Q3 2019 Earnings Call
Today's conference call is being recorded for replay purposes.
During the presentation, all participants will be in listen only mode. A question answer session will follow the company's formal remarks.
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And now I would like to turn the call overall, Katy Mclean director of the Blackrock TCP Capital Corp, Global Investor Relations team Katy. Please proceed.
Thank you Shannon 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 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 or meet as of today are subject to change without notice.
This morning, we issued our earnings release for the third quarter ended Septemberthirty 2019, we also posted a supplemental earnings presentation to our web site at TCP capital Dotcom to be it a slide presentation, which will refer to on today's call. Please click on the Investor Relations link and select events and presentations.
These documents should be reviewed in conjunction with the company's Form 10-Q , which was filed with the FCC. This morning, I will now turn the call over to our chairman and CEO Howard Levkowitz. Thanks Katy.
I'm here with our TCPC team and we thank everyone for participating on our call today I will start with an overview of our third quarter performance and that our CFO , Paul Davis will review our financial results. After Paul's comments I will provide some closing remarks before opening the call to your questions.
I'll begin with a few highlights from the third quarter that are summarized on slide four of our investor presentation first.
We earned net investment income of 43 cents per share out, earning our dividend by seven cents. This was a 30th consecutive quarter that our net investment income covered our dividend and today, we declared a fourth quarter dividend of 36 cents per share payable on December 31 to shareholders of record as of December 17.
Second we delivered another strong quarter of deployments totaling $176 million, we continue to leverage both our long standing relationships with borrowers and deal sources and the power of Black rock platform to identify unique and attractive investment opportunities.
Dispositions in the quarter were $181 million, resulting in net dispositions of $5 million.
A large number of these dispositions occurred at the end of the quarter.
Elevating our average port supply wheel size and net investment income for the quarter and resulting in prepayment income of six cents per share.
Third.
We're privileged to have access to diverse low cost and flexible sources of financing, including secured and unsecured debt to that point in August we successfully issued $150 million of senior unsecured notes with a five year maturity and attractive rate from 3.9%.
I would like to discuss some of the larger movements in our portfolio during the third quarter, we experienced more volatility in the valuation of a few of our investments than we typically experience.
Leading portfolio gains was a 5.2 million dollar increase in the value of our investment in Edmentum.
As we have previously discussed we've been working alongside the Edmentum management team to improve operations and we're pleased to see meaningful ongoing improvements the company in our holdings as a result of those efforts. We also recognize $4 million and gains and prepayment income on the pay off of our loan to snap logic during the third quarter.
The largest markdown in the quarter was a 5 million dollar mark down of our investment in Fidelis driven in large part by an ongoing liquidity shortfall at the company. We are actively engaged with management and potential co investors to both address the shortfall and to proactively deal with the issues that drove the underperformance in the past.
As discussed on last quarter's call. We expect the value of this investment to be volatile as we work toward a solution to strengthen the balance sheet.
And we plan to provide updates as appropriate.
Additionally, we took mark downs of $3 million on each of our investments in Highland and AG wife, both for company specific reasons.
Hi, Linda is a leading telecom and wireless engineering and construction company, whose competitor customers are experiencing project delays in certain end marks.
Including from delayed Fiveg projects.
Why continues to be a fundamentally good company that has faced a series of external challenges, including record high commodity prices for certain raw materials, particularly rhodium.
As well as some customers slow downs due to international trade uncertainty.
It's important to note than on a combined basis. These investments account for a very small percentage of our portfolio.
We are focused on maximizing their value along with the rest of the portfolio and our team has a strong long term track record an experience working through challenging situations as demonstrated by the increase in value of our investment in Edmentum and the gains we realized on snap logic, turning to slide six of the presentation.
At quarter end, our portfolio had a fair market value of $1.7 billion, 93% of which was in senior secured debt.
And constructing our portfolio, we have consistently focused on senior already as well as diversification.
As of September 30, we held investments in a record 105 companies across a wide variety of industries.
Our largest position represented only 3.8% of the portfolio and taken together our five largest positions represented only 15.8% of the portfolio. Furthermore.
As the chart on the left side of slide six illustrates our recurring income is distributed across a diverse set of portfolio companies. We are not reliant on income from any one portfolio company in fact on an individual company basis, well over half of our portfolio companies each contribute less than 1% to our recurring income.
Our portfolio continues to be predominantly floating rate at quarter end, 92% of our debt investments were floating rate as demonstrated on slide seven.
As I noted we deployed at $176 million in the third quarter substantially all of which was in senior secured loans and notes are strong origination activity resulted from the relationships. We have developed over two decades indirect lending has also expanded access to deal flow and additional resources, we are leveraging as part of the.
Blackrock platform.
Our team is able to add more value to our borrowers and deal sources by providing a full range of strategies and risk profile across the global credit platform.
Deployment activity in the quarter included seven originations three of which were with existing borrowers.
Follow on investments in existing portfolio companies continue to be in certain important source of investment opportunities.
From a portfolio risk management perspective. These are credits, we know and understand well these opportunities reflect the strength of our borrower relationships and the value we delivered to them.
Year to date nearly half of our new investments have come from existing borrowers. We also continue to focus on investments, where we lead or co lead negotiations, which allows us to set deal terms was solid creditor protections. We were leader co lead on five seven new investments in the third quarter.
Our top five investments in the quarter.
Demonstrate our emphasis on diversity and lending at the top of the capital structure. They include.
$35 million senior secured loan to jewel labs and investment generated from a relationship we had through our private funds.
We made this investment in early August and while we are aware of the recent headlines about jewel. We believe this is a well structured and well covered loan.
A $27 million senior secured loan to W. HP global to support the acquisition of and Cline, a women's apparel footwear and accessories brand. This opportunity came to us through a longstanding relationship we have with the W.H.P. management team and our extensive experience in financing.
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Our third largest investment in the quarter was a $23 million senior secured revolver loan to spark networks to support the expansion of its portfolio of online dating communities.
Spark is now the second largest dating company in North America and has over 1 million monthly paying subscribers globally. We also provided a $20 million senior secured revolver to sand data, which provides electronic verification of payroll and the other information for the home care market and our fifth.
Largest investment in the quarter was a $14 million senior secured loan to win shuttle a leader in application data management software.
Our third quarter investments demonstrate our emphasis on building a diverse portfolio with exposure to a variety of industries. We remain disciplined in our underwriting with an emphasis on companies and industries that can perform consistently throughout economic cycles.
Dispositions in the quarter totaled $181 million and included the pay off of our $36 million loan defensive technology alone. We originally underwrote in 2014.
Additional payoffs included a 32 million dollar loan to snap logic.
$28 billion obligation from F. CFG lending relationship we've had for six years and a 17 million dollar loan to Adesto.
New investments during the quarter had a weighted average effective yield of 10.8% investments we exited at a weighted average effective yield of 11.6%.
As we exited and reduce several higher yielding second lien positions and a $28 million Junior note investment.
The overall effective yield on our debt portfolio at quarter end was 10.6% compared to 11% at the end of last quarter, primarily as a result of the decline in LIBOR.
As shown on slide eight and nine respectively. We have returned $11 per share in dividends and outperformed the wells Fargo BDC index by 24% since our IPO now.
We'll turn the call over to Paul who will discuss our financial results Paul.
Thanks, Howard and Hello, everyone. Starting on slide 16, net investment income in the third quarter was 43 cents per share.
Exceeding our dividend of 36 cents by 19%.
This extends a record covering our regular dividend every quarter since we went public in early 2012.
Over this period on a cumulative basis weve out earned our dividends by an aggregate $43 million or 73 cents per share based on total shares outstanding at quarter end.
Investment income for the third quarter was 18 cents per share substantially all of which was interest income.
This includes recurring cash interest of 69 cents.
Recurring discount and fee amortization of four cents.
And pick income of six cents.
We also generated six cents per share from prepayment income, including both prepayment fees and unamortized I'd.
Our income recognition follows our conservative policy.
Generally amortizing upfront economics over the life of an investment rather than recognizing all of it at the time investment has made.
Operating expenses from third quarter were 45 cents per share and included incentive compensation of nine cents per share as well as interest and other debt expenses of 21 cents per share.
For net investment income of 43 cents per share.
Incentive compensation during the third quarter reflected the reduction in our incentive fee rate from 20% to 17.5%.
That took effect on February nine to this year.
Net unrealized losses of $6.7 million or 11 cents per share were primarily driven by the portfolio company valuation changes Howard discussed earlier.
As of September 30, we had loans to three portfolio companies on nonaccrual status Fidelity Agee y and avanti, representing 1.4% of the portfolio at market value and 3.8% of cost.
We placed fidelis on nonaccrual last quarter and Avanti has been challenged for some time.
AG why is a fundamentally good company, whose valuation is currently less than its debt.
Turning to slide 15, we had total liquidity of $432 million at quarter end.
This included available leverage of $346 million cash of $80 million and net pending settlements of $6 million.
Year to date, we expanded our credit facility capacity by a total of $150 million.
Reduce the interest rate on our SP CP facility by 25 basis points.
And extended the maturity of both facilities to May 2023.
Our credit facility expansion gave us flexibility as we plan for the maturity of our 2019 convertible notes.
And with the subsequent issuance of in August of our $150 million of 3.9% unsecured five year notes, we were able to then reduce our credit facility commitment by $50 million after quarter end to balance our secured and unsecured debt capital.
The unsecured note issuance and net increase in our credit facility capacity further expanded our diverse leverage program.
Which now includes too low cost credit facilities.
Two convertible note issuances.
Two straight unsecured note issuances and an ESP program.
Astounding draws astounding outstanding draws on our $150 million SP program increased to $138 million at September 30.
While quarter and cash was temporarily elevated by a number of very large repayments in the last few the quarter.
Regulatory leverage which is net of Sps see that cash and outstanding trades decreased.
Quarter over quarter from 0.98 times at that point 90 times common equity at June 32.96 times at September 30, well within our two to one leverage limitation following shareholder approval of our increased leverage flexibility back in February .
I'll now turn call back over to Howard. Thanks, Paul We're pleased with our strong that.
Net income dividend coverage and disciplined origination activity during the quarter.
Our team is focused on delivering the results our shareholders have come to expect from TCPC.
Middle market borrowers continued to look for tailored financing solutions from lenders, who know their businesses. However, we're cautious on the environment given the idiosyncratic company an industry ships, we continue to observe.
Given this we continue to be disciplined in our underwriting executing only a small number of the investment opportunities we review each quarter.
We make investment decisions based on a comprehensive analysis of each company its management team on strategy and relevant industry dynamics with this in mind, we continue to leverage our platform to pursue attractive investment opportunities in the fourth quarter to date through November 5th we have invested approximately $69.2 million primary.
Early in five senior secured loans.
The combined effective yield of these investments is approximately 10.1% looking ahead. We believe we are well positioned to continue to generate strong and consistent performance for several reasons.
Our 20 plus years of experience, which span several market cycles is a key advantage in attracting borrowers and deal sources as well as managing risk.
Our robust origination platform gives us the ability to source unique and attractive investment opportunities the scale of the Blackrock platform enhances our deal flow supporting our selective investment approach has lead our co lead on most of our investments we take an active role in due diligence deal structuring establishing terms and monitoring invest.
The direct relationships reform with borrowers as part of this process help protect TCPC and its shareholders.
The Blackrock TCP team is structured so that deal team members source structure and monitor investments to ensure interests are aligned over the life of an investment and finally, the Blackrock TCP team has deep experience in both performing and distressed credit. This helps us structured deals that are downside protected and managed through any challenges.
That may arise in closing, we remain focused on generating superior risk adjusted returns for our investors, while preserving capital with downside protection with that operator, please open the call for questions.
As a reminder, SASSA question, you will need to press star one on your telephone.
Your question press the pound Keith please standby compiled acuity roster.
Our first question comes from Chris Kotowski with Oppenheimer and company. Your line is open.
Hi, good good afternoon.
Good morning in your case.
I was just wondering it seems like you've been fairly active on the right hand side of the balance sheet with a new notes and.
Yes.
Just noticed this reduction of the the facility.
And.
Was wondering lazard, all just kind of opportunistic or is there.
Kind of a.
Programatic move on your in your view to too.
Move towards more fixed rate liabilities or is there is there a strategy or it was that primarily optimistic or or as the started to just broadening and diversifying as always.
Chris It's Howard Thanks for the question.
Our our liability management is really a function of our risk management perspective, and wanting to diversify our sources of funding we have to revolvers and SBK facility a series of note facilities and a convert.
And we had expanded our revolver capacity earlier in the year when it was attractive to do so.
And when it became attractive to issue the 3.9% notes the summer we did so.
But then we looked at it and felt we had more credit capacity than we needed and we have good relationships with our bank. So we were able to unwind a portion.
The incremental facilities debt that we had taken on we take it on incremental debt from both of our lenders and just on when that from one of them.
Okay and then the one.
Area, where you seem to be running up towards capacity is on the SP. Eight debentures can you remind us sort of where you stand on potentially expanding that.
Okay, well currently we still got some cash available in the FDIC.
I see dropdown. So we can we still have capacity to use that but are in process of looking at expanding RSP assay facility as well.
Okay, and then finally from me.
You always provide that that interest rate sensitivity chart on page seven and.
Obviously, we had.
I guess one rate cut in July and one in.
October and I'm, just kind of curious.
How how long you know just from the.
From the narrow point of view of an analyst is trying to model out. The next couple of quarters, how long before we kind of feel that impact given kind of the rollovers in your portfolio.
So well.
Chris This is Howard again, youre feeling it.
It's rolling through.
Most of our assets are on three month resets not all of them, but most of them.
As are the floating rate liability. So they may not all flow through concurrently, but you're getting it real time, we've had compression year over year in LIBOR of about 66 basis points and so the reason our overall portfolio yield is down this quarter is a combination of two things as we discussed we exited a few of our second lien.
Positions in our one larger.
Junior note.
Which were higher yielding positions that overall 11, six but you're also seeing the effect of LIBOR, which was down 25 basis points. This this quarter flowing through.
We do have on the vast majority of our investments LIBOR floors.
But we'll see where rates go up.
Okay.
All right that's it for me thank you.
Thank you.
Our next question comes from Robert Dodd with Raymond James Your line is open.
Hi, guys.
Following up on that question, a little but rather than yields can you give us any any color on what you're seeing.
On spread so I mean, some evidence so some data indicates middle market spreads are widening a little bit right now on.
What are you seeing in kind of the pipeline kind of like for like kind of spreads because obviously mix effects, but what's yes, what's what's really going on on the spread throughout the yield.
Right Robert its Raj speaking I'll try to address that I think.
Look everything in our business seems to be a little bit episodic and we're very.
Focused on being a value added provider financing provider to our.
Our counterparts and I think historically, that's led to a more stable.
You know spread for us even in an environment, where it's been reducing I do agree what your sentiment that there seems to be certainly a stabilization and and as we look at the pipeline even opportunity to take that.
Wider but again, it's very episodic deal by deal basis, but I think the environment as a little friendlier on the spread side, but it's still ultimately comes down to being able to.
Finally opportunities be positioned to windows, it's still a competitive environment, but I think we've seen some some benefit on the the other side of it even though rates have gone down and we're going to continue to look for those does that opportunities.
Got it thank you and then talking about.
Episode episodic repayments, obviously very high this quarter.
Some genius of second lien and some some big loans that you felt back with prepayment fees any.
Have you got any indications right now about any large repayments coming.
In either in the near term because that can only Susan dumbass around.
Quite a lot.
Yes, I think I think like every quarter, it's hard to predict.
We certainly have our eye on some things that we're working on.
Opportunistically, but it's really that you can change quite quickly. So it would be wouldn't be fair to predict on that basis.
Got it got it and then one one final kind of housekeeping dividend income in the quarter with was.
The highest we've seen in the while I mean huge but.
Almost reaching millions.
Can you give us any color where that comes settlement is any of that associated with the conventional lending JV, which is now.
It's the open up and running from what I understand.
Yes, I can I can take that one there has been.
I'm good activity on the 36 Street JV.
Some nice payments that flow through which would account for I think a chunk of that dividend income I would not annualized that but we are pleased with the progress we've made.
And that vehicle, which is season I think more season now.
But that would not be the convention the conventional anyone.
Got it I appreciate it thank you.
Thank you. Our next question comes from Ryan Lynch with KBW. Your line is open.
Hey, guys. Thanks for taking my questions.
First one has to do with public in your portfolio today.
Diversified financial services from an industry standpoint is your largest concentration today.
That's grown substantially just throughout 2019, so can you maybe just talk about.
Why there's been significant growth in that area.
And why you guys feel that.
Give areas of yen.
Ryan. This is this is Paul so I'll start out there by.
By noting that this quarter, we switched the industry classification system, we use we used to be using categorizations based on the U.S. government classic industry classification system, but.
Switch to.
Switch to.
Change that to the current system with a view that a more closely aligns our financial reporting.
The way, we manage our business, including from an end market perspective, so that investors have had a clear view of where our exposures are.
And so currently currently that that system is the is the S&P system. So so that the changes aren't necessarily apples and oranges, but we feel this gives better transparency disclosure going forward.
So it's more of just more of a classification change has reported versus actually.
Making.
Focused effort into that area.
Correct correct, yes, well said thank you.
I would just add to that Ryan its rise that keep in mind that the jvs, which have grown as well.
Fixed rate in particular would would fall into that category.
Okay.
And then can you maybe talk a little bit about how your investment in Jewel lab that deal was was sourced to you and then.
Maybe specifically with jewel, but also just broader that obviously company has some controversy to it so how do you guys get comfortable.
Making an investment would you guys, obviously view as an attractive risk adjusted returns, but potentially you could have some reputation risk.
So.
Sure this as Howard Thanks for the question.
As we mentioned.
Bout half our investments come from existing sources and this is one of those it wasn't an investment BDC, but was a company that we had been involved with and one of our private funds no longer involved with them that capacity.
And so we had a preexisting relationships.
It's it's always difficult to answer a hypotheticals, but we invested in jewel in early August .
On the premise that the company has developed an alternative to combustible cigarettes that could dramatically reduce cigarette consumption.
And our investment was based on fundamentally sound underwriting, which includes multiple sources of repayment loading a very low loan to value cash well in excess of our debt and successful business operation in multiple locations.
Having said that we're very conscious of the headlines in the circumstances surrounding the company and we continue to monitor.
Okay.
Those are all my questions I appreciate the time today.
Thank you.
Thank you. Our next question comes from Christopher Nolan with Ladenburg Thalmann. Your line is open.
Have you guys provided any update on Fidelis.
Yes. This is Roger I'll take that.
I think the update here is very similar to some of the commentary last quarter.
This is obviously a very important.
But I would say isolated position and what we're dealing with what the company.
We continue to see some benefit.
Both topline and as well as the outlook for the business based on the work we've done.
Overall going back over a year ago in terms of switching out management and making some changes.
But as Howard mentioned in his prepared comments there there is a ongoing liquidity need and we are actively working.
To address that and hopefully resolve it and that May ultimately include us.
With a financing partner taking over the business or it may be an alternative but I think the update again is very consistent what how we looked at the company last quarter.
We are at parts of the business outlook from the liquidity outlook.
And it's an ongoing activity that we will just continue to try to update update you all along.
Great and I guess, some sort of a follow up on spread question from Robert.
Given most of your first lien loans are adjustable rate and a loss subordinated loans are fixed at what point does.
Rates for first lien search getting so on attractive you start looking to go down the capital structure incrementally and on a selective basis.
Sure I'll I'll take that again, it's rice and I guess I would I would do is first clarify.
I don't know that all the.
Junior paper or in that in our case, some second lien debt. It's fixed in fact, a lot of that will be floating as well.
So we always look at both the relative risk reward and absolute return.
Occasionally at episodic Lee we will look to go.
To a junior position and that tends to be in situations, where we're very comfortable obviously with that with the structural subordinate subordination.
Oftentimes, it's a smaller first lien and one thats placed with banks, but I think that that assessment is ongoing and is real time.
Which we were we will look at that but it really is situation specific portfolio. As you know is really heavily weighted towards I think well covered and.
Strong risk reward first liens, but the opportunities do exist and occasionally emerge to go junior.
Alright. Thanks.
Thank you once again, ladies gentlemen, if you wish to ask a question at this time. Please press Star then why don't you touched on telephones are.
Our next question comes from Fin O'shea with Wells Fargo Securities. Your line is open.
Hi, Good morning, good morning, and afternoon. Thanks for taking my question.
One follow on the markdowns this quarter.
Can you expand on EG why touch that name.
Look to previously.
On pits and.
Just can you help us understand the context of putting upticks name on non accrual.
Assuming that the cash isn't really shored up to pay a cash dividend anyway.
What really happens in terms of the company's profitability for for you to go from.
Pick two non accrual tech.
Sure.
Then.
Good morning on our end and afternoon on years, it's it's Howard.
AG, while a comment first on the business and then on the accounting and Paul May have something to add on the accounting.
Gee why is a fundamentally good business, we've had a couple of markdowns and we've been disappointed.
It has its a maker of high end.
Resins that go into a series of sophisticated end use products.
The markets for most of these have been strong this quarter, we saw some weakness on the international front due to what we think is trade uncertainty and the company was significantly impacted as some of its raw materials, particularly rhodium.
Has soared in is at record price levels as a result of this our valuation providers.
Decreased the value of the company.
To a level lower than where the instrument was valued and we thought that it called into question Collectability of the pick to a sufficient point that belonged on non accrual.
So just.
A follow up there is is rhodium the inputs and the company cat.
Yes on the costs sustainably is.
That's sort of the basics.
Basic backdrop there.
This is a fairly recent record increase.
We'll see what the company can and can't do.
But in terms of its impact on the business and these valuations are done with the benefited the information in front of people at the time, but they have.
That.
It was marked down based on that we think fundamentally it remains a good business.
With a unique product and unique positioning.
But it is going through some lower earnings at this point.
Okay.
Very much appreciate the color on that and can you provide just a follow up if I may.
Update on the Blackrock private credit platform.
Private credit or direct lending assets as you see them.
The co invest with.
TCP BDC.
Sure we have.
As I think people are well aware at Blackrock Blackrock manages another BDC be KCC, which co invests. In addition to that we have a series of private funds.
And that is we handle those in a consistent manner to the way that TCP handle them before we were acquired with Blackrock, which is quite simply.
Under our allocation policy as approved by our independent Board members.
And consistent.
With applicable.
Policies across the firm, it's something works in multiple vehicles. They take it pro rata to the extent, but they have room, it's that simple and so we have been investing that way in 40 Act vehicles going back now since we got our original Exemptive order six.
And it really hasn't changed today, albeit we've got some older vehicles that are running off and that no longer have investment capacity and so we're bringing on new vehicles.
Okay. Appreciate the context, thanks for taking my question.
Ben Thanks for your questions.
Thank you and I'm currently showing no further questions at this time like turn the call back over Howard Levkowitz for closing remarks.
Okay.
Your questions in our dialogue today I would like to thank all of our shareholders for your confidence and your continued support and our experienced and talented team of professionals at Blackrock TCP Capital Corp. For your continued hardware can dedication. Thanks again for joining US This concludes todays call.
Ladies and gentlemen, this concludes today's conference call. Thanks for participating you may now disconnect.
Hello.