BDC Update: BlackRock TCP Capital
March 21, 2024
Imperfect
Once in a while BDC Best Ideas lays an egg. Just a few weeks ago, when scratching around for candidates for short-term price appreciation amongst under-valued BDC stocks, we plumped for BlackRock TCP Capital (TCPC). We were going on results up to the IIIQ 2023 and this is what we said:
That leaves us with MRCC, SCM, TCPC and WHF to choose from. The BDC that stands out here is Blackrock TCP Capital (TCPC). It is much larger than the rest and will soon be getting even bigger with the acquisition of its sister BDC - BlackRock Capital Investment (BKCC). Net Investment Income Per Share (NIIPS) is poised to increase in 2023 by about 50% over the 2021 level and distributions in that same period are up 41%. NAVPS has dropped a modest (1.6%) in 2023 and the value of the 3 non-performing investments held amount to only 1% of the portfolio. The BDC Credit Reporter indicates TCPC has only 4 Important Underperformers in its 143 company portfolio with a fair market value greater than $5mn. Further losses are expected but in a "normal" range.
We added the following:
We could readily see TCPC trade up to $15.00 a share - a 30% price increase - over the next year. Add to that the $1.69 potential dividend and you've got a "total return" of 45% - pretty good by anyone's reckoning. We're ducking any longer-term projection till the merger with BKCC is completed in a few weeks but we're pretty confident that investors who hold on for the long term have little to fear. All those dividends accumulating over time should almost guarantee that TCPC will generate a superior return for the "have and hold" set. Plus - for those of you who like famous brand names, you've got BlackRock as the external manager...
Rebutted
Since then, TCPC has published disappointing IVQ 2023 results, which included a (10.2%) drop in recurring earnings quarter over over and a (6.4%) decrease in Net Asset Value Per Share (NAVPS). Ouch! That's not the way you want to go just before acquiring your sister BDC and moving forward as the only Blackstone-branded public BDC out there. The BDC Reporter's credit review for the IVQ 2023 concluded by saying "It’s time for investors to be a little afraid about TCPC".
Today, making matters worse, TCPC reported its NAVPS as of March 15, 2024. This was calculated as part of the merger and gives us an early insight into what's happening to the portfolio in 2024. We were told that TCPC's NAVPS has dropped again - to $11.90, an (8%) drop. To be blunt: That's a lot. The BDC Reporter wrote an article analyzing the subject and offering up unsolicited advice to management in a free article.
Noticed
The market is well aware of TCPC's challenges and the BDC's stock price has dropped from $11.57 a share at the time of our recommendation to $10.17 as we write this, and has been as low as $9.92. There seems to be little chance that TCPC will be "trading up" to $15.00 a share any time soon. The earlier market doubts that had been reflected in its price appear to have been well founded after all.
Are We There?
We can't say if TCPC has reached some sort of bottom where its NAVPS is concerned. Even management probably does not know given that the fate of several large investment positions is up in the air. Thras.io is in bankruptcy; Securus Technologies has an only tentative plan to sort out its long-standing problems and so on.
Staying Calm And Carrying On
However, all is not lost. The bulk of the BDC's portfolio - and that of BKCC's - is performing as expected and generating a 13% plus yield. There are no liquidity concerns and the merger will shave off some costs. If we believe the analysts recurring earnings in 2024 will come to $1.72 in 2024, not so far off the $1.84 in 2023 and still better than 2022 ($1.53) and 2021 earnings ($1.26). The annualized running rate as of the last quarter of 2023 was $1.76 per share. Distributions, which totaled $1.69 in 2023, we project dropping only modestly to $1.61.
Good Things Happen To Those...
We calculate that a buy-and-hold investor who bought TCPC at its price when we recommended the stock in January will still be in the black on a "total return" basis in less than a year if the stock price does not drop any further and if distributions come in as expected. Using the projections in the Expected Return Table over the next 5 years one would still generate a robust total return of about 14.5% per annum.
Way To Go
Absent evidence that a BDC is beginning to irremediably crack up, we'd rather hold on to a wayward stock rather than book a (12%) realized loss and run for the exit. This is especially true now when - thanks to the Fed - yields are super-high and profits are robust. As we wrote in our earlier article, this one of the benefits of investing in BDCs - the constant flow of distributions even when fundamental performance is underwhelming as it is right now for TCPC. Patience is now the key to recovery.
December 15, 2022
Carrying On
We've not written about BlackRock TCP Capital (TCPC) since August 25, 2022 because performance has been in line with our projections. Now there are a couple of updates necessary and a new opportunity to mull over the long term outlook.
Dividend Coverage
Just today, the BDC announced a $0.05 special distribution for 2022, which brings the total payout in 2022 to $1.27, slightly higher than we'd predicted. TCPC remains un-generous in distributing its earnings as the analyst consensus for 2022 is for Net Investment Income Per Share (NIIPS) of $1.52. The NIIPS consensus for 2023 is $1.60, but the annualized running rate on the quarterly dividend is still only $1.28, even after a recent increase.
One More Year
We've added 2027 to our projection now that 2022 is dropping off. We still expect to see the $1.40 per annum that starts in 2023 to continue through to 2027. (Notwithstanding management's reluctance to get close to paying out all earnings, we're wondering if we may be undershooting payout expectations in 2023 when rates are expected to peak. If TCPC's annual payout reached $1.44 that would tie the 2019 level - i.e. hardly a wild eyed projection).
No Change
For the moment, though, we're sticking with $1.4000 in annual distributions over the next 5 years, which leaves room for some income to be lost to bad debts and - eventually - higher unsecured note borrowing costs. We are also sticking with a Terminal dividend multiple of 12.75x, which is based on historical performance.
Valuation Metrics
At the opening on Thursday, December 15, TCPC was at $12.54. That's a 9.0x multiple of the expected 2023 distribution and 9.9X the actual 2022 payout. The BDC trades at a greater than (10%) discount to net book value and the ROE, using the $1.40 projected payout and the $14.12 IIIQ 2022 NAV Per Share is 9.9%. Using projected earnings, the ROE is even higher: 11.3%.
Year In Review
Like most BDC stocks - and as this price chart illustrates - TCPC has had a roller coaster year, with two strong downdrafts, one full recovery and a partial one. Currently, the stock price sits (13%) off its 2022 high and 18% above the lowest price. This is a pretty typical performance for a BDC stock.
Not Good Enough
In a relative sense, TCPC's stock price has held up better than many of its peers and our expectations for dividend growth are relatively modest (10% for 2023 over 2022). The time to buy was probably in late September when TCPC reached $10.89 and the Total Return was 129%. We missed that window in our Model Portfolio and do not (yet) own this stock in Best Best Ideas. Maybe if there's a third drop...
August 25, 2022
Better
Of all the BDCs out there that have reported IIQ 2022 results, BlackRock TCP Capital (TCPC) was one of the better performers where income and earnings growth were concerned. Total investment income increased by 4% and Net Investment Income by 8% over the IQ level, even though the portfolio remained unchanged in size. Net Investment Income Per Share (NIIPS) was up 9%, to $0.37 from $0.34. See the BDC Reporter's annotation of the IIQ 2022 conference call transcript.
Higher
Some of the boost came from a one-time dividend from a portfolio company, but the principal reason was the general increase in rates that increased the portfolio yield significantly. This is just the beginning as borrower loan agreements increasingly reset at higher rates, and as the Fed keeps pushing up the reference rate. According to TCPC itself in the 10-Q, a 200 basis point increase from the June 2022 level - most of which has already occurred or is pretty much locked in for September - would add $0.42 in annual NIIPS to a BDC whose current running rate is already $1.48. Or, in other words, TCPC - without lifting a finger and assuming no benefits from new loan spreads widening or an increase in the portfolio size - could book NIIPS of $1.92 before long.
Dividend Shy
Of course, this is a phenomenon we've seen all quarter long - and which we've been counting on all year. Some of that earnings increase is already included in our 5 year outlook for the BDC, but the time has come for a re-think and an increase. However, we have to contend with a TCPC management that is loath - after having to sharply reduce its regular distribution in 2020 - to commit itself to a possibly unsustainable payout. Management does not like to even pay shareholders through "specials". Thus, despite EPS of $0.37 in IIQ 2022 and - probably- $0.40 or higher in IIIQ 2022 - TCPC's payout remains locked in at $0.30.
Alteration Made
At some time, though, TCPC will have to up its payout and we're guessing that this will be done with a regular distribution increase rather than a series of "specials". Given management's preference for holding back a good portion of earnings, we're assuming that from 2023, the quarterly payout will increase, but only to $0.35 or $1.40 annually. That's up from the $1.30 we had previously projected.
To Continue
Aggressively - because we believe rates are not going back to their prior, very low, levels - we're assuming TCPC will be able to maintain that $0.35 distribution through 2026. As a result, we're using a $1.40 payout as the dividend for the terminal value, sticking with a 12.75x multiple. This brings our Target Price to $17.85. That's quite higher than the current price at today's opening of $13.95 - 28%. Still, TCPC has traded higher in the past - back in 2014 - when earnings reached as high as $1.64 , or $0.41 a quarter. There's a good chance - thanks to Chairman Powell - TCPC could revisit those heights. If so, the stock price should follow.
Bottom Line
Besides changing the 2023-2026 annual dividend estimates, we made no other change to our model. Using our 2023 dividend estimate, the yield will be 10.0%. The "total return" over 5 years comes to 77%, or 15.4% per annum. Seeking Alpha - probably using different assumptions - calculates that TCPC's 5 year historic return is 33%. That was a time that included a descent in the stock price and the dividend cut starting in 2020.
In Demand
You might have expected the return to be higher, but TCPC is trading close to book value and only (4%) off its 52 week high. This is a popular BDC choice right now. Maybe it's the BlackRock name, even though this was an acquisition and its CEO has since departed. Maybe it's that unchanged distribution since IIIQ 2020 and the ever increasing earnings "coverage". In fact, TCPC is one of only 3 BDCs trading within 5% of their highs and 19% off its lowest point. Price-wise, in a relative sense, TCPC is not a bargain, but - if we're right on our multiple assumptions - represents a return just above the current average of the 43 BDCs we evaluate.
Not So Good
If we're wrong and TCPC only manages to maintain its current distribution, the total return we project drops sharply to 53% over 5 years. That's not terrible, but below average for the sector and offers a single digit yield of 8.6% at a time when double digit dividend yields are out there for quality players.
Important
That's why the next couple of quarters will be decisive for investors where TCPC is concerned and all eyes will be on how management addresses its dividend. The BDC Reporter will also be diving deeply into TCPC's credit status and those results might cause a re-think.