BlackRock TCP Capital Q1 2025 Earnings Call Transcript

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Provided by Quartr
May 8, 2025

There are 8 speakers on the call.

Operator

Ladies and gentlemen, good afternoon. Welcome everyone to BlackRock TCP Capital Corp. Q1 twenty twenty five Earnings Call. Today's conference call is being recorded for replay purposes.

Operator

During the presentation, all participants will be in a listen only mode. A question and answer session will follow the company's formal remarks. I will repeat these instructions before we begin the Q and A session. And now I would like to turn the call over to Mikayla Murray, a member of the BlackRock TCP Capital Corp. Investor Relations team.

Operator

Mikayla, please proceed.

Speaker 1

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.

Speaker 1

Accordingly, we make no representation or warranty with respect to such information. Earlier today, we issued our earnings release for the first quarter ended 03/31/2025. 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.

Speaker 1

Now I will turn the call over to our Chairman, Co CIO and CEO, Phil Seng.

Speaker 2

Thank you, Mikaela, 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. Eric Cuellar, our CFO, will then review our financial results in more detail. I'll follow Eric's remarks with commentary on the current market environment before we open the call up for questions.

Speaker 2

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.

Speaker 2

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 nonaccrual list and the number of portfolio companies on nonaccrual status at quarter end declined meaningfully to eight from 12 in the prior quarter. Non accruals now comprise 4.4% of our portfolio at fair value, down from 5.6% or 120 basis points sequentially. During the quarter, we exited our nonaccrual positions in Securis, McAfee, CIBT and Avanti, all of which were broadly syndicated second lien loans that we believe to offer 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.

Speaker 2

Subsequent to quarter end, we removed Renovo from nonaccrual following the completion of a comprehensive recapitalization, which significantly delevered its 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 form a 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 Razer Group, Gordon Brothers and Alpine, also known as four thousand eight hundred forty, which is a pallet management services provider that we haven't previously discussed. 4,840 benefited from increased pallet demand coming out of COVID, but as the market began to normalize in 2023, volumes declined.

Speaker 2

While a slower than anticipated market recovery has pressured performance, we remain confident in four thousand eight hundred forty's position as a leader within the pallet space, which is a critical element of the supply chain and transport of essential goods.

Speaker 3

We will continue to monitor closely forty eight forty's performance and industry trends more broadly.

Speaker 2

We are focused on optimizing the outcome for each of these investments, and 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 nonaccrual status in the first quarter of twenty twenty

Speaker 3

three.

Speaker 2

We recently provided growth capital to Job 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 Auto Alert, after nearly a decade as a lender, we assumed control of the company in March of twenty twenty three as part of a restructuring. Since then, Auto Alert has shown consistent financial performance and recently reported its second consecutive year of earnings growth, which contributed to the write up of its value this quarter.

Speaker 2

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 $04 per share. Both are payable on 06/30/2025 to shareholders of record on 06/16/2025. 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 09/30/2025, we repurchased 3,150 shares of TCP stock this quarter and an additional 39,500 shares after quarter end.

Speaker 2

Now I'll turn the call over to Jason to provide more detail on our portfolio along with our investment activity during the quarter.

Speaker 4

Thanks, Phil. I'll start with an overview of our portfolio, which had a fair market value of approximately $1,800,000,000 at the end of the quarter invested across 146 companies in over 20 industry sectors.

Speaker 2

Our

Speaker 4

average investment size was granular at $12,100,000 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%, while those we exited had a weighted average yield of 11.2%.

Speaker 4

These yields reflect the exit of four investments on nonaccrual 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 $66,000,000 of capital during the quarter with two new and nine 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.

Speaker 4

Our largest new investment this quarter, a $6,700,000 first lien term loan and revolver in APRIS retail demonstrates our focus on investing in first lien loans to high quality middle market companies. APRIS 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 U. S.

Speaker 4

Retailers, Apris 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 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.

Speaker 4

Now I'll turn the call over to Eric, who will discuss our financial results along with our capital and liquidity position.

Speaker 5

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.

Speaker 5

This amount included recurring cash interest of $0.47 non recurring income of $03 recurring discount and fee amortization of $05 PIK income of $08 and dividend income of $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 03/31/2025, our cumulative total return did not exceed the total return hurdle. And as a result, no incentive compensation was accrued for the first quarter.

Speaker 5

Additionally, as Phil mentioned, our adviser has agreed to waive one third of our base management fee for three quarters beginning on 01/01/2025 and ending on 09/30/2025. Net realized losses for the quarter were approximately $41,000,000 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 12/31/2024. Net unrealized gains in the first quarter totaled $30,000,000 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 Javan Talent and Auto Alert. The net increase in net assets for the quarter was $21,000,000 or 25¢ per share.

Speaker 5

As of March 31, '8 portfolio companies were on nonaccrual status, representing 4.4% of the portfolio at fair value and 12.6% at cost, down from 5.614.4% respectively at the end of twenty twenty four. As previously noted, as a result of progress made subsequent to quarter end, our pro form a 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.

Speaker 5

Our balance sheet positioning is solid, and our total liquidity increased to $629,000,000 at quarter end with $530,000,000 of available leverage and $99,000,000 of cash. Unfunded loan commitments to portfolio companies at quarter end were 8% of our $1,800,000,000 investment portfolio or approximately $135,000,000 including only $43,000,000 of revolver commitment. Net leverage at the end of the quarter was 1.13 times, which is well within our target range of 0.9 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%.

Speaker 5

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.

Speaker 2

Thanks, Eric. 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 is 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.

Speaker 2

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 U. S.-based Operators provide 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.

Speaker 2

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 and 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 $10,000,000,000,000 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.

Speaker 2

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 twelve 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.

Speaker 2

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 having 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.

Speaker 2

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.

Speaker 2

I'll now pass the call back to the operator so we can open the call for Q and A.

Operator

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

Speaker 6

Hey, guys. First of all, congratulations on the quarter in terms of stabilizing the performance. Second, on the share repurchases, I saw there was a $50,000,000 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?

Speaker 5

Yeah. Good question, Chris. We as you know, we've done historically repurchases when we believe them to be accretive and meaningfully accretive. We did a little bit in q one. We did some more post q one as Phil noted.

Speaker 5

Certainly, we've been trading at levels that 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 the the stock is reacting well this morning, but certainly we'll continue to look at where we think it's accretive to repurchase shares.

Speaker 6

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

Speaker 2

Yeah. Thanks. Thanks, Chris. The vast majority of our companies do have sponsors or, I would say, institutional ownership in there. There there are many many of our borrowers, have institutional ownership but not control.

Speaker 2

So oftentimes, decision making is, you know, and our negotiations on terms and the deals are structured with, with management teams, founders, entrepreneurs, and businesses. But I think majority are sponsor backed.

Speaker 6

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

Speaker 2

Yeah. That's a great question. So so, clearly, we've been in an environment, you know, where, well well into 2025. So think about the rate rate rise environment, we're probably in year three. So, you know, with higher rates, slower growth, right, causing some liquidity, you know, issues across, you know, across the market, sponsors have, have had several years of looking to support their companies, continuing to, infuse capital when necessary, providing, you know, the operational expertise, that they that they may bring to the table.

Speaker 2

But, you know, three years in now, many of these sponsors, if they're not seeing their equity, their equity value continue to, be sustainable or the equity option there, then they may be less supportive. We've seen a mix. You know, clearly, most of our companies are performing, continue to perform well. Or if they're, if they've had some, you know, declining performance. It hasn't been to a point where, you know, the values equity values out of the money.

Speaker 2

So we have seen continued support, and we're negotiating with an you know, a couple here and there in our portfolio where, where the sponsor is putting in additional equity, and we're, you know, discussing, you know, ways to help accommodate, accommodate that. And then, you know, to the extent that we don't get the right support from the equity, then we're obviously very much, you know, comfortable with, enforcing our rights and and, you know, managing these companies on a post restructuring basis, which I think you've seen us do over the past two decades of of running this business.

Speaker 4

Okay. Thank you.

Speaker 2

Thank you, Chris.

Operator

Thank you. Our next question comes from Robert Dodge with Raymond James. Please go ahead, Robert.

Speaker 5

Hi,

Speaker 7

guys. To echo Chris, congrats on resolving and exiting some of these things. On the aggregators, I mean, I appreciate you made some comments. I mean, I think it's still back to the environment, still more than half of the fair value of of the non accruals is is in the aggregator space. So, I mean, it's a you know, there's there's a lot of non income producing fair value, let alone the cost basis potentially.

Speaker 7

I mean, can you give us any more color on like how long you think you're completing restructuring or repositioning those businesses is going to take from an earnings drag perspective? Obviously a if there is recovery to be made there, there is an earnings drag and it's dragging on your capacities generate NII. So can you give us any thoughts on a timeline on those? Obviously, it's tricky, but anything you can say.

Speaker 2

Yeah. Thanks, Robert. That's, you know, that's a topic that we are keenly focused on as well. Obviously, you know, we we're looking at our non accruals very closely, working very hard in trying to, work through those names. And you're right.

Speaker 2

The the aggregators are a large percentage of those. And, you know, we think that we should be through, the restructurings, you know, probably in the next few quarters, at the at the back end. You know, it could be sooner. I think we're making a lot of progress. That being said, you know, we are seeing some, you know, some some good signs of improvement, you know, in thinking about the ability to, have performing performing debt in there.

Speaker 2

You know, 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, Celerx, you know, they have some real promising brands, in that business, that continue to grow meaningfully year over year. So we're really excited about, about the prospects there in terms of, you know, the ability to to kinda generate sustained income. But, both SellerX and and and Razer are, you know, still in the restructuring process, and, you know, those aren't necessarily easy to manage given the multiple stakeholders, up and down the cap stack.

Speaker 2

So we're working on those, but we expect to get those done in the next few quarters. And, you know, if we're to be optimistic, then perhaps, one of them sooner.

Speaker 7

Got it. Got it. I mean, just just to that point, I mean, on on the repositioning of the portfolio, you know, going forward, is you know, to to your point, like, some of these these aggregators, there are you know, they were broader club deals. There are a lot of other people involved, which adds complexity if it does reach the point that a restructuring is required. So is is there any change or is there likely to be any change in in kind of the types of deals you're going to do on a go forward basis in terms of, like, how many other lenders you're willing to be in a group with?

Speaker 7

And I mean, you you said, you know, you didn't wanna do the the broadly syndicated or the second liens unless you had strong influence, think was you wording something with that effect. I mean, is that going to be more true across the portfolio as well where there'll be less of these broad group deals and more your the the dominant lender kind of deal? Is what what are your thoughts there?

Speaker 2

Yeah. Robert, we are definitely taking that approach going forward. We feel that some of the some of the errors of the past have been related to situations where we're not able to exercise our influence. You know, the the the bucket of broadly second lien loans that that were put on in 2021. That's clearly an area that we've seen, the shortcomings of not being able to exercise, you know, the experience, the skill set, the capabilities of our team in these situations.

Speaker 2

And and that's definitely one of the stated areas of focus for us going forward. By the way, whether that's Got it. You know, whether we we look at second lien or or even a first lien.

Speaker 7

Got it. Appreciate it. Thank you.

Speaker 2

Thank you, Robert.

Operator

As a reminder, if you would like to ask The next question comes from Paul Johnson with KBW. Please go ahead, Paul.

Speaker 3

Good afternoon. Thanks for taking my questions. 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.

Speaker 3

I'm not sure if you made a new investment in that company, or exactly what's, going on there. That'd be helpful. Thanks.

Speaker 2

Yeah. Thanks, Paul. So job and talent so job and talent is one of the tech enabled staffing agencies that, we had we had in the portfolio for some time. Job and talent has been performing. It's seen year over year growth on both revenue and profitability.

Speaker 2

And this past quarter, we did have an opportunity to provide growth capital there. So one, I think the markup, you know, came from improved performance or continue to continue to improve performance. Second is, from the economics that we benefited from on this incremental growth capital. The company is in continues to invest in growth. And as part of that, there's an opportunity, you know, as an incumbent lender lender to structure a really nice, preferred, debt investment in the business, which included, you know, really enhanced economics that accrued to our benefit here, PCPC.

Speaker 3

Are you able to share any of the the economics? You know, how are your, you know, how your what what sort of income you're receiving or, you know, what what you guys hold there?

Speaker 5

Yeah, Paul. No. We're really not we haven't done so in the past, but we're we're, for confidentiality reasons, not able to share the details.

Speaker 3

Okay. Yes. Thanks for that. And then

Speaker 2

I will add

Speaker 3

Go ahead. Sorry.

Speaker 2

Yes. I add that, you know, we're just you know, it's confidential with respect to, the company, and and the terms of the deal. But I think, you know, it was it was a very attractive situation for us. It was one where where a lot of the existing stakeholders in the business also stepped up. I think we were we were probably about, you know, closer to 50% of the deal, because, a lot of the existing stakeholders want to come in as well on on this piece of paper.

Speaker 3

Okay. Got it. Thanks. That's helpful. 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?

Speaker 3

Or is there any plans to do so this year?

Speaker 5

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

Speaker 3

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

Speaker 5

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

Speaker 3

Okay. Thank you very much. That's all for me.

Speaker 5

Thanks, Paul.

Operator

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

Speaker 2

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.

Operator

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

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Key Takeaways

  • During Q1, TCP reduced nonaccruals from 12 to 8 companies, lowering its nonaccrual exposure to 4.4% of portfolio fair value (4.1% pro forma post‐quarter).
  • Adjusted net investment income was $0.36 per share (flat QoQ) with annualized NII ROE of 15.4% and NAV per share of $9.18 as of March 31, 2025.
  • The firm deployed $66 million in Q1—100% in first‐lien loans—maintaining a portfolio weighted 90% toward senior secured debt and a 12.2% weighted average yield.
  • Management declared a Q2 base dividend of $0.25 plus a $0.04 special dividend, repurchased 42,650 shares, and is waiving one‐third of its base management fee through September 2025.
  • TCP’s strategic priorities include resolving remaining portfolio challenges, closely monitoring company performance, and maintaining disciplined underwriting focused on core middle market opportunities.
A.I. generated. May contain errors.
Earnings Conference Call
BlackRock TCP Capital Q1 2025
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