BlackRock TCP Capital: 8% Yield, Good Dividend Coverage, NAV Up 15%

Summary

• TCPC yields 8.3%, with 1.07 dividend coverage in Q1 2021.
• NAV/share rose 15% in Q1 2021 vs. Q1 2020.
• Net acquisitions hit their highest point in five quarters.
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BlackRock TCP Capital Corp (NASDAQ:TCPC) is a Business Development Company 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 $10M and $35M in companies with enterprise values between $100M and $1500M. It prefers to make equity investments in companies for an ownership stake. (TCPC site)

BDC's offer the retail investor exposure to privately-held firms, which often also are funded by venture capital firms. TCPC's investments are 86% 1st Lien and 14% 2nd Lien, with 94% Floating Rate. 84% of its floating rate debt investments had interest rate floors as of 3/31/2021, limiting exposure to any further declines in interest rates

The three-month LIBOR rate declined 261 basis points since 12/31/2018 (from 2.80% to 0.19% as of 3/31/2021). The cumulative decline in LIBOR over this period has resulted in a total impact to net investment income of $0.09/share, per quarter before incentive fees.

With all of the talk about potential inflationary pressures, floating rates may end up adding value to TCPC's portfolio. For example, management estimates that a 200 basis point rise in the three-month LIBOR rate would lift TCPC's NII/Share by $.25:

(TCPC site)

Holdings:

TCPC's biggest industry concentration is now Diversified Financial Services, at 14.6%, up 300 basis points, followed by Internet Software & Services, 12.2%.

It looks well diversified. Its exposure to airlines decreased from 3.1% to 2.3% in Q1 '21, while its Hotels & Restaurants exposure decreased from 2.2% to 1.9%.

With the US economy reopening rapidly, those two highly pressured industries should start to see some relief in 2021. Its loans to companies in more pandemic-impacted industries, such as retail and airlines, are generally supported by strong collateral protections. Repeat borrowers are an important source of originations, accounting for over than half of new investments in 2020.

Debt investments in two portfolio companies were on non-accrual status as of March 31, 2021, representing 0.4% of the portfolio at fair value and 0.8% at cost. No new loans were placed on non-accrual in Q1 '21.

(TCPC site)

TCPC's top 10 holdings only contribute 2%-3% to income, with the remaining 79 holdings contributing from less than 1%, up to 2%. The portfolio's fair value was $1.7B as of 3/31/21, with 89% in senior secured debt, at a weighted yield of 9.5%:

(TCPC site)

Earnings:

Total investment income was flat in Q1 '21, while net investment income and NII/Share fell by -16%. This was due to a $4.69M incentive fee in this quarter, whereas Q1 '20's incentive fee was waived.

Incentive fees can be a very important detail in BDCs - we've come across several companies which have fee waivers in place up until a specific date, which will raise the hurdle for management to achieve steady net investment income.

Net realized and unrealized gains did an about face in Q1 '21, jumping to $17M, vs. -$91M a year ago. This helped NAV/share rise by 15.3%, to $13.56, vs. $11.76 a year ago:

Portfolio Activity:

Q1 '21 was TCPC's best quarter by far over the past five quarters for gross and net acquisitions, with net acquisitions rising by 31% vs. Q1 '20, and gross acquisitions up 28%.

It invested $183 million, including investments in 15 new loans, six of which were existing borrowers. So far in Q2 '21, investment activity totals ~$100.6 million, primarily in seven senior secured loans with a combined effective yield of approximately 8.9%, so they're off to a good start for Q2 '21.

(TCPC site)

Dividends:

At its $14.48 5/5/21 closing price, TCPC yielded 8.29%, and should go ex-dividend next on ~6/12/21.

Management decreased the quarterly dividend from $.36 to $.30 in Q3 '20, where it remains. NII/dividend coverage was 1.07X in Q1 '21, and has averaged 1.10X over the most recent four quarters.

TCPC has one of the stronger records of dividend coverage among BDCs, with steady 1X-plus coverage over the past eight years:

(TCPC site)

TCPC's cumulative dividends/share and BV/share was $26.54 as of 3/31/21, with an annualized ROI of 10.7% since its IPO:

(TCPC site)

Valuations:

We've covered several BDCs in our articles, particularly those trading at discounts to NAV/share. Some BDCs trade at a discount for a reason - they may have higher non-accruals and/or deteriorating NAV, while others are temporarily overlooked by the market, due to pandemic-related economic uncertainty.

At $14.48, TCPC actually trades at a premium to NAV/share of 6.78%, although its premium was lower than the BDC industry average of 11%. Its Price/NII/Share of 11.88X is in line, as is its dividend yield, while its Price/Sales is lower than average for its industry.

(TCPC site)

Profitability and Leverage:

ROA and ROE declined year-over-year in Q1 '21, but remained much higher than BDC industry averages, while EBIT/margin also fell, and was slightly lower than average. TCPC's debt/NAV eased in Q1 '21, but remains higher than industry averages. Leverage is a key factor in this industry though, as it allows BDC's to ramp up their investment activity.

Interest coverage improved to 4.26X, while assets/debt fell to 1.7X in Q1 '21:

Debt and Liquidity:

As of March 31, 2021, available liquidity was approximately $419.7 million, comprised of approximately $395.9 million in available capacity under its leverage program, $14.3 million in cash and cash equivalents, and $9.5 million in net outstanding settlements of investments sold.

On Feb. 9, 2021, TCPC issued $175.0 million in aggregate principal amount of 2.85% notes due 2026.

TCPC's next debt maturities are in March and August 2022, when its 2022 convertible Notes come due for $139.4M, and its 2022 Notes come due for $174.8M.

TCPC is rated investment grade by Fitch and Moody's.

(TCPC site)

Analysts' Price Targets:

At $14.48, TCPC is 3.6% above analysts' $13.96 average price target, and very close to the highest target of $14.75.

Since our previous article in February, analysts have raised their price targets substantially for TCPC:

Parting Thoughts:

There are some very positive attributes for TCPC - its access to the huge Blackrock platform, its attractive yield, and its history of strong dividend coverage. However, we're loath to buy it or any other BDC at a premium to NAV/share, so we're remaining Neutral for now. We'll look for a possible dip to hopefully gain a cheaper entry price.

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