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Investing.com -- On Monday, Fitch Ratings revised the outlook for BlackRock TCP Capital (NASDAQ:TCPC) Corp. to negative from stable, while affirming its Long-Term Issuer Default Rating (IDR), senior secured debt, and senior unsecured debt at ’BBB-’. The revised outlook is due to a significant deterioration in the asset quality of BlackRock TCP Capital, shown by increased non-accrual levels and above-average realized loss rates in recent quarters.
The negative outlook also reflects the company’s below-average asset coverage cushion and potential for further declines, given the likelihood of additional credit deterioration in the current high interest rate environment. Weak cash earnings coverage for dividend payments also contributes to this risk.
In 2024, BlackRock TCP Capital’s net realized losses were 4.6% of the average portfolio at fair value, which was above the average of its peer business development companies (BDC). Non-accrual investments were 15.8% and 6.1% of the debt portfolio at cost and fair value respectively at the end of 2024, significantly higher than the peer averages and a notable increase from the previous year. Unrealized losses also increased, resulting in the portfolio being marked at 88.9% of cost at the end of 2024.
Fitch expects that elevated non-accruals will lead to more realized losses for BlackRock TCP Capital in 2025 as investments are restructured. A downgrade could result from meaningful realized or unrealized credit losses.
Credit deterioration in BlackRock TCP Capital’s Amazon (NASDAQ:AMZN) aggregator investments led to a significant increase in non-accrual investments in the fourth quarter of 2024. This sub-sector represented 48.7% of total non-accrual investments at cost in the fourth quarter of 2024 as balance sheet weakness and macroeconomic headwinds led to performance deterioration for some companies.
Other portfolio companies, including those in the direct-to-consumer and software sectors, have been affected by softening demand and inflationary pressures. Fitch expects BDCs to face additional credit issues in 2025 as high interest rates and economic uncertainty challenge borrower performance. BlackRock TCP Capital’s credit performance could continue to be negatively affected by above-average industry concentrations.
Despite the negative outlook, BlackRock TCP Capital’s ratings continue to reflect its affiliation with BlackRock Inc (NYSE:BLK). and its focus on senior secured investment. The company’s investment advisor agreed to waive one-third of its base management fee for the three calendar quarters ending in the third quarter of 2025, which will benefit the company’s earnings and aid dividend coverage.
However, constraints on the rating include BlackRock TCP Capital’s above-average leverage, including borrowings guaranteed by the Small Business Administration (SBA (LON:SBA)), refinancing risk resulting from debt maturities in 2025 and 2026, and weakening cash-based earnings coverage of base dividends.
As of December 31, 2024, BlackRock TCP Capital had $91.6 million of cash, $509.3 million of borrowing capacity on its secured credit facilities, and $10 million of capacity under a Small Business Investment Company (SBIC) facility. This was sufficient relative to unfunded lending commitments of $143.9 million and $92 million of unsecured notes and $20.3 million of SBA debentures maturing in 2025.
However, in 2026, $325 million of unsecured notes and $22.2 million of additional SBA debentures mature, which presents some refinancing risk. Unsecured debt amounted to 65.7% of BlackRock TCP Capital’s outstanding debt at the end of 2024, within Fitch’s ’bbb’ category benchmark range of 35%-100%. Fitch believes funding flexibility could decline if BlackRock TCP Capital is unable to issue additional unsecured debt on economic terms to replace upcoming debt maturities.
In 2024, BlackRock TCP Capital’s adjusted net investment income (NII) coverage of the regular dividends declared was 113.8%. Coverage was significantly weaker at 83.2% when adjusted for non-cash interest income and expenses. The company cut the regular dividend 26% for the first quarter of 2025, to $0.25 per share, which will benefit dividend coverage. Fitch views the dividend cut as prudent. Failure to improve cash earnings coverage of the dividend could result in a ratings downgrade.
Fitch believes BlackRock TCP Capital’s NII will face pressure from lower investment yields and higher non-accruals, but the base management fee waiver will offset some of the earnings pressure. The secured and unsecured debt ratings are primarily linked to the Long-Term IDR and are expected to move in tandem with it. However, a significant reduction in unsecured debt as a proportion of total debt could result in the unsecured debt rating being notched down from the IDR.
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