Q4 2021 BlackRock TCP Capital Corp Earnings Call
We'll mental earnings presentation to our website at TCP capital Dot Com <unk>.
To view, the slide presentation, which we 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-K , which was filed with the SEC earlier today I will now turn the call over to our chairman and CEO Raj Vig.
Thanks, Katie and thank you all for joining us today for <unk> fourth quarter 2021 earnings call.
I will begin today's call with a few comments on the market environment as well as highlights from our fourth quarter and full year 2021 results.
And then turn the call over to our Chief operating Officer, Phil Chang, who will provide an update on our portfolio and investment activities are.
Our CFO , Eric <unk> will then review our financial results as well as our capital and liquidity positioning in greater detail and I will then close with a few concluding remarks.
After our prepared remarks, we will all be available to take your questions.
Turning to the current market environment in prior calls we have expressed our view that in general private capital markets performed well during the pandemic and that direct lending in particular emerge as a <unk>.
Well positioned source of financing for a wider spectrum of middle market companies.
We continue to believe that that is the case activity during Q4 and full year 2021 was among the busiest in our over two decades of investing and current activity levels in the middle market remains robust.
We work with a broad range of businesses as they seek to finance growth make acquisitions or simply refinance existing debt with greater earnings power.
As such we believe that our shareholders continue to benefit from our efforts and expertise as our direct lending investments deliver a premium source of income and an attractive risk reward position relative to other fixed income investment categories.
I'd now like to review, our fourth quarter performance and discuss a few key highlights for 2021, a year in which our team again delivered strong results for shareholders.
First we had strong NAV appreciation year.
Year over year NAV per share increased eight 5%, including an increase of one 9% in the fourth quarter alone. This performance was driven by both realized and unrealized gains in our portfolio holdings as well as by net investment income that continues to exceed dividends paid.
ROE for the full year was 17, 5% the highest level since <unk> became a public company in 2012.
<unk> strong portfolio performance combined with a lower cost of capital.
Second portfolio credit quality remains strong.
As of December 31, non accruals were limited to just 9% of the portfolio at fair value and have remained at 1% or less throughout the pandemic.
Our excellent credit quality is a function of our disciplined and consistent underwriting process, along with a stable or improving profitability across many of our portfolio companies even during the midst of the pandemic.
Third as Phil will discuss in more detail the strength of our underwriting platform continued to drive robust investment activity.
Year over year, TCT sees investment activity increased 65% and was up 8% versus the pre pandemic levels in 2019.
We reviewed nearly 1000 investment opportunities across the U S private capital platform in 2021.
As a testament to the strength of the relationships, we developed where they bought a wide variety of deal sources as well as the extensive resources and relationships the broader Blackrock platform.
During the fourth quarter, we deployed more than $180 million in capital and continue to identify attractive opportunities across our industry groups.
We also had approximately $115 million of sales and repayments, resulting in net portfolio growth of $67 million.
Fourth we further optimize our balance sheet and liability profile during the year.
We issued a total of $325 million of unsecured notes due February 2026 at attractive rates. As a result, we were able to redeem higher cost notes that were due in August 2022 prior to their maturity, thereby taking advantage of the attractive financing environment.
To further reduce our cost of capital.
Additionally, we amended one of our two credit facilities on more favorable terms, including lowering the headline borrowing rate on facility.
We continue to seek ways to diversify and enhance the right side of our balance sheet and are benefiting from the significant flexibility and our existing capital structure.
Fifth in addition to our strong performance and financial results in 2021 and is an indication of our commitment to strong corporate governance TCP CS Board of directors elected our existing a longtime board member Eric drought to serve as lead independent director.
And finally, we extended our record of continuous dividend coverage, having done so every quarter. Since we took the company public in 2012.
On February 24, our board declared a first quarter 2022 dividend of <unk> 30 per share payable on March 31 to shareholders of record on March 17th.
It is also worth noting that we continue to exceed our cumulative total return hurdle.
As a reminder, <unk> maintains a 7% hurdle based on total returns, including realized and unrealized gains and losses and with a cumulative looked at.
Since 2012, we have generated a 10, 9% annualized return on invested assets and a total annualized cash return of nine 7%, which we believe is the high end of our peer group demonstrating our ability to consistently identify attractive opportunities at premium yields.
Throughout 2021, we capitalize on the scale of our platform and breadth of our teams experience to grow along with the expanding direct lending market.
Some portfolio highlights I'd like to mentioned at year end, our portfolio had a fair market value of approximately $1 $8 billion.
89% of our investments are senior secured debt and it's spread across a wide range of industries, providing portfolio diversity and minimizing concentration risk.
Our portfolio continues to be weighted towards companies with established business models and less cyclical industries.
The portfolio at year end it was made up of 115th investments in 115 companies.
As the chart on the left side of slide seven of the presentation illustrates our recurring income distributed distributed broadly across our portfolio and is not reliant on income from any one company in fact, nearly 90% of our portfolio companies each contribute less than 2% to our recurring income.
84% of our debt investments are personally providing significant downside protection and 95% of our debt investments are floating rate positioning us well for a rising rate environment, we are likely entering.
Now I will turn to turn it over to Phil to discuss our investment activity and portfolio positioning Bill.
Thanks Raj.
Moving onto our investment activity, while the number of direct lending managers has grown in recent years, we remain one of a small group of reputable lenders capable of providing complete and customized financing solutions.
As such we emphasized transactions, where we act as a lead co lead or part of a small club of lenders negotiating deal terms and conditions that we believe provide downside protection on our investments.
Also of note our team is generally finding opportunities to invest at higher spreads than the average middle market transactions.
This is a direct result of our extensive longstanding set of relationships developed over the past two decades as well as our industry specialization, which our deal sources of value and enables us to assess and underwrite risk well.
We source an increasingly large set of investment opportunities.
And while we've been actively deploying capital in this market, we maintain a very disciplined approach to investing.
We regularly review a substantial number of opportunities, but we ended up investing in only a small percentage of them.
As an example, while we reviewed nearly 1000 potential investments across the U S. Private capital platform in 2021, we invested in fewer than 60 of them.
Investment activity in the fourth quarter was robust for new deployments as <unk> invested $182 million, primarily in 19 investments, including loans to 11, new portfolio companies and eight existing ones.
Follow on investments in existing holdings also continued to be an important source of opportunity accounting for nearly 40% of our total investments in 2021.
Incumbency is clearly becoming an important factor in sourcing investments and from a risk management perspective. These are companies, we already know and understand well and therefore very comfortable making these follow on investments.
As we analyze new investment opportunities, we emphasize seniority in the capital structure portfolio diversity and transactions, where we can act as a lead or co lead.
Our largest new investment during the fourth quarter was a first lien incremental term loan to <unk> trading.
<unk> is a provider of infrastructure services network connectivity data analytics and cloud services for the financial services industry.
<unk> customers include some of the largest financial services companies in the U S.
It's also a great example of how our existing portfolio generates attractive opportunities.
The company was looking to secure financing for a strategic acquisition and needed to move quickly given Blackrock was the sole lender on their existing first lien term loan Pico approached our team to provide the acquisition financing and.
And we saw this as an attractive opportunity to increase our investment in a portfolio company that has performed well since our since our initial investment and that has been able to witness firsthand, how well management executed upon its business plan.
And continue to grow the company, both organically and through acquisitions.
Our second largest investment in the quarter was a second lien term loan to anthology to support its acquisition of blackboard.
The combined companies a scaled market leader in end to end software solutions to higher education institutions.
Anthologies equity sponsored reached out to Blackrock directly given their experience working with us on very similar transactions.
Leveraging our team's experience investing in online learning platforms. We saw this as a great opportunity to provide second lien financing to a combined company with strong competitive positioning and that is benefiting from very favorable industry tailwind.
New investments in the fourth quarter were offset by dispositions and repayments totaling $115 million.
These included the sale of a portfolio of asset backed credit linked notes managed by credit Suisse as well as the sale of our loans to Onyx Center source.
The payoff of our loans to live auctioneers and a paydown of our loan to one sky.
Our successful exit of on X. It is worth noting is the company, which is a leading payment solutions vendor to the hospitality industry had experienced challenges as a result of the pandemic.
We were able to sell our loans at a price that was meaningfully higher than our recent marks and ultimately delivered a healthy return.
Yeah.
The overall effective yield on our debt portfolio was nine 2% as of December 31.
Investments in new portfolio companies during the quarter also had a weighted average effective yield of nine 2% and.
And the weighted average effective yield on exited positions was roughly 95%.
Given that 95% of our debt portfolio is floating rate and the majority of our outstanding liabilities are fixed rate. We believe we are well positioned for when rates rise.
In fact, while a 100 basis point increase in interest rates would have a modestly positive impact on our earnings given we have interest rate floors on the majority of our loans.
850 basis point increase in rates would result in approximately a 12% per share increase in our annual net investment income.
We continue to invest selectively in 2022.
Penni, our underwriting discipline.
Focusing on companies with established business models that are well positioned to succeed throughout economic cycles.
Our pipeline is healthy and we continue to source opportunities from a broad range of sectors.
The yields on investments in our pipeline are generally in line with our current portfolio and to date, we have had limited prepayment income in the first quarter.
Let me now turn it over to Eric to walk through our financial results as well as our capital and liquidity positioning.
Thanks, Bill I will now cover our financial results for the fourth quarter and the full year in 2021.
For the fourth quarter, we generated net investment income of 31 per share.
Which exceeded our dividend of <unk> 30 per share.
And for the full year, we generated net investment income of $1 26 per share.
Earning our dividends for the year by <unk>.
We continue committed to paying a sustainable dividend that is fully covered by net investment income.
And today as Raj noted, we declared a first quarter dividend of <unk> 30 per share.
Investment income for the fourth quarter was 69 per share.
This included recurring cash interest of 59.
Recurring discount and fee amortization of <unk> and.
And Pik income of <unk>.
Notably our pick income for the year was the lowest level in more than three years.
Investment income also included <unk> <unk> of dividend income and <unk> from accelerated OID and exit fees.
As a reminder, our income recognition follows our conservative policy of <unk>.
Generally amortizing upfront economics over the life of an investment rather than recognizing all of it at the time the investment is made.
Operating expenses for the fourth quarter were <unk> 31 per share and.
And included interest and other debt expenses of <unk> 17 per share.
Incentive fees in the quarter totaled $3 $7 million or <unk> <unk> per share.
Our net increase and net assets for the quarter was $32 6 million or <unk> 56 per share.
Which included net unrealized gains of $21 4 million or <unk> 37 per share.
Partially offset by net realized losses of $6 5 million or <unk> 11 per share.
Unrealized gains during the fourth quarter, primarily reflected a $10 million increase in the value of our investment in core entertainment.
A $5 million increase in Mentum.
And a $2 million increase in radio group.
Unrealized gains also included the reversal of previously unrealized losses on our investments and Onyx and a portfolio of credit linked note as we exited both investments.
These exits were also the primary driver of the $6 5 million of net realized losses recognized in the fourth quarter.
Substantially all of our investments are valued every quarter using prices provided by independent third party sources.
These include quotation services and independent valuation services.
And our process is also subject to rigorous oversight.
<unk> back testing of every disposition against our valuations.
Yeah.
Our credit quality remains strong with non accrual is limited to just three portfolio companies that in total represent just <unk>, 9% of the portfolio at fair value and one 7% at cost at December 31.
Now turning to our liquidity positioning.
We ended the quarter with total liquidity of $352 million.
Relative to our total investments of $1 8 billion.
This included available leverage of $356 million in cash of $20 million.
Net of trade spending settlement of $23 million.
Unfunded loan commitments to portfolio companies at quarter end equal to seven 2% of total investments.
Or approximately $132 million.
Of which only $31 million were revolver commitments.
The increase in unfunded commitments quarter over quarter was primarily driven by two delayed draw commitments that had not yet funded as of December 31.
Our diverse and flexible leverage program includes two low cost credit facilities, our convertible note issuance two.
Two unsecured note issuances and an SBA program.
And our unsecured debt continues to be investment grade rated by both Moody's and Fitch.
Additionally, given the modest size of each of our debt issuances, we are not overly reliant on any single source of financing.
And our maturities are well ladder.
Given the success of our latest bond issuance back in August and.
And the significant capacity on our credit facilities.
We're very well positioned to redeem or refinance our convertible notes due next week.
Combined the weighted average interest rate on our outstanding liabilities decreased to $3 two 6% from 354% at the beginning of 2021.
With that I'll turn it back over to Raj.
Thanks, Eric.
We are pleased with our fourth quarter and full year results and are confident in our team's ability to deliver strong ongoing risk adjusted returns for our shareholders.
We also remain cautiously optimistic regarding the current investment investment environment.
While we have seen an increase in volatility in the public markets to start the year likely to bring by concerns around inflation supply chain disruptions and uncertainty around rates transaction volumes in the private markets are healthy and revenue and EBITDA growth trends are strong across the middle market in our portfolio.
In this environment, we are leveraging our team's competitive advantages, including over two decades of experience lending to middle market companies.
Our long track record combined with our industry specialization makes us a unique and valuable partner to our borrowers and deal sponsors.
In addition, our experienced and structuring loans that are downside protected as contributed to exceptional long term performance.
Advantages enabled <unk> to deliver a 17, 5% ROE in 2021, and a 26, 9% ROE since the start of the pandemic.
And with that operator, please open the call for questions.
Thank you if you would like to ask a question. Please press star followed by one on your telephone keypad now if you change your mind. It is star followed by <unk>.
We will now take our first question from Kevin <unk> of JMP Securities. Your line is open. Please go ahead.
Hi, good morning, and congratulations on a nice quarter.
So as you.
Paired remarks, you were able to lower the overall cost of capital in 2021 by issuing the two 5% unsecured notes and then also amending the credit facility.
Just curious if you see additional opportunity to lower financing costs, and what that might look like particularly with the convertible notes maturing in early March.
Yes, I can take that one.
Yes, we definitely continue to watch the markets, obviously, it's been a tough.
Tough week, so far, but we always look to the market to the capital markets Opportunistically.
Reach out to the markets as we've done in the last few years.
As we mentioned we are very well positioned to take out our converts which are coming up due next month.
And those are the highest trench.
So far in our capital structure. So those are coming off the balance sheet, we can very well.
Repay those with our credit facilities, which have a significantly lower.
Cost on the converts, but we definitely continue to monitor the capital markets.
Okay, and Kevin I would just add.
I would just add that we've we've certainly tried to keep.
Sufficient flexibility in the balance sheet to do just what Eric was mentioning so we're not holding or.
<unk>.
Requiring to just take them what the market.
Prices at that point in time, but we will continue to optimistically Opportunistically look and monitor and I think there is an increasing number of investors.
Getting familiar with the Bdcs.
In the past so I think that's a positive but overall, we're comfortable where we are and have the flexibility to deal with the upcoming debt.
Okay understood. Thanks, Raj and then just a follow up question related to interest rate sensitivity could you provide the weighted average LIBOR floor for floating rate investments.
Sure.
Basis points.
9%.
Okay 90 basis points. That's it for me. Thank you for taking my questions.
Thanks, Kevin Great. Thank you.
The next question comes from Robert Dodd of Raymond James Your line is open. Please go ahead.
Hi, guys. Congrats congrats on the quarter just a question about.
Prepaid card.
Over the long term average.
You've averaged about a nickel and pre pay piece.
For the last eight quarters, there's only been one quarter, that's actually hit or exceeded that.
There had been anything.
Structurally that's changed in the portfolio to result in lower levels of prepaid income or is it just.
Is that part of the cycle so to speak I mean, theres been other periods when it's been low.
While as well.
I know, obviously you said.
You've seen limited in Q1, so far but any color on.
These lower the new normal or do you expect it to rebound.
Thanks, Robert the question in the compliment I think it's a very good question.
Certainly discuss discuss it on our side I think the short answer is there.
There isn't anything that's changed in the portfolio positioning.
I think it's just a lower level and to be honest the one hand.
<unk>, because we're keeping money outstanding with companies, we know and are comfortable with longer.
From a risk point of view, it's you're just having that experience, let you make the right types of decisions on the other hand, youre not picking up that income that it's more episodic.
But to be honest it is a smaller and smaller portion of.
And then we've had a higher NII overall, so the run rate NII is actually at a higher quality as well.
But the other side of it is it's still mentioned something like 40% of our.
Deployment is coming from the existing names so not only are they named staying outstanding longer we're actually adding onto them at an increasing level.
Again, a positive in my opinion, because youre, putting money out too.
Companies in credits you know so I don't know that its necessarily.
Any structural change your positioning the portfolio it does feel like.
Winners are seeing winners longer and just what rates rising.
Or more likely to rise people are less actively refinancing opportunistically.
So maybe there's an element of that but overall it isn't something that we're doing consciously and I think there's a lot of benefits to it but it is a notable difference from from prior periods as you mentioned.
Right.
I appreciate that detailed answer that.
On the point on the incumbency.
Do you have any data.
About <unk>.
Do you have.
That is supporting and evidenced the.
40%.
Income above us produces better credit protection.
Investors or is it.
I don't want to say, it's easier to do when it comes on board.
But how does that is there upside from that from a credit protection and doing that in the data.
Yes, it's still that way.
Yes, let me, let me I'll start and I'll.
May have additional comments, but I think on the one hand, the data we looked and maybe it's not the type of incumbency specifically, but.
Maintaining a 1% or less.
Accrual level through what is obviously a notable.
Credit risk cycle, when the pandemic I think it's proven that putting are doing something right.
I think anytime we add we add onto alone.
We do have a chance of going back and either tightening up you get a chance to re underwrite it in many ways because you can go back in.
Tighten up the documents that's appropriate you have a chance to.
Our history of credit performance through prior earnings.
On a.
Closely watch basis, so I think intuitively it feels like that is certainly something that is credit enhancing or at least.
A chance to go back in.
And reassess your original estimates and underwriting.
The data I would point to is just the overall performance of the portfolio I wouldn't.
Isolated to the incumbents, but certainly the incumbents are a pretty big part of that.
Driving that empirical output Phil may have some additional comments in addition to that from my observations.
Yes, Robert Thanks for that question out.
Add to what Roger is saying oftentimes in these situations, where we do.
Provide an incremental loan to existing borrowers.
We have a seat at the table and we're often negotiating and structuring favor.
Favorable situations for us whether that's through the document whether thats through pricing or other structural considerations.
<unk> is a great example.
Where we had an opportunity to.
Tighten things up.
And we had an opportunity to really diligence.
The add on target that the company was contemplating acquiring.
And we're very pleased with the outcome of the due diligence. So that's a great example of us.
Wanting to put good money after good investment.
And oftentimes in these situations for add ons generally.
D D.
The equity sponsor is also putting in additional capital to continue supporting the business and funding, let's say the acquisition or the growth.
So these are often good situations and in our opinion.
To invest in.
I appreciate that thank you and congrats on the quarter again and the year.
In the two years relief. Thank you Robert Thank you very much.
As a reminder, if you would like to ask a question. Please press star followed by one on your telephone keypad now.
Next question comes from Christopher Nolan of Ladenburg Thalmann. Your line is open. Please go ahead.
Hey, guys.
Is there a timing.
In the event of a rate increase by the fed would there be a timing difference between revenues.
Increasing as opposed to.
What your interest expense could rise.
Okay.
Hi, Chris This is Eric Yeah, I'd say theres, a very small timing lag most of our loans.
Quarterly some of them monthly.
So any pickup in rates would kick in at the next reset dates so either the next coming month end or quarter end.
Okay, and then as a follow up question strategically.
For much of the past year I mean, you guys have posted some really good returns, but your stock prices lag.
More often not trading below book value per share.
And I'm trying to understand you know.
Where are you guys sort of thinking about how to.
Increase the.
Stock price multiple I mean, you.
I mean performance issue is it something else want to hear your thoughts on that.
It's funny I was going to ask you the same question Chris.
Because.
I think importantly and control.
Input but offline.
But you guys are doing great, yes, no I think what time the stock price is struggling.
I appreciate the observation.
And I don't want to speculate I guess, what we've tried to what we can control we've tried to control and I think.
That is portfolio.
Selection and investment performance.
Positioning for the rate environment, So I think we've done.
<unk> done what we think is appropriate and.
While we're disappointed where where the stock is at some level. It is.
All we can do and we're hoping people pick up on the same comments that you mentioned and we will just continue to try to maintain that performance I don't know that I have a magic answer or.
Sort of a targeted set of observations.
Other than observing the same thing you would observe but.
We're just going to keep trying to perform the way we think of an investor.
Investors would like us to and hopefully things following a positive in a positive way from that.
Okay, we'll take it offline. Thank you.
Thank you.
The next question comes from Ryan Lynch with <unk>. Your line is open. Please go ahead.
Yeah.
Hey, good morning, guys and thanks for taking my questions.
First one just wanted to hit on obviously there are a lot of different you know worried to concerns in the market, but maybe the one that's.
Probably most focused on is just inflation issues, both labor and potentially raw material or input cost inflation.
Your portfolio it looks like it has a lot of services.
Sort of services.
Industry exposure.
So maybe it's less of a worry but as you guys are kind of evaluating your portfolio and borrowers are there any particular companies.
You guys have had noticed that they may have a harder time, passing along those those higher input costs.
To the end user and you're more concerned about going forward.
Yes, no. It's a good question.
And I think your observations are are astute and that much of our portfolio.
As you know services is a lot of technology.
And just general business services, and what we do at the time of underwriting even before inflation became kind of a.
The topic of the day was really to make sure. We understand that there is pricing power on the revenue side and these companies whether it's on the subscription revenues or its actual.
Pricing per engagement on for service companies.
And when we don't have a lot of.
Heavy manufacturing so the other concern these days of supply chain.
And input costs and I think there is a not a lot of exposure.
In terms of the types.
Types of companies that those issues will hit.
So I think we are comfortable that these companies have the ability I think the one thing that we are watching more closely.
Not so much on the inability to pass on pricing, but it's really on labor.
And wage inflation and Thats, obviously, we underwrite would it be fair bit of buffer and <unk>.
Conservatism so to the extent there is enormous increases in that area or other inputs. These companies and these capital structures can handle it but I wouldn't sort of highlight any one company or an area that.
Other than a normal course that we feel is outsized exposed in fact, I think we have less exposure to some of the.
Topical issues.
I can't point to any empirical.
It's just more intuition.
Okay.
That's good to hear and then my other question was.
You guys mentioned, a $10 million unrealized gain in core entertainment.
Can you talk about what drove that that bad.
Increase in value and that portfolio company.
Yeah.
Yeah.
Sure. So you might think I'm wondering when they take it.
Yeah go ahead Ron.
Okay basically it was there was a sale of the business. So it was actually.
Our value tied to an actual transaction value.
Strategic acquirer and so I think that highlights and many of these names where we have some equity.
Equity exposure, we try to tend to value them reasonably if not conservatively.
And you had mentioned was another example, where we have obviously seen a consistent markups and oftentimes tied to cash investments or.
Cash related transactions, but core to be specific was tied to a sales price of the business to a strategic buyer.
Okay.
Well congrats on that successful exit.
All for me today I appreciate the time.
Thank you.
Yeah.
There are no further questions on the line at this time, so I'll hand, the call back over to Raj Bank.
Thank you. We appreciate your participation on today's call I would like to take a moment to thank our team for all the continued hard work and dedication, particularly through the pandemic and all the challenges imposed I would also like to thank our shareholders and capital partners for your confidence and your continued support.
Thanks for joining us this concludes today's call.
This concludes today's call. Thank you for joining you may now disconnect your lines.
Yeah.
Yeah.