TCP Capital's (TCPC) CEO Howard Levkowitz on Q2 2014 Results - Earnings Call Transcript

Aug. 7.14 | About: TCP Capital (TCPC)

TCP Capital Corporation (NASDAQ:TCPC)

Q2 2014 Earnings Conference Call

August 7, 2014 1:00 PM ET

Executives

Jessica Ekeberg - IR

Howard Levkowitz - Chairman and CEO

Paul Davis - CFO

Raj Vig - President and COO

Analysts

Chris Kotowski - Oppenheimer & Company

Jonathan Bock - Wells Fargo Securities

Troy Ward - Keefe, Bruyette & Woods

Robert Dodd - Raymond James

Doug Christopher - Crowell Weedon

Christopher Nolan - MLV & Company

Operator

Ladies and gentlemen, good afternoon. Welcome everyone to the TCP Capital Corporation Second Quarter 2014 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) I will repeat these instructions after management completes their prepared remarks. And now, I would like to turn the call over to Jessica Ekeberg, Vice President of the TCP Capital Corp. Digital Relations team. Jessica, please proceed.

Jessica Ekeberg

Thank you. Before we begin, I would like to note that this conference call may contain forward-looking statements based on the estimates and assumptions of management, at the time of such statements and are not guarantees of future performance. Forward-looking statements involve risks and uncertainties and actual results could differ materially from those projected. Any forward-looking statements made on this call are made as of today and are subject to change without notice.

During today's call, we will refer to a slide presentation which you can access by visiting our Web site, www.tcpcapital.com. Click on the Investor Relations link and select Events & Presentations. Our earnings release and 10-Q are also available on our site.

I will now turn the call over to Mr. Howard Levkowitz, Chairman and CEO of TCP Capital Corp.

Howard Levkowitz

Thanks, Jessica. We would like to thank everyone for participating in today's call. I am here with our President and COO, Raj Vig; our Chief Financial Officer, Paul Davis, and other members of the TCPC team.

This morning, we issued our earnings release for the second quarter ended June 30, 2014. We also posted a supplemental earnings presentation to our Web site which we will refer to throughout this call. We will begin our call with an overview of TCPC's performance and investment activities, and then, our CFO, Paul Davis will provide more details on our financial results. Then I will provide some additional perspective before we take your questions.

We will begin by reviewing our recent significant achievements on Slide 4, followed by a brief review of our financial highlights which are summarized on Slide 5 of our presentation. In May, we received a $75 million leverage commitment from the SBA. In June, we increased our TCPC funding facility to 200 million and expanded the accordion feature to $250 million. In June, we closed $108 million private placement of 5.25% convertible senior unsecured notes due in December 2019. In July, we opened new office in San Francisco anchored by our new energy technology team which is led by Todd Jaquez-Fissori. The strategic extension of our platform will be valuable in expanding our investment opportunities. At the end of July, we completed our fourth follow-on equity offering of 5.4 million shares. We raised net proceeds of $90.4 million and consistent with our previous follow-on offerings, this offering is accretive to our net asset value.

Now turning to the highlights of our second quarter; first, we deployed $169 million in new investments during the quarter with net deployments of $81 million; second, we delivered net investment income of $0.40 per share; third, we reported earnings of $0.33 per share and a net asset value of $15.31; fourth we declared a quarterly dividend of $0.36 per share which is payable on September 30, 2014 to shareholders of record on September 16.

In the second quarter, our originations increased as we continued to leverage our platform and create attractive investment opportunities. Over the last four quarters, we have invested over $575 million on a gross basis and approximately $300 million on a net basis. In the second quarter we continue to focus on allocating capital primarily to income producing securities, 93% of our new investments were in senior secured loans and 7% were in senior secured notes. For those viewing our presentation, please turn to Slide 8.

At the end of the second quarter our highly diversified portfolio had a fair value of $894.7 million invested in 74 companies across numerous industries. In the second quarter, we continued to focus on investing in senior secured and floating rate debt. At quarter end, approximately 97% of the portfolio was in debt securities, 98% of which were senior secured debts. 77% of the debt positions were in floating rate debt, 89% of which hand interest rate floors. With most of our debt portfolio and floating rate securities, we are well positioned for any meaningful rise in interest rates.

During the second quarter, we continued to deploy capital at a strong pace investing approximately $169 million in 14 different transactions. These investments included senior secured debt investments in nine new and five existing portfolio companies. In total, we invested approximately $157.1 million in senior secured loans and approximately $11.5 million in senior secured notes. Our new investment were in companies across a wide variety of industries including healthcare, consumer products, retail, chemicals, software, aircraft financing and business services.

In the second quarter, we exited $87.9 million of investments including a $16 million senior secured loan to ConvergeOne, a $15 million senior secured loan to Isola and a $10 million senior secured loan to NCM. New investments we made in the quarter had a weighted average effective yield of 9.9% and investments we exited during the quarter had a weighted average effect of yield of 9.8%. Our overall effective portfolio yield was 10.7% compared with 10.8% in the previous quarter. Despite margin compression in the broad market during Q2, we were able to deploy capital on new investments at a slightly higher yield than the investments we exited during the quarter while continuing to emphasize senior secured investments.

Now I will turn the call over to Paul for a more detailed report of the second quarter financial results. After Paul’s comments I will provide some additional perspective on what we’re seeing in the market then we will take your questions.

Paul Davis

Thanks Howard. We are pleased with our results of the three months ended June 30, 2014. As you can see on Slide 12 total investment income was approximately $24.6 million, per share total investment income was $0.68, which includes pick income of $0.04 per share and prepayment income of $0.02 per share. As we have mentioned in prior calls it is our general policy to amortize upfront economics on debt investments rather than recognize all the income at the time the investment is made.

Cash income from aircraft leases of $0.03 per share was offset by depreciation expense of $0.02 per share reducing the company’s taxable income. Total operating expenses for the quarter were approximately $6.2 million or $0.17 per share. We also accrued dividends on the preferred leverage facility of $0.4 million or $0.01 per share. Our annualized operating expense ratio including interest expense and preferred dividends but excluding incentive compensation was 4.7% of the average net assets. Incentive compensation which is subject to total return hurdle of 8% annually is calculated by multiplying net investment income after preferred dividends and net realized gains reduced by any net unrealized losses by 20%.

Incentive compensation from net investment income for the quarter was $3.6 million or $0.10 per share. For purposes of imputing incentive compensation realized gains on investments acquired before January 1, 2013 are measured by comparing investment disposition proceeds to the fair value of the investments at January 1, 2013 when the incentive compensation period began. For book purposes our reserve amount is also calculated based on any additional incentive compensation that would have been payable had we liquidated at net asset value on the balance sheet date. This reserve is not payable unless the associated gains are actually realized and is subject to reversal. At June 30, 2014, this reserve amount was approximately $1.6 million, a decrease of $0.6 million or $0.02 per share from the end of the prior quarter.

Net investment income before dividends on the preferred equity facility and incentive compensation was approximately $18.4 million or $0.51 per share. Net investment income after preferred dividends and incentive compensation on net investment income was approximately $14.6 million or $0.40 per share. The difference between this amount and our net increase in net assets from operations or $0.33 per share was primarily comprised of two items; net realized and unrealized losses of approximately $3.0 million or $0.08 per share and the reduction in reserve for incentive compensation of $0.6 million or $0.02 per share.

Net realized gains were $0.9 million or $0.03 per share. Net unrealized losses were $3.9 million or $0.11 per share almost half of which came from Marsico and investment made prior to our initial public offering as part of our legacy distress strategy and which has yielded significant income for many years. We also had an unrealized mark-to-market adjustment on certain of our aircraft leased to United Airlines. As a reminder when we mark our portfolio at the end of the quarter, each quarter substantially the entire portfolio is priced using the external sources with only a de minimis amount being priced internally.

As of June 30, 2014 the quality of our portfolio remains strong with no debt investments on non-accrual status. After paying our second quarter regular dividend and special dividend which totaled $14.8 million, we closed the second quarter with tax bases undistributed ordinary income of approximately $27.7 million. Available liquidity at the end of the quarter totaled approximately $284 million which was comprised of available leverage of $246 million and cash and cash equivalents of $29.4 million plus net pending settlements of $8.8 million. Available leverage included our $75 million leverage commitment from the small business administration in connection with our SBIC license. Net combined leverage was approximately 0.63 times common equity at quarter end and 0.69 times common equity immediately prior to our July 27th equity offering.

TCP Capital continues to benefit from an attractive expense structure. As noted, total second quarter expenses including all costs of leverage and excluding incentive compensation were 4.7% of average net assets on an annualized basis. This is due impart of TCP Capital’s low cost of leverage as highlighted on Slide 13. Our total weighted average interest rate on an outstanding on a combined leverage program including both debt and preferred equity was 2.6% at the end of the quarter. Amounts drawn on a preferred equity facility accrued dividends at a rate of LIBOR plus 85 basis points, amounts drawn on the TCPC funding facility accrued interest at a rate of LIBOR plus 250 basis points, subject to certain funding requirements and borrowings on our continuing original credit facility for a interest rate of LIBOR plus 44 basis points as of June 30, 2014. Starting August 1, 2014 the rate on our original credit facility increased to LIBOR plus 250 basis points.

I will now turn the call back over to Howard.

Howard Levkowitz

Thanks Paul. I will briefly cover what we are currently seeing in the middle market and then open up the line for questions. So far in the third quarter of 2014 through August 5, 2014, we have invested approximately $99.2 million in seven senior secured loans with a combined effective yield of approximately 11.3%. In conjunction with one of the new loans we made in Q3, TCPC also received warrants. The Q3 investments include our second investment in our FCIC subsidiary which we partially funded with SBA debentures. We caution that our originations can be lumpy and should not be annualized. Our primary focus remains on expanding our earnings by effectively putting our recently expanded and diversified liquidity sources to work to optimize our portfolio. We are focused on capitalizing on the many attractive opportunities we are seeing to provide much needed growth capital to middle market companies.

Our pipeline remains robust. We continue to evaluate a wide range of investment opportunities across a variety of industry sectors. And over the past 12 months, we have originated more than $575 million of transactions from our traditional dealer partners as well as new sponsor and non-sponsor relationships. We are especially proud of the progress we have made in expanding our origination platform and referral sources. We view these relationships as a validation of our business model and the value we bring to the companies we fund. We are excited about our new San Francisco office and believe our team there will further expand our opportunities.

TCPC has built a stronger market position by leveraging our growing platform to lend to establishment of market companies with sustainable competitive advantages that generate significant cash flow and/or have significant asset coverage or enterprise value. Looking to the future we are uniquely qualified to capitalize our new opportunities for several reasons. First we have scale and depth in our origination and servicing platform and a highly experienced team to identify investment opportunities from a broad range of sources and to play an integral role in structuring and investing in complex investment opportunities.

We believe our rigorous investment process and highly diversified portfolio will enable us to continue to achieve high risk adjusted returns overtime while preserving our investor’s capital. Second, our lower cost of capital and diverse funding sources continue to be key competitive advantages for TCPC. In the second quarter, our weighted average cost of capital was below the average for BDCs. In addition, TCPC remains well positioned with our attractively price leverage, our recently issued convertible notes and our new long-term unsecured notes from the SBIC facility which adds another source of low cost funding.

Finally our interests are closely aligned with our shareholders. Our origination income recognition practices are conservative and we have a shareholder-friendly fee structure. We have personally invested alongside our shareholders with approximately $10 million of our pre-IPO holdings voluntarily locked up and members of the management team and the Board of Directors have on a number of occasions including during the second quarter purchased shares in the open market. We are pleased with our strong second quarter results and we remain committed to our rigorous investment process that delivers high risk adjusted returns while preserving capital. We manage our portfolio with a long term view and we are optimistic about our prospects for continued growth and returns.

We would like to thank our new shareholders for your participation in our recent offerings and our existing shareholders for your continued support. And with that, operator, please open the call for questions.

Question-and-Answer Session

(Operator Instructions) The first question comes from the Chris Kotowski from Oppenheimer & Company.

Chris Kotowski - Oppenheimer & Company

Yes, I wonder if you could talk a little bit about first of all the SBIC and how you plan is there -- if you can give us a flavor for how are you deploying that capital? And then -- I guess start with that.

Raj Vig

Sure. Thanks it is Raj here and I will touch on that. We’re very pleased obviously to have received the approval and also to have made our first draw under the SBIC just as far as the process goes if that’s what you are asking. What we have set up internally is a review team, people with specific responsibility to review every pipeline opportunity as it comes down, comes through the platform to determine if it qualifies or not, and if it qualifies, while there is not hard and fast rule of having it be the draw against the SBIC facility we generally are looking to draw it obviously because it’s attractive, it’s an attractive facility both in terms of cost and term and all the reasons we looked to get it in the first place. But we know as a pipeline deals comes through which qualifies and which do not, we obviously as you mentioned in our prior call, had pre-approval for -- an a investment before the facility was available. We have a second investment that qualified that was made in Q3, and as Howard mentioned, we’ve already made our first draw on the facility. One of the things just as a reminder whether its unique to us or not, it’s very attractive we are not required by the SBA to post equity against the facility versus as we draw it down which is very good from a point of view of no drag on our equity capital versus putting it to work as it feels qualifying close.

Chris Kotowski - Oppenheimer & Company

And then I guess just more generally for Howard, obviously the high yield markets have been under stress and a number of BDCs have traded off sharply in recent weeks. And so the market obviously has concerns, but we keep seeing just great credit numbers and I guess I wonder if you have an opinion about to what extent the market stress that we are seeing reflects a real build up of potential problems in the next six to nine months or is it just market volatility in your opinion?

Howard Levkowitz

Well, with respect to the market volatility, I think we referred to the analysts and experts on where markets trade and on any given day stocks may move up and down quite a bit which doesn’t necessarily indicate a fundamental change in the value of the underlying company and it’s clear that there is a lot more volatility nervousness in the market and high yield also clearly got ahead of itself to the point where it was no longer high yield simply, low rated credit. With respect to how that’s impacting us we think generally that’s a good thing for our business. We are not competing directly with the broadly syndicated markets, but there is a chilling effect on financings generally when the market is back up and our markets are a little stickier, they don’t move exactly with the syndicated markets. Some borrowers still think they still get returns as if the markets hadn’t changed. But on the whole it’s helpful. And I don’t think it’s necessarily having an impact on credit. I think these were market related expense.

Operator

The next question comes from Jonathan Bock from Wells Fargo.

Jonathan Bock - Wells Fargo Securities

Just one quick item as it relates to the SBIC and I believe you kind of outlined this prior, so it would be a good refresher. The percentage of the portfolio that you have today that would qualify for the SBIC?

Raj Vig

So we have said in the past -- thanks for the question. What we have said in the past Jonathan is we have looked historically before we applied as to whether we would have had companies that qualified and we saw a fair bit that would so it encouraged us to take advantage of the facility and the terms. To pursue that -- and this is sort of the pre-registration period. We have not disclosed I don’t believe how the existing portfolio would qualify or not. I think we have to decide whether we will disclose that and we know the number and it’s immaterial, but it’s -- a fair bit of portfolio would qualify but I don’t know to that we disclose that. So let me come back to you on that number it’s in fact we sort of approved internally to do that.

Jonathan Bock - Wells Fargo Securities

Number is appreciated and two…

Raj Vig

And just one more point, sorry to cut you off. Before we applied obviously we did not have the team in San Francisco and as you know, inherently a lot of their companies if they look at including the one in Q3 enhances that sort of overall profile on top of what our traditional platform has sourced and generated.

Jonathan Bock - Wells Fargo Securities

Are you going to make it a -- I mean obviously everybody wants to grow their SBIC facility but are you kind of looking and trying to maybe perhaps maximize the types of loans that qualifying through the SBIC funnel to have them maybe over emphasize near term prior to the potential SBIC rate lock?

Raj Vig

We as I said on the first answer, we don’t have a hard and fast rule as to having to use it it’s something qualified I believe we are looking to leverage it, it is an attractive rate obviously and term and structure but we also have attractive other facilities which I guess are bit of a high class problem. We are looking to leverage it I don’t know that maximizing it is sort of an explicit agreement but we feel that we will have some good opportunities, we’ve seen some already come through, we’ve already drawn on it, but it will be sort of quarter-by-quarter of what’s the best approach with a bias towards leveraging it.

Jonathan Bock - Wells Fargo Securities

Got it. And then another item in your portfolio that we found attractive and senior Gogo was in the market add on and an extension of the term loan. Now one I mean this is kind of a two point item. Do you if you are looking at trends today, are you expecting kind of a continued uptake in portfolio velocity as you start to see with Gogo is a very attractive investment, and then also that’s just broadly speaking and then on the investment in specific, could one expect to see any type of amendment to fees coming off this transaction just given its notoriety within the portfolio?

Howard Levkowitz

Sure. I think that’s starting to get into a little bit into Q3 as opposed to Q2. So we are happy to take up the specifics on the next call but generally speaking we have been very pleased with the continued deal flow that we are seeing across the platform, our pipeline is robust, there are lot of deals that we are doing on a sole basis also and really they are across the sectors that we focus on.

Operator

The next question comes from Troy Ward from KBW.

Troy Ward - Keefe, Bruyette & Woods

Howard, can we just get a little bit of color on the addition of the energy tech team. Can you kind of give us some color on what kind of an energy tech specific focus is? What’s kind of an average EBITDA company of that focus I guess I would say, so kind of what is that entail in energy tech investment?

Howard Levkowitz

Sure I’m going to let Raj talk a little bit more about the specifics, but I think in terms of thinking about what they mean for the team in a prior question about what the SBA means for the team, we are continuing the run the business in the way that we wanted before. The SBIC license enables us to have another financing tool. The team in San Francisco is synergistic to what we have been doing. Now they are focusing on slightly different kinds of companies and Raj will give you a little bit more color on that, but we think it’s really just expanding on the kinds of business we have been doing.

Raj Vig

Sure, thanks for the question. I think we went over this a little bit in prior quarters, but I will try to reiterate some of the color. In a sense, we had already been looking at I guess what we would qualify as energy tech deals in our portfolio across some overlapping industries whether it was technology or energy or even chemicals. We have done some solo, we have done some renewable, but very much similar to the way we our platform sources deals, there is certainly a concentrated set of sourcing parties in this sector particularly the VCs as well as some strategic parties. So I guess one criteria I would highlight there is an element, there is a higher element of venture capital parties or constituents in energy tech fields and generally these are earlier stage but very high growth companies but most importantly these are very well funded companies with well funded parties behind them that is a big element of the protection that we see in energy tech on top of all the collateral and the structural protections that we see.

There is no sort of specific hard or fast answer as to what is an energy tech feel, because there are a lot of sub-sectors that qualify from renewable across the board, wind, solar, other sectors that are sort of high growth and replacing our complementing fossil fuels. There are segments that would include energy storage and this is a very well funded area that we are seeing activity and we are seeing ag, bio and other elements around the pharma and the chemical and the bio landscape. So in many ways, there is not unlike other sectors, there is not hard and fast list of things and there is some movement in the subsectors that our team looks at. They take a very solid approach they are very focused on who is investing, what the capital structure protections are and what the TCP specific structure protections are. And at some point I think we might have them talk to some of their deals as we are making these investments including the one we’ve already made in Q3 to get more color but those are some of the characteristics I’d highlight that attracted us to the team and to the sector in specific.

Troy Ward - Keefe, Bruyette & Woods

But in generalities, would you say that these investments you would typically get an equity investment, co-investment alongside of this or similar…

Raj Vig

So I would say typically there is a couple things that we look for and get and we will be getting one is certainly the back end fee that seems to be a bit of a market standard in that sector, it’s a fee you get upon exit, repayment or maturity regardless of the form of that return of capital. We often see and we’re seeing this in the pipeline as well equity or warrants alongside the credit investment and if you really ask us our preference we’re getting warrants that tends to preferable than co-investment equity dollars. And the bias there may be occasional equity co-investment but I would tell you that the preference and what we’re seeing more the case than not is a warrant participation or just very good rate OID and backend existing as part of the structure.

Troy Ward - Keefe, Bruyette & Woods

Great, that’s helpful. Thank you. And then Howard can you just discuss briefly I don’t think you touched on this kind of just what you saw in kind of the trailing 12 for the company’s EBITDA in your portfolio obviously with the size of your portfolio you do a broad swap and kind of some very good insights maybe into the underlying economy. So I’d appreciate if any color you can provide on what you’ve seen on a broad perspective from your EBITDA?

Howard Levkowitz

Sure, generally our portfolio is healthy and the companies are doing well. Having that said that I think in the broader economy that’s clearly recovering there is a lot of lumpiness and some sectors aren’t recovering at the same rate. And I think on a more company specific basis there is a lot of change going on both in terms of regulatory changes and competitive changes and whether having a big impact on businesses out there.

Troy Ward - Keefe, Bruyette & Woods

And do you think perspective borrowers in the leverage finance transactions do you think they are thinking about the impact of higher interest rates through floating rate in those through floating rate borrowings one, two, three years down the road. Is that an active conversation that happens when you’re speaking with potential borrowers?

Raj Vig

I’ll take that this is Raj again. It is and some level I think borrowers are not unsophisticated even in the middle market and there is a reasonable treasury and structuring mentality and many of these do have sponsor or concentrated institutional backers who at the management teams aren’t thinking about it certainly their owners are cognizant of it. I’d say perhaps more importantly we think about it a lot so when we structure an instrument in terms of both the level of leverage and just the coverage of that cash payment it’s something we look at as having good coverage good buffer and tailor to the company. So whether it’s thought about or not by the issuer we get it all the time and talk about it quite frequently to make sure it’s appropriate.

Troy Ward - Keefe, Bruyette & Woods

Is there means some amount of your borrowers or borrowers out there that are using, that are swapping out and fixing their instruments even if that’s a floating rate?

Raj Vig

I would say occasionally but it’s not the comment or the it’s certainly not the majority of tons occasionally that happens if that made happen in the backend in their own treasury departments. But generally these are these seems to be fixed floating rate liabilities for them and they keep it that way from what we’ve seen.

Troy Ward - Keefe, Bruyette & Woods

Great, thanks Raj.

Operator

The next question comes from Robert Dodd from Raymond James. Robert Dodd, your line is open. Please check your mute button.

Robert Dodd - Raymond James

I was muted. Thanks. So you gave a good bit of color on the energy kick space in terms of pricing differences and potential for warrants et cetera maybe highlights. Can you explain that a bit to the SBIC space or typically in a broader sense obviously energy impact some force within that? We see higher total returns what kind of before risk adjustment at least what kind of expectation should we have then in terms of what coupon versus what participation and whether you trade one off versus the other we should expect to see as you ramp the SBIC side of the portfolio basically is it going to be high yield or you have maintained yields and go from more equity participation?

Raj Vig

So the cheeky answer to use there for real bit of term is that we’ll look for both and we can get it there is definitely higher yields. These are again without making a hard and fast rule or absolute rule we’ll look for double digit coupons reasonable issuance discounts and then the additive fee on the backend which maybe Paul also touched on how we’re treating that from an accounting point of view we can clarify that. But these are higher returning instruments and just correlated to the SBIC again it’s not always the case or I suppose it doesn’t you can’t say but absolute certainty there it’s always the case and we’ll qualify but a lot of these companies are a little younger, a little earlier and the criteria tends to match up from an SBIC criteria perspective as to qualifying for the draw.

Warrant and again they will be up to our team who is very thoughtful on the sectors the exit opportunities the growth outlook as to whether they will as to whether they will take any trade off if it’s available for warrants versus coupon but generally speaking they are not looking to sort of subsidize the contractual return, nor we across our platform for an equity position but in many cases it’s available it’s appropriate and we will seek it out.

Operator

The next question comes from Doug Christopher from Crowell Weedon.

Doug Christopher - Crowell Weedon

Hi, thank you very much and thanks for the color on the last question. I have a question regarding the kind of hypothetical let’s say the interest rate increase or short term rates moves up let’s say 50 basis points. How might we think about that how might the portfolio react, is there much of a lag in terms of the adjustment this from the kind of 20,000 foot view, how might we think about that?

Howard Levkowitz

We are actually in our 10-Q, I have the page number on this. On Page 53 we have that disclosure.

Doug Christopher - Crowell Weedon

And then secondly, So SBA -- going back to the SBA question, let’s if 15% of the current portfolio was under that structure currently, does that improve margins noticeably?

Howard Levkowitz

The way we view the SBA is a wonderful tool to provide financing. And I wouldn’t think of it as dramatically changing our business. As Raj discussed earlier when we made the decision to apply for the license, we looked back at our portfolio on a historical basis and reached the conclusion that much of what we were doing would qualify to be financed through the SBIC. And so we decided to apply for the license, we are planning to run our business in the same way.

We will from time-to-time do investments and have much higher returns not necessarily always different risks associated with those, sometimes it is simply a function of what we are able to structure in a given circumstance with the given borrower. More of those maybe weighted to going into the FDIC facilities, the energy tech investments tend to fall more into that category, but I wouldn’t view it as being a significant change in how we are running the business or the kinds of investments that we are going to do.

Doug Christopher - Crowell Weedon

And the lastly and thank you for that, when we -- the overall stock market has given back lot of its gains and some volatility in the high yield market has show a little reaction I think one of the first callers discussed that regarding BDCs. Are you -- has the market I guess in terms of price or the attractiveness overall generally is of investments, have the opportunities I guess increased as prices have come back down or has it been more stable.

Howard Levkowitz

We had a very robust Q2 which was coming in a period when the capital markets were, the debt markets -- syndicated debt markets were quite frothy. If you look at the originations we disclosed for Q3 so far, they are at a higher yield and they are at a robust pace. Now we want to caution please don’t annualize five weeks, this is seven data points and what we wind up doing for the rest of the quarter maybe significantly different. It’s hard to generalize five weeks into the quarter particularly when it’s in the summer, when things often slowdown for many people. Having said that, disrupted capital markets are generally better for our business, it may mean that there is less M&A activity but our business isn’t dependent on M&A activity. We have a broad based sponsor, non-sponsor transactions. And generally when it’s harder for things to get done in the broadly syndicated market, that creates certain amount of angst among other capital providers as well and that tends to be a better condition for making loans in our business. But again I caution you that it’s not linear and the relationship moves somewhat slowly sometimes.

Operator

The next question comes from Christopher Nolan from MLV & Co.

Christopher Nolan - MLV & Company

Howard just a follow-up on the prior question just now, should we read as indicating that you are seeing improved pricing trends for many of your investments?

Howard Levkowitz

No, I wouldn’t read into that too much. We are pleased that quarter to date, our pricing has been higher. The Q2 was certainly below our effective yields although our risk adjusted basis we were happy with the deals we did and we’re seeing a lot of variety, but I wouldn’t say that after a five weeks into this quarter maybe six or seven weeks of some choppier markets that it’s fair to make a generalization that’s going to apply through the rest of the year. I do think there is a little bit more caution out there which is certainly a good thing for our business generally and we like the variety and type of transactions that we’re seeing. But I think it’s too soon to say that there is really been a fundamental change in the pricing environment.

Christopher Nolan - MLV & Company

Great. And then follow-up I noticed the percentage of floating rate investments in the quarter increased to 77% versus 73% in the prior quarter. I mean is that just sort of a normal volatility or is this reflecting people’s expectation short term rates may stay low for a while?

Howard Levkowitz

We have over the last several years shifted an increasingly large portion of the loans that we’re making to floating rate. We acknowledge that in the short term we’re giving up some current income and lowering our earnings as a result. But as a matter of risk and positioning we would prefer to have the portfolio position benefit from higher rates. It’s hard to see rates going lower and that basically gone down for over 30 years there are lots of people who try and predict where rates are going to go for a living we don’t. Our job is as risk managers is to position our portfolio in what we think is the most sensible way and if rates stay low we’re earning great yields and out earning the dividend and if they start to go up we’ll benefit.

Christopher Nolan - MLV & Company

And final question for the SBIC, Raj indicated that you do not have to put up the $75 million or so in equity capital lease on a deal for deal basis or do you have to put it up later on what’s the case there?

Raj Vig

Yes just to clarify. In general I think it has been the policy of the [SBI] to have people pre-fund the vehicle, in our case we don’t have to pre-fund we were able to do it on a deal by deal basis.

Christopher Nolan - MLV & Company

Great. Okay, thanks for taking the questions.

Operator

The next question comes from Chris Kotowski from Oppenheimer & Company.

Chris Kotowski - Oppenheimer & Company

Thanks for coming back at me, what I was trying to get at with before is how should we think about your weighted average cost of leverage say in the back half of this year and next year? Because right now the couple of moving parts in there now and this quarter you grew the loan portfolio by about 80 million but you issued a 105 million of converts. And then it looks like the cash stayed pretty even and you paid down the partnership facility which is actually your lowest cost of borrowing right that’s the L plus 44. So I guess do you have a preferred order in which you fund things I mean I guess if you fund something in the SBIC then it is higher cost money near term but long term maybe great. And is there an order in which you have to do you have to use the L plus 250 facility before you used the L Plus 44 basis points facility or can you mix and match it anyway you want?

Howard Levkowitz

The short answer is mix and match anyway we like. We have had what we think is the lowest cost of funding of any public BDC. We still have a very low cost of funding. The $108 of converts is obviously outstanding as is the preferred $134 million at LIBOR plus 85 basis points. Our other sources of funding the two facilities that we have which on a going forward basis are both that at effectively LIBOR plus 250 can be drawn at various times and will go up and down through for various reasons having to do with how we allocate our borrowing.

And the SBA loans are going to get drawn over time as you know those are based off the treasuries, 10 year treasuries which is currently at a very attractive rate. So those will get set over time. But for 10-year fixed rate money we’re pleased that the rate at which we can currently borrow under that facility. So I think if you put all of those things together you will see that we still have a very low cost of borrowing.

Chris Kotowski - Oppenheimer & Company

And just to understand the process, you paid down the L plus 44 facility be it this time before the L plus 250 facility, is there a reason behind that?

Howard Levkowitz

Please remember that the L plus 44 went up to LIBOR plus 250. (inaudible) being as an expensive as it was.

Chris Kotowski - Oppenheimer & Company

Okay.

Operator

At this time, I show no further questions. I would now like to turn the call back over to Howard Levkowitz for closing remarks.

Howard Levkowitz

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

Operator

Ladies and gentlemen, that does conclude the conference for today. Again thank you for your participation. You may all disconnect. Have a good day.

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