16% Yield, 23% Discount: BlackRock TCP Capital Corp

Summary

• TCPC yields 15.95%.
• It's selling at a 23.3% discount to NAV.
• No debt maturities until 2022.
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BlackRock TCP Capital Corp (NASDAQ:TCPC) is a Business Development Corp., a BDC, 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 $1500 million. 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 down -36% year to date, even with bouncing back 61.65% over the past quarter:Valuations:

That price decline has led to a hefty -23.3% discount to NAV for TCPC, which is selling at a deeper Price/Book discount of .78X vs. the industry average of .87X. Price/Sales also is much lower, at 2.76X, vs. the 4.42X industry average, while the market is demanding a much higher yield in an industry where yields are already at nosebleed levels:Dividends:

A 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 1.06X in Q1 '20, 1.12X in 2019 and 1.10X in 2018:

(TCPC site)

Management has kept the quarterly dividend at $.36 since Q2 2013. At $9.02, TCPC yields 15.96%, and should go ex-dividend next ~9/11/20. It goes ex-dividend and pays in a March/June/Sept./Dec. schedule.

Taxes:

97.91% of TCPC's distributions were deemed ordinary dividends in 2019, with the remaining 2.09% as Return of Capital.

(TCPC site)

Holdings:

TCPC's biggest industry concentration is Internet Software & Services, 12%, followed by Diversified Financial Services, at 11.1%. It looks pretty well diversified, but it does have limited exposure to Automobiles, 4.2%, Airlines, 3.3%, and Hotels and Restaurants, 2.6%.

Management commented on COVID-19 impact on the Q1 '20 earnings call on May 12:

"While our portfolio is generally invested in less cyclical industries and we have limited direct exposure to industries that have been most impacted, we have been actively working with management teams to facilitate information and assistance.

We had no new non-accruals during the first quarter. Furthermore, our loans to companies in directly impacted industries are supported by strong collateral protections. Additionally, all payments on interest and amortization are current."

For example, our investments categorized as textile, apparel and luxury goods are primarily brand licensing businesses. And our loans are collateralized by intellectual property and/or inventory. Our airline exposure was limited to 3.3%. And our loans in this industry are collateralized by planes and engines designed to have a higher value retention in a downturn."

TCPC had loans to two portfolio companies, AGY and Avanti, which remained on non-accrual, representing 0.2% of its portfolio at fair value and 0.8% at cost, as of 3/31/20.

(TCPC site)

TCPC's assets are 83% first lien and 16% second lien, with 92% of the portfolio having floating rates, which, given the ultra low rate environment we're now in, could be a problem. Fortunately, they have floors in place for 66% of their floating rate assets. Their debt portfolio had an average yield of 10.3%, as of 3/31/20.

The diversification of TCPC's holdings looks good - the majority of TCPC's holdings, 55 companies, contribute less than 1% to income, while 27 companies contribute 1 - 2%, with 3 companies contributing 2%-3%, and only four companies contributing 3%:

(TCPC site)

Earnings:

Q1 2020 saw mostly negative comps vs. Q1 '19, excepting realized gains. NII was down -5.45%, while NII/Share fell -5%, and NAV/Share fell -17%, to $11.76, vs. $14.18 in Q1 '19. Declining LIBOR rates also have cut into earnings over the past five quarters - the three-month LIBOR rate declined 135 basis points since the end of 2018 or 48%. The rate was 1.45% as of 3/31/20, and is currently .30%.

Management estimates that a 100 basis point drop in the rate equates to a $2.267M or -$.04 annual hit to NII/Share, which would be 2.5% of the trailing $1.60 in NII/share that TCPC earned over the most recent four quarters:

(TCPC site)

Management commented on this decline on the Q1 '20 call: "While the private loan market experienced less volatility than traded markets, wider spreads and markdowns in our portfolio led to a 5.5% decline in the fair value of our portfolio and an 11% decrease in net asset value net of share repurchases."

Management took advantage of Q1 2020's fire sale prices to buy back one million shares of stock, resulting in an NAV contribution of $0.09 per share. The Q1 '20 -$1.18 decrease in NAV was the biggest decline since the Q2 '19 decrease of -$.18:

(TCPC site)

Net acquisitions reached their highest point over the past five quarters in Q1 '20, hitting $66M, as exits and repayments fell to $76.88M, vs. a range of $117 - $$180M for the prior four quarters:

(TCPC site)

Over the trailing four quarters, TCPC's NII/share has been roughly flat, at $1.60 vs. $1.63 for the previous four quarters, with total income down by -2.55%. Realized losses were much higher, at -$71.41M, due primarily to a $56.6 million loss realization on the restructuring of an investment in Fidelis and a $20.5 million loss realization on the disposition of an investment in Green Biologics.

Financials:

TCPC's ROA, ROE, EBIT Margin and EBIT compare well to industry averages. We show a debt/NAV of 1.42X, while management lists a 1.23X net regulatory leverage in its Q1 '20 presentation.

Debt and Liquidity:

In addition to the question of how vulnerable a BDC's holdings are to the recession, the other half of the equation is the BDC's debt and leverage situation.

TCPC's Assets/Debt ratio was 1.35X, as of 3/31/20, and its trailing Interest coverage ratio was 4.05X, which is roughly in line with other BDC's we've covered recently.

TCPC has a mix of debt - 53% is unsecured, 33% is its credit facility, and the remaining 14% is comprised of SBA, Small Business Administration, debentures:

(TCPC site)

It had $259M of untapped capacity on its credit facility, as of 3/31/20.

The earliest debt maturities aren't until 2022, when ~$314M in Notes come due. With its investment grade rating from Fitch's and Moody's, who both reaffirmed its investment-grade ratings in April, TCPC should be able to continue to tap the capital markets.

(TCPC site)

The Debt/Equity ratio of 1.22X is its highest in the past 5 quarters. The average size of investment has decreased from $16.89M in Q1 '19 to $15.06M in Q1 '20. Given our current environment, that's probably a positive.

(TCPC site)

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.