BlackRock TCP Capital: BDC Pick Still Suboptimal After Q1 Results (NASDAQ:TCPC)

In March of this year, I released an article about BlackRock TCP Capital Corp (Nasdaq: TPC) which led to BDC’s rating being downgraded from Buy to Hold due to suboptimal Q4 results and signs of negative fundamental momentum ahead.

More specifically, the main reasons behind it The reduction was as follows:

• Increase influence.
• Decreased National Insurance Adjusted Scores.
• Decrease in net investment financing flows.

At the same time, I did not make a short move (or sell) as the dividend coverage level remains steady at 129% even after taking into account the latest National Insurance figures. Additionally, and this is a more general argument, the current environment, where we see a consolidation of the long-term top scenario combined with good economic performance, makes it very risky to take on any BDC out there.

Since publishing my article, TCPC has slightly outperformed BDC Index Although until the release of Q1 2024 earnings results, the stock was clearly lagging the index (and even found itself in negative return territory).

Immediately after the Q1 2024 earnings release, TCPC actually rose. However, we also have to be cognizant of the fact that recent macroeconomic data points have been suggesting that interest rates will remain higher for longer, which in turn has created notable tailwinds that have benefited more leveraged and leveraged companies. Business development centers.

Let’s now review TCPC’s recent financial results and see whether this rise in stock prices is justified or not.

Dissertation review

The performance of the first quarter of 2024 can be considered decent with no major negative surprises on either the downside or the upside.

For the first quarter of 2024, TCPC reported adjusted net income of $0.45 per share – an increase from $0.44 per share in the previous quarter, but still below the highs previously achieved in the second and third quarters of 2023.

However, from an NAV perspective, the picture is not stable as total NAV during Q1 2024 declined by 6.4% mostly due to net unrealized losses in two (relatively large) portfolio companies. These write-offs were high enough to offset the surplus cash held from the Adjusted National Insurance after dividends.

In this context, Raj Vij – Chairman and CEO – commented during a recent earnings call that these write-downs were not indicative of the overall quality of the portfolio, which remains strong:

The write-downs in the first quarter are mostly the result of circumstances specific to a small number of companies, and as we mentioned before, we do not believe these situations represent any indication of broader credit challenges in our portfolio. The majority of our portfolio companies continue to report revenue and margin expansion, with many achieving sustained improvements in performance.

Also, if we look at the non-accrual front, we will notice that the actual data is very strong as only five companies in the portfolio are placed under non-accrual, representing 1.7% of the portfolio at fair value, which can be considered below the sector average.

Another relatively suboptimal dynamic was recorded on the portfolio activity front, where total acquisitions continued to decline, disrupting TCPC from increasing portfolio size as exits continue to come in at higher volumes of new financings for the fourth consecutive quarter.

However, it is worth noting here that these new financings amounting to around $20 million were secured with very attractive returns. For example, the total effective return on TCPC’s debt portfolio is currently 14.1%. Investments in new companies during the first quarter generated a weighted average effective return of 14.7%, which is approximately 70 basis points greater than the total portfolio return.

From this, we can conclude that TCPC remains fairly selective regarding new investments by maintaining optimal margins and credit quality. Regarding the last item, Phil Tseng – the President – gave some nice color during the earnings call cell:

When reviewing new opportunities, we emphasize transactions in which we are positioned as an impact lender, where we have a direct relationship with the borrower and the ability to leverage our more than two decades of experience in negotiating return terms and conditions that we believe provides a sense of downside protection. We believe this has been the primary driver of our declining realized loss ratios over our history.

Finally, because new financing volumes were negative for four consecutive quarters, the level of financial leverage decreased accordingly. TCPC’s current net debt to equity ratio is 1.08 times, which is in line with overall sector average levels.

However, the debt maturity profile does embody some risks, which depend largely on how the interest rate curve evolves. Specifically, if we look at the table below, we see that there are approximately $660 million of loans (or just under half of the total amount drawn) that rely on below-market fixed-rate financing. About $250 million is scheduled to mature in 2024, which will immediately expand TCPC’s interest expense component as the cost of funding converges to a market-wide rate following a refinancing/debt extension event.

Subsequently, the next notable fixed-rate debt refinancing event is scheduled to occur in early 2026, which, if interest rates remain unchanged or close to prevailing levels, should create additional headwinds to TCPC’s modified national insurance generation.

Bottom line

In summary, TCPC shows some positive dynamics and some negative dynamics, which together make the investment case suboptimal.

On the one hand, earnings coverage is strong at 132%, leaving ample cash on the books that can be directed toward additional financing or improving debt. On the other hand, net financing volume remains negative, leading to a mix of upcoming fixed-rate debt rollovers that will impose additional headwinds on TCPC to generate growth in the modified national insurance segment.

Given the above elements and the fact that TCPC is trading at a P/E of 0.99x (effectively in line with the underlying NAV), in my opinion, there are more attractive BDC picks out there.