At this point in the quarter, our pipeline includes many transactions that are well within our historical yield range.

Today, given the wealth of M&A activity and accessibility to cheap financing, both of which have propelled asset values to all-time highs in credit spreads to recent lows, we are increasingly cautious. Despite the market fervor and intense competition, we remain relentlessly focused on generating superior risk-adjusted returns for investors, while preserving capital with downside protection. Our focus on appropriate risk reward means we are prepared to let our balance sheet shrink when appropriate as we did during the fourth quarter.

We believe that even in a highly competitive market, TCPC is well-positioned for growth in 2018 for several reasons: first, we have been investing in middle market companies for nearly 2 decades, which has allowed us to deliver consistent returns across multiple market cycles; second, over this time, we have developed long-term relationships with deal sources and portfolio companies, which provides us with the ability to source unique and interesting investment opportunities, a key advantage in today's market. The vast majority of our new transactions in 2017 were either small club deals or deals where we have acted as the sole or co-lead due in part to the relationships we have developed.

Third, we have maintained our focus on credit quality and downside protection by taking a highly selective approach to investments and staying true to our disciplined underwriting standards. Fourth, our co-investment exemptive relief from the SEC, which we obtained in 2006, affords us the opportunity to co-invest alongside Tennenbaum Capital's other clients to provide larger and more comprehensive capital solutions to our borrowers than TCPC could pursue on itself.

Fifth, our low cost of capital and diverse funding sources provide us with access to a variety of attractively priced equity and debt financing alternatives. Our follow-on issuance of 4.125% 5-year notes and the revolving credit facility we entered into earlier this week are just 2 examples.

Finally, our interests are closely aligned with our shareholders. Our origination income recognition practices are conservative, and we have one of the most shareholder-friendly fee structures in the industry. We continue to invest alongside our shareholders, and members of the management team and Board of Directors continue to purchase TCPC shares in the open market as was evidenced on a number of occasions as recently as this month.

Looking to the future, our strategy remains the same. We will continue to focus on effectively deploying capital from our diverse and attractively priced funding sources to optimize our portfolio performance by generating a strong recurring earnings stream while focusing on capital preservation.

In closing, we are pleased with our performance and achievements in 2017, and we are optimistic about our prospects for delivering continued growth and returns to our shareholders in 2018. We would like to thank all of our shareholders for your confidence and your continued support.

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

(Operator Instructions) Our first question comes from Robert Dodd of Raymond James.

On your -- a few questions. On your rate sensitivity, obviously, you mentioned to it potentially in your comments, potentially provide upside. And obviously, we've seen over the -- a year ago today, your portfolio yield was 10.9%, now it's 11%. Obviously, LIBOR has moved up. How much of the kind of snapshot sensitivity that's in the presentation -- the cue based on the balance sheet today. How much of that do you think the positive sensitivity of LIBOR will actually stick versus get competed away in the environment we're in right now? Not an easy question, but...

Robert, thanks for the question. I think it's a good one. We don't ultimately know what is going to happen to competition in this market. But as you know, we've been doing this for long time, for 2 decades. And we're not trying to be all things to all people, and we continue to try and look for more unique opportunities, which is why I think we've been able to maintain a lot of our spread, despite a compressing spread environment. In this past quarter, it was roughly, as you pointed out, netted out. We do think though that we've positioned our balance sheet very well for the future with the vast majority of it, almost 70%, in fixed rate versus the vast majority, almost 90% of our assets, being in floating rate assets. And that should benefit us, particularly if we see the kind of rate moves we've seen the last 2 quarters, which were very significant. Of course, there's also a lag in timing. The presentation is mechanical. When these flow through versus -- on the asset and liability side, it doesn't always match up quarter-over-quarter.

I appreciate that. On kind of -- also based on your comment, you said increasingly cautious. Obviously, you shrank the portfolio in the fourth quarter, which I think, obviously, time-to-time, that is absolutely the right thing to do. Do you think -- pulling out your crystal ball, I mean, is it still in the first quarter and what you're seeing in pipeline? Is it still kind of the time to be shrinking the portfolio, given how aggressive the competitive environment is? Or do you think net you're going to be growing in 2018?

Yes. Robert, let me take that question. It's Raj. And what I will do is first caveat that we are reluctant to give 2018 forecast because it is relatively, as Howard always says, a lumpy business. I also would just remind you that the portfolio didn't shrink because we didn't deploy. We actually deployed a fair amount. It shrank because there are a lot of repayments. And I think that's partly a function of the nature of our business, where a lot of these companies have a transitional piece of capital that tends to repay, refi or the company gets sold in the interim. It also may be partly a function of the competition, where -- I don't have an exact count, but as I go through the exits, a number of them were companies that we just had, I think, a good view on and a good position as a lender, that someone else came in and priced down that we didn't want to participate in because I think we feel like we chose the right piece of the private credit cycle versus the repricing. How that plays out in 2018, it remains to be seen. There is a fair bit of competition. But I would just also remind you, when you look at our Q4 and our year-to-date, the breakout of where we were a sole lender or part of a small club, i.e., a solution -- a financing solution versus a -- just a participant, for Q4, it's about 70% of the investments we made. And for the year-to-date 2017, it's roughly 75%. So an overwhelming majority where we think we were driving structure, driving terms, really being the lead financing or sole financing party versus a participant and a price-taker to some degree. I think as that positioning continues or even expands, given the ability to be well-positioned as a capital partner, that to me is the best way to drive the business forward. And how the competition takes us out or drives pricing down remains to be seen. But from our point of view, if we shrink as a function of that, that's okay. But if we're able to continue to continuously deploy in good size, and it's at least the net deployment, that's okay as well as long as we're staying kind of true to form and disciplined in the deployment side of it.

Okay. I appreciate that color. One more, if I can. About the nonaccrual. Obviously, 0 -- you described 0 at fair value, one nonaccrual asset. When I look through the schedule, Kawa Solar, which is marked at, basically, the revolving credit piece of that, it's got a 0 coupon now, right, but obviously, there's nothing to accrue, but a couple quarters ago it was -- it's a 9.5% all in L+8.20%. What -- without obviously spilling the beans on exactly what's going on there, but -- what's the outlook for that? And also, is there a potential that that becomes a nonzero coupon? Because it kind of feels like a nonaccrual to me, not a big one, but...

Yes, let me take that, and we talked a little bit about this at the end of last quarter right on the heels at the time of the earnings call of closing a restructuring on that business, which is now closed, and we are doing what we normally do in that situation to harvest recovery and value. It's hard to look at that position in isolation of all the other pieces for Conergy and Kawa. They are really a collective set of securities around the business that was restructured a couple of times. The Kawa piece is really the ongoing operating business that we put a little bit of a funding into at the beginning of Q1 to effectuate the restructuring and ultimately think about the best way to exit here. So you're looking at one piece, which I think has a restructured interest rate as part of a broader restructuring that is hard to sort of isolate. But we have put some money in. We are -- we do have a fair bit of equity ownership of the operating business. And to me, that's -- that was the way to participate in recovery dollars because the equity instrument moves up and down, but the credit instrument only moves down. So we thought that was the best way to proceed on the assets. There's probably more news coming post that funding. We are very active in working with the business and the team, which is based in Asia predominantly now versus the U.S. assets, which we have generally been exiting. And I think it's probably a broader storyline there that will make more sense as we go through the year.

Our next question comes from Jonathan Bock of Wells Fargo.

Joe Mazzoli filling in for Jonathan Bock today. So the first question. In 2018, we've kind of outlined in some of our research that we think there's going to be M&A activity or potential consolidation in the BC space. And we think that the established platforms, best-in-class management teams like TCP will certainly benefit from that. So as for potential combinations, is this something that could be considered below net asset value?

Joe, let's start with the first part. Good morning was correct. It is still morning out here in California. So with respect to that question, we are continuously focused on making good investments in TCPC that are consistent with our long-term strategy. As we think about other things going on in the industry and with respect to other players and participants, we are constantly looking at things and seeing if things makes sense. But our goal is to do what makes sense for the shareholders over the long term here, and that's really where we're focused.

Okay. Certainly appreciate that, Howard. And the next question just relates to an item that we picked up on a slight different -- slight adjustment from last year's K to this year's K. We see that on 20 -- January 29, 2018, effective January 1 to convert the existing incentive compensation structure from a profit allocation and distribution to the GP and to a fee payable to the adviser. So as we read that, it kind of seems like that might actually be negative from a tax perspective to the management company. So we're just kind of curious what might be driving that.

Joe, great question. First thing I just want to make sure is absolutely clear. This will not affect the amount of compensation paid. It doesn't affect the computation. It doesn't affect the services we receive from the adviser. This, as you know, simply converts the form of the incentive compensation from a carry interest allocation to a fee which puts us in line with most if not all the other BDCs that receive incentive compensation as a fee. There is a tax impact just in that all of the tax effects of the underlying portfolio operating company now flow to TCPC. I don't see that as being a negative at all. It means that all the capital losses and gains go to TCPC, which means there are capital gains and we get to use that against our capital loss carryforward, if there are capital losses, we get to retain those for future use as well. So I see this as a fairly neutral or positive thing for TCPC from the tax perspective. But just once again, to be clear, it does not impact our incentive compensation structure in any way. We continue to retain the cumulative look back and total return hurdle rate percent going all the way back to just after our inception.

Our next question comes from George Bahamondes of Deutsche Bank.

So repayment activity was higher than usual in 4Q. I'm wondering if you guys could provide any color on year-to-date repayment activity?

So we don't provide interim during the quarter. Details like that are forward-looking guidance. If you look back historically, our prepayment income is lumpy, and that is because we can't predict when entities are going to repay. And as Raj pointed out earlier, we had a higher level of prepayments during this quarter in general than we do. But I think the best way to look at it is probably look back over a long period of time because it really will vary by quarter.

Got it, okay. Next question. I was wondering if you could disclose any share repurchases that were completed year-to-date, if any?

Once again, we don't do disclosures intra-quarter. I do think it's important to note that we have -- our board has reapproved our share purchase plan up to $50 million, and it is formulaic. And so it is driven by an algorithm, which is designed to acquire more shares if the price falls below NAV more significantly. And we haven't had this go into effect for a while. But it's -- that's the way it's designed. So if we're only slightly below NAV, it's not going to wind up buying in very many shares. If share prices drop down lower, it will buy more shares. I would also note that, during this time, members of management and our outside Board of Directors acquired shares on a number of occasions during this quarter. That though is in the public filings.

Our next question comes from Christopher Testa of National Securities.

Just -- I appreciate the color on where you guys are the sole or lead agent on the deal versus when you're kind of clubbing up. Just wondering, is there any discernible difference between kind of the average borrower EBITDA on the sole or lead agency deals versus the more club deals?

Yes, it's Raj again. I don't -- I mean, I don't have a company-by-company study. But I would say, on the margin, we don't necessarily distinguish in the profile one versus the other. It's really a function of sometimes it's reciprocation of -- with club members. Sometimes the club members are bringing us into the deal. So I wouldn't think about the sole or club -- small club as a different nature or type of company or EBITDA level necessarily.

Yes, I would just add one thing to that. We look at it company-by-company and sole or lead of number of businesses, and we have the advantage of our exemptive order, but there is a limit to what we can do internally, although we've got very significant lending power. There are some deals on the larger side of what we do, where we're going to be clubbing up with other people by definition or somebody else maybe agenting it because we can't do it all. And we are not in the business of taking syndication risk on deals. We are in the principal business, in the lending business. We're not in the fee business. So we are not out committing the things that are bigger than we can hold or take down ourselves.

Great. Appreciate that detail, guys. And kind of sticking with that topic is, I know, Howard, you cited, obviously, the intense competition still in the market. Are you seeing more of that competition kind of in the core middle market or kind of the upper middle market? In other words, are there are fewer people who are still able to write the large checks like you guys can with the exemptive relief? Is that more of kind of a sweet spot where you're getting pricing power? I'm just curious, your thoughts there.

Yes, I think -- and I don't -- I think we view ourselves as upper middle market at some level as well. I'm not sure how you're discerning core versus upper. But I think the point is that there is broader competition. People are able to do larger checks or to Howard's just recent point, commit to larger deals and then syndicate down as a business model. So I would say competition has grown, and it's broader-based versus distinguishing between core and upper. People are able to do bigger checks, and they're using that, as we've seen on the refinancing of our size or pricing deals down, that we may just decide not to participate in a process.

Okay, great. And just curious, I was interested with the opening of the Atlanta office. If you could just provide any additional detail on how many employees you have there and if there's going to be any specific verticals that that office is going to focus on?

Yes, it's a small office, and we hired someone to cover the region. We tried to do over the -- over time is on the investment side and also on the origination side, find pockets that are a little less picked over. That sometimes may include industries. It may also include regions, and we feel like having a local presence in the Southeast is very helpful. It's already led to some good opportunities. But it -- to be clear, it's not a -- I wouldn't consider it a broad-based office. There's an individual down there that's been a resident in the area and has a lot of local contacts that we think is the right way to approach the regional coverage.

Got it. So this is more geographical in focus. Was that primarily driven by the favorable migration trends to states within that kind of proximity there?

I wouldn't say exclusively that. But we do think the region has got a lot of opportunities. There are a lot of non-sponsor businesses and family-owned businesses. But I would say just broadly thinking about where can we extend the footprint and the brand to leverage good opportunities.

Our next question comes from Paul Johnson of KBW.

When I look at total average, it's not unreasonably high by any means, but you're definitely levered probably more near the high end of where you've been historically. There's a little bit of room left to grow in the SBIC. But I'm wondering if you could tell us -- I mean, in the absence of any equity issuance that you might do, are you pretty comfortable with leverage where it is today? Do you think you could take that higher? Any color there would be great.

Yes. One thing that's very important to notice, we have $87 million in cash on our balance sheet at year-end. And so when you're looking at leverage, the way we think about it is net leverage. Because the timing of cash flows is unpredictable, and it happens that, at year-end, we got a fair amount of cash back, including some literally last business day of the year. And so we think about it with respect to our cash liquidity as well, which, when you do that, makes the number a lot lower than what you're suggesting. We are comfortable here. We're comfortable within a range. We have always declined historically to put an exact range on it because the way we think about it is we invest one loan at a time. And we don't want to create any artificial incentive to maintain some minimum level of leverage. And at the same time, we recognize that you can get to the end of the quarter and have an unpredictable situation where you think something may pay off that doesn't and -- or vice versa. And so we're very comfortable with our leverage where it is. It's moved around in a range. It can go certainly a little higher than where it is. And it can definitely be lower, where it's been most of our existence. But we always operate with a significant cushion and have never approached sort of the upper end of what is permitted.

Sure. Is there any portion of that cash balance that's in the SBIC?

There was approximately $15 million in the SBIC.

Okay. And then my last question. Just has to kind of do with the dividend. I mean, you guys obviously nicely earned that over the years, prepayment income's been a big driver of that recently. And naturally, I think we would expect that start to wane a little bit over time. And while you guys have done a great job covering the dividend, does the JV or some sort of off balance sheet arrangement begin to make sense to help you sustain the ROE at the current level. I know you mentioned it on the last call, but I was just wondering if that's still something you're considering?

We continue to look at JV opportunities, at other opportunities. We have a significant portion of our non-qualifying asset bucket available for use. But we are not going to do something just because we can or because other people are doing it. Our focus is on doing things that we feel comfortable with that we've done historically or that fit in on an adjacent basis with the kind of business we've been running. And so it may be that at some point we introduce that or some other structure. But to date, we haven't seen the need to do so.

Our next question comes from Christopher Nolan of Ladenburg Thalmann.

What do you anticipate to be the impact -- excuse me, let me back up. According to the K, 83% of your floating rate investments are below their floors. So what impact would a Fed tightening of 25 bps have on earnings or the spread?

This is Paul. I'll just -- at 12/31 -- maybe I'm looking at a different number than you're looking at, but all of our assets were over their floors except one, and that was the matter of a lag. So at this point, any movement in LIBOR is accretive to us fortunately.

Great. And then, is the investments more priced on 3-month LIBOR, 1 month LIBOR -- excuse me, 1 year LIBOR? I mean, where should we think about where the investments are more sensitive to rate changes on the yield curve?

That's -- most of our assets are 3-month LIBOR. There's some variety 1 month, 3-month and some others were predominantly 3-month.

Final question is, given on tax law changes, how has that changed the appetite for first-lien debt? I mean, are companies looking to lever up? Or they looking to raise more equity? I mean, just trying to get a little flavor in terms of how the tax law affected your market?

Yes, the short answer is we haven't yet seen a big change. There was a lot written, starting right after the election in November '16, about what might happen, theoretical math changes on how people might elect to have different capitalization structures. And I think the theory of that has been interesting and it might apply big cap companies. But in our markets where we might have an entrepreneur, a family business, a management team or even sponsors, generally speaking, people don't have unlimited access to equity. And they've been managing their balance sheets from what we've seen in a very similar fashion to what they were doing before. And that doesn't mean that there won't be some changes and that there won't be some impacts. But we haven't to date seen any significant changes in the market based on solely on the tax change.

(Operator Instructions) Our next question comes from Doug Christopher of D.A. Davidson.

I have just a couple regarding the expense levels. I might have missed this. The administrative, the -- and advisory, kind of the expense continued increases there. Was that related to the expansion in the new office?

No, it's not. It's just a matter of our allocation of expenses across the various businesses. But I would point out that for a long time we were waiving a portion of those fees. That might be part of the difference.

Yes, and -- well, the reason I ask, is there a point where BDCs -- we talk about lumpiness, the potential net dispositions over acquisitions and how that can change. We think about the uncertainty of the borrowing potential, financing markets, interest rate spreads. The administrative and the fee basis would seem to be under the control. Is there a point where there is some type of leverage to that? Is there a point of, I guess, we would call it optimization in those expenses where they might be leveraged or more consistent?

Sure. It's a good question. Historically, ours have been on a percentage of assets. And as Paul just pointed out, we waived a percentage of them. As we've ramped up, we've gone back to charging for them. But as we get bigger, there's certainly potentials for synergy. But also in our case, there hasn't been huge growth in our loan size. So we have increased the number of loans which -- each of which increases the amount of work and administrative activities surrounding it. And so there's a lot of components to go into that. But sometimes the growth of the loan doesn't create efficiency. But if we continue to grow, it certainly might in the future.

Our next question comes from Robert Dodd of Raymond James.

Just a follow-up probably for you, Paul, a follow-up to Joe's question about changing some allocation to fee. On the tax consequences, just to get (inaudible), are there any implications for this change to investment company taxable income which pays the dividend or to allocation of any accrued spillover income -- spillover and undistributed income to the BDC shareholders?

Sure. Yes, I'll take that in 2 parts. Now in the carried interest allocation format, which was a structure we just inherited from our predecessor entity, all of the tax attributes across, up and down the operating company were allocated effectively 20%, 80% roughly to the GP and to the HoldCo. Now with this change, all of the tax attributes are being allocated to the HoldCo. This puts us in line, and it's consistent with this course of structure of most if not all the BDCs out there which receive incentive compensation as a fee. But from the HoldCo's perspective, really the only effective change, I think, is just the allocation of capital losses and gains, which we -- which I talked about because those kind of pass through the shareholders as a consequence of the BDC tax laws. The rest just gets taken up into the ordinary income dividend.

I'm showing no further questions from the phone line. I'd like to turn the call back over to Howard Levkowitz for any closing remarks.

Thank you. 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. Thank you, again, for joining us. This concludes today's call.

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you for your participation. You may all disconnect.