Q4 2023 BlackRock TCP Capital Corp Earnings Call
Participants
Katie McGlynn; Investor Relations; BlackRock TCP Capital Corp
Rajneesh Vig; Chairman & CEO; BlackRock TCP Capital Corp
Philip Tseng; President & COO; BlackRock TCP Capital Corp
Erik Cuellar; Chief Financial Officer; BlackRock TCP Capital Corp
Christopher Nolan; Analyst; Ladenburg Thalmann & Co. Inc.
Paul Johnson; Analyst; Keefe, Bruyette, & Woods, Inc.
Robert Dodd; Analyst; Raymond James & Associates, Inc.
Presentation
Operator
Ladies and gentlemen, good afternoon. Welcome, everyone to BlackRock TCP Capital Corp's fourth quarter and full year 2023 earnings conference call. Today's conference call is being recorded for replay purposes. (Operator Instructions) And now I would like to turn the call over to Katie McGlynn, Director of the BlackRock TCP Capital Corp., Investor Relations team. Katie, please proceed.
Katie McGlynn
Thank you, Emily. Before we begin, I'll 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.
Additionally, certain information discussed and presented may have been derived from third-party sources and has not been independently verified. Accordingly, we make no representation or warranty with respect to such information.
Earlier today, we issued our earnings release for the fourth quarter and full year ended December 31, 2023. We also posted a supplemental earnings presentation to our website at www.tcpcapital.com. To view the slide presentation, which we will refer to on today's call, please click on the Investor Relations link and select Events & Presentations. These documents should be reviewed in conjunction with the company's Form 10-K, which was filed with the SEC earlier today.
I will now turn the call over to our Chairman and CEO, Raj Vig.
Rajneesh Vig
Thanks, Katie, and thank you all for joining us for TCP's fourth quarter and year-end 2023 earnings call. I will begin the call with an overview of our fourth quarter and full-year results and then provide an update on our proposed merger with our affiliated BDC, BlackRock Capital Investment Corporation, or BCIC.
Philip Tseng, our President and Chief Operating Officer, will then review the investment environment and our portfolio activity. Eric Cueller, our Chief Financial Officer, will review our financial results as well as our capital and liquidity in very detail. Finally, I will wrap up with a few comments on the outlook and opportunities we see ahead before taking your questions.
Let's begin with a review of highlights of our fourth quarter and full year results. I am pleased to report that for the full year 2023 TCPC delivered net investment income of $1.84 per share, an increase of 20% over 2022. Our annualized net investment income return on equity for the year was 14.5%. Given our predominantly floating rate portfolio and higher proportion of fixed rate liabilities, our net investment income for the period benefited from strong credit performance, higher base rates, and marginally wider spreads.
Net investment income for the fourth quarter was $0.44 per share. And our run rate NII at the end of the quarter, again remained among the highest in TCPC's history as a public company. During the fourth quarter, our NAV declined 6.4%, reflecting in part the special dividend of $0.25 we paid on December 31 in addition to our regular dividend.
Excluding this special dividend, NAV declined 4.5%, primarily due to net unrealized losses on three portfolio companies, Edmentum, Thras.io, and Securus. We will discuss each of these companies in more detail, but I would like to emphasize that the write-downs in the fourth quarter are mostly the result of unique circumstances impacting the aforementioned portfolio companies, and in the case of Thras.io, the subsector in which it operates versus any indication of broader credit from macroeconomic related challenges to our portfolio.
Despite concerns in the market about how higher interest rates and a recession might be pressuring middle-market borrowers, we believe that in general, our portfolio companies are successfully navigating the current environment given the proven resiliency of the sectors and companies we focus on. In fact, at the most recent quarter, the majority of our portfolio companies continue to report revenue and margin growth in their businesses.
Now turning back to the three primary contributors to net unrealized losses in the quarter. I'll begin with Edmentum, which has been a long-term beneficiary of the shift to online learning, which accelerated during COVID, but is now experiencing a reversion to a more normalized but still positive demand environment.
As a reminder, our current investment in Edmentum is a residual equity position after receiving full repayment of our original debt investment. While we remain confident in the prospects for this well-positioned business in an overall positive secular trends, we reversed a portion of the unrealized gains we had previously recognized on our investment to reflect current demand and performance expectations.
Second is Thras.io, an Amazon aggregator that along with much of the sector had initially been impacted by COVID-related supply chain issues and then by slowing growth in online consumer spending. The combination has generally lagged the industry participants, including Thras.io,l with temporary excess inventories and many with over-leveraged balance sheets relative to their current operations.
While we placed this loan on nonaccrual during the beginning of the most recent quarter, we have actually been working closely for some time now with the management team and other lenders to improve liquidity and position the company for long-term success. As of yesterday, this involve the company formally filing for bankruptcy to accelerate achievement of a number of these objectives as well as to incorporate a protective lender lead financing.
I'd like to highlight that our team began reviewing and ultimately investing in aggregator space relatively early, and we believe we have selected the ultimate winners in this growing space. Generally, these will be scaled players that have management teams with the experience, funding, and ability to navigate these temporary industry challenges.
Third is Securus, a traded loan that has faced mark-to-market volatility over the last several quarters, reflecting broad market conditions as well as some company-specific issues. While 2023 performance has tracked ahead of prior years, Securus has this liquidity tightness due to an elevated cost structure and CapEx requirements as part of a large 2022 product tablet rollout and upcoming debt maturities. We are in active discussions with key stakeholders regarding next steps and the path forward.
As a reminder, our team has unique expertise and a proven track record of success working through challenging credit such as these. We are leveraging this expertise and proactively working with the management teams, owners, and lenders of the businesses to drive performance improvements at the companies and ultimately a positive outcome for our investments. Importantly, outside of these idiosyncratic situations, the credit quality of our portfolio remains solid.
Now turning to our dividend. Today, our Board of Directors declared a first-quarter dividend of $0.34 per share, which is consistent with our fourth-quarter regular dividend. This first quarter dividend is payable on March 29 to shareholders of record of March 14. We have always taken a disciplined approach to the dividend with an emphasis on stability and strong coverage from our recurring net investment income.
Throughout TCP's history, we have consistently covered our dividends with recurring NII and have also paid several special dividends, including in recent quarters.
Before handing it over to Phil, I'd also like to give a quick update on the proposed merger of TCPC with BCIC. As we approach the shareholder vote, we look forward to closing the transaction as promptly as possible after the successful vote of each BDC. We remain excited about the potential for the transaction, which will bring together two very similar portfolios that we know well with substantial overlap and which will -- we expect to create meaningful value for all shareholders. And we hope that any of our shareholders who have not yet voted on the transaction will vote today or in the near future.
Now I will turn it over to Phil to discuss our investment activity and portfolio.
Philip Tseng
Thanks, Raj. I'll start with a few comments on the investment environment before providing an update on the portfolio and highlights from our investment activity during the fourth quarter.
Starting with the investment environment, while economic uncertainty resulted in the slowdown in private credit transactions in the first half of 2023, we saw a modest pickup in the fourth quarter. This was driven by pockets of activity in both sponsor and non-sponsor opportunities, refinancings and follow-on financing to support existing portfolio companies.
Over the past nine months or so, we've seen increased bifurcation of the direct lending market. Many of them observed more borrower-friendly trends such as tightening pricing and covenant light deal structures. These are especially prevalent in the upper middle market given the robust return of banks. However, the core middle market where we focus has been less impacted by this trend, but we continue to leverage our industry expertise to opportunistically source and invest in the stock deals that present attractive risk reward opportunities.
We remain disciplined and continue to pass on a substantial number of less attractive opportunities, particularly when we believe that inflation does not really reflect the corresponding risk, or turns don't provide adequate lender protections.
In the fourth quarter of 2023, we invested $40 million, primarily in senior secured loans. Deployment of the quarter included both five new and one existing portfolio company. Consistent with our strategy, our emphasis remains on companies with established business models and proven core customer bases that make them more resilient.
In reviewing new opportunities, we emphasize transactions where we are positioned as the lender influence, that is, where we have a direct relationship with the borrower and the ability to leverage our more than two decades of experience negotiating deal terms and conditions that we believe provide meaningful downside protection. We believe this has been a key driver of the low realized loss rates we have experienced over our history.
Our industry specialization continues to be an advantage as it provides two key benefits for us in this environment. First, it enhances our ability to assess and effectively mitigate risks in our underwriting when we negotiate terms and credit documentation. And two, it expands our deal sourcing capabilities with sponsors and non-sponsors who value that industry expertise, which lend itself to more reliable execution in their eyes.
Follow-on investments in existing holdings continues to be an important source of opportunity. About half of the dollars we deployed over the last 12 months were existing portfolio companies. Our largest new investment during the fourth quarter was $25 million senior secured first lien term loan to support the acquisition of Mesquite Gaming.
Mesquite owns and operates two of the three casinos and hotels in the Mesquite Nevada market, the Casablanca Resort and the Virgin River Hotel and Casino. We view this as an attractive investment opportunity as the company stands to benefit from strong ongoing customer demand given its position in a growing market as well as favorable competitive dynamics and high barriers to entry.
New investments in the fourth quarter were offset by dispositions and payoffs of $42 million. As part of our ongoing portfolio management, we closely monitor and directly engage with our existing portfolio companies proactively assessing both current and projected performance related to our original underwriting assumptions.
In the limited situations where performance is below our expectations, we are engaged the management teams and owners to proactively drive performance improvement and ensure our capital remains well protected. Managing situations where capital may be at risk is a key priority for us. And we believe our 20-plus years of experience in managing portfolios through cycles will lead to prove that.
The majority of our portfolio companies are successfully navigating the higher rate market, the labor inflation, and the general uncertainty in this economy, and continue to deliver revenue growth and margin expansion. This reflects the durability of companies in the middle market. It is our ability to take the right industry and the right company.
Now turning to our portfolio. At quarter end, our portfolio at fair market value of approximately $1.6 billion. 89% of our investments were senior secured debt spread across a wide range of industries, providing portfolio diversity and minimizing concentration risks. We also continue to emphasize company in the less cyclical industries. At quarter end, the portfolio consisted of investments in 142 companies, where our average portfolio company investment was $11 million.
As the chart on slide 7 of the presentation illustrates, our recurring income is distributed broadly across our portfolio is not reliant on any one company. In fact, more than 90% of our portfolio companies, each contribute less than 2% to our recurring income.
83% of our debt investments are personally providing significant downside protection and 96% of our debt investments are floating rate. The overall effective yield on our debt portfolio increased to 14.1% from 12.7% at the end of 2022, reflecting the benefit of higher base rates and wider spread on the investments.
Investments in new portfolio companies during the quarter had a weighted average effective yield of 13.4%, exceeding the 12.5% weighted average effective yield on equity positions. Post quarter end, we've seen a pickup in activity driven by pent-up demand as borrowers and private equity sponsors adjust to the current rate environment.
Our pipeline is growing and the projected yields in our pipeline are generally in line with our current portfolio. To date, we have had no prepayment income in the first quarter. We continue to invest selectively, maintaining our underwriting discipline while being mindful of the ongoing macroeconomic uncertainty. We have decided companies that provide a necessary service for product to their customers such that they are more resilient across cycles.
It's also important to note that we're not underwriting the protection. Instead, we seek to build in sufficient buffers to ensure companies can withstand changes in the macro environment without impairing their ability to service our loans.
Looking forward, we believe we are well positioned to continue to deliver attractive returns given that our team has one of the longest track records in direct lending in any of the publicly traded BDCs. While we do not have an explicit forward view on rates, we do believe we will be in a slower growth and elevated rate environment for the foreseeable future and could see a range of macro-economic scenarios,
In periods like these, our experience combined with our deep industry knowledge provide us an advantage that has resulted in strong results through various cycles.
Now let me turn it over to Eric to walk through our financial results as well as our capital and liquidity positioning.
Erik Cuellar
Thank you, Bill. As Raj noted, our net investment income in the fourth quarter benefited from the increase in base rates over the last 18 months as well as wider spreads on new investments. Net investment income of $0.44 was up 10% versus the fourth quarter of 2022. On an annual basis, net investment income was $1.84 per share, an increase of approximately 20% over 2022.
Today we declared a first quarter dividend of $0.34 per share. We remain committed to paying a sustainable dividend that is fully covered by our net investment income regardless of the interest rate environment as we have done consistently over the last 12 years. Investment income for the fourth quarter was $0.88 per share. This included recurring cash interest of $0.76, recurring discount and fee amortization of $0.03, and PIC income of $0.06. PIC income remains in line with the average over our history. Investment income also included $0.02 per share of dividend income.
Operating expenses for the fourth quarter were $0.35 per share and included $0.20 of interest and other debt expenses. Incentive fees in the quarter totaled $5.3 million, or $0.09 per share. Net realized losses for the quarter were $16,000 or less than a penny per share. Net unrealized losses in the fourth quarter totaled $38 million or $0.66 per share, primarily reflecting unrealized markdowns on three investments, which Raj discussed earlier.
The net decrease in net assets for the quarter was $13.3 million or $0.23 per share. As Raj noted, the credit quality of our overall portfolio remains strong. As of December 31, we had four portfolio companies on nonaccrual, representing 2.0% of the portfolio at fair value and 3.7% at costs.
Turning to our liquidity, our balance sheet positioning remains solid, and our total liquidity increased to $349 million at the end of the quarter relative to our total investments of $1.6 billion. This included available leverage of $247 million and cash of $112 million.
Unfunded loan commitments to portfolio companies at year end equaled 4% of total investments or approximately $55 million, of which only $35 million were revolver commitments. Our diverse and flexible leverage program includes two low-cost credit facilities, two unsecured note issuances, and an SBA program. Our unsecured debt continues to be investment-grade rated by both Fitch and Moody's.
Given the modest size of each of our debt issuances, we are not overly reliant on any single source of financing and our debt maturities remain well-laddered. Additionally, we are comfortable with our current mix of secured and unsecured financing and do not have any immediate financing needs.
Combined, the weighted average interest rate on our outstanding borrowings modestly increased during the quarter to 4.29%. It's also up only 138 basis points since March of 2022, while base rates have increased more than 500 basis points during this period. This is the result of having over 73% of our borrowings from fixed rate sources.
Now I'll turn the call back over to Raj.
Rajneesh Vig
Thanks, Eric. Reflecting on our historical performance since we took TCPC public in 2012, we have delivered a 10.1% annualized return on invested assets and an annualized cash return of 9.7%. We are very proud of these results, which include performance during periods when base rates were substantially lower than they are today. We believe this performance remains at the high end of our peer group and speaks to our ability to consistently identify attractive middle market opportunities at premium yields and to deliver exceptional returns to our shareholders across market and economic cycles.
Looking ahead, we see significant opportunity to continue to build on our track record of success. Traditional lenders continue to retreat from lending to the middle market. At the same time, more borrowers view private credit as an attractive and stable source of long-term capital. Middle market borrowers are increasingly turning to private credit for their financing needs in uncertainty and execution, flexibility, and close partnerships that can provide value beyond what bank financing has historically offered.
As a pioneer in direct lending, we believe TCPC is uniquely positioned to benefit from growing demand for private credit. Additionally, we are excited about our combination with BCIC and the opportunity we see ahead to deliver solutions to our borrowers and to structure transactions that deliver attractive returns to our shareholders.
And with that, operator, please open the call for question.
Question and Answer Session
Operator
(Operator Instructions) Christopher Nolan, Ladenburg Thalmann.
Christopher Nolan
Turning on to new investments in the quarter, was most of these investments for sponsors who are investing in new companies or just support a sponsor's existing portfolio company?
Philip Tseng
Thanks, Chris. This is Phil. It's both. It's about, I'd say close to about half and half. We did support some new platforms. And as I and Rajneesh mentioned in the prepared remarks, we see the gain but there are a number of add-ons to existing portfolio companies.
Christopher Nolan
Okay. And then are you seeing a decrease in dividend income from portfolio companies in general?
Rajneesh Vig
Sorry, you mean in terms of our NII, Chris?
Christopher Nolan
Yes, the dividend income that you guys would receive from a portfolio company. Are you seeing that decrease?
Rajneesh Vig
No, we've seen it go the other direction. We've had -- if I'm understanding the question correctly, keep in mind, our spreads are fixed, and the base rate is the reference rate generally through '23 has been quite positive. I think we -- and we've seen obviously enough to give results that drive a couple of specials on top of -- a couple of dividend increases.
I think the only company I can -- or not in company, but investment that I can highlight has had a little bit of a different experience, has been our JV at 36th Street, in part because, unlike the rest of our portfolio they are doing fixed rate leases with some duration that they have been higher on average on a return on asset level, but also have the ability to get some quite good advance rate at the JV level.
But I wouldn't call it material. Obviously, that's the one area I carve out. But other than that, as the results highlight, there's been quite positive dividend -- sustained dividend improvements increases, and I think we've really tried our best to send that out to shareholders in a responsible manner.
Christopher Nolan
All right. I'll follow that offline. Last question, the 2024 notes, how are you guys thinking about refinancing that, given your comments higher for longer, is your inclination to finance that with bank borrowings or to do another fixed rate issue?
Erik Cuellar
Thanks, Chris. I'll take that question. We're definitely keeping a close eye on the market. We're very happy with the way the market has opened up for the BDC sector and we like what we're seeing. We also are happy that we have flexibility in our credit facilities, but certainly we're going to be looking to address that need in the next couple of quarters.
Operator
(Operator Instructions) Paul Johnson, KBW.
Paul Johnson
On the new nonaccrual rThras.io, I know it's a nonaccrual, it's been couple of other BDC portfolios. But I'm just wondering if you can give some color as to kind of the storyline there maybe? And then how much approximately would you say -- you said -- you mentioned that you've had other winners in that space. Now how much of your portfolio are these e-retailer or e-commerce roll up?
Rajneesh Vig
Yeah, thanks for the question. I'll try to -- there were couple of several questions. I'll try to partially answer them. Just to remind everyone, the exposure of Thras.io in the portfolio is approximately 1%. So by no means material, but every company is important. We'll come back to you on the broader exposure, but it won't be significantly more than that.
The history here is -- I think maybe not that different in other areas of high growth -- you have seen a industry or some industry, I would say, emerge from a dramatic movement to online spending, I would call the Amazonization of the world where people have moved from buying things and resource to online with significant spend and the ability to support several layers of scale with a dramatically exciting long-term equity opportunity.
As in other areas of fast growth, the companies, I think the valuations got a little bit ahead of the companies. And then you had a serious incidence coming as COVID, where supply chains were -- and supplies were a little constrained due to COVID. Then they ordered in a little bit of access to provide for buffer for anticipated spend and then spend being a little bit impressed because of recessionary issues. So the way I would describe it is good businesses but stretched balance sheets as a result. And -- but exactly that will absolutely support several companies and leaders of scale and long-term winners.
I think my comment of our exposure here as we do in every other industry, we spend a lot of time thinking about industry dynamics, and ultimately, the types of players you wanted to finance. And I would call the current period a little bit of indigestion stemming from those issues.
But indigestion in the context of the long-term set of successful businesses that can exist here, that may have needed a little bit of a push, in some cases, lender-led to fix the balance sheet, provide some financing or consolidation, which is -- for both, which is happening. And I think we're fortunate that we're in a position of being able to do that with both knowledge and the skill set that we have many prior examples of -- in this portfolio and others that we manage. So I'll pause there. The aggregate across the sector is closer to 7%-- but in supply, as these states reiterates, it's 1%.
Paul Johnson
Got you. That's 7% you said for that retail roll-up strategy?
Rajneesh Vig
Across the participants in that sector. And there are other -- by no means is the only activity around, you know, addressing those issues. I think some other specifics will be released and other companies in the next -- maybe this week earlier this week. Stay tuned.
Paul Johnson
Okay. That's very good color. And then if you kind of take out Edmentus, Thras.io, or Securus. There's NAV impact on net decline. You take those three out, what were the marks on the rest of the portfolio? Was it stable? Was there any sort of broad markdown elsewhere in the portfolio?
Rajneesh Vig
Yeah, I would say I would characterize it as generally stable. There are a lot of companies that have movement. I don't want to put any numbers about it being accurate. But I think you can see from the general performance that it's pretty stable. And to put the NAV movement in context, 75% of it is tied to these three businesses. Some of it is tied to the dividends going out the door and then the remainder of all these three business are tied to a very stable low performing portfolio.
Paul Johnson
And then last question just on the pipeline bigger picture, activity picking up, curious on your thoughts where the pipeline stand today versus maybe six months ago? Any high-quality deals? Or is the market still sort of looking on this return of the M&A market?
Philip Tseng
Yes, that's a good question, Paul. So I would say that the pipeline is seeing a pick up and we start seeing a pickup in activity last quarter in Q4 of last year. I would say that the pickup continues to be gradual rather than a step function higher. So I think that there is still more to come in terms of buyers and sellers willing to transact more refinancing activity and so on. I think we're still early days on that resurgence.
But I'd say, based on what we're hearing and talking to the market participants, both intermediaries, business owners, sponsors and so on. And we do expect that activity to be being fully higher this year than last year. And whether that's more weighted towards back half, it's still TBD, but we're hopeful.
Operator
Robert Dodd, Raymond James.
Robert Dodd
Going back to Paul's question first. From your comments, the file bankruptcy, lender-led financing, can we presume that that there will be incremental capital deployed the first year maybe Q1, Q2, but in kind of the first half of the year, that there will be additional financial support provided to that business to work it through?
Rajneesh Vig
Correct. And just to be specific, look, when we go through these things, these types of challenged credits, you have a -- I guess I'll add some more color. You have an array of tools to facilitate a fix. When it's a good business, a challenged balance sheet and a good sector, I would say that's something that's workable and then you decide what is the best way within which to facilitate the changes or the fundings that you're providing the lender.
In the case of a bankruptcy, a lender-led bankruptcy, I should say, that is a -- provides benefits that you want to offset to what to do to the company if anything. And here, the benefits of this process were felt to outweigh any challenges of the bankruptcy, and I would call it one that can be done very efficiently, including protecting the nature and the terms of financing provided, particularly because there were other discussions being had around this and given interest in the company and the sector, and this was felt to be something that I think we net-net benefit from. But to answer your question, to think we -- yes, there will be additional funding support as the bankruptcy filing will highlight which is for document now.
Robert Dodd
Thank you. I mean [Perch], I believe is another one of the non-accrual now as the fair value deteriorated over a few quarters. Is it looking likely to be following the same kind of path, Thras.io? Or is that one being handled differently by you and the sponsor.
Rajneesh Vig
Yes, no. I wish I could be specific, but I can probably be specific in another year. So the answer in many of these will need to just think about scaling and consolidating and addressing balance sheet issues that are a result of some macro issues. So I think ultimately, all of them will have -- we'll look at and maybe utilize a set of these tools, whether it's funding, clean up balance sheets and maybe even consolidating, I would include [Perch] in that content. And I think stay tuned for something for a part year on those comments. But the answer is essentially yes.
Operator
(Operator Instructions) We have no further questions registered so I will hand back to the management team for any closing comments.
Rajneesh Vig
Thank you. We appreciate your participation on today's call. I want to thank our team for all their hard work and dedication and our shareholders and capital partners for their confidence and continued support. Thanks for joining us. This concludes today's call.
Operator
Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your line.
