BlackRock TCP Capital - Earnings Call - Q2 2025

Transcript

Speaker 6

Good afternoon and welcome everyone to BlackRock TCP Capital Corp.'s second quarter earnings call. Today's conference call is being recorded for replay purposes. During the presentation, all participants will be in a listen-only mode. A question and answer session will follow the company's formal remarks. To ask a question, please press the star key followed by the digit 1. I will repeat these instructions before we begin the Q and A session. Now I would like to turn the call over to Alex Doll, a member of BlackRock TCP Capital Corp.'s Investor Relations team. Alex, please proceed.

Speaker 3

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 the time of such statements and are not guarantees of future performance. Forward-looking statements involve risks and uncertainties, and actual results could differ materially from those projected. Any forward-looking statements made on this call are made as of today and are subject to change without notice. Additionally, certain information discussed and presented may have been derived from third-party sources and has not been independently verified. Accordingly, we make no representation or warranty with respect to such information. Earlier today, we issued our earnings release for the second quarter ended June 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, Philip M. Tseng.

Speaker 4

Thank you, Alex, and thanks to all of our investors and analysts for joining us today. I'll begin today's call with a high-level overview of our performance for the second quarter. Our President, Jason A. Mehring, will then provide details on our portfolio and investment activity, and Erik L. Cuellar, our CFO, will review our financial results. Following Erik's remarks and before we open the call up to questions, I'll provide an update on BlackRock's recent acquisition of HPS Investment Partners and the strategic benefits it brings to TCPC. We're also joined today by Dan Worrell, our Co-CIO, who will be available to answer questions. Now I'll begin with an overview of our second quarter performance. We made meaningful progress in reducing non-accruals, which declined to 3.7% of the portfolio's fair market value, down from 4.4% last quarter and 5.6% at the end of 2024.

That said, NAV declined during the quarter primarily due to markdowns on previously restructured portfolio companies rather than any new credit issues. Turning to more detail on non-accruals, we removed four large investments from non-accrual status this quarter, including InMoment, Celerex, Lithium, and Renovo. We are pleased with this steady improvement. However, progress is not linear, and situations can remain dynamic as the companies implement their turnaround plans. We also added four investments to non-accrual. These additions, Thrasio, Fishbowl, Brook & Whittle, and 4840, fall into two main categories. In the first category, we have companies that have been restructured and are continuing to demonstrate uneven performance. This includes Thrasio, an Amazon Aggregator, and Fishbowl, a marketing platform that helps restaurants drive guest engagement. In our experience, restructured companies often experience some level of volatility in their financial results as they work towards long-term recovery.

As you may recall, Thrasio was restructured in early 2024. We placed the company on non-accrual this quarter following a recent agreement to extend PIK interest for another 12 months. This extension provides management with the time needed to continue executing on key strategic initiatives, including streamlining the brand portfolio and diversifying beyond Amazon. It also allows the company to navigate macro uncertainties, including tariff policy changes and potential softening in consumer confidence. Despite the PIC extension, we are encouraged that Thrasio's performance continues to improve with the support of several standout brands that are delivering strong results in their respective categories. Fishbowl, which underwent a restructuring in 2022, continues to make progress on its turnaround strategy with improved bookings. Despite the bookings momentum, near-term liquidity remains constrained. As a result, we decided to place the credit on non-accrual. However, Fishbowl continues to meet its interest obligations through PIK interest.

The second category of underperformance includes companies that are being impacted by lower demand, principally due to shifts in consumer purchasing behavior. One example is 4840, a shipping and packaging service provider which we discussed last quarter. In light of 4840's recent performance and outlook, we decided to place it on non-accrual. In a similar situation, Brook & Whittle, a sustainable packaging and label manufacturer, has felt the effect of customers turning down to lower-cost providers to reduce their expenses. We are actively engaged with the management teams of each one of these portfolio companies as they work to address operational challenges and improve performance. In the second quarter, we marked down our position in AutoAlert, an automotive data analytics platform, as part of a restructuring. In March of 2023, we assumed control of the company and since then its performance has improved.

Even so, valuations for similar companies in the sector have recently come down and our third-party valuation providers adjusted AutoAlert's valuation to reflect those broader market trends. We also substantially marked up several portfolio companies this quarter. Our largest gain was on Domo, a publicly traded cloud software company. We marked this investment up following a better-than-expected earnings report in the first quarter and are confident that Domo is on the right track for continued strong performance. Now turning to our dividend, our board declared a second quarter dividend of $0.25 and a special dividend of $0.04 per share, both of which are payable on September 30 to shareholders of record on September 16. As part of our commitment to supporting our shareholders, we also repurchased 40,830 shares of TCPC stock this quarter.

Now I'll turn the call over to Jason to address our portfolio in more detail as well as our recent investment activity.

Speaker 1

Thanks Phil and welcome everyone. During the second quarter, we remain focused on selectively deploying capital into opportunities directly aligned with our stated investment strategy. As a reminder, this includes investing in the core middle market, maintaining a well-diversified portfolio, prioritizing first lien loans, and leveraging the extensive resources of the BlackRock platform to optimize our opportunity set. Since the start of the year, we've invested $178 million in 13 new and 11 existing portfolio companies. Our average position size this year has been granular at $7.4 million, lower than in prior years, in line with our overall diversification strategy. All of these investments refer to lean models and we have continued to focus on companies supported by long-term growth drivers with strong fundamentals that exhibit economic resilience.

In addition, repeat borrowers remain an important source of originations and existing portfolio companies have accounted for 51% of our investment dollars year to date. Now I'll discuss three investments we made this quarter to illustrate how we're executing our strategy, particularly our emphasis on acting as a lender of influence. In each transaction, BlackRock served as either the sole or lead lender. First, we invested $4.1 million as part of $160 million first lien financing for The Difference Card or TDC. TDC enables small and mid-sized businesses to lower health care expenses by pairing high deductible health plans with employer-funded reimbursement programs, allowing them to offer competitive coverage at a reduced cost. We were drawn to TDC's 20+ year operating history, high customer retention rates, and ability to deliver meaningful savings to employers.

The company benefits from a predictable recurring revenue model with healthy margins and low capital needs resulting in strong cash flow generation. In addition, the transaction was structured with downside protection and supported by a conservative loan-to-value profile. This investment aligns with our strategy of backing resilient, capital-efficient businesses in essential, less cyclical sectors like health care, and our platform was able to serve as the lead lender in this transaction. Second, we invested $6.9 million as part of a BlackRock-led $150 million first lien credit facility in Dragos. A leader in protecting operational technology and industrial control systems from cyber attacks, Dragos serves critical infrastructure sectors such as oil and gas and utilities, where its deeply embedded platform provides real-time threat detection and risk mitigation. Dragos has a large addressable market and is poised to benefit from favorable regulatory and secular tailwinds.

We invested in Dragos due to its strong market position, mission-critical offering with high switching costs, impressive annual top-line growth of more than 50% and improving profitability. This deal highlights our emphasis on originating senior secured loans to resilient high-growth businesses in less cyclical sectors and restructured with strong downside protection. Third, we invested $10 million as part of a $205 million first lien credit facility in Brown & Settle, a leader in site development for the construction of large commercial buildings such as data centers. Brown & Settle is well positioned for sustained growth supported by a fully contracted backlog, strong relationships with blue chip general contractors, and a significant footprint in Northern Virginia, one of the world's largest and fastest-growing data center hubs. This investment also reflects our focus on originating senior secured loans to middle market borrowers in sectors that are benefiting from long-term tailwinds.

BlackRock was the sole provider of the credit facility, which includes a $185 million term loan and a $20 million revolver. This investment was sourced directly from the sponsor and structured to support Brown & Settle's continued growth while providing downside lender protection. At the end of the quarter, our portfolio had a fair market value of approximately $1.8 billion invested across 153 companies in more than 20 industry sectors. Our average investment size was $11.7 million, or 65 basis points of the portfolio. The vast majority, or 89% of that portfolio, was invested in senior secured debt, all of which was in floating-rate instruments. Investment income remains broadly distributed across our diverse portfolio, with 76% of portfolio companies each contributing less than 1% of total income. The weighted average annual effective yield of our portfolio was 12% in the second quarter compared to 12.2% in the prior quarter.

New investments had a weighted average yield of 10.8%, while those we exited carried an average yield of 10.5%. Now I'll turn the call over to Erik, who will walk through our financial results and capital and liquidity decisions.

Speaker 2

Thank you, Jason. I will begin with a review of our financial results for the second 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. Second quarter adjusted net investment income was $0.31 per share and gross investment income was $0.61 per share in the second quarter. This compares to $0.36 and $0.66 per share, respectively, in the first quarter. This quarter's gross investment income included recurring cash interest of $0.48 per share, non-recurring income of $0.01, recurring discount and fee amortization of $0.03, PIK income of $0.07, and dividend income of $0.02 per share.

PIK interest income represented 11.4% of total investment income, down from 11.6% last quarter. Operating expenses for the second quarter were $0.28 per share, including $0.20 per share of interest and other debt expenses. As of June 30, 2025, our cumulative total return did not exceed the total return hurdle and therefore no incentive compensation was accrued for the second quarter. Additionally, we waived a portion of our base management fee again this quarter in line with our advisor's decision to waive one third of our base management fee for the first three quarters of 2025. Net realized losses for the quarter were approximately $66 million or $0.78 per share, driven by the restructuring of our investments in Celerex, Khoros, InMoment, and Renovo. These losses were already substantially reflected in last quarter's NAV.

Net unrealized gains were $23 million or $0.27 per share, primarily reflecting the reversal of previously recognized unrealized losses from the restructuring of the investments I just mentioned, partially offset by unrealized losses in AutoAlert and Brook & Whittle. The net decrease in net assets for the quarter was $16 million or $0.19 per share. As of June 30, eight portfolio companies were on non-accrual status, representing 3.7% of the portfolio at fair value and 10.4% at cost. This is down from 4.4% and 12.6%, respectively, as of March 31. The remainder of our portfolio is performing well. 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 position. Our balance sheet remains strong.

Total liquidity at quarter end was $566 million, including $455 million of available leverage and $107 million in cash. Unfunded loan commitments represented 8.6% of our $1.8 billion investment portfolio, or approximately $154 million, including $64 million in revolver commitments. Net regulatory leverage was 1.28 times at quarter end, compared to 1.13 times in Q1, which was slightly above our target range of 0.9 times to 1.2 times. The increase was primarily due to the timing of new investments late in the quarter, a delay in expected repayments, and a decline in NAV. Based on our current outlook, we expect third quarter leverage to return to approximately the levels reported in Q1. Our diversified leverage program includes 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%, unchanged from the prior quarter.

Subsequent to quarter end, we repaid the remaining $92 million outstanding of our 2025 notes, the first step in addressing our upcoming maturities. At the end of July, we extended the maturity of our $200 million funding to credit facility to support future investment activity. Looking ahead, we are taking proactive steps to manage our capital structure, including evaluating the best alternatives to refinance our 2026 notes. Now I'll turn the call back to Phil for his closing remarks.

Speaker 4

Thank you, Erik. Now I will provide an update on BlackRock's recently completed acquisition of HPS Investment Partners and the benefits it provides TCPC. Our entire team is very excited to join forces with HPS. This acquisition positions BlackRock to capitalize on the enormous opportunities that lie ahead in private credit. To fully capture those, BlackRock and HPS created a new platform called Private Financing Solutions, or PFS. PFS combines the firm's private credit and GP/LP solutions and liquid and private credit CLO businesses into one single integrated platform. With more than $280 billion in total assets under management, PFS is well positioned to provide both public and private income solutions. We expect TCPC to benefit from the PFS platform in several ways. First, BlackRock is centralizing its private investment, sourcing, and origination teams within PFS to maximize collaboration and effectiveness.

TCPC will continue to directly source investments and will also leverage PFS's extensive deal sourcing and origination capabilities to expand our pipeline. Second, the new PFS platform enhances our investment expertise and resources. With decades of experience executing thousands of successful private credit transactions spanning performing and special situations across market cycles, we are already benefiting from the team's deep experience, knowledge, and insights. We recently welcomed three senior credit investors from HPS to our investment committee and expect our close collaboration with the broader PFS team will enhance our sourcing, underwriting, and portfolio management capabilities now and over the long term. Third, BlackRock is now positioned as one of a few firms that can lead large private credit transactions. We're excited about the opportunity to participate in larger transactions where we are a lender of influence and that offer compelling risk-adjusted returns.

In closing, while we are disappointed by the additional markdowns to our portfolio this quarter, we made progress in reducing non-accruals and in sourcing attractive investments that position our portfolio to return to historical performance levels. Our entire team continues to focus on diligently working through portfolio challenges to deliver the best possible outcomes for our shareholders. I want to thank our investors and analysts for your continued patience and support. We appreciate it and will continue to keep you apprised of our progress. I'll now turn the call to the operator to open the call for questions.

Speaker 6

Thank you. We will now begin the question and answer session. As a reminder, if you would like to ask a question today, please do so now by pressing STAR followed by the number one on your telephone keypad. If you change your mind or you feel like your question has already been answered, you can press STAR followed by 2 to withdraw yourself from the queue. We will just take a brief pause to allow the questions to come in. As a reminder, if you would like to ask a question today, please do so now by pressing STAR followed by the number one on your telephone keypad. Our first question today comes from Paul Conrad Johnson with Keefe, Bruyette & Woods. Please go ahead. Paul.

Good afternoon. Thanks for taking my questions. I guess you outlined some of the changes that have been made with the Private Financing Solutions kind of reorganization within BlackRock. You added a few new people at the investment committee. How does that change the investment process going forward? Aside from the benefits that you're trying to pull from the broader BlackRock and HPS sort of combined platform now, is there anything notable that you guys are implementing with the new investment committee members?

Speaker 4

Hey Paul, thanks for the question. I think it's an important one to understand, you know, what the combined process and resourcing looks like for sure. Certainly, changes as we described in the call on the investment process first will be on the front end. On the origination and sourcing side, we described that the Private Financing Solutions (PFS) platform will be centralizing all originations. The idea there is to leverage the depth of our resources with both private equity sponsors, advisors, intermediaries, banks, and so on to ensure that the best middle market deals do get to the right homes. That's absolutely critical and we're actually seeing in the past five weeks that we've been together, have started seeing deals that we otherwise wouldn't have seen. I think that's certainly a positive with respect to our investment process.

We are continuing to do our normal process around our investment committee, but we have our portfolio management process as well that is being absolutely supplemented with the engagement of the HPS Investment Partners professionals, both those that are formally on our investment committee but also much broader than that. That's obviously very welcomed. We do think that our experience in the market in direct lending has been vast. Layering onto that the vast experience of HPS Investment Partners and their decades of experience across direct lending and other credit strategies certainly is accretive to us. I'll also add that HPS Investment Partners resources do come with depth on the restructuring side and portfolio management side. There's a substantial group within HPS Investment Partners that's now within the PFS platform that we have started to tap into.

In fact, we've had a number of these restructuring professionals engaged in our portfolio companies already and those are your financial, legal restructuring professionals but also post-restructuring, operational improvement, private equity type restructuring professionals. We've already started engaging with them. They're on a number of our portfolio companies. We have had those resources as part of BlackRock but certainly enhancing our capabilities there is hopefully accretive to recovering value for some of our portfolio companies.

Yeah, I appreciate that, Phil, and I guess kind of tagging on to this, touched on some of this here in your response. BlackRock is scaling pretty fast, obviously with the HPS acquisition here, and still seems like there's a lot of secular growth here left in the industry. I imagine BlackRock's going to be looking to capture that.

But.

For TCPC, how do you ensure through this period of growth, I think the sector will continue to experience, continues to get the proper access and proper resources from the platform and avoid kind of falling too low in priority or falling off the advisors' priority list in terms of management? How do you guys ensure that TCPC continues to get access to all these resources?

Yeah, that's a great question. I think that folks can be assured that TCPC is an important strategic priority and overall priority for the PFS platform in BlackRock. Keep in mind, TCPC is the only publicly traded BDC on the PFS platform. There are certainly other vehicles and pools of capital within PFS direct lending, but TCPC is important and, based on our engagement and involvement, like I said with the new committee members, with the engagement outside of the committee members across our investment process, whether it's origination, underwriting, portfolio management, or restructuring, the engagement's deep. I would certainly attest to the importance of TCPC to HPS leadership as well as BlackRock. Appreciate that, thanks.

The last question was just on AutoAlert, just on the markdown this quarter. Did you say the company was performing well? It sounds like the mark this quarter was driven more due to comps, or was there any sort of kind of performance-related mark in that asset as well?

Yeah, our comment on AutoAlert was that the performance has improved since we restructured and took over the company. It has made some improvements certainly on both revenue and EBITDA. The valuation decline was more driven by the comps, market multiples, and value associated with these automotive data analytics providers. Thank you. That's all for me. Thanks, Paul.

Speaker 6

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

Hi guys. On one of your comments, obviously you want to be a lender of influence, which obviously I think we. Why you want that now as a whole platform, the Private Financing Solutions (PFS) platform could obviously be a lender of influence without TCPC necessarily being a big piece of any given loan. How should we think about that? Is TCPC maybe going to take more diversified, smaller bite sizes but PFS is going to be a lender of influence in the transaction, or is it that you want TCPC itself to be that lender of influence, in which case the bite sizes might be a little larger than they would be if it.

Speaker 2

Was more platform to event influence?

Speaker 4

Hey, thanks Robert. Yeah, you saw in the last couple quarters employment, our average ticket size coming out of TCPC was around $11 million plus or minus. Clearly, TCPC in and of itself leading transactions, and TCPC, as we've always kind of spoken about, gets the benefit of being part of a larger platform and getting allocations of these deals similar to many of our peers in the BDC world. It is no different now with the addition of HPS or broader PFS. There will be deals that we are now able to speak for the entirety of, certainly lead, co-lead, and at least be a lender of influence. I think the percentage of those deals will increase, and TCPC will get allocations to those deals. Just in looking at the last couple quarters, in and of itself that search has been happening already.

Of the deals we've done in the last two quarters, I think I would say at least 90% of them have been sole or co-lead.

Speaker 1

Got it, got it. Thank you.

Thank you. One more second on the viewpoint, the write down. In a lot of cases we're already previously restructured assets and it's not just in your portfolio, we're seeing it elsewhere where restructured assets are going through in some cases a second round of problems. Is there a theme here where maybe first restructurings aren't as aggressive as maybe they should be? This is more a question about the restructuring market, the workout approach, because it does seem to, again, not just you or not just TCPC, where we're seeing more of these things kind of revisit, write downs or monocle or whatever, even after going through the process once. It's happening more often to assets that have been through the process once than potentially to new assets that are.

Any thoughts there on like, do restructurings and adjustments, do they need to be more aggressive than they have been?

Speaker 4

I think it's difficult to say, Robert. I think it's a case by case basis. I think there are market conditions or economic conditions or macro. The embarker environment certainly has something to do with it as well. Right. If the higher rate environment stays higher for longer, does that impact demand or does inflation impact customer demand and so on? I think some of these estimates or forecasts in the macro side can have an impact on companies just like they do on new underwrite. I think hindsight's always 20/20. Restructured businesses are in challenging situations when they are going through restructuring, and as you know, the recoveries and performances of these businesses are not linear in terms of their recovery. We're working extremely hard with the management teams of each one of these businesses to address the operational challenges and work to improve performance.

I think over time, we've been on the right side of those outcomes, and we're hoping to deliver on that again.

Got it.

Speaker 2

Thank you.

Speaker 4

Thank you.

Speaker 6

Thank you. As a final reminder, if you would like to ask any questions today, please do so now by pressing star, followed by the number one on your telephone keypad. At this time, we have no further questions registered. I'll hand the call back to Philip M. Tseng for closing comments.

Speaker 4

I'd like to thank our team for their continued efforts and our investors and our analysts for your support. Please contact us with any questions and have a great day. Thank you all.

Speaker 6

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