Q2 2019 Earnings Call
During the presentation, all participants will be in a listen only mode.
A question and answer session will follow the Companys formal remarks to ask a question. Please press the star key followed by the did you on I will repeat these instructions before we begin the kuni session.
Now I would like to turn the call over to Katie Mcmillan director of the Blackrock TCP Capital Corp, Global Investor Relations team Katy. Please proceed.
Thank you Danielle before we begin I'll note that this conference call may contain forward looking statements based on the estimates and assumptions of management at the time of such statements and are not guarantees of future performance.
Forward looking statements involve risks and uncertainties and actual results could differ materially from those projected any forward looking statements made on this call are made as of today and are subject to change without notice.
This morning, we issued our earnings release for the second quarter ended June 32019, we also posted a supplemental earnings presentation to our website at TCP capital Dot com.
Have you decide 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-Q , which was filed with the FCC. This morning, I'll now turn the call over to our chairman and CEO Howard locally.
Thanks Katy.
I'm here with our TCPC team and we thank everyone for participating on our call today.
I will begin with an overview of our performance during the second quarter and then our CFO Paul Davis will review our financial results. After Pauls comments I will provide some closing remarks.
Before opening the call to your questions.
And the second quarter, we earned net investment income of 41 cents per share.
Out, earning our dividend by five cents. This was the 29th consecutive quarter that our net investment income covered our dividend and today, we declared a third quarter dividend of 36 cents per share payable on September thirtyth.
To shareholders of record as of September 16th.
The second quarter was among our strongest quarters for deployments, which totaled $232 million.
We continue to leverage both our long standing relationships with borrowers in deal sources and the power of the Blackrock platform to identify unique and attractive investment opportunities.
[noise] dispositions in the quarter were $117 million, resulting in net acquisitions of $115 million.
While our investment portfolio remains strong overall, our net asset value declined 3.8% during the second quarter.
This decline was almost entirely due to a write down of our investment in Fidelis, a cyber security solutions provider that has significantly underperformed our expectations.
Our initial investment in Fidelis, which we made in 2015 was at a relatively low loan to value and was made alongside a well regarded private equity firm, whose cash equity investment was nearly three times our debt.
The Dallas initially performed to plan, but subsequently struggled in an increasingly competitive sector.
After implementing several growth initiatives customers are reacting favorably and sales have increased however liquidity is challenging as revenue growth has yet to outpace costs.
During the second quarter, it became clear that notwithstanding several add on investments from the sponsor the companys liquidity position no longer support its valuation.
As a result.
We recorded a $28.6 million unrealized loss in place the loans on non accrual we are disappointed by this result.
And are continuing to work closely with management and the sponsor to maximize value.
The credit quality of the remainder of our portfolio is strong.
Across the middle market, we are seeing mostly isolated credit events that appear to be more idiosyncratic and not indicative of widespread issues.
Turning to slide six of the presentation at quarter end, our portfolio had a fair market value of $1.7 billion, 92% of which was in senior secured debt.
In constructing our portfolio, we have consistently focused on seniority as well as diversification.
As of June 30, we held investments in a record hundred four companies across a wide variety of industries.
Our largest position represented only 3.2% of the portfolio and taken together our five largest positions represented only 14.9% 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're 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.
At quarter end, 91% of our debt investments were floating rate as demonstrated on slide seven.
As I noted earlier, we deployed $232 million in the second quarter substantially all of which was in senior secured loans and notes.
Our strong origination activity in the second quarter resulted from the relationships. We have developed over two decades in direct lending as well as expanded access to deal flow and additional resources, we are leveraging as part of the Blackrock platform.
We are able to add more value to our borrowers and deal sources by providing a full range of strategies and risk profiles across the global credit platform.
Deployment activity in the quarter included 18, new investments seven of which were with existing borrowers.
Follow on investments in existing portfolio companies continue to be an important source of investment opportunities.
And reflect the strength of our borrower relationships and the value we delivered to them.
We also continue to focus on investments, where we lead or co lead negotiations.
Leveraging our industry expertise and allowing us to set deal terms with solid creditor protections.
In addition to substantial deal flow from existing borrowers our industry focus model is generating a number of opportunities from borrowers that prefer lenders who truly understand their business.
Our top five investments in the second quarter demonstrate our emphasis on diversity in lending at the top of the capital structure.
They include a $21 million senior secured loan to diamond back a global provider of integrated risk management tools Diamond back as a new investment for TCPC is a longtime relationship of our firm.
A $20 million senior secured loan to unit.
A project management solutions provider, the company's ownership contacted us directly based on our relationship and our proven execution capabilities.
Our third largest investment in the fourth quarter was a $19 million senior secured loan to global trends a provider of freight management services.
We also made a $17 million senior secured loan to do that solutions marketing, leading provider of cloud based operations management software and.
Our fifth largest investment in the quarter was a $15 million upsize of our existing senior secured loan to apex group.
A fund administrator, serving the global investment management industry.
Our other investments in the second quarter provide exposure to a variety of industries, including online retail construction materials healthcare equipment and aircraft financing.
Combined our second quarter investments demonstrate our emphasis on non cyclical industries.
Dispositions in the quarter were $117 million.
These included pay offs of all of our loans due in Vigo totaling $40 million.
And payoffs of the 30 million dollar loan to ARCC service and a 20 million dollar loan to data.
New investments during the quarter had a weighted average effective yield of 9.7%.
And the investments we exited had a weighted average effective yield of 12.3%.
While our average new investments were lower yielding than the investments we exited this quarter, we would caution against viewing any one quarter is a trend the overall effective yield on our debt portfolio at quarter end was 11% compared to 11.4% at the end of the last quarter.
As shown on slides eight and nine respectively. We have returned $10.64.
Per share in dividends and outperform the Wells Fargo BDC index by 33% since our IPO now I will turn the call over to Paul who will discuss our financial results Paul.
Thanks, Howard and Hello, everyone.
Starting on slide 14, we generated net investment income in the second quarter of 41 cents per share.
Again exceeding our dividend of 36 cents per share.
This extends our more than seven year record of covering our regular dividend every quarter since we went public.
Over this period on a cumulative basis, we downturn or dividends by an aggregate $39 million or 66 cents per share based on total shares outstanding at quarter end.
Investment income for the second quarter was 82 cents per share.
Substantially all of which was interest income.
This includes recurring cash interest of 64 cents.
Recurring discount and fee amortization of four cents.
And Pik income of eight cents.
We also generated five cents per share from prepayment income, including both prepayment fees and unamortized, though I'd.
Our income recognition follows our conservative policy of generally amortizing upfront economics over the life of an investment rather than recognizing all of it at a time investment is made.
Operating expenses for the quarter were 41 cents per share.
And included incentive compensation of eight cents per share as well as interest and other debt expenses of 19 cents per share.
For net investment income of 41 cents per share.
Incentive compensation was reduced by more than a penny due to the reduction in our incentive fee rate from 20% to 17.5% that took effect on February nine.
Net unrealized losses of $34.6 million or 59 cents per share were primarily attributed to the write down of our investment in Fidelis most of which were placed on non accrual during the quarter.
And which comprised 1.1% of our portfolio at fair value at June 30.
No the loans were on nonaccrual at quarter end and the credit quality of our portfolio is strong.
Realized gains net of realized losses were flat for the quarter.
Turning to slide 18, we had total liquidity of $237 million at quarter end.
This included available leverage of $227 million.
And cash of $22 million.
Reduced by net pending settlements of $12 million.
Since the beginning of the second quarter.
We have expanded our credit facility capacity by a total of $150 million.
Which includes an incremental $50 million on our SPP facility that we added earlier this week.
During the second quarter, we also reduced the interest rate on our SPP facility by 25 basis points to LIBOR plus 200.
And extended the maturity of both facilities to May 2023.
The increased capacity reduced cost.
And extended maturities of our credit facilities further expand our diverse leveraged program, which includes two low cost credit facilities to convertible note issuances.
A straight unsecured note issuance.
And in SP program.
Outstanding draws on our $150 million SP program increased to $118 million at June 30, as we added two new portfolio companies to the FDIC.
The increased leverage flexibility following shareholder approval of our reduced regulatory the coverage ratio allowed us to take advantage of attractive investment opportunities during the quarter.
Regulatory leverage at quarter end, which is net of SP I see debt was <unk> 0.99 times common equity on a gross basis and 0.98 times net of cash and outstanding trades.
Our investment grade rating was reaffirmed by Moody's in June .
And we're proud to continue to be one of only three bdcs with both two to one leverage flexibility and an investment grade rating from both Moody's and S&P.
I'll now turn the call back over to Howard. Thanks, Paul While we are pleased with our strong net investment income dividend coverage and net deployment during the quarter. We are disappointed by the decline in our in a b.
However, we do not believe this is indicative of broader issues and we remain focused on delivering the results our shareholders have come to expect from TCPC.
Including consistent dividend coverage disciplined investing and strong credit quality.
Middle market indicators have been particularly healthy.
With 8.5% year over year revenue growth in the second quarter outpacing revenue growth for the S&P 500. However.
We remain cautious on the environment and we continue to observe idiosyncratic binney and industry shifts that service reminders of the importance of our patient and disciplined investment approach.
Which is the underpinning of our strong and consistent performance.
We make investment decisions based on a comprehensive analysis of each company.
Its management team and strategy and relevant industry dynamics.
In this environment, we continue to leverage our platform to pursue attractive investment opportunities.
In the third quarter to date through August seven.
We have invested approximately $125 million, primarily in four senior secured loans.
The combined effective yield of these investments is approximately 9.7%.
Which excludes certain fees earned this quarter.
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.
Joining blackrock has further enhanced our deal flow supporting our selective investment approach and our disciplined underwriting.
As the leader co lead on the majority of the loans, we make we take an active role in due diligence deal structuring establishing terms and monitoring investments.
The direct relationships, we formed with borrowers as part of this process help protect TCPC and its shareholders.
The Blackrock TCPC.
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 manage 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 and with that operator, Please open up the call for questions.
Ladies and gentlemen, if you have a question at this time. Please press the Star then the number one key on your Touchtone telephone.
If your question has been answered or you wish to remove yourself from the queue. Please press the pound key again, that's star then one to ask a question.
In the interest of time, we ask that you. Please limit yourself to one question and one follow up.
Our first question comes from Chris Kotowski with Oppenheimer. Your line is now open.
Yes, good morning, good afternoon.
I assume just on.
So dale as obviously.
You probably can't comment too much on what any of what if any prospects are for recoveries, though as you can.
Please do but I guess I think just more generally is when you're in the lending business some losses are inevitable.
And.
And.
I Wonder how you think about.
Some mechanism to two.
Philip the NPV bucket after those kinds of losses and.
Like equity as a fairly small part a part of your portfolio.
So I think less than 5% and so.
You don't have a lot of gains that you can take to offset the inevitable losses. One they have happened. So how do you kind of strategically think about being able to try to.
Fill the bucket up and keep that stable over time.
So.
Chris Thanks for the question.
There are few ways.
I think you said it well.
You can't always avoid losses, although that we certainly make every every effort to do so.
And in order to maintain and bolster the equity I think there are a few things one is over earning the dividend, which we have consistently done throughout our history.
We do have a small equity.
Percentage of our assets as you note, we do get warrants and we do fund at a discount and have prepayment premium and Vigo, which we exited which was a long time loan.
We've been lenders to the company for I think over six years in aggregate that's undergone a name change it used to be PA is a good example of that where at various times.
We have acquired debt.
And become their largest lender.
At a pretty significant discount.
And so we were able to pick up some accretion on that and so our goal is to have enough balance there over time.
To be able to offset and although we havent done one for a while occasionally doing equity offerings that.
With the goal of having them be accretive to shareholders as well and Chris. This is Paul Howard mentioned.
Our historical practice of out, earning our dividend I think.
This this event highlights the power of our diversified portfolio even.
At the end of the quarter Dan.
At June 30, our recurring net investment income.
Was 35 cents, excluding prepayments other onetime income compared to 36 cents at the end of the prior quarter and compared with 36 and dividend.
And as Howard noted in his prepared remarks over half of our portfolio companies contributed less than 1% of our income.
With only handful over 2%.
Okay, and just as a follow up on for Dallas, where there any interest reversals this quarter or is what we see in the second quarter kind of the.
What we should expect as the run rate of.
Of interest income for the third.
No we would we put put fidelis on on non accrual during the quarter.
But there were no reversals or previous quarters.
No reversals of previous quarters correct.
Okay. All right. Thank you that's it for me.
Thank you.
Thank you and our next question comes from Robert Dodd with Raymond James Your line is now open.
Hi, guys.
Following up on on on that question I mean, when when we look at the Dallas, obviously that change this quarter versus last is pretty pronounced. So can you give us any color on.
On what you saw it to to make such a.
Material.
The adjustment to the fair value.
Obviously, you talked about it last quarter, but this is this is pretty finance and then I presume. It's it's a waterfall valuation methodology. So can you give us any.
Karla on the sensitivity of the waterfall to too.
The fair value of between that seat tranche two changes in inputs in your waterfall.
Hi, its Raj I'll I'll try to answer those questions and.
Maybe what I'll do is add a little more color to Howard's prepared remarks on the name and then we can talk about.
Yes, the impact the valuation, but just to reiterate as Howard mentioned this is a name we've been in for some time now.
At the outset of this transaction in 2015. This is a business that was really overcapitalized, both the cash equity into the business as well as cash on the balance sheet.
From the time of the transaction close not shortly not long thereafter.
The company facing challenges, partly this was the marketplace, but to be honest a lot of it was self inflicted issues from management and leveraging our sort of experience and working with companies.
From our special situations heritage, we and the owners, we really work too.
Improve those shortfalls and that included a change in management and included several additional fundings on the business.
And what we have seen since that time over the last several quarters is.
The impact positive impact on that from improvements in revenue bookings all the things you want to see happen on the on the income statement the challenge and really the answer to your question is.
The balance sheet.
Challenges and the impact of that shortfall on continuing this recovery.
It was notable and perhaps during the quarter became more evident and more pronounced where one impact the other and.
This isn't a valuation that hasn't changed over time.
It has changed over the last several years, but really where you saw the impact.
Where its less evident within the equity in the junior tranches.
And this quarter, where the mitigation of our coverage and actually reduction of our coverage in the junior tranche to see tranche.
You are seeing a more pronounced and disproportionate effect.
And our piece, but the valuation has declined over time.
Partly due to performance and partly due to just the market multiples, which have also come down. So I think it's harder to see that in any one quarter because of what we disclose and what.
You know what the overall valuation decrease has been but you are seeing in this quarter that a more notable impact.
Where were affected in a straight waterfall.
To your point.
Then over time, where the equity has.
More of the of the valuation Curations.
Got it got it I appreciate that color.
Okay, just one more if I can how would you always tell us not to read anything into the trends on yields.
The average yield this quarter 11, it was 11 for last quarter, but then obviously post quarter end.
<unk> hundred 25 million deployed with with yields on the 10.
Hey.
Its AA.
To reiterate you don't read anything into that or is there a conscious decision with leverage going up a little bit obviously with the approvals et cetera to maybe do some some some lower risk lower spread assets.
Yes, we have and it's a good question and the numbers you just laid out are obviously pretty significant if you look at the overall change in yields about half of that is just.
Decreases in LIBOR.
And some of the rest of that and particularly the pronounced difference on the exits include.
Couple of higher yielding things like indigo that we mentioned earlier with respect to the new assets, we haven't fundamentally changed anything differently in the business. We are continuing to underwrite the same kinds of businesses and using the same approach in any given quarter that may get pulled down or up by a handful of investments in this case, we had a one of our.
The largest groups if not a record group of new investments at.
Yes in the portfolio. So it was more diffuse and there were a number of those that were somewhat lower yielding.
I said that I wouldn't read too much into that because historically over time.
These numbers have moved up and down and clearly theres been a dramatic shift in.
Rates in the last.
Depending on how you want to count at week or couple of months.
And.
Even the middle market will not automatically be immune to that.
We have been focused on doing more senior.
Yes senior loans.
Less cyclical companies and on the margin with a higher leverage we certainly have the ability to do things.
At a lower yield, but theres no overall shift in our approach to it.
The market. So we will see what happens over time, but we're not trying to do things differently.
Okay got it I appreciate that thank you.
Of course, thanks for the questions.
Thank you and as a reminder, ladies and gentlemen that Star then one to ask a question.
Our next question comes from Fin O'shea with Wells Fargo Securities. Your line is now open.
Hi, guys good afternoon.
First question I saw you guys filed you all that is filed an expanded.
17 de order for Coinvestment this week so.
Hi can you hear me all there.
Yes can you hear me.
Hello.
Are we still on.
Can you hear me.
First on.
With us.
Okay.
Ladies and gentlemen, please standby your conference call will resume momentarily once again, thank you for your patience and please standby.
And our next question comes from Christopher Nolan with Ladenburg Thalmann. Your line is now open.
Hey, guys.
I appreciate that you guys have excellent credit quality and historically, it's been very strong.
Back on Fidelis I'm looking at term loan C and it looks like the cost basis went up by $2.6 million.
Since last quarter and the fair values now is zero on that.
Can you give us a little background is what happened where you guys are trying to put more capital into the business before writing down this loan.
No the well they.
Turning on to see ADM increases at function of Pik interest.
That part of our.
One of our latest efforts with the with the company and our restructuring of our position.
How does have picked position that accreted into the sea.
So we did find some additional money into the business, but that isn't the term loan a.
So, but specifically to your question on that R&D amounted to see that was written down that was new fund not new funding that was accretion.
Great and then.
Back to an earlier question is I estimate back of the envelope. This.
Fidelis contributes roughly two cents or so to EPS quarterly.
Currencies.
Does.
<unk> is a full quarter taken out of the second quarter earnings per share is only a partial quarter of Dell has taken a quarterly earnings.
No. We said we stopped accrual at the end of May.
Okay. So this second quarter totally reflects no fidelis.
No we stopped the cruelty animates theres two months of Fidelis, but I would note.
When we compute and incentive fees it was excluding.
Anything that we accrued.
Okay. So we just need a backup hurdles for the third quarter. Okay. Thank you for the clarification.
Thanks.
Thank you and once again, ladies and gentlemen, if you would like to ask a question at this time. Please press star one.
And our next question comes from Ryan Lynch with KBW. Your line is now open.
Hey, guys.
Good question I had it looks like out of your.
230 million of investments 18 companies. This quarter about 11 were new and seven were existing so youve found a lot of new portfolio companies to venture into this quarter for a couple of other bdcs talk about given the competitive environment leaning more towards their existing.
Borrowers and using the power of incumbency.
Given them more familiar with it with these borrowers in this environment can you just talk about.
You guys approach to find new borrowers in this challenging environment.
Yeah, I can take that I think I would echo the sentiment that where you can you have a known borrower and the history.
And the relationship that is that its certainly an attractive way.
To generate new deployment and at a certain scale you see that with some consistency.
I think in terms of finding new borrowers part of that part of it. It just goes historically to a relationship based.
Effort on our side.
Finding it and finding opportunities in many different places whether its business owners management team's board members historical relationships.
I also think that it's a good segue to highlighting some of the benefits of being part of the large platform, where there has been incremental opportunities coming through Blackrock just given its presence in the market. So I think net net there is not a new approach I think its more of the same.
Being able to provide a solution being a credible counterparty the power of the portfolio generating.
Lead some existing names is also notable but but it's a it's very much the same as we've been talking about.
Over the last couple of years, but the benefit of the Blackrock.
Relationships. In addition to that Ryan maybe just to add one thing to what Raj was saying historically, we have had very strong relationships with borrowers with our industry focused approach.
Now being part of Blackrock, what we're seeing is the benefits of having.
An additional group of borrowers who appreciate our industry centered approach and also like the idea of having a very large highly regarded institutional lender in there and so.
It's been a significant net benefit to our origination activities.
Got you it makes sense.
And then obviously the last few days of Ben.
Pretty wild with some new tariffs getting put on but thats just the continuation there has been.
Cerus put on obviously.
[noise] quarters before that some months before this so.
Have you guys done an evaluation and look through your portfolio to see.
As these terror, new tariff start to come on and obviously theres been existing ones already in place.
Are there any portfolio companies are sectors that are particular vulnerable in your guys portfolio today.
Yes so.
We have been doing an analysis on that for some time and in fact, when we just completed our most recent quarterly review as part of that that was a special focus item.
Which was a few weeks ago before the latest proposed increases.
And we have been.
Pleased and surprised in fact with how little we're hearing from companies about the impact of tariffs in fact, there's only one company that was directly citing it as being a material issue for their business now having said that.
It's still early in this next round and it's not always immediately clear to people and sometimes the impacts may be.
Two or three layers away and so it may take a while to filter through but so far.
Our emphasis on non cyclical companies.
With a more domestic focus.
I think has benefited.
Yes.
Pretty significantly with respect to the tariffs.
Okay understood.
Thanks for the time today.
Thank you.
Thank you and our next question comes from Fin O'shea with Wells Fargo. Your line is now open.
Hi, guys.
Hey look back.
Okay.
I just wanted to ask.
Question on the.
Amended 17 de order you filed this week.
Can you explain to us in layman's terms, if the seeks to grant you any expanded.
Leeway on co investments with your platform funds.
Yes.
Thanks for the question. It is an attempt to simplify the existing order as you're well aware because I think you've been a.
Student of these and I suspect some a number of others are on this call as well these orders have gotten increasingly complicated overtime, particularly in larger platforms.
Even before we were part of Blackrock, our order had grown in complexity and so this seeks to simplify the process for us.
And across.
You know our relationships at Blackrock, that's really the intent of it.
Thank you for the color and.
Noticing the order create some leeway to.
For the advisor to receive fees under rule 57, K. to is there any such activity that takes place that.
Peer Blackrock.
So.
TCP.
Has always put all of the fees. It has received in connection with anything.
Related to investments in TCP capital Corp, and our other funds in the funds. It is our view that if we are generating income as a part of our investment activities. Our duty is to give that to our investors.
And it's a policy we've always fall followed and don't have any intent of changing.
Got it thanks for taking my questions.
Thank you for your questions.
Thank you and I'm not showing any further questions. At this time I would now like to turn the call back over to Howard Levkowitz for any closing remarks.
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 hard work and dedication.
We appreciate your questions and our dialogue good day, Thanks again for joining US This concludes todays call.
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program you may all disconnect everyone have a wonderful day.