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BlackRock TCP Capital Corp. - Quarter Report: 2014 June (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

  x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the Quarter Ended June 30, 2014

 

  ¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission File Number: 814-00899

 

TCP CAPITAL CORP.

(Exact Name of Registrant as Specified in Charter)

 

Delaware   56-2594706
(State or Other Jurisdiction   (IRS Employer
of Incorporation)   Identification No.)

 

2951 28 th Street, Suite 1000    
Santa Monica, California   90405
(Address of Principal Executive Offices)   (Zip Code)

 

Registrant’s telephone number, including area code (310) 566-1000

 

Securities registered pursuant to Section 12(b) of the Act:

 

Common Stock, par value $0.001 per share   NASDAQ Global Select Market
(Title of each class)   (Name of each exchange where registered)

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days: Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ¨   Accelerated filer                x
     
Non-accelerated filer   ¨   Smaller Reporting company ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

 

The number of shares of the Registrant’s common stock, $0.001 par value, outstanding as of August 7, 2014 was 41,600,130.

 

 
 

 

Table of Contents

TCP CAPITAL CORP.

 

FORM 10-Q FOR THE SIX MONTHS ENDED JUNE 30, 2014

 

TABLE OF CONTENTS

 

Part I. Financial Information  
     
Item 1. Financial Statements  
  Consolidated Statements of Assets and Liabilities as of June 30, 2014 (unaudited) and December 31, 2013 2
  Consolidated Statements of Investments as of June 30, 2014 (unaudited) and December 31, 2013 3
  Consolidated Statements of Operations for the three and six months ended June 30, 2014 (unaudited) and June 30, 2013 (unaudited) 13
  Consolidated Statements of Changes in Net Assets for the six months ended June 30, 2014 (unaudited) and year ended December 31, 2013 14
  Consolidated Statements of Cash Flows for the six months ended June 30, 2014 (unaudited) and June 30, 2013 (unaudited) 15
  Notes to Consolidated Financial Statements (unaudited) 16
  Consolidated Schedule of Changes in Investments in Affiliates for the six months ended June 30, 2014 (unaudited) and year ended December 31, 2013 33
  Consolidated Schedule of Restricted Securities of Unaffiliated Issuers as of June 30, 2014 (unaudited) and December 31, 2013 35
  Consolidating Statement of Assets and Liabilities as of June 30, 2014 (unaudited) and December 31, 2013 37
  Consolidating Statement of Operations for the six months ended June 30, 2014 (unaudited) and June 30, 2013 (unaudited) 39
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 41
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 53
     
Item 4. Controls and Procedures 53
     
Part II. Other Information  
     
Item 1. Legal Proceedings 54
     
Item 1A. Risk Factors 54
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 55
     
Item 3. Defaults upon Senior Securities 55
     
Item 4. Mine Safety Disclosures 55
     
Item 5. Other Information 55
     
Item 6. Exhibits 55

 

1
 

 

TCP Capital Corp.

 

Consolidated Statements of Assets and Liabilities

 

   June 30, 2014   December 31, 2013 
   (unaudited)     
Assets          
Investments, at fair value:          
Companies less than 5% owned (cost of $825,953,904 and $684,569,508, respectively)  $827,560,564   $678,326,915 
Companies 5% to 25% owned (cost of $54,237,483 and $73,946,547, respectively)   50,409,131    69,068,808 
Companies more than 25% owned (cost of $41,400,990 and $42,588,724 respectively)   16,699,429    18,867,236 
Total investments (cost of $921,592,377 and $801,104,779, respectively)   894,669,124    766,262,959 
           
Cash and cash equivalents   29,379,532    22,984,182 
Receivable for investments sold   17,396,874    3,605,964 
Accrued interest income:          
Companies less than 5% owned   8,213,741    6,282,353 
Companies 5% to 25% owned   372,400    415,061 
Companies more than 25% owned   35,257    41,691 
Deferred debt issuance costs   7,351,121    2,969,085 
Options (cost $51,750)   1,855    14,139 
Prepaid expenses and other assets   1,185,503    753,768 
Total assets   958,605,407    803,329,202 
           
Liabilities          
Debt   250,500,788    95,000,000 
Payable for investments purchased   8,561,631    14,706,942 
Incentive allocation payable   3,613,830    3,318,900 
Payable to the Investment Manager   1,750,735    1,121,108 
Interest payable   882,820    430,969 
Unrealized depreciation on swaps   208,862    331,183 
Accrued expenses and other liabilities   2,598,420    3,136,010 
Total liabilities   268,117,086    118,045,112 
           
Commitments and contingencies (Note 5)          
           
Preferred equity facility          
Series A preferred limited partner interests in Special Value Continuation Partners, LP; $20,000/interest liquidation preference; 6,700 interests authorized, issued and outstanding   134,000,000    134,000,000 
Accumulated dividends on Series A preferred equity facility   494,140    504,252 
Total preferred limited partner interests   134,494,140    134,504,252 
           
Non-controlling interest          
General Partner interest in Special Value Continuation Partners, LP   1,602,199    1,168,583 
           
Net assets applicable to common shareholders  $554,391,982   $549,611,255 
           
Composition of net assets applicable to common shareholders          
Common stock, $0.001 par value; 200,000,000 shares authorized, 36,200,130 and 36,199,916 shares issued and outstanding as of June 30, 2014 and December 31, 2013, respectively   36,200    36,200 
Paid-in capital in excess of par   670,361,329    667,842,020 
Accumulated net investment income   24,543,049    24,016,095 
Accumulated net realized losses   (111,661,878)   (105,800,278)
Accumulated net unrealized depreciation   (27,284,519)   (35,314,199)
Non-controlling interest   (1,602,199)   (1,168,583)
Net assets applicable to common shareholders  $554,391,982   $549,611,255 
           
Net assets per share  $15.31   $15.18 

 

See accompanying notes.

 

2
 

 

TCP Capital Corp.

 

Consolidated Statement of Investments (Unaudited)

 

June 30, 2014

 

Showing Percentage of Total Cash and Investments of the Company

 

                              % of    
Issuer  Instrument  Ref  Spread  Floor  Maturity  Principal   Cost   Value   Portfolio   Notes
                                   
Debt Investments (A)                                   
Accounting, Tax Preparation, Bookkeeping, and Payroll Services                              
Expert Global Solutions, LLC  First Lien Term Loan B  LIBOR (Q)  7.25%   1.25%  4/3/2018  $689,015   $697,904   $688,154    0.07%   
Expert Global Solutions, LLC  Second Lien Term Loan  LIBOR (Q)  11.00%   1.50%  10/3/2018  $7,434,877    7,243,959    7,241,571    0.78%   
                         7,941,863    7,929,725    0.85%   
Activities Related to Real Estate                                    
Greystone Select Holdings, LLC  First Lien Term Loan  LIBOR (Q)  8.00%   1.00%  3/26/2021  $16,552,744    16,325,144    16,602,402    1.80%   
                                        
Advertising, Public Relations, and Related Services                              
Doubleplay III Limited (United Kingdom)  First Lien Facility A1 Term Loan  EURIBOR (Q)  6.25%   1.25%  3/18/2018  3,165,705    16,565,886    17,575,821    1.90%  D/I
                                        
Artificial Synthetic Fibers and Filaments Manufacturing                              
AGY Holding Corp.  Sr Secured Term Loan  Fixed  12.00%   -  9/15/2016  $2,056,927    2,056,927    2,056,927    0.22%  B
AGY Holding Corp.  Second Lien Notes  Fixed  11.00%   -  11/15/2016  $9,268,000    7,586,317    8,767,528    0.95%  B/E
                         9,643,244    10,824,455    1.17%   
Basic Chemical Manufacturing                                    
M&G Chemicals S.A. (Luxembourg)  Sr Secured Term Loan  LIBOR (Q)  7.50%   -  3/18/2016  $15,632,077    15,632,077    15,632,077    1.69%  I
PeroxyChem, LLC  First Lien Term Loan  LIBOR (Q)  6.50%   1.00%  2/28/2020  $8,977,500    8,806,735    9,067,275    0.98%   
                         24,438,812    24,699,352    2.67%   
Beverage Manufacturing                                    
Carolina Beverage Group, LLC  Secured Notes  Fixed  10.625%   -  8/1/2018  $7,780,000    7,780,000    8,421,850    0.91%  E/G
                                        
Business Support Services                                    
STG-Fairway Acquisitions, Inc.  Second Lien Term Loan  LIBOR (Q)  9.25%   1.25%  8/28/2019  $14,643,455    13,988,543    14,833,820    1.61%   
                                        
Chemical Manufacturing                                    
Archroma  Term Loan B  LIBOR (Q)  8.25%   1.25%  9/30/2018  $19,996,931    19,662,046    20,321,881    2.20%   
                                        
Communications Equipment Manufacturing                              
Globecomm Systems, Inc.  First Lien Term Loan  LIBOR (Q)  7.625%   1.25%  12/11/2018  $14,925,000    14,775,750    14,805,600    1.60%  B
                                        
Computer Equipment Manufacturing                              
ELO Touch Solutions, Inc.  Second Lien Term Loan  LIBOR (Q)  10.50%   1.50%  12/1/2018  $10,000,000    9,691,295    9,100,000    0.99%   
                                        
Computer Systems Design and Related Services                              
Autoalert, LLC  First Lien Term Loan  LIBOR (Q)  4.75% Cash + 4% PIK   0.25%  3/31/2019  $30,303,333    29,726,913    30,591,215    3.31%   
Blue Coat Systems, Inc.  First Lien Revolver  LIBOR (Q)  3.50%   1.00%  5/31/2018  $    (834,605)   (455,460)   (0.05%)  L
Blue Coat Systems, Inc.  Second Lien Term Loan  LIBOR (Q)  8.50%   1.00%  6/28/2020  $15,000,000    14,878,125    15,275,025    1.65%   
MSC Software Corporation  Second Lien Term Loan  LIBOR (M)  7.50%   1.00%  5/29/2021  $11,993,035    11,873,105    12,112,966    1.31%   
OnX Enterprise Solutions, Ltd.  First Lien Term Loan B  LIBOR (Q)  8.00%   -  9/3/2018  $2,373,333    2,373,333    2,394,693    0.26%   
OnX Enterprise Solutions, Ltd.  First Lien Term Loan  LIBOR (Q)  7.00%   -  9/3/2018  $10,586,667    10,450,746    10,544,320    1.14%   
OnX USA, LLC  First Lien Term Loan B  LIBOR (Q)  8.00%   -  9/3/2018  $4,746,667    4,746,667    4,789,387    0.52%   
OnX USA, LLC  First Lien Term Loan  LIBOR (Q)  7.00%   -  9/3/2018  $5,293,333    5,229,107    5,272,160    0.57%   
Vistronix, LLC  First Lien Revolver  LIBOR (Q)  7.50%   1.00%  12/4/2018  $199,849    193,183    199,849    0.02%   
Vistronix, LLC  First Lien Term Loan  LIBOR (M)  7.50%   1.00%  12/4/2018  $6,680,650    6,602,060    6,650,587    0.72%   
Websense, Inc.  Second Lien Term Loan  LIBOR (Q)  7.25%   1.00%  12/27/2020  $7,200,000    7,164,000    7,263,000    0.78%   
                         92,402,634    94,637,742    10.23%   
Cut and Sew Apparel Manufacturing                                    
Jones Apparel, LLC  First Lien FILO Term Loan  LIBOR (M)  9.60%   1.00%  4/8/2019  $14,329,403    14,186,109    14,487,027    1.57%   
                                        
Data Processing, Hosting, and Related Services                                    
The Telx Group, Inc.  Senior Notes  Fixed  13.5% PIK   -  7/9/2021  $4,165,481    4,165,481    4,307,108    0.47%  E
                                        
Electric Power Generation, Transmission and Distribution                              
Panda Sherman Power, LLC  First Lien Term Loan  LIBOR (Q)  7.50%   1.50%  9/14/2018  $11,070,172    10,944,276    11,367,683    1.23%   
                                        
Electrical Equipment and Component Manufacturing                              
Palladium Energy, Inc.  First Lien Term Loan  LIBOR (Q)  9.00%   1.00%  12/26/2017  $16,153,317    15,912,128    16,395,617    1.77%   
                                        
Electrical Equipment Manufacturing                                    
API Technologies Corp.  First Lien Term Loan  LIBOR (Q)  7.50%   1.50%  2/6/2018  $6,860,745    6,792,137    6,857,314    0.74%   
                                        
Fabricated Metal Product Manufacturing                              
Constellation Enterprises, LLC  First Lien Notes  Fixed  10.625%   -  2/1/2016  $2,900,000    2,858,907    2,682,500    0.29%  E
                                        
Financial Investment Activities                                    
Institutional Shareholder Services, Inc.  Second Lien Term Loan  LIBOR (Q)  7.50%   1.00%  4/30/2022  $7,994,196    7,914,254    8,064,145    0.87%   
Marsico Capital Management  First Lien Term Loan  LIBOR (M)  5.00%   -  12/31/2022  $10,555,929    13,291,319    4,292,727    0.46%  J
                         21,205,573    12,356,872    1.33%   

 

3
 

 

 TCP Capital Corp.

 

Consolidated Statement of Investments (Unaudited) (Continued)

 

June 30, 2014

 

Showing Percentage of Total Cash and Investments of the Company

 

                              % of    
Issuer  Instrument  Ref  Spread  Floor  Maturity  Principal   Cost   Value   Portfolio   Notes
                                   
Debt Investments (continued)                                       
Freight Transportation Arrangement                                    
Livingston International, Inc. (Canada)  Second Lien Term Loan  LIBOR (Q)  7.75%   1.25%  4/18/2020  $3,665,217   $3,601,696   $3,703,702    0.40%  I
                                        
Full-Service Restaurants                                       
RM Holdco, LLC  Subordinated Convertible Term Loan  Fixed  1.12% PIK   -  3/21/2018  $5,164,796    5,164,796    1,007,135    0.11%  B
RM OpCo, LLC  Convertible First Lien Term Loan Tranche B-1  Fixed  12% Cash + 7% PIK   -  3/21/2016  $1,491,872    1,467,184    1,491,872    0.16%  B
RM OpCo, LLC  First Lien Term Loan Tranche A  Fixed  11.00%   -  3/21/2016  $3,751,177    3,751,177    3,751,177    0.41%  B
RM OpCo, LLC  First Lien Term Loan Tranche B  Fixed  12% Cash + 7% PIK   -  3/21/2016  $7,433,488    7,433,488    7,433,488    0.80%  B
RM OpCo, LLC  First Lien Term Loan Tranche B-1  Fixed  12% Cash + 7% PIK   -  3/21/2016  $2,341,059    2,307,647    2,341,059    0.25%  B
                         20,124,292    16,024,731    1.73%   
Gaming Industries                                       
AP Gaming I, LLC  First Lien Revolver  LIBOR (Q)  8.25%   1.00%  12/20/2018  $2,500,000    2,827,878    3,000,000    0.32%   
AP Gaming I, LLC  First Lien Term Loan B  LIBOR (Q)  8.25%   1.00%  12/20/2020  $14,925,000    14,498,873    15,186,188    1.64%   
                         17,326,751    18,186,188    1.96%   
General Medical and Surgical Hospitals                                    
RegionalCare Hospital Partners, Inc.  Second Lien Term Loan  LIBOR (M)  9.50%   1.00%  10/23/2019  $21,017,525    20,707,525    20,925,678    2.26%   
                                        
Grocery Stores                                       
Bashas, Inc.  First Lien FILO Term Loan  LIBOR (M)  9.35%   1.50%  12/28/2015  $12,772,956    12,737,142    12,964,551    1.40%   
                                        
Insurance Carriers                                       
Acrisure, LLC  Second Lien Notes  LIBOR (Q)  10.50%   1.00%  3/7/2020  $680,363    571,794    718,115    0.08%   
Acrisure, LLC  Second Lien Notes  LIBOR (Q)  10.50%   1.00%  3/7/2020  $11,051,757    10,838,772    11,123,593    1.20%   
                         11,410,566    11,841,708    1.28%   
Insurance Related Activities                                    
Confie Seguros Holding II Co.  Second Lien Term Loan  LIBOR (M)  9.00%   1.25%  5/8/2019  $6,341,809    6,252,568    6,405,259    0.69%   
                                        
Lessors of Nonfinancial Intangible Assets                                    
ABG Intermediate Holdings 2, LLC  Second Lien Term Loan  LIBOR (S)  8.00%   1.00%  5/27/2022  $15,990,714    15,830,807    16,010,702    1.73%   
                                        
Lessors of Real Estate                                       
Hunt Companies, Inc.  Senior Secured Notes  Fixed  9.625%   -  3/1/2021  $13,084,000    12,926,643    13,738,200    1.49%  E/G
                                        
Merchant Wholesalers                                       
Envision Acquisition Company, LLC  Second Lien Term Loan  LIBOR (Q)  8.75%   1.00%  11/4/2021  $9,079,011    8,897,430    9,215,196    1.00%   
                                        
Motion Picture and Video Industries                                    
CORE Entertainment, Inc.  First Lien Term Loan  Fixed  9.00%   -  6/21/2017  $9,462,231    9,391,249    8,516,008    0.92%   
CORE Entertainment, Inc.  Second Lien Term Loan  Fixed  13.50%   -  6/21/2018  $7,569,785    7,509,764    6,933,923    0.75%   
                         16,901,013    15,449,931    1.67%   
Newspaper, Periodical, Book, and Directory Publishers                              
Hanley-Wood, LLC  First Lien FILO Term Loan  LIBOR (Q)  6.75%   1.25%  7/15/2018  $16,561,400    16,561,400    16,519,997    1.79%   
MediMedia USA, Inc.  First Lien Revolver  LIBOR (Q)  6.75%   -  5/20/2018  $5,890,000    4,960,524    5,492,658    0.59%   
MediMedia USA, Inc.  First Lien Term Loan  LIBOR (Q)  6.75%   1.25%  11/20/2018  $9,591,911    9,349,033    9,400,073    1.02%   
                         30,870,957    31,412,728    3.40%   
Nondepository Credit Intermediation                                    
Caribbean Financial Group (Cayman Islands)  Sr Secured Notes  Fixed  11.50%   -  11/15/2019  $10,000,000    9,834,804    10,950,000    1.19%  E/G/I
Trade Finance Funding I, Ltd. (Cayman Islands)  Secured Class B Notes  Fixed  10.75%   -  11/13/2018  $15,084,000    15,084,000    15,084,000    1.63%  E/I
                         24,918,804    26,034,000    2.82%   
Nonscheduled Air Transportation                                    
One Sky Flight, LLC  Second Lien Term Loan  Fixed  12% Cash + 3% PIK   -  6/3/2019  $18,379,293    17,130,833    18,379,293    1.99%   
                                        
Oil and Gas Extraction                                       
Willbros Group, Inc.  First Lien Term Loan  LIBOR (Q)  9.75%   1.25%  8/7/2019  $13,661,463    13,329,888    13,917,615    1.51%   
                                        
Other Information Services                                    
TCH-2 Holdings, LLC  Second Lien Term Loan  LIBOR (M)  7.75%   1.00%  11/6/2021  $19,988,392    19,688,567    19,788,509    2.14%   
                                        
Other Telecommunications                                    
Securus Technologies, Inc.  Second Lien Term Loan  LIBOR (Q)  7.75%   1.25%  4/30/2021  $14,000,000    13,860,000    14,230,440    1.54%   
                                        
Petroleum and Coal Products Manufacturing                                    
Boomerang Tube, LLC  Second Lien Term Loan  LIBOR (Q)  9.50%   1.50%  10/11/2017  $3,933,213    3,860,914    3,579,223    0.39%   

 

4
 

 

TCP Capital Corp.

 

Consolidated Statement of Investments (Unaudited) (Continued)

 

June 30, 2014

 

Showing Percentage of Total Cash and Investments of the Company

 

                              % of    
Issuer  Instrument  Ref  Spread  Floor  Maturity  Principal   Cost   Value   Portfolio   Notes
                                   
Debt Investments (continued)                                       
Plastics Products Manufacturing                                    
Iracore International, Inc.  Sr Secured Notes  Fixed  9.50%   -  6/1/2018  $13,600,000   $13,600,000   $14,348,000    1.55%  E
                                        
Radio and Television Broadcasting                                    
SiTV, Inc.  First Lien Term Loan  LIBOR (M)  6% Cash  + 4% PIK   2.00%  8/3/2016  $7,032,138    6,709,167    7,418,905    0.80%   
SiTV, Inc.  Sr Secured Notes  Fixed  10.375%   -  7/1/2019  $7,312,000    7,312,000    7,503,940    0.81%  E/G
The Tennis Channel, Inc.  First Lien Term Loan  LIBOR (Q)  8.50%   -  5/29/2017  $17,946,954    17,549,375    18,027,715    1.95%   
                         31,570,542    32,950,560    3.56%   
Retail                                       
Kenneth Cole Productions, Inc.  First Lien FILO Term Loan  LIBOR (M)  10.40%   1.00%  9/25/2017  $10,863,636    10,675,504    10,917,954    1.18%   
Shopzilla, Inc.  Second Lien Term Loan  LIBOR (Q)  12.50%   -  3/31/2016  $6,710,057    6,615,475    6,699,991    0.73%   
Shop Holding, LLC  Convertible Promissory Note  Fixed  5.00%   -  8/5/2015  $73,140    73,140    66,045    0.01%  E
                         17,364,119    17,683,990    1.92%   
Satellite Telecommunications                                    
Avanti Communications Group, PLC (United Kingdom)  Sr Secured Notes  Fixed  10.00%   -  10/1/2019  $9,914,000    9,914,000    10,538,275    1.14%  E/G/I
                                        
Scheduled Air Transportation                                    
Aircraft Leased to Delta Air Lines, Inc.                                    
N913DL  Aircraft Secured Mortgage  Fixed  8.00%   -  3/15/2017  $247,913    247,913    255,000    0.03%  F
N918DL  Aircraft Secured Mortgage  Fixed  8.00%   -  8/15/2018  $351,588    351,588    362,440    0.04%  F
N954DL  Aircraft Secured Mortgage  Fixed  8.00%   -  3/20/2019  $472,542    472,542    485,860    0.05%  F
N955DL  Aircraft Secured Mortgage  Fixed  8.00%   -  6/20/2019  $493,042    493,042    506,600    0.06%  F
N956DL  Aircraft Secured Mortgage  Fixed  8.00%   -  5/20/2019  $491,365    491,365    504,900    0.05%  F
N957DL  Aircraft Secured Mortgage  Fixed  8.00%   -  6/20/2019  $497,355    497,355    511,020    0.06%  F
N959DL  Aircraft Secured Mortgage  Fixed  8.00%   -  7/20/2019  $503,294    503,294    517,140    0.06%  F
N960DL  Aircraft Secured Mortgage  Fixed  8.00%   -  10/20/2019  $525,171    525,171    539,580    0.06%  F
N961DL  Aircraft Secured Mortgage  Fixed  8.00%   -  8/20/2019  $517,785    517,785    532,100    0.06%  F
N976DL  Aircraft Secured Mortgage  Fixed  8.00%   -  2/15/2018  $352,091    352,091    362,780    0.04%  F
Aircraft Leased to United Airlines, Inc.
N510UA  Aircraft Secured Mortgage  Fixed  20.00%   -  10/26/2016  $281,584    281,584    336,205    0.04%  B
N512UA  Aircraft Secured Mortgage  Fixed  20.00%   -  10/26/2016  $288,287    288,287    346,275    0.04%  B
N545UA  Aircraft Secured Mortgage  Fixed  16.00%   -  8/29/2015  $177,520    177,520    190,855    0.02%  B
N659UA  Aircraft Secured Mortgage  Fixed  12.00%   -  2/28/2016  $2,161,944    2,161,944    2,318,999    0.25%  F
N661UA  Aircraft Secured Mortgage  Fixed  12.00%   -  5/4/2016  $2,350,477    2,350,477    2,551,735    0.28%  F
Mesa Air Group, Inc.  Acquisition Delayed Draw Loan  LIBOR (M)  7.25%   -  7/15/2022  $    (271,500)   20,363    -   L
Mesa Air Group, Inc.  Acquisition Loan  LIBOR (M)  7.25%   -  7/15/2022  $18,100,000    8,688,000    9,077,150    0.98%   
                         18,128,458    19,419,002    2.12%   
Scientific Research and Development Services                                 
BPA Laboratories, Inc.  Senior Secured Notes  Fixed  12.25%   -  4/1/2017  $17,200,000    16,536,295    18,748,000    2.03%  E
                                        
Semiconductor and Other Electronic Component Manufacturing                                 
SunEdison, Inc.  Senior Secured Letters of Credit  LIBOR (Q)  3.75%   -  2/28/2017  $9,379,246    (1,031,717)   (937,925)   (0.10%)  K/L
                                        
Software Publishers                                       
Acronis International GmbH (Switzerland)  First Lien Revolver  LIBOR (Q)  9.50%   1.00%  2/21/2017  $563,407    563,407    540,871    0.06%  I
Acronis International GmbH (Switzerland)  First Lien Term Loan  LIBOR (Q)  9.50%   1.00%  2/21/2017  $25,000,000    24,754,319    24,900,000    2.70%  I
BlackLine Systems, Inc.  First Lien Term Loan  LIBOR (Q)  0.4% Cash + 7.6% PIK   1.50%  9/25/2018  $13,065,025    12,325,788    12,914,777    1.40%   
Coreone Technologies, LLC  First Lien Term Loan  LIBOR (Q)  3.75% Cash + 5% PIK   1.00%  9/4/2018  $13,899,746    13,632,684    13,830,247    1.50%   
Deltek, Inc.  Second Lien Term Loan  LIBOR (Q)  8.75%   1.25%  10/10/2019  $15,000,000    14,817,883    15,346,875    1.66%   
Edmentum, Inc.  Second Lien Term Loan  LIBOR (Q)  9.75%   1.50%  5/17/2019  $21,500,000    21,342,939    21,715,000    2.35%   
                         87,437,020    89,247,770    9.67%   
Specialty Hospitals                                       
UBC Healthcare Analytics, Inc.  First Lien Term Loan  LIBOR (Q)  9.00%   1.00%  7/1/2018  $4,933,947    4,909,278    4,958,617    0.54%   
                                        
Structured Note Funds                                       
Magnolia Finance V plc (Cayman Islands)  Asset-Backed Credit Linked Notes  Fixed  13.125%   -  8/2/2021  $15,000,000    15,000,000    15,231,000    1.65%  E/I

 

5
 

 

 TCP Capital Corp.

 

Consolidated Statement of Investments (Unaudited) (Continued)

 

June 30, 2014

 

Showing Percentage of Total Cash and Investments of the Company

 

                  Principal                
                  Amount or           %    
Issuer  Instrument  Ref  Spread  Floor  Maturity  Shares   Cost   Value   Portfolio   Notes
                                   
Debt Investments (continued)                                       
Textile Furnishings Mills                                       
Lexmark Carpet Mills, Inc.  First Lien Term Loan  LIBOR (Q)  10.00%   1.00%  9/30/2018  $15,758,531   $15,415,095   $15,994,909    1.73%   
                                        
Wired Telecommunications Carriers                                       
Integra Telecom Holdings, Inc.  Second Lien Term Loan  LIBOR (Q)  8.50%   1.25%  2/22/2020  $15,000,000    14,718,767    15,325,050    1.66%   
                                        
Wireless Telecommunications Carriers                                    
Alpheus Communications, LLC  First Lien FILO Term Loan  LIBOR (Q)  6.92%   1.00%  5/31/2018  $    (11,183)   (28,122)   0.00%  L
Alpheus Communications, LLC  First Lien FILO Term Loan  LIBOR (Q)  6.92%   1.00%  5/31/2018  $8,248,124    8,166,127    8,041,921    0.87%   
Globalive Wireless Management Corp. (Canada)  First Lien Term Loan  LIBOR (Q)  10.90%   -  4/30/2014  $3,037,292    2,933,872    3,067,665    0.33%  I
Gogo, LLC  First Lien Term Loan  LIBOR (Q)  9.75%   1.50%  6/21/2017  $19,335,284    18,588,807    20,592,078    2.23%   
                         29,677,623    31,673,542    3.43%   
                                        
Total Debt Investments                        852,895,704    865,195,213    93.63%   
                                        
Equity Securities                                       
Business Support Services                                       
Findly Talent, LLC  Membership Units                708,229    230,938    162,185    0.02%  C/E
STG-Fairway Holdings, LLC  Class A Units                841,479    943,287    2,015,174    0.22%  C/E
                         1,174,225    2,177,359    0.24%   
Communications Equipment Manufacturing                                    
Wasserstein Cosmos Co-Invest, L.P.  Limited Partnership Units                5,000,000    5,000,000    4,500,000    0.49%  B/C/E
                                        
Data Processing, Hosting, and Related Services                                    
Anacomp, Inc.  Class A Common Stock                1,255,527    26,711,048    929,090    0.10%  C/E/F
                                        
Depository Credit Intermediation                                       
Doral Financial Corporation  Common Stock                53,890    11,699,417    232,804    0.03%  C/K
                                        
Financial Investment Activities                                       
Marsico Holdings, LLC  Common Interest Units                168,698    172,694    4,234    -   C/E/J
                                        
Full-Service Restaurants                                       
RM Holdco, LLC  Membership Units                13,161,000    2,010,777    -    -   B/C/E
                                        
Machine Shops; Turned Product; and Screw, Nut, and Bolt Manufacturing                              
Precision Holdings, LLC  Class C Membership Interest                33    -    5,723    -   C/E
                                        
Nonmetallic Mineral Mining and Quarrying                                    
EPMC HoldCo, LLC  Membership Units                1,312,720    -    1,063,303    0.12%  B/E
                                        
Nonscheduled Air Transportation                                       
Flight Options Holdings I, Inc.  Warrants to Purchase Common Stock                1,843    1,274,000    1,339,035    0.15%  C/E
                                        
Radio and Television Broadcasting                                       
SiTV, Inc.  Warrants to Purchase Common Stock                233,470    300,322    177,624    0.02%  C/E
                                        
Retail                                       
Shop Holding, LLC  Class A Units                507,167    480,049    373,326    0.04%  C/E
Shop Holding, LLC  Warrants to Purchase Class A Units                326,691    -    -    -   C/E
                         480,049    373,326    0.04%   
Scheduled Air Transportation                                       
Aircraft Leased to Delta Air Lines, Inc.                                    
N913DL  Trust Beneficial Interests                865    91,495    121,720    0.01%  E/F
N918DL  Trust Beneficial Interests                724    101,682    139,414    0.02%  E/F
N954DL  Trust Beneficial Interests                682    120,984    70,380    0.01%  E/F
N955DL  Trust Beneficial Interests                661    120,890    112,200    0.01%  E/F
N956DL  Trust Beneficial Interests                666    120,865    107,780    0.01%  E/F
N957DL  Trust Beneficial Interests                661    121,648    108,800    0.01%  E/F
N959DL  Trust Beneficial Interests                656    122,429    109,480    0.01%  E/F
N960DL  Trust Beneficial Interests                643    125,518    108,800    0.01%  E/F
N961DL  Trust Beneficial Interests                652    124,720    103,360    0.01%  E/F
N976DL  Trust Beneficial Interests                766    104,403    102,691    0.01%  E/F
Aircraft Leased to United Airlines, Inc.                                    
N510UA  Trust Beneficial Interests                60    226,717    460,974    0.05%  B/E
N512UA  Trust Beneficial Interests                59    221,632    452,773    0.05%  B/E
N536UA  Trust Beneficial Interests                -    -    -    0.00%  B/E
N545UA  Trust Beneficial Interests                75    396,478    649,581    0.07%  B/E
N585UA  Trust Beneficial Interests                -    -    -    0.00%  B/E
United N659UA-767, LLC (N659UA)  Trust Beneficial Interests                467    2,306,488    2,609,590    0.28%  E/F
United N661UA-767, LLC (N661UA)  Trust Beneficial Interests                453    2,264,254    2,627,969    0.28%  E/F
                         6,570,203    7,885,512    0.84%   

  

6
 

 

TCP Capital Corp.

 

Consolidated Statement of Investments (Unaudited) (Continued)

 

June 30, 2014

 

Showing Percentage of Total Cash and Investments of the Company

  

                               % of    
Issuer  Instrument  Ref  Spread  Floor   Maturity  Shares   Cost   Value   Portfolio   Notes
                                    
Equity Securities (continued)                                        
Resin, Synthetic Rubber, and Artificial Synthetic Fibers and Filaments Manufacturing        
KAGY Holding Company, Inc.  Series A Preferred Stock                 9,778   $1,091,200   $754,378    0.08%  B/C/E
                                         
Semiconductor and Other Electronic Component Manufacturing                          
AIP/IS Holdings, LLC  Membership Units                 352    -    229,504    0.02%  C/E
                                         
Software Publishers                                        
SLS Breeze Intermediate Holdings, Inc.  Warrants to Purchase Common Stock                 1,232,731    522,678    653,841    0.07%  C/E
                                         
Wired Telecommunications Carriers                                     
Integra Telecom, Inc.  Common Stock                 1,274,522    8,433,884    5,206,677    0.56%  C/E
Integra Telecom, Inc.  Warrants                 346,939    19,920    199,386    0.02%  C/E
V Telecom Investment S.C.A. (Luxembourg)  Common Shares                 1,393    3,236,256    3,742,115    0.41%  C/D/E/I
                          11,690,060    9,148,178    0.99%   
                                         
Total Equity Securities                         68,696,673    29,473,911    3.19%   
                                         
Total Investments                         921,592,377    894,669,124    96.82%   
                                         
Cash and Cash Equivalents                                        
Wells Fargo & Company  Overnight Repurchase Agreement Collateralized by Freddie Mac Note  Fixed  0.05%   -   7/1/2014             8,548,755    0.93%   
Union Bank of California  Commercial Paper  Fixed  0.10%   -   7/1/2014             16,000,000    1.73%   
Cash Denominated in Foreign Currencies                              258,660    0.03%   
Cash Held on Account at Various Institutions                              4,572,117    0.49%   
Cash and Cash Equivalents                              29,379,532    3.18%   
                                         
Total Cash and Investments                             $924,048,656    100.00%  H

 

Notes to Statement of Investments:

 

(A)Investments in bank debt generally are bought and sold among institutional investors in transactions not subject to registration under the Securities Act of 1933. Such transactions are generally subject to contractual restrictions, such as approval of the agent or borrower.

 

(B)Non-controlled affiliate – as defined under the Investment Company Act of 1940 (ownership of between 5% and 25% of the outstanding voting securities of this issuer). See Consolidated Schedule of Changes in Investments in Affiliates.

 

(C)Non-income producing security.

 

(D)Principal amount denominated in foreign currency. Amortized cost and fair value converted from foreign currency to US dollars. (See Note 2)

 

(E)Restricted security. (See Note 2)

 

(F)Controlled issuer – as defined under the Investment Company Act of 1940 (ownership of 25% or more of the outstanding voting securities of this issuer). Investment is not more than 50% owned nor deemed to be a significant subsidiary. See Consolidated Schedule of Changes in Investments in Affiliates.

 

(G)Investment has been segregated to collateralize certain unfunded commitments.

 

(H)All cash and investments, except those referenced in Notes G above, are pledged as collateral under certain debt as described in Note 4 to the Consolidated Financial Statements.

 

(I)Non-U.S. company or principal place of business outside the U.S. and as a result is not a qualifying asset under Section 55(a) of the Investment Company Act. Under the Investment Company Act, the Company may not acquire any non-qualifying asset unless, at the time such acquisition is made, qualifying assets represent at least 70% of the Company's total assets.

 

(J)Exempt from the definition of investment company under Section 3(c) of the Investment Company Act and as a result is not a qualifying asset under Section 55(a) of the Investment Company Act. Under the Investment Company Act, the Company may not acquire any non-qualifying asset unless, at the time such acquisition is made, qualifying assets represent at least 70% of the Company's total assets.

 

(K)Publicly traded company with a market capitalization greater than $250 million and as a result is not a qualifying asset under Section 55(a) of the Investment Company Act. Under the Investment Company Act, the Company may not acquire any non-qualifying asset unless, at the time such acquisition is made, qualifying assets represent at least 70% of the Company's total assets.

 

(L)Negative balances relate to an unfunded commitment that was acquired at a discount.

 

LIBOR or EURIBOR resets monthly (M), quarterly (Q), or semiannually (S).

 

Aggregate acquisitions and aggregate dispositions of investments, other than government securities, totaled $278,982,081, and $155,421,221 respectively for the six months ended June 30, 2014. Aggregate acquisitions includes investment assets received as payment in kind. Aggregate dispositions includes principal paydowns on and maturities of debt investments. The total value of restricted securities and bank debt as of June 30, 2014 was $894,436,320, or 96.8% of total cash and investments of the Company.  

 

Options and Swaps at June 30, 2014 were as follows:  

 

Investment  Notional
Amount
   Fair Value 
         
Interest Rate Cap, 4%, expires 5/15/2016  $25,000,000   $1,855 
Euro/US Dollar Cross-Currency Basis Swap, Pay Euros/Receive USD, Expires 3/31/17  $4,289,019   $(208,862)

  

See accompanying notes.

 

7
 

 

 TCP Capital Corp.

 

 Consolidated Statement of Investments

 

December 31, 2013

 

Showing Percentage of Total Cash and Investments of the Company

 

                              % of    
Issuer  Instrument  Ref  Spread  Floor  Maturity  Principal   Cost   Value   Portfolio   Notes
                                   
Debt Investments (A)                                       
Accounting, Tax Preparation, Bookkeeping, and Payroll Services                                 
Expert Global Solutions, LLC  First Lien Term Loan  LIBOR (Q)  7.25%   1.25%  4/3/2018  $699,754   $701,280   $703,691    0.09%   
Expert Global Solutions, LLC  Second Lien Term Loan  LIBOR (Q)  11.00%   1.50%  10/3/2018  $7,434,877    7,228,004    7,382,833    0.94%   
                         7,929,284    8,086,524    1.03%   
Advertising, Public Relations, and Related Services                                    
Doubleplay III Limited (United Kingdom)  First Lien Facility A1
Term Loan
  EURIBOR (Q)  6.25%   1.25%  3/18/2018  13,165,705    16,428,630    16,736,606    2.12%  D/J
                                        
Architectural, Engineering, and Related Services                                    
ESP Holdings, Inc.  Jr Unsecured Subordinated Promissory Notes  Fixed  6% Cash + 10% PIK   -  12/31/2019  $7,959,369    7,959,369    7,959,369    1.01%  B/E
                                        
Artificial Synthetic Fibers and Filaments Manufacturing                              
AGY Holding Corp.  Sr Secured Term Loan  Fixed  12.00%      9/15/2016  $2,056,927    2,056,927    2,056,927    0.26%  B
AGY Holding Corporation  Second Lien Term Loan  Fixed  11.00%   -  11/15/2016  $9,268,000    7,586,317    9,268,000    1.17%  B/E
                         9,643,244    11,324,927    1.43%   
Beverage Manufacturing                                       
Carolina Beverage Group, LLC  Secured Notes  Fixed  10.625%   -  8/1/2018  $7,780,000    7,780,000    8,207,900    1.04%  E
                                        
Business Support Services                                       
STG-Fairway Acquisitions, Inc.  Second Lien Term Loan  LIBOR (Q)  9.25%   1.25%  8/28/2019  $14,643,455    13,944,123    14,929,002    1.89%   
                                        
Chemical Manufacturing                                       
Archroma  Term Loan B  LIBOR (Q)  8.25%   1.25%  9/30/2018  $17,456,250    17,107,125    17,401,699    2.20%   
                                        
Communications Equipment Manufacturing                                    
Globecomm Systems Inc.  First Lien Term Loan  LIBOR (Q)  7.625%   1.25%  12/11/2018  $15,000,000    14,850,000    15,097,500    1.91%  B
                                        
Computer Equipment Manufacturing                                    
ELO Touch Solutions, Inc.  Second Lien Term Loan  LIBOR (Q)  10.50%   1.50%  12/1/2018  $10,000,000    9,666,672    9,100,000    1.15%   
                                        
Converted Paper Products Manufacturing                                    
Ranpak Corp.  Second Lien Term Loan  LIBOR (Q)  7.25%   1.25%  4/23/2020  $3,469,573    3,434,877    3,573,660    0.45%   
                                        
Computer Systems Design and Related Services                                    
Blue Coat Systems  First Lien Revolver  LIBOR (Q)  3.50%   1.00%  5/31/2018  $4,500,000    3,540,000    4,060,800    0.51%  L
Blue Coat Systems  Second Lien Term Loan  LIBOR (Q)  8.50%   1.00%  6/28/2020  $15,000,000    14,878,125    15,300,000    1.94%   
OnX Enterprise Solutions, Ltd.  First Lien Term Loan  LIBOR (Q)  7.00%   -  9/3/2018  $10,640,000    10,483,300    10,709,160    1.36%   
OnX USA, LLC  First Lien Term Loan  LIBOR (Q)  7.00%   -  9/3/2018  $5,320,000    5,244,790    5,354,580    0.68%   
Websense, Inc.  Second Lien Term Loan  LIBOR (Q)  7.25%   1.00%  12/27/2020  $7,200,000    7,164,000    7,218,000    0.91%   
                         41,310,215    42,642,540    5.40%   
Data Processing, Hosting, and Related Services                                    
The Telx Group, Inc.  Senior Unsecured Notes  Fixed  10% Cash  + 2% PIK   -  9/26/2019  $7,098,916    6,960,435    7,631,335    0.97%  E
                                        
Panda Sherman Power, LLC  First Lien Term Loan  LIBOR (Q)  7.50%   1.50%  9/14/2018  $11,070,172    10,932,474    11,402,277    1.44%   
Panda Temple Power II, LLC  First Lien Term Loan  LIBOR (Q)  6.00%   1.25%  4/3/2019  $5,892,970    5,834,041    6,069,759    0.77%   
                         16,766,515    17,472,036    2.21%   
Electrical Equipment and Component Manufacturing                                    
Palladium Energy, Inc.  First Lien Term Loan  LIBOR (Q)  9.00%   1.00%  12/26/2027  $16,500,317    16,225,541    16,426,066    2.08%   
                                        
Fabricated Metal Product Manufacturing                                    
Constellation Enterprises, LLC  First Lien Notes  Fixed  10.625%   -  2/1/2016  $12,500,000    12,322,875    10,875,000    1.38%  E/G
                                        
Financial Investment Activities                                       
Marsico Capital Management  First Lien Term Loan  LIBOR (M)  5.00%   -  12/31/2022  $10,637,623    13,394,183    3,882,732    0.49%  K
                                        
Freight Transportation Arrangement                                    
Livingston International, Inc. (Canada)  Second Lien Term Loan  LIBOR (Q)  7.75%   1.25%  4/18/2020  $3,665,217    3,597,620    3,756,848    0.48%  J
                                        
Full-Service Restaurants                                       
RM Holdco, LLC  Subordinated Convertible Term Loan  Fixed  1.12% PIK   -  3/21/2018  $5,164,796    5,164,796    2,197,621    0.28%  B
RM OpCo, LLC  Convertible First Lien Term Loan Tranche B-1  Fixed  12% Cash  + 7% PIK   -  3/21/2016  $1,370,199    1,339,883    1,370,199    0.17%  B
RM OpCo, LLC  First Lien Term Loan Tranche A  Fixed  11.00%   -  3/21/2016  $3,626,947    3,626,947    3,626,947    0.46%  B
RM OpCo, LLC  First Lien Term Loan Tranche B  Fixed  12% Cash  + 7% PIK   -  3/21/2016  $6,825,328    6,825,328    6,825,328    0.86%  B
RM OpCo, LLC  First Lien Term Loan Tranche B-1  Fixed  12% Cash  + 7% PIK   -  3/21/2016  $2,150,088    2,109,019    2,150,088    0.27%  B
                         19,065,973    16,170,183    2.04%   

 

8
 

 

TCP Capital Corp.

 

Consolidated Statement of Investments (Continued)

 

December 31, 2013

 

Showing Percentage of Total Cash and Investments of the Company

 

                              % of    
Issuer  Instrument  Ref  Spread  Floor  Maturity  Principal   Cost   Value   Portfolio   Notes
                                   
Debt Investments (continued)                                       
Gaming Industries                                       
AP Gaming I, LLC  First Lien Term Loan B  LIBOR (Q)  8.25%   1.00%  12/20/2020  $15,000,000   $14,550,000   $14,737,500    1.87%   
                                        
Grocery Stores                                       
Bashas, Inc.  First Lien FILO Term Loan  LIBOR (M)  9.35%   1.50%  12/28/2015  $14,843,788    14,802,168    15,066,445    1.91%   
                                        
Inland Water Transportation                                       
US Shipping Corp  First Lien Term Loan B  LIBOR (Q)  7.75%   1.25%  4/30/2018  $12,603,333    12,477,300    12,965,679    1.64%   
                                        
Insurance Related Activities                                       
Confie Seguros Holding II Co.  Second Lien Term Loan  LIBOR (Q)  9.00%   1.25%  5/8/2019  $6,341,809    6,245,733    6,391,370    0.81%   
                                        
Merchant Wholesalers                                       
Envision Acquisition Company, LLC  Second Lien Term Loan  LIBOR (Q)  8.75%   1.00%  11/4/2021  $9,079,011    8,897,430    9,192,498    1.16%   
                                        
Metal Ore Mining                                       
St Barbara Ltd. (Australia)  First Priority Senior Secured Notes  Fixed  8.875%   -  4/15/2018  $7,359,000    7,326,651    6,144,765    0.78%  E
                                        
Motion Picture and Video Industries                                       
CORE Entertainment, Inc.  First Lien Term Loan  Fixed  9.00%   -  6/21/2017  $9,462,231    9,381,116    8,610,631    1.09%   
CORE Entertainment, Inc.  Second Lien Term Loan  Fixed  13.50%   -  6/21/2018  $7,569,785    7,502,054    6,858,225    0.88%   
                         16,883,170    15,468,856    1.97%   
Newspaper, Periodical, Book, and Directory Publishers                                 
Hanley-Wood, LLC  First Lien FILO Term Loan  LIBOR (Q)  6.75%   1.25%  7/15/2018  $16,707,600    16,707,600    16,699,246    2.13%   
MediMedia USA, Inc.  First Lien Revolver  LIBOR (M)  6.75%   -  5/20/2018  $4,960,000    3,797,500    4,523,908    0.57%   
MediMedia USA, Inc.  First Lien Term Loan  LIBOR (M)  6.75%   1.25%  11/20/2018  $9,701,250    9,433,029    9,458,719    1.20%   
                         29,938,129    30,681,873    3.90%   
Nondepository Credit Intermediation                                    
Caribbean Financial Group (Cayman Islands)  Senior Secured Notes  Fixed  11.50%   -  11/15/2019  $10,000,000    9,824,072    10,700,000    1.35%  E
Trade Finance Funding I, Ltd. (Cayman Islands)  Secured Class B Notes  Fixed  10.75%   -  11/13/2018  $15,000,000    15,000,000    14,962,500    1.90%  E/J
                         24,824,072    25,662,500    3.25%   
Nonresidential Building Construction                                    
NCM Group Holdings, LLC  First Lien Term Loan  LIBOR (Q)  11.50%   1.00%  8/29/2018  $10,000,000    9,620,619    9,875,000    1.25%   
                                        
Nonscheduled Air Transportation                                       
One Sky Flight, LLC  Second Lien Term Loan  Fixed  12% Cash
 + 3% PIK
   -  5/4/2019  $18,200,000    16,929,086    17,708,600    2.24%   
                                        
Oil and Gas Extraction                                       
Willbros Group, Inc.  First Lien Term Loan  LIBOR (Q)  9.75%   1.25%  8/7/2019  $15,426,118    15,051,713    15,657,510    1.98%   
                                        
Other Telecommunications                                       
Securus Technologies, Inc.  Second Lien Term Loan  LIBOR (Q)  7.75%   1.25%  4/30/2021  $14,000,000    13,860,000    13,925,660    1.76%   
                                        
Petroleum and Coal Products Manufacturing                                    
Boomerang Tube, LLC  Second Lien Term Loan  LIBOR (Q)  9.50%   1.50%  10/11/2017  $7,749,023    7,563,978    7,477,807    0.95%   
                                        
Plastics Products Manufacturing                                       
Iracore International, Inc.  Senior Secured Notes  Fixed  9.50%   -  6/1/2018  $13,600,000    13,600,000    14,426,622    1.83%  E
                                        
Professional, Scientific, and Technical Services                                    
Connolly, LLC  Second Lien Term Loan  LIBOR (Q)  9.25%   1.25%  7/15/2019  $12,000,000    11,829,534    12,270,000    1.55%   
ConvergeOne Holdings  First Lien Term Loan  LIBOR (Q)  8.00%   1.25%  5/8/2019  $12,654,643    12,464,823    12,570,236    1.59%   
                         24,294,357    24,840,236    3.14%   
Promoters of Performing Arts, Sports, and Similar Events                                    
Stadium Management Group  Second Lien Term Loan  LIBOR (M)  9.50%   1.25%  12/7/2018  $11,000,000    10,817,390    11,055,000    1.40%   
                                        
Radio and Television Broadcasting                                       
SiTV, Inc.  First Lien Term Loan  LIBOR (Q)  6% Cash
 + 4% PIK
   2.00%  8/3/2016  $6,995,124    6,648,634    6,774,778    0.86%   
The Tennis Channel, Inc.  First Lien Term Loan  LIBOR (Q)  8.50%   -  5/29/2017  $17,589,459    17,134,705    17,615,843    2.23%   
                         23,783,339    24,390,621    3.09%   
Retail                                       
Kenneth Cole Productions, Inc.  First Lien FILO Term Loan  LIBOR (M)  10.40%   1.00%  9/25/2017  $11,272,727    11,051,496    11,329,090    1.44%   
Shopzilla, Inc.  Second Lien Term Loan  LIBOR (Q)  9.50%   -  3/31/2016  $6,710,057    6,525,027    6,683,216    0.85%   
                         17,576,523    18,012,306    2.29%   
Satellite Telecommunications                                       
Avanti Communications Group, PLC (United Kingdom)  Senior Secured Notes  Fixed  10.00%   -  10/1/2019  $9,914,000    9,914,000    10,335,345    1.31%  E/H/J

 

9
 

 

TCP Capital Corp.

 

 Consolidated Statement of Investments (Continued)

 

December 31, 2013

 

Showing Percentage of Total Cash and Investments of the Company

 

                              % of    
Issuer  Instrument  Ref  Spread  Floor  Maturity  Principal   Cost   Value   Portfolio   Notes
                                   
Debt Investments (continued)                                       
Scheduled Air Transportation                                       
Aircraft Leased to Delta Air Lines, Inc.                                    
N913DL  Aircraft Secured Mortgage  Fixed  8.00%   -  3/15/2017  $289,048   $289,048   $296,820    0.04%  F
N918DL  Aircraft Secured Mortgage  Fixed  8.00%   -  8/15/2018  $388,001    388,001    397,290    0.05%  F
N954DL  Aircraft Secured Mortgage  Fixed  8.00%   -  3/20/2019  $514,375    514,375    524,620    0.07%  F
N955DL  Aircraft Secured Mortgage  Fixed  8.00%   -  6/20/2019  $533,283    533,283    543,320    0.07%  F
N956DL  Aircraft Secured Mortgage  Fixed  8.00%   -  5/20/2019  $532,275    532,275    542,640    0.07%  F
N957DL  Aircraft Secured Mortgage  Fixed  8.00%   -  6/20/2019  $537,947    537,947    548,250    0.07%  F
N959DL  Aircraft Secured Mortgage  Fixed  8.00%   -  7/20/2019  $543,573    543,573    553,520    0.07%  F
N960DL  Aircraft Secured Mortgage  Fixed  8.00%   -  10/20/2019  $564,855    564,855    574,430    0.07%  F
N961DL  Aircraft Secured Mortgage  Fixed  8.00%   -  8/20/2019  $558,427    558,427    568,310    0.07%  F
N976DL  Aircraft Secured Mortgage  Fixed  8.00%   -  2/15/2018  $394,360    394,360    404,600    0.05%  F
Aircraft Leased to United Airlines, Inc.
N510UA  Aircraft Secured Mortgage  Fixed  20.00%   -  10/26/2016  $328,848    328,848    404,605    0.05%  B
N512UA  Aircraft Secured Mortgage  Fixed  20.00%   -  10/26/2016  $334,535    334,535    414,010    0.05%  B
N536UA  Aircraft Secured Mortgage  Fixed  16.00%   -  9/29/2014  $108,845    108,845    114,000    0.01%  B
N545UA  Aircraft Secured Mortgage  Fixed  16.00%   -  8/29/2015  $249,695    249,695    275,405    0.03%  B
N585UA  Aircraft Secured Mortgage  Fixed  20.00%   -  10/25/2016  $392,794    392,794    486,115    0.06%  B
N659UA  Aircraft Secured Mortgage  Fixed  12.00%   -  2/28/2016  $2,708,150    2,708,150    2,948,986    0.37%  F
N661UA  Aircraft Secured Mortgage  Fixed  12.00%   -  5/4/2016  $2,880,186    2,880,186    3,171,026    0.40%  F
                         11,859,197    12,767,947    1.60%   
Scientific Research and Development Services                                    
BPA Laboratories, Inc.  Senior Secured Notes  Fixed  12.25%   -  4/1/2017  $17,200,000    16,536,295    17,630,000    2.23%  E
                                        
Semiconductor and Other Electronic Component Manufacturing                              
Isola USA Corporation  Senior Secured Term Loan B  LIBOR (Q)  8.25%   1.00%  11/29/2018  $14,583,333    14,366,560    14,729,167    1.87%   
                                        
Software Publishers                                       
BlackLine Systems, Inc.  First Lien Term Loan  LIBOR (Q)  0.4% Cash
 + 7.6% PIK
   1.50%  9/25/2018  $12,579,747    11,811,044    12,183,485    1.56%   
Coreone Technologies, LLC  First Lien Term Loan  LIBOR (Q)  3.75% Cash
 +5% PIK
   1.00%  9/14/2018  $13,556,801    13,243,533    13,455,125    1.72%   
Deltek, Inc.  Second Lien Term Loan  LIBOR (Q)  8.75%   1.25%  10/10/2019  $15,000,000    14,805,253    15,300,000    1.94%   
Edmentum, Inc.  Second Lien Term Loan  LIBOR (Q)  9.75%   1.50%  5/17/2019  $15,000,000    14,748,486    15,112,500    1.91%   
                         54,608,316    56,051,110    7.13%   
                                        
Specialty Hospitals                                       
UBC Healthcare Analytics, Inc.  First Lien Term Loan  LIBOR (Q)  9.00%   1.00%  7/1/2018  $5,526,021    5,498,391    5,559,177    0.70%   
Vantage Oncology, LLC  Senior Secured Notes  Fixed  9.50%   -  6/15/2017  $5,000,000    5,000,000    5,137,500    0.65%  E
                         10,498,391    10,696,677    1.35%   
Structured Note Funds                                       
Magnolia Finance V plc (Cayman Islands)  Asset-Backed Credit Linked Notes  Fixed  13.125%   -  8/2/2021  $15,000,000    15,000,000    15,000,000    1.90%  E/J
                                        
Textile Furnishings Mills                                       
Lexmark Carpet Mills, Inc.  First Lien Term Loan  LIBOR (Q)  10.00%   1.00%  9/30/2018  $16,351,467    15,942,680    16,392,346    2.08%   
                                        
Wired Telecommunications Carriers                                       
Integra Telecom Holdings, Inc.  Second Lien Term Loan  LIBOR (Q)  8.50%   1.25%  2/22/2020  $15,000,000    14,701,027    15,459,375    1.96%   
                                        
Wireless Telecommunications Carriers                                    
Alpheus Communications, LLC  First Lien Delayed FILO Term Loan  LIBOR (Q)  6.92%   1.00%  5/31/2018  $    (11,183)   (8,437)   -   M
Alpheus Communications, LLC  First Lien FILO Term Loan  LIBOR (Q)  6.92%   1.00%  5/31/2018  $8,248,124    8,166,127    8,186,263    1.04%   
Globalive Wireless Management Corp.
(Canada)
  First Lien Term Loan  LIBOR (Q)  10.90%   -  4/30/2014  $3,037,292    2,933,872    3,067,665    0.39%  J
Gogo, LLC  First Lien Term Loan  LIBOR (Q)  9.75%   1.50%  6/21/2017  $19,587,428    18,707,700    21,252,360    2.69%   
                         29,796,516    32,497,851    4.12%   
                                        
Total Debt Investments                        720,651,321    726,514,593    92.05%   

 

10
 

 

TCP Capital Corp.

 

Consolidated Statement of Investments (Continued)

 

December 31, 2013

 

Showing Percentage of Total Cash and Investments of the Company

 

                              % of    
Issuer  Instrument  Ref  Spread  Floor  Maturity  Shares   Cost   Value   Portfolio   Notes
                                   
Equity Securities                                       
Architectural, Engineering, and Related Services                                    
ESP Holdings, Inc.  Cumulative Preffered 15%               20,297   $2,249,930   $3,947,862    0.51%  B/C/E
ESP Holdings, Inc., Common Stock  Common Stock                88,670    9,311,782    2,856,346    0.36%  B/C/E
                         11,561,712    6,804,208    0.87%   
                                        
Business Support Services                                       
STG-Fairway Holdings  Class A Units                841,479    1,174,225    1,722,508    0.22%  C/E
Wasserstein Cosmos Co-Invest, L.P.  Limited Partnership Units                5,000,000    5,000,000    5,000,000    0.64%  B/C/E
                         6,174,225    6,722,508    0.86%   
Data Processing, Hosting, and Related Services                                    
Anacomp, Inc.  Class A Common Stock                1,255,527    26,711,048    1,004,422    0.13%  B/C/E
                                        
Depository Credit Intermediation                                       
Doral Financial Corporation  Common Stock                53,890    11,699,417    843,913    0.11%  C/L
                                        
Financial Investment Activities                                       
Marsico Holdings, LLC  Common Interest Units                168,698    172,694    4,302    -   C/E/K
                                        
Full-Service Restaurants                                       
RM Holdco, LLC  Membership Units                13,161,000    2,010,777    -    -   B/C/E
                                        
Machine Shops; Turned Product; and Screw, Nut, and Bolt Manufacturing                                 
Precision Holdings, LLC  Class C Membership Interests                33    -    41,645    0.01%  C/E
                                        
Nonmetallic Mineral Mining and Quarrying                                    
EPMC HoldCo, LLC  Membership Units                1,312,720    -    1,562,137    0.20%  B/E
                                        
Nonscheduled Air Transportation                                       
Flight Options Holdings I, Inc.  Warrants to Purchase Common Stock                1,843    1,274,000    1,268,904    0.16%  C/E
                                        
Radio and Television Broadcasting                                       
SiTV, Inc.  Warrants to Purchase Common Stock                233,470    300,322    354,874    0.04%  C/E
                                        
Retail                                       
Shop Holding, LLC  Class A Unit                490,037    462,576    532,919    0.07%  C/E
Shop Holding, LLC  Warrants to Purchase Class A Unit                326,691    -    38,258    -   C/E
                         462,576    571,177    0.07%   
Scheduled Air Transportation                                       
Aircraft Leased to Delta Air Lines, Inc.
N913DL  Trust Beneficial Interests                727    97,376    125,970    0.02%  E/F
N918DL  Trust Beneficial Interests                623    109,938    142,970    0.02%  E/F
N954DL  Trust Beneficial Interests                591    133,027    68,000    0.01%  E/F
N955DL  Trust Beneficial Interests                576    133,868    113,560    0.01%  E/F
N956DL  Trust Beneficial Interests                580    133,907    108,800    0.01%  E/F
N957DL  Trust Beneficial Interests                576    134,785    109,650    0.01%  E/F
N959DL  Trust Beneficial Interests                573    135,658    110,500    0.01%  E/F
N960DL  Trust Beneficial Interests                563    139,173    109,650    0.01%  E/F
N961DL  Trust Beneficial Interests                570    138,350    103,870    0.01%  E/F
N976DL  Trust Beneficial Interests                654    113,413    103,033    0.01%  E/F
Aircraft Leased to United Airlines, Inc.
N510UA  Trust Beneficial Interests                54    197,409    465,625    0.06%  B/E
N512UA  Trust Beneficial Interests                53    193,046    458,277    0.06%  B/E
N536UA  Trust Beneficial Interests                81    396,289    656,766    0.08%  B/E
N545UA  Trust Beneficial Interests                67    348,071    641,840    0.08%  B/E
N585UA  Trust Beneficial Interests                53    214,737    571,706    0.07%  B/E
United N659UA-767, LLC (N659UA)  Trust Beneficial Interests                412    2,097,640    2,840,323    0.36%  E/F
United N661UA-767, LLC (N661UA)  Trust Beneficial Interests                400    2,066,062    2,852,677    0.36%  E/F
                         6,782,749    9,583,217    1.19%   
                                        
Resin, Synthetic Rubber, and Artificial Synthetic Fibers and Filaments Manufacturing                              
KAGY Holding Company, Inc.  Series A Prefereed Stock                9,778    1,091,200    662,134    0.08%  B/C/E
                                        
Semiconductor and Other Electronic Component Manufacturing                                    
AIP/IS Holdings, LLC  Membership Units                352    -    229,504    0.03%  C/E
                                        
Software Publishers                                       
SLS Breeze Intermediate Holdings, Inc.  Warrants to Purchase Common Stock                1,232,731    522,678    561,632    0.07%  C/E
                                        
Wired Telecommunications Carriers                                       
Integra Telecom, Inc.  Common Stock                1,274,522    8,433,884    5,583,686    0.72%  C/E
Integra Telecom, Inc.  Warrants                346,939    19,920    194,050    0.02%  C/E
V Telecom Investment S.C.A (Luxembourg)  Common Shares                1,393    3,236,256    3,756,053    0.48%  C/D/E/J
                         11,690,060    9,533,789    1.22%   
                                        
Total Equity Securities                        80,453,458    39,748,366    5.04%   
                                        
Total Investments                        801,104,779    766,262,959         

 

11
 

  

TCP Capital Corp.

 

Consolidated Statement of Investments (Continued)

 

December 31, 2013

 

Showing Percentage of Total Cash and Investments of the Company


                              % of    
Issuer  Instrument  Ref  Spread  Floor  Maturity  Shares   Cost   Value   Portfolio   Notes
                                   
Cash and Cash Equivalents                                       
Wells Fargo & Company  Overnight Repurchase Agreement  Fixed  0.09%   -  1/2/2014          $10,501,688    1.33%   
Union Bank of California  Commercial Paper  Fixed  0.10%   -  1/2/2014             8,499,976    1.07%   
Cash Denominated in Foreign Currencies                             121,389    0.02%   
Cash Held on Account at Various Institutions                             3,861,129    0.49%   
Cash and Cash Equivalents                             22,984,182    2.91%   
                                        
Total Cash and Investments                            $789,247,141    100.00%  I

 

Notes to Consolidated Statement of Investments:

 

(A) Investments in bank debt generally are bought and sold among institutional investors in transactions not subject to registration under the Securities Act of 1933. Such transactions are generally subject to contractual restrictions, such as approval of the agent or borrower.
 
(B) Non-controlled affiliate – as defined under the Investment Company Act of 1940 (ownership of between 5% and 25% of the outstanding voting securities of this issuer). See Consolidated Schedule of  Changes in Investments in Affiliates.
 
(C) Non-income producing security.
 
(D) Principal amount denominated in foreign currency. Amortized cost and fair value converted from foreign currency to US dollars. (See Note 2)
 
(E) Restricted security. (See Note 2)
 
(F) Controlled issuer – as defined under the Investment Company Act of 1940 (ownership of 25% or more of the outstanding voting securities of this issuer). Investment is not more than 50% owned nor deemed to be a significant subsidiary. See Consolidated Schedule of Changes in Investments in Affiliates.
 
(G) Investment has been segregated to collateralize certain unfunded commitments.
 
(H) $2,000,000 principal amount of this investment has been segregated to collateralize certain unfunded commitments.
 
(I)  All cash and investments, except those referenced in Notes G and H above, are pledged as collateral under the Revolving Facilities as described in Note 4 to the Consolidated Financial Statements.
 
(J) Non-U.S. company or principal place of business outside the U.S. and as a result is not qualifying asset under Section 55(a) of the Investment Company Act. Under the Investment Company Act, the Company may not acquire any non-qualifying asset unless, at the time such acquisition is made, qualifying assets represent at least 70% of the Company's total assets.
 
(K) Excepted from the definition of investment company under Section 3(c) of the Investment Company Act and as a result is not qualifying under Section 55(a) of the Investment Company Act. Under the Investment Company Act, the Company may not acquire any non-qualifying asset unless, at the time such acquisition is made, qualifying assets represent at least 70% of the Company's total assets.
 
(L) Publicly traded company with a market capitalization greater than $250 million and as a result is not qualifying under Section 55(a) of the Investment Company Act. Under the Investment Company Act, the Company may not acquire any non-qualifying asset unless, at the time such acquisition is made, qualifying assets represent at least 70% of the Company's total assets.
 
(M) Negative balances relate to an unfunded commitment that was acquired at a discount.
 
LIBOR or EURIBOR resets monthly (M), quarterly (Q), or semiannually (S).
 
Aggregate acquisitions and aggregate dispositions of investments, other than government securities, totaled $471,087,319, and $235,641,665, respectively for the year ended December 31, 2013. Aggregate acquisitions includes investment assets received as payment in kind. Aggregate dispositions includes principal paydowns on and maturities of debt investments. The total value of restricted securities and bank debt as of December 31, 2013 was $765,419,046, or 97.0% of total cash and investments of the Company.

 

Options and Swaps at December 31, 2013 were as follows:

 

Investment  Notional
Amount
   Fair Value 
Interest Rate Cap, 4%, expires 5/15/2016  $25,000,000   $14,139 
Euro/US Dollar Cross-Currency Basis Swap, Pay Euros/Receive USD, Expires 3/31/17  $4,289,019   $(331,183)

 

See accompanying notes.

 

12
 

 

TCP Capital Corp.

 

Consolidated Statements of Operations (Unaudited)

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2014   2013   2014   2013 
                 
Investment income                    
Interest income:                    
Companies less than 5% owned  $22,333,382   $12,247,602   $40,474,125   $27,487,968 
Companies 5% to 25% owned   1,357,315    1,202,653    2,694,179    2,096,165 
Companies more than 25% owned   234,835    312,268    492,462    642,585 
Dividend income:                    
Companies 5% to 25% owned   -    -    1,968,748    - 
Other income:                    
Companies less than 5% owned   319,582    419,415    954,316    576,948 
Companies 5% to 25% owned   87,504    118,653    208,543    219,756 
Companies more than 25% owned   254,682    168,604    463,572    311,515 
Total investment income   24,587,300    14,469,195    47,255,945    31,334,937 
                     
Operating expenses                    
Management and advisory fees   3,104,872    1,940,295    5,991,080    3,905,033 
Interest expense   1,019,751    186,702    1,476,612    323,109 
Amortization of deferred debt issuance costs   429,394    142,914    802,148    251,478 
Administrative expenses   379,469    167,808    636,275    335,616 
Legal fees, professional fees and due diligence expenses   355,237    162,152    559,393    301,204 
Commitment fees   215,864    38,506    407,062    61,094 
Director fees   81,670    72,000    167,382    143,809 
Insurance expense   64,928    42,522    118,828    78,795 
Custody fees   60,849    30,232    111,656    59,651 
Other operating expenses   449,058    224,535    768,644    417,506 
Total operating expenses   6,161,092    3,007,666    11,039,080    5,877,295 
                     
Net investment income   18,426,208    11,461,529    36,216,865    25,457,642 
                     
Net realized and unrealized gain (loss) on investments and foreign currency
Net realized gain (loss):                    
Investments in companies less than 5% owned   125,710    (4,095,160)   (6,670,011)   (3,577,502)
Investments in companies 5% to 25% owned   808,036    -    808,411    - 
Net realized gain (loss)   933,746    (4,095,160)   (5,861,600)   (3,577,502)
                     
Net change in net unrealized appreciation/depreciation   (3,945,684)   4,753,522    8,029,680    6,591,253 
Net realized and unrealized gain (loss)   (3,011,938)   658,362    2,168,080    3,013,751 
                     
Dividends on Series A preferred equity facility   (356,677)   (392,669)   (725,812)   (786,082)
Net change in accumulated dividends on Series A                    
preferred equity facility   (383)   19,111    10,112    35,122 
Distributions of incentive allocation to the General Partner from:                    
Net investment income   (3,613,830)   (2,217,594)   (7,100,233)   (4,941,336)
Net realized gains   -    (258,441)   -    (258,441)
Net change in reserve for incentive allocation   602,388    126,768    (433,616)   (344,310)
                     
Net increase in net assets applicable to common shareholders resulting from operations  $12,045,768   $9,397,066   $30,135,396   $22,176,346 
Basic and diluted earnings per common share  $0.33   $0.40   $0.83   $0.98 
Basic and diluted weighted average common shares outstanding   36,200,021    23,639,742    36,199,969    22,564,670 

 

See accompanying notes.

 

13
 

 

TCP Capital Corp.

 

Consolidated Statements of Changes in Net Assets

 

           Paid in   Accumulated       Accumulated         
   Common Stock   Capital   Net   Accumulated   Net   Non-     
       Par   in Excess of   Investment   Net Realized   Unrealized   controlling   Total Net 
   Shares   Amount   Par   Income   Losses   Depreciation   Interest   Assets 
                                 
Balance at December 31, 2012   21,477,628   $21,478   $444,234,060   $22,526,179   $(59,023,861)  $(91,770,306)  $-   $315,987,550 
                                         
Issuance of common stock in public offering   14,720,000    14,720    224,548,170    -    -    -    -    224,562,890 
Issuance of common stock from dividend reinvestment plan   2,288    2    37,414    -    -    -    -    37,416 
Net investment income   -    -    -    54,330,262    -    -    -    54,330,262 
Realized and unrealized gains (losses)   -    -    -    -    (47,384,746)   56,456,107    -    9,071,361 
Dividends on Series A preferred equity facility   -    -    -    (1,494,552)   -    -    -    (1,494,552)
General Partner incentive allocation   -    -    -    (10,567,142)   (645,691)   -    (1,168,583)   (12,381,416)
Dividends paid to common shareholders   -    -    -    (40,502,256)   -    -    -    (40,502,256)
Tax reclassification of stockholders' equity in accordance
with generally accepted accounting principles
   -    -    (977,624)   (276,396)   1,254,020    -    -    - 
Balance at December 31, 2013  $36,199,916   $36,200   $667,842,020   $24,016,095   $(105,800,278)  $(35,314,199)  $(1,168,583)  $549,611,255 
                                         
Issuance of common stock from dividend reinvestment plan   214    -    3,715    -    -    -    -    3,715 
Issuance of convertible debt   -    -    2,515,594    -    -    -    -    2,515,594 
Net investment income   -    -    -    36,216,865    -    -    -    36,216,865 
Realized and unrealized gains (losses)   -    -    -    -    (5,861,600)   8,029,680    -    2,168,080 
Dividends on Series A preferred equity facility   -    -    -    (715,700)   -    -    -    (715,700)
General Partner incentive allocation   -    -    -    (7,100,233)   -    -    (433,616)   (7,533,849)
Dividends paid to common shareholders   -    -    -    (27,873,978)   -    -    -    (27,873,978)
Balance at June 30, 2014  $36,200,130   $36,200   $670,361,329   $24,543,049   $(111,661,878)  $(27,284,519)  $(1,602,199)  $554,391,982 

 

See accompanying notes.

14
 

 

TCP Capital Corp.

 

Consolidated Statements of Cash Flows (Unaudited)

 

   Six Months Ended June 30, 
   2014   2013 
Operating activities          
Net increase in net assets applicable to common shareholders resulting          
from operations  $30,135,396   $22,176,346 
Adjustments to reconcile net increase in net assets applicable to common          
shareholders resulting from operations to net cash provided by (used in)           
operating activities:          
Net realized loss   5,861,600    3,577,502 
Net change in unrealized appreciation/depreciation of investments   (8,028,604)   (6,611,142)
Dividends paid on Series A preferred equity facility   725,812    786,082 
Net change in accumulated dividends on Series A preferred equity facility   (10,112)   (35,122)
Net change in reserve for incentive allocation   433,616    344,310 
Accretion of original issue discount on investments   (1,851,211)   (1,324,008)
Net accretion of market discount/premium   (937,125)   (81)
Accretion of original issue discount on convertible debt   16,382    - 
Interest and dividend income paid in kind   (2,711,682)   (546,987)
Amortization of deferred debt issuance costs   802,148    251,478 
Changes in assets and liabilities:          
Purchases of investment securities   (276,270,400)   (170,316,516)
Proceeds from sales, maturities and paydowns of investments   155,421,221    121,049,823 
Increase in accrued interest income - companies less than 5% owned   (1,931,388)   (1,444,027)
Decrease (increase) in accrued interest income - companies 5% to 25% owned   42,661    (324,728)
Decrease in accrued interest income - companies more than 25% owned   6,434    5,751 
Decrease (increase) in receivable for investments sold   (13,790,910)   5,032,415 
Increase in prepaid expenses and other assets   (431,735)   (696,123)
Increase (decrease) in payable for investments purchased   (6,145,311)   28,364,525 
Increase in payable to the Investment Manager   629,627    515,806 
Increase in management and advisory fees payable   -    1,940,295 
Increase in interest payable   451,851    106,748 
Increase in incentive allocation payable   294,930    2,476,035 
Decrease in accrued expenses and other liabilities   (537,590)   (746,408)
Net cash provided by (used in) operating activities   (117,824,390)   4,581,974 
           
Financing activities          
Borrowings   344,000,000    52,000,000 
Repayments of debt   (186,000,000)   (93,000,000)
Payments of debt issuance costs   (5,184,185)   (789,675)
Dividends paid on Series A preferred equity facility   (725,812)   (786,082)
Dividends paid to common shareholders   (27,873,978)   (18,186,395)
Proceeds from shares issued in connection with dividend reinvestment plan   3,715    33,867 
Proceeds from common shares sold, net of underwriting and offering costs   -    78,176,790 
Net cash provided by financing activities   124,219,740    17,448,505 
           
Net increase in cash and cash equivalents   6,395,350    22,030,479 
Cash and cash equivalents at beginning of period   22,984,182    18,035,189 
Cash and cash equivalents at end of period  $29,379,532   $40,065,668 
           
Supplemental cash flow information          
Interest payments  $1,008,379   $216,361 
Excise tax payments   -    969,946 

 

See accompanying notes.

 

15
 

 

TCP Capital Corp.

 

Notes to Consolidated Financial Statements (Unaudited)

 

June 30, 2014

 

1. Organization and Nature of Operations

 

TCP Capital Corp. (the “Company”) is a Delaware corporation formed on April 2, 2012 as an externally managed, closed-end, non-diversified management investment company. The Company elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). The Company’s investment objective is to achieve high total returns through current income and capital appreciation, with an emphasis on principal protection. The Company invests primarily in the debt of middle-market companies as well as small businesses, including senior secured loans, junior loans, mezzanine debt and bonds. Such investments may include an equity component, and, to a lesser extent, the Company may make equity investments directly.

 

Investment operations are conducted in Special Value Continuation Partners, LP, a Delaware limited partnership (the “Partnership”), of which the Company owns 100% of the common limited partner interests, or in one of the Partnership’s wholly owned subsidiaries, TCPC Funding I, LLC, a Delaware limited liability company (“TCPC Funding”) and TCPC SBIC, LP, a Delaware limited partnership (the “SBIC”). The Partnership has also elected to be treated as a BDC under the 1940 Act. The SBIC was organized in June 2013, and on April 22, 2014, received a license from the United States Small Business Administration (the “SBA”) to operate as a small business investment company under the provisions of Section 301(c) of the Small Business Investment Act of 1958. These consolidated financial statements include the accounts of the Company, the Partnership, TCPC Funding and the SBIC. All significant intercompany transactions and balances have been eliminated in the consolidation.

 

The Company has elected to be treated as a regulated investment company (“RIC”) for U.S. federal income tax purposes. As a RIC, the Company will not be taxed on its income to the extent that it distributes such income each year and satisfies other applicable income tax requirements. The Partnership, TCPC Funding, and the SBIC have elected to be treated as partnerships for U.S. federal income tax purposes.

 

The general partner of the Partnership is SVOF/MM, LLC, which also serves as the administrator of the Company and the Partnership (the “Administrator” or the “General Partner”). The managing member of the General Partner is Tennenbaum Capital Partners, LLC (the “Advisor”), which serves as the Investment Manager to the Company, the Partnership, TCPC Funding, and the SBIC. Most of the equity interests in the General Partner are owned directly or indirectly by the Advisor and its employees.

 

Company management consists of the Investment Manager and the Board of Directors. Partnership management consists of the General Partner and the Board of Directors. The Investment Manager and the General Partner direct and execute the day-to-day operations of the Company and the Partnership, respectively, subject to oversight from the respective Board of Directors, which sets the broad policies of the Company and performs certain functions required by the 1940 Act in the case of the Partnership.

 

The Board of Directors of the Partnership has delegated investment management of the Partnership’s assets to the Investment Manager. Each Board of Directors consists of five persons, three of whom are independent. If the Company or the Partnership has preferred equity interests outstanding, as the Partnership currently does, the holders of the preferred interests voting separately as a class are entitled to elect two of the Directors. The remaining directors will be subject to election by holders of the common shares and preferred interests voting together as a single class.

 

16
 

 

TCP Capital Corp.

 

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

June 30, 2014

 

2. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The following is a summary of the significant accounting policies of the Company and the Partnership.

 

Use of Estimates

 

The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Although management believes these estimates and assumptions to be reasonable, actual results could differ from those estimates and differences could be material.

 

Investment Valuation

 

The Company’s investments are generally held by the Partnership, TCPC Funding, or the SBIC. Management values investments at fair value based upon the principles and methods of valuation set forth in policies adopted by the Partnership’s Board of Directors and in conformity with procedures set forth in the Revolving Facilities and the statement of preferences for the Preferred Interests, as defined in Note 4, below. Fair value is generally defined as the amount for which an investment would be sold in an orderly transaction between market participants at the measurement date.

 

All investments are valued at least quarterly based on affirmative pricing or quotations from independent third- party sources, with the exception of investments priced directly by the Investment Manager which together comprise, in total, less than 5% of the capitalization of the Partnership. Investments listed on a recognized exchange or market quotation system, whether U.S. or foreign, are valued for financial reporting purposes as of the last business day of the reporting period using the closing price on the date of valuation. Liquid investments not listed on a recognized exchange or market quotation system are valued using prices provided by a nationally recognized pricing service or by using quotations from broker-dealers. Investments not priced by a pricing service or for which market quotations are either not readily available or are determined to be unreliable are valued using affirmative valuations performed by independent valuation services or, for investments aggregating less than 5% of the total capitalization of the Partnership, directly by the Investment Manager.

 

Fair valuations of investments are determined under guidelines adopted by the Boards of Directors of the Company and the Partnership, and are subject to their approval. Generally, to increase objectivity in valuing the investments, the Investment Manager will utilize external measures of value, such as public markets or third-party transactions, whenever possible. The Investment Manager’s valuation is not based on long-term work-out value, immediate liquidation value, nor incremental value for potential changes that may take place in the future. The values assigned to investments that are valued by the Investment Manager are based on available information and do not necessarily represent amounts that might ultimately be realized, as these amounts depend on future circumstances and cannot reasonably be determined until the individual investments are actually liquidated. The foregoing policies apply to all investments, including those in companies and groups of affiliated companies aggregating more than 5% of the Company’s assets.

 

17
 

 

TCP Capital Corp.

 

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

June 30, 2014

 

2. Summary of Significant Accounting Policies (continued)

 

Fair valuations of investments in each asset class are determined using one or more methodologies including the market approach, income approach, or, in the case of recent investments, the cost approach, as appropriate. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets. The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present value amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that may be taken into account include, as relevant:  available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, M&A comparables, our principal market and enterprise values, among other factors.

 

Unobservable inputs used in the fair value measurement of Level 3 investments as of June 30, 2014 included the following:

 

Asset Type  Fair Value   Valuation Technique  Unobservable Input  Range (Weighted Avg.)
Bank Debt  $354,091,533   Market rate approach  Market yields  3.7% - 18.3% (10.9%)
    208,202,341   Market quotations  Indicative bid/ask quotes  1 - 5 (2)
    16,024,731   Market comparable companies  Revenue multiples  0.4x (0.4x)
    2,056,927   Market comparable companies  EBITDA multiples  7.8x (7.8x)
Other Corporate Debt   4,373,153   Market rate approach  Market yields  12.5% - 15.8% (12.5%)
    41,265,000   Market quotations  Indicative bid/ask quotes  1 (1)
    8,767,527   Market comparable companies  EBITDA multiples  7.8x (7.8x)
Equity   7,885,513   Market rate approach  Market yields  13.0% - 18.0% (13.6%)
    3,045,069   Market quotations  Indicative bid/ask quotes  1 - 2 (1)
    929,090   Market comparable companies  Revenue multiples  0.4x - 1.1x (1.1x)
    17,381,435   Market comparable companies  EBITDA multiples  4.0x – 6.6x (5.8x)

 

Generally, a change in an unobservable input may result in a change to the value of an investment as follows:

 

Input   Impact to Value if
Input Increases
 

Impact to Value if
Input Decreases

Market yields   Decrease   Increase
Revenue multiples   Increase   Decrease
EBITDA multiples   Increase   Decrease

 

Investments may be categorized based on the types of inputs used in valuing such investments. The level in the GAAP valuation hierarchy in which an investment falls is based on the lowest level input that is significant to the valuation of the investment in its entirety. Transfers between levels are recognized as of the beginning of the reporting period.

 

18
 

 

TCP Capital Corp.

 

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

June 30, 2014

 

2. Summary of Significant Accounting Policies (continued)

 

At June 30, 2014, the Company’s investments were categorized as follows:

 

Level  Basis for Determining Fair Value  Bank Debt   Other
Corporate Debt
   Equity
Securities
 
1  Quoted prices in active markets for identical assets  $-   $-   $232,804 
2  Other observable market inputs *   154,433,236    75,980,765    - 
3  Independent third-party pricing sources that employ significant unobservable inputs   580,830,991    50,098,573    26,851,302 
3  Investment Manager valuations with significant unobservable inputs   (455,459)   4,307,107    2,389,805 
Total      $734,808,768   $130,386,445   $29,473,911 

 

* For example, quoted prices in inactive markets or quotes for comparable investments.

Negative balance relates to an unfunded commitment that was acquired and valued at a discount.

 

Changes in investments categorized as Level 3 during the six months ended June 30, 2014 were as follows:

 

   Independent Third-Party Valuation 
   Bank Debt   Other
Corporate Debt
   Equity
Securities
 
Beginning balance  $515,953,643   $53,334,634   $36,066,746 
Net realized and unrealized gains (losses)   2,964,824    506,298    (3,124,422)
Acquisitions   223,669,965    13,086,400    1,836,050 
Dispositions   (83,626,914)   (14,077,239)   (7,927,072)
Transfers out of Level 3     (78,130,527)   (24,476,520)   - 
Transfers into Level 3 §   -    21,725,000    - 
Ending balance  $580,830,991   $50,098,573   $26,851,302 
                
Net change in unrealized appreciation/ depreciation during the period on investments still held at period end (included in net realized and unrealized gains/losses, above)  $3,581,470   $(144,520)  $(1,367,777)

 

  Comprised of eight investments that transferred to Level 2 due to increased observable market activity.

§  Comprised of two investments that transferred from Level 2 due to reduced trading volumes.

 

   Investment Manager Valuation 
   Bank Debt   Other
Corporate Debt
   Equity
Securities
 
Beginning balance  $4,060,800   $7,631,335   $2,837,707 
Net realized and unrealized losses   (141,655)   (529,274)   (64,313)
Acquisitions   125,396    4,303,962    230,939 
Dispositions   (4,500,000)   (7,098,916)   (614,528)
Ending balance  $(455,459)**  $4,307,107   $2,389,805 
                
Net change in unrealized appreciation/ depreciation during the period on investments still held at period end (included in net realized and unrealized gains/losses, above)  $(141,655)  $141,626   $(678,840)

 

** Negative balance relates to an unfunded commitment that was acquired and valued at a discount.

 

19
 

 

TCP Capital Corp.

 

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

June 30, 2014

 

2. Summary of Significant Accounting Policies (continued)

 

There were no transfers between Level 1 and 2 during the six months ended June 30, 2014.

 

At June 30, 2013, the Company’s investments were categorized as follows:

 

Level  Basis for Determining Fair Value  Bank Debt   Other Corporate Debt   Equity Securities 
1  Quoted prices in active markets for identical assets  $-   $-   $894,571 
2  Other observable market inputs *   101,706,681    49,326,054    - 
3  Independent third-party pricing sources that employ significant unobservable inputs   348,965,723    26,638,820    35,306,315 
3  Investment Manager valuations with significant unobservable inputs   -    7,590,732    1,333,148 
Total      $450,672,404   $83,555,606   $37,534,034 

 

* For example, quoted prices in inactive markets or quotes for comparable investments.

 

Changes in investments categorized as Level 3 during the six months ended June 30, 2013 were as follows:

 

   Independent Third-Party Valuation 
   Bank Debt   Other
Corporate Debt
   Equity
Securities
 
Beginning balance  $359,343,326   $17,171,637   $32,675,370 
Net realized and unrealized gains (losses)   (1,850,044)   7,821,477    (4,860,276)
Acquisitions   106,094,345    7,596,680    9,675,533 
Dispositions   (55,970,621)   (15,172,634)   (2,184,312)
Transfers out of Level 3    (58,651,283)   -    - 
Transfers into Level 3    -    9,221,660    - 
Ending balance  $348,965,723   $26,638,820   $35,306,315 
                
Net change in unrealized appreciation/ depreciation during the period on investments still held at period end (included in net realized and unrealized gains/losses, above)  $(412,366)  $1,870,504   $2,101,209 

  

Comprised of eight investments that transferred to Level 2 due to increased observable market activity.

Comprised of one investment that transferred from Level 2 due to reduced trading volumes.

 

   Investment Manager Valuation 
   Bank Debt   Other
Corporate Debt
   Equity
Securities
 
Beginning balance  $-   $7,167,458   $1,424,764 
Net realized and unrealized gains (losses)   -    353,516    (91,616)
Acquisitions   -    69,758    - 
Ending balance  $-   $7,590,732   $1,333,148 
                
Net change in unrealized appreciation/ depreciation during the period on investments still held at period end (included in net realized and unrealized gains/losses, above)  $-   $353,516   $(91,615)

 

20
 

 

TCP Capital Corp.

 

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

June 30, 2014

 

2. Summary of Significant Accounting Policies (continued)

 

There were no transfers between Level 1 and 2 during the six months ended June 30, 2013.

 

Investment Transactions

 

Investment transactions are recorded on the trade date, except for private transactions that have conditions to closing, which are recorded on the closing date. The cost of investments purchased is based upon the purchase price plus those professional fees which are specifically identifiable to the investment transaction. Realized gains and losses on investments are recorded based on the identification method, which typically allocates the highest cost inventory to the basis of investments sold.

 

Cash and Cash Equivalents

 

Cash consists of amounts held in accounts with brokerage firms and the custodian bank. Cash equivalents consist of highly liquid investments with an original maturity of three months or less.

 

Repurchase Agreements

 

In connection with transactions in repurchase agreements, it is the Company’s policy that the custodian take possession of the underlying collateral, the fair value of which is required to exceed the principal amount of the repurchase transaction, including accrued interest, at all times. If the seller defaults, and the fair value of the collateral declines, realization of the collateral may be delayed or limited.

 

Restricted Investments

 

The Company may invest without limitation in instruments that are subject to legal or contractual restrictions on resale. These instruments generally may be resold to institutional investors in transactions exempt from registration or to the public if the securities are registered. Disposal of these investments may involve time-consuming negotiations and additional expense, and prompt sale at an acceptable price may be difficult. Information regarding restricted investments is included at the end of the Consolidated Statement of Investments. Restricted investments, including any restricted investments in affiliates, are valued in accordance with the investment valuation policies discussed above.

 

Foreign Investments

 

The Company may invest in instruments traded in foreign countries and denominated in foreign currencies. Foreign currency denominated investments comprised approximately 2.4% and 2.7% of total investments at June 30, 2014 and December 31, 2013, respectively. Such positions were converted at the respective closing rate in effect at June 30, 2014 and December 31, 2013 and reported in U.S. dollars. Purchases and sales of investments and income and expense items denominated in foreign currencies, when they occur, are translated into U.S. dollars on the respective dates of such transactions. The portion of gains and losses on foreign investments resulting from fluctuations in foreign currencies is included in net realized and unrealized gain or loss from investments.

 

21
 

 

TCP Capital Corp.

 

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

June 30, 2014

 

2. Summary of Significant Accounting Policies (continued)

 

Investments in foreign companies and securities of foreign governments may involve special risks and considerations not typically associated with investing in U.S. companies and securities of the U.S. government. These risks include, among other things, revaluation of currencies, less reliable information about issuers, different transaction clearance and settlement practices, and potential future adverse political and economic developments. Moreover, investments in foreign companies and securities of foreign governments and their markets may be less liquid and their prices more volatile than those of comparable U.S. companies and the U.S. government.

 

Derivatives

 

In order to mitigate certain currency exchange and interest rate risks, the Partnership has entered into certain swap and option transactions. All derivatives are recognized as either assets or liabilities in the Consolidated Statement of Assets and Liabilities. The transactions entered into are accounted for using the mark-to-market method with the resulting change in fair value recognized in earnings for the current period. Risks may arise upon entering into these contracts from the potential inability of counterparties to meet the terms of their contracts and from unanticipated movements in interest rates and the value of foreign currency relative to the U.S. dollar.

 

The Partnership did not enter into any new derivative transactions during the six months ended June 30, 2014. At June 30, 2014, the Partnership held an interest rate cap with a notional amount of $25,000,000 and a cross currency basis swap with a notional amount of $4,289,019. Gains and losses from derivatives during the six months ended June 30, 2014 were included in net realized and unrealized loss on investments in the Consolidated Statement of Operations as follows:

 

Instrument  Realized Gains
(Losses)
   Unrealized Gains
(Losses)
 
Cross currency basis swaps  $-   $(12,284)
Interest rate cap   -    (122,321)

 

The Partnership did not enter into any new derivative transactions during the six months ended June 30, 2013. At June 30, 2013, the Partnership held a cross currency basis swap with a notional amount of $6,040,944. Gains and losses from derivatives during the six months ended June 30, 2013 were included in net realized and unrealized loss on investments in the Consolidated Statement of Operations as follows:

 

Instrument  Realized Gains
(Losses)
   Unrealized Gains
(Losses)
 
Cross currency basis swaps  $-   $92,452 

 

Valuations of derivatives held at June 30, 2014 and June 30, 2013 were determined using observable market inputs other than quoted prices in active markets for identical assets and, accordingly, are classified as Level 2 in the GAAP valuation hierarchy.

 

22
 

 

TCP Capital Corp.

 

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

June 30, 2014

 

2. Summary of Significant Accounting Policies (continued)

 

Debt Issuance Costs

 

Costs of approximately $3.5 million and $1.5 million were incurred during 2006 and 2013 in connection with placing and extending the Partnership’s revolving credit facility (see Note 4), respectively. Costs of approximately $1.6 million and $1.0 million were incurred during 2013 and 2014 in connection with placing and extending TCPC Funding’s revolving credit facility (see Note 4), respectively. Costs of approximately $3.4 million were incurred in June 2014 in connection with placing the Company’s unsecured convertible notes (see Note 4). These costs were deferred and are being amortized on a straight-line basis over the estimated life of the respective instruments. The impact of utilizing the straight-line amortization method versus the effective-interest method is not material to the operations of the Company or the Partnership.

 

Revenue Recognition

 

Interest and dividend income, including income paid in kind, is recorded on an accrual basis. Origination, structuring, closing, commitment and other upfront fees, including original issue discounts, earned with respect to capital commitments are generally amortized or accreted into interest income over the life of the respective debt investment. Other fees, including certain amendment fees, prepayment fees and commitment fees on broken deals, are recognized as earned. Prepayment fees and similar income received upon the early repayment of a loan or debt security are included in interest income.

 

Certain debt investments are purchased at a considerable discount to par as a result of the underlying credit risks and financial results of the issuer, as well as general market factors that influence the financial markets as a whole. GAAP generally requires that discounts on the acquisition of corporate bonds, municipal bonds and treasury bonds be amortized using the effective-interest or constant-yield method. GAAP also requires the collectability of interest to be considered when making accruals. Accordingly, when accounting for purchase discounts, discount accretion income is recognized when it is probable that such amounts will be collected, generally at disposition. When principal payments on a loan are received in an amount in excess of the loan’s amortized cost, the excess principal payments are recorded as interest income.

 

Income Taxes

 

The Company intends to comply with the applicable provisions of the Internal Revenue Code of 1986, as amended, pertaining to regulated investment companies and to make distributions of taxable income sufficient to relieve it from substantially all federal income taxes. Accordingly, no provision for income taxes is required in the consolidated financial statements. The income or loss of the Partnership, TCPC Funding and the SBIC is reported in the respective partners’ income tax returns. In accordance with ASC Topic 740 – Income Taxes , the Company recognizes in its consolidated financial statements the effect of a tax position when it is determined that such position is more likely than not, based on the technical merits, to be sustained upon examination. As of June 30, 2014, all tax years of the Company, the Partnership, TCPC Funding and the SBIC since January 1, 2010 remain subject to examination by federal tax authorities. No such examinations are currently pending.

 

23
 

 

TCP Capital Corp.

 

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

June 30, 2014

 

2. Summary of Significant Accounting Policies (continued)

 

Cost and unrealized appreciation and depreciation of the Partnership’s investments (including derivatives) for U.S. federal income tax purposes at June 30, 2014 were as follows:

 

Unrealized appreciation  $32,885,769 
Unrealized depreciation   (60,067,779)
Net unrealized depreciation   (27,182,010)
      
Cost  $921,644,127 

 

3. Management Fees, Incentive Compensation and Other Expenses

 

The Company’s management fee is calculated at an annual rate of 1.5% of total assets (excluding cash and cash equivalents) on a consolidated basis as of the beginning of each quarter and is payable to the Investment Manager quarterly in arrears.

 

Incentive compensation is only paid to the extent the total performance of the Company exceeds a cumulative 8% annual return since January 1, 2013 (the “Total Return Hurdle”). Beginning January 1, 2013, the incentive compensation equals 20% of net investment income (reduced by preferred dividends) and 20% of net realized gains (reduced by any net unrealized losses), subject to the Total Return Hurdle. The incentive compensation is payable quarterly in arrears as an allocation and distribution to the General Partner and is calculated as the difference between cumulative incentive compensation earned since January 1, 2013 and cumulative incentive compensation paid since January 1, 2013. A reserve for incentive compensation is accrued based on the amount of additional incentive compensation that would have been distributable to the General Partner assuming a hypothetical liquidation of the Company at net asset value on the balance sheet date. At June 30, 2014, the General Partner’s equity interest in the Partnership was comprised entirely of the reserve amount and is reported as a non-controlling interest in the consolidated financial statements of the Company.

 

The Company and the Partnership bear all respective expenses incurred in connection with the business of the Company and the Partnership, including fees and expenses of outside contracted services, such as custodian, administrative, legal, audit and tax preparation fees, costs of valuing investments, insurance costs, brokers’ and finders’ fees relating to investments, and any other transaction costs associated with the purchase and sale of investments.

 

24
 

 

TCP Capital Corp.

 

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

June 30, 2014

 

4. Leverage

 

At June 30, 2014 and December 31, 2013, leverage was comprised of convertible senior unsecured notes issued by the Company (the “Notes”), amounts outstanding under senior secured revolving credit facilities issued by the Partnership (the “Partnership Facility”) and TCPC Funding (the “TCPC Funding Facility,” and, together with the Partnership Facility, the “Revolving Facilities”) as well as amounts outstanding under a preferred leverage facility issued by the Partnership (the “Preferred Interests”), as follows:

 

   June 30, 2014   December 31, 2013 
Convertible Notes  $105,500,788   $- 
Partnership Facility   45,000,000    45,000,000 
TCPC Funding Facility   100,000,000    50,000,000 
Total Debt  $250,500,788   $95,000,000 
           
Preferred Interests   134,000,000    134,000,000 
Total Leverage  $384,500,788   $229,000,000 

 

The combined weighted-average interest and dividend rates on total leverage outstanding at June 30, 2014 and December 31, 2013 were 2.63% and 1.38%, respectively.

 

Amounts outstanding under the Convertible Notes and the Revolving Facilities are carried at amortized cost in the Statement of Assets and Liabilities. As of June 30, 2014, the estimated fair value of the TCPC Funding Facility approximated its carrying value, and the Partnership Facility and Convertible Notes had estimated fair values of $44,155,425 and $108,000,000, respectively. The estimated fair values of the Revolving Facilities and Convertible Notes are determined by discounting projected remaining payments using market interest rates for our borrowings and entities with similar credit risks at the measurement date. At June 30, 2014, the Revolving Facilities and Convertible Notes would be deemed to be Level 3 in the GAAP valuation hierarchy.

 

Convertible Notes

 

On June 11, 2014, the Company issued $108 million of convertible senior unsecured notes that mature on December 15, 2019, unless previously converted or repurchased in accordance with their terms. The Company does not have the right to redeem the Convertible Notes prior to maturity.  The Convertible Notes bear interest at an annual rate of 5.25%, payable semi-annually. In certain circumstances, the Convertible Notes will be convertible into cash, shares of the Company’s common stock or a combination of cash and shares of common stock (such combination to be at the Company’s election), at an initial conversion rate of 50.9100 shares of common stock per one thousand dollar principal amount of the Convertible Notes, which is equivalent to an initial conversion price of approximately $19.64 per share of common stock, subject to customary anti-dilution adjustments. The initial conversion price was approximately 12.5% above the $17.46 per share closing price of the Company’s common stock on June 11, 2014. At June 30, 2014, the principal amount of the Convertible Notes exceeded the value of the conversion rate multiplied by the per share closing price of the Company’s common stock. The Convertible Notes are general unsecured obligations of the Company, and rank structurally junior to the Revolving Facilities and Preferred Interests.

 

25
 

 

TCP Capital Corp.

 

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

June 30, 2014

 

4. Leverage (continued)

 

Prior to the close of business on the business day immediately preceding June 15, 2019, holders may convert their Convertible Notes only under certain circumstances set forth in the indenture governing the terms of the Convertible Notes (the “Indenture”). On or after June 15, 2019 until the close of business on the scheduled trading day immediately preceding December 15, 2019, holders may convert their Convertible Notes at any time. Upon conversion, the Company will pay or deliver, as the case may be, at its election, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, subject to the requirements of the Indenture.

 

The Convertible Notes are accounted for in accordance with ASC Topic 470-20 – Debt with Conversion and Other Options. Upon conversion of any Convertible Note, the Company intends to pay the outstanding principal amount in cash and to the extent that the conversion value exceeds the principal amount, we have the option to pay in cash or shares of our common stock (or a combination of cash and shares) in respect of the excess amount, subject to the requirements of the Indenture.  The Company has determined that the embedded conversion option in the Convertible Notes is not required to be separately accounted for as a derivative under GAAP. In accounting for the Convertible Notes, we estimated at the time of issuance that the values of the debt and equity components of the Convertible Notes were approximately 97.7% and 2.3%, respectively. The original issue discount equal to the equity component of the Convertible Notes was recorded in “paid-in-capital in excess of par” in the accompanying Consolidated Statement of Assets and Liabilities. As a result, the Company will record interest expense comprised of both stated interest and accretion of the original issue discount.  At the time of issuance, the equity component was $2,515,594.  As of June 30, 2014, the components of the carrying value of the Convertible Notes were as follows:

 

Principal amount of debt    $108,000,000 
Original issue discount, net of accretion     (2,499,212 )
Carrying value of debt    $105,500,788 

 

For the six months ended June 30, 2014, the components of interest expense for the Convertible Notes were as follows:

 

Stated interest expense  $251,319 
Accretion of original issue discount   16,382 
Total interest expense  $267,701 

 

The estimated effective interest rate of the debt component of the Convertible Notes, equal to the stated interest of 5.25% plus the accretion of the original issue discount, was approximately 5.75% for the six months ended June 30, 2014.

 

26
 

 

TCP Capital Corp.

 

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

June 30, 2014

 

4. Leverage (continued)

 

Partnership Facility

 

The Partnership Facility provides for amounts to be drawn up to $116 million, subject to certain collateral and other restrictions. The Partnership Facility matures on July 31, 2016. Most of the cash and investments held directly by the Partnership, as well as the net assets of TCPC Funding and the SBIC, are included in the collateral for the facility.

 

Advances under the Partnership Facility through July 31, 2014 bear interest at an annual rate equal to 0.44% plus either LIBOR or the lender’s cost of funds (subject to a cap of LIBOR plus 20 basis points). Advances under the Partnership Facility for periods from July 31, 2014 through the maturity date of the facility will bear interest at an annual rate equal to 2.5% plus either LIBOR or the lender’s cost of funds (subject to a cap of LIBOR plus 20 basis points). In addition to amounts due on outstanding debt, the facility accrues commitment fees of 0.20% per annum on the unused portion of the facility, or 0.25% per annum when less than $46.4 million in borrowings are outstanding. The facility may be terminated, and any outstanding amounts thereunder may become due and payable, should the Partnership fail to satisfy certain financial or other covenants. As of June 30, 2014, the Partnership was in full compliance with such covenants.

 

TCPC Funding Facility

 

The TCPC Funding Facility, issued on May 15, 2013, provides for amounts to be drawn up to $200 million, subject to certain collateral and other restrictions. The TCPC Funding Facility matures on May 15, 2017, subject to extension by the lender at the request of TCPC Funding. The facility contains an accordion feature which allows for expansion of the facility up to $250 million subject to consent from the lender and other customary conditions. The cash and investments of TCPC Funding are included in the collateral for the facility.

 

As of June 30, 2014, borrowings under the TCPC Funding Facility bore interest at a rate of LIBOR plus 2.50% per annum. In connection with the extension and expansion of the facility on February 21, 2014, the interest rate was reduced to a rate of LIBOR plus 2.50% effective March 15, 2014.  In addition to amounts due on outstanding debt, the facility accrues commitment fees of 0.75% per annum on the unused portion of the facility, or 1.00% per annum when the unused portion is greater than 33% of the total facility. The facility may be terminated, and any outstanding amounts thereunder may become due and payable, should TCPC Funding fail to satisfy certain financial or other covenants. As of June 30, 2014, TCPC Funding was in full compliance with such covenants.

 

27
 

 

TCP Capital Corp.

 

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

June 30, 2014

 

4. Leverage (continued)

 

Preferred Interests

 

At June 30, 2014, the Preferred Interests were comprised of 6,700 Series A preferred limited partner interests issued and outstanding with a liquidation preference of $20,000 per interest. The Preferred Interests accrue dividends at an annual rate equal to 0.85% plus either LIBOR or the interestholder’s cost of funds (subject to a cap of LIBOR plus 20 basis points). The Preferred Interests are redeemable at the option of the Partnership, subject to certain conditions. Additionally, under certain conditions, the Partnership may be required to either redeem certain of the Preferred Interests or repay indebtedness, at the Partnership’s option. Such conditions would include a failure by the Partnership to maintain adequate collateral as required by its credit facility agreement or by the Statement of Preferences of the Preferred Interests or a failure by the Partnership to maintain sufficient asset coverage as required by the 1940 Act. As of June 30, 2014, the Partnership was in full compliance with such requirements.

 

5. Commitments, Contingencies, Concentration of Credit Risk and Off-Balance Sheet Risk

 

The Partnership, TCPC Funding and the SBIC conduct business with brokers and dealers that are primarily headquartered in New York and Los Angeles and are members of the major securities exchanges. Banking activities are conducted with a firm headquartered in the San Francisco area.

 

In the normal course of business, investment activities involve executions, settlement and financing of various transactions resulting in receivables from, and payables to, brokers, dealers and the custodian. These activities may expose the Company, the Partnership, TCPC Funding and the SBIC to risk in the event that such parties are unable to fulfill contractual obligations. Management does not anticipate any material losses from counterparties with whom it conducts business. Consistent with standard business practice, the Company, the Partnership, TCPC Funding and the SBIC enter into contracts that contain a variety of indemnifications, and are engaged from time to time in various legal actions. The maximum exposure under these arrangements and activities is unknown. However, management expects the risk of material loss to be remote.

 

The Consolidated Statement of Investments includes certain revolving loan facilities and other commitments held by the Partnership with unfunded balances at June 30, 2014 as follows:

 

Revolving Loan Facilities  $23,051,808 
Delayed Draw Loans and Notes   19,827,496 
Letters of Credit   9,379,246 
Total Unfunded Commitments  $52,258,550 

 

28
 

 

TCP Capital Corp.

 

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

June 30, 2014

 

6. Related Parties

 

The Company, the Partnership, TCPC Funding, the SBIC, the Investment Manager, the General Partner and their members and affiliates may be considered related parties. From time to time, the Partnership advances payments to third parties on behalf of the Company which are reimbursable through deductions from distributions to the Company. At June 30, 2014, no such amounts were outstanding. From time to time, the Investment Manager advances payments to third parties on behalf of the Company and the Partnership and receives reimbursement from the Company and the Partnership. At June 30, 2014, amounts reimbursable to the Investment Manager totaled $1,750,735, as reflected in the Consolidated Statement of Assets and Liabilities.

 

Pursuant to administration agreements between the Administrator and each of the Company and the Partnership (the “Administration Agreements”), the Administrator may be reimbursed for costs and expenses incurred by the Administrator for office space rental, office equipment and utilities allocable to the Company or the Partnership, as well as costs and expenses incurred by the Administrator or its affiliates relating to any administrative, operating, or other non-investment advisory services provided by the Administrator or its affiliates to the Company or the Partnership. For the six months ended June 30, 2014, expenses allocated pursuant to the Administration Agreements totaled $629,612. The Administrator waived reimbursement of all administrative expenses prior to January 1, 2013.

 

7. Stockholders’ Equity and Dividends

 

The following table summarizes the total shares issued in connection with the Company’s dividend reinvestment plan for the six months ended June 30, 2014.

 

   Shares Issued   Price Per Share   Net Proceeds 
Shares issued from dividend reinvestment plan   214   $17.38   $3,715 

 

The following table summarizes the total shares issued and proceeds received in the public offering of the Company’s common stock net of underwriting discounts and offering costs as well as shares issued in connection with the Company’s dividend reinvestment plan for the year ended December 31, 2013.

 

   Shares Issued   Price Per Share   Net Proceeds 
May 21, 2013 public offering   5,175,000   $15.63   $78,176,790 
October 1, 2013 public offering   4,370,000   $15.76   $66,473,600 
December 18, 2013 public offering   5,175,000   $16.00   $79,912,500 
Shares issued from dividend reinvestment plan   2,288   $16.35   $37,416 

 

29
 

 

TCP Capital Corp.

 

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

June 30, 2014

 

7. Stockholders’ Equity and Dividends (continued)

 

The Company’s dividends are recorded on the ex-dividend date. The following table summarizes the Company’s dividends declared for the six months ended June 30, 2014:

 

Date Declared  Record Date  Payment Date  Amount Per Share   Total Amount 
March 6, 2014  March 17, 2014  March 31, 2014  $0.36   $13,031,970 
May 7, 2014  June 18, 2014  June 30, 2014  $0.41*  $14,842,008 
              $27,873,978 

* Includes a special dividend of $0.05.

 

The following table summarizes the Company’s dividends declared for the six months ended June 30, 2013:

 

Date Declared  Record Date  Payment Date  Amount Per Share   Total Amount 
March 7, 2013  March 18, 2013  March 29, 2013  $0.40*  $8,591,051 
May 8, 2013  June 7, 2013  June 28, 2013  $0.36   $9,595,344 
              $18,186,395 

* Includes a special dividend of $0.05.

 

8. Earnings Per Share

 

The following information sets forth the computation of the net increase in net assets per share resulting from operations for the six months ended June 30, 2014 and June 30, 2013:

 

   Six Months Ended
June 30, 2014
   Six Months Ended
June 30, 2013
 
Net increase in net assets applicable to common shareholders resulting from operations  $30,135,396   $22,176,346 
Weighted average shares outstanding   36,199,969    22,564,670 
Earnings per share  $0.83   $0.98 

 

9. Subsequent Events

 

On August 7, 2014, the Company’s board of directors declared a third quarter cash dividend of $0.36 per share payable on September 30, 2014 to stockholders of record as of the close of business on September 16, 2014.

 

On August 1, 2014, the Holding Company closed a public offering of 5.4 million shares of its common stock at $17.33 per share for gross proceeds of approximately $93.6 million and net proceeds of $90.4 million, net of underwriter discounts and approximately $0.4 million of expenses related to the offering.

 

30
 

 

TCP Capital Corp.

 

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

June 30, 2014

 

10. Financial Highlights

 

   Six Months Ended June 30, 
   2014   2013 
         
Per Common Share          
Per share NAV at beginning of period (1)  $15.18   $14.71 
           
Investment operations:          
Net investment income   1.00    1.13 
Net realized and unrealized gain   0.06    0.13 
Dividends on Series A preferred equity facility   (0.02)   (0.03)
Incentive allocation reserve and distributions   (0.21)   (0.25)
Total from investment operations   0.83    0.98 
           
Issuance of common stock   -    0.01 
Issuance of convertible debt   0.07    - 
Distributions to common shareholders from:          
Net investment income   (0.77)   (0.76)
Per share NAV at end of period  $15.31   $14.94 
           
Per share market price at end of period  $18.21   $16.77 
           
Total return based on market value (1), (2)   13.1%   18.9%
Total return based on net asset value (1), (3)   5.9%   6.7%
           
Shares outstanding at end of period   36,200,130    26,654,701 

 

31
 

 

TCP Capital Corp.

 

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

June 30, 2014

 

10. Financial Highlights (continued)

 

    Six Months Ended June 30,  
    2014     2013  
             
Ratios to average common equity: (4), (5)                
Net investment income (6)     11.8 %     13.5 %
Expenses     4.0 %     3.4 %
Expenses and incentive allocation (7)     5.3 %     4.8 %
                 
Ending common shareholder equity   $ 554,391,982     $ 398,188,158  
Portfolio turnover rate (1)     19.1 %     22.6 %
Weighted-average debt outstanding   $ 136,015,368     $ 68,712,707  
Weighted-average interest rate on debt     2.2 %     0.9 %
Weighted-average number of common shares     36,199,969       22,564,670  
Average debt per share   $ 3.76     $ 3.05  

 

(1)Not annualized.

(2)Total return based on market value equals the change in ending market value per share during the period plus declared dividends per share during the period, divided by the market value per share at the beginning of the period.

(3)Total return based on net asset value equals the change in net asset value per share during the period plus declared dividends per share during the period, divided by the beginning net asset value per share at the beginning of the period.

(4)Annualized, except for incentive allocation.

(5)These ratios include interest expense but do not reflect the effect of dividends on the preferred equity facility.

(6)Net of incentive allocation.

(7)Includes incentive allocation payable to the General Partner and all Company expenses.

 

32
 

  

TCP Capital Corp.

 

 Consolidated Schedule of Changes in Investments in Affiliates (1) (Unaudited)

 

Six Months Ended June 30, 2014

 

Security  Acquisitions   Dispositions (2)   Dividends or
Interest (3)
 
AGY Holding Corp., Senior Secured Term Loan, 12%, due 9/15/16  $-   $-   $378,971 
AGY Holding Corporation, Senior Secured 2nd Lien Notes, 11%, due 11/15/16   -    -    509,740 
Anacomp, Inc., Class A Common Stock   -    -    - 
EPMC HoldCo, LLC, Membership Units   -    (587,048)   - 
ESP Holdings, Inc., Cumulative Preferred 15%   -    (2,489,100)   1,968,748 
ESP Holdings, Inc., Common Stock   -    (2,955,297)   289,315 
ESP Holdings, Inc., Junior Unsecured Subordinated Promissory Notes, 6% Cash + 10% PIK, due 12/31/19   -    (7,959,369)   205,175 
Globecomm Systems Inc., Senior Secured 1st Lien Term Loan, LIBOR + 7.625%, 1.25% LIBOR Floor, due 12/11/18   -    (75,000)   668,556 
KAGY Holding Company, Inc., Series A Preferred Stock   -    -    - 
N510UA Aircraft Secured Mortgage, 20%, due 10/26/16   -    (47,264)   30,823 
N512UA Aircraft Secured Mortgage, 20%, due 10/26/16   -    (46,248)   31,435 
N536UA Aircraft Secured Mortgage, 16%, due 9/29/14   -    (108,844)   4,678 
N545UA Aircraft Secured Mortgage, 16%, due 8/29/15   -    (72,175)   17,094 
N585UA Aircraft Secured Mortgage, 20%, due 10/25/16   -    (392,795)   27,571 
N659UA Aircraft Secured Mortgage, 12%, due 2/28/16   -    (546,206)   148,446 
N661UA Aircraft Secured Mortgage, 12%, due 5/4/16   -    (529,708)   154,955 
N510UA Equipment Trust Beneficial Interests   47,264    (17,956)   42,916 
N512UA Equipment Trust Beneficial Interests   46,248    (17,662)   42,592 
N536UA Equipment Trust Beneficial Interests   80,397    (467,756)   40,259 
N545UA Equipment Trust Beneficial Interests   72,175    (23,768)   54,258 
N585UA Equipment Trust Beneficial Interests   92,583    (536,863)   31,098 
N913DL Aircraft Secured Mortgage, 8%, due 3/15/17   -    (41,134)   10,735 
N918DL Aircraft Secured Mortgage, 8%, due 8/15/18   -    (36,413)   14,788 
N954DL Aircraft Secured Mortgage, 8%, due 3/20/19   -    (41,833)   19,780 
N955DL Aircraft Secured Mortgage, 8%, due 6/20/19   -    (40,241)   20,568 
N956DL Aircraft Secured Mortgage, 8%, due 5/20/19   -    (40,910)   20,515 
N957DL Aircraft Secured Mortgage, 8%, due 6/20/19   -    (40,592)   20,747 
N959DL Aircraft Secured Mortgage, 8%, due 7/20/19   -    (40,278)   20,978 
N960DL Aircraft Secured Mortgage, 8%, due 10/20/19   -    (39,684)   21,841 
N961DL Aircraft Secured Mortgage, 8%, due 8/20/19   -    (40,643)   21,566 
N976DL Aircraft Secured Mortgage, 8%, due 2/15/18   -    (42,269)   14,925 
N913DL Equipment Trust Beneficial Interests   41,134    (47,016)   8,402 
N918DL Equipment Trust Beneficial Interests   36,413    (44,668)   6,713 
N954DL Equipment Trust Beneficial Interests   41,833    (53,876)   6,209 
N955DL Equipment Trust Beneficial Interests   40,241    (53,218)   5,775 
N956DL Equipment Trust Beneficial Interests   40,910    (53,952)   5,790 
N957DL Equipment Trust Beneficial Interests   40,592    (53,728)   5,673 
N959DL Equipment Trust Beneficial Interests   40,278    (53,508)   5,559 
N960DL Equipment Trust Beneficial Interests   39,684    (53,338)   5,127 
N961DL Equipment Trust Beneficial Interests   40,643    (54,274)   5,254 
N976DL Equipment Trust Beneficial Interests   42,269    (51,280)   5,973 
RM Holdco, LLC, Membership Units   -    -    - 
RM Holdco, LLC, Subordinated Convertible Term Loan, 1.12% PIK, due 3/21/18   -    -    29,083 
RM OpCo, LLC, Senior Secured 1st Lien Term Loan Tranche A, 11%, due 3/19/16   171,723    (47,493)   204,293 
RM OpCo, LLC, Senior Secured 1st Lien Term Loan Tranche B, 12% Cash + 7% PIK, due 3/19/16   608,160    -    683,624 
RM OpCo, LLC, Senior Secured 1st Lien Term Loan Tranche B-1, 12% Cash + 7% PIK, due 3/19/16   198,627    -    222,963 
RM OpCo, LLC, Convertible 1st Lien Term Loan Tranche B-1, 12% Cash + 7% PIK, due 3/21/16   127,300    -    142,835 
United N659UA-767, LLC (N659UA)   546,206    (337,356)   201,124 
United N661UA-767, LLC (N661UA)   529,708    (331,516)   201,973 
Wasserstein Cosmos Co-Invest, L.P., Limited Partnership Units   -    -    - 

  

Notes to Schedule of Changes in Investments in Affiliates:

 

  (1) The issuers of the securities listed on this schedule are considered affiliates under the Investment Company Act of 1940 due to the ownership by the Company of 5% or more of the issuers' voting securities.

  (2) Dispositions include sales, paydowns, mortgage amortizations, and aircraft depreciation.

  (3) Also includes fee and lease income as applicable.

 

33
 

 

TCP Capital Corp.

 

Consolidated Schedule of Changes in Investments in Affiliates (1)

 

Year Ended December 31, 2013

 

Security  Acquisitions   Dispositions (2)   Dividends or
Interest (3)
 
                
AGY Holding Corp., Senior Secured Term Loan, 12%, due 9/15/16  $2,056,927   $-   $128,215 
AGY Holding Corporation, Senior Secured 2nd Lien Notes, 11%, due 11/15/16   7,586,317    -    640,007 
Anacomp, Inc., Class A Common Stock   -    -    - 
EPMC HoldCo, LLC, Membership Units   -    (1,481,930)   - 
ESP Holdings, Inc., Cumulative Preferred 15%   -    -    - 
ESP Holdings, Inc., Common Stock   -    -    32,627 
ESP Holdings, Inc., Junior Unsecured Subordinated Promissory Notes, 6% Cash + 10% PIK, due 12/31/19   749,529    -    1,199,575 
Globecomm Systems Inc., Senior Secured 1st Lien Term Loan, LIBOR + 7.625%, 1.25% LIBOR Floor, due 12/11/18   14,850,000    -    83,281 
International Wire Group Holdings, Inc., Senior Secured Notes, 8.5%, due 10/15/17   -    (15,759,750)   443,715 
KAGY Holding Company, Inc., Series A Preferred Stock   8,096,057    (1,644)   - 
N510UA Aircraft Secured Mortgage, 20%, due 10/26/16   -    (81,562)   74,646 
N512UA Aircraft Secured Mortgage, 20%, due 10/26/16   -    (79,808)   75,593 
N536UA Aircraft Secured Mortgage, 16%, due 9/29/14   -    (143,097)   29,100 
N545UA Aircraft Secured Mortgage, 16%, due 8/29/15   -    (128,230)   50,422 
N585UA Aircraft Secured Mortgage, 20%, due 10/25/16   -    (93,707)   88,705 
N659UA Aircraft Secured Mortgage, 12%, due 2/28/16   -    (999,280)   390,117 
N661UA Aircraft Secured Mortgage, 12%, due 5/4/16   -    (969,098)   401,041 
N510UA Equipment Trust Beneficial Interests   81,562    (35,912)   72,866 
N512UA Equipment Trust Beneficial Interests   79,808    (35,323)   72,497 
N536UA Equipment Trust Beneficial Interests   143,097    (45,201)   104,929 
N545UA Equipment Trust Beneficial Interests   128,359    (47,536)   92,525 
N585UA Equipment Trust Beneficial Interests   93,707    (46,776)   80,203 
N913DL Aircraft Secured Mortgage, 8%, due 3/15/17   -    (77,509)   26,248 
N918DL Aircraft Secured Mortgage, 8%, due 8/15/18   -    (68,612)   33,806 
N954DL Aircraft Secured Mortgage, 8%, due 3/20/19   -    (78,825)   44,415 
N955DL Aircraft Secured Mortgage, 8%, due 6/20/19   -    (75,824)   45,803 
N956DL Aircraft Secured Mortgage, 8%, due 5/20/19   -    (77,085)   45,775 
N957DL Aircraft Secured Mortgage, 8%, due 6/20/19   -    (76,487)   46,204 
N959DL Aircraft Secured Mortgage, 8%, due 7/20/19   -    (75,896)   46,629 
N960DL Aircraft Secured Mortgage, 8%, due 10/20/19   -    (74,776)   48,285 
N961DL Aircraft Secured Mortgage, 8%, due 8/20/19   -    (76,582)   47,846 
N976DL Aircraft Secured Mortgage, 8%, due 2/15/18   -    (79,647)   34,759 
N913DL Equipment Trust Beneficial Interests   77,509    (94,032)   12,045 
N918DL Equipment Trust Beneficial Interests   68,612    (89,338)   9,213 
N954DL Equipment Trust Beneficial Interests   78,825    (107,751)   7,578 
N955DL Equipment Trust Beneficial Interests   75,824    (106,437)   6,891 
N956DL Equipment Trust Beneficial Interests   77,085    (107,904)   6,845 
N957DL Equipment Trust Beneficial Interests   76,487    (107,457)   6,648 
N959DL Equipment Trust Beneficial Interests   75,896    (107,015)   6,456 
N960DL Equipment Trust Beneficial Interests   74,776    (106,678)   5,662 
N961DL Equipment Trust Beneficial Interests   76,582    (108,546)   5,805 
N967DL Equipment Trust Beneficial Interests   79,647    (102,560)   7,056 
RM Holdco, LLC, Membership Units   -    -    - 
RM Holdco, LLC, Subordinated Convertible Term Loan, 1.12% PIK, due 3/21/18   57,991    -    57,992 
RM OpCo, LLC, Senior Secured 1st Lien Term Loan Tranche A, 11%, due 3/19/16   16,974    (149,183)   413,430 
RM OpCo, LLC, Senior Secured 1st Lien Term Loan Tranche B, 12% Cash + 7% PIK, due 3/19/16   567,205    -    1,258,016 
RM OpCo, LLC, Senior Secured 1st Lien Term Loan Tranche B-1, 12% Cash + 7% PIK, due 3/19/16   186,901    -    410,004 
RM OpCo, LLC, Convertible 1st Lien Term Loan Tranche B-1, 12% Cash + 7% PIK, due 3/21/16   1,339,883    -    182,711 
United N659UA-767, LLC (N659UA)   999,280    (674,714)   316,842 
United N661UA-767, LLC (N661UA)   969,098    (663,034)   313,627 
Wasserstein Cosmos Co-Invest, L.P., Limited Partnership Units   5,000,000    -    - 

 

Notes to Schedule of Changes in Investments in Affiliates:

 

(1)The issuers of the securities listed on this schedule are considered affiliates under the Investment Company Act of 1940 due to the ownership by the Company of 5% or more of the issuers' voting securities.

(2)Dispositions include sales, paydowns, mortgage amortizations, and aircraft depreciation.

(3)Also includes fee and lease income as applicable.

 

34
 

  

 TCP Capital Corp.

 

Consolidated Schedule of Restricted Securities of Unaffiliated Issuers (Unaudited)

 

June 30, 2014

 

Investment  Acquisition Date
    
AIP/IS Holdings, LLC, Membership Units  Var. 2009 & 2010
Avanti Communications Group, PLC, Senior Secured Notes, 10%, due 10/1/19  9/26/13
BPA Laboratories, Inc., Senior Secured Notes, 12.25%, due 4/1/17  3/5/12
Caribbean Financial Group, Senior Secured Notes, 11.5%, due 11/15/19  10/19/12
Carolina Beverage Group, LLC, Secured Notes, 10.625%, due 8/1/18  7/26/13
Constellation Enterprises, LLC, Senior Secured 1st Lien Notes, 10.625%, due 2/1/16  1/20/11
Findly Talent, LLC, Membership Units  1/1/14
Flight Options Holdings I, Inc., Warrants to Purchase Common Stock  12/4/13
Hunt Companies, Inc., Senior Secured Notes, 9.625%, due 3/1/21  2/25/14
Integra Telecom, Inc., Common Stock  11/19/09
Integra Telecom, Inc., Warrants  11/19/09
Iracore International, Inc., Senior Secured Notes, 9.5%, due 6/1/18  5/8/13
Magnolia Finance V plc, Asset-Backed Credit Linked Notes, 13.125%, due 8/2/21  8/1/13
Marsico Holdings, LLC Common Interest Units  9/10/12
Precision Holdings, LLC, Class C Membership Interests  Var. 2010 & 2011
Shop Holdings, LLC, Convertible Promissory Note, 5%, due 8/5/15  2/5/14
Shop Holding, LLC, Class A Units  6/2/11
Shop Holding, LLC, Warrants to Purchase Class A Units  6/2/11
SiTV, Inc., Senior Secured Notes, 10.375%, due 7/1/19  6/18/14
SiTV, Inc., Warrants to Purchase Common Stock  8/3/12
SLS Breeze Intermediate Holdings, Inc., Warrants to Purchase Common Stock  9/25/13
STG-Fairway Holdings, LLC, Class A Units  12/30/10
The Telx Group, Inc., Senior Notes, 13.5% PIK, due 7/9/21  4/9/14
Trade Finance Funding I, Ltd., Secured Class B Notes, 10.75%, due 11/13/18  11/13/13
V Telecom Investment S.C.A, Common Shares  11/9/12

 

35
 

  

TCP Capital Corp.

 

Consolidated Schedule of Restricted Securities of Unaffiliated Issuers

 

December 31, 2013 

 

Investment  Acquisition Date
    
AIP/IS Holdings, LLC, Membership Units  Var. 2009 & 2010
Avanti Communications Group, PLC, Senior Secured Notes, 10%, due 10/1/19  9/26/13
BPA Laboratories, Inc., Senior Secured Notes, 12.25%, due 4/1/17  3/5/12
Caribbean Financial Group, Senior Secured Notes, 11.5%, due 11/15/19  10/19/12
Carolina Beverage Group, LLC, Secured Notes, 10.625%, due 8/1/18  7/26/13
Constellation Enterprises, LLC, Senior Secured 1st Lien Notes, 10.625%, due 2/1/16  1/20/11
Flight Options Holdings I, Inc., Warrants to Purchase Common Stock  12/4/13
Integra Telecom, Inc., Common Stock  11/19/09
Integra Telecom, Inc., Warrants  11/19/09
Iracore International, Inc., Senior Secured Notes, 9.5%, due 6/1/18  5/8/13
Magnolia Finance V plc, Asset-Backed Credit Linked Notes, 13.125%, due 8/2/21  8/1/13
Marsico Holdings, LLC Common Interest Units  9/10/12
Precision Holdings, LLC, Class C Membership Interests  Var. 2010 & 2011
Shop Holding, LLC, Class A Units  6/2/11
Shop Holding, LLC, Warrants to Purchase Class A Units  6/2/11
SiTV, Inc., Warrants to Purchase Common Stock  8/3/12
SLS Breeze Intermediate Holdings, Inc., Warrants to Purchase Common Stock  9/25/13
St Barbara Ltd., 1st Priority Senior Secured Notes, 8.875%, due 4/15/18  3/22/13
STG-Fairway Holdings, LLC, Class A Units  12/30/10
The Telx Group, Inc., Senior Unsecured Notes, 10% Cash + 2% PIK, due 9/26/19  9/26/11
Trade Finance Funding I, Ltd., Secured Class B Notes, 10.75%, due 11/13/18  11/13/13
V Telecom Investment S.C.A, Common Shares  11/9/12
Vantage Oncology, LLC, Senior Secured Notes, 9.5%, due 6/15/17  6/6/13

 

36
 

  

TCP Capital Corp

 

Consolidating Statement of Assets and Liabilities (Unaudited)

 

June 30, 2014

 

       Special Value         
   TCP   Continuation       TCP 
   Capital Corp.   Partners, LP       Capital Corp. 
   Standalone   Consolidated   Eliminations   Consolidated 
Assets                    
Investments:                    
Companies less than 5% owned  $-   $827,560,564   $-   $827,560,564 
Companies 5% to 25% owned   -    50,409,131    -    50,409,131 
Companies more than 25% owned   -    16,699,429    -    16,699,429 
Investment in subsidiary   657,998,651    -    (657,998,651)   - 
Total investments   657,998,651    894,669,124    (657,998,651)   894,669,124 
                     
Cash and cash equivalents   -    29,379,532    -    29,379,532 
Accrued interest income   -    8,621,398    -    8,621,398 
Receivable for investment securities sold   -    17,396,874    -    17,396,874 
Deferred debt issuance costs   3,344,134    4,006,987    -    7,351,121 
Receivable for investments sold   -    17,396,874    -    17,396,874 
Interest rate cap option   -    1,855    -    1,855 
Receivable from subsidiary   400,000    -    (400,000)   - 
Prepaid expenses and other assets   101,156    1,084,347    -    1,185,503 
Total assets   661,843,941    955,160,117    (658,398,651)   958,605,407 
                     
Liabilities                    
Debt   105,500,788    145,000,000    -    250,500,788 
Payable for investment securities purchased   -    8,561,631    -    8,561,631 
Incentive allocation payable   -    3,613,830    -    3,613,830 
Payable to the Investment Manager   1,241,631    509,104    -    1,750,735 
Interest payable   246,604    636,216    -    882,820 
Unrealized depreciation on swaps   -    208,862    -    208,862 
Payable to Parent   -    400,000    (400,000)   - 
Accrued expenses and other liabilities   462,936    2,135,484    -    2,598,420 
Total liabilities   107,451,959    161,065,127    (400,000)   268,117,086 
                     
Preferred equity facility                    
Series A preferred limited partner interests   -    134,000,000    -    134,000,000 
Accumulated dividends on Series A preferred equity facility   -    494,140    -    494,140 
Total preferred limited partner interests   -    134,494,140    -    134,494,140 
                     
Non-controlling interest                    
General Partner interest in Special Value Continuation Partners, LP   -    -    1,602,199    1,602,199 
                     
Net assets  $554,391,982   $659,600,850   $(659,600,850)  $554,391,982 
                     
Composition of net assets                    
Common stock  $36,200   $-   $-   $36,200 
Additional paid-in capital   670,361,329    771,171,985    (771,171,985)   670,361,329 
Accumulated deficit   (116,005,547)   (111,571,135)   113,173,334    (114,403,348)
Non-controlling interest   -    -    (1,602,199)   (1,602,199)
Net assets  $554,391,982   $659,600,850   $(659,600,850)  $554,391,982 

 

37
 

 

TCP Capital Corp

 

Consolidating Statement of Assets and Liabilities

 

December 31, 2013

 

       Special Value         
   TCP   Continuation       TCP 
   Capital Corp.   Partners, LP       Capital Corp. 
   Standalone   Consolidated   Eliminations   Consolidated 
Assets                    
Investments:                    
Companies less than 5% owned  $-   $678,326,915   $-   $678,326,915 
Companies 5% to 25% owned   -    69,068,808    -    69,068,808 
Companies more than 25% owned   -    18,867,236    -    18,867,236 
Investment in subsidiary   551,095,042    -    (551,095,042)   - 
Total investments   551,095,042    766,262,959    (551,095,042)   766,262,959 
                     
Cash and cash equivalents   -    22,984,182    -    22,984,182 
Accrued interest income   -    6,739,105    -    6,739,105 
Receivable for investments sold   -    3,605,964    -    3,605,964 
Deferred debt issuance costs   -    2,969,085    -    2,969,085 
Interest rate cap option   -    14,139    -    14,139 
Receivable from subsidiary   531,717    -    (531,717)   - 
Prepaid expenses and other assets   30,493    723,275    -    753,768 
Total assets   551,657,252    803,298,709    (551,626,759)   803,329,202 
                     
Liabilities                    
Debt   -    95,000,000    -    95,000,000 
Payable for investment securities purchased   -    14,706,942    -    14,706,942 
Incentive allocation payable   -    3,318,900    -    3,318,900 
Payable to the Investment Manager   833,737    287,371    -    1,121,108 
Interest payable   -    430,969    -    430,969 
Unrealized depreciation on swaps   -    331,183    -    331,183 
Payable to Parent   -    531,717    (531,717)   - 
Accrued expenses and other liabilities   1,212,260    1,923,750    -    3,136,010 
Total liabilities   2,045,997    116,530,832    (531,717)   118,045,112 
                     
Preferred equity facility                    
Series A preferred limited partner interests   -    134,000,000    -    134,000,000 
Accumulated dividends on Series A preferred equity facility   -    504,252    -    504,252 
Total preferred limited partner interests   -    134,504,252    -    134,504,252 
                     
Non-controlling interest                    
General Partner interest in Special Value Continuation Partners, LP   -    -    1,168,583    1,168,583 
                     
Net assets  $549,611,255   $552,263,625   $(552,263,625)  $549,611,255 
                     
Composition of net assets                    
Common stock  $36,200   $-   $-   $36,200 
Additional paid-in capital   667,842,020    666,530,318    (666,530,318)   667,842,020 
Accumulated deficit   (118,266,965)   (114,266,693)   115,435,276    (117,098,382)
Non-controlling interest   -    -    (1,168,583)   (1,168,583)
Net assets  $549,611,255   $552,263,625   $(552,263,625)  $549,611,255 

 

38
 

 

TCP Capital Corp.

 

Consolidating Statement of Operations (Unaudited)

 

Six Months Ended June 30, 2014

 

       Special Value         
   TCP   Continuation       TCP 
   Capital Corp.   Partners, LP       Capital Corp. 
   Standalone   Consolidated   Eliminations   Consolidated 
Investment income                    
Interest income:                    
Companies less than 5% owned  $-   $40,474,125   $-   $40,474,125 
Companies 5% to 25% owned   -    2,694,179    -    2,694,179 
Companies more than 25% owned   -    492,462    -    492,462 
Dividend income:                    
Companies 5% to 25% owned   -    1,968,748    -    1,968,748 
Other income:                    
Companies less than 5% owned   -    954,316    -    954,316 
Companies 5% to 25% owned   -    208,543    -    208,543 
Companies more than 25% owned   -    463,572    -    463,572 
Total interest and related investment income   -    47,255,945    -    47,255,945 
                     
Operating expenses                    
Management and advisory fees   -    5,991,080    -    5,991,080 
Interest expense   251,319    1,225,293    -    1,476,612 
Amortization of deferred debt issuance costs   25,866    776,282    -    802,148 
Administration expenses   -    636,275    -    636,275 
Legal fees, professional fees and due diligence expenses   184,807    374,586    -    559,393 
Commitment fees   -    407,062    -    407,062 
Director fees   55,023    112,359    -    167,382 
Insurance expense   39,552    79,276    -    118,828 
Custody fees   1,750    109,906    -    111,656 
Other operating expenses   576,081    192,563    -    768,644 
Total expenses   1,134,398    9,904,682    -    11,039,080 
                     
Net investment income (loss)   (1,134,398)   37,351,263    -    36,216,865 
                     
Net realized and unrealized gain (loss) on investments and foreign currency
Net realized gain (loss):                    
Investments in companies less than 5% owned   -    (6,670,011)   -    (6,670,011)
Investments in companies 5% to 25% owned   -    808,411    -    808,411 
Net realized loss   -    (5,861,600)   -    (5,861,600)
Net change in unrealized appreciation/depreciation   -    8,029,680    -    8,029,680 
Net realized and unrealized gain   -    2,168,080    -    2,168,080 
                     
Interest in earnings of subsidiary   31,269,794    -    (31,269,794)   - 
Dividends paid on Series A preferred equity facility   -    (725,812)   -    (725,812)
Net change in accumulated dividends on Series A preferred                    
equity facility   -    10,112    -    10,112 
Distributions of incentive allocation to the General Partner                    
from net investment income   -    -    (7,100,233)   (7,100,233)
Net change in reserve for incentive allocation   -    -    (433,616)   (433,616)
                     
Net increase in net assets resulting from operations  $30,135,396   $38,803,643   $(38,803,643)  $30,135,396 

 

39
 

  

TCP Capital Corp.

 

Consolidating Statement of Operations (Unaudited)

 

Six Months Ended June 30, 2013

 

       Special Value         
   TCP   Continuation       TCP 
   Capital Corp.   Partners, LP       Capital Corp. 
   Standalone   Standalone   Eliminations   Consolidated 
Investment income                    
Interest income:                    
Unaffiliated issuers  $-   $27,487,968   $-   $27,487,968 
Controlled companies   -    642,585    -    642,585 
Affiliates   -    2,096,165    -    2,096,165 
Other income:                    
Unaffiliated issuers   -    576,948    -    576,948 
Controlled companies   -    311,515    -    311,515 
Other Affiliates   -    219,756    -    219,756 
Total interest and related investment income   -    31,334,937    -    31,334,937 
                     
Operating expenses                    
Management and advisory fees   -    3,905,033    -    3,905,033 
Administration expenses   -    335,616    -    335,616 
Amortization of deferred debt issuance costs   -    251,478    -    251,478 
Legal fees, professional fees and due diligence expenses   220,446    80,758    -    301,204 
Interest expense   -    323,109    -    323,109 
Commitment fees   -    61,094    -    61,094 
Director fees   47,751    96,058    -    143,809 
Insurance expense   26,228    52,567    -    78,795 
Custody fees   1,750    57,901    -    59,651 
Other operating expenses   274,629    142,877    -    417,506 
Total expenses   570,804    5,306,491    -    5,877,295 
                     
Net investment income   (570,804)   26,028,446    -    25,457,642 
                     
Net realized and unrealized gain (loss) on investments and foreign currency                    
Net realized gain (loss):                    
Investments in unaffiliated issuers   -    (3,577,502)   -    (2,034,839)
Net realized loss   -    (3,577,502)   -    (2,034,839)
Net change in unrealized appreciation/depreciation   22,747,150    6,591,253    (22,747,150)   5,048,590 
Net realized and unrealized gain (loss)   22,747,150    3,013,751    (22,747,150)   3,013,751 
                     
Dividends paid on Series A preferred equity facility   -    (786,082)   -    (786,082)
Net change in accumulated dividends on Series A  preferred equity facility   -    35,122    -    35,122 
Distributions of incentive allocation to the General  Partner from net investment income   -    -    (4,941,336)   (4,941,336)
Distributions of incentive allocation to the General   Partner from net realized gains   -    -    (258,441)   (258,441)
Net change in reserve for incentive allocation   -    -    (344,310)   (344,310)
                     
Net increase in net assets resulting from operations  $22,176,346   $28,291,237   $(28,291,237)  $22,176,346 

  

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Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The information contained in this section should be read in conjunction with our unaudited consolidated financial statements and related notes thereto appearing elsewhere in this quarterly report on Form 10-Q. Some of the statements in this report (including in the following discussion) constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which relate to future events or the future performance or financial condition of TCP Capital Corp. (the “Holding Company,” “we,” “us,” or “our”). The forward-looking statements contained in this report involve a number of risks and uncertainties, including statements concerning:

 

  our, or our portfolio companies’, future business, operations, operating results or prospects;

 

  the return or impact of current and future investments;

 

  the impact of a protracted decline in the liquidity of credit markets on our business;

 

  the impact of fluctuations in interest rates on our business;

 

  the impact of changes in laws or regulations governing our operations or the operations of our portfolio companies;

 

  our contractual arrangements and relationships with third parties;

 

  the general economy and its impact on the industries in which we invest;

 

  the financial condition of and ability of our current and prospective portfolio companies to achieve their objectives;

 

  our expected financings and investments;

 

  the adequacy of our financing resources and working capital;

 

  the ability of our investment adviser to locate suitable investments for us and to monitor and administer our investments;

 

  the timing of cash flows, if any, from the operations of our portfolio companies;

 

  the timing, form and amount of any dividend distributions; and

 

  our ability to maintain our qualification as a regulated investment company and as a business development company.

 

We use words such as “anticipate,” “believe,” “expect,” “intend,” “will,” “should,” “could,” “may,” “plan” and similar words to identify forward-looking statements. The forward looking statements contained in this annual report involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth as “Risk Factors” in this report.

 

We have based the forward-looking statements included in this report on information available to us on the date of this report, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with the SEC, including annual reports on Form 10-K, registration statements on Form N-2, quarterly reports on Form 10-Q and current reports on Form 8-K.

 

Overview

 

The Holding Company is a Delaware corporation formed on April 2, 2012 and is an externally managed, closed-end, non-diversified management investment company. The Holding Company elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). Our investment objective is to seek to achieve high total returns through current income and capital appreciation, with an emphasis on principal protection. We invest primarily in the debt of middle-market companies as well as small businesses, including senior secured loans, junior loans, mezzanine debt and bonds. Such investments may include an equity component, and, to a lesser extent, we may make equity investments directly. Investment operations are conducted either in Special Value Continuation Partners, LP, a Delaware Limited Partnership (the “Operating Company”), of which the Holding Company owns 100% of the common limited partner interests, or in one of the Operating Company’s wholly-owned subsidiaries, TCPC Funding I, LLC (“TCPC Funding”) and TCPC SBIC, LP (the “SBIC”). The Operating Company has also elected to be treated as a BDC under the 1940 Act. The General Partner of the Operating Company is SVOF/MM, LLC (“SVOF/MM”), which also serves as the administrator (“Administrator”) of the Holding Company and the Operating Company. The managing member of SVOF/MM is Tennenbaum Capital Partners, LLC (the “Advisor”), which serves as the investment manager to the Holding Company, the Operating Company, TCPC Funding, and the SBIC. Most of the equity interests in the General Partner are owned directly or indirectly by the Advisor and its employees.

 

41
 

  

The SBIC was organized as a Delaware limited partnership in June 2013. On April 22, 2014, the SBIC received a license from the United States Small Business Administration (the “SBA”) to operate as a small business investment company under the provisions of Section 301(c) of the Small Business Investment Act of 1958.

 

The Holding Company has elected to be treated as a regulated investment company (“RIC”) for U.S. federal income tax purposes. As a RIC, the Holding Company will not be taxed on its income to the extent that it distributes such income each year and satisfies other applicable income tax requirements. The Operating Company, TCPC Funding, and the SBIC have elected to be treated as partnerships for U.S. federal income tax purposes.

 

Our leverage program is comprised of $116 million in available debt under a senior secured revolving credit facility issued by the Operating Company (the “Operating Company Facility”), $200 million in available debt under a senior secured revolving credit facility issued by TCPC Funding (the “TCPC Funding Facility,” and, together with the Operating Company Facility, the “Revolving Facilities”), $108 million in convertible senior unsecured notes issued by the Holding Company (the “Notes”), $75 million in committed leverage from the SBA (the “SBA Program”), and $134 million of outstanding preferred limited partner interests in the Operating Company (the “Preferred Interests,” and, together with the Revolving Facilities, the Notes, and the SBA Program, the “Leverage Program”).

 

To qualify as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements and timely distribute to our stockholders generally at least 90% of our investment company taxable income, as defined by the Internal Revenue Code of 1986, as amended, for each year. Pursuant to this election, we generally will not have to pay corporate level taxes on any income that we distribute to our stockholders provided that we satisfy those requirements.

 

Investments

 

Our level of investment activity can and does vary substantially from period to period depending on many factors, including the amount of debt and equity capital available to middle-market companies, the level of merger and acquisition activity, the general economic environment and the competitive environment for the types of investments we make.

 

As a BDC, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in “qualifying assets,” including securities and indebtedness of private U.S. companies, public U.S. operating companies whose securities are not listed on a national securities exchange or registered under the Securities Exchange Act of 1934, as amended, public domestic operating companies having a market capitalization of less than $250 million, cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less. We are also permitted to make certain follow-on investments in companies that were eligible portfolio companies at the time of initial investment but that no longer meet the definition. As of June 30, 2014, 86.9% of our total assets were invested in qualifying assets.

 

Revenues

 

We generate revenues primarily in the form of interest on the debt we hold. We also generate revenue from dividends on our equity interests and capital gains on the sale of warrants and other debt or equity interests that we acquire. Our investments in fixed income instruments generally have an expected maturity of three to five years, although we have no lower or upper constraint on maturity. Interest on our debt investments is generally payable quarterly or semi-annually. Payments of principal of our debt investments may be amortized over the stated term of the investment, deferred for several years or due entirely at maturity. In some cases, our debt investments and preferred stock investments may defer payments of cash interest or dividends or PIK. Any outstanding principal amount of our debt investments and any accrued but unpaid interest will generally become due at the maturity date. In addition, we may generate revenue in the form of prepayment fees, commitment, origination, structuring or due diligence fees, fees for providing significant managerial assistance, consulting fees and other investment related income.

 

42
 

  

Expenses

 

Our primary operating expenses include the payment of a base management fee and, depending on our operating results, incentive compensation, expenses reimbursable under the management agreement, administration fees and the allocable portion of overhead under the administration agreement. The base management fee and incentive compensation remunerates the Advisor for work in identifying, evaluating, negotiating, closing and monitoring our investments. Our administration agreement with SVOF/MM, LLC (the “Administrator”) provides that the Administrator may be reimbursed for costs and expenses incurred by the Administrator for office space rental, office equipment and utilities allocable to us under the administration agreement, as well as any costs and expenses incurred by the Administrator or its affiliates relating to any non-investment advisory, administrative or operating services provided by the Administrator or its affiliates to us. We also bear all other costs and expenses of our operations and transactions (and the Holding Company’s common stockholders indirectly bear all of the costs and expenses of the Holding Company, the Operating Company, TCPC Funding and the SBIC), which may include those relating to:

  our  organization;

 

  calculating our net asset value (including the cost and expenses of any independent valuation firms);

 

  interest payable on debt, if any, incurred to finance our investments;

 

  costs of future offerings of our common stock and other securities, if any;

 

  the base management fee and any incentive compensation;

 

  dividends and distributions on our preferred shares, if any, and common shares;

 

  administration fees payable under the administration agreement;

 

  fees payable to third parties relating to, or associated with, making investments;

 

  transfer agent and custodial fees;

 

  registration fees;

 

  listing fees;

 

  taxes;

 

  director fees and expenses;

 

  costs of preparing and filing reports or other documents with the SEC;

 

  costs of any reports, proxy statements or other notices to our stockholders, including printing costs;

 

  our fidelity bond;

 

  directors and officers/errors and omissions liability insurance, and any other insurance premiums;

 

  indemnification payments;

 

  direct costs and expenses of administration, including audit and legal costs; and

 

  all other expenses reasonably incurred by us and the Administrator in connection with administering our business, such as the allocable portion of overhead under the administration agreement, including rent and other allocable portions of the cost of certain of our officers and their respective staffs.

 

The investment management agreement provides that the base management fee be calculated at an annual rate of 1.5% of our total assets (excluding cash and cash equivalents) payable quarterly in arrears. For purposes of calculating the base management fee, “total assets” is determined without deduction for any borrowings or other liabilities. The base management fee is calculated based on the value of our total assets (excluding cash and cash equivalents) at the end of the most recently completed calendar quarter.

 

43
 

  

Additionally, the investment management agreement and the Amended and Restated Limited Partnership Agreement provide that the Advisor or its affiliates may be entitled to incentive compensation under certain circumstances. The incentive compensation equals the sum of (1) 20% of all ordinary income since January 1, 2013 and (2) 20% of all net realized capital gains (net of any net unrealized capital depreciation) since January 1, 2013, with each component being subject to a total return requirement of 8% of contributed common equity annually. The incentive compensation is payable to the General Partner by the Operating Company pursuant to the Amended and Restated Limited Partnership Agreement. If the Operating Company is terminated or for any other reason incentive compensation is not paid by the Operating Company, it would be paid pursuant to the investment management agreement between us and the Advisor. The determination of incentive compensation is subject to limitations under the 1940 Act and the Advisers Act.

 

Critical accounting policies

 

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ. Management considers the following critical accounting policies important to understanding the financial statements. In addition to the discussion below, our critical accounting policies are further described in the notes to our financial statements.

 

Valuation of portfolio investments

 

We value our portfolio investments at fair value based upon the principles and methods of valuation set forth in policies adopted by our board of directors. Fair value is defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. Market participants are buyers and sellers in the principal (or most advantageous) market for the asset that (i) are independent of us, (ii) are knowledgeable, having a reasonable understanding about the asset based on all available information (including information that might be obtained through due diligence efforts that are usual and customary), (iii) are able to transact for the asset, and (iv) are willing to transact for the asset or liability (that is, they are motivated but not forced or otherwise compelled to do so).

 

Investments for which market quotations are readily available are valued at such market quotations unless the quotations are deemed not to represent fair value. We generally obtain market quotations from recognized exchanges, market quotation systems, independent pricing services or one or more broker-dealers or market makers. However, short term debt investments with remaining maturities within 90 days are generally valued at amortized cost, which approximates fair value. Debt and equity securities for which market quotations are not readily available, which is the case for many of our investments, or for which market quotations are deemed not to represent fair value, are valued at fair value using a consistently applied valuation process in accordance with our documented valuation policy that has been reviewed and approved by our board of directors, who also approve in good faith the valuation of such securities as of the end of each quarter. Due to the inherent uncertainty and subjectivity of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may differ significantly from the values that would have been used had a readily available market value existed for such investments and may differ materially from the values that we may ultimately realize. In addition, changes in the market environment and other events may have differing impacts on the market quotations used to value some of our investments than on the fair values of our investments for which market quotations are not readily available. Market quotations may be deemed not to represent fair value in certain circumstances where we believe that facts and circumstances applicable to an issuer, a seller or purchaser, or the market for a particular security cause current market quotations to not reflect the fair value of the security. Examples of these events could include cases where a security trades infrequently causing a quoted purchase or sale price to become stale, where there is a “forced” sale by a distressed seller, where market quotations vary substantially among market makers, or where there is a wide bid-ask spread or significant increase in the bid-ask spread.

 

The valuation process adopted by our board of directors with respect to investments for which market quotations are not readily available or for which market quotations are deemed not to represent fair value is as follows:

 

  The investment professionals of the Advisor provide recent portfolio company financial statements and other reporting materials to independent valuation firms approved by our board of directors.

  

  Such firms evaluate this information along with relevant observable market data to conduct independent appraisals each quarter, and their preliminary valuation conclusions are documented and discussed with senior management of the Advisor.

 

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  The fair value of smaller investments comprising in the aggregate less than 5% of our total capitalization may be determined by the Advisor in good faith in accordance with our valuation policy without the employment of an independent valuation firm.

 

  The audit committee of the board of directors discusses the valuations, and the board of directors approves the fair value of the investments in our portfolio in good faith based on the input of the Advisor, the respective independent valuation firms (to the extent applicable) and the audit committee of the board of directors.

 

Those investments for which market quotations are not readily available or for which market quotations are deemed not to represent fair value are valued utilizing a market approach, an income approach, or both approaches, as appropriate. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that we may take into account in determining the fair value of our investments include, as relevant and among other factors: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, merger and acquisition comparables, our principal market (as the reporting entity) and enterprise values.

 

When valuing all of our investments, we strive to maximize the use of observable inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of us. Unobservable inputs are inputs that reflect our assumptions about the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances.

 

Our investments may be categorized based on the types of inputs used in their valuation. The level in the GAAP valuation hierarchy in which an investment falls is based on the lowest level input that is significant to the valuation of the investment in its entirety. Investments are classified by GAAP into the three broad levels as follows:

 

Level 1 — Investments valued using unadjusted quoted prices in active markets for identical assets.

 

Level 2 — Investments valued using other unadjusted observable market inputs, e.g. quoted prices in markets that are not active or quotes for comparable instruments.

 

Level 3 — Investments that are valued using quotes and other observable market data to the extent available, but which also take into consideration one or more unobservable inputs that are significant to the valuation taken as a whole.

 

 As of June 30, 2014, 0.1% of our investments were categorized as Level 1, 25.8% were categorized as Level 2, 73.4% were Level 3 investments valued based on valuations by independent third party sources, and 0.7% were Level 3 investments valued based on valuations by the Advisor.

 

 Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our financial statements express the uncertainty with respect to the possible effect of such valuations, and any change in such valuations, on the financial statements.

 

Revenue recognition

 

Interest and dividend income, including income paid in kind, is recorded on an accrual basis to the extent that such amounts are determined to be collectible. Origination, structuring, closing, commitment and other upfront fees earned with respect to capital commitments are generally amortized or accreted into interest income over the life of the respective debt investment. Other fees, including certain amendment fees, prepayment fees and commitment fees on broken deals, are recognized as earned. Prepayment fees and similar income received upon the early repayment of a loan or debt security are included in interest income.

 

Certain of our debt investments are purchased at a considerable discount to par as a result of the underlying credit risks and financial results of the issuer, as well as general market factors that influence the financial markets as a whole. GAAP generally requires that discounts on the acquisition of corporate bonds, municipal bonds and treasury bonds be amortized using the effective-interest or constant-yield method. GAAP also requires that we consider the collectability of interest when making accruals. Accordingly, when accounting for purchase discounts, we recognize discount accretion income when it is probable that such amounts will be collected.

 

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Net realized gains or losses and net change in unrealized appreciation or depreciation

 

We measure realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized. Realized gains and losses are computed using the specific identification method. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.

 

Portfolio and investment activity

 

During the three months ended June 30, 2014, we invested approximately $168.6 million across 9 new and 5 existing portfolio companies. Of these investments, 100% were in senior secured debt comprised of senior loans ($157.1 million, or 93% of the total) and senior secured notes ($11.5 million, or 7% of the total). Additionally, we received approximately $87.9 million in proceeds from sales or repayments of investments during the three months ended June 30, 2014.

 

During the six months ended June 30, 2014, we invested approximately $279.0 million across 17 new and 8 existing portfolio companies. Of these investments, 99.9% were in senior secured debt comprised of senior loans ($242.8 million, or 87.0% of the total) and senior secured notes ($36.0 million, or 12.9% of the total). The remaining $0.2 million (0.1% of the total) were comprised of two equity investments and PIK payments received on investments in unsecured debt. Additionally, we received approximately $155.4 million in proceeds from sales or repayments of investments during the six months ended June 30, 2014.

 

At June 30, 2014, our investment portfolio of $894.7 million (at fair value) consisted of 74 portfolio companies and was invested 97% in debt investments, of which 99.9% was in senior secured debt and 0.1% in subordinated debt. In aggregate, our investment portfolio was invested 81% in senior secured loans, 16% in senior secured notes, less than 1% in subordinated debt, and 3% in equity investments. Our average portfolio company investment at fair value was approximately $12.1 million. Our largest portfolio company investment by value was approximately $30.6 million and our five largest portfolio company investments by value comprised approximately 13% of our portfolio at June 30, 2014. At December 31, 2013, our investment portfolio of $766.3 million (at fair value) consisted of 67 portfolio companies and was invested 95% in debt investments, of which 98% was in senior secured debt and 2% in unsecured or subordinated debt. In aggregate, our investment portfolio was invested 76% in senior secured loans, 17% in senior secured notes, 2% in unsecured or subordinated debt, and 5% in equity investments. Our average portfolio company investment at fair value was approximately $11.4 million. Our largest portfolio company investment by value was approximately $21.3 million and our five largest portfolio company investments by value comprised approximately 13% of our portfolio at December 31, 2013.

 

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The industry composition of our portfolio at fair value at June 30, 2014 was as follows:

 

    Percent of Total  
Industry   Investments  
Computer Systems Design and Related Services     10.6 %
Software Publishers     10.0 %
Radio and Television Broadcasting     3.7 %
Wireless Telecommunications     3.5 %
Newspaper, Periodical, Book, and Directory Publishers     3.5 %
Scheduled Air Transportation     3.1 %
Nondepository Credit Intermediation     2.9 %
Basic Chemical Manufacturing     2.8 %
Wired Telecommunications Carriers     2.7 %
General Medical and Surgical Hospitals     2.3 %
Chemical Manufacturing     2.3 %
Other Information Services     2.2 %
Nonscheduled Air Transportation     2.2 %
Communications Equipment Manufacturing     2.2 %
Scientific Research and Development Services     2.1 %
Gaming Industries     2.0 %
Retail     2.0 %
Advertising, Public Relations, and Related Services     2.0 %
Business Support Services     1.9 %
Activities Related to Real Estate     1.9 %
Electrical Equipment and Component Manufacturing     1.8 %
Full-Service Restaurants     1.8 %
Lessors of Nonfinancial Intangible Assets     1.8 %
Textile Furnishings Mills     1.8 %
Motion Picture and Video Industries     1.7 %
Structured Note Funds     1.7 %
Cut and Sew Apparel Manufacturing     1.6 %
Plastics Products Manufacturing     1.6 %
Other Telecommunications     1.6 %
Oil and Gas Extraction     1.6 %
Lessors of Real Estate     1.5 %
Grocery Stores     1.4 %
Financial Investment Activities     1.4 %
Insurance Carriers     1.3 %
Electric Power Generation, Transmission and Distribution     1.3 %
Artificial Synthetic Fibers and Filaments Manufacturing     1.2 %
Satellite Telecommunications     1.2 %
Merchant Wholesalers     1.0 %
Computer Equipment Manufacturing     1.0 %
Other     5.8 %
Total     100.0 %

 

The weighted average effective yield of the debt securities in our portfolio was 10.7% at June 30, 2014 and 10.9% at December 31, 2013. The weighted average effective yields on our senior debt and other debt investments were 10.7% and 5.7%, respectively, at June 30, 2014, versus 10.9% and 13.1% at December 31, 2013.

 

At June 30, 2014, 77.0% of our debt investments bore interest based on floating rates, such as LIBOR, EURIBOR, the Federal Funds Rate or the Prime Rate, and 23.0% bore interest at fixed rates. The percentage of our floating rate debt investments that bore interest based on an interest rate floor was 89.0% at June 30, 2014. At December 31, 2013, 71.2% of our debt investments bore interest based on floating rates, and 28.8% bore interest at fixed rates. The percentage of our floating rate debt investments that bore interest based on an interest rate floor was 92.1% at December 31, 2013.

 

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Results of operations

 

Investment income

 

Investment income totaled $24.6 million and $14.5 million, respectively, for the three months ended June 30, 2014 and 2013, of which $23.9 million and $13.8 million were attributable to interest and fees on our debt investments and $0.7 million and $0.7 million to other income, respectively. The increase in investment income in the three months ended June 30, 2014 compared to the three months ended June 30, 2013 reflects an increase in interest income due to the larger investment portfolio and a higher percentage of the portfolio in income-producing assets in the three months ended June 30, 2014 compared to the three months ended June 30, 2013.

 

Investment income totaled $47.3 million and $31.3 million, respectively, for the six months ended June 30, 2014 and 2013, of which $43.7 million and $30.2 million were attributable to interest and fees on our debt investments, $2.0 million and $0.0 million to dividends from equity securities, and $1.6 million and $1.1 million to other income, respectively. The increase in investment income in the six months ended June 30, 2014 compared to the six months ended June 30, 2013 reflects an increase in interest income due to the larger investment portfolio and a higher percentage of the portfolio in income-producing assets in the six months ended June 30, 2014 compared to the six months ended June 30, 2013 and an increase in dividend income and other income.

 

Expenses

 

Total operating expenses for the three months ended June 30, 2014 and 2013 were $6.2 million and $3.0 million, respectively, comprised of $3.1 million and $1.9 million in base management fees, $0.4 million and $0.2 million in legal and professional fees, $1.3 million and $0.2 million in interest expense and fees related to the Notes and the Revolving Facilities, $0.4 million and $0.1 million in amortization of debt issuance costs, and $1.0 million and $0.6 million in other expenses, respectively. The increase in expenses in the three months ended June 30, 2014 compared to the three months ended June 30, 2013 primarily reflects the increase in management fees due to the larger portfolio and the increase in interest expense and other costs related to the increase in available and outstanding debt and the higher average interest rate following the issuance of the Notes.

 

Total operating expenses for the six months ended June 30, 2014 and 2013 were $11.0 million and $5.9 million, respectively, comprised of $6.0 million and $3.9 million in base management fees, $0.6 million and $0.3 million in legal and professional fees, $1.9 million and $0.4 million in interest expense and fees related to the Notes and the Revolving Facilities, $0.8 million and $0.3 million in amortization of debt issuance costs, and $1.8 million and $1.0 million in other expenses, respectively. The increase in expenses in the six months ended June 30, 2014 compared to the six months ended June 30, 2013 primarily reflects the increase in management fees due to the larger portfolio and the increase in interest expense and other costs related to the increase in available and outstanding debt and the higher average interest rate following the issuance of the Notes.

 

Net investment income

 

Net investment income was $18.4 million and $11.5 million, respectively, for the three months ended June 30, 2014 and 2013. The increase in in net investment income in the three months ended June 30, 2014 compared to the three months ended June 30, 2013 primarily reflects the increased interest income in the three months ended June 30, 2014, partially offset by the increase in expenses.

 

Net investment income was $36.2 million and $25.5 million, respectively, for the six months ended June 30, 2014 and 2013. The increase in in net investment income in the six months ended June 30, 2014 compared to the six months ended June 30, 2013 primarily reflects the increased interest and dividend income in the six months ended June 30, 2014, partially offset by the increase in expenses.

 

Net realized and unrealized gain or loss

 

Net realized gains (losses) for the three months ended June 30, 2014 and 2013 were $0.9 million and $(4.1) million, respectively. The net realized loss during the three months ended June 30, 2013 was primarily due to a charge on the recapitalization of AGY, a transaction in which we received both new debt and preferred equity in a deleveraged company. The initial AGY investment was part of our legacy distressed debt strategy and has generated substantial cash interest income. For the three months ended June 30, 2014 and 2013, the change in net unrealized depreciation was $(3.9) million and $4.8 million, respectively. The change in net unrealized depreciation for the three months ended June 30, 2014 was primarily due to an investment made prior to our initial public offering as part of our legacy distressed strategy and which has yielded significant income for many years. The Company also had an unrealized mark to market adjustment on certain of our United Airlines aircraft. The change in net unrealized depreciation for the three months ended June 30, 2013 was primarily due to the reversal of unrealized depreciation from the recapitalization of AGY.

 

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Net realized gains (losses) for the six months ended June 30, 2014 and 2013 were $(5.9) million and $(3.6) million, respectively. The net realized loss during the six months ended June 30, 2014 was due primarily to the disposition of our investment in ESP Holdings, Inc., an investment made prior to our initial public offering as part of our legacy distressed strategy and which has generated substantial cash interest income. For the six months ended June 30, 2014 and 2013, the change in net unrealized appreciation was $8.0 million and $6.6 million, respectively. The change in net unrealized depreciation for the six months ended June 30, 2014 and June 30, 2014 were primarily due to reversals of prior period unrealized depreciation.

 

Income tax expense, including excise tax

 

The Holding Company has elected to be treated as a RIC under Subchapter M of the Internal Revenue Code (“the Code”) and operates in a manner so as to qualify for the tax treatment applicable to RICs. To qualify as a RIC, the Holding Company must, among other things, timely distribute to its stockholders generally at least 90% of its investment company taxable income, as defined by the Code, for each year. The Holding Company has made and intends to continue to make the requisite distributions to its stockholders which will generally relieve the Holding Company from U.S. federal income taxes.

 

Depending on the level of taxable income earned in a tax year, we may choose to carry forward taxable income in excess of current year dividend distributions from such current year taxable income into the next tax year and pay a 4% excise tax on such income. Any excise tax expense is recorded at yearend as such amounts are known. There was no U.S. federal excise tax recorded during the six months ended June 30, 2014 and 2013.

 

Dividends to preferred equity holders

 

Dividends on the Preferred Interests for the three months ended June 30, 2014 and 2013 were $0.4 million and $0.4 million, respectively, as average LIBOR rates for the two periods were similar. Dividends on the Preferred Interests for the six months ended June 30, 2014 and 2013 were $0.7 million and $0.8 million, respectively, as average LIBOR rates for the two periods were similar.

 

Incentive compensation

 

Incentive compensation distributable to the General Partner for the three months ended June 30, 2014 and 2013 was $3.6 million and $2.5 million, respectively. Incentive compensation distributable to the General Partner for the six months ended June 30, 2014 and 2013 was $7.1 million and $5.2 million, respectively. Incentive compensation for the three and six months ended June 30, 2014 and 2013 was distributable due to our performance exceeding the total return threshold. The reserve for incentive compensation to the General Partner decreased during the three months ended June 30, 2014 and 2013 by $0.6 million and $0.1 million, respectively. The reserve for incentive compensation to the General Partner increased during the six months ended June 30, 2014 and 2013 by $0.4 million and $0.3 million, respectively. The change in reserve for incentive compensation for the three and six months ended June 30, 2014 reflects the change in the amount in excess of distributable incentive compensation which would have been earned by the General Partner had we liquidated at net asset value at June 30, 2014 and June 30, 2013, respectively. 

 

Net increase or decrease in net assets resulting from operations

 

The net increase in net assets resulting from operations was $12.0 million and $9.4 million for the three months ended June 30, 2014 and 2013, respectively. The higher net increase in net assets resulting from operations during the three months ended June 30, 2014 is primarily due to the increase in net investment income, partially offset by the net realized and unrealized loss during the three months ended June 30, 2014 compared to the net realized and unrealized gain during the three months ended June 30, 2013. The net increase in net assets resulting from operations was $30.1 million and $22.2 million for the six months ended June 30, 2014 and 2013, respectively. The higher net increase in net assets resulting from operations during the six months ended June 30, 2014 is primarily due to the increase in net investment income.

 

Liquidity and capital resources

 

Since our inception, our liquidity and capital resources have been generated primarily through the initial private placement of common shares of Special Value Continuation Fund, LLC (the predecessor entity) which were subsequently converted to common stock of the Holding Company, the net proceeds from the initial and secondary public offerings of our common stock, borrowings under our Leverage Program, and cash flows from operations, including investments sales and repayments and income earned from investments and cash equivalents. The primary uses of cash have been investments in portfolio companies, cash distributions to our equity holders, payments to service our Leverage Program and other general corporate purposes.

 

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Amounts outstanding and available under the combined Leverage Program at June 30, 2014 were as follows:

 

   Rate   Carrying Value **   Available   Total Capacity 
Operating Company Facility   L+44*   $45,000,000   $71,000,000   $116,000,000 
TCPC Funding Facility   L+250*    100,000,000    100,000,000    200,000,000 
Notes ($108 million par)   5.25%    105,500,788    -    105,500,788 
SBA Program   TBD    -    75,000,000    75,000,000 
Preferred Interests   L+85*    134,000,000    -    134,000,000 
Total Leverage Program       $384,500,788   $246,000,000   $630,500,788 

 

* Based on either LIBOR or the lender’s cost of funds, subject to certain limitations.

** Except for the Notes, all carrying values are the same as the principal amounts outstanding.

 

Net cash used in operating activities during the six months ended June 30, 2014 was $117.8 million. Our primary use of cash in operating activities during this period consisted of the settlement of acquisitions of investments (net of dispositions) of $140.8 million, partially offset by net investment income less preferred dividends and incentive allocation (net of non-cash income and expenses) of approximately $23.0 million.

 

Net cash provided by financing activities was $124.2 million during the six months ended June 30, 2014, consisting primarily of $158.0 million of net borrowings, reduced by $27.9 million in dividends on common equity, $0.7 million in dividends on the Preferred Interests, and payment of $5.2 million in debt issuance costs.

 

At June 30, 2014, we had $29.4 million in cash and cash equivalents.

 

The Revolving Facilities are secured by substantially all of the assets in our portfolio, including cash and cash equivalents, and are subject to compliance with customary affirmative and negative covenants, including the maintenance of a minimum shareholders’ equity, the maintenance of a ratio of not less than 200% of total assets (less total liabilities other than indebtedness) to the sum of total preferred equity and indebtedness, and restrictions on certain payments and issuance of debt. Unfavorable economic conditions may result in a decrease in the value of our investments, which would affect both the asset coverage ratios and the value of the collateral securing the Revolving Facilities, and may therefore impact our ability to borrow under the Revolving Facilities. In addition to regulatory restrictions that restrict our ability to raise capital, the Leverage Program contains various covenants which, if not complied with, could accelerate repayment of debt or require redemption of the Preferred Interests, thereby materially and adversely affecting our liquidity, financial condition and results of operations. At June 30, 2014, we were in compliance with all financial and operational covenants required by the Leverage Program.

  

Unfavorable economic conditions, while potentially creating attractive opportunities for us, may decrease liquidity and raise the cost of capital generally, which could limit our ability to renew, extend or replace the Leverage Program on terms as favorable as are currently included therein. If we are unable to renew, extend or replace the Leverage Program upon the various dates of maturity, we expect to have sufficient funds to repay the outstanding balances in full from our net investment income and sales of, and repayments of principal from, our portfolio company investments, as well as from anticipated debt and equity capital raises, among other sources. Unfavorable economic conditions may limit our ability to raise capital or the ability of the companies in which we invest to repay our loans or engage in a liquidity event, such as a sale, recapitalization or initial public offering. The Operating Company Facility, the TCPC Funding Facility and the Notes mature in July 2016, May 2017, and December 2019, respectively, and the Preferred Interests will be subject to mandatory redemption in July 2016. Any inability to renew, extend or replace the Leverage Program could adversely impact our liquidity and ability to find new investments or maintain distributions to our stockholders.

 

Challenges in the market are intensified for us by certain regulatory limitations under the Code and the 1940 Act. To maintain our qualification as a RIC, we must satisfy, among other requirements, an annual distribution requirement to pay out at least 90% of our ordinary income and short-term capital gains to our stockholders. Because we are required to distribute our income in this manner, and because the illiquidity of many of our investments may make it difficult for us to finance new investments through the sale of current investments, our ability to make new investments is highly dependent upon external financing. While we anticipate being able to continue to satisfy all covenants and repay the outstanding balances under the Leverage Program when due, there can be no assurance that we will be able to do so, which could lead to an event of default.

 

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Contractual obligations

 

In addition to obligations under our Leverage Program, we have entered into several contracts under which we have future commitments. Pursuant to an investment management agreement, the Advisor manages our day-to-day operations and provides investment advisory services to us. Payments under the investment management agreement will be equal to a percentage of the value of our gross assets (excluding cash and cash equivalents) and an incentive compensation, plus reimbursement of certain expenses incurred by the Advisor. Under our administration agreement, the Administrator provides us with administrative services, facilities and personnel. Payments under the administration agreement are equal to an allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations to us, and may include rent and our allocable portion of the cost of certain of our officers and their respective staffs. We are responsible for reimbursing the Advisor for due diligence and negotiation expenses, fees and expenses of custodians, administrators, transfer and distribution agents, counsel and directors, insurance, filings and registrations, proxy expenses, expenses of communications to investors, compliance expenses, interest, taxes, portfolio transaction expenses, costs of responding to regulatory inquiries and reporting to regulatory authorities, costs and expenses of preparing and maintaining our books and records, indemnification, litigation and other extraordinary expenses and such other expenses as are approved by the directors as being reasonably related to our organization, offering, capitalization, operation or administration and any portfolio investments, as applicable. The Advisor is not responsible for any of the foregoing expenses and such services are not investment advisory services under the 1940 Act. Either party may terminate each of the investment management agreement and administration agreement without penalty upon not less than 60 days’ written notice to the other.

 

Distributions

 

Our quarterly dividends and distributions to common stockholders are recorded on the ex-dividend date. Distributions are declared considering our estimate of annual taxable income available for distribution to stockholders and the amount of taxable income carried over from the prior year for distribution in the current year. We do not have a policy to pay distributions at a specific level and expect to continue to distribute substantially all of our taxable income. We cannot assure stockholders that they will receive any distributions or distributions at a particular level.

 

The following tables summarize dividends declared for the six months ended June 30, 2014 and June 30, 2013:

 

Date Declared   Record Date   Payment Date   Amount Per Share     Total
Amount
 
March 6, 2014   March 17, 2014   March 31, 2014   $ 0.36     $ 13,031,970  
May 7, 2014   June 18, 2014   June 30, 2014     0.41 *     14,842,008  
Total for six months ended June 30, 2014           $ 0.77     $ 27,873,978  
                         
March 7, 2013   March 18, 2013   March 29, 2013   $ 0.40 *   $ 8,591,051  
May 8, 2013   June 7, 2013   June 28, 2013     0.36       9,595,344  
Total for six months ended June 30, 2013           $ 0.76     $ 18,186,395  

 

* Includes a special dividend of $0.05.

 

The following table summarizes the total shares issued in connection with our dividend reinvestment plan for the six months ended June 30, 2014 and 2013:

 

    2014     2013  
Shares Issued     214       1,104  
Average Price Per Share   $ 17.36     $ 15.96  
Proceeds   $ 3,715     $ 17,614  

 

We have elected to be taxed as a RIC under Subchapter M of the Code. In order to maintain favorable RIC tax treatment, we must distribute annually to our stockholders at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, out of the assets legally available for distribution. In order to avoid certain excise taxes imposed on RICs, we must distribute during each calendar year an amount at least equal to the sum of:

 

  98% of our ordinary income (not taking into account any capital gains or losses) for the calendar year;

 

  98.2% of the amount by which our capital gains exceed our capital losses (adjusted for certain ordinary losses) for the one-year period generally ending on October 31 of the calendar year; and

 

  certain undistributed amounts from previous years on which we paid no U.S. federal income tax.

 

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We may, at our discretion, carry forward taxable income in excess of calendar year distributions and pay a 4% excise tax on this income. If we choose to do so, all other things being equal, this would increase expenses and reduce the amounts available to be distributed to our stockholders. We will accrue excise tax on estimated taxable income as required. In addition, although we currently intend to distribute realized net capital gains (i.e., net long-term capital gains in excess of short-term capital losses), if any, at least annually, out of the assets legally available for such distributions, we may in the future decide to retain such capital gains for investment.

 

We have adopted an “opt in” dividend reinvestment plan for our common stockholders. As a result, if we declare a dividend or other distribution payable in cash, each stockholder that has not “opted in” to our dividend reinvestment plan will receive such dividends in cash, rather than having their dividends automatically reinvested in additional shares of our common stock.

 

We may not be able to achieve operating results that will allow us to make dividends and distributions at a specific level or to increase the amount of these dividends and distributions from time to time. Also, we may be limited in our ability to make dividends and distributions due to the asset coverage test applicable to us as a BDC under the 1940 Act and due to provisions in our existing and future credit facilities. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of favorable RIC tax treatment. In addition, in accordance with U.S. generally accepted accounting principles and tax regulations, we include in income certain amounts that we have not yet received in cash, such as PIK interest, which represents contractual interest added to the loan balance that becomes due at the end of the loan term, or the accrual of original issue or market discount. Since we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the requirement to distribute at least 90% of our investment company taxable income to obtain tax benefits as a RIC and may be subject to an excise tax.

 

  In order to satisfy the annual distribution requirement applicable to RICs, we have the ability to declare a large portion of a dividend in shares of our common stock instead of in cash. As long as a portion of such dividend is paid in cash and certain requirements are met, the entire distribution would be treated as a dividend for U.S. federal income tax purposes.

 

Related Parties

 

We have entered into a number of business relationships with affiliated or related parties, including the following:

 

  Each of the Holding Company, the Operating Company, TCPC Funding, and the SBIC has entered into an investment management agreement with the Advisor.

 

  The Administrator provides us with administrative services necessary to conduct our day-to-day operations. For providing these services, facilities and personnel, the Administrator may be reimbursed by us for expenses incurred by the Administrator in performing its obligations under the administration agreement, including our allocable portion of the cost of certain of our officers and the Administrator’s administrative staff and providing, at our request and on our behalf, significant managerial assistance to our portfolio companies to which we are required to provide such assistance.

  

  We have entered into a royalty-free license agreement with the Advisor, pursuant to which the Advisor has agreed to grant us a non-exclusive, royalty-free license to use the name “TCP.”

 

  Pursuant to its limited partnership agreement, the general partner of the Operating Company is SVOF/MM, LLC. SVOF/MM, LLC is an affiliate of the Advisor and the general partners or managing member of certain other funds managed by the Advisor.

 

The Advisor and its affiliates, employees and associates currently do and in the future may manage other funds and accounts. The Advisor and its affiliates may determine that an investment is appropriate for us and for one or more of those other funds or accounts. Accordingly, conflicts may arise regarding the allocation of investments or opportunities among us and those accounts. In general, the Advisor will allocate investment opportunities pro rata among us and the other funds and accounts (assuming the investment satisfies the objectives of each) based on the amount of committed capital each then has available. The allocation of certain investment opportunities in private placements is subject to independent director approval pursuant to the terms of the co-investment exemptive order applicable to us. In certain cases, investment opportunities may be made other than on a pro rata basis. For example, we may desire to retain an asset at the same time that one or more other funds or accounts desire to sell it or we may not have additional capital to invest at a time the other funds or accounts do. If the Advisor is unable to manage our investments effectively, we may be unable to achieve our investment objective. In addition, the Advisor may face conflicts in allocating investment opportunities between us and certain other entities that could impact our investment returns. While our ability to enter into transactions with our affiliates is restricted under the 1940 Act, we have received an exemptive order from the SEC permitting certain affiliated investments subject to certain conditions. As a result, we may face conflict of interests and investments made pursuant to the exemptive order conditions which could in certain circumstances affect adversely the price paid or received by us or the availability or size of the position purchased or sold by us.

 

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Recent Developments

 

From July 1, 2014 through August 5, 2014, the Operating Company has invested approximately $99.2 million in seven senior secured loans with a combined effective yield of approximately 11.3%.

 

On August 1, 2014, the Company closed a public offering of 5.4 million shares of its common stock at $17.33 per share for gross proceeds of approximately $93.6 million and net proceeds of $90.4 million, net of underwriter discounts and approximately $0.4 million of expenses related to the offering.

 

On August 7, 2014, the Company’s board of directors declared a third quarter cash dividend of $0.36 per share payable on September 30, 2014 to stockholders of record as of the close of business on September 16, 2014.

 

Item 3:     Quantitative and qualitative disclosure about market risk

 

We are subject to financial market risks, including changes in interest rates. At June 30, 2014, 77.0% of our debt investments bore interest based on floating rates, such as LIBOR, EURIBOR, the Federal Funds Rate or the Prime Rate. The interest rates on such investments generally reset by reference to the current market index after one to six months. At June 30, 2014, the percentage of our floating rate debt investments that bore interest based on an interest rate floor was 89.0%. Floating rate investments subject to a floor generally reset by reference to the current market index after one to six months only if the index exceeds the floor.

 

Interest rate sensitivity refers to the change in earnings that may result from changes in the level of interest rates. Because we fund a portion of our investments with borrowings, our net investment income is affected by the difference between the rate at which we invest and the rate at which we borrow. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. We assess our portfolio companies periodically to determine whether such companies will be able to continue making interest payments in the event that interest rates increase. There can be no assurances that the portfolio companies will be able to meet their contractual obligations at any or all levels of increases in interest rates. 

 

Based on our June 30, 2014 balance sheet, the following table shows the annual impact on net income (excluding the related incentive compensation impact) of base rate changes in interest rates (considering interest rate floors for variable rate instruments) assuming no changes in our investment and borrowing structure:

 

Basis Point Change   Interest income     Interest Expense     Net Income  
Up 300 basis points   $ 14,881,166     $ (8,370,000 )   $ 6,511,166  
Up 200 basis points     8,158,593       (5,580,000 )     2,578,593  
Up 100 basis points     1,802,700       (2,790,000 )     (987,300
Down 100 basis points     (253,060 )     644,211       391,151  
Down 200 basis points     (253,060 )     644,211       391,151  
Down 300 basis points     (253,060 )     644,211       391,151  

 

Item 4.         Controls and Procedures

 

As of the period covered by this report, we, including our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on our evaluation, our management, including the chief executive officer and chief financial officer, concluded that our disclosure controls and procedures were effective in timely alerting management, including the chief executive officer and chief financial officer, of material information about us required to be included in our periodic SEC filings. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, are based upon certain assumptions about the likelihood of future events and can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. There has not been any change in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

 

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PART II – Other Information

 

Item 1. Legal Proceedings

 

Although we may, from time to time, be involved in litigation arising out of our operations in the normal course of business or otherwise, as of June 30, 2014, we are currently not a party to any pending material legal proceedings.

 

Item 1A. Risk Factors

 

Except as set forth below, there have been no material changes from the risk factors previously disclosed in our most recent annual report on Form 10-K, as filed with the Securities and Exchange Commission on March 6, 2014.

 

The SBIC may be unable to make distributions to us that will enable us to meet or maintain RIC status, which could result in the imposition of an entity-level tax.

 

In order for us to continue to qualify for RIC tax treatment and to minimize corporate-level taxes, we will be required to distribute substantially all of our net ordinary income and net capital gain income, including income from certain of our subsidiaries, which includes the income from the SBIC. We will be partially dependent on the SBIC for cash distributions to enable us to meet the RIC distribution requirements. The SBIC may be limited by the Small Business Investment Act of 1958, and SBA regulations governing SBICs, from making certain distributions to us that may be necessary to enable us to maintain our status as a RIC. We may have to request a waiver of the SBA's restrictions for the SBIC to make certain distributions to maintain our eligibility for RIC status. We cannot assure you that the SBA will grant such a waiver and if the SBIC is unable to obtain a waiver, compliance with the SBA regulations may result in loss of RIC tax treatment and a consequent imposition of an entity-level tax on us.

 

The SBIC is subject to SBA regulations, and any failure to comply with SBA regulations could have an adverse effect on our operations.

 

On April 22, 2014, the Operating Company's wholly-owned subsidiary, the SBIC received an SBIC license from the SBA. The SBIC license allows the SBIC to obtain leverage by issuing SBA-guaranteed debentures, subject to the issuance of a capital commitment by the SBA and other customary procedures. SBA-guaranteed debentures are non-recourse, interest only debentures with interest payable semi-annually and have a ten year maturity. The principal amount of SBA-guaranteed debentures is not required to be paid prior to maturity but may be prepaid at any time without penalty. The interest rate of SBA-guaranteed debentures is fixed on a semi-annual basis at a market-driven spread over U.S. Treasury Notes with 10-year maturities. The SBA, as a creditor, will have a superior claim to the SBIC's assets over our stockholders in the event we liquidate the SBIC or the SBA exercises its remedies under the SBA-guaranteed debentures issued by the SBIC upon an event of default.

 

Under current SBA regulations, a licensed SBIC can provide capital to those entities that have a tangible net worth not exceeding $18.0 million and an average annual net income after Federal income taxes not exceeding $6.0 million for the two most recent fiscal years. In addition, a licensed SBIC must devote 25.0% of its investment activity to those entities that have a tangible net worth not exceeding $6.0 million and an average annual net income after Federal income taxes not exceeding $2.0 million for the two most recent fiscal years. The SBA regulations also provide alternative size standard criteria to determine eligibility, which depend on the industry in which the business is engaged and are based on factors such as the number of employees and gross sales. The SBA regulations permit licensed SBICs to make long term loans to small businesses, invest in the equity securities of such businesses and provide them with consulting and advisory services. The SBA also places certain limitations on the financing terms of investments by SBICs in portfolio companies and prohibits SBICs from providing funds for certain purposes or to businesses in a few prohibited industries. Compliance with SBA requirements may cause the SBIC to forego attractive investment opportunities that are not permitted under SBA regulations.

 

Further, the SBA regulations require that a licensed SBIC be periodically examined and audited by the SBA to determine its compliance with the relevant SBA regulations. The SBA prohibits, without prior SBA approval, a "change of control" of an SBIC or any transfers of the capital stock of a licensed SBIC. If the SBIC fails to comply with applicable SBA regulations, the SBA could, depending on the severity of the violation, limit or prohibit its use of debentures, declare outstanding debentures immediately due and payable, and/or limit it from making new investments. In addition, the SBA can revoke or suspend a license for willful or repeated violation of, or willful or repeated failure to observe, any provision of the Small Business Investment Act of 1958 or any rule or regulation promulgated thereunder. The Advisor, as the SBIC's investment adviser, does not have any prior experience managing an SBIC. Its lack of experience in complying with SBA regulations may hinder its ability to take advantage of the SBIC's access to SBA-guaranteed debentures. Any failure to comply with SBA regulations could have an adverse effect on our operations.

 

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SBA regulations limit the outstanding dollar amount of SBA-guaranteed debentures that may be issued by an SBIC or group of SBICs under common control.

 

The SBA regulations currently limit the dollar amount of SBA-guaranteed debentures that can be issued by any one SBIC to $150.0 million or to a group of SBICs under common control to $225.0 million. A proposed bill in the U.S. Senate, the Expanding Access to Capital for Entrepreneurial Act, or Senate Bill 511, would increase the total SBIC leverage capacity for affiliated SBIC funds from $225 million to $350 million. However, the ultimate form and likely outcome of such legislation or any similar legislation cannot be predicted.

 

An SBIC may not borrow an amount in excess of two times (and in certain cases, up to three times) its regulatory capital. As of June 30, 2014, the SBIC did not have any SBA-guaranteed debentures outstanding. If we reach the maximum dollar amount of SBA-guaranteed debentures permitted, and if we require additional capital, our cost of capital may increase, and there is no assurance that we will be able to obtain additional financing on acceptable terms.

 

Moreover, the current status of the SBIC as an SBIC does not automatically assure that the SBIC will continue to receive SBA-guaranteed debenture funding. Receipt of SBA leverage funding is dependent upon the SBIC continuing to be in compliance with SBA regulations and policies and available SBA funding. The amount of SBA leverage funding available to SBICs is dependent upon annual Congressional authorizations and in the future may be subject to annual Congressional appropriations. There can be no assurance that there will be sufficient debenture funding available at the times desired by the SBIC.

 

The debentures guaranteed by the SBA have a maturity of ten years and require semi-annual payments of interest. The SBIC will need to generate sufficient cash flow to make required interest payments on the debentures. If the SBIC is unable to meet its financial obligations under the debentures, the SBA, as a creditor, will have a superior claim to the SBIC's assets over our stockholders in the event we liquidate the SBIC or the SBA exercises its remedies under such debentures as the result of a default by us.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4: Mine Safety Disclosures.

 

None.

 

Item 5: Other Information.

 

None.

 

Item 6: Exhibits

 

Number   Description
3.1   Articles of Incorporation of the Registrant (1)
3.2   Bylaws of the Registrant (2)
4.1   Indenture, dated as of June 17, 2014, by and between the Registrant and U.S. Bank National Association, as the Trustee(3)
4.2   Form of Global Note of 5.25% Convertible Senior Notes Due 2019 (included as part of Exhibit (4.1))(3)
10.1   Form of Amendment No. 4 to Loan Financing and Servicing Agreement, dated as of June 9, 2014, by and among TCPC Funding I, LLC, as borrower, each lender and agent from time to time party thereto, Deutsche Bank AG, New York Branch, as administrative agent, and Wells Fargo Bank, National Association, as collateral agent and collateral custodian(4)
31.1   Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934*
31.2   Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934*
32.1   Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U. S. C. 1350)*

 

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* Filed herewith.

  

(1) Incorporated by reference to Exhibit (a)(2) to the Registrant's Registration Statement under the Securities Act of 1933 (File No. 333-172669), on Form N-2, filed on May 13, 2011.
(2) Incorporated by reference to Exhibit (b)(2) to the Registrant's Registration Statement under the Securities Act of 1933 (File No. 333-172669), on Form N-2, filed on May 13, 2011.
(3) Incorporated by reference to Exhibit 4.1 of the Registrant's Form 8-K filed on June 17, 2014.
(4) Incorporated by reference to Exhibit 10.01 of the Registrant's Form 8-K filed on June 9, 2014.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, there unto duly authorized.

 

TCP CAPITAL CORP.

 

Date:   August 7, 2014    
  By: /s/ Howard M. Levkowitz
  Name: Howard M. Levkowitz
  Title: Chief Executive Officer
   
Date:   August 7, 2014    
  By: /s/ Paul L. Davis
  Name: Paul L. Davis
  Title: Chief Financial Officer

 

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