As we’ve noted in other recent articles, Business Development Companies, known as BDCs, offer the retail investor exposure to privately held firms, which often are funded by venture capital firms.
BlackRock TCP Capital Corp. (TCPC) is a BDC specializing in direct equity and debt investments in middle-market, senior secured loans, junior loans, originated loans, mezzanine, senior debt instruments, bonds, and secondary-market investments. It seeks to invest in the United States. The fund typically invests between $10M and $35M in companies with enterprise values between $100M and $1,500M. It prefers to make equity investments in companies for an ownership stake (TCPC site).
BDCs got crushed in the early 2020 COVID Crash, and TCPC was no exception. However, since we began coverage in July 2020, it has had a total return of 35%:
It has bounced back 196% from its 52-week low of ~$4.00, and has outperformed the benchmark Wells Fargo Business Development Company ETN – BDCS, over the past month, quarter, year to date, and in 2020.
It has also outperformed the S&P 500 over the past month and quarter, but still lags it over the past year and year to date:
Its $1.6B portfolio is comprised of 82% 1st lien assets, with 92% at floating rates. However, 79% of those floating rate assets have rate floors, which limits exposure to any further declines in interest rates. Total debt positions represented ~93% of the investment portfolio at fair value, and equity positions, including equity interests in portfolios of debt and lease assets, represented ~7%, as of 9/30/20.
One source of strength for TCPC’s portfolio is its diversity – the overwhelming majority of its portfolio companies contribute 2% or less to overall income:
TCPC’s biggest industry concentration is still Internet Software & Services, 12.3%, followed by Diversified Financial Services, at 11.6%. It looks well diversified, but it does have limited exposure to Automobiles, 4.5%, Airlines, 3.1%, and Hotels & Restaurants, 2.2%. Its loans to companies in more pandemic-impacted industries, such as retail and airlines, are generally supported by strong collateral protections.
As of 9/3020, total non-accruals were only 0.6% of the portfolio at fair value.
Management already declared the Q4 ’20 distribution of $.30. They cut the quarterly dividend for the 1st time in TCPC’s history in August, dropping the September payout to $.30 from the previous $.36, which it had maintained since Q2 2013.
At $11.89, TCPC yields 10.09%, and will go ex-dividend on 12/16/20. It goes ex-dividend and pays in a March/June/September/December schedule.
Its trailing distribution coverage was 1.13X, based upon net investment income, NII/share. Unlike many other BDCs, which rely on realized gains to cover their dividends, TCPC has a long history of covering them with net investment income:
NAV/share improved by 4% in Q3 ’20, to $12.71, vs. $12.21 as of 6/30/20, while NII/share was similar, $.35 vs. $.36 in Q2 ’20. Total investment income was down by -5% sequentially.
TCPC’s biggest markdowns came in Q1 ’20, when unrealized and realized gains were -$91.5M. They’ve since turned positive, however, in Q2 and Q3 2020.
Like other BDCs, the pandemic lockdowns have pressured TCPC’s 2020 earnings thus far – Q1-Q3 2020 year-over-year comps show -12% negative growth in total investment income and -12.7% growth in NII. NII/share was down -11.38%.
Profitability & Leverage:
TCPC’s ROA, ROE and EBIT margin all look better than BDC industry averages, whereas its Debt/NAV leverage is higher.
However, its interest coverage ratio continued to improve in Q3 ’20, coming in at 4.29X, while its Assets/Debt ratio was steady, at 1.81X:
Debt & Liquidity:
As of 9/30/20, TCPC’s available liquidity was ~$253M, comprised of ~$223.9M in available capacity, and $35.4M in cash and cash equivalents. The earliest maturity is March 2022, when $139M in convertible notes come due.
At $11.89, TCPC has a -6.45% discount to its 9/30/20 NAV/share of $12.71. It looks cheaper than BDC industry averages on several bases, including P/Book, P/NII per share, and P/Sales, while having a slightly higher yield.
After its big run up in price in November, TCPC is now above analysts’ average $11.21 price target.
If you’re interested in owning TCPC, but you want a cheaper entry price, there are some thinly traded options available. This May 2021 cash secured put uses the $10.00 put strike, and has a bid of $.45, giving you a breakeven of $9.55, which is 6.8% below the lowest price target of $10.25.
Conversely, if you want a bit of a hedge, TCPC’s February $12.50 call strike pays $.25, nearly equal to its $.30 quarterly dividend.
The upside risk is that TCPC may rise above the $12.50 price strike, which will limit your capital gain participation to $.61/share.
You can see more details for both of these trades in our Covered Calls Table and our Cash Secured Puts Table.
All tables furnished by DoubleDividendStocks.com, unless otherwise noted.
Our Marketplace service, Hidden Dividend Stocks Plus, focuses on undercovered, undervalued income vehicles, and special high yield situations.
We scour the US and world markets to find solid income opportunities with dividend yields ranging from 5% to 10%-plus, backed by strong earnings. We publish exclusive articles each week with investing ideas for the HDS+ site that you won’t see anywhere else.
We offer a range of income vehicles, including high yield stocks and bonds, preferred stocks, select REIT’s, and CEF’s, many of which are selling below their book values or redemption values. Our latest buyout success story has a 40%-plus total return.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in TCPC over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: We may initiate a bullish put position in TCPC.
Our DoubleDividendStocks.com service features options selling for dividend stocks. It’s a separate service from our Seeking Alpha Hidden Dividend Stocks Plus service.
Disclaimer: This article was written for informational purposes only, and is not intended as personal investment advice. Please practice due diligence before investing in any investment vehicle mentioned in this article.