TCP Capital (NASDAQ:TCPC) is a business development company that I would like to bring to my readers' attention. Until I was asked about them this morning, I was not really aware of them. But they deserve some attention, at least from my review. The stock is trading in the middle of its 52 week range (figure 1), and despite trading at a slight premium to its net asset value, I think the stock could be an attractive long-term holding in the dividend paying portion of one's portfolio given its shareholder-friendly approach. I prefer internally managed companies, versus externally, however, TCP Capital does fall in the latter camp. TCP takes a middle market approach. It invests primarily in debt of private, middle-market companies with enterprise values typically between $100 million and $1.5 billion. It primarily invests in senior debt instruments and will pump $10 million to $40 million into each investment, provided it passes TCP's rigorous lending standards.
Figure 1. 52 Week Trading Range of TCP Capital
Source: Yahoo Finance
The dividend
First let me say that like all business development companies, the yield is attractive. I like the juicy dividend that this company pays, and it tends to pays dividend every quarter, most recently being $0.36. It also pays special dividends, with two being paid in 2014. The key when investing in such a name is determining whether the dividend is sustainable, which including the special dividends in 2014, totaled $1.54, which equates to a forward yield of 9.58% based on the share price of $16.08 at the time of this writing.
Income
The company had a good fourth quarter and a strong 2014. Total investment income during Q4 2014 was $32.1 million or $0.71 per share. The company's operating expenses are a touch heavy, coming in at $9.5 million in Q4 2014, or $0.21 per share. But what I am most concerned with is net investment income. Net investment income during the fourth quarter of 2014 was $22.7 million or $0.50 per share. After adjusting for related incentive compensation and preferred dividends, net interest income was $18.0 million or $0.40 per share. This covered the dividend by $0.04. However, as a whole the company did lose money, to the tune of $16.2 million or $0.36 per share, but this was mostly due to two distressed investments that are now about off the books. For the year the company, like all BDCs has experienced top line pressure from a flattening interest rate curve. But net investment income outpaced the dividends. Net investment income was $61.5 million in 2014, or $1.56 per share (after adjusting for preferred dividends and incentive compensation).
Assets
Understanding the assets of a business development company is key. For the most part TCP Capitals assets are sound, though there have been some issues. To end 2014, the company's investment portfolio consisted of debt and equity positions in 84 companies with a value of approximately $1.15 billion. Debt positions represented approximately 97% of the portfolio, all of which were senior secured debt. Equity positions represented approximately 3% of the investment portfolio. Now although total assets grew to end the year, the total assets per share declined. Total assets were $1.206 billion to end 2014 and net assets applicable to common shareholders was $731.1 million for a net asset value per share of $15.01. This compares to total assets of $1.12 billion with $654.5 million attributable to common shareholders or $15.43 per share at the end of Q3 2014. Why the decline? Well, there was a follow-on stock offering of 5.9 million shares in November, diluting the equity, but raising needed cash.
Premium-to-book and cash position
The company's net asset value per share at December 31, 2014, was again $15.01 losing just 1% for the entire year 2014. Given the volatility in rates, this is rather stable. Thus at $16.08 the shares trade at a slight 7% premium-to-book. This premium stems from the growth the company has displayed in addition to the company being able to cover its dividends and issue special ones. The Street is valuing the company like this as it believes this growth will continue.
The company has access to liquidity as well, strengthening in particular in Q4 with its offering. To start 2015, TCP had available liquidity of approximately $254.1 million, comprised of approximately $27.3 million in cash and cash equivalents, $217.9 million in available capacity under its leverage program, and approximately $8.9 million in net outstanding settlements. I will also point out that in Q4 it expanded its TCPC Funding I, LLC credit facility by $50 million to $250 million and increased the accordion feature by $50 million to $300 million. It raised $97 million from that 5.9 million share offering (sold at a premium-to-book).
Looking ahead
I expect continued gains from this company. Its overall credit quality continues to remain strong with no loans on non-accrual as of December 31, 2014. It should be noted there is one potential loan that I have some concerns with and that is its second lien term loan to Edmentum. Management stated that it is "working hard to restructure the company's balance sheet to maximize the return on our investment." The investment is rather small, but meaningful nonetheless, with a fair value of $11.3 million. This is almost 1% of the total assets at year end, but in Q4 the company took at $10.4 million writedown. So there is a possibility this one could cause issues in 2015, but overall the portfolio is sound. I also want to address the company's energy exposure as those business development companies with heavy exposure have been crushed.
For TCP Capital, performance of direct energy investments has been sound. This sector makes up a very small, 3.6% of the portfolio. Looking ahead are these investments safe? I think so. We know that the loan to Willbros Group was repaid in full during the quarter while MD America has received a large equity commitment from its owners and management has stated that it "will use the proceeds to repay [the] term loan in full." I have some concerns with the investments in Iracore and Boomerang Tube, which require demand from the energy industry to profit. With lower prices and lower demand, their earnings have declined. However, both loans, make up less than 1% of total assets. Further they are still performing and I expect no issue from them in 2015, especially as energy prices have come off their lows.
I expect shares of this company to continue to trade at a premium, unless it is forced to put loans on non-accrual, which other than the Edmentum investment, I don't see happening. If you can get shares under $16, I think it is a bargain. I am looking for at least $1.60 in net investment income per share, factoring in the recent portfolio growth and expected investments, but think $1.65 is likely. This would be modest growth of 5.7% and is likely conservative. Should these earnings come to pass, and we will have a better picture of this likelihood in a few months, expect more special dividends. I think this is a better tactic than just raising the dividend flat out, as it gives the company financial flexibility.
Take home message
TCP is a good business development company. While it is not the strongest of the sector, it is growing its portfolio and has committed to paying not only a regular dividend but is paying special dividends where possible. It has cash and liquidity to move forward. It is successfully growing its portfolio. It is well positioned for 2015 with financial flexibility and a stronger portfolio of investments. Further, it is very shareholder-friendly. Aside from the dividends, management has just recently announced a share repurchase program where it will pick up $50 million in outstanding shares, increasing shareholder value. All things considered, I like this company and think the stock is set to move higher.
