NEWS

SANTA MONICA, Calif. & NEW YORK–(BUSINESS WIRE)– BlackRock TCP Capital Corp. (“TCPC”) (NASDAQ: TCPC) and BlackRock Capital Investment Corporation (“BCIC”) (NASDAQ: BKCC) today announced that they have entered into definitive agreement pursuant to which BCIC will merge with and into a wholly-owned, indirect subsidiary of TCPC, subject to shareholder approval and customary closing conditions. Following the merger, TCPC will continue to trade on the Nasdaq Global Select Market under the ticker symbol “TCPC” and the surviving entity will continue as a subsidiary of TCPC.

In connection with and in support of the transaction, TCPC’s advisor, a wholly-owned, indirect subsidiary of
BlackRock, Inc., has agreed to the following shareholder-friendly actions: (1) a reduction in the base management
fee rate from 1.50% to 1.25% on assets equal to or below 200% of the net asset value of TCPC (for the avoidance of doubt, the base management fee rate on assets that exceed 200% of the net asset value of TCPC would remain 1.00%) with no change to the basis of the calculation; (2) a waiver of all or a portion of its advisory fees to the extent the adjusted net investment income of TCPC on a per-share basis (determined by dividing the adjusted net investment income of TCPC by the weighted average outstanding shares of TCPC during the relevant quarter) is less than $0.32 per share in any of the first four (4) fiscal quarters ending after the closing of the transaction (the first of which will be the quarter in which the closing occurs unless it is the last day of the quarter) to the extent there are sufficient advisory fees to cover such deficit; and (3) coverage of 50% of merger transaction costs for both TCPC and BCIC, up to a combined cap of $6 million (or, if the closing of the transaction does not occur because the requisite approval of TCPC or BCIC shareholders was not obtained, up to a combined cap of $3 million).

For the full press release, click here.

ANALYSIS

Getting In Line

BlackRock has followed in the footsteps of several other asset managers with multiple public and/or non-traded BDCs and decided on a merger of the funds under its control.

Oaktree recently engineered a similar combination of its two public BDC entities.

Survivor

TCPC will be the surviving entity given its larger size and better lifetime track record.

This essentially means that the management team scooped up years ago when BlackRock acquired what was then Tennenbaum Capital will be leading the enlarged TCPC.

(Except for former Tennenbaum Managing Partner Howard Levkowitz who moved on to other endeavors sometime after the acquisition).

There will be a conference call on September 7th to discuss the merger in greater detail and to prepare the ground for shareholder approvals.

Looking Good

At first glance, it appears that TCPC shareholders will mostly benefit from the increased size of the combined portfolios and the lowered management fee.

We calculate the latter will benefit shareholders to the tune of $5.6mn annually.

We expect there will also be savings in general and administrative expenses.

Shareholders, though, are on the hook for about $3mn of merger transaction costs.

Net Book Value

Both BDCs are trading below net book value per share: TCPC just (5%) and BKCC (18%).

BKCC ended at $5.30 and TCPC at $12.29.

Both are up in the after-hours on September 6 on the news.

VIEWS

At Last

We’ve long expected this move by BlackRock, which makes sense from a number of perspectives.

At the moment in most of the BDC space, “bigger is better” and this helps, even though the combined entities remain well below the size of the sector’s behemoths.

Long Time Coming

It has taken years for BlackRock to “clean up” BKCC – whose stock price dropped as much as (80%) over its history:

In the last couple of years, management finally turned around the portfolio, which consists principally of first-lien loans and is highly diversified.

Most Important Of All

On the credit side, there are only two companies currently on non-accrual and virtually no value involved.

The only significant non-performer is Gordon Brothers – an asset-based lender that BKCC used to own but was sold off two years ago. Only some profit participation value remains and that might yet be collected in part or in full.

Them And Us

The BDC itself indicates that 34% of its portfolio is not performing to plan. However, a recent in-depth review by the BDC Credit Reporter was relatively sanguine about the credit outlook of BKCC:

In total, we estimate BKCC is at risk of booking a further ($7mn) in losses in the future from its Important Underperformers, or (2.2%) of its net book value, or ($0.10) per share. That’s not nothing but is far less than the  (43%) drop in NAVPS recorded by the BKCC in the prior 5 years, reflecting the failure of prior strategies.

BKCC is not out of the credit woods but its new approach of taking bite-sized amounts of transactions should minimize losses even if the number of troubled companies increases further. Furthermore, there’s the long-term hope that Gordon Brothers will actually boost the BDC’s net assets over time, even though we’ve not yet budgeted any benefit from that source. For the moment, BKCC’s credit status and outlook – notwithstanding its own rating system – remain within “normal” levels.

BDC Credit Reporter – BlackRock Capital Investment: IIQ 2023 Credit Highlights – August 22, 2023

Not-So-Final Word

We will reserve final judgment till we listen to the conference call and read any supporting data.

At first blush, though, this seems like a good move for BlackRock and – more importantly from our perspective – the two sets of shareholders.

BlackRock, though, has not been as generous as some other managers making these sorts of combinations but they don’t have to as approval is all but guaranteed.

Just Saying

Still, we’d like to see Blackrock and many other asset managers with multi-billion dollar portfolios match Golub Capital’s (GBDC) recent reduction of its management fee to 1.0% of portfolio assets.

Golub gave the main reason for its munificence as “scale”, which TCPC is gaining here.

As the saying goes: “Just because you don’t have to do something does not mean you shouldn’t”.