BlackRock TCP Capital Corp. Q1 FY2025 Earnings Call

Ladies and gentlemen, good afternoon. Welcome everyone to BlackRock TCP Capital Corp. Q1 2025 Earnings Call. Today's conference call is being recorded for replay purposes. During the presentation, all participants will be in a listen-only mode. A question-and-answer session will follow the company's formal remarks. And now I would like to turn the call over to Michaela Murray, a member of the BlackRock TCP Capital Corp. Investor Relations team. Michaela, please proceed.

Thank you. Before we begin, I'll note that this conference call may contain forward-looking statements based on the estimates and assumptions of management at the time of such statements and are not guarantees of future performance. Forward-looking statements involve risks and uncertainties and actual results could differ materially from those projected. Any forward-looking statements made on this call are made as of today and are subject to change without notice. Additionally, certain information discussed and presented may have been derived from third-party sources and has not been independently verified. Accordingly, we make no representation or warranty with respect to such information. Earlier today, we issued our earnings release for the first quarter ended March 31, 2025. We also posted a supplemental earnings presentation to our website at www.tcpcapital.com. To view the slide presentation, which we will refer to on today's call, please click on the Investor Relations link and select Events and Presentations. These documents should be reviewed in conjunction with the company's Form 10-Q, which was filed with the SEC earlier today. Now, I will turn the call over to our Chairman, Co-CIO and CEO, Phil Tseng.

Thank you, Michaela. And thank you all for joining our call. Today, I'll begin with a brief overview of our results for the quarter and then share an update on our portfolio. After that, I'll turn the call over to our President, Jason Mehring, to review details of our investment activity. Erik Cuellar, our CFO, will then review our financial results in more detail. I'll follow Erik's remarks with commentary on the current market environment before we open the call up for questions. We're also joined today by Dan Worrell, our Co-CIO; and Patrick Wolfe, our COO. I am pleased to report that during the first quarter, we made meaningful progress in strengthening the portfolio. Although the impact of global macroeconomic factors, including tariffs, remains uncertain, we are beginning to see signs of portfolio stabilization. We delivered solid results for the quarter. Adjusted net investment income was $0.36 per share, flat with the prior quarter. Annualized net investment income, ROE, was 15.4% and the net asset value per share was $9.18 compared to $9.23 in the fourth quarter. During the first quarter, no new names were added to the non-accrual list and the number of portfolio companies on non-accrual status at quarter end declined meaningfully to eight from 12 in the prior quarter. Non-accruals now comprised 4.4% of our portfolio at fair value, down from 5.6% or 120 basis points sequentially. During the quarter, we exited our non-accrual positions in Securus, McAfee, CIBT and Aventiv, all of which were broadly syndicated second lien loans that we believed offered limited near-term upside. As we pointed out last quarter, we are primarily focused on investing in first lien loans and will only consider second lien loans in situations where we are a lender of influence. Subsequent to quarter end, we removed Renovo from non-accrual following the completion of a comprehensive recapitalization, which significantly deleveraged the balance sheet. Since the recapitalization, we have remained actively engaged with Renovo's management team as they pursue a variety of initiatives aimed at improving performance. As a result of this action, our pro-forma non-accrual percentage post-quarter end has decreased to 4.1% at fair value to 11.8% at cost. Our largest markdowns during the quarter were Razor Group, Gordon Brothers and Alpine, also known as 4840, which is a pallet management services provider that we haven't previously discussed. 4840 benefited from increased pallet demand coming out of COVID, but as the market began to normalize in 2023, volumes declined. While a slower-than-anticipated market recovery has pressured performance, we remain confident in 4840's position as a leader within the pallet space, which is a critical element for the supply chain and transport of essential goods. We will continue to monitor closely 4840's performance and industry trends more broadly. We are focused on optimizing the outcome for each of these investments. We are actively exploring solutions for our positions in the aggregators as well. Our largest markups were Job and Talent, a tech-enabled staffing agency and AutoAlert, an automotive data analytics platform, which we previously removed from our non-accrual status since the first quarter of 2023. We recently provided growth capital to Job and Talent to accelerate the execution of their long-term strategic plan. Job and Talent continues to perform well and is delivering year-over-year revenue growth, supported by accelerating demand in the staffing industry as well as higher levels of profitability, reflecting their success in streamlining their operations. The deal structure for the Job and Talent investment provided upside to lenders based on improved value creation and performance, which contributed to the meaningful markup this quarter. Regarding AutoAlert, after nearly a decade as a lender, we assumed control of the company in March of 2023 as part of the restructuring. Since then, AutoAlert has shown consistent financial performance and recently reported its second consecutive year of earnings growth, which contributed to the write-up in its value this quarter. Now turning to our dividend. In line with our revised dividend policy, our Board declared a second quarter dividend of $0.25 and a special dividend of $0.04 per share. Both are payable on June 30, 2025, to shareholders of record on June 16, 2025. We appreciate the continued support of our shareholders as we reposition our portfolio to deliver consistent, attractive returns. In addition to operating with our long-standing shareholder-friendly fee structure and waiving one-third of our base management fee through September 30, 2025, we repurchased 3,150 shares of TCP stock this quarter and an additional 39,500 shares after quarter end. Now, I'll turn the call over to Jason to provide more detail on our portfolio along with our investment activity during the quarter.

Thanks, Phil. I'll start with an overview of our portfolio, which had a fair market value of approximately $1.8 billion at the end of the quarter invested across 146 companies in over 20 industry sectors. Our average investment size was granular at $12.1 million or 0.7% of the portfolio. 90% of the portfolio was invested in senior secured debt and 94% of that amount was floating rate. Investment income was distributed broadly across our diverse portfolio with more than 74% of our portfolio companies each contributing less than 1% of the total. At quarter end, the weighted average annual effective yield of our portfolio was 12.2% compared to 12.4% last quarter. New investments had a weighted average yield of 11.4%, although as we exited, had a weighted average yield of 11.2%. These yields reflect the exit of four investments on non-accrual that did not contribute to current yield. Excluding these four exits, the annual effective yield on deals exited in the period was 11.9%. Moving on to investment activity. We deployed $66 million of capital during the quarter with the two new and non-existing portfolio companies. Repeat borrowers remain an important source of originations and existing portfolio companies accounted for 89% of our first-quarter investments. 100% of new investments were in first lien loans, which comprised 82.5% of our total portfolio at quarter end. Our largest new investment this quarter, a $6.7 million first lien term loan and revolver in Apparis retail demonstrates our focus on investing in first lien loans to high-quality middle market companies. Apparis is a market leader in software that helps retailers combat returns fraud and employee theft. This sector is positioned for growth due to several factors, including increased cybercrime and the shift towards digital payments. With long-term contracts with over 60 of the top 100 US retailers, Apparis has an attractive high-margin business model with recurring revenue and strong free cash flow generation. In an environment of slowing consumer spending, this type of software is essential to helping retailers protect profit margins and reduce financial losses. As we evaluate new investment opportunities, we remain focused on the core pillars of our strategy Phil outlined last quarter. These include targeting core middle market companies, maintaining a well-diversified portfolio, prioritizing first lien loans, and leveraging the extensive resources of the BlackRock platform. We are taking a disciplined approach to new investments and continue to pass on opportunities that aren't aligned with our strategy. Now, I'll turn the call over to Erik, who will discuss our financial results along with our capital and liquidity position.

Thank you, Jason. Let me begin with our financial results for the quarter. As detailed in our earnings press release, adjusted net investment income excludes the amortization of the purchase accounting discount resulting from our merger with BCIC and is calculated in accordance with GAAP. A full reconciliation of adjusted net investment income to GAAP net investment income as well as other non-GAAP financial metrics is included in our earnings press release and 10-Q. As Phil noted, adjusted net investment income was $0.36 per share and gross investment income was $0.66 per share in the first quarter. This amount included recurring cash interest of $0.47, non-recurring income of $0.03, recurring discount and fee amortization of $0.05, PIK income of $0.08 and dividend income of $0.04 per share. PIK interest income for the quarter was 11.6% of total investment income. Operating expenses for the first quarter were $0.28 per share, including $0.20 per share of interest and other debt expenses. As of March 31, 2025, our cumulative total return did not exceed the total return hurdle, and as a result, no incentive compensation was accrued for the first quarter. Additionally, as Phil mentioned, our advisor has agreed to waive one third of our base management fee for three quarters beginning on January 01, 2025, and ending on September 30, 2025. Net realized losses for the quarter were approximately $41 million or $0.48 per share, driven by the disposition of our investments in Securus, McAfee, CIBT, and Avanti. These losses were substantially already reflected in our net asset value at December 31, 2024. Net unrealized gains in the first quarter totaled $30 million or $0.35 per share, primarily reflecting the reversal of previous unrealized losses on our investments in Securus, McAfee, CIBT, and Avanti, as well as unrealized markups on Job and Talent and AutoAlert. The net increase in net assets for the quarter was $21 million or $0.25 per share. As of March 31st, eight portfolio companies were on non-accrual status, representing 4.4% of the portfolio at fair value and 12.6% at cost, down from 5.6% and 14.4% respectively at the end of 2024. As previously noted, as a result of progress made subsequent to quarter end, our pro-forma non-accruals level is now 4.1% at fair value and 11.8% at cost. As Phil noted, we are working closely with our borrowers, their creditors and sponsors to resolve these issues with the best possible outcome to our shareholders. The remainder of our portfolio is performing well. Turning to our liquidity. Our balance sheet positioning is solid and our total liquidity increased to $629 million at quarter end with $530 million of available leverage and $99 million of cash. Unfunded loan commitments to portfolio companies at quarter end were 8% of our $1.8 billion investment portfolio or approximately $135 million, including only $43 million of revolver commitments. Net leverage at the end of the quarter was 1.13 times, which is well within our target range of 0.9 times to 1.2 times. We have several financing options to fund new investments, including our diverse and flexible leverage program, which has three low-cost credit facilities, three unsecured note issuances and an SBA program. The weighted average interest rate on debt outstanding at quarter end was 5.2%. Looking ahead, we are focused on plans to refinance our next major debt maturity in 2026. Our goal is to have the best possible options to refinance the 2026 debt maturity. As we continue to improve the credit quality of our portfolio, we expect to have access to attractively priced capital. On an ongoing basis, we are working with our lenders to expand our current credit facility. Now, I'll turn the call back over to Phil.

Thanks, Erik. I'll now provide some market commentary. As you know, in the current volatile market environment, many companies are now operating under entirely different conditions compared to a year ago. Access to capital has tightened, financing costs are higher, and global trade disruptions are impacting supply chains. After carefully reviewing our portfolio, we believe the immediate and direct impact from potential tariffs will be relatively limited and that it will take some time to fully quantify the downstream effects. We estimate that only a mid-single-digit percentage of our portfolio at fair market value will be directly impacted by tariffs. This includes the Amazon aggregators and others in the consumer, retail, semiconductor, and energy sectors. While tariff impacts will vary by industry, we believe our focus on US-based operators provides some insulation from supply chain disruption. Our portfolio has historically been weighted towards services-based companies, which currently comprise the vast majority of the portfolio. These businesses are typically asset-light and less reliant on global supply chain disruptions, reducing their exposure to trade-related pressures. Turning to the demand side. Although the expected lift in M&A activity has not materialized, we continue to see strong interest from borrowers and referral sources for direct loans in the core middle market. With over 200,000 companies generating more than $10 trillion in annual revenue, the middle market is the fastest-growing sector of the economy. We are seeing plenty of new opportunities from companies that are well positioned to grow even in this current environment. These companies need growth capital to take their business to the next phase by investing in organic growth initiatives, refinancing existing debt, or making strategic tuck-in acquisitions. In addition, incumbency has always been a strong competitive advantage for TCPC. And in the past 12 months, over half of our new originations came from existing portfolio companies. We're finding opportunities within our portfolio where our deep relationships and industry experience mitigate investment risk, especially in a volatile environment. Having invested through multiple cycles, we know that some of the best opportunities can often be found in periods of uncertainty, and we're well positioned to selectively deploy capital where we see attractive risk and return. We've been in the direct lending business for many years and have seen through prior periods that middle market growth companies are resilient and have a demonstrated ability to adapt to changing market conditions. With less competition than the broadly syndicated market, this segment of the market has also historically delivered strong risk-adjusted returns. Against this backdrop, we are focused on three main priorities. First, we are working hard to resolve the remaining challenged positions within our portfolio. Second, we are keeping a close eye on all of our portfolio companies and are staying in close contact with their management teams to assess potential impacts of the current environment on their businesses. Our direct relationships have many benefits. They help us proactively monitor performance, resolve emerging issues, and identify follow-on financing opportunities. Third, we are maintaining a disciplined approach to originating and underwriting loans that align with our investment strategy. Our goal is to position our portfolio to perform well in all market environments, including a potential downturn. Taken together, we believe execution on these priorities will position TCPC to navigate this period of heightened uncertainty as we deliver the best possible risk-adjusted returns to our shareholders. I'll now pass the call back to the operator so we can open the call for Q&A.

Thank you. We will now begin the question-and-answer session. Our first question today comes from Christopher Nolan with Ladenburg Thalmann.

First of all, congratulations on the quarter in terms of stabilizing the performance. Second, on the share repurchases, I saw there was a $50 million reauthorization. And just given where the stock price is trading and everything else, what's the thoughts in terms of the trajectory of repurchases going forward?

As you know, we've done historically repurchases when we believe them to be accretive and meaningfully accretive. We did a little bit in Q1. We did some more post-Q1, as Phil noted. Certainly, we've been trading at levels that can make it accretive. Our thought is to continue to monitor the trading price but really to continue to do them as they are accretive. The stock is reacting well this morning but certainly, we'll continue to look at where we think it's accretive to repurchase shares.

And then given the commentary around the middle market companies, do most of your portfolio companies have sponsors or are they sort of don't have sponsors?

The vast majority of our companies do have sponsors or I would say institutional ownership in there. Many of our borrowers have institutional ownership but not control. So oftentimes decision-making and our negotiations on terms and the fields are structured with management teams, founders, entrepreneurs, and businesses. But I think the majority are sponsor-backed.

And in this environment, what is the appetite of those sponsors are kicking in more equity when you do a financing?

We've been in a situation for some time now, approaching 2025, where the environment includes rising rates and slower growth, which is leading to some liquidity challenges in the market. Sponsors have been supporting their companies for several years by infusing capital and offering their expertise. However, after three years, if sponsors don’t see their equity values holding steady, they may become less supportive. Generally, most of our companies are still performing well, and even those that have faced declines haven’t severely impacted their equity value. We continue to receive support, and we're currently negotiating with a few portfolio companies where sponsors are injecting additional equity. If we don't receive adequate support from equity, we are prepared to enforce our rights and manage these companies after restructuring, as we have done consistently over the past two decades.

Our next question comes from Robert Dodd with Raymond James.

To echo Chris, congratulations on resolving and exiting some issues. Regarding the aggregators, I appreciate your comments. However, more than half of the fair value of the non-accruals still exists in the aggregator space. This represents a significant amount of non-income producing fair value, in addition to the potential cost basis. Could you provide any further insights on how long you anticipate the restructuring or repositioning of those businesses will take in terms of earnings impact? Clearly, if there's potential for recovery, it will result in an earnings drag that affects your ability to generate net interest income. Can you share any perspective on the timeline for these matters? I understand it's complex, but any information would be helpful.

That's a topic that we are keenly focused on as well. Obviously, we're looking at our non-accruals very closely, working very hard in trying to work through those names. And you're right, the aggregators are a larger percentage of those. And we think that we should be through the restructurings probably in the next few quarters at the back end, could be sooner. I think we're making a lot of progress. That being said, we are seeing some good signs of improvement and thinking about the ability to have performing debt in there. Thrasio is certainly one that that's well on its way, that's not on non-accrual but that's one I just bring up, because it's one of the aggregators. The other one, CellarX, they have some real promising brands in that business that continue to grow meaningfully year-over-year. So we're really excited about the prospects there in terms of the ability to kind of generate sustained income. But both CellarX and Razor are still in the restructuring process and those aren't necessarily easy to manage given that multiple stakeholders up and down the cap stack. So we're working on those but we expect to get those done in the next few quarters, and if we're to be optimistic then perhaps one of them sooner.

I want to address the point about the repositioning of the portfolio moving forward. There are some complexities involved with certain aggregators and broader club deals, especially if restructuring becomes necessary. Will there be any changes to the types of deals you pursue in the future, specifically regarding how many other lenders you'll work with? You've mentioned your reluctance to engage in broadly syndicated deals or second liens unless you have significant influence. Will this approach apply more broadly across the portfolio, leading to fewer large group deals and instead favoring arrangements where you're the dominant lender? What are your thoughts on this?

Robert, we are definitely taking that approach going forward. We believe that some of the past mistakes were due to situations where we could not exert our influence. The category of broadly second lien loans from 2021 is clearly an area where we've recognized the drawbacks of not being able to leverage the experience, skills, and capabilities of our team. This will certainly be one of our primary focuses moving ahead, whether we are considering second lien or even first lien loans.

The next question comes from Paul Johnson with KBW.

I was wondering, can you just explain what happened here with the Job and Talent markup, what drove that? It appears to be there's a few different things going on with the investment this quarter. I'm not sure if you made a new investment in that company or exactly what's going on there. That would be helpful.

So Job and Talent is one of the tech-enabled staffing agencies that we've had in our portfolio for some time. Job and Talent has been performing. It's seen year-over-year growth on both revenue and profitability. And this past quarter, we did have an opportunity to provide growth capital there. So one, I think the markup came from improved performance or continued to improve performance. Second is from the economics that we benefited from on this incremental growth capital. The company continues to invest in growth. And as part of that, there is an opportunity as an incumbent lender to structure a really nice preferred debt investment in the business, which included really enhanced economics that accrue to our benefit here for TCPC.

Can you share any details about the economics? What kind of income are you receiving or what do you hold there?

We haven't shared details in the past, and for confidentiality reasons, we are unable to disclose them now.

I will add that it's confidential regarding the company and the terms of the deal, but I believe it was a very attractive situation for us. Many of the existing stakeholders in the business also participated. We likely contributed close to 50% of the deal since a lot of the existing stakeholders wanted to be involved as well.

And then the last one I just had, I think I'd asked a few quarters ago. But I'm curious, are you pursuing any new SBIC licenses or is there any plans to do so this year?

We do have plans to do so. We have a small tail amount still available under our current license, but we are underway in the process of obtaining a second license, which is, by the way, the max that you can get. You're only able to get two licenses.

And do you have any thoughts on that process? Is that window still open or any of the ongoing administration changes, has that disrupted kind of the expected timeline or anything for getting a license approved?

So far from what we can tell, it has not impacted either the availability or the timing, but it does take a little bit of time, it always has. But so far there's been no real changes to the process.

At this time, we have no further questions registered. And so I'll turn the call back over to Phil Tseng for closing remarks.

Thank you. In closing, I want to thank our entire team at BlackRock TCP for all of their hard work, and our investors and analysts for your continued trust and support. Please reach out to us with any questions. Thank you.

Thank you everyone for joining us today. This concludes our call, and you may now disconnect your lines.