TCPC - NASDAQ

Ladies and gentlemen, good afternoon. Welcome everyone to BlackRock TCP Capital Corp's Fourth Quarter and Year-Ended 2024 Earnings Conference Call. Today's conference call is being recorded for replay purposes. During the presentation, all participants will be in a listen-only mode. A question-and-answer session will follow the Company's formal remarks. [Operator Instructions] 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 a statement 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 fourth quarter and year ended December 31, 2024. We also posted a supplemental earnings presentation to our website at tcpcapital.com. To view the slide presentation, which we referred to on today's call, please click on Investor Relations link and select Events and Presentations. These documents should be reviewed in conjunction with the Company's Form 10-K, which we filed with the SEC earlier today. Please note that we will shortly issue a corrected, earnings release due to a typographical error. The third sentence of the third paragraph under Consolidated Results of Operations has been corrected to refer to unrealized losses rather than unrealized gains. Our NAV and other statistics are presented correctly throughout. I will now turn the call over to our Chairman and CEO, Phil Tseng.

Thank you, Michaela, and thank you all for joining our call today. I will discuss our results for the fourth quarter and full year 2024. I will also describe how we are approaching our portfolio construction and investments to return the portfolio to historical above-market returns, as well as outline a shareholder-friendly change we have implemented. I'll then turn the call over to our President, Jason Mehring, to review details of our investment activity and provide comments on the market environment. Last, Erik Cuellar, our CFO, will provide financial results before we open the call up for questions. We're also joined today by Dan Worrell, our Co-CIO. We are optimistic about our future and confident in our strategic plan to successfully navigate the challenges presented in 2024. Full year 2024 adjusted net investment income was $1.52 per share as compared to $1.84 per share in 2023. Annualized net investment income ROE for the year was 14.5%. The declines in net investment income and ROE primarily reflect the impact from lower base rates, and an increase in non-accruals and expenses versus the prior year. Fourth quarter adjusted net investment income per share was flat with last quarter at $0.36. At the end of the quarter, non-accruals represented 5.6% of the portfolio at fair market value as compared to 3.8% in the previous quarter. NAV per share was $9.23 compared to $10.11 per share, reflecting incremental investment portfolio markdowns, the largest of which were Razor, Securus and Astra. Our results were also impacted by market conditions, including tighter spreads as a result of the continued slower deal environment and declining interest rates. The vast majority of our portfolio continues to perform well and in a way that is reflective of our 12-year history of consistently delivering attractive returns as a public company. That said, we are not pleased with the markdowns and non-accruals that have impacted our performance in recent quarters and we remain laser focused on working with our borrowers and sponsors to resolve these issues. Based on our team's substantial experience in direct lending, we are confident that we will make the right decisions to resolve these issues. We know from experience that resolving credit issues quickly does not always produce the best results for shareholders and that shareholder returns are often optimized through thoughtful solutions that may take some time to execute. Now, let me provide a few high-level updates on markdowns and non-accruals during the quarter. We marked down our positions in Razor, Securus and Astra, each of which we've addressed on prior calls. We remain actively engaged with the management teams of each of these companies on the best path forward and we'll provide additional detail when we can. I'll quickly share an update on the Amazon aggregators. First is Razor, which accounted for roughly 70% of our total markdowns this quarter. It continues to struggle with inventory issues that have impacted its profitability and liquidity. We're working closely with Razor to resolve these challenges, which may include consolidation to drive improved cash flow and provide runway for its turnaround. Again, these resolutions are not always linear and can take time to complete. On the other hand, SellerX which experienced a markup for the quarter, is further along in its transformation, having simplified its business by reducing overstock and investing in its growing brands while trimming unprofitable products. Notably, the Company's top brand nearly doubled in revenue year-over-year as it diversified its sales channels into brick and mortar. This progress is emblematic of the fact that improvements may take time and effort for our challenged borrowers. During the quarter, we added two new names, Renovo and InMoment to non-accrual status. On our last call, we mentioned that InMoment, which provides customer experience management software and solutions that help businesses understand and improve their customer experiences, experienced a slowdown in growth due to industry dynamics and is transitioning its focus towards its multi-signal product, which we believe has a long-term growth potential. This slowdown in growth has continued into the fourth quarter, resulting in our decision to place the Company on non-accrual. We will continue to monitor InMoment closely and to collaborate and support the management team. Renovo, the other company we placed on non-accrual this quarter, is a direct-to-consumer home remodeling company. Renovo's performance has declined as the Company worked to integrate acquisitions, while demand for residential repair and remodel services softened due to persistent inflation, resulting in deferred home repair and remodeling spend. We remain actively engaged with Renovo and its management team on both performance and financing considerations. Given our recent financial performance, our Board made the decision to reduce our regular dividend to $0.25 per share for the first quarter. While net investment income exceeded our dividend in the fourth quarter, we believe the revised level is sustainable. In addition, our Board declared a $0.04 special dividend for the first quarter, and we intend to declare a special dividend of at least $0.02 in each of the second and third quarters of 2025, subject to board approval. Next, I want to discuss actions we're taking to support our shareholders. We appreciate your continued trust and patience and believe these are examples of how we continue to align with you. First, on February 25, 2025, our advisor voluntarily agreed to waive one-third of our base management fee for three calendar quarters beginning on January 1, 2025, and ending on September 30, 2025. These fees cannot be earned back at a later date. We are taking this action as we acknowledge the decline in the portfolio's NAV. Second, during the fourth quarter, we purchased, repurchased, 510,687 shares at a weighted average price per share of $8.86, pursuant to the plan our Board of Directors re-approved on April 24, 2024. And third, as you know, our shareholder-friendly incentive structure, incentive fee structure, ensures that we earn incentive fees only when our total return exceeds the hurdle rate. This fee structure was intentionally designed to align management and shareholder interests. When our shareholders do well, we do well, and only then. As the new management team, we have a clear path to position TCPC in a way that results in consistent, attractive, long-term returns. First, we will continue to focus primarily on the core middle market with an industry-driven, proactive approach to sourcing and underwriting. We will also opportunistically invest in companies in both the lower and upper middle market that align with our strategy, are relationship-driven, and ensure an efficient use of available capital. There are many benefits to lending in the middle market. It's an attractive and underserved segment with less competition than the broadly syndicated market that has historically delivered strong risk-adjusted returns. It's also an area where our direct relationships and our deep industry knowledge and deal-structuring expertise are highly valued in creating customized financing solutions for companies that need growth capital. Second, we will maintain a highly diversified portfolio and limit exposure to industry subsectors. We have always focused on maintaining a diverse portfolio in industries we know well and where we have an established ecosystem of referral sources and borrower relationships, including verticals like healthcare, technology, and fintech. Going forward, we will also avoid meaningful concentrations in any one industry subsector such as Amazon aggregators. Third, we will continue to prioritize investing in first lien loans, and where we consider second lien loans, we will emphasize those where we are a lender of influence. We know that having a direct relationship or at least a seated table with borrowers provides significant downside protection. Finally, we will continue to deepen our connections to and leverage the broader BlackRock platform. Our ability to draw on the extensive resources and relationships of the full platform is a distinct competitive advantage. As part of BlackRock, we have access to a broader origination platform and investment team as well as substantial resources. In addition, we see a significant amount of proprietary deal flow that allows us to be highly selective in the investments we make. With our talented, experienced team and the unparalleled resources of the BlackRock platform, I am confident that we will successfully work through our current challenges and return the portfolio to historical performance levels. We believe that we have the right team and the right plan. We appreciate our shareholders' continued patience throughout this process. Now, I'll turn it over to Jason who will review our investment activity during the quarter and the market environment.

Thanks, Phil. I'll start my comments with a brief overview of our portfolio. At year end, our portfolio had a fair market value of approximately $1.8 billion invested across 154 companies in more than 20 industry sectors and with an average position size of $11.7 million. 91.2% of our portfolio was invested in senior secured loans, 94.5% of which were floating rate. Investment income was distributed broadly across our diverse portfolio with more than 77 of our portfolio companies each contributing less than 1% to the total. At quarter end, the weighted average effective yield of our portfolio was 12.4% compared to 13.4% last quarter. New investments had a weighted average yield of 10.8%, while those that we exited had a weighted average yield of 14%. These statistics reflect decline in base rates and some spread reduction during the period. In addition, a portion of our repayments in the quarter were from higher priced second lien deals that we have not emphasized more recently. While overall M&A volumes remained below expectations, we continued to see a healthy flow of new investment opportunities in the quarter and took a highly selective approach to investing, emphasizing seniority in the capital structure, portfolio diversity and transactions where we are a lender of influence. We deployed a total of $121 million of capital during the quarter into nine new and nine existing portfolio companies. All of our new investments were first lien loans and at quarter end, 83.6% of the portfolio was in first lien loans, up from 81.3% in the prior quarter. In several instances, we chose not to maintain our involvement in deals that were repriced at lower yields or that were amended to include weaker covenants where we believe the risk outweighed the potential reward. As a result of our focus on direct origination and borrower relationships, incumbency remains an important competitive advantage for TCPC. Investments in existing portfolio companies accounted for nearly 45% of our fourth quarter activity. From a risk management perspective, allocating additional capital to businesses and industries we know well and understand deeply is beneficial. At the same time, we have seen a healthy level of opportunities from new borrowers that are aligned with our investment strategy. Now I'll discuss two specific investments from the quarter. Our largest investment in a new portfolio company was a $14.7 million first lien loan to Global Experience Specialists or GES. Founded in 1926, GES is a global exhibition and trade show management company that provides end-to-end services for exhibitions, conferences, and live events. Its services include strategy, creative, design, production, and logistics. We view this as a highly attractive opportunity to invest in a global leader with high levels of recurring revenue from long-term client contracts within the $15-plus billion exhibition industry. Our largest investment into an existing portfolio company during the quarter was a $12.8 million loan to Applause, a crowd-testing company that connects software developers with a global community of digital experts to test and ensure the quality of applications before they are released to consumers. We have been a long-time financing partner to Applause. We originally invested in the Company to support its leveraged buyout in 2017 and led a subsequent transaction in October of last year. Since our initial investment, Applause has performed well and has significantly expanded annual recurring revenue, driven by growth in AI advancements, strategic partners, and customer expansion. As it relates to the overall market and our pipeline, we have not seen the level of increase in M&A activity that most expected heading into 2024. This has been driven in part by interest rates. While the Fed has cut rates, the pace and overall level of reductions has been less than many had hoped for. Our view is that the market is digesting the implied rate outlook for 2025 and that there's likely to be some lift in overall activity as expectations are adjusted. While rates clearly have significant influence on deal activity, the potential for other policy shifts following the U.S. Election cannot be ignored. There's much that is to be determined on this front, but it's reasonable to think that a more favorable regulatory environment may contribute to activity as buyers and sellers endeavor to narrow the valuation gaps that have existed more recently. It's also worth noting that many private equity sponsors continue to hold record levels of dry powder, which should further drive transaction volumes. As it relates to spread compression, which both Phil and I have mentioned previously, this has been an ongoing theme, driven by increased competition between private credit and traditional lending sources. With that said, many companies have repriced or refinanced their debt at this point, suggesting a level of stabilization ahead. Overall, while it's difficult to predict specifics related to deal activity, we continue to think the middle market economy is strong and that we're well positioned to provide capital to borrowers in our core segment of that market. Now, I'll turn the conversation over to Erik, who will discuss our financial results, capital, and liquidity position.

Thank you, Jason. Let me begin with our financial results for the quarter. As Phil noted, adjusted net investment income was $0.36 per share for the fourth quarter and $1.52 per share for the full year 2024. As detailed in our earnings press release, adjusted net investment income excludes 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 release and 10-K. Gross investment income for the fourth quarter was $072 per share. This amount included recurring cash interest of $0.52 nonrecurring income of $0.06, recurring discount and fee amortization of $0.03, PIC income of $0.08 and dividend income of $0.03 per share. Fixed interest income for the quarter was 10.5% of total investment income. Operating expenses for the fourth quarter were $0.32 per share and included $0.21 per share of interest and other debt expenses. As of December 31, 2024, the Company's cumulative total return did not exceed the total return hurdle. And as a result, no incentive compensation was accrued for the three months ended December 31, 2024. Additionally, as Phil mentioned, our advisor has agreed to waive 1/3 of our base management fees for three quarters beginning on January 1, 2025, and ending on September 30, 2025. Net realized losses for the quarter were approximately $3,000 or less than $0.01 per share. Net unrealized losses in the fourth quarter totaled $72 million or $0.85 per share, primarily reflecting unrealized markdowns on the three investments Phil discussed earlier. The net decrease in net assets for the quarter was $80 million or $0.89 per share. As of December 31, 12 portfolio companies were on non-accrual status, representing 5.6% of the portfolio at fair value and 14.4% at cost. As Phil noted, we are working closely with our borrowers, their creditors and sponsors to resolve issues with the best possible outcomes for our shareholders. The remainder of our portfolio is performing well. Turning to our liquidity. Our balance sheet position remains solid, and our total liquidity increased to $615 million at quarter end with $519 million of available leverage and $92 million in cash. Unfunded loan commitments to portfolio companies at year end were 8% of our $1.8 million investment portfolio or approximately $144 million including only $62 million of revolver commitments. Net regulatory leverage at the end of the quarter was 1.14x which is within our target range of 0.9x to 1.2x. We have ample financing options to fund new investments with our diverse and flexible leverage program, which includes three low-cost credit facilities, three unsecured note issuances and an SBA program. The weighted average interest rate on debt outstanding at the end of the quarter was 5.2%, down from 5.4% at the end of the prior quarter. Now, I'll turn the call back over to the operator to open the line up for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question today comes from Finian O'Shea with Wells Fargo Securities. Please go ahead, Finian.

On the dividend and the specials, can you give some color on your spillover now, I apologize if you gave that already, and what the target level will be?

Yes, Fin, I'll address first the spillover. We -- as you recall, we declared a special of $0.10 in Q4 of 2024. We did not distribute the full amount. We probably have about $0.10 or so of carryover from the prior quarter into this quarter, but I'll let Phil address the dividend level.

Yes, Fin, we really try to be very thoughtful here on the regular dividend level. Our approach was to really think about a sustainable level based on the earnings power of the portfolio today. But there are a number of considerations that we had to make in coming up to this decision. Obviously, the ongoing impact of base rates coming down, they're lower today than they have been over the past few years. And of course, the current spread environment, it's been tightening, I think as most in industry have come to recognize. And so, as we rotate the portfolio over time from repayments into new deployments, we are seeing some spread compression there. And of course, our non-accruals will end up yielding less interest income. So, what we really want to do is try and be thoughtful here around a true sustainable regular dividend level, and that's where we arrived. But of course, we understand that we do want to provide strong total shareholder returns here and therein lies our approach around the specials and the guidance accordingly for Q2 and Q3.

And just sort of a platform question, I'm not sure to what extent you can discuss, but we've all seen the BlackRock HPS acquisition, and it appears that TCP will be a unit roll-up to HPS, and that means your investment portfolio management, et cetera, function becomes part of theirs. So, do you have any, like should we brace for any strategic change in, say, your investment strategy or anything like that?

Yes, that's a fair question. The HPS headline has been out there since BlackRock agreed to the acquisition of HPS back in December. I don't expect there to be meaningful change. I can't really go into much detail around the transaction, given that it hasn't closed yet, and we expect it to close at some point in the middle of this year, subject to regulatory approvals. But our team is laser-focused on business as usual, particularly our existing portfolio, and seeing this portfolio through some of these performance-related issues. But I think, importantly, Finn, the acquisition of HPS does highlight BlackRock's deep and growing commitment to private credit and direct lending, particularly in the U.S, as you know, given their scale. And I think it will bring very much expanded resources to our business, including a network of borrower relationships and enhanced sourcing capabilities as well as just broader private credit expertise to our platform. So, we're very excited. I think one of the compelling aspects of the transaction is how complementary the HPS, U.S. Direct lending business as well as the BlackRock private market businesses are. So, I know we're excited. Our team is excited. And I think if understanding how to get the benefits of a larger platform that we've experienced to-date as being part of the BlackRock platform is any indication, but we're very much looking forward to having HPS as part of that.

And is your like, just a sort of follow-up there. When BlackRock acquired TCP, I think you're in some blanket co-invest order where you see everything and your Board is entitled to claim everything that fits the mandate. Is that, like should we assume that that applies that, for example your funds and the HPS funds will be together in a co-invest order, but perhaps as you point out, like to be determined if there's cross pollination of deals?

We look forward to providing more details at a later date closer to when the deal comes to a close, but at this time we can't make comments.

Our next question comes from Robert Dodd with Raymond James. Please go ahead, Robert.

And I understand you're being as open as you can on the assets. But I mean, what level of confidence should we have that this is it, so to speak, in terms of the write downs, right? I mean, obviously, the Amazon aggregators have been a problem for a while and SellerX might be improving, but Razor was a big markdown. So, I mean, how much confidence should we have that that the NAV well, there can be volatility to your point. It's not an even pathway, right? But that this is a realistic, floor level or is there just more things we should be worried about in the portfolio?

Yes. Robert, that's a fair question. We're obviously laser focused on trying to manage the existing non-accruals and the positions that have shown meaningful markdowns. The Razor markdown, which was the vast majority of the markdowns for the quarter, did come as a surprise to us. Partly, there was an expectation that the recent equity investor that came in just about two quarters ago was going to continue supporting the business, but that went into different direction, hence the meaningful markdown. Aside from that, most of the markdowns came from the existing cohort of assets that have been on the list, so to speak, on the non-accrual list in particular. So, outside of those names, will there be ongoing markdowns or potential non-accruals, there may be, but I think it's largely been centered around the assets that we've been discussing.

I appreciate that. If I look at, one of the new ones, Renovo. Remodeling, I have to assume that there's exposure to lumber tariffs and maybe remodeling products from China and maybe China tariffs as well. But so, what's the -- it was seeing slower demand, but now maybe faces tariffs going forward as well. So, I mean, what's the risk on something like that, that there's incremental deterioration and that's just obviously a new non-accrual rather than the existing group to your point that a lot of the issues have been restricted to that, but there are some new ones?

Sure, this is Jason. I'm happy to try and take a swing at the Renovo answer. And I think on that front, the underlying issues there have certainly been in part because of issues with inflation and sort of consumer appetite to bite off home projects, but there also have been some just operational sort of execution issues, which are probably easier to address. The one thing about this particular platform and something we thought about at the time of our initial investment is that the sorts of projects that they focus on are smaller dollar amount as opposed to comprehensive home redos or remodels. So, number one, it ought to be a little less volatility based on our work and our experience within that market as there is elsewhere. And then secondarily, a lot of the things that they focus on are come from, like windows, for example, come from supply chains that are domestic as opposed to coming from abroad. Now that doesn't mean that they're 100% insulated from what might happen with commodity or material prices broadly. But our current read right now is that they're not necessarily specifically in the crosshairs of trouble because of where they're getting the underlying materials. Obviously, everything related to tariffs continues to move around and we're staying on top of it, but at the moment, we don't think that tariffs are necessarily a significant new issue in the context of that specific name at the moment.

One more if I can, and I'm going to keep my tinfoil hat in the box at the moment, but the decision to waive one third of base management fees through the first three quarters of the year, positive for shareholders, so applaud that. Maybe I'm reading too much into it, but at the same time, roughly the time that's expiring is the time that the HPS acquisition is supposed to close. So, I mean, is that -- is it just coincidental or is it waiving some management fees until that close and then review the new landscape? Is that kind of what's being laid out here?

I think, Robert, I appreciate your insightfulness and creativity, but I think that is looking into it a little bit too much. It's not coincidental. We did try and take a thoughtful approach to really acknowledge the NAV decline. And the management fee waiver is one of several things that the advisor's done to really try and support TCPC. As you know, there was a reduction in our management fee last year from one and a half to one and a quarter to really be more aligned with the peer universe. And then our shareholder friendly incentive structure, I think that showed its merits this past quarter. So, I think it's a collection of ways that the advisors trying to support TCPC here, but there's nothing coincidental about -- sorry, there's nothing specific to the timing on HPS or any other matters.

Our next question comes from Christopher Nolan with Ladenburg Thalmann. Please go ahead.

Hi. I applaud the -- I echo Robert in terms of waiving the management fee and also reduction of dividend. Given everything that's going on and I appreciate you guys are handling a pretty hairy situation, and you have a really large debt maturity in 2026, $325 million, that's a 2.85% note. As I recall that's investment grade. I presume you want to keep the investment grade if you're able to, but should we look for lower leverage going through the year or so or what steps should we take to watch as you prepare for that refinance?

Yes. As you pointed out, that really is our next large maturity. We actually have a small piece coming due in December of 2025 as well. And certainly, we'll be looking to access the capital markets closer to that date. We're definitely focused on maintaining that investment grade rating from our rating agencies. Obviously, that helps with the process as well. But when we issue those notes, it's what we on a combined basis post-merger, we believe that we're going to be doing similar sizes in terms of issuances.

Okay. So, you're currently anticipating maintaining the investment grade?

Yes, we continue to have close discussions with our rating agencies and we have no reason to think otherwise.

Okay. And I guess kind of a pointed question. Your NAV per share decreased 22 in 2024 versus 9% a year earlier. And is what has changed? I know there was the acquisition. Is there additional management overhead from being part of BlackRock? And if so, if that's the case, it may not be serving you guys well in terms of the performance. Anything you could comment on that would be helpful?

Yes, I think it's the result of the broader factors that go into these portfolios. There was obviously a rapid increase in rates in the back half of ’22 and through 2023. I think that is having a significant impact on borrowers who were levered pre rate rise, for example. That coupled with a slower growth environment given the higher rates across not just the U.S. but globally. It's putting pressure on a number of these operating companies and couple that with of course higher interest burden. So, I think it's a lot of that that's come to impact these businesses in different ways and that's largely what we're seeing. So, you're right, as you mentioned a lot that was in 2024 and I think that is a reflection of that.

Thank you. At this time, we have no further questions. And so, I’ll hand the call back to Phil Tseng for closing remarks.

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