TCP ramps up floating rate debt in a frothy market

The Los Angeles firm originated a total of $267m of investments in Q2. 

As competition in the mid-market heats up, TCP Capital Corporation will finish the year with a conservative investment approach after boosting its net asset value over the first two quarters, executives said on an earnings call last Thursday.

Demand for mid-market finance has increased this year, bringing in a host of new competitors in the space, “some of whom are being aggressive”, Howard Levkowitz, chief executive officer at the firm, said on the call.

However, he noted that the mid-market still has a significant number of “companies with solid fundamentals out there that need access to creative financing”. And in this environment, the firm has been passing on many opportunities while focusing selectively on floating-rate senior debt.

The Los Angeles-based business development company increased the senior floating rate proportion of its portfolio to 85 percent by 30 June, according to the earnings results. That figure is up from 81 percent floating-rate products as of 31 December. Levkowitz said the increase of its floating-rate debt portfolio positions the firm well for rising interest rates.

TCP’s total investments were $1.45 billion at the end of the quarter, compared to $1.34 billion as of 31 March and $1.23 billion as of 30 June 2016, the earnings results showed. The firm’s overall portfolio showed an effective yield of 11.1 percent over the quarter.

The firm originated a total of $267 million of investments in the last quarter, with the largest debt investments including a $26 million senior loan to Bond International Software and $25 million loans to both real estate lending firm Greystone and Pacific Union mortgage company.

The firm also increased its net asset value per share over the quarter, hitting $15.04 as of 30 June, up from $14.92 and $14.74 as of as of 31 March and 30 June, respectively, earnings results showed.

TCP reported $31.04 million in net investment income over the second quarter, an increase from the $24.88 million in NII the firm earned over the first quarter and the $23.13 million in NII it brought in during the second quarter of 2016.

The BDC’s management fee is 1.5 percent of gross assets (net cash and cash equivalents), the earnings slides showed. The firm has a 20 percent incentive fee with an annualised 8 percent total return hurdle.