BlackRock TCP Capital - Q4 2025

Transcript

Operator (participant)

Ladies and gentlemen, good afternoon. Welcome, everyone, to the BlackRock TCP Capital Corp. fourth 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 star followed by one on your telephone keypad. I will repeat these instructions before we begin the Q&A session. Now, I would like to turn the call over to Alex Dole, a member of the BlackRock TCP Capital Corp. Investor Relations team. Alex, please go ahead.

Alex Dole (Investor Relations Team Member)

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. Actual results could differ materially from those projected. For more information, please refer to the risk factors discussed in our most recently filed report on Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. 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 full year ended December 31st, 2025 and posted a supplemental earnings presentation on 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-K, which was filed with the SEC earlier today. Now, I will turn the call over to our Chairman, CEO, and Co-CIO, Phil Tseng.

Phil Tseng (Chairman, CEO, and Co-CIO)

Thank you, Alex. Thank you to our investors and analysts for joining us today. I'll begin with an overview of our fourth quarter and full year 2025 performance. Our President, Jason Mehring, will provide details on our portfolio and investment activity. Erik Cuellar, our CFO, will review our financial results. I'll provide closing comments before we open the call up for your questions. We are also joined today by Dan Worrell, our Co-CIO, who will be available to answer questions. Since we pre-announced our preliminary fourth quarter results on January 23rd, I will focus my remarks on providing more detail on the results and the key factors behind our performance. I'll begin with an overview of our financial results. Full year 2025 adjusted NII was $1.22 per share, compared to $1.52 in 2024.

Annualized NII ROE for the year was 12.3% compared to 14.5% in 2024. Adjusted NII was $0.25 per share in the fourth quarter compared to $0.30 per share last quarter, and $0.36 per share for the fourth quarter of 2024. The decline in NII primarily reflects the impact of portfolio markdowns and non-accruals, as well as lower base rates and tighter spreads year-over-year. Fourth quarter NII includes the benefit of a voluntary waiver by our advisor of one-third of the base management fee, which added approximately $0.02 per share.

As of December 31, 2025, non-accrual debt investments represented 4% of the portfolio at fair market value and 9.7% at cost, compared to 5.6% at fair market value and 14.4% at cost for the fourth quarter of 2024. NAV declined 19% to $7.07 per share as of December 31, 2025 from $8.71 as of September 30, in line with the midpoint of the range we previously provided on January 23. The portfolio markdowns for the quarter largely reflect issuer-specific developments during the period. Six portfolio companies contributed approximately 67% or $1.11 per share of the NAV decline. Now, I'll provide details on these six investments.

Our investment in Edmentum, an educational technology business, is comprised entirely of preferred and common equity, making it inherently sensitive to changes in enterprise value. Edmentum's valuation declined as a result of overall underperformance in the fourth quarter and lower anticipated future growth. This markdown accounted for 23% or $0.38 per share of the NAV decline for the quarter. Razor and SellerX are Amazon aggregators that have been restructured previously and continued to underperform during the quarter, resulting in further reduction to their outlooks. Razor contributed $0.24 per share or 15% of the NAV decline, and we have now fully written our position down to zero. SellerX contributed $0.22 per share or 13% of the NAV decline.

On Renovo, as discussed on our last earnings call, we moved forward with writing down our investment in the fourth quarter. This negatively impacted NAV by $0.15 per share in line with the expectations we communicated previously. Hylan, a provider of telecom and wireless engineering and construction services, which was also previously restructured. Due to ongoing underperformance in this quarter as well as liquidity concerns, we marked down this position, which includes both debt and equity. This resulted in a $0.06 per share impact to NAV. Last, we marked down our position in InMobi, a digital advertising company. Our remaining exposure consisted solely of warrants for equity that we retained after the company fully repaid its term loan.

Based on InMobi's underperformance in the fourth quarter and an associated impact on the company's outlook, we reduced the valuation of this position, resulting in a $0.06 per share impact to NAV. Looking at the reduction in NAV for the quarter more broadly, approximately 91% was from investments that we underwrote in 2021 or earlier. Certain of the companies, including Amazon aggregators and e-learning platforms, benefited from high levels of pandemic era demand, but have since seen results soften. All of these positions were underwritten in a significantly lower base rate environment and have faced challenges adjusting to sustained higher interest rates. Regarding our challenged investments, we continue to work diligently with our borrowers, their sponsors, and creditors to optimize recovery values, including pursuing restructurings and other transaction-driven outcomes when appropriate. I'll share an update on capital allocation, starting with our dividend.

Our board declared our first quarter dividend of $0.17 per share payable on March 31, 2026, to shareholders of record on March 17, 2026. As we have said before, our goal is to maintain a dividend that is both sustainable and covered by NII. As part of our commitment to supporting our shareholders, we repurchased 515,869 shares of TCPC stock during the fourth quarter at a weighted average price of $5.84 per share. We also purchased an additional 233,541 shares after quarter end at a weighted average share price of $5.50 per share. Now I'll turn the call over to Jason to discuss our portfolio as well as our recent investment activity.

Jason Mehring (President)

Thanks, Phil. Welcome everyone. I'll begin with an overview of our portfolio composition. At year-end, our portfolio had a fair market value of $1.5 billion invested across 141 companies in more than 20 industry sectors with an average position size of $10.9 million. 92.4% of our portfolio was invested in senior secured loans, all of which were floating rate. 7.5% was in equity investments. Our largest investment based on fair value represented 7.2% of our portfolio. Our five largest investments accounted for 23.1%. Investment income was distributed broadly across our diverse portfolio, with more than 75% of our portfolio companies each contributing less than 1%.

During 2025, the average size of our investments in new portfolio companies was $5.8 million, compared to an $11.7 million average position size at the end of last year, demonstrating our ongoing effort to reduce concentration risk. All new portfolio company investments during 2025 were in first lien loans, bringing total portfolio exposure to first lien loans to 87.4% on a fair value basis, up from 83.6% last year. At the end of the fourth quarter, the weighted average effective yield of our portfolio was 11.1% compared to 11.5% last quarter. Investments during the quarter had a weighted average yield of 9.7%, while those we exited had a weighted average yield of 11.1%. Current yields reflect lower base rates and spread compression during the period.

In the fourth quarter, in line with our strategy, we deployed $35 million into senior secured loans across five new and three existing portfolio companies. Our largest new investment was a four and a half million dollar first lien term loan to a highly scaled wealth management platform with a focus on high net worth individuals. This financing was made in connection with a recapitalization where BlackRock Private Financing Solutions, or PFS, was the second largest lender in a $2 billion credit facility. The PFS platform has been a lender to this business since early 2024. The opportunity was a natural fit for TCPC, given our past success investing in the wealth management sector. In addition to attractive industry fundamentals, we were drawn to the company's high client retention rate, strong management team, and brand recognition.

Our second largest investment was a $4 million first lien loan to Coalfire, a leading cybersecurity services and solutions provider. This investment was part of a $375 million first lien financing in which BlackRock PFS provided approximately 30% of the facility. We believe Coalfire is well positioned to benefit from increasing cybersecurity regulation and complexity. Given our focus on direct origination and borrower relationships, incumbency continues to be an important competitive edge for TCPC, and during 2025, 65.4% of our deployments came from existing portfolio companies. We continue to find opportunities within our portfolio where our deep relationships and industry expertise help as we evaluate risk. Paydowns this quarter were $80.7 million compared to $140 million in the prior quarter.

Before I turn the call over to Erik, I want to briefly comment on the software sector, which has been the subject of considerable interest among investors and the press. While public equities in this sector are experiencing a valuation reset following a long upward run, we haven't seen that widely translate into lower operating results in our portfolio companies, although we will continue to monitor developments going forward. In addition, we believe software is not monolithic as some segments are fundamentally more resilient than others. For some time, we have considered the potential for AI disruption in our underwriting of potential software investments, and we have sought to continue to actively pursue businesses where we believe AI is more likely to positively augment a company's offering rather than displace it. Now I'll turn the call over to Erik, who will discuss our financial results, capital, and liquidity positioning.

Erik Cuellar (CFO)

Thank you, Jason. I will begin with a review of our financial results for the fourth quarter and year-ended December 31st, 2025. 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-K. Gross investment income for the fourth quarter was $0.52 per share. This included recurring cash interest of $0.41, non-recurring income of $0.01, recurring discount and fee amortization of $0.02, PIK income of $0.06, and dividend income of $0.02 per share.

PIK interest income for the quarter was 10.9% of total investment income, up from 9.5% last quarter and included no new names. Operating expenses for the fourth quarter were $0.25 per share, including $0.18 per share of interest and other debt expenses. As of December 31, 2025, our cumulative total return did not exceed the total return hurdle, and therefore no incentive compensation was accrued for the fourth quarter. Additionally, as Phil mentioned, we waived a portion of our base management fee again this quarter. Net realized losses for the quarter were $73.9 million or $0.87 per share, with Anacomp and Astra being the most significant portfolio company contributors. Net unrealized losses were $66.5 million or $0.78 per share, primarily due to the unrealized markdowns on the six investments Phil discussed earlier.

The net decrease in net assets for the quarter was $118.3 million or $1.39 per share. I'll discuss our balance sheet and liquidity positioning, which remains solid. Total liquidity at year-end was $570.2 million, including $482.8 million in available borrowings and $61.1 million of cash. The weighted average interest rate on debt outstanding at year-end was 4.9%, down from 5.0% at the end of the third quarter. Unfunded loan commitments represented 8.4% of our $1.5 billion investment portfolio or $129.2 million, including $53.7 million in revolver commitments.

net regulatory leverage was 1.41x at year-end compared to 1.2x at the end of the third quarter, resulting in a total debt-to-equity leverage ratio of 1.74x. Subsequent to year-end, our net regulatory leverage ratio has improved to 1.34x as a result of paydowns. We expect to reduce leverage further over time as we exit additional investments. On February 9, 2026, we paid down the entire $325 million principal amount of our 2026 unsecured notes, resulting in current liquidity of approximately $290.8 million. Our diverse leverage program now includes three low-cost credit facilities, an unsecured note issuance, and an SBA program. I will turn the call back to Phil for his closing remarks.

Phil Tseng (Chairman, CEO, and Co-CIO)

Thanks, Erik. While the write-downs in the fourth quarter were disappointing, we continue to actively manage our investment portfolio with the goal of seeking to maximize recoveries and reposition our portfolio to deliver attractive returns to our shareholders over time. Our highest near-term priority is to improve the credit quality of our investment portfolio by working diligently to resolve challenged credits. At the same time, we continue to implement the refined investment strategy we set forth last year.

This includes seeking to, one, deploy capital selectively into senior secured first lien loans where we are a lender of influence. Two, build a well-diversified portfolio in terms of industry sectors and investment size to reduce concentration risk. Three, fully leverage the unparalleled resources of BlackRock's platform. There is work to be done, but we're confident in our strategy. As Jason mentioned, in 2025, we increased first lien investments to 87.4% of the portfolio on a fair value basis, up from 83.6% last year. In addition, we improved our portfolio diversification by reducing the average size of new investments made in 2025 to $5.8 million each, or 38 basis points, compared to the $11.7 million average position size at the end of 2024.

We are proud to be part of BlackRock and believe the substantial resources of this industry-leading platform will support our efforts to reposition our portfolio and enhance our capabilities. We are already seeing the benefits of an expanded pipeline of investment opportunities that supports our objective of deploying capital very selectively into what we believe are high-quality investments that align with our investment strategy. I want to thank our investors for your continued support as we reposition our portfolio. Now I'll turn the call back to the operator for questions.

Operator (participant)

Thank you. To ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. Our first question comes from Robert Dodd from Raymond James. Your line is now open, Robert. Please go ahead.

Robert Dodd (Director)

Good morning or afternoon, wherever we are. I appreciate all the color you gave about the individual businesses, and obviously you've discussed kind of the new allocation efforts going forward. At what point, and this is really a question for the board rather than you, to be fair, but at what point does it make sense to take maybe more aggressive overall strategic adjustments to the BDC rather than continue in, you know, the current efforts? I mean, it shrunk, you know, leverage is up. If you buy back stock, leverage will go up even more unless you shrink the portfolio. There's a lot of issues that are gonna take a... even [audio distortion] best efforts, and I applaud them, and I think you're putting in those best efforts, it's gonna take a long time to turn this business around. At what point does it make sense to do something more aggressive on the strategic front?

Phil Tseng (Chairman, CEO, and Co-CIO)

Yeah. Thanks, Robert. Appreciate the question. You know, we continually evaluate ways to optimize returns for the shareholders, and at this time, we believe the best path forward is to continue to focus on improving the credit quality of the portfolio and executing on the investment strategy that we've been discussing. You know, this includes an ongoing rotation of the portfolio into first lien loans, which we've made progress on. It's up to 87.4% now, versus 83.6% a year ago. Also increasing portfolio diversification, which as you know, has been an area that's been suboptimal and causing some of the credit losses so far.

We've made progress on that front as well, where the average size of new investments have decreased to about $5.8 million per position or about 38 basis points. Of course, you know, we're working on continuing to leverage the broader resources that BlackRock's platform has to offer, which has been yielding some benefits as you heard from the prepared remarks on a couple of the new investments that we put into the portfolio this past quarter.

Robert Dodd (Director)

I appreciate that, Phil. Thank you. Now going on to the portfolio assets. I mean, several of them, as you mentioned, had been previously restructured. This is not a theme just in your portfolio. We've seen several other assets at other BDCs this quarter and in more recent quarters that have been previously restructured and are back on non-accrual or back getting marked downs. How should we take that or how should investors take that in terms of whether the last year, few years, it looks like restructurings seem to stick less often than maybe was the case if we go back further. That's just a sense, right?

I mean, what's your view on that on when you do the initial restructuring on an asset, do you need to be more aggressive on that, maybe equitize more of the debt or if you can take the keys quicker or what is it? I mean, again, this is not just assets in your book, it's elsewhere, but, you know, obviously you've had a fair number of them. What's your take on how restructurings need to be done going forward?

Phil Tseng (Chairman, CEO, and Co-CIO)

Yeah. Restructurings, you know, they can play out in several different ways. The road to recovery as we've discussed on past calls are not always linear. They're rarely linear, so it's hard to predict when they may recover.

These businesses oftentimes recover into a, from a capital structure standpoint, you know, with a loan and equity component. Equity investments, as you know, are more sensitive to enterprise value changes, you know, just given that they're at the bottom of the capital stack. Whereas, you know, whereas the debt is obviously more insulated from enterprise value changes. You know, we think, Robert, we have a robust process in place, certainly bringing to bear the resources of the broader BlackRock platform to actively manage these challenged investments. I appreciate your concern around, you know, when we can call bottoms on some of these restructurings. It's challenging.

Robert Dodd (Director)

That's it for me. Thank you.

Operator (participant)

Thank you. Our next question comes from Finian O'Shea from Wells Fargo. Your line is now open. Please go ahead.

Finian O'Shea (Director and Senior Equity Research Analyst)

Hey, everyone. Afternoon. Just to piggyback on the first topic with Robert. listening to the issuer-specific developments, and I appreciate those, but they just don't sound like that big of changes in the context of their outstanding underperformance. In the history of BDCs, these NAV drawdowns do happen from time to time, but I can't remember another Friday night 8-K. The question is there sort of more to the story, perhaps a change in personnel, a change in procedure on the valuation team that was brought to the board and led them to rethink and, you know, push this out there?

Jason Mehring (President)

Hey, Finian, it's Jason. Thanks for the question. You know, there hasn't been any sort of change to our valuation policy. You know, as I think we've talked about before, you know, our end of quarter process includes a pretty granular review of each portfolio company, and that methodology does include, obviously, third-party valuation services and resources from within the BlackRock PFS platform. I think that's all remained consistent. I do think that when you look at the overall write-downs in the quarter, they were concentrated fairly heavily among those six names that we'd outlined, which were about two-thirds of the drop in NAV. I think that those names, generally speaking, had a, an equity orientation, which obviously, as everybody knows, is more volatile and is fundamentally more sensitive to changes in underlying performance.

We obviously didn't delineate, you know, specific, you know, performance-level detail when we were outlining the businesses that we talked about. It's safe to say that the inputs and just sort of the factors related to the business performance, industry outlook, et cetera, moved in a way that had, you know, an accumulative basis and more material impact on NAV for the quarter.

Finian O'Shea (Director and Senior Equity Research Analyst)

Is the I guess not a change in. It sounds like go forward, we're not gonna 8-K all the time when the equity market moves. It sounds like maybe less valuation, but more, yeah, these six names had, you know, just the straw that broke the camel's back kind of thing, idiosyncratic event that forced your hand to reassess the valuation. That's very one-off. This is like the one 8-K that will ever happen under those circumstances.

Jason Mehring (President)

Listen, it's obviously difficult to predict the future, I think there were a unique collection of factors that led to a more material markdown in the aggregate for the quarter, which is why we saw fit to release the 8-K when we did in January, to make sure that the market was aware. To your point, it's not something that we've seen on a regular basis. There were, again, idiosyncratic factors that happened to occur in unison, which drove a lot of that swing. Again, we've referenced those six names. Again, the process is the same and, you know, we'll continue to consider the need to disclose things on an 8-K basis if and when they arise.

Finian O'Shea (Director and Senior Equity Research Analyst)

Appreciate it. Thanks.

Jason Mehring (President)

Thanks, Finian.

Operator (participant)

Thank you. As a reminder to ask a question, please press star followed by one on your telephone keypad now. We will now pause for any questions to be registered. We currently have no further questions. I would like to hand back to Phil Tseng for any closing remarks.

Phil Tseng (Chairman, CEO, and Co-CIO)

Thanks, operator. In closing, I want to thank you all for joining our call today. I'd also like to thank our team for their continued hard work and dedication for TCPC. As always, please reach out with any questions. Thank you.

Operator (participant)

Thank you. This now concludes today's call. Thank you all for joining. You may now disconnect your lines.