Ladies and gentlemen, good afternoon. Welcome, everyone, to BlackRock TCP Capital Corp.'s First Quarter 2021 Earnings Conference Call. Today's conference call is being recorded for replay purposes. . And now I would like to turn the call over to Katie McGlynn, Director of the BlackRock TCP Capital Corp. Global Investor Relations team.

Katie, please proceed..

Thank you, Rocco. 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. .

Thanks, Katie, and thank you all for joining us today. We appreciate your continued interest in TCPC and hope that you are safe and well. There are several members of the TCPC team on the call with me, including our President and COO, Raj Vig; our CFO, Paul Davis; and our controller, Erik Cuellar.

I will start with a few comments on our performance in the first quarter and an update on our portfolio. Next, Paul will review our financial results as well as our capital and liquidity positioning. After that, I will provide some closing comments before opening the call to your questions. Beginning with the highlights from our first quarter.

We delivered another robust quarter of results that included further NAV depreciation, continued strong credit quality, steady originations and strong investment income. Our consistent results were driven, in part, by our focus on established middle market companies with resilient business models in less cyclical industries.

Despite the significant market volatility in 2020, our NAV ended the year higher than it was at the end of 2019, and our NAV further appreciated 2.4% in the first quarter of this year.

NAV appreciation in the first quarter reflected further spread narrowing on middle market private credit transactions as well as strong financial performance across most of our portfolio companies. Our credit quality remains solid with loans to 2 portfolio companies on nonaccrual, totaling just 0.4% of the portfolio at fair value at quarter end.

We also took advantage of the favorable bond market during the quarter to lower our borrowing costs. We issued an additional $175 million of unsecured notes at an attractive rate of 2.85%, which was record pricing for sub index eligible BDC bond issuance.

In February, both Moody's and Fitch, also reaffirmed our investment-grade rating with stable outlook. Turning to our portfolio positioning. At quarter end, our portfolio had a fair market value in excess of $1.7 billion, an increase of over $100 million from the prior quarter.

89% of our investments are senior secured debt and are spread across a range of industries, providing portfolio diversity and minimizing concentration risk. Our portfolio is also weighted towards businesses with limited direct exposure to sectors that have been more severely affected by the pandemic.

Furthermore, our loans to companies in more impacted industries, including those in the retail and airline sectors, are generally supported by strong collateral protections and most of our investments in these industries continue to perform well. .

Thank you, Howard. And I would also like to thank Paul for his leadership and guidance over the years.

After serving as TCPC's Controller for the past 10 years, I've had a chance to work with most of you, and I look forward to working with all of you even more closely and continuing to work with the TCPC team to deliver strong results for our shareholders. Now I will turn the call over to Paul, who will discuss our financial results in more detail.

Paul?.

Thanks, Erik. Thanks, Howard. My many congratulations to Erik on his pending appointment. I've worked alongside Erik for a decade and known to be a capable and experienced leader and well-qualified to serve as the company's CFO.

I'm grateful for the trust and opportunity to have served our shareholders since our inception, and I leave our team and the company in good hands. Now turning to our financial results for the quarter. We generated net investment income of $0.32 per share, which exceeded our dividend of $0.30 per share.

We remain committed to paying a sustainable dividend that is fully covered by net investment income as we've done every quarter since our IPO in 2012. Today, we declared a second quarter dividend of $0.30 per share. .

Thanks, Paul. The last 14 months have emphasized the key role that BDCs play in providing capital to the middle market businesses that account for roughly 1/3 of private sector GDP as well as the stability and resiliency of these businesses.

Middle market companies increasingly look to direct lenders like BlackRock for tailored financing solutions to achieve their strategic growth initiatives. We remain selective in making new investments, leveraging the strength and scale of the BlackRock platform to source unique or overlooked opportunities as we've done throughout our history. .

. Today's first question comes from Chris Kotowski with Oppenheimer..

Yes. I was wondering, in particular, on Page 18 of your presentation, you see a significant step down in the interest income and a significant step-up in dividend income? And you referenced $1.3 million of dividend income.

But I was wondering, is there some other kind of reclassification or what happened there?.

Chris, it's Raj. I'll take that. I think the biggest part of that movement is probably tied to Edmentum, where we have an equity position that's accruing. And obviously, we had the recap and the repayment of the debt in prior quarters..

And I would also -- I would say I would note that, that is -- we view it as recurring dividend income..

Right..

The $1.3 million that you referenced is recurring?.

That's most of it..

Yes. Anything tied to Edmentum, which I think is the majority of that is recurring contractual income..

Correct..

And the step down in the interest income, is that kind of just the other side of the equation? Was it a debt equity swap? Or because you -- I mean, your interest income had been pretty steady in the $40 million, $41 million area, and then it dropped, right, like $3 million or $4 million another quarter?.

No. It wasn't big part by that switch from debt-to-equity on the Edmentum position. And really no prepayment income this quarter, which does flow into interest income..

Yes. Just to be clear, it wasn't a debt equity swap within between the quarters. It was a repayment of the debt position and an ongoing income tied to the equity, which was stepped up because of the valuation upon which that transaction was closed. It wasn't a swap technically. It just was the ongoing position as equity at a higher value..

And then secondly, I think you indicated that there were no -- in the current quarter-to-date that there were no significant paydowns. I wonder, can you characterize the inflow side of the equation. Is there -- one would think the from theologic M&A statistics that it's a very active market..

Chris, thanks for the question. It is -- and just for clarity, Erik's comment was not that there weren't material prepayments, but there wasn't significant prepayment income.

Making that distinction, as I think you and others are well aware, we have episodic prepayment premiums from different investments and they range in amounts from quarter-to-quarter. And we were just identifying that we hadn't, to date, gotten significant amounts of those. Our deal activity is robust.

You can see from Q1, we added a number of investments, most of which we were the leader sole investor on, certainly in the larger ones. That continues into Q2 also, but repayments and prepayment income are both episodic. Q1 has historically been a little lighter for us, although it's been robust on the origination side. We're only 5 weeks into Q2.

So it wouldn't derive too much from 5 weeks of data..

And our next question today comes from Robert Dodd with Raymond James..

And follow-up on Chris, just to kind of drill down to the dividend income question a little first. I mean, so you had -- the control dividend was $1.7 million. You say $1.3 million of that was related to Edmentum and is recurring.

There are obviously -- so there's another $400,000, which obviously there's NEG, Iracore, couple of other control equity positions.

Was the other $400,000 from them? And is that not returning?.

Yes. We had about $0.5 million from Iracore this quarter. We also had about, I think, $800,000 from 36th Street and then some other income from Amtech dividend income this quarter, about $800 million from Amtech as well..

Understood. And how much is basically of the dividend income, you said that basically just the $1.3 million is recurring? I mean, the 36th Street....

No. -- Yes, sorry, yes. So I don't have an exact breakdown of -- but I would say most of that should be recurring. 36th Street, as you know, has a preferred rate contractual, and then we have a participation in dividend income a majority split, which has actually been -- we're well into that each quarter, and it's growing.

So that is actually partly recurring and then the variable component actually takes us up quite a bit over the recurring amount, which we like. So the majority -- I would say the majority of it is recurring, but then where it's not, we're actually seeing good, consistent variable income that has actually been growing as it ties to 36th Street..

Got it. Got it. So that's kind of recurring nonrecurring..

Recurring, nonrecurring and growing, I guess, if you will. We get the last one..

Yes. Got it. Yes. Appreciate it. And just on the portfolio overall, I mean, when it looks to be in very, very good shape. I mean, ignoring, if I can, that you're not seeing near-term repayments.

Is the -- expect -- what's the probability in your view with the hot M&A market through the rest of the year, which appears likely specific tax changes next year, that you're going to see a material acceleration in prepayment activity, whether that comes with fees or not, it's a different question, right? The prepayment activity kind of in the middle of this year? And how is your pipeline ready to cope with that? I mean, any color on that front? It looks like the market is hot and you're going to get repaid on a good number of assets?.

So maybe I'll try to start and ask others and Howard to join in on some of the perspective. But I would say that -- so let me try to break it up a little bit. The pipeline is good. It's very good, and you've seen that in the deployment for the quarter and just the early part of the next quarter.

It's hard to predict prepayment income in part because of the timing of prepayments and also the level of what gets triggered at a time of prepayment. I would also say that the portfolio has been generating good leads internally from add on opportunities. So a lot of folks right now are actually continuing to invest in our business, grow through M&A.

So it's not so much a prepayment, it's actually additional capital to pursue those initiatives, which we like, we really like those types of deals. So it's hard to predict, and I don't actually want to get in the game of predicting what happens with prepayment from repayment, but it's very episodic, as Howard said.

Over time, I expect that we'll see some more, but it's just hard to predict within each quarter. But the pipeline, I think, just to go back to my earlier point, is in good shape to handle that as it comes..

Robert, just to build on what Raj is saying, it's Howard. When we look back at our portfolio historically and TCPC has been public well over 9 years, and its predecessor funds existed privately for two decades. Every quarter, it varies. But over long periods of time, prepayments are fairly consistent.

And this includes even the very difficult periods through the great GFC you can see variance. In Q4, we had significant prepayments. Q1, they were low. But if you look at a multi-quarter period of time historically, you have quarter-to-quarter delta but over long periods of time, it tends to be fairly consistent.

And we think that's likely to continue, albeit with Raj's comment that we are really actively working with good borrowers to retain them. And historically, for a long period of time, over half our loans have been to existing borrowers and relationships.

And it's the advantage of having been doing this for a long time, having good relationships with people. And so that's something that's really important to us, and we look to do where it makes sense..

And the next question today comes from Ryan Lynch at KBW..

First one, just kind of a higher level one. You guys obviously have had seen a nice increase in your deal flow, both in the first quarter, but also a really strong start to Q2.

Can you just talk about from where you guys sit? What is kind of the main drivers that's resulting in the increase in deal flow that you guys are you able to take advantage of?.

Yes. Thanks for the question. I would say, when you exclude the sort of immediate post-COVID period, but in the current period, it's very much what we've seen historically, which is M&A, some growth capital investments.

In fact, many sectors are we're seeing -- even in the defensive areas, we're seeing good growth and initiatives, particularly around the technology space, health care and financial services. But it's -- I think it's a good use of proceeds to invest in the business or invest in the business via acquisition of another business.

And I would say those are the themes we're seeing consistently across the sector that we like and have exposure to..

Does the -- just where we are as far as coming out of a cycle, having the outlook of very strong economic growth over the coming quarters and hopefully, coming years.

Does that change the frame in which you guys are looking to deploy capital, either that be in certain sectors? Or in where you guys are looking to invest in the capital structure of the companies of the sectors that you're currently in?.

I would say marginally. I mean, we really do -- not only the history of the public company, but just the platform, in general, we've always said we're going to -- we like focusing on the defensive industries.

I think going into COVID, we didn't anticipate Covid, but we anticipate the defensive industries being able to hold up well, and generally, they did. I think at the margin, as we see growth, I wouldn't say it's going to change where we want to be in the capital structure. We may be willing to participate in that growth more actively.

It doesn't mean we're going to stretch on our loan-to-value or our attachment points, but we -- there's some evidence in growth and some reliability on the valuations and the creditworthiness it drives. So I think at the margin, we'll be open to those within the sectors that we follow.

But generally speaking, what we've been doing we feel works, where we've been investing in the cap structure feels like the right place. And I think I very much echo that we want to do more of the same with our borrowers..

And our next question today comes from Finian O'Shea with Wells Fargo..

Congratulations, Paul, and everyone else on the new beginnings. I just had a question tying a lot of this dialogue together on the origination environment, a slower repayment environment, I wanted to ask about your leverage. I know that you don't tie yourself to a number there, but we are on the higher end of where you'll typically run.

Is this a function of when combining that with an outlook for portfolio growth.

Is this a function of you have more unsecured debt and the economy is good, and there's more opportunities should we think of those things driving leverage potentially higher? Or should we think about TCP sort of relaxing on portfolio growth over the next couple of quarters?.

So Fin, thanks for the question. It's Howard. Good afternoon to you, and still good morning from us here in Santa Monica. Appreciate the question on leverage. We are very mindful of the leverage that we run on the right side of our balance sheet. We're very pleased with what we've been able to do there.

A year ago, starting to extend facilities, add more unsecured debt. We have ample liquidity on our revolvers and flexibility. And as we think about the balance sheet, we build it one loan at a time.

And it's -- we're really focused on doing good deals how do they fit in with our portfolio construction and management, and we have the flexibility to go up and down in our leverage a little bit.

And we really prefer to think about does each incremental deal fit in with the portfolio well or not as opposed to does this add just a small increment of additional leverage on it. And as long as we're within our band of safety and comfort, which we're well within that. We just received favorable treatment from both rating agencies earlier this year.

We are comfortable letting the leverage go up a little bit or come down as it did for a number of the last quarters as opposed to focusing on that as a singular issue. And our goal is to provide good solutions to our borrowers, have good loans on the books.

And not get overly concerned with whether the leverage attachment point is moving up or down a little bit as long as it stays within in our comfort risk range, and we are well within that..

Okay. And was there any -- I haven't looked at the latest rating agency review.

Is there any change in their sort of target guidelines on your maintaining investment grade?.

No. I mean, this is Paul. Our last conversations with them have all been very positive. They're seeing the way we're tracking against their metrics from all -- everything I could tell is strong and positive and lot of confidence in our rating going forward. They have their own view is on the sector as a whole.

But on us, they've both been very positive, and we're grateful for that..

And our next question today comes from Kevin Fultz with JMP Securities..

Most of my questions have been answered already, but I just have one follow-up on prepayments. I know we're talking about a 5-week period with possibly some visibility beyond that.

But would you say the cadence of prepayments quarter-to-date is similar to what you saw in the first quarter?.

It's really too early to make that assessment. If you look at our prepayments, Q1 versus Q4, there's a big difference. They were much larger in Q4. And year-end has its own pattern, Q1 has it to pattern, but I don't -- wouldn't derive a whole lot from that other than the fact that it's a 13-week period in any given quarter.

And in a few weeks, sometimes you can have loans. We had a loan last year that we thought were going to pay off 3 quarters in a row. They kept taking it up and there kept being issues, technical issues. And so it was a larger loan. And that's the kind of thing that happens in these portfolios. It's very normative.

And at this point, we were simply highlighting the fact that we hadn't seen the significant prepayment income because we do from time to time, have quarters where it's more significant. But this quarter-to-date, we haven't yet seen much of it..

And our next question today comes from Christopher Nolan with Ladenburg Thalmann..

First, I want to say, congratulations to both Paul and Erik. Paul, it's a pleasure working with you. And Erik, I am looking forward to working with you in the future. Most of my questions have been asked and answered, except there is one that we're talking -- we're hearing more and more about economic inflation starting to creep in.

It's already affecting the economy. And looking at the Q, roughly 3/4 of your adjustments at fair value, use an income approach using a discount rate. Now I know that according to the Q, if interest rates were to go up, your net investment income benefits.

But what happens to your book value per share? I mean is it impacted? And if so, how much do you think from, let's say, 50 bp movement?.

We have the interest rate sensitivity on there. And of course, that's tied to LIBOR. And over time, we will see a transition away from LIBOR. And I would just note that the interest rate changes that everybody is so focused on are more in the treasury market than in the LIBOR market. And so I'd keep that in mind.

But we have granular disclosure on what we would expect there with respect to interest rates..

Yes I just add -- sorry, Yes, I was going to add that because most of our portfolio is floating rate, it's unlikely that it would have a significant effect on valuations. It's really more driven by changes in spreads versus LIBOR changes since it is mostly floating rate..

Well, again, my concern is more about how your valuations happen because if interest rates go up and you're using a discount rate, normally, that discount rate will go up, and that would impact the fair value of your investments..

But yes, I think what we're saying is if the interest rates went up, the reference rate went up, and it was actually tied to LIBOR as floating rate assets, the overall rate on the loans would also go up. And so I think that mitigates that difference between the valuation rate and what the loan rate is.

But I think it also -- just speaking practically, if things went up gradually, I don't see that being a big shot to the system because the asset side and the liability side, the rates will just progressively move. If it was a sudden dramatic move in rates, perhaps that's different, something along the lines of what happened in COVID.

But again, that's just -- it's hard to predict a shock to the system. But I think any gradual moves would allow us to match it on the asset side..

And Chris, we've been using -- we use third-party valuations for almost our entire portfolio every quarter. And we've been using this process going back decades. It's very robust. And you can actually see historically, I mean, we have had rate movement. We have had LIBOR go up and down over the last 5 years, in fact.

And certainly, the last 8 or 9 coming out of the global financial crisis and you can see quarter-over-quarter, the impacts on our books.

And I think as both Erik and Raj are pointing out, if you're getting a move in LIBOR itself, we'd expect the spreads to move in the way they have historically probably and you can see how that flows through in our books. And it's -- there's a lot of precedent for..

Yes. And just as a punch line, we actually welcome higher rates. We said that the last time rates were on the downward trend, I think, again, on the asset side, that's something in terms of the underwriting environment would be welcome to us..

Ladies and gentlemen, this concludes your question-and-answer session. I'll turn the call back over to Howard Levkowitz for any final remarks..

Thanks. We appreciate your questions and our dialogue today. I'd like to thank all of our shareholders for your confidence and your continued support. I'd also like to thank our experienced and talented team of professionals at BlackRock TCP Capital Corp. for your continued hard work and dedication thanks for joining us. This concludes today's call..

Thank you, sir. You may now disconnect your lines, and have a wonderful day..