KBRA Assigns Ratings to BlackRock TCP Capital Corp.
KBRA assigns issuer and senior unsecured debt ratings of BBB- to BlackRock TCP Capital Corp. (NASDAQ:TCPC, the company", ))). The rating Outlook is Stable.
Key Credit Considerations
The ratings are supported by TCPC's ties to BlackRock, Inc.'s (NYSE:BLK) $86 billion credit platform, of which $35 billion is principally dedicated to private middle market direct lending. BLK, with $10.6 trillion in assets under management, is one of the largest investment managers in the world. Since 2000, the credit platform has invested capital totaling more than $41 billion in 1,025 transactions, sourcing investments through an extensive network of industry and sponsor contacts. The BlackRock platform consists of a large and diverse team of 425 professionals, including a U.S. investment team of 22 people. TCPC maintains SEC exemptive relief to co-invest among certain BlackRock credit affiliates and investment vehicles, allowing TCPC to compete in the highly competitive industry through size and scale. BLK owns approximately 0.3% of TCPC's common equity, providing minor support. Also supporting the ratings is the company's diversified ~$2.0 billion investment portfolio at fair value (FV), comprised of 158 portfolio companies across 23+ sectors with a high percentage (80.6%) of senior secured first lien loans. TCPC focuses on investing in the core middle market ($25-$75 million EBITDA companies), a comparatively less competitive segment than the upper middle market, usually providing for enhanced documentation. The top three portfolio sectors are Internet Software & Services (13.8%), Software (12.6%), and Diversified Financial Services (12.0%).
The company has solid access to the capital markets and a diversified funding mix of secured bank revolving facilities, unsecured senior debt, and SBA debentures. At 2Q24, the ratio of secured debt to gross assets was 8.6%, which is much lower than peers, and unsecured debt to total debt was 85.7%, providing additional financial flexibility and less encumbered collateral for the benefit of the unsecured noteholders. As of June 30, 2024, the company's gross leverage was 1.35x, which is higher than peers, although leverage net of cash was 1.13x and within the company's target net leverage range of 0.90x-1.20x. Asset coverage is adequate at 174% when considering its 150% regulatory asset coverage requirement, providing the company with a 16% cushion to withstand a moderate increase in market volatility in a less favorable economic environment. As of June 30, 2024, TCPC had solid liquidity of $779.8 million, including $194.7 million cash and $585.1 million in available bank credit lines, offset by $93.5 million of unfunded portfolio company commitments and $575 million of unsecured debt due within two years.
Counterbalancing strengths are the comparatively high level of non-accruals, which were 10.5% and 4.9% at cost and FV, respectively, as of June 30, 2024. Non-accruals have steadily risen since 2020, and, in 2Q24, increased markedly, led by the addition to non-accrual of two portfolio companies, Pluralsight and Khoros. With the post-quarter-end restructuring of Pluralsight and Magenta, non-accruals for 3Q24 are expected to be notably lower. KBRA expects a further decline in non-accruals as the company restructures loans and the portfolio stabilizes. Moreover, the BlackRock Direct Lending platform reports an historic loss rate of just 0.06% (through December 2023), indicating solid risk management over time. Further counterbalancing strengths are the potential risks related to TCPC's illiquid assets, retained earnings constraints as a regulated investment company (RIC), and uncertain economic environment with high base rates, inflation, and geopolitical risks.
Formed in 2006 as a Delaware limited liability company and converted to a Delaware corporation in 2012, the company is a publicly traded closed-end, externally managed, non-diversified management investment company that has elected to be treated as a business development company operating under the Investment Company Act of 1940 and as a RIC for tax purposes, which, among other things, must distribute to its shareholders at least 90% of the company's investment company taxable income. The advisor ("Advisor") is Tennenbaum Capital Partners, LLC. In 2018, the Advisor merged with a wholly owned subsidiary of BlackRock Capital Investment Advisors, LLC, an indirect wholly-owned subsidiary of BlackRock, Inc., with the Advisor as the surviving entity.
Rating Sensitivities
Given the Stable Outlook, an upgrade is not expected in the medium term. However, positive rating momentum could be achieved over time if the portfolio credit quality improves materially, leverage remains near the target range, and senior secured loans remain a high proportion of the company's total investments. A rating downgrade and/or Outlook change to Negative could be considered if management alters its stated company strategy by increasing focus on riskier investments coupled with higher leverage metrics. A prolonged downturn in the U.S. economy with negative impact on the company's earnings performance, asset quality, and leverage and/or a change in credit monitoring could also precipitate negative rating action.
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Methodologies
Disclosures
A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.
Information on the meaning of each rating category can be located here.
Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.
About KBRA
Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.
Doc ID: 1005954
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