TCP Capital: Preliminary Financial Estimates Published
On October 30, 2017 TCP Capital (TCPC) released some preliminary financial results for the IIIQ 2017. Here are the details; analysis of how the third quarter estimates compare to prior numbers and our view about TCPC’s likely credit performance and dividend sustainability a few days in advance of the quarterly reveal.
TCPC estimates Net Investment Income before Incentive Fees to clock in at $0.46-$0.48 per share for the IIIQ 2017.
After Incentive Fees, the Net Investment Income Per Share should range between $0.37 and $0.39.
Furthermore, TCPC projects NAV Per Share will be between $14.91 and $14.93.
The press release makes very clear that the numbers given are just estimates and investors should not place undue reliance on them.
The earnings numbers are EXACTLY the same as those estimated six months before for the quarter ended March 31.
NAV Per Share, though, was projected in a slightly wider band of $14.89 to $14.95.
When the actual March results came out, the gross Net Investment Income Per Share was $0.47, and the number after Incentive Fees $0.39.
However, the June results (for which there does not seem to have been an estimate for) were different.
Gross NII Per Share was $0.54 and the Net Investment Income Per Share $0.43, buoyed by much higher pre-payment income than usual.
At that point, NAV Per Share ended at $15.04.
Thus, the numbers suggest IIIQ 2017 results will be materially down – both in earnings and book value terms – from the IIQ.
Focusing on the Net Investment Income After Incentive Fees – which is the BDC standard – TCPC will be down by $0.04-$0.06 per share.
That’s as much as a 14% decrease from quarter to quarter.
NAV, though, will only shift by less than 1%.
The BDC Reporter – and most of the analysts – are unlikely to be greatly moved by the downward shift in earnings.
The BDC prepared investors last quarter by pointing out on its Conference Call that $0.15 per share “came from prepayment income, including both prepayment fees and unamortized OID”.
The “normal” range is $0.05-$0.09 per share.
Our common sense guess is that TCPC’s prepayments reverted to the mean and brought down Net Investment Income this quarter.
The BDC should still be generating Net Investment Income Per Share in excess of its distribution.
Moreover – for better or worse depending on one’s view of these things – TCPC has a small mountain of undistributed Taxable Income available to offset any shortfall in income should one occur.[The BDC Reporter is NOT a Big Fan of how some BDCs deliberately under-distribute income to shareholders in order to smooth out and extend pay-outs over time, but most shareholders appreciate the apparent solidity of the dividend].
We’re Not Done Yet
We do have a couple of concerns about TCPC going into the IIIQ 2017 results which the preliminary estimates press release does not address.
First, there is credit quality.
TCPC does not have an unblemished record in this regard.
In the first 6 months of the year alone ($6.9mn) of Realized Losses have been booked.
Even more importantly going forward, there are a few questionable credits amongst the nicely diversified 94 company portfolio.
What To Look Out For
We’ll be looking for an update on Green Biologics LLC, which only began shipping its first products in 2016. TCPC paid $272,807 for its warrants, but values them at $1,455.
That causes us to place the nearly $15mn in debt, with an interest rate of 12.0%, to Green Biologics on our Watch List.
Ditto for TCPC’s investment in Avanti Communications, which includes $7.8mn in debt.
We’ve written extensively about this borrower – which TCPC shares with Great Elm Corporation. Here’s a useful overview from June 2017.
By no means is Avanti’s eventual success guaranteed or even very likely, but we doubt there will be any great revelations this quarter.
Also on our Watch List are $26.3mn in various loans to RM Opco LLC, or Real Mex, a restaurant company that has been under-performing.
Real Mex has had a revolving door where CEOs are concerned only a few years after exiting from bankruptcy.
Much needs to be fixed in its Mexican restaurant chains, which include El Torito, Chevys Fresh Mex and Acapulco.
A new CFO was added in the summer.
The restaurant sector has had many trouble spots of late, so an update on how Real Mex is performing will be invaluable.
Last But Not The Least
Finally (for the purpose of this article) there is Kawa Solar Holdings Energy, which TCPC has $29mn in loans to.
This solar company was already in trouble last quarter and being restructured even as TCPC held its most recent Conference Call.
Most recently we’ve heard that an Asian subsidiary of Kawa was sold to a buyer group consisting of Goldman Sachs and..Tennenbaum Capital Partners, the Investment Advisor of TCPC.
(This is similar to the situation at Avanti where TCPC related entities are both in the debt and equity despite obvious potential conflicts of interest. Given that leveraged lending has become a virtually unregulated sector – outside of the money center banks who literally have regulators sitting in their offices – these issues rarely ever get aired, except in passing).
Judging from what we heard on the Conference Call, we wouldn’t be surprised if TCPC recorded another Realized Loss on some portion of its Kawa debt and that the nature of the investment changed.
The second – not unrelated item – is the increasing proportion of TCPC’s investment income which is coming from Pay-In-Kind or other non-cash sources.
In the first 6 months of 2017, $7mn of $45mn of Net Investment Income was paid in PIK. That’s 15.5% of the total and more than twice the number a year before.
Technically speaking, TCPC’s cash Net Investment Income fell short of the dividend “liability” in the first 6 months of the year.
TCPC is not typically a lender who gets paid in non-cash form.
Our experience is that an increase in PIK in BDCs like this one is usually a sign of credit stress as lenders bend over backwards to keep borrowers solvent.
It’s no coincidence that some of the PIK payers on TCPC’s books are Avanti Communications and Kawa Solar Holdings and Edmentum Ultimate Holdings, all on our Watch List.
In our view, TCPC shareholders should spend their time focused on what’s happening to these and other problem credits rather than worrying/taking comfort from out of context changes in projected Net Investment Income and book value.
We have TCPC’s Dividend Outlook for the next 12 months as Unchanged.
The BDC has maintained an unaltered $0.36 a quarter pay-out for 17 quarters in a row, an impressive feat when compared to multiple dividend reducers.
The preliminary results did nothing to alter our view.
Nonetheless, the BDC Reporter remembers that no BDC is immune from credit troubles and – as your Mother warned – nothing lasts forever.
Our nearly impossible self imposed task is to give our readers a heads up when that time might be coming.
We’ll revisit the subject after the TCPC third quarter earnings come calling.Already a Member? Log In
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