BlackRock TCP Capital: Ought to You Seize This 12.8% Yield For 2024? (NASDAQ:TCPC)

Enterprise improvement corporations have had an incredible 2023 with the VanEck BDC Revenue ETF (BIZD) up 25% year-to-date on a complete return foundation. The US financial system continues to file wholesome GDP figures and low unemployment, set throughout the wrapper of rates of interest at highs of 5.25% to five.50%. This has constructed a golden period for personal credit score. BlackRock TCP Capital (NASDAQ:TCPC) has confronted extra headwinds, with its widespread fairness up 2.25% on a complete return foundation this yr to replicate internet asset worth that has dipped for 2 consecutive quarters towards a broader NAV downtrend since 2021. That is as TCPC final declared a quarterly money dividend of $0.34 per share, left unchanged sequentially, for an 11.8% annualized dividend yield. There’s additionally a $0.25 per share particular dividend fee set to be paid.

TCPC’s fiscal 2023 third quarter NAV got here in at $735 million, $12.72 per share, and that was a ten% fall over its year-ago comp and a 22 cents per share dip sequentially. The continued decline means uncertainty and has pushed the widespread fairness to commerce at a ten% low cost to NAV. This low cost has persevered regardless of a $50 million share repurchase plan that didn’t purchase any of TCPC’s shares through the third quarter regardless of the low cost to NAV and towards an funding grade “BBB-” credit standing from Fitch.

TCPC gives a double-digit dividend yield to revenue traders from an investment-grade steadiness sheet however NAV weak spot has meant a flatlining of whole funding returns this yr. For sure traders, the dividend is all that issues with the safety of their principal funding forming a secondary goal. As some BDCs can obtain each aims, TCPC is a much less compelling purchase.

Credit score Underwriting High quality And Fee-In-Type

Santa Monica-based TCPC focuses on senior secured lending to middle-market corporations. Its whole portfolio had a good worth of $1.6 billion throughout 143 portfolio corporations on the finish of the third quarter. This was 76% invested in first lien senior secured debt with a smaller 13% second lien publicity and round 11% of the portfolio allotted to fairness. The credit score portfolio had a 14.1% weighted common efficient yield, up a considerable 280 foundation factors from 11.3% within the year-ago quarter. It was additionally 95% constructed from floating fee loans.

Third quarter whole funding revenue of $54.2 million grew by 12.4% over its year-ago comp and beat consensus estimates by $1.55 million as TCPC’s floating fee positioning helped enhance curiosity revenue. Fee-in-kind revenue at $3.5 million was 6.48% of whole funding revenue, up 220 foundation factors from 4.28% within the year-ago comp. Loans to 3 portfolio corporations, totaling 1.1% of total investments at honest worth, have been on non-accrual on the finish of the third quarter. These non-accruals represented 1.7% of the portfolio at value.

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Web Asset Worth, Leverage, And Curiosity Fee Cuts

The NAV dip was led by unrealized markdowns of $0.27 per share on six positions. This countered a internet funding revenue that at $0.49 per share grew by 17% enhance year-over-year for 144% base dividend protection. The rise of PIK revenue may imply greater mortgage non-accruals in future quarters, with non-accrual loans a yr in the past at simply 0.3% of TCPC’s portfolio at honest worth. TCPC additionally does have a better debt-to-equity ratio than the BDC friends closest to its market cap, however 1.3x remains to be broadly at a degree of consolation.

TCPC is about to merge with BlackRock Capital Funding (BKCC), one other BDC linked to BlackRock (BLK) early subsequent yr. The consolidated entity ought to profit from decrease operational bills and a decrease base administration charge fee. Whether or not NAV recovers within the fourth quarter will rely upon whether or not TCPC decides to pay out one other particular dividend. 2024 gives a fabric step change within the present financial zeitgeist. The Fed’s December dot plot confirmed three rate of interest cuts of a minimum of 75 foundation factors subsequent yr, an end result that may dampen internet funding revenue development for BDCs.

The market expectations are for 150 foundation factors of rate of interest cuts, with the CME FedWatch Device displaying the present base expectations for subsequent yr is for charges to be at 3.75% to 4.00% on the finish of 2024.

Rate of interest cuts are in fact not 100% sure subsequent yr, with present disruption to international transport within the Panama Canal and the Suez Canal threatening to pose some inflationary stress in the event that they persist longer than 1 / 4. TCPC is a maintain. I might be inclined to contemplate the place for a purchase if the NAV per share began to extend.