BlackRock TCP Capital (TCPC) - 2024 Q1 - Earnings Call Transcript

Financial Data and Key Metrics - Adjusted net income for Q1 2024 was $0.45 per share, up from$ 0.44 in the prior quarter [13] - Annualized net investment income (NII) return on equity for the quarter was 14.7% [13] - NAV declined by 6.4% in Q1 2024, primarily due to unrealized losses on investments in Thrasio, Razor, and Edmentum [14] - The company declared a Q2 dividend of $0.34 per share, implying 132% NII coverage based on Q1 adjusted NII [24] Business Line Data and Key Metrics - The portfolio consists of investments in 157 companies, with an average investment of$ 13.5 million per company [36] - 91% of investments are senior secured debt, with 80% being first-lien and 97% floating rate [37] - The overall effective yield on the debt portfolio is 14.1%, with new investments in Q1 having a weighted average effective yield of 14.7% [38] - The company invested $20 million in Q1, primarily in senior secured loans, with$ 24 million in dispositions and payoffs [28][33] Market Data and Key Metrics - The portfolio fair market value at the end of Q1 was approximately $2.1 billion [36] - The company has a diversified portfolio across industries, with 75% of portfolio companies contributing less than 1% to recurring income [37] - The company expects further consolidation and cost optimization in the Amazon aggregator space, with fewer but larger-scale vendors emerging [19][20] Company Strategy and Industry Competition - The merger with BCIC has provided greater scale, lower fee structures, and more efficient access to capital [12] - The company focuses on middle-market companies with established business models and proven customer bases, emphasizing downside protection [28][29] - The company sees emerging opportunities in M&A as interest rates stabilize and valuations for higher-quality assets narrow [30] - The company’s industry specialization enhances risk assessment and deal sourcing capabilities, particularly in the middle market [31][49] Management Commentary on Operating Environment and Future Outlook - The company expects a slower growth and elevated rate environment for the foreseeable future, with potential macroeconomic volatility [39] - The direct lending market has seen increased bifurcation, with more borrower-friendly trends in the upper middle market, but the core middle market remains resilient [40][41] - The company remains optimistic about near- to intermediate-term M&A activity, driven by pent-up demand and lower debt service costs [30][76] Other Important Information - The company’s total liquidity increased to$ 409 million at the end of Q1, with $286 million in available leverage and$ 121 million in cash [46] - Net leverage excluding SBIC debt is 1.08x, within the target range of 0.9x to 1.2x [47] - The company has five portfolio companies on non-accrual, representing 1.7% of the portfolio at fair value and 3.6% at cost [52] Q&A Session Summary Question: Thrasio Bankruptcy Valuation - The bankruptcy process for Thrasio was finalized after Q1, and the valuation may differ from the mark due to strategic considerations in the bankruptcy process [61][62][63] - The company maintains rigorous valuation processes and expects volatility in marks during restructuring [65][66][67] Question: Market Activity and Interest Rates - The company expects M&A activity to pick up as rates stabilize, but moderates expectations due to the current yield curve [73][74][75] - Market participants are actively pre-marketing deals, and institutional investors are pressuring GPs for distributions, which could drive activity [76][77] Question: Portfolio Flexibility and Non-LBO Deals - The company has historically shown flexibility in deal types, including ABL financing and leasing, and expects to continue exploring such opportunities [79][80][81] - The merger with BCIC provides greater scale to pursue less traditional deal types [81] Question: Debt Refinancing and Funding Costs - The company plans to address upcoming debt maturities in the near term, leveraging its investment-grade rating and favorable capital market conditions [83][91][92] - Moody’s outlook change on private credit may impact funding costs, but the company’s long-established rating provides stability [92][93] Question: Software and ARR Exposure - The company’s software portfolio is diversified across end markets, with ARR being a subset of its software exposure [99][100][101] - Software exposure is viewed as less correlated but more susceptible to end-market risks [102]