Good morning, and welcome to the BlackRock TCP Capital Corp and BlackRock Capital Investment Corporation Merger Call. My name is Carla, and I will be the Operator of today's call. If you would like to register a question for the Q&A portion of the call, please press star followed by one on your telephone keypad. When asking your question, please ensure your telephone is unmuted locally. And to revoke a question, you can press star followed by two. I would now like to pass the conference over to our host to begin, Katie McGlynn, Director of the BlackRock TCP Capital Corp Investor Relations team. Katie, please go ahead when you're ready.
Thank you, Carla. Before we begin, I'll note that this conference call contains forward-looking statements based on the estimates and assumptions of management at the time of such statements and are not guarantees of future performance. Forward-looking statements, including those related to the expected benefits, synergies, and cost savings of the merger, involve risks and uncertainties, and actual results could differ materially from those projected. Any forward-looking statements made on this call are made as of today and are subject to change without notice. Additionally, certain information discussed 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. Please review the legal disclaimers contained in TCPC and BCIC's Form 8-K that were filed with the SEC yesterday.
Yesterday, after the market closed, we issued a press release announcing that BlackRock TCP Capital Corp, or TCPC, and BlackRock Capital Investment Corporation, or BCIC, have entered into a definitive agreement pursuant to which BCIC will merge with and into an indirect, wholly-owned subsidiary of TCPC. TCPC will be the operating company following the merger and will continue to trade on the NASDAQ Global Select Market. We expect the transaction to close in the first quarter of 2024, subject to shareholder and regulatory approvals and customary closing conditions. We also posted a supplemental merger presentation to both companies' websites at www.tcpcapital.com and www.blackrockbkcc.com. To view the slide presentation on the TCPC website, please click on the Investor Relations link and select Events and Presentations. To view it on the BCIC website, please click on the Investors link and select Presentations.
These documents should be reviewed in conjunction with the respective companies' Form 8-K outlining the terms of the proposed merger. I will now turn the call over to Raj Vig, BlackRock TCP Capital Corp, Chairman and CEO.
Thank you, Katie. Good morning, and thank you all for joining us. I'm here today with BCIC's Chairman and Interim CEO and the CIO of BlackRock's private debt platform, Jim Keenan. We are excited to jointly announce the merger of the two public BDCs advised by BlackRock, BlackRock TCP Capital Corp and BlackRock Capital Investment Corporation, or TCPC and BCIC, respectively. On the call today, Jim will begin by providing a brief overview of BCIC's successful transformation over the last several years and a brief overview of the merger. I will then discuss the benefits and terms of the transaction in more detail, including a review of the support provided by BlackRock, the advisor, as part of the transaction. I will also provide some details on the combined portfolio, and we will then open the line for your questions. Let me now turn the call over to Jim.
Thanks, Raj. Over the past several years, the BCIC portfolio has transformed, rotating out of non-core positions and reinvesting proceeds into income-producing senior secured investments. The BCIC investment portfolio is now closely aligned with TCPC, with considerable overlap between the two portfolios. The credit quality of BCIC's portfolio is also very strong, with non-accruals limited to just 2.5% by market value. We believe that now is the right time for the two BDCs to combine and create additional value for all shareholders. This transaction is a strategic step in the growth of the evolution of BlackRock's BDC platform, which is in turn an important part of our $81 billion global private debt business, within which direct lending represents one of our largest core strategies. This transaction positions the combined company to remain competitive in the ever-expanding BDC landscape.
As Raj will discuss in more detail, BlackRock is proposing a number of shareholder-friendly measures in support of the transaction. We believe this merger positions the combined company for sustained growth and will create meaningful value for the shareholders of both companies. The transaction is expected to result in a combined company with enhanced scale, operational core synergies, and a better access to capital on improved terms. We also anticipate that the transaction will be accretive to NII over time. I'll now hand it over to Raj to walk through the transaction benefits in more detail.
Thanks, Jim. First off, let me say that I'm very excited about the combination, as well as to lead the combined company with my colleague, Phil Tseng, on a go-forward basis. As Jim highlighted, what's especially compelling about the merger is that it combines two similar portfolios that we know well since the same investment team has been managing both portfolios for many years now. This provides us with confidence in the combined portfolio and gives us an opportunity to enhance returns for all shareholders going forward. I'd like to start by highlighting the specific benefits of the merger in more detail. First, the combined company will have enhanced scale... with approximately $2.4 billion in assets and $1.1 billion in net assets as of June 30th, which we believe can result in improved trading dynamics and market receptivity.
Second, as a larger company, we believe that TCPC, as the ongoing entity, will have better and more efficient access to capital, including the potential to access debt financings on more favorable terms. This, of course, includes the benefit of applying TCPC's investment-grade ratings to current issuances and to future debt offerings. Third, we are combining two very similar and well-performing portfolios in a more efficient structure, while maintaining significant diversity in portfolio positions and income generation, and maintaining seniority in the underlying capital structures. As Jim highlighted, the BCIC portfolio had 87% overlap with the TCPC portfolio as of June 30th on a fair value basis.
On a pro forma basis, as of June 30th, the combined company had investments in 156 portfolio companies, 90% of which were senior secured, 78% of which were first lien, and 95% of the pro forma portfolio was floating rate. The pro forma combined portfolio had an attractive weighted average yield on debt investments of 13.5% at June 30th, and the combined portfolio is comprised of investments spread across a wide range of industries with an emphasis on less cyclical companies and industries. The average investment size of the pro forma combined portfolio was less than 1% of the total portfolio at fair value as of June 30th, and the combined portfolio will maintain strong credit quality with low levels of investments on non-accrual as of June 30th.
On a pro forma basis, non-accruals remain less than 1% of the portfolio by fair value. Finally, we expect that the transaction will be accretive to NII over time, driven in the near term by cost savings resulting from the proposed reduction in management fees and visible operational cost synergies, which we estimate could be in excess of $2 million annually. Over the longer term, NII should benefit from portfolio growth, as the combined BDC will have strong liquidity and materially improved leverage capacity to deploy in what remains a very lender-friendly investment environment. Most importantly, our investment strategy and overall approach to investing that has been proven over time will not change. We will remain focused on maintaining a high quality and a conservatively positioned portfolio by investing defensively while seeking out favorable risk-reward opportunities across a diverse and economically resilient set of sectors.
As a reminder, BlackRock's U.S. Private Capital team has more than 23 years of experience in direct lending across multiple market cycles and will continue to manage the portfolio going forward. We will maintain our investor-aligned fee structure and our relentless focus on delivering attractive risk-adjusted returns to all shareholders over the long term. The combined company will also continue to benefit from the depth and breadth of the broader BlackRock platform. I will now turn to the terms of the transaction. This will be a NAV for NAV exchange that will result in an ownership split of the combined company that is proportional to each of TCPC's and BCIC's respective net asset values.
BCIC shareholders will receive newly issued shares of TCPC common stock based on the ratio of BCIC net value per share, divided by the TCPC net value, asset value per share, each determined shortly before closing. In addition, BlackRock, the advisor, is supporting the transaction with several shareholder-friendly measures, including a reduction in the management fee from 1.5%- 1.25% for assets equal to or below 200% of net assets. Secondly, a net investment income coverage via a waiver of advisory fees for any of the four quarters ending following the merger closing in the event net investment income in any such quarter is less than $0.32 per share, in any quarter, up to a maximum of the advisory fees earned during that quarter.
And finally, BlackRock has agreed to cover 50% of the merger costs for both companies, up to a cap of $6 million, assuming shareholder approval for the transaction and the TCPC share issuance is successful. Prior to closing, the Boards of Directors of both TCPC and BCIC intend to continue to declare and pay quarterly dividends and meet each company's taxable distribution requirements to comply with registered investment company status. In summary, we believe this merger represents a great opportunity for all shareholders of both TCPC and BCIC and are very excited to come to a timely close of the transaction. With that, operator, please open the line for questions.
Thank you. If you'd like to ask a question, you may do so by pressing star followed by one on your telephone keypad. To revoke your question, please press star followed by two. And when preparing for your question, please ensure your phone is unmuted locally. We will now take our first question. This comes from Sean-Paul Adams from Raymond James. Sean, your line is now open. Please go ahead.
Hi, guys. Good morning. I just had one quick question, and it's, would we be right to expect this merger to create discount accretion income? And if it does, would that income be excluded from the income incentive fee?
Great, great question. Yes, and it's primarily driven by the GAAP treatment of this transaction, and it will, at the given trading prices, create a transaction discount, which would create amortization. But to your question, any income that's generated from that GAAP discount will be excluded from any incentive fees.
Perfect. Thank you.
Thanks, Sean. Our next question comes from Finian O'Shea from Wells Fargo Securities. Finian, your line is now open. Please go ahead.
Hey, everyone. Good morning, and congratulations. A two-part question: why such a large premium for BKCC that you will effectively pay? And then why 1.25% on the base fee? Thank you.
Thanks, Finian. Maybe I'll try to take those and ask anyone to supplement, if appropriate. I think on the first question, it's not necessarily a discretionary large premium. These are obviously NAV for NAV mergers by regulatory requirement. And so as an affiliate combination, that is sort of we're just complying with the rules. I think the implied, you know, premium may be what you're asking about. And I think, you know, our view here is that we have an ability to combine two very similar portfolios with a lot of day-one benefits, you know, between the cost savings and being able to pass on benefits to shareholders with the fee reduction.
And then, more importantly, on a go-forward basis, the ability to take advantage of lower combined leverage in what remains in one of the most attractive investment environments we've seen, I think really provides the combined company on a go-forward basis with leverage to increase and to continue to deliver benefits to shareholders over time. And you know that we've done—the extent that's happened more recently on a standalone basis, we've been good about passing that on through the dividend increases thus far in the past year to shareholders. But I think we're really excited about being able to take one plus one and do something greater than two with it.
In terms of the fee structure you mentioned, you know, I would say that the level we've taken it to does you know, continue to keep the combined company in a best-in-class fee structure position between the level of the fee, which is among the lowest in the industry, and maintaining the you know, the high water mark on a permanent look-back basis and all the things that our TCPC shareholders have benefited from. We believe the combination is pretty compelling. But I think to answer your question specifically, 1.25% was seen as you know, very competitive, best in class and a real material you know, benefit to the combined shareholder base.
Well, the new fee changes are typically going down to 1%, like 1.25% seems like the median. So I was wondering what sort of you and the Board considered on the trade-off there.
Well, as a reminder, over, you know, over 200%, we do go down to one. But I think the Board went through a very thorough process. Obviously, both Boards are advised, you know, independently, and I think where we came out was seen as a very, you know, compelling level and very competitive. Just as a reminder, the current pro forma yield on the portfolio is north of 13%.
So I think from a point of view of what we are delivering to shareholders and how we've performed, you know, on a historical basis with non-accrual still remaining below 1%, I think the Board felt it was giving the shareholders a very good conclusion, and I think their independent advisors, you know, have validated that. So I think I'll leave it there.
Okay, makes sense. So the one was probably too low. Any changes in the combined management team to look out for?
I think at the moment we are not going to comment on that. The same team that has led both portfolios continues to lead the combined businesses. Obviously, we have a lot of people who've been impactful and are involved in these BDCs who we're lucky to have, but at the moment, we're going to stick to the final disclosures and just emphasize that it's the same teams that have been operating thus far.
Okay, that's all for me. Thanks so much.
Thank you.
Thanks, Finian. Our next question comes from Ryan Lynch from KBW. Ryan, your line is now open. Please go ahead.
Hey, good morning. First question I had was just why now? I mean, I know BlackRock had bought Tennenbaum back in 2018, and I know the advisor, and this had been talked about ever since, you know, why operate two public BDCs has always been on people's minds, you know, for years. And five years later, you finally decided to, to, to merge these two together. Why did the timing make sense now? And why was this, you know, versus a couple of years ago, why, why maybe it didn't make sense?
Thanks. This is Jimmy. I'll jump in on this one. I think, you know, from a starting point, you know, we believe in the, you know, the U.S. direct lending platform, right? It's as mentioned before, it's part of our scaled business across our global private debt, but it's one of our anchor and core strategies that we continue to invest in. So the acquisitions that the advisor has made over the course of time has, you know, anchored the strategy, and the BDCs have been, you know, a core part of of this strategy itself. Over the course of the last five years, we've continued to invest broadly. I want to say, since the TCPC acquisition, we've taken the team from about 30 people to nearly 60 and have continued to add resources around origination and legal structure and workout.
So we continue to expand, and invest in the business, on behalf of the benefits to, to all the shareholders there. Regarding specifically the timing of the merger, I think when, when you think about the benefits, that we discussed here, of scale and, you know, what the accretion to that, to all the shareholders there, philosophically, that has made sense, you know, from the beginning. However, the portfolios came from very different places, right? So if you think about TCPC has continued to be, a portfolio that had been, focused on first lien investments, stable income. BKCC or BCIC, when acquired, was more of, I would call it, a junior capital, more mezz-oriented debt, higher volatility, more concentrated.
And if you look at what we've done over the last five years, was really trying to transition that portfolio, and the message given was into a very similar strategy, which was, you know, more around stable income, and being able to produce that resilient outcome for shareholders. You know, in doing so, based off the fact, as Raj mentioned, this is the same team that has been managing both BDCs and jointly transactioning with all of our private funds as well. And so over time, the overlap of the portfolio, both with regards to the seniority, the structure, the name count, all have continued to grow and overlap.
And so why today versus two years ago is now that the portfolios make a lot more sense, and there's less change for both shareholders over you know in today's transaction. Two years ago, this transaction would have resulted in a significant change to the TCPC shareholders based off of the portfolio composition.
That makes sense, and that's kind of what my sense was, is there was—you know, you were trying to get the portfolios to look more alike over time, and I think you've kind of gotten there. On that point, though, I think you said 87% of BCIC's portfolios in TCPC's portfolio, so very, very large overlap of the, you know, of the portfolio coming into TCPC. My two-part question sort of is on that 13%. I'd love to just hear, you know, as a TCPC shareholder or an analyst looking at this, what is that—so what is composed of that 13%, that's the non-overlap? How should investors think about that portion? And obviously, that includes the Gordon Brothers investment.
For those who aren't investors in BKCC, who may not be as familiar with that investment, that's obviously an investment that struggled. Can you please provide some background on that investment and where it sits today, and what's sort of the outlook for that business?
Yeah, perfect. Yeah, I, I'll start, and then I'll invite Raj and Nik in to touch on both sides. I would say, as a whole, when you look at it, you know, from a BCIC standpoint, the main focus had been really exiting non-core positions, right? And so to think through that, those were all the positions that didn't meet the standards of what we were trying to kind of build the overall portfolio. So they tended to be more junior, things that might be more distressed or in workout, non-accrual, and things that we would not want to own on a go-forward basis, right? And so we had been working over time, which took, obviously, a fair amount of time just based off of the minority positions in there.
The remaining positions in that 13% is both, what we call it, non-overlapping positions of both BCIC and of TCPC. Those were, you know, generally came prior to, the, the initial merger, where you weren't where we weren't jointly transacting between the two portfolios. Since the merger of TCPC into BlackRock, I would say almost everything has been jointly transacted. So that's the genesis of it. When it comes down to that 13%, all generally qualify from what we're looking for to build the overall portfolio and being more stable and, and, and very comfortable with regards to where they are. So with that, I'll invite Nik and Raj in to talk about Gordon Brothers specifically, as well as the, the, non-overlapping, TCP positions.
Yeah. Hey, Ryan, this is Nik Singhal. So just for some historical context into Gordon Brothers Finance Company, approximately two years ago, GBFC sold its loan portfolio to Callodine, and its management team also moved over to Callodine, at which point of time we received a significant paydown of our erstwhile GBFC position. As part of that transaction, there were certain items that provided additional recovery, and that's what our remaining BCIC's remaining GBFC position pertains to. At the time the Callodine transaction was done, the fair market value was around $30 million. We've already received approximately $15 million on that, lowering the cost basis.
The two main sources of additional recoveries are, one, a first loss note that for which the reference portfolio is the portfolio that GBFC sold to Callodine back in 2020. And the other piece is a profit participation note that pertains to how Callodine performs every year going forward. The fair market value of that piece as sits today takes into account a range of expected recoveries over time on those two pieces, discounted at the appropriate rate. And that fair market value is approximately $15 million as of June 30th.
Yeah. Let me just wrap up on this one. I was just going to say, you know, just a reminder, this is an affiliate merger. This is not a portfolio that is a third-party portfolio that we had to get familiar with and bring under house. It's a portfolio that we, you know, managed, we rotated, and including across our private funds, these are assets that we, as a single team, have, you know, sourced, diligenced, and underwritten. So it's really bringing the same portfolio, you know, essentially the same portfolio under one fund structure, with efficiencies that we will create and pass on, versus a third-party portfolio that we had to get familiar with and where there are, you know, unknowns in it. There are some non-overlapping.
I think the team has collectively done a very good job of rotating into a similar set of assets. And more, you know, importantly, in my view, and I think in Phil's view, is we have an ability now for the ongoing entity to take advantage of, you know, leverage capacity on top of the cost savings that really will—can be meaningful, and create, you know, more lift, as we deploy into the current environment. So it's really just the affiliate nature here, I think, should not be mitigated. And this is sort of like a... It's not your traditional, you know, third-party effort, and we're very, very excited to get this behind us and move forward as a single entity in the current environment.
Okay. That's really helpful and good color. I just had one quick follow-up on the Gordon Brothers, though. You said there's a first loss note and a profit participation note. On that first loss note, does that have a maturity date? Because I'm assuming the profit participation note, that's going to be kind of a longer-term recovery over time. But I'm just curious, does the first loss note have a maturity date on repayment?
No, it doesn't have a maturity date. We expect to receive payments on that note, as and when that reference portfolio amortizes down.
Okay. Got you Okay. That's all for me. I appreciate the time today.
Thank you.
Thanks, Ryan. Our next question comes from Christopher Nolan from Ladenburg Thalmann. Christopher, your line is now open. Please go ahead.
Hey, guys. On the reference to increased leverage capacity, both companies stocks chronically trade below book value per share. How are you anticipating to increase leverage capacity from this combined entity that, you know, aside from just combining the balance sheets? I mean, is there a strategy here in terms of getting the book value above one times and being able to raise some equity creatively and growing from there?
Chris, Chris, thank you for the question. As you know, there's out of our control in terms of the trading prices of both stocks. However, in terms of available leverage, as we have commented in previous earnings calls, TCPC has been towards the higher end of its leverage range. What this will do on a combined basis is open up the capacity under both credit facilities on both sides to be able to get us to the target leverage that we seek to achieve. So it's just making available the full capacity under both sets of credit facilities.
Yeah, and let me maybe add on to that and just highlight, you know, on a combined basis, we have over $400 million of liquidity and capacity. But I just want to go to your opening point where I would slightly edit the comment that we have chronically traded below book. I think for most of our, you know, TCPC's history, over a decade, we've actually traded above book. More recent environment, that's been different, but that is not a function of the performance. You know, the performance has been amongst the high end of our peer group. We have demonstrated, I think, high quality underwriting with very few items on non-accrual through very interesting periods of time.
We have a portfolio yield that is in the teens, that we know that we're passing on to the benefit of shareholders. So I think the question about where we're trading is more maybe for, you know, the folks on this call because the performance doesn't, you know, doesn't correlate to that. And I think part of it is getting this announced, for me, is a big milestone because the question that we typically get that we can't answer about, you know, when this is happening, is now answered. And ideally, that is taken out of the, you know, the dialogue versus a focus on what we've done for shareholders and how we're performing, and how we can perform on a go-forward basis.
with the ability to deploy, even if we don't have, you know, increased repayments in this environment. So I do think there is a history here that correlates to a higher, you know, trading multiple. It's been more the norm than not, and, you know, we're excited to continue to deliver on performance and get back to that profile, which I believe is more consistent with our performance.
Yeah, and I agree, that, you know, there's a disconnect between the stock price and your performance. I just- my basic question is, is given the increased scale following this transaction, how can you try to get those more aligned? Is there some sort of plan here or-
Yeah. We look forward to your research note.
All right. And then on the leverage front, can you give some guidance in terms of the impact on NAV per share and when the deal closes?
Well, we certainly expect the transaction to be accretive to NII over time. Initially, the highest impact will come from the reduction in management fees. That will impact or hit day one, along with many of the synergies that we expect from this transaction. Those include many of the fixed type of expenses that are related to running two separate BDCs. Some of those will hit on day one. Some of them will take a few quarters to fully be realized. However, we do expect it relatively quickly to become accretive to NII.
Okay. Thank you.
Thank you for the questions.
Thanks, Christopher. As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad. We now have a follow-up question from Finian O'Shea from Wells Fargo. Finian, please go ahead when you're ready.
Hey, everyone. Thanks for the follow-up. Just having done a little portfolio review here, it looks like you have a pretty good concentration in Amazon FBA sellers, which are pretty obviously challenged as seen in the news. Wondering if you have any sort of outlook to provide us on what sort of losses or non-accruals you might expect from that part of the portfolio? Thank you.
Yeah, let me. Welcome back. Let me take that. I think overall, we do. I would say that our - and we've talked about this on prior earnings calls. You know, our view around that sector and its underlying thesis has not changed. We believe it's a very important sector, you know, and it's a growing one, given how we all live and utilize the assets and the vendors.
I would say that we saw between some of the more macro, recent macro issues, you know, a bit of an extension of the thesis, maybe, you know, not a change in it, but maybe a longer period for folks to achieve it, and a little more of a need for a quicker maturity or maturation of that, whether it's through consolidation, or other events that allow fewer managers to be larger with better margins and better survivability. We have been a part of that change. I think our position allows us to, you know, like we do in other names, where we have a strong position to defend our capital, and if sometimes that may mean to influence, you know, in an appropriate manner, how things proceed, and that has been happening.
So our view is that we will be, you know, generally fine with these names. The timing of and the level of growth has changed a little bit. The outlook is a little softer, but it's still positive and, you know, we're very comfortable with these positions, so I don't want to forecast, you know, metrics or, you know, quarterly expectations other than to step back and say at a high level, we're comfortable with this sector. We're positive on it, and we're also seeing things happen, of which we are oftentimes a part of, that allows these companies to more quickly become more stable and profitable, which I think allows the credits to be, you know, maintained as high performing.
And over time, you will see that and talk about it individually, but that at a high level is what I would- how I would comment on it.
Does that include sponsors putting money into them?
Well, there have been across the board, not just limited to the Amazon names, but anytime, you know, we have a review of a company and a credit, that's oftentimes a discussion, and the recent period has very often led to that, you know, that event. So yes, that could be part of it. It could be consolidation. Certainly, these companies, on a standalone basis, have the ability to make discretionary cuts, that more rightsize them to their operating environment. But, it's a full spectrum of things that are, you know, not unique to these names, but just how we've, you know, protected our credits and performed. And I think the results are, you know, a bit self-evident thus far.
Great. Thanks again.
Thanks, Fin.
Thanks, Finian. Our next question comes from Melissa Wedel from J.P. Morgan. Melissa, your line is now open. Please go ahead.
Good morning. Thanks for taking my questions today. Was curious, after the closing of the transaction, will BKCC assets be brought on balance sheet to TCPC, or will, because it's in, merging with a subsidiary, will it be held as more of an equity investment on the TCPC balance sheet?
Hi, Melissa. Good, good question. Yeah, all of the assets will come onto the balance sheet on day one. The reason for the subsidiary is really just to manage the credit facilities, and collateralize those facilities, but they will be fully shown, individually in the schedule of investments.
Okay, great. Thank you.
Sure.
Thanks, Melissa. We have no other questions at this time.
I was just going to add on Eric's last question.
Sorry, continue.
The nice thing about that consolidation of assets is that there won't be many more line items, given the significant overlap. But if there's no further questions, let me just thank everyone for participating. We are available for follow-up if we can answer additional questions. And again, I just want to emphasize our excitement about this transaction. It's been a long time coming, and we're excited to get it announced and get it closed quickly and to move forward. And thank you all for being a part of the conversation. With that, we're going to conclude the call.
Thank you. This concludes today's call. Thank you for your participation. You may now disconnect your line.