BlackRock TCP Capital: This 12% Yielding BDC Is Likely Fairly Valued

Core Viewpoint - BlackRock TCP Capital has completed the acquisition of BlackRock Capital Investment, resulting in a larger and more diversified business development company (BDC) with a distinct first lien strategy. However, the shares have seen significant revaluation, leading to limited upside potential for FY 2024 [2][15]. Financial Performance - In Q1 2024, BlackRock TCP Capital generated $28.3 million in net investment income, reflecting a 9% year-over-year growth, primarily driven by higher interest income from variable rate investments [8]. - The company reported a distribution coverage ratio of 132% in Q1 2024, supported by a consistent net investment income, with previous ratios of 138% in FY 2023 and 125% in FY 2022 [10]. Portfolio Composition - Post-merger, BlackRock TCP Capital manages a $2.1 billion investment portfolio, with 80% in first liens and 11% in second liens, resulting in approximately 91% of investments being secured lending [4]. - The company has a relatively high non-accrual percentage of 1.7% as of March 2024, down from 2.0% at the end of FY 2023, which raises concerns about trading at a premium to net asset value [7]. Valuation Insights - The net asset value (NAV) per share at the end of March 2024 was $11.14, showing a 6% quarter-over-quarter decline due to unrealized investment losses. The shares are currently trading at a 2% premium to NAV [12]. - The historical average price-to-NAV ratio for the company was 0.93X, and the current valuation suggests limited upside potential, especially considering the high non-accrual ratio [13]. Market Outlook - The Federal Reserve is expected to lower the federal fund rate, which could negatively impact BDCs heavily invested in variable rate loans. This change in interest rate trajectory may limit future net investment income growth [4][8]. - Despite the healthy distribution coverage, the overall valuation of BlackRock TCP Capital appears to be fair, with limited upside potential in the current market environment [15].