Q2 2022 BlackRock TCP Capital Corp Earnings Call
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Ladies and gentlemen, good afternoon, welcome everyone to Blackrock TCP Capital Corp, second quarter 2022 earnings Conference call. Today's conference call is being recorded for replay purposes. During the presentation, all participants will be in a listen only mode.
<unk> and answer session will follow the Companys formal remarks to ask a question. Please press the star key followed by the digit one I will repeat these instructions before we begin the Q&A session and now I would like to turn the call over to Katie Mcglynn director of Blackrock P. C P crop.
Little Corp, Investor Relations team Katy. Please proceed.
Thank you Bethany 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.
We're 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 second quarter ended June 32022, we also posted a supplemental earnings presentation to our website at TCP capital Dotcom.
The slide presentation, which we will refer to on today's call. Please click on the Investor Relations link and select events and presentations.
Documents should be viewed in conjunction with the company's Form 10-Q, 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> second quarter 2022 earnings call.
As usual I will begin today's call with a few comments on the market environment as well as highlights from our second quarter results. I will then turn the call over to our President and Chief operating Officer, Phil Tseng, who will provide an update on our portfolio and investment activity.
Our CFO , Eric Hilliard will then review our financial results as well as our capital and liquidity positioning in greater detail I will then conclude with a few closing remarks before we take your questions.
As many of you are aware the current economic environment is characterized by negative GDP growth the highest inflation rate that generation and aggressive fed tightening.
Within this environment direct lending continues to be a reliable source of financing for a wide spectrum of middle market companies.
And a reliable source of returns for investors.
We have often noted that direct lending has outperformed other segments of the market during periods of instability and we believe that remains the case in the current environment.
As a reminder, the assets we invested are typically senior in the capital structure and underwritten with meaningful lender protections. These often includes significant collateral packages and contain real covenants, specifically tailored to each borrower's business and industry our.
Our strategy has always focus on core middle market businesses and diverse resilient and less cyclical industries. These.
These companies have historically outperformed outperformed our larger corporate counterparts during economic downturns for.
For example, during 2007 to 2009, the middle market added $2 2 million jobs, while larger businesses actually shed $3 7 million jobs.
It seems like you have been living in quote unquote unprecedented times for some time now.
Prior to 2020, none of US had considered a global pandemic and an economic shutdown in our base case underwriting.
Since the initial COVID-19 shock pandemic and supply chain pressures have contributed to an inflationary environment that many have an experienced in quite some time or ever for that matter.
Our team's proven ability to identify and invest in businesses that has successfully managed through periods of economic stress gives us confidence in the resiliency of our approach to direct lending.
Regardless of the market environment, we have always been disciplined on our underwriting standards and evaluated a borrower's ability to manage in times of duress through both a forward looking view and historical lens of performance through prior periods of stress.
We remain confident in the strength of our diverse portfolio to continue to withstand periods of economic volatility.
So what does this all mean for the existing portfolio I'm very glad.
To report that the portfolio remains in excellent shape.
Clearly in many sectors growth is slowing inflationary pressures, especially for wages has resulted in a degree of margin erosion and where applicable supply chain issues have further pressured earnings. However, we have been pleased with our borrowers are proactive actions to these pressures, including curbing spending and their ability to find cost savings.
In other parts of their organization.
We have also been able to further validate relatively inelastic demand for their products or services.
Observed an ability to pass along cost increases to their end customers.
Furthermore, given the floating rate nature of our strategy interest rate increases or actually a benefit to our portfolio and of course, we continue to closely monitor our borrower's ability to service debt in a rising rate environment.
Let's now turn to our second quarter performance and a few highlights from the quarter.
First we delivered solid net investment income of 37 per share, which exceeded our second quarter dividend of <unk> 30 per share.
This extends our record of continuous dividend coverage throughout our more than 10 years as a public company and today our board of directors declared a third quarter 2022 dividend of <unk> 30 per share payable on September 30 to shareholders of record on September 16th.
Second our portfolio credit quality remains strong as of June 30, non accruals were just <unk>, 3% of the portfolio at fair value.
Our excellent asset quality is a function of our disciplined and consistent underwriting practices.
And third as Phil will discuss in more detail the strength of our underwriting platform continued to drive solid investment opportunities that result in a total of $103 million deployed a total of nine investments during the second quarter.
This is a testament to the strength of the relationships, we developed with a variety of deal sources over our more than two decades indirect lending as well as the extensive resources and relationships of the broader Blackrock platform.
Sales and repayments during the second quarter totaled $82 million, resulting in net acquisitions of $21 million.
During the quarter, we continued to exceed our cumulative total return hurdle as a reminder, <unk> maintains a 7% hurdle rate based on total returns, including realized and unrealized gains and losses and.
And with a cumulative look back.
Since 2012, when we took over took TCP see public we've generated a 10, 7% annualized return on invested assets and a total annualized cash return of nine 4%. We believe that this is at the high end of our peer group demonstrating our ability to consistently identify attractive opportunities.
At premium yields and deliver exceptional returns to our shareholders.
And they did declined two 1% during the second quarter, primarily as a result of widening market credit spreads, which resulted in net unrealized losses on our existing portfolio.
These unrealized losses were partially offset by net investment income in excess of the dividend.
Now I'll turn it over to Phil to discuss our investment activity and portfolio positioning Phil.
Thanks Raj.
Despite the public market volatility, we continue to capitalize on the scale of our platform and breadth of our teams experience to identify attractive investment opportunities at.
At quarter end, our portfolio had a fair market value of approximately $1 8 billion.
89% of our investments were senior secured debt spread across a wide range of industries, providing portfolio diversity and minimizing concentration risk.
As we previously noted our portfolio is weighted towards companies with established business models and less cyclical industries.
The portfolio at quarter end consistent consisted of investments in 122 companies as the chart on the left side of slide six of the presentation illustrates our recurring revenue income is distributed broadly across our portfolio and is not reliant on income from any one company in fact more than 90% of our portfolio companies.
Each contribute less than 2% of our recurring income.
84% of our debt investments are first lien providing significant downside protection.
And 95% of our debt investments are floating rate positioning us well for the current rising rate environment.
Moving onto our investment activity as one of a small group of reputable lenders capable provide a complete and customized financing solutions, we focused on transactions, where our U S. Private capital team actually the lead Kobe or part of a small club of lenders.
This enabled us to negotiate deal terms and conditions that we believe provide meaningful downside protection on our investments.
Robust lender protections, including substantial collateral and tailored covenant packages are particularly important in periods of economic volatility.
We have delivered for borrowers and deal sources on over 1000 transactions across the U S private capital platform.
Our extensive long standing relationships provide us an advantage in identifying and assessing investment opportunities in this current environment.
In addition, our industry specialization, which our borrowers truly value bolsters, our ability to assess and underwrite risk.
We source an increasingly large set of investment opportunities for multiple channels 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 only invest in a small fraction of them.
General market activity was slower in the first half of 2022 relative to the record levels. We saw in 2021.
Based on M&A and refinancings. However, we actually continue to see strong new deal activity, which allowed us to be highly selective.
<unk> invested $103 million in the second quarter, primarily nine divestments, including loans to six new portfolio companies and three existing ones.
Follow on investments in existing holdings continues to be important sources of opportunity.
Counting for 50% of total dollars invested over the last 12 months.
<unk> is an important factor in sourcing investment opportunities.
And we believe that advantage will only increase if economic conditions continue to deteriorate.
These are companies, we already know and understand well and therefore are very comfortable in making follow on investments.
As we analyze new investment opportunities, we emphasize seniority in the capital structure portfolio diversity and transactions, where our U S private capital team access leader Kobe.
TCP six largest investment during the second quarter wasn't incremental first lien term loan to <unk> the.
The company provides AI based market intelligence to financial services and corporate clients.
Our team was selected to provide the financing given our reputation and scale. Despite offers from other lenders at lower pricing.
Blackrock U S private capital team acted as sole lender to refinance existing.
Existing debt and subsequently to provide acquisition financing.
We saw this as an attractive opportunity to invest in a company with robust growth and a highly visible revenue stream from entrenched blue chip customer base.
Our second largest investment in the quarter was our first lien term loan and revolver to become a global provider of compensation management software.
The sponsored reached out to us directly to provide the acquisition financing and we served as the sole vendor. We view this as an opportunity to lead to an industry leader with a strong value proposition.
High quality retention rates that provide high revenue visibility and a diverse existing client base.
As Raj mentioned, new investments in the first quarter were partially offset by dispositions and repayments totaling $82 million as we had several successful exits in paydowns.
These included the full repayments of our loans to can say.
Puppet and core media.
The overall effective yield on our portfolio was nine 8% as of June 30, reflecting the benefit of higher interest rates now that substantially all of our loans are above the floors.
Investments in new portfolio companies during the quarter had a weighted average yield of eight 9%.
Seeding the eight eight weighted average effective yield on exited positions.
Given that 95% of our debt portfolio is floating rate and the majority of our outstanding liabilities are fixed rate, we are well positioned for further rate increases.
We continue to invest selectively maintaining our underwriting discipline and being mindful of the inflationary environment.
We focus on companies with established business models that are well positioned to succeed throughout economic cycles.
And our pipeline currently is healthy and we're sourcing attractive opportunities across multiple 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 third quarter.
Let me now turn it over to Eric to walk through our financial results as well as our capital and liquidity positioning.
Thank you Phil.
I'll start by turning to our financial results for the second quarter.
We generated strong net investment income of 37 per share, which exceeded our dividend of <unk> 30 per share.
Investment income benefited in part from the increase in base rates and given the majority of our loans reset quarterly we expect to see further benefits of the rate increases today in our third quarter net investment income.
We are committed to paying a sustainable dividend that is fully covered by net investment income.
We have done consistently over the last 10 years.
And today is rational we declared a third quarter dividend of <unk> 30 per share.
Investment income for the second quarter was <unk> 76 per share.
This included recurring cash interest of 61.
Recurring discount and fee amortization of <unk>.
And Pik income of <unk>.
Notably our Pik income remains near its lowest level in the last 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 second quarter were <unk> 32 per share and included interest and other debt expenses of 16 <unk> per share.
Incentive fees in the quarter totaled $4 5 million or.
Or <unk> <unk> per share.
Net realized losses in the second quarter totaled $18 4 million or <unk> 32 per share.
And included $13 $8 million from the realization of previous unrealized losses on our investment and fishbowl as a result of the Companys restructuring.
Also a $13 $3 million from the realization of previous unrealized losses on our investment in Nevada.
These was partially offset by an 11 million dollar gain from the exit of our investment in core entertainment.
Net unrealized losses totaled $3 million.
And were primarily driven by widening market spreads, which had a negative impact of the mark to market of our existing portfolio.
The impact of wider spreads was partially offset by a $6 7 million unrealized gain on our investment in Atlanta.
As well as the reversal of previously recognized unrealized losses on fishbowl.
The net increase in net assets for the quarter was $128000 or less than a penny per share.
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.
Including back testing every disposition against our valuations.
Our credit quality remained strong with non accrual loans at quarter end limited to only two portfolio companies that represent just 30 basis points of the portfolio at fair value and 50 basis points at cost.
Now turning to our liquidity.
We ended the quarter with total liquidity of $237 million.
Relative to our total investments of $1 8 billion.
This included available leverage of $187 million.
And cash of $49 million.
Unfunded loan commitments to portfolio companies at quarter end equaled, 8% total investments or approximately $142 million.
Of which only $25 million or revolver commitments.
Our diverse and flexible leverage program includes two low cost credit facilities two.
Two unsecured note issuances.
SBA program.
And our unsecured debt continues to be investment grade rated by both Moody's and Fitch.
Given the modest size of each of our debt issuances, we are not overly reliant on any single source of financing.
And our maturities remaining well ladder.
Additionally, due in part to the opportunistic add on bond issuance that we executed in August of last year.
And we took advantage of an attractive financing environment at the time.
We are comfortable with our current mix of secured and unsecured financing.
Do not have any immediate financing needs.
Combined the weighted average interest rate on our outstanding borrowings decreased to $3, one 9% from $3 two 6% at the end of 2021.
Now I will turn the call back over to Raj.
Thanks, Eric to conclude we delivered another strong quarter of results and are confident in our team's ability to generate attractive ongoing risk adjusted returns.
For our shareholders in this complex and evolving environment vol.
Volatility and uncertainty in the public markets. This year has been driven by inflation concerns and geopolitical instability in periods of economic uncertainty. We are reminded of the benefits of private credit, which has historically performed well throughout economic cycles.
To reiterate our loans are typically at the top of the capital stack, often with collateral protections and with significant equity <unk> subordinated capital structured below our investments.
Additionally, we structure, our loans with meaningful financial maintenance covenants, and our portfolio remains well diversified by issuer and industry.
It is in periods of market volatility that the strength of our diversified strategy and depth of our teams experience as a particular advantage.
Our investment teams expertise consists of performing direct lending and special situations investing.
This combination of investing experience. In addition to our focus on transactions, where blackrock either lead or co lead negotiations on deal terms ensures that we structure loans that are priced appropriately and include adequate downside protection, which has contributed to our team's exceptional long term performance and.
And with that operator, please open the call for questions.
Alright and lean.
You would like to ask a question please.
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I'll pause here briefly ask questions are registered.
Our first question is from the line of Kevin <unk> with JMP Securities. Please go ahead.
Okay.
Hi, good morning, and thank you for taking my questions.
Good morning, Mike to start by asking about your thoughts around maintaining the level of the dividend at <unk> 30 per share obviously over the past two quarters easily covered the dividend and with an outlook for rising base rates driving further net investment income acceleration.
Here the dividend increase could be supported just curious if you could share some high level thoughts about how you're thinking about things there.
Yeah, Kevin. Thank you for the question and by no means is that a surprise I think in the current environment.
I would say as we've said in the past calls our focus is to maintain a well covered and stable dividend one that has a lot of protection and visibility.
I think the environment certainly for the marginal dollar has more.
Return to it but when you when you.
Bifurcate that a lot of that return is coming through our rates increase in rates that we've seen benefit from and just the operating leverage in our portfolio.
If you kind of make your way through the one time benefits and just the run rate of the portfolio with its higher.
Roughly 32.
But we know when we think about any.
Any change to the dividend, we really need to make sure that the.
Components that are driving that.
Higher dividend and coverage of it.
Are more visible and stable and I think.
For the current quarter. It was just too early to determine if that was the case and we're continuing to assess it as we do every quarter with the board.
I, just cannot making our way through the portfolio and just environmental components. So it's certainly a timely and relevant question I think it doesn't change our operating philosophy of what we think is valued in a dividend which is.
Our stable and cover dividend and as we kind of get our hands around the components that drive a stable and cover dividend I think we're going to continue to assess it.
Within the context of the environment and our outlook hopefully that helps give you some clarity.
Okay that all makes sense and then just one follow up if I can originations.
Originations were understandably on the lighter side in the second quarter, given the slowdown in M&A activity in macro uncertainty, but it appears you are able to find some attractive opportunities. So can you provide some commentary around expectations for the deal environment and then also net origination activity levels for the back half of the year.
Yes, I think that yes, we do we do continue to expect.
Help you originations volume.
We're by no means a proxy for the broader private credit market. So understanding that there has been a general slowdown in M&A and refinancing activity in particular.
We.
We're seeing a little bit different.
The other trend for US, which is we continue to be selective we continue to play deeply in the industries that we like.
And we expect that to continue in the next in the next two quarters.
We have deep relationships pretty entrenched in a lot of the sectors we play.
We're off to a being asked to step in early on a lot of these processes as our buyers looking for financing certainty.
As part of being able to deliver.
And that business sells.
And with the help of Blackrock.
Water sourcing platform.
It only continues to enhance.
What we do.
Yeah.
Yes.
Okay got it that's it for me congratulations on a solid quarter.
Thank you.
Thank you Mr Fong.
Our next question.
Comes from the line of Ryan Lynch with K BW. Please go ahead.
Hey, good morning.
My first question I had you guys talked about benefiting from rising rates obviously.
There was a big move in the second quarter, which doesn't really flow through.
As loans reset probably until the third quarter. So could you help.
I'm not sure if you promise math or not but could you help quantify what you think that the benefit from rising rates will be in the third quarter over what it was in the second quarter to kind of give us a sense of what that impact is.
Yeah, Ryan this is Erik thanks for the question.
We do expect to see that flow through.
Even more so in Q3 and as you mentioned.
Not completely all of the rate increases because of the lag when they do reset.
The table that we can play both in the Q and the presentation kind of gives you a rough idea.
Yeah.
Where do you see the full benefit run through in any single quarter it could be up to five.
Per quarter again, well, we expect to see a partial.
But from that so probably more in the range of 2% to 30.
Incremental income for the quarter.
Okay.
Helpful and the other question I had.
I was hoping you could provide some more color on your investment in juul.
There's been some recent news out there were all triage written their investment down significantly I think it's written down like 95 plus percent from their original investment.
The investments I just wrote it down significantly.
A weeks ago.
That investment.
The product out band by the by the FDA for <unk> for a minute there they've got reopened in there they're looking at it that exited.
Is it a view that that application closer so I'm just curious.
Youre in a first lien position in that capital structure, but with the equity.
Getting work closer and closer to zero. It seems like every every every few quarters is there any capital thats. So.
Your first lien was there any sub debt or second lean there, whereas the capital stack basically the equity on that your first lien position.
Yeah, I can take that one and certainly this one has a lot of headlines to it.
As you can imagine because of that where we're a little cautious in what we can and can't say just anticipating.
A lot of.
Discussion outside of our position, but I would say that just to be clear just to be specific.
The fda's actions.
Ah we're subject to a stay order in July so that that.
Shut down essentially was stayed.
Buys by the court, but I think overall, you know and to answer your question. There is junior capital below our first lien.
And even with the write down I think to.
Convertible bonds and then the equity itself still has value. It's just obviously not the values at the last investments were made.
But regardless being in the first and.
Our sense is and our view is generally that we're we're you know our thesis is intact at that level, even with the headlines.
And some of the volatility around the name.
I think we're cautious to comment beyond that other than saying we're in the first were comfortable in that position there is junior capital beneath us.
And what happens in.
In the public eye will probably continue to have headline elements to it but.
We are we feel comfortable.
Okay I appreciate the commentary I understand the sensitivity around around.
Not saying too much.
That's all from me I appreciate the time today.
Thank you.
Thank you Mr Lynch.
Our next question comes from the line of Robert Dodd with Raymond James. Please go ahead.
Hi, everyone.
Congrats on the quarter plus as opposed to housekeeping one that I've got a couple of blah blah.
On the dividend income which was.
It was quite strong this quarter was there any.
Is that a recurring level was there any one time.
Dividend income in it.
This quarter.
Hi, Robert this is Eric.
Both.
Do you have.
Our level of recurring dividend income, which has been approximately <unk> <unk> per quarter.
We do view that as recurring.
This quarter, we did get approximately a little over <unk>, what we would consider nonrecurring dividend income from 36th Street.
<unk> has continued to perform very well.
That made an incremental distribution this quarter.
Got it got it got it I appreciate that thank you.
One the U S. There was a comment.
Earlier I can't remember your virtual one of them.
Talking about the pipeline yields are generally in line with the rest of the portfolio.
Is that.
What are you seeing on pricing I mean, if the pipeline is generally in line is that an indication that in the bulk.
In the.
The incumbent positions you in et cetera, et cetera are you not seeing.
<unk>.
Any any spread widening on opportunities in pipeline right now.
Is that true or do you expect to see any spread widening in this environment.
Yeah, I'll take that Robert.
Phil May have additional comments, but I think it's it's a more nuanced answer I would say and as part of the reason, we like private credit theirs.
From a total return point of view, there's numerous ways to get return right. So.
We are seeing spreads at least stable and to be honest in cases widening.
At the marginal dollar are our target returns and kind of hurdle rates.
We make decisions for new investments has gone up.
A big chunk of the return increased thus far has been through the reference rate.
It's mostly sofer now versus LIBOR that has seen a lot of uptick and you've seen that partially flowing through the portfolio and that will continue at these levels.
But also the things that don't necessary.
Emerge upon the current yield.
Partly it's the OID widening and as a reminder, we don't take that all upfront we amortize it.
And also you have prepayment structures are.
We now have more ability to push back and see those.
I'm, a little more favorable which you won't get until the back end.
As those trigger so I think the net net of it is.
The opportunity set is.
Pipeline is as good.
Pricing environment is better.
The bulk of it thus far has been through the reference rate and you know as we see.
Discussions with our borrowers continue the ability to sort of push back or at least keep spreads and an interesting level.
And we've been wider for a total return targets that are higher is as all you know it was all kind of relevant today.
We'll emerge upon the close of the deal similar emerge.
Over the license deal and some will come at the back end, but I think your intuition around it being a better environment from that perspective is spot on I would say.
Got it wrong just answered that.
All right.
Sorry, Robert This is bill I'll just add that.
We're in the risk reward assessment business and it's not only about the reward. So we are using this environment to may.
Maybe if we're not pushing on pricing Shirley we're certainly pushing on.
Elements of risk so.
Looking to negotiate whether it's better structures I E lower leverage maybe.
And maybe tighter covenants, maybe other credit documentation enhancements.
So we're really using the environment too too.
It's not just focus on pushing price, which of course, we're always looking to enhance our yields but also for downside protection to manage risks got it yes.
It's definitely a risk reward business not just in the wood business.
One last one if I can I saw in the press release I think the manager has been.
Ill put it as a valuation designee can you tell us what that means in.
Yes.
Practical sense.
Sure Robert.
What it doesn't mean that there is any change in the validation process at all.
Historically the board has been.
The one approving the evaluation.
And with that the advisor.
Pfizer performing substantially all of the validation procedures.
Now this is formalized the process by which the adviser.
To fulfill the validation.
Policies and procedures, so no real change in any of that validation processes.
Got it thank you.
Thank you Robert Thank you Robert.
Thank you Mr Chairman.
Our next question comes from the line of Christopher Nolan with Ladenburg Thalmann. Please go ahead.
Hey, guys Fishbowl.
That's now control company.
<unk>.
Look toward business isn't a restaurant business or hotel I mean, well.
Color around what it is.
Yeah sure so fishbowl, it's been renamed supersonic.
<unk>, it's a software.
Platform for restaurants, so the enhanced marketing.
Solutions for for the most of the quick service side of the restaurant industry.
Severely impacted as we've discussed in the past by Covid.
Cut downs.
Experienced management turnover. So at this point, we have gone through the recapitalization of that business.
So we co own the business with the sponsor.
Which I would note.
As part of that process and fees additional capital onto the balance sheet as.
As well as some to pay off to pay down the debt at par.
So we challenges certainly remain with this credit.
But.
We're optimistic given.
The implementation of a new CEO recently with restaurants.
Expertise.
And so we feel like we're better positioned now, especially from a capital structure and management perspective.
To achieve to achieve our growth objectives.
Great. That's it for me thank you.
Thank you.
Thank you Mr. Nolan.
There are no additional questions waiting at this time I would like to pass the conference back to.
Raj Vig for any closing remarks.
Thank you operator, we appreciate your participation on today's call I would like to thank our team for all the continued hard work and dedication I would also like to thank our shareholders and capital partners for their confidence and their continued support thanks for joining US. This concludes today's call.
Okay.
That concludes the Blackrock TCP capital Corp, second quarter 'twenty to 'twenty two earnings conference call I Hope you all enjoy the rest of your day.
Okay.
Yes.