12% Yield, 20% Discount: BlackRock TCP Capital (NASDAQ:TCPC)

BlackRock TCP Capital Corp (TCPC) is a Business Development Corp. specializing in direct equity and…

BlackRock TCP Capital Corp (TCPC) is a Business Development Corp. specializing in direct equity and debt investments in middle-market, senior secured loans, junior loans, originated loans, mezzanine, senior debt instruments, bonds, and secondary-market investments. It seeks to invest in the United States. The fund typically invests between $10 million and $35 million in companies with enterprise values between $100 million and $1.5 billion. It prefers to make equity investments in companies for an ownership stake. (TCPC site)

Like other BDC’s that we’ve covered in recent articles, TCPC has gotten hit hard in the 2020 COVID-19 crash – it’s still down -34% year to date, even with bouncing back 45% since the March lows.

It has had a pretty good run since our last article in early July, delivering a total return of 11.53% in ~10 weeks:

It has outperformed the UBS ETRACS Linked to the Wells Fargo Business Development Company ETN – BDCS, the broad Financial Select Sector SPDR Fund – XLF, and the S&P 500 since the March lows, but has lagged all three so far in 2020, and over the past year:

Holdings:

TCPC’s biggest industry concentration is still Internet Software & Services, 12.7%, followed by Diversified Financial Services, at 11.6%. It looks well diversified, but it does have limited exposure to Automobiles, 4.5%, Airlines, 3%, and Hotels & Restaurants, 2.4%.

(TCPC site)

Another strength is that, of its biggest holdings, only five companies contribute 3% to recurring income, with 27 holdings contributing 1 – 2%, and 51 companies contributing less than 1%:

(TCPC site)

Its portfolio is 82% 1st lien, with 92% at floating rates. However, 79% of those floating rate assets have rate floors, which limits exposure to any further declines in interest rates.

Total debt positions represented ~93% of the investment portfolio at fair value, and equity positions, including equity interests in portfolios of debt and lease assets, represented ~7%, as of 6/30/20.

TCPC had debt investments in three portfolio companies which were on non-accrual status as of June 30, 2020, representing 0.6% of its portfolio at fair value and 1.6% at cost. There were 11 portfolio companies, out of 101, which had debt amendments during the quarter.

Debt and Liquidity:

TCPC had $348.3M in available liquidity as of 6/30/20, which included $20.6M in cash, and $328M from its credit facilities and its Small Business Administration Debentures.

In Q2 2020, management extended the maturity of its SVCP credit facility from May 6, 2023, to May 6, 2024, and increased the capacity from $270.0 million to $300M.

Management did additional refinancing adjustments in July and August:

On July 31, 2020, TCPC’s SVCP Facility was amended to include a $100M accordion feature which allows for expansion of the facility to up to $400M subject to consent from the lender and other customary conditions.

On Aug.t 4, 2020, they established a new $200M revolving credit facility, with Morgan Stanley as administrative agent. The New Facility matures on Aug. 4, 2025, and generally bears interest at LIBOR plus 2.00%. It replaces the previous $300M facility that was due to mature in 2023.

(TCPC site)

TCPC’s Assets/Debt ratio improved in Q2 ’20 to 1.79X, vs. 1.35X in Q1 ’20, while its Interest Coverage also got a bit better, rising to 4.15X:

Distributions:

Management cut the quarterly dividend for the first time in TCPC’s history in August, dropping the September payout to $.30 from the previous $.36, which it had maintained since Q2 2013.

“The board’s decision to adjust the dividend rate was a prudent response to substantial declines in LIBOR over the last year and a half. We are confident in the sustainability of our dividend at this level.” (TCPC site)

At $9.76, TCPC yields 12.30% – it just went ex-dividend this week, and should go ex-dividend again in mid-December.

A more positive note for TCPC is that, unlike many other BDCs, which rely on realized gains to cover their dividends, it has a long history of covering them with Net Investment Income, NII. Its NII/dividend coverage was 1.01X in Q2 2020, 1.06X in Q1 ’20, and 1.12X in 2019.

(TCPC site)

Earnings:

In Q2 2020, TCPC invested ~$56M, mainly in five investments, comprised of two new and three existing portfolio companies. The investments included ~$53M in senior secured loans, with the remaining $3.1M primarily in equity investments. It also received proceeds from sales and repayments of investment principal of ~$101.8M.

Like many other companies, Q1-2 2020 vs. Q1-2 2019 comps weren’t positive for TCPC: Total Investment Income fell -9.26%, NII fell 8.55%, NII/share fell -9.76%, and NAV/share fell -10.48%.

However, Q2 was better than Q1 2020, showing a net increase in net assets resulting from operations $46.4M, or $0.80/share, with NAV/share rising to $12.21, vs. $11.76 at March 31, 2020.

Valuations:

At $9.76, TCPC is priced at a 20% discount to its $12.21 NAV/share. Its price/NII per share of 6.30X is much cheaper than the BDC average of 9.49X, while its P/book of .80X compares favorably to BDC averages of .88X.

Even with the distribution cut, its 12.3 % yield is higher than the already high average of 11%:

Analysts’ Price Targets:

At $9.76, TCPC is ~12% below analysts’ average price target of $10.93 and ~23% below the $12.00 highest price target.

Summary:

TCPC already cut its distribution, so one might think of it as being “Garped,” or already having eliminated a negative. Interestingly, the market reacted positively to the cut, sending the shares higher after the early August declaration.

Financials are out of favor in 2020 – one of the worst-performing sectors, and within this sector, BDCs have really been walloped. However, we’re sitting this one out until some of the macro clouds of uncertainty clear, hopefully over the next few months.

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