BlackRock TCP Capital Corp. (TCPC) Earnings Call Transcript & Summary

Hello, everyone. Thank you for joining us, and welcome to the BlackRock TCP Capital Corp. Q2 2026 Earnings Call. [Operator Instructions] I will now hand the conference over to Alex tall, a member of the BlackRock TCP Capital Corp. Investor Relations team. Alex, please go ahead.

Thank you, operator. Before we begin, I will note that this conference call may contain forward-looking statements based on management's estimates and assumptions at the time such statements are made, which are not guarantees of future performance. Forward-looking statements involve risks and uncertainties, and actual results could differ materially from those projected. For more information, please refer to the risk factors discussed in our Form 10-Q in the Form 8-K filed with the SEC today, along with the associated press release. Any forward-looking statements made on this call are as of today and are subject to change without notice. Additionally, certain information gust and presented may have been derived from third-party sources and has not been independently verified. Accordingly, we make no representation or warranty with respect to such information. Before we begin, I would also like to note that today's discussion includes references to certain non-GAAP financial measures, including adjusted net investment income. As detailed in our earnings press release, adjusted net investment income excludes the amortization of the purchase accounting discount resulting from our merger with BCIC and is calculated in accordance with GAAP. A full reconciliation of adjusted net investment income to GAAP net investment income as well as other non-GAAP financial metrics in the earnings press release and 10-Q. Earlier today, we issued a press release announcing our results for the second quarter ended June 30, 2026, as well as the portfolio sale transaction we just completed. We posted a supplemental presentation with information on both to our website at www.tpcapital.com. To view the slide presentation, which we will refer to on today's call, please click the Investor Relations link and select Events and Presentations. These documents should be reviewed in conjunction with the company's Form 10-Q, which was filed with the SEC earlier today. Now I will turn the call over to our Chairman and CEO; and Co-CIO, Phil Tseng.

Thank you, Alex, and thank you to our investors and analysts for joining us. Today, I'll start with an overview of the portfolio sale transaction we announced this morning, followed by the highlights of our second quarter 2026 performance. Then Jason Mehring, our President, will cover portfolio and investment activity, and Erik Cuellar, our CFO, will walk through our financial results and our balance sheet. I'll provide closing remarks before we open the call for questions. We're also joined by Dan Worrell, our Co-CIO, who will be available for questions. Let me begin with the transaction. This is a milestone for TCPC that meaningfully accelerates the work already underway to strengthen our financial position and reshape our investment portfolio. This transaction materially lowers leverage, reduces investment position sizes and significantly enhances our investment capacity while realizing a substantial premium to the value implied by TCPC's current share price. Looking forward, it provides substantially greater financial investment and operational flexibility, creating a stronger foundation for delivering long-term shareholder value. We will step through the transaction at a high level. Additional detail can be found in the Subsequent Events Disclosure section of the 10-Q. TCPC transferred approximately $523 million of investments across 78 portfolio companies into a continuation vehicle sponsored by Pantheon. The assets sold comprised approximately 48% of the fair market value of our pre-transaction debt portfolio and have broadly similar sector, lean and credit characteristics. The assets include all collateral underlying the recently issued BlackRock DLF 2026 CLO plus additional contributed investments. TCPC retained a direct interest in substantially all of the portfolio companies, transferring on average approximately 2/3 of each investment position to the vehicle. In addition, the company retained a 5% equity interest in the continuation vehicle and TCPC's investment adviser will also act as the investment adviser for the vehicle without compensation. The continuation vehicle assumed all of the CLO liabilities. The transaction was priced at 95% of the December 31, 2025, gross fair market value of the assets sold, subject to customary adjustments, including unfunded commitments, portfolio repayments and investment income generated prior to closing and other items as more fully outlined in Appendix A of the 8-K we filed this morning. The transaction is expected to result in a NAV decline of approximately 10.4% or $0.68 per share based on June 30 our Board of Directors obtained a third-party fairness opinion from Lincoln International in connection with the transaction. The strategic impact of the transaction is substantial. The approximately $152 million of proceeds were used primarily to reduce debt. And together with deconsolidation of the CLO and post quarter end repayments, TCPC has reduced net leverage to approximately 0.4x on a pro forma basis and unfunded commitments to below $40 million, significantly improving TCPC's financial flexibility and creating substantial new investment capacity. To help evaluate the best way to use that flexibility to create further long-term shareholder value, the Board has engaged Keith, Brett, and Wood to assist with a strategic review. This review will consider a range of options, including but not limited to, reinvesting the portfolio returning capital to shareholders, pursuing strategic combinations or other corporate transactions or some combination of these options. I want to thank everyone involved in the transaction. It was a complex process and the hard work required reflects the firm's commitment to TCPC and its shareholders. With that, let me turn to our second quarter results. Apart from the transaction, we continue to make progress against our strategic priorities during the second quarter, including reducing non-accruals, strengthening the balance sheet and advancing our portfolio repositioning efforts. While quarterly NAV performance reflected issuer-specific developments and a small number of portfolio companies, broader portfolio performance was generally in line with our expectations, and we experienced strong repayment volumes. NAV, in the quarter declined approximately 2.1% to $6.58 per share, primarily reflecting developments at Pluralsight, PVC, and Zilian as well as realized losses on our exits of AutoAlert and BECOM. Non-accruals declined to 1.6% of the portfolio and fair value and 7.4% cost from 2.8% and 7.6%, respectively, at the end of the first quarter. The improvement was driven in large part by positive developments at Thrasio which repaid $22 million. We removed our remaining $3.7 million position in Thrasio for nonaccrual status as we expect this position will be paid down in full given the current health of the business. As you may recall, we restructured our investment Thrasio in early 2024, and we are pleased with this outcome, which we believe reflects the benefits of active portfolio management and patients. Repayment activity was strong in the second quarter, totaling $111.6 million in payoffs and paydowns and resulting in net repayments of $86.6 million, which advanced our portfolio repositioning efforts. In addition to Thrasio, we received repayments of $14.9 million from Starz, $13.1 million from AutoAlert and an additional $48.7 million across 5 other companies. This repayment activity also strengthened the balance sheet with net leverage declining to 1.38x at quarter end, from 1.48x at the end of the first quarter. Following the portfolio sale transaction and post quarter end repayments completed to date, net leverage is expected to decline to approximately 0.4x on a pro forma basis into less than 0.3x after additional portfolio company paydowns from transactions that have been announced. Turning to capital allocation. On July 30, 2026, our Board declared a third quarter dividend of $0.17 per share, payable on September 30 to shareholders of record as of September 16. We also repurchased 156, and 370 shares of TCPC stock during the second quarter at a weighted average price of $3.78 per share. Now I'll turn the call over to Jason to discuss the portfolio and investment activity in more detail.

Thanks, Bill, and welcome, everyone. With the portfolio sale transaction now complete, I'll review our in-quarter portfolio metrics and then highlight how the transaction and post quarter end repayments have positioned the portfolio going forward. At quarter end, the portfolio had a fair market value of $1.29 billion invested across 134 portfolio companies in 35 industry sectors with an average position size of $9.6 million. 91.5% of the portfolio was invested in senior secured loans, all of which were floating rate with the balance of the portfolio and equity. Substantially all new investments during the quarter were in first lien loans, bringing total first lien exposure to 89.8% on a fair value basis. Our largest investment based on fair value represent 8.9% of the portfolio and the 5 largest investments accounted for 27.6%, as of June 30, software represented 29.7% of the portfolio at fair value across 45 portfolio companies with approximately 97% invested in debt and 3% in equity. This software exposure decreased modestly from 30.5% across 47 companies in Q1, primarily reflecting the successful exits of Persato and Starrisk during the period. The current software portfolio was originated at a loan-to-value of approximately 26%, providing a considerable equity cushion. As we've discussed previously, we do not view software and potential AI risk as monolithic because certain segments are fundamentally more resilient than others. For some time, our underwriting focused on systems of record with proprietary data assets, and solutions that are deeply embedded in customer workflows or serve regulated end markets, which we believe are generally more insulated from AI-related disruption. In line with our focus on enhancing portfolio quality, disciplined deployment and strengthening our balance sheet. We intentionally kept investment activity limited and highly selective in the second quarter. The majority of the $25 million of capital deployed during the quarter was directed towards previously committed investments, and we added 1 new borrower. Capitalizing on incumbency remains a priority for us and we continue to find compelling investment opportunities among our existing portfolio companies where we have long-standing relationships and industry experience. As Phil mentioned, we saw meaningful payoffs and paydowns this quarter. totaling $111.6 million and resulting in net repayments of $86.6 million. Subsequent to quarter end, we also received $97.4 million in additional repayments including $55.2 million from Motive Technologies, formerly known as KeepTruckin, and $39 million from Pico quantitative trading. In addition, Domo announced that it had entered into a definitive agreement to sell substantially all of its operating businesses to progress software. We expect this will result in full repayment of $69 million debt investment when the transaction closes in the fourth quarter. This is a significant positive development in our software book and another example of our ability to create value through active engagement with our portfolio companies. Together, these developments address more than $150 million of exposure across 3 larger portfolio positions and represent meaningful progress towards reducing concentration in advancing our broader portfolio position -- repositioning efforts. We also see increasing repayment volumes as assigned to general borrower health. At the end of the second quarter, the weighted average effective yield on our portfolio was 10.5%. New investments had a weighted average yield of 9.4%, while those we exited had a weighted average yield of 10.9%. Current yields reflect lower base rates and spread compression consistent with the past several quarters. The portfolio sale transaction and post quarter end repayments have significantly reduced our leverage and unfunded commitments and increased our new investment capacity, meaningfully accelerating our ability to reposition the portfolio. On a pro forma basis, the portfolio has a fair market value of $671 million invested across 132 portfolio companies, with an average position size of approximately $5.1 million. If we include the additional investment capacity available at a modest onetime debt-to-equity ratio and assume no new software investments with that capacity Software would represent approximately 23% of the pro forma portfolio. That level would be further reduced to approximately 17% if you factor in the expected repayment of Domo. Following recent repayments and the portfolio sale transaction, we have approximately $395 million of liquidity providing significant flexibility and investment capacity as board evaluates how best to create long-term shareholder value. We continue to benefit from the capabilities of the PFS platform, which provides access to a broad opportunity set, allowing us to remain highly selective and focused on granular, high-quality first lien investments. Now I'll turn the call over to Erik to discuss our financial results, capital and liquidity position.

Thank you, Jason. I'll begin with a review of our financial results for the second quarter of 2026. Total investment income was $40.0 million or $0.48 per share. This included recurring cash interest income of $0.35 per share, nonrecurring income of $0.04 per share, recurring discount and fee amortization of $0.02 per share, PIK income of $0.04 per share and dividend income of $0.03 per share. PIK income represented 7.6% of total investment income down from 8.5% in Q1. Operating expenses for the second quarter were $21.9 million or $0.26 per share including $15.0 million or $0.18 per share of interest and other debt expenses. Net investment income was $18.1 million or $0.22 per share, and adjusted net investment income was $7.5 million or $0.21 per share. As of June 30, 2026, our cumulative total return did not exceed the total return hurdle and therefore, no incentive compensation was accrued for the quarter. Net realized losses for the quarter were $14.8 million or $0.18 per share, driven primarily by a $10 million loss on the exit of our investment in AutoAlert. Net unrealized gains were $1.3 million or $0.01 per share, driven primarily by $11.3 million and reversals of previous unrealized losses related to AutoAlert and Thrasio. These gains were partially offset by markdowns in Pluralsight, PVHC and Celion, which together accounted for approximately $9.5 million of unrealized losses. Quarterly distributions to shareholders totaled $0.17 per share during the period. After net investment income, realized and unrealized gains and losses and distributions, NAV declined by $0.14 per share to $6.58 at June 30. The corresponding decrease in net assets for the quarter was $13.1 million. Now I'll discuss our balance sheet and liquidity, which benefited from both repayment and liability optimization activity during the quarter, with improvements further accelerated by the portfolio sale transaction we completed today. During the quarter, we completed 2 important liability management initiatives. In May, we issued $406 million of CLO debt and used the proceeds to fully repay our TCPC Funding II and merger facilities, allowing us to term out a significant portion of our secured debt. Additionally, given the level of paydowns and realizations, including those related to the portfolio transaction and the absence of new development activity in our SBIC subsidiary, we elected to repay the remaining $107 million outstanding on our SBIC debt and subsequently surrender our license. We concluded there was limited benefit to maintaining the structure given the SBIC's cash position and fully drawn facility. Together, these 2 actions support our broader balance sheet objectives by extending liability maturities, increasing financing flexibility and reducing complexity within our capital structure. As Jason mentioned, we also received $86.6 million in net repayments in the second quarter. As a result, total liquidity at the end of the second quarter was $533.7 million including $376.2 million in available borrowing capacity under our revolvers and $157.5 million in cash. The combined weighted average interest rate on debt outstanding was 6.03% as of June 30, 2026. Net leverage was reduced to 1.38x at quarter end, resulting in total debt-to-equity ratio of 1.6x. With the combination of post-quarter-end repayment activity and this portfolio sale transaction, we estimate that our pro forma leverage ratio further improved to approximately $0.49 and would be less than 0.3x if adjusted for future closure of the recently announced Domo transaction that Jason mentioned. Unfunded loan commitments represented 7% of our $1.29 billion investment portfolio or $90 million, including $53 million in revolver commitments as of June 30, 2026. Pro forma for repayments and the portfolio sale transaction, unfunded loan commitments have been reduced to approximately $36 million. Overall, TCPC has a simpler balance sheet enhanced liquidity and substantially greater financial flexibility today than it did at the outset of the second quarter. Now I'll turn the call back to Phil for closing remarks.

Thanks, Erik. Over the past year, we have made strong progress strengthening our financial position and reshaping our investment portfolio, and this transaction pulls forward the realization of those efforts. The outcome is significantly lower leverage, reduced investment position sizes and enhanced investment capacity. We believe these outcomes provide substantially greater financial investment and operational flexibility creating a stronger foundation from which to evaluate and pursue strategic alternatives that can deliver greater long-term value to shareholders. We look forward to working with KBW and sharing more details as that process progresses as appropriate. With that, I'd like to thank our investors and analysts for their continued support of TCPC. Operator, we are now ready to open the call for questions.

[Operator Instructions] Your first question comes from the line of Robert Dodd with Raymond James.

And congrats on kind of the landmark transaction. To your point, Phil, it kind of does raise the question though of what next. Can you address that? Like there's a strategic review -- so it's kind of 2 components to the question on that. Like how long do you think the strategic review, and I obviously that's hard to say that. I think that's likely to take -- and two, while that's ongoing, what are you likely strategies. Obviously, if the review -- part of the view is, should we reinvest or should we buy back stock, for example, among other things. Are you likely to do those things while the view is ongoing? Or is it kind of semis on your hands until the views complete and you have a strategic mandate to produce to pursue something.

Yes, Robert, thanks for the question. So there's no specific timetable on the strategic review. Obviously, we are now in a very good position where we've created a great foundation from which to evaluate various alternatives that we otherwise were in a position, too. So we feel that this transaction has given us and certainly accelerated our position to be here to evaluate variety of alternatives, which includes the investment flexibility and capacity that we've talked about on the call and also going deeper into a variety of other initiatives that we've been undertaking at the company. And we made good progress, but this certainly accelerates it. In terms of specifically around timing, we'll see. Obviously, KBW will do its work, work together with management and the Board and come back with a variety of alternatives from which we can evaluate and maybe it's a combination of alternatives to drive longer-term shareholder value. In terms of how we're going to be investing over the subsequent period between now and then, we're going to continue doing what we've been doing, which is being prudent about our capital and obviously, the strategic review goes hand in hand in how we allocate that capital. So we're going to have that lens as we proceed through this period.

Moving on from that for a second. And again, I think the transaction definitely puts you in a position where it's appropriate to review options before where your position was kind of dictating what you had to do before. So congrats on that. Moving on -- I mean, to your point, like, I mean, I think you've got a Thrasio, you expect to be fully paid down the $69 million that should get repaid in the fourth quarter. There's a lot of repayments coming in as well how -- I mean to that point, you quite apart from the transaction, there's been a lot of movement as well. How much more can be done on that on the portfolio side, kind of like this year. I mean, longer term, obviously, things do what they do. But how many more things that could potentially be accelerated maybe not purely from your actions, but in terms of beyond the transaction even also reducing even beyond Delmar, et cetera, et cetera, some of the chunky investments in the portfolio?