BlackRock TCP Capital Corp. Q3 FY2025 Earnings Call

Ladies and gentlemen, good afternoon, and welcome to BlackRock TCP Capital Corp.'s Third Quarter Earnings Call. Today's conference call is being recorded for replay purposes. Now I would like to turn the call over to Alex Doll, a member of the BlackRock TCP Capital Corp. Investor Relations team. Alex, please proceed.

Thank you, operator. Before we begin, I'll note that this conference call may contain forward-looking statements based on the estimates and assumptions of management at this 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 third quarter ended September 30, 2025, and 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, CEO, and Co-CIO, Phil Tseng.

Thank you, Alex, and thanks to all of our investors and analysts for joining us today. I'll begin with an overview of our third quarter performance. Our President, Jason Mehring, will then provide details on our portfolio and investment activity; and Erik Cuellar, our CFO, will review our financial results. I'll then share commentary on the current market environment before we open the call for your questions. We are also joined today by Dan Worrell, our Co-CIO, who will be available to answer your questions. I'll begin with our results for the quarter. We made continued progress in executing on the strategic priorities we outlined at the start of the year, resolving challenged credits, improving the quality of our investment portfolio, and positioning TCPC to return to historical performance levels. Third quarter NAV was unchanged from the previous quarter at $8.71. And importantly, nonaccruals improved to 3.5% of the portfolio at fair market value compared to 5.6% at the end of 2024. During the third quarter, we sold one nonaccrual investment above our valuation estimate and placed two smaller previously restructured investments back on nonaccrual. I'd also like to share an update on our investment in Renovo, which, as you may recall, is a direct-to-consumer home remodeling business. Renovo was previously removed from nonaccrual status following a comprehensive recapitalization in the second quarter. However, early in the fourth quarter, company-specific performance and liquidity issues led the Renovo Board to determine that the best available path forward was a liquidation process which started on November 3, 2025. The position in Renovo represented approximately 0.7% of our total investments at fair value as of September 30. We do not expect to recover value on our investment in Renovo, and we expect to fully write down this position in the fourth quarter of 2025. Further, we expect this to impact fourth quarter NAV by approximately $0.15 per share on a pro forma basis. We view this outcome as a result of issues specific to the issuer rather than a reflection of broader sector weakness. We also realized portfolio gains this quarter, the largest of which was NEP Group, a global leader in broadcast and live production services for sports and entertainment. In September, NEP announced a recapitalization that closed in October, strengthening its balance sheet while adding new junior capital below our position. As a result, our investment was upgraded from a second lien to a first lien term loan, improving our recovery prospects and demonstrating our team's success in executing a complex restructuring. Now I'll share an update on capital allocation, starting with our dividend. Our Board declared a third quarter dividend of $0.25 per share payable on December 31 to shareholders of record on December 17. This is consistent with the base dividend level we have paid since the first quarter of the year and reflects recent Fed cut rates and spreads we are seeing in the market. As part of our commitment to supporting our shareholders, we also repurchased more than 25,000 shares of TCPC stock during the third quarter and an additional 170,000 shares after quarter end. Now I'll turn the call over to Jason to discuss our portfolio in more detail as well as our recent investment activity.

Thanks, Phil, and welcome, everyone. During the third quarter, we selectively deployed capital into opportunities that are directly aligned with our investment strategy, investing primarily in core middle market companies, maintaining a well-diversified portfolio, prioritizing first lien loans and leveraging the extensive resources of BlackRock. As we mentioned last quarter, BlackRock and HPS created a new platform called Private Financing Solutions, or PFS. PFS combines the firm's private credit, GPLP solutions, liquid and private credit CLOs, and leveraged finance businesses into a single integrated platform. The integration of the BlackRock and HPS businesses has already been an important catalyst for expanding TCPC's access to deal flow. In the third quarter, we saw a 20% increase in the number of deals we reviewed relative to last quarter and a 40% increase in the number of deals we advanced to the screening stage. In today's market environment, a larger deal funnel is an advantage in identifying high-quality opportunities. Now I'll highlight two of our third quarter investments, beginning with KBRA, where we invested $2.4 million as part of a new $1.1 billion first lien term loan financing for the company. KBRA is a major U.S. credit rating agency that provides independent ratings and research across corporate, financial, and public markets, and it has been a portfolio company of ours for 3.5 years. The business is owned by a sector-focused sponsor that we have partnered with on multiple deals, and the BlackRock PFS platform led this transaction, which refinanced KBRA's existing debt, funded a shareholder dividend, and provided growth capital for M&A. Our investment in KBRA aligns closely with our strategy of investing in companies with substantial barriers to entry that generate recurring revenue, healthy margins, and strong free cash flow. We believe these characteristics support our ability to deliver risk-adjusted returns that are attractive to our shareholders. We also made a $5.2 million follow-on investment in Syndigo, a software company that helps brands and retailers manage and share product information across online and in-store channels. This transaction was part of a $930 million first lien term loan led by PFS that facilitated Syndigo's recent acquisition of 1WorldSync, a content management company. This business combination advances Syndigo's goal of using AI to help companies deliver accurate and consistent product content across the entire customer experience. BlackRock has long been a lender to Syndigo, and this transaction demonstrates our continued commitment to the company's growth and success. We view it as an attractive opportunity to support a scaled market leader with resilient recurring revenue and strong free cash flow. Since the start of the year, we've invested $241 million in 18 new and 13 existing portfolio companies with a granular average position size of $7.8 million. This is a significant decrease from an $11.7 million average position size across our portfolio at the end of 2024 and reflects progress in creating a more diversified, lower-risk portfolio. All of our investments in the third quarter were in first lien term loans to companies with strong fundamentals that are positioned for long-term growth. Incumbency has remained an important competitive advantage for TCPC and repeat borrowers represented 51% of our year-to-date originations. At the end of the quarter, our portfolio had a fair market value of $1.7 billion invested across 149 companies in more than 20 industry sectors. 89% of the portfolio was invested in senior secured debt, all of which is in floating rate instruments. Investment income was broadly distributed across our diverse portfolio, with 78% of the portfolio companies each contributing less than 1% of total income. The weighted average annual effective yield of our portfolio was 11.5% in the third quarter compared to 12% in the prior quarter. New investments had a weighted average yield of 10.1%, while those we exited carried an average of 11.7%. Paydowns this quarter were $140 million compared to $48 million in the prior quarter. This higher level of paydowns was mainly due to timing as several repayments we expected to close in the second quarter closed in the third quarter instead. Now I'll turn the call over to Erik, who will walk through our financial results and capital and liquidity position.

Thank you, Jason. I will begin with a review of our financial results for the third 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. Third quarter adjusted net investment income was $0.30 per share and gross investment income was $0.59 per share in the third quarter. This compares to $0.31 and $0.61 per share, respectively, in the second quarter. This quarter's gross investment income included recurring cash interest of $0.46 per share, nonrecurring income of $0.03, recurring discount and fee amortization of $0.02, PIK income of $0.06 and dividend income of $0.02 per share. PIK interest income represented 9.5% of total investment income, down from 11.4% last quarter. Operating expenses for the third quarter were $0.27 per share, including $0.20 per share of interest and other debt expenses. As of September 30, 2025, our cumulative total return did not exceed the total return hurdle, and therefore, no incentive compensation was accrued for the third quarter. As you will recall, our market-leading fee structure is particularly shareholder-friendly, which aligns interest between investors and management. Additionally, we waived a portion of our base management fee again this quarter, in line with our advisers' decision to waive a third of our base management fee for the first three quarters of 2025. Net realized losses for the quarter were approximately $97.0 million or $1.14 per share. $72.6 million of this amount was due to the restructuring of our investment in Razor, and the remaining amount was related to our dispositions of Conergy, Iracore, and INH Buyer, which resulted in losses of $13.2 million, $4.1 million, and $3.9 million, respectively. Importantly, these impacts were already substantially reflected in our net asset value as of June 30, 2025. Net unrealized gains were $94.1 million or $1.11 per share, primarily reflecting the markup of NEP that Phil mentioned earlier, along with the reversal of previously recognized unrealized losses from the restructuring and disposition of the investments I mentioned. The net increase in net assets for the quarter was $24.4 million or $0.29 per share. As of September 30, 9 portfolio companies were on nonaccrual status, representing 3.5% of the portfolio at fair value and 7.0% at cost. This is down from 3.7% and 10.4%, respectively, as of June 30, and 5.6% and 14.4%, respectively, at December 31, 2024. As Phil noted, we continue to work closely with our borrowers, their sponsors and creditors to optimize our recovery value. Now I'll discuss our balance sheet and liquidity positioning. Our balance sheet remains strong. Total liquidity at quarter end was approximately $528 million, including $466.1 million of available leverage and $61 million in cash. Unfunded loan commitments represented 9.0% of our $1.7 billion investment portfolio or approximately $154 million, including $48.3 million in revolver commitments. Net regulatory leverage was 1.2x at quarter end compared to 1.28x at the end of the second quarter and in line with our target range of 0.9 to 1.2x. The decrease was primarily due to repayments during the quarter. Our diverse leverage program includes three low-cost credit facilities, three unsecured note issuances, and an SBA program. The weighted average interest rate on our debt outstanding at quarter end was 5.0%. Looking ahead, we are taking proactive steps to manage our capital structure, including evaluating the best alternatives to refinance our 2026 notes. Given our credit debt ratings, we plan to address the notes through a combination of our credit facilities and a potential private placement. While spreads have widened over the past few weeks, we continue to monitor market conditions closely to determine the most cost-effective path forward. Now I'll turn the call back to Phil for his closing remarks.

Thank you, Erik. Now I will provide some market commentary. As we mentioned, we have seen an increase in deal flow and our pipeline is growing. While M&A activity has begun to show some signs of life, most borrowers are currently focused on refinancing existing debt at lower rates or extending maturities to execute on continued growth plans. At the same time, the volume of high-quality investment opportunities remains limited. Against this backdrop, we are pleased to see and review more opportunities as part of the PFS platform, and we are intently focused on deploying capital into high-quality deals. In closing, we are encouraged by the progress we've made this year in improving the credit quality and the diversity of our portfolio. Looking to the final quarter of the year, we are focused on continuing to resolve challenged positions in our portfolio and positioning TCPC to deliver strong sustainable returns to our investors. Thank you for your continued support and interest in TCPC. And now I'll turn the call to the operator to open the call for questions.

Our first question is from Robert Dodd at Raymond James.

First, I'd like to discuss the two previous restructurings that returned to nonaccrual. Additionally, Renovo was restructured and is now going to be written off. Can you provide any insights on the common themes here? That's three restructurings in a relatively short period that didn't succeed, so is there any commonality in what happened? Are there any changes you can implement? You may not have control over every step in the restructuring process, but can you make adjustments to be more aggressive in your first restructuring attempts? Any thoughts on this would be appreciated, as having three in such a short period is concerning.

Yes. Thanks, Robert. We share your sentiments. We're obviously disappointed that deals that have been restructured do come back on. So, as you know, these are restructurings that get completed with respect to their capital structure. And then it takes time for the business itself to kind of go through its operational restructuring plan and execution. So, I think that's what we're seeing here. Credit issues or operational issues don't resolve themselves quickly, and it does take time and it's not linear. With these specifically, there's no commonality amongst these. I mean, there are others, by the way, that have gone through restructurings and have come out continuing to perform and on a positive path. So, we have a number of those cases that we can talk about as well. But I would say there's no common theme amongst these three that went back on.

Regarding the market environment, it seems that there is a greater level of detail with the new investments totaling 7.8 million positions, which is promising as it indicates more diversification in the portfolio. Most borrowers still seem to be concentrating on reducing costs. I have also heard that the M&A cycle is beginning to gain momentum. It appears that you are primarily witnessing refinancing activity rather than new borrower activity. How do you foresee this evolving over the next 12 months, although that's quite a long timeframe to make predictions?

I believe your observations about the increase in refinancing are accurate and reflect our deployment over the past few quarters, particularly in the current market. We are indeed noticeable growth in M&A activity, with new platforms and sponsors coming in and competing for assets, leading to a significant number of deals in the pipeline. This suggests that we may see higher volumes in the coming quarters. However, regarding actual deployments, refinancings and incremental add-ons to our existing portfolio remain the main sources, accounting for about 50% of our activity last quarter. Regarding portfolio diversification, since the current management took over at the end of last year, we've prioritized this aspect to avoid the concentration issues the portfolio faced previously. This year, we have made 31 new investments with an average position size of $7 million to $8 million, which contrasts sharply with the previous management approach.

Are you noticing any signs of stress not only in the portfolio but also more generally in the deals being reviewed? There have been some headlines about this, although you don't have exposure to those issues. Are there any areas of concern you are observing in the portfolio, or do you see patterns in the deals that are being declined? Are there any common reasons for the rejections?

Yes. We are always focused on credit risks in our portfolio and in new deals that we evaluate each week. Some common themes include a strong focus on more cyclical names and understanding their vulnerabilities to a softer economic cycle or macro environment. Regarding software, many discussions are centered around AI, which is significant. We aim to understand the risks associated with AI, particularly concerning how it may displace existing solutions or whether the borrower has a competitive advantage in AI. These are some key topics we frequently discuss. However, there are no atypical risk factors in other specific industry sectors at the moment. We are still addressing concerns related to tariffs and geopolitical risks in those areas.

At this time, we have no further questions on the call. So, I will hand back to management for closing comments.

Thank you, everyone, for dialing in and streaming on the webcast, and I'd like to thank our team for their continued efforts and hard work around the portfolio. Please contact us with any questions, and have a great day.

Thank you. This concludes today's conference call, and you may now disconnect.