BlackRock TCP Capital Corp. Q3 FY2025 earnings call

• Progress in executing strategic priorities: resolving challenged credits, improving portfolio quality. - Investment in Renovo: early fourth quarter issues led to liquidation process, expected full write-down in Q4 2025. - Realized portfolio gain from NEP Group recapitalization. - Dividend: Q3 dividend of $0.25 per share declared, payable December 31. - Share repurchases: over 25,000 shares repurchased in Q3 and an additional 170,000 after quarter end. - In Q3, selectively deployed capital into core middle market companies, saw 20% increase in deals reviewed and 40% increase in deals advanced to screening stage. - Highlighted investments in KBRA and Syndigo, with KBRA being a major U.S. credit rating agency and Syndigo a software company.

Third quarter NAV was unchanged from the previous quarter at $8.71. Nonaccruals improved to 3.5% of the portfolio at fair market value compared to 5.6% at the end of 2024. During the quarter, sold one nonaccrual investment above valuation estimate and placed 2 smaller previously restructured investments back on nonaccrual. Investment in Renovo, representing approximately 0.7% of total investments at fair value as of September 30, is expected to be fully written down in Q4 2025, impacting NAV by ~$0.15 per share. Realized portfolio gains included NEP Group. In Q3, invested $2.4 million in KBRA as part of a $1.1 billion first lien term loan financing, and made a $5.2 million follow-on investment in Syndigo. The portfolio had a fair market value of $1.7 billion invested across 149 companies in over 20 industry sectors, with 89% in senior secured debt. Weighted average annual effective yield of the portfolio was 11.5% in Q3, down from 12% in prior quarter. Paydowns were $140 million in Q3 compared to $48 million in prior quarter.

• Expect to fully write down the Renovo investment in Q4 2025, impacting NAV by approximately $0.15 per share on a pro forma basis. - Focused on deploying capital into high-quality deals as part of the PFS platform. - Intently focused on continuing to resolve challenged positions in the portfolio and positioning TCPC to deliver strong sustainable returns to investors.

• Previously restructured investments were returned to nonaccrual status. - Investment in Renovo entered liquidation process and is expected to result in full write-down. - Concerns about deals that have been restructured coming back on nonaccrual, with no common theme identified among these cases.

Q: First, if we can discuss the -- I think at the beginning, you said there were 2 previous restructurings that were returned to NILCO. And then obviously, Renovo was restructured and is now are going to be written off. Can you give us any color on any themes here? I mean that's 3 restructurings in relatively short order that sort of didn't stick, right? So, is there any commonality between what occurred there? Are any changes that you can make? Obviously, you might not in control of all of the restructuring steps there. But any changes you can make to the restructuring process to kind of -- I mean, maybe the restructuring to be more aggressive the first time? Or just any thoughts there? I mean, 3 in short order is not great.

A: Yes. Thanks, Robert. We share your sentiments. We're obviously disappointed that deals that have been restructured do come back on. So, as you know, these are restructurings that get completed with respect to their capital structure. And then it takes time for the business itself to kind of go through its operational restructuring plan and execution. So, I think that's what we're seeing here. Credit issues or operational issues don't resolve themselves quickly, and it does take time and it's not linear. With these specifically, there's no commonality amongst these. I mean there are others, by the way, that have gone through restructurings and have come out continuing to perform and on a positive path. So, we have a number of those cases that we can talk about as well. But I would say there's no common theme amongst these 3 that went back on.

Q: Then just on the market environment and obviously, the expanded view, I mean, granularity down, like I think you said the new investments like 7.8 million positions. So that's good, right? More diversification in the portfolio. I mean, the comments that like most borrowers are still focused on lowering cost. I mean, I've heard elsewhere, right, like the M&A cycle is starting to pick up. So, I mean, are you still -- it sounds like you're still mainly experiencing refinancing activity rather than new borrower activity. I mean, how do you expect that to evolve over the next, I would say, 12 months, but that's a long time to project anything.

A: It is. So, I think your comments about seeing a lot of refinancings, that is certainly how I'd characterize deployment in the past several quarters, largely in the market as well. I think the thoughts around M&A activity picking up, we are seeing that, and we are seeing new platforms, sponsors coming in and bidding on assets and a lot of deals in the pipeline really picking up. So, I would say that's probably a leading indicator of hopefully higher volumes in the next several quarters. But in terms of actual deployments, we're seeing refinancings, incremental add-ons on our existing portfolio as being kind of the predominant source of deployment, probably closer to 50% at this point or last quarter rather. And on -- sorry on portfolio diversification is a good one. We've been -- since this management team really came in at the end of last year, we've really been focused on that portfolio diversification point so that we don't -- this portfolio doesn't fall victim to a lot of the concentration issues that it had previously. So, we've had 31 new investments this year at an average position size of $7 million to $8 million, and that's a stark contrast to how this portfolio was managed previously.

Q: And then last one, I mean, are you seeing any -- and not just in the portfolio, but more broadly, even in deals that get reviewed, are you seeing any incremental indicators of stress? I mean, obviously, there's been some headlines. You don't have exposure to that in general. But are you seeing any areas of concern either in the portfolio, obviously, but also in like deals that are coming over the desk? Is there an increasing number of like any commonality between -- about why they're being rejected by or anything like that?

A: Yes. We're certainly always focused on credit risks in the portfolio and in new deals that we evaluate every week. Some of the common themes are, of course, always focusing around more cyclical names, really trying to understand vulnerabilities to a softer cycle or softer macro environment. And then with respect to software, a lot of folks have been talking about AI, and that's real, really trying to understand -- and by the way, not just software for any other kind of business process, really trying to understand the risks around AI in terms of displacing or if that borrower has a strong competitive solution there on the AI solution themselves. So those are some of the things that we're commonly talking about. But with respect to other specific industry sectors, nothing right now that are atypical risk factors that we wouldn't otherwise be discussing. Sure, we're talking about tariffs still. We're talking about geopolitical risks in those areas, too.