BlackRock TCP Capital Corp (TCPC) 2018 Q3 法說會逐字稿

Ladies and gentlemen, good afternoon. Welcome everyone to the BlackRock TCP Capital Corporation Third Quarter 2018 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)

And now I would like to turn the call over to Katie McGlynn, Vice President of the BlackRock TCP Capital Corporation Global Investor Relations team, Katie, please proceed.

Thank you Heather. Before we begin, all 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 third quarter ended September 30, 2018. 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. I'm here with our TCPC team and we thank everyone for participating on our call today. I will begin with a review of our third quarter highlights, followed by an overview of our portfolio activity. Our CFO, Paul Davis will then review our financial results for the third quarter. After Paul's comments, I will provide some closing remarks before opening the call to your questions.

Now, let's begin with highlights from the third quarter, which are summarized on Slide 4 of our presentation. We delivered another strong quarter of originations, totaling $164 million as new and existing borrowers seek our industry expertise and our flexible and tailored financing solutions. It was also an active quarter for dispositions, which totaled $211 million, resulting in net dispositions in the third quarter of $48 million. Despite our platform's robust pipeline of potential deal flow, we continue to deploy capital judiciously and are willing to let our balance sheet shrink when appropriate as we did this quarter.

As shown on Slide 5, we earned net investment income of $0.42 per share in the third quarter, out-earning our dividend by $0.06 and extending our record to 26 consecutive quarters in which investment income exceeded our dividend. And today we declared a fourth quarter dividend of $0.36 per share payable on December 31, to holders of record as of December 17.

Turning to our investment portfolio on Slide 6. At quarter end, our portfolio had a fair market value of $1.6 billion, 92% of which was in senior secured debt. We held investments in 95 companies across a wide variety of industries. Our largest position represented only 3.4% of the portfolio and taken together, our 5 largest positions represented only 15.4% of the portfolio. As you can see in the chart on the left side of Slide 6, our recurring income is distributed across a diverse set of portfolio companies. We are not reliant on income from any individual portfolio company. In fact, on an individual company basis, over half of our portfolio in companies contribute less than 1% to our recurring income. Additionally, over the last several years, we have positioned our portfolio to benefit from a rising rate environment. At quarter end, 92% of our debt investments were floating rate, as demonstrated on Slide 7.

Our successful efforts to position our portfolio have been further enhanced by our predominantly fixed rate liabilities. On August 1, Tennenbaum Capital Partners joined the BlackRock credit platform. As part of the world's largest asset manager, we have access to an even larger origination network, additional proprietary investment opportunities and a deep risk management platform. Together, we are able to add more value to our borrowers and deal sources by providing a full range of strategies and risk profiles across the global credit platform. This allows us to remain highly selective in our investments and to continue to focus on transactions where we have a competitive advantage and can add more value to our clients.

Lastly, after careful consideration and input from our stakeholders, including our shareholders, lenders, and rating agencies, our board has approved a reduction of our minimum asset coverage ratio from 200% to 150% effective November 7, 2019. Additionally, we plan to seek shareholder approval to reduce our asset coverage ratio at a special meeting of shareholders, which we anticipate holding at the earliest practical date. We weighed a number of factors, including potential risks associated with increased leverage and flexibility to optimize risk reward for shareholders in a variety of market environments and the increased regulatory headroom the higher asset coverage ratio provides. Ultimately, we determined that having the flexibility to modestly increase our leverage will be beneficial.

We are also committed to maintaining our investor-friendly fee structure. As such, contingent upon receiving the required consents, in conjunction with the reduced asset coverage ratio, we plan to lower our base management fee on assets in excess of 1x leverage to 1% from the current rate of 1.5%; lower the incentive fee rate to 17.5% from the current rate of 20% and lower the hurdle rate for incentives to 7% from the current rate of 8%. Our cumulative annualized hurdle on a total return basis will remain unchanged. Regardless of any incremental changes in our regulatory leverage, we remain focused on fundamental credit analysis and generating superior risk adjusted returns for our shareholders, as we have done since inception.

We are also pleased to report that S&P has affirmed our investment grade rating after our adoption of a modified asset coverage ratio. And Moody's has initiated an investment grade rating for TCPC. Having an investment grade rating with 2 of the top rating agencies is an affirmation of our strong long-term track record managing private credit and allows us to continue to pursue diverse funding sources and maintain our low cost of financing.

Moving onto our portfolio performance. While the overall portfolio remained strong, NAV declined from $14.61 to $14.51 in the third quarter, due to 3 legacy positions that we mentioned last quarter; Real Mex, Green Biologics and AGY. As we discussed on prior calls, we continue to work through each of these positions to maximize value. In the case of Real Mex, we exited the position post quarter end, in line with where the position was marked as of 9/30. AGY continues to be a fundamentally good company, despite earnings volatility and Green Bio missed projections, but received an equity infusion from its strategic owner during the quarter.

These positions aside, the credit quality of our portfolio remains strong. As of September 30, we did not have any loans on nonaccrual, other than loans associated with our investment in Real Mex, which is now sold. Of the $164 million deployed, substantially all was in senior secured loans. These include investments in 7 new companies and 5 existing portfolio companies. Follow-on 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. We were able to understand our borrowers' businesses and offer them creative financing solutions, which ultimately allows us to set deal terms that include solid creditor protections.

Our top 5 investments in the third quarter reinforced our commitment to maintaining a diversified portfolio and lending at the top of the capital structure. They include a $39 million senior secured loan in connection with the refinancing of our long-term borrower Dodge Data & Analytics, a company that provides information and insights on construction projects; a $27 million senior secured loan to [AeroTech Group] a network of independent broker-dealers providing a range of services to financial advisers across the U.S; a $25 million senior secured loan to Web.com, a provider of value-added Web services; a $13 million senior secured loan to TEAM Software, a leading SaaS platform for security contractors and building service companies; and an $11 million senior secured loan to Donuts Inc., a registry of top level Web domains. Our other investments in the third quarter provide exposure to a variety of industries, including construction, payment processing, automotive and publishing.

Dispositions in the third quarter totaled $211 million and included a $36 million pay-off of our loan to Nephron Pharmaceuticals, a $36 million pay-off of our loan to Actifio and a $22 million pay-off of our loan to Enerwise. Although it was an active quarter for dispositions, we remain disciplined in redeploying the capital.

New investments in the quarter had a weighted average effective yield of 9.8% and the investments we exited during the quarter had a weighted average effective yield of 11.3%. The overall effective yield on our debt portfolio at quarter end increased to 11.7% as the portfolio continues to benefit from modest increases in LIBOR.

TCPC's consistent strong performance has been a function of our long-term relationships with deal sources, portfolio companies and other constituents, our deep industry knowledge and our disciplined approach to sourcing, underwriting and managing our portfolio. As shown on Slide 8, our dividends have returned at $9.56 per share since our IPO in 2012 and as demonstrated on Slide 9, TCPC has outperformed the Wells Fargo BDC index by 23% over the same period.

Over the past few years, we have seen many new entrants into direct lending and substantially more capital, seeking investment opportunities in the middle market. Against this backdrop, being part of the world's largest global asset manager greatly enhances our ability to build upon TCP's successful 20 year track record in direct lending. While we benefit significantly from BlackRock scale, informational advantages and resources, our leadership strategy and disciplined underwriting process remain unchanged.

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

Thanks, Howard, and hello everyone. Starting on Slide 14, net investment income was $0.42 per share, exceeding our dividend of $0.36 per share. This continues our more than 6-year record of covering our dividend every quarter since we went public. Over this period, on a cumulative basis, we have out-earned our dividends by an aggregate of $32 million or $0.54 per share, based on total shares outstanding at quarter end. Investment income for the quarter was $0.84 per share, substantially, all of which was interest income.

Recurring cash interest was $0.65, recurring discount and fee amortization was $0.07 and recurring PIK income was $0.05 . The remaining $0.06 per share was from prepayment income, including both prepayment fees and unamortized OID. 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 for the quarter were $0.42 per share and included incentive compensation of $0.10 per share and interest and other debt expenses of $0.17 per share for net investment income of $0.42 per share. We realized net gains during the quarter of $1.1 million or $0.02 per share, primarily from the payoff of our iGM loans.

As Howard noted, our unrealized losses of $10.4 million or $0.18 per share were primarily comprised of write-downs on 3 positions we've discussed in the past, one of which we exited post quarter end. Partially offsetting these losses is a gain on our investment in 36th Street, as the company reported record deployment in the third quarter. 36th Street is an equipment financing company in which we made a non-controlling investment in about 2 years ago, which has been successfully ramping its portfolio and which has helped to diversify our portfolio into a niche area of specialty finance. Our credit quality remained strong with debt from only 1 portfolio company on nonaccrual at quarter end, representing 0.01% of the portfolio fair value.

Turning to Slide 18, we closed the quarter with total liquidity of $260.3 million. This includes available leverage of $223 million and cash and cash equivalents of $90.3 million and is net of pending settlements of $53 million. Outstanding draws on our $150 million SBA program remained at $98 million. Regulatory leverage at quarter end, which is net of SBIC debt, was 0.79x common equity on a gross basis and 0.75x net of cash and outstanding trades. With our stock trading at a slight discount to NAV during the quarter, we made modest share repurchases under our share repurchase program, which is based on an algorithm.

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

Thanks, Paul. We continue to see strong demand for our lending solutions for middle market companies across a wide variety of industries. We recognize that there continue to be increasing amounts of capital, targeting middle-market lending. That said, the middle market is broad and there are many fundamentally good companies that need access to creative borrowing solutions we provide. We continue to see demand from borrowers for unique and nimble financing solutions. And as I mentioned earlier, the breadth of products available across the BlackRock platform make us an attractive partner to our deal sources.

And this point in the quarter, our pipeline is robust and includes many transactions that are well within our historical yield range. In the fourth quarter to-date, through November 7, we have invested approximately $102.7 million, primarily in 5 senior secured loans with a combined effective yield of approximately 11.9%.

Looking ahead, we believe we are well positioned for continued growth for several reasons. First, our nearly 2 decades of experience investing in middle market companies across multiple market cycles. Second, our long-term relationships with deal sources and portfolio companies, which provides us with the ability to source unique investment opportunities. Third, our focus on credit quality and downside protection. Fourth, our low cost of capital and diverse funding sources, which provide access to a variety of attractively priced equity and debt financing alternatives. Fifth, our interests have always been and will remain closely aligned with our shareholders. And finally, our partnership with BlackRock has expanded our market leading private credit platform with significant scale, resources and geographic research that provide enhanced opportunities for our shareholders.

Looking to the future, our leadership strategy and robust underwriting process remain unchanged. 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 we focus on capital preservation.

In closing, we're excited about the future. We would like to thank all of our shareholders for your confidence and your continued support. And with that, operator, please open up the call for questions.

(Operator Instructions) Your first question comes from Fin O'Shea with Wells Fargo Securities.

Just to start out on the fee structure reform, appreciating the, of course, the lower base incentive rates. With leverage going higher, I would think that the hurdle would also go higher, if anything. So do you view this as sort of an exchange, or is there another philosophy driving the lower hurdle rates that you propose?

Sure. Thanks for the question Fin. The proposal that we've -- that we are bringing forth to our shareholders has several components to it. It's a reduction in the management fee to the extent that our assets exceed 1:1 leverage. It's a reduction in our incentive fee and then as you point out, also a reduction in the hurdle rate. We viewed it all as being part of a process of continuing to focus on having an industry leading fee structure. We will retain something that we have that's unique, which is a cumulative look-back, which is something we introduced and believe is very important, it's an institutional structure. And the fact that we're putting all of these changes together is really an effort on our part to make sure that we are continuing to have, in all aspects, an interesting -- an industry-leading structure. The 7% hurdle rate seems to be most common. If we'd had it in the past, it wouldn't have made any difference in our earnings. In fact, if we've had this retroactively, the big difference would have been that our incentive fee would have been lower with the proposed 12.5% reduction from the current levels, from 20% to 17.5%, but we just think that it makes sense as long as we're going to make the change to have this going forward on a long-term basis. We've clearly been in a world where spreads have been compressed for a long time and rates have been lower and we think this is a good industry-leading structure.

Sure. Agree that shareholders would have benefited from this format from the start, given your actual return on equity. One more question on generally, deal flow, assuming that those pipelines are sort of emerging at this point between you and BKCC, can you give us some color on the, say, this quantity and quality of the expanded funnel that you are now seeing?

Sure Fin, it's Raj. I'll take that one. I guess I would say a couple of things. One is keeping in mind that the gestation period for these deals, sometimes it can be lengthy and that we've just -- we've been closed for several months now, meaning, things are -- that are rolling through now have been things we've been working on for several months. They have -- all have their own life cycle. But to answer your question more directly, the quantity certainly is incremental. We have been seeing more opportunity as a joint platform and that benefit, I think, is going both ways. We're seeing more through their side, they are benefiting from things that we see. So I think the early days of the thesis, the data points are positive. How and when those close on things will have a natural life cycle. That is not immediate. We do expect more data points going forward that we can talk about, but in terms of the quantity and the quality, both are up and additive and we're excited about the ongoing prospects.

Your next question comes from Robert Dodd with Raymond James.

It's -- kind of following up on the fee, I think Howard you said that the new fee is contingent on shareholder approval for the leverage adjustment obviously. So as it stands, I know you have board approval as of November of next year. So just hypothetically, if the shareholders do not give approval, would it be your plan to not use the additional leverage or would it be your plan to fee structure when you use the incremental leverage, whether that's shareholder approval or the board timing coming up a year from now? Can you give us just some more color on how those things will interact?

Sure. Robert, that's a good question and an interesting question. Our focus right now is on putting this in front of the shareholders. We think it's the right thing to do. We are strong believers in doing things for the shareholders that benefit them over the right -- over the long period of time. And so we're going to be putting this forth in front of the shareholders and giving them a chance to vote on it. And it is our hope that they will do so and expectation and we'll be happy to visit after that anything that's going to happened in the future. I think at this point it's a little premature to address that, though.

Okay, fair enough. So, one way or the other, if this goes through what would be the new target leverage for this, for your business in terms of -- not just -- I mean obviously regulatory leverage, which is what's in discussion here, but then there's also total leverage when you take your SBICs into account. I presume obviously the rating agencies have historically had not just regulatory leverage guidance, but also total. Have they given you any guidance on what's acceptable to them under this new framework and what actually is your target going to be?

Sure, this is Paul. I'll take that one. Historically, we've never had a target leverage ratio and I will continue to manage our leverage consistently as we've done in the past, which has been very conservatively. Just because we have the ability to take on additional leverage doesn't necessarily mean we'll use it. For example, we've had the SBIC program in place a long time and are still not fully drawn on that because we continue to invest as we -- as is appropriate, not necessarily just because we can. The rating agencies have put in targets. If we see those leverages, though, we will have conversations with them again about the rating. Both of them came out at about 1.3x, S&P came at 1.25x and Moody's was at 1.3x.

Got it, I appreciate that. Then one more if I can. Just on the originations and dispositions in the quarter, Howard. I mean, obviously you've got a good track record of not doing deals just to do deals, but what were kind of the drivers, if any, particularly material this quarter on -- and just the exits are hard to predict, but was there anything changed in terms of price, terms this quarter that you didn't like or decision to exit certain -- or reduce exposure to certain industries, so anything that stood out over Q3 and maybe into Q4 about the decision making on which deals you're doing versus not doing and dispositions, if you had any, say. in those, but sometimes you don't?

It's Raj again, I'll try to take that. I think the short answer of course is that, no, there really isn't. We've always said the -- sorry, Robert, we have always said that the deal cycle is very chunky and it's hard to predict. I think sometimes you've seen that in a larger amount of refinancings or prepayments, sometimes you've seen it in a lower amount and so we've really not tried to make that linear. This quarter there were a couple of deals that were a little larger in size that repaid with good outcomes to us and that may or may not happen again next quarter. It's hard to predict. But in terms of your question, there really isn't anything dramatically different that we've looked for or tried to avoid, other than really just trying to stay disciplined on the deployment itself and looking for good risk-adjusted opportunities.

And maybe even I'll just give you a little follow-on granularity. Our largest investment Q3 was an amended financing and an expansion of an existing lender, albeit at a lower rate. So that brought down our rate a little bit. Our largest financing in Q4 where our financings to-date, as we disclosed, are over $102 million for 5 weeks at 11.9%, was a larger loan that was originally scheduled to be in Q3, a timing that moved a couple of times. And so this is just the lumpiness of the business. It is coincidental, not driven by any identifiable meaning fact -- meaningful factor.

Your next question comes from Chris Kotowski with Oppenheimer.

Just on the fees structure change, I just want to make sure I have it right. Obviously, the base management fee, that's just apply -- reduction applies just to the amount above 1x debt, but the incentive fee would presumably apply to the entire amount, right?

That's correct, yes. The entire incentive fee would now be 17.5% over a 7% total return cumulative hurdle.

Okay. So that's quite a give up for you. Then next does that happen as this passes or only once you cross the 100% leverage threshold?

That would be -- the adjustment in the fee structure is -- would happen at the same time that our change in leverage requirement would go into effect.

But what I'm asking is, if you stay below the 1:1 does your incentive fees stay at 20% or does it go down to 17.5% anymore?

If we are staying below as a mechanical matter, but this has been approved, it goes into effect.

And then I guess sort of a more big picture question is, throughout 2015 and '16 you're kind of regularly growing the portfolio and quite rapidly, I thought at the time and now we've had 3 or 4 more flattish quarters I guess. And I'm wondering, is that just the kind of natural lumpiness in variability or is it that the environment is riskier or pricing is not there or some combination of all the above?

I think it's like a multiple test question, it's probably selection D, it's a combination of all the above. We've always said, we've never really targeted growth for the sake of growth, maybe it's a bit of a smaller dollar function as well, but we have been doing the same things and I think positioning the portfolio to be defensive over that same time frame. There is definitely more competition at the margin today than a few years past. I think we've always said we don't look in the mainstream areas for the deal flow versus trying to find pockets that are interesting in the sourcing channel. So I think it's a little bit of all of the above, but at -- again each quarter, the dynamic of whether we grow or shrink a little bit is driven by the life cycle of an individual deal that aggregate up, it tends to be the outcome that is hard to predict. So I don't think this is a change in the opportunity set, I do think, each quarter has its own character, given the underlying deal flow and you've seen that go both ways in the past.

And I guess, we've been reading a lot about increasingly weaker covenants and leveraged lending, Janet Yellen is talking about it, Jim Grant writes about it. It's discussed by the regulators and all that. I'm going to assume not so much of an effect for you that I think your view is generally having highly structured loans?

Correct. I mean when Janet Yellen talks about our portfolio, it'll be interesting day. But there's a lot of names in there that no one really recognizes and I think that's a function of where we're seeing the deal flow from in the true middle market. It also is an area that I think we have a little better ability than the more syndicated loan market to hold the line. That may mean there are a few more deals that go a different route if they have that option. But to answer your question, we are certainly holding line on the right types of structures with protections including covenants, but also the documents which are maybe not a financial measure, but certainly an area that contains a lot of rights that we put a priority on.

Your next question comes from Ryan Lynch of KBW.

First one has to do with the credit ratings, you guys obviously now have a credit rating -- investment grade rating from Moody's and I believe you're only one of 3 BDCs to do that and then S&P maintained your investment grade rating. I believe you're only one of 2 BDCs to do that. So can you maybe just give us some background on how you're able to achieve this, because I think that's a pretty impressive feat and what this really means for you guys going forward?

Ryan, thanks for calling that out and for acknowledging that. We have a long history of managing investment grade rated leveraged vehicles. We at TCP as a manager and clearly now as part of BlackRock, but going back to the first fund that we operated in 1999, we've worked with the rating agencies over the years and developed a long-term track record and organization and operation that I think they appreciate. And as we thought about the decision to increase our leverage put us in a position to be able to do so and give us more regulatory headroom. It was something that we were very careful about and I think we've discussed this in a number of forums, which is that we didn't rush to do this, we wanted to make sure that if we were going to do it, we had the proper conversations with all of our important counter-parties and the rating agencies are included in that group. And so to us, making sure that we understood where they were coming from in this process was a key part of making the decision, and we are pleased to be able to have S&P continue with their view and Moody's added to that most recently and for those to happen concurrently.

Hi, this is Paul. I would add to that. Some of the things on which the rating agencies were focused, strong -- obviously we've been doing this for 20 years. That was very helpful to them. The fact we've covered our dividend every quarter since inception was very helpful to them. Our stable portfolio value was very helpful. We have a very diversified right side of the balance sheet. We've got great access to capital markets. All of these things came together. We are very pleased to have an organization that has been performing strongly and is well positioned for growth and for continued stability and dividend coverage and I'm glad that rating agencies saw those things and we're pleased to be able to have both Moody's and S&P giving us investment grade ratings now.

That's helpful. And that's great. Now that the BlackRock transaction has officially been closed, I know it's still pretty early on and you guys have only been on that platform for about 3 months, but I know you gave a couple of things that you thought reasons for things you'd benefit from. Now that you're actually on that platform and have been operating on there, can you just talk about maybe what are the biggest changes or the biggest benefits you guys have seen in this early period from being on that platform?

Sure. I can try to touch on that and others can jump in. I think part of it we touched on which was their footprint and brand is a second to none, if you will. I think leveraging that in the context of our day-to-day for new relationships, whether it's through intermediaries or other constituents that are tied to the platform, or to be honest, even existing folks that we have relationships with that we can broaden and deepen certainly on the opportunity of widening the funnel side of it, there is a clear early benefit. And I think they are ongoing benefit. I would say the other thing that we have seen some benefits on early on and will deepen is you have a platform here with BlackRock that is a meaningful holder across, just about every asset class with a very deep and intensive risk management system that can track things across sectors, across markets, industries. And to the extent you can benefit from leading indicators by -- even got to company, there is an insight here that we haven't fully leveraged. I think we're still learning. But whether it's a risk management benefit or just the ability to find additional opportunities because of changes in the external environment, there's a ability to -- there is I think a good potential to harness that on our platform and in our asset class that is kind of more on the come than we can really define today. Obviously the resources from compliance, risk management, as I mentioned, just a very deep middle and back-office platform is all additive. There's a mentorship and an excitement from our folks on growing with them over their years as professionals that we've seen some qualitative elements on. So there are numerous and they are early. So it's hard to pinpoint a lot of exact items, but those are some of the categories I would highlight that we expect to put more meat on the bone to as the years roll by, quarters roll by.

That's helpful. And then with the passage of the increased leverage, did you guys mention, did you guys plan on changing your strategy at all? I know some guys have made a target, moving up to a little more senior strategy. Have you guys decided whether you guys are going to do that, have that approach or just keep the business as it's always been, which has been really successful?

We don't currently have any plans to make a significant change in our business. As you pointed out, the business works very well the way it is. And so our current thinking is that we will keep executing in the manner that we have been.

Okay. And then one last one, I guess it's maybe more of just a comment, maybe following up on Robert Dodd's question with the leverage. I would just say, I know you guys haven't provided leverage guidance in the past, but I would say with the increased leverage, I mean, there's a wide range of leverage now that you could run at. And I would say, not providing leverage or any sort of range, even if it is a very wide range, I think it makes it really hard for investors to really understand how you plan on running the business going forward. I mean leverage has a major impact on the ROEs and the risk of your BDC. So I think not providing any sort of guidance on that I think leaves a lot of uncertainty about how you guys are going to operate the business going forward. So I would just encourage, going forward, as you guys think about this, I think any sort of guidance you could provide, even if it's a wide range of leverage guidance, I think would be very helpful for investors and myself going forward.

Thank you for the comment. We will take it under advisement. We have historically stayed away from that because we think if you set it as a floor it can create some artificial incentives, which is something we would definitely not do. In fact, you've seen us let our balance sheets shrink the last 2 quarters, and if you set a ceiling, you can sometimes be in a position where you think you're getting some payoffs that don't happen, or really wanting to do a deal that you ought to do, but bouncing up against it. And so we've been hesitant to create artificial constraints that would have an impact on how we run the business day to day. We have been very focused on investing in loans one at a time that makes sense, being very careful about our risk, not at any time putting ourselves in a position where we are close to a regulatory max or didn't have sufficient liquidity and it's absolutely our intent to continue to run the business with those same principles in place. We now do have more flexibility, which is a nice thing to have, both from an operating and just from a headroom perspective with respect to the regulatory cap, to the extent the markets become more volatile. But we're not expecting to do anything sort of significantly different with respect to leverage in this short period of time.

Ryan I might add to that. I know some of our peers have given some pretty wide ranges. We did say and we did announce in our release that we intend to continue to operate in a manner that could -- keeps us investment grade, which is I think also consistent with those peers that have made similar announcements.

That makes sense. I understand those comments and those constraints and why you don't provide it. It just leaves a lot of uncertainty of a major component of your business.

Your next question comes from Christopher Testa with National Securities Corporation.

Howard, just wanted to ask, does BlackRock seem to take into account the overhang on TCPC stock, seems to be primarily around the uncertainty surrounding what might happen in the future with BKCC. Has there been any discussion about this, do they seem inclined to make an announcement on the future of what they want to do with this vehicle?

Chris, thanks for the question. BKCC is a separate distinct legal entity and they make their own announcements and have their own independent board and investment committee. So I think it might be appropriate to direct that comment to them. We are getting organizational synergies on deal flow with our exemptive order, but as of today the entities are distinct.

I understand. I guess maybe a better way to phrase it is, does BlackRock see that TCP's stock price is really under a lot of pressure despite the company's performance being still very strong and understanding that there is something outside of the performance that's weighing on that.

So, we will share your comments and invite you to do the same.

All right, that's fair enough. And I know you said there was currently no plans to make any significant change in the business with regards to the originations. You now have the lower hurdle rate and the ability to go above 1:1. Is there a potential for maybe some new product offerings and possibly lower yielding investments coming from new sponsor relationships or new products that BlackRock will enable you to offer that would make that feasible and only feasible to put on the balance sheet over 1:1?

We don't currently plan to make any huge changes in the way we're operating the business. If you look at our originations in Q3, there's a pretty broad range of yields on there, from high to low. The difference is about maybe 400 basis points. In some quarters it's wider than that. And so, yes, this gives us a little bit more flexibility in an environment where we've -- notwithstanding the recent increases, rates have been low for a very long time and there clearly has been some yield compression in the market. And so some deals that in the past might have been priced at one level are probably a little tighter today. You wouldn't see that from our book, where our effective yields has been in a very tight range for the last 6, almost 7 years, ticking up really slightly this year, with the increase in LIBOR. And so, yes, this gives us a little bit more flexibility, which can be helpful with respect to any given loan or investment, but we are not planning to have some significant change.

Okay. Yes, that's fair. And I just wanted to just ask a question on Green Biologics if I can. The fair value to cost was marked down to [28 from 52] on the overall position, especially the convertible notes and the senior secured term loan marked down to [13 and 17]. Just wondering what specifically in the quarter drove these pretty starkly negative marks or if there is anything new -- any new headwinds that are facing the company that are different from past quarters?

The company has struggled to make its numbers and that's continued and it's gotten an equity infusion. And in connection with the equity infusion and the revaluation of the various securities in the capital structure, the position was marked down.

Your next question comes from Chris York with JMP Securities.

So the fee change associated with the pursuit of additional leverage is nice representation of alignment in BlackRock. But I'm curious whether the manager has considered directly investing in the BDC, which has become common from leading alternative asset managers to show alignment with BDC shareholders?

We as management and our Board of Directors have been frequent buyers of the stock. And so that has been true since we've gone public. With respect to BlackRock itself, that's a different discussion, but I think we have shown our alignment from those people that are most directly involved. You also see in connection with the decrease in the incentive fee rate, which by the way was not prompted by any outside inquiry, but was something that we decided to do internally when we decided to go to the shareholders with a request to increase the leverage. We thought it -- and we're going to make a change in the fee, we looked at all components of it. And it's always been our view that we ought to try and stay as shareholder friendly as practical in that regard. And so that is a significant current give-up in that. And that I think shows a real commitment. And with respect to other investments in the shares, we'll see what happens.

Okay, sounds good. And then Howard or maybe even Raj, this question is on strategy. You've had your equity investment in 36th Street Capital for about 3 years, which is appreciated nicely. I am curious what is your willingness or likelihood that you become a controlling equity investor in the portfolio company and where you could start putting some of these loans on your balance sheet?

I would say at the moment that's pretty limited. The business has been -- it's slow to start, if you will, but it was a de novo initiative with an operating team that comes out of the industry, we thought it was an interesting way to enter into a space that we think has very good risk-adjusted opportunities, but from a bite size and from a sourcing arrangement, a little different than what we do. So I think we kind of approached it a little -- just skinned the cat a little differently, which seems to be picking up and working now. So, both because of our strategy, no change in strategy and not breaking what seems to be working concept, I think we would rather just let it run its course, continue to grow as it has been doing and support it in a way that we think is logical versus making any change to their kind of operations today.

And then can you remind me, is that a yielding or non-yielding investment?

I'm sorry, can you repeat that question?

Is it providing you that investment -- 36th Street providing income?

It is. This is Paul, it is. There are two components. There's a debt component and an equity component and it's definitely accruing income for us.

Is the equity component accruing?

Yes.

And then Paul, you said you exited a troubled investment post quarter end. What was that investment and then mark on that investment?

That was Real Mex.

And then, do you have the mark of the exit?

We exited about (inaudible) 9 30.

And your next question comes from Derek Hewett with Bank of America Merrill Lynch.

Howard or Paul, could you discuss your thoughts on your capital structure going forward since the BlackRock deal has closed now and given the potential for higher leverage at this point, would you fund any sort of incremental portfolio growth with year revolving credit facility or would you want additional flexibility with some sort of bond issuance, given your investment-grade rating and then also the BlackRock affiliation?

Derek, thanks for joining us and it's good to have somebody on this coast who realizes it's still morning out here. I think what you suggested highlights our alternatives. If you look at Page 18 of our presentation, which shows our diversified sources of funding, we have 6 different sources of funding. We've got the SBA. We have 2 different credit lines and 3 different note issues and it's intentional. We've diversified our sources of funding by type, by size, so that we have the flexibility to optimize our balance sheet, both our cost and liquidity and also our risk and so that we're not dependent on any one source. And clearly the confirmation of the investment grade rating, the addition of Moody's are helpful from the perspective of the number of lenders. And so today we have adequate liquidity. But as we think about it for the future, we have a series of options and we will keep you posted along with the rest of the market as soon as we're ready to make a decision on going forward with something new.

Thank you. And I'm showing no further questions at this time. I'd like to turn the call back over to Howard Levkowitz for closing remarks.

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

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you all may disconnect. Everyone have a wonderful day.