2023-11-20 08:05:31 ET
Summary
- BlackRock TCP Capital is a high-yielding BDC income stock that doesn't get as much attention as its more popular peers.
- TCPC is externally managed by BlackRock, giving it access to extensive information and resources.
- TCPC has a strong track record of creating wealth for shareholders and is well-positioned to capitalize on potential distress in capital markets.
BDCs can be a great place for high yield, especially during inflationary time when investors need higher income to support everyday living expenses. While the big names like Ares Capital ( ARCC ) and Blue Owl Capital Corporation ( OBDC ) capture plenty of attention there’s also value to be had in lesser followed names.
This brings me to BlackRock TCP Capital ( TCPC ), which I last covered here with a Strong Buy rating back in September of last year, noting its low non-accrual rate and discount to book value. The stock hasn’t done too shabby for investors since then, giving a 1.2% return in price, and a 13.5% total return when dividends are included. In this article, I revisit TCPC and discuss why income investors shouldn’t overlook this high-yielding income stock.
Why TCPC?
BlackRock TCP Capital is a BDC that’s externally managed by advisor BlackRock ( BLK ), one of the largest asset managers around with $84 billion in AUM across private debt classes globally. This gives TCPC a leg-up in terms of getting broad access to information across BLK’s extensive alternative asset management platform.
It's also worth noting that TCPC carries a fee-friendly structure, with the base management fee being 1.25% on up to 200% of the net asset value, and 1% on net assets that exceed 200% of net asset value of TCPC debt to equity, although the latter scenario is unlikely to happen considering that BDCs are bound to a statutory debt to equity ratio of less than 200%. This compares favorably to the 1.5% that most large externally-managed BDCs charge, including industry bellwether Ares Capital.
TCPC has done a fairly good job of creating wealth for shareholders, with an annualized return on invested assets of 10.3% since inception. An investment in TCPC has resulted in nearly a 100% return since its inception in 2012. This is based on a NAV per share of just under $15 at IPO, and a combined NAV/share and cumulative dividends paid of $28.97 as of the end of September, as shown below.
At present, TCPC’s portfolio carries a $1.6 billion fair value and 89% of which is invested in senior secured debt and 76% of the portfolio is first lien secured debt, which puts TCPC at the top of the capital stack should a borrower default on those loans. TCPC is also well diversified with low exposure to cyclical industries. Its top segments are internet software, financial and consumer services, software, and professional services representing just over half of the portfolio, as shown below.
Meanwhile, TCPC continues to produce solid results, with a weighted average yield on debt of 14% during the third quarter, sitting higher than the 12-13% of most BDCs in the current high interest rate environment. While investments on non-accrual are low, at 1.1% of portfolio fair value representing just 3 companies, this percentage is higher than the 0.3% from when I last visited the stock after its Q2 2022 results. This appears to be a reflection of how higher interest rates have pressured a few of TCPC’s borrowers, with one of the three non-accruals being added during the most recent ended quarter.
Importantly, TCPC continues to out-earn its shareholder distribution of $0.44 per share, with NII per share of $0.49 during Q3. This represents 17% YoY NII/share growth, driven by TCPC’s high exposure to floating rate debt investments. As shown below, this helps to offset a part of the $0.27 net unrealized loss during the quarter. It's worth noting that unrealized losses are due to mark-to-market losses as private markets bake in additional risks to debt instruments in a higher interest rate environment, and unlike realized losses, unrealized losses can be reversed should the market environment improve.
Looking ahead, TCPC is well-positioned to capitalize on potential distress in capital markets should a recession appear on the horizon. In such a scenario, TCPC could get favorable pricing on debt from leveraged players willing to sell, given TCPC’s strong liquidity of $353 million and debt to equity ratio of 1.0x, sitting far below the 2.0x statutory limit. Notably, TCPC also carries an investment grade credit rating of Baa3 from Moody’s.
TCPC could also benefit from its recently announced merger with affiliate BDC, BlackRock Capital Investment Corp. ( BKCC ), as this combines two BDCs with similar portfolios and is expected to create value through cost synergies and be accretive to net investment income. This is reminiscent of a similar merger between Oaktree Specialty Lending ( OCSL ) and Oaktree Strategic Income, which resulted in less management overlap and resulted in a simpler company structure.
Risks to TCPC include macroeconomic uncertainty as it relates to high interest rates, since higher rates pressure borrowers , especially if the economy falls into a recession. Moreover, TCPC carries merger integration risk, as BKCC has a higher non-accrual rate of 3.4% compared to TCPC’s 1.1%, as mentioned earlier. While BKCC’s higher non-accrual rate is already reflected by its lower share price, it’s worth monitoring whether if BKCC’s non-accrual rate goes materially higher.
All in all, I see value in TCPC’s current price of $11.59, representing a 9% discount to its NAV/share of $12.72. This has driven up TCPC’s dividend yield to an attractive 11.7%, especially considering the aforementioned buffer between the distribution and NII. This puts TCPC’s valuation at the middle of its trading range over the past 12 months and as shown below, TCPC trades cheaper than that of peers OCSL, ARCC, and OBDC despite having a competitive fee structure and low non-accrual rate.
Investor Takeaway
In conclusion, BlackRock TCP Capital offers investors an attractive income opportunity with its high yield and strong dividend coverage. The company is well-positioned to benefit from potential distress in the credit markets with its strong balance sheet and has a solid track record of creating value for shareholders. While there are risks to consider with potential for a recession, TCPC's current valuation with discount to NAV makes it an appealing investment option for those seeking high income from their portfolios. Considering the potential for an economic slowdown, I'm downgrading from a 'Strong Buy' to a 'Buy' rating on TCPC stock.
For further details see:
12%-Yielding BlackRock TCP Capital: Don't Overlook This High Income BDC