Fitch Ratings has affirmed BlackRock TCP Capital Corp.'s (TCPC) Long-Term Issuer Default Rating (IDR), senior secured debt, and senior unsecured debt ratings at 'BBB-'.

The ratings have been removed from Rating Watch Negative. The Rating Outlook is Stable.

On May 22, 2024, TCPC priced an issuance of $325 million 6.95% senior unsecured notes due May 2029. Fitch has removed the Rating Watch Negative on the 'BBB-(EXP)' rating assigned to this issuance and upon settlement of the issuance, Fitch would convert the expected rating to a final rating of 'BBB-'.

Key Rating Drivers

The removal of the Negative Watch reflects Fitch's expectation that following the $325 million unsecured issuance, unsecured debt will be sustained over 35% of TCPC's total debt outstanding. Additionally, Fitch believes liquidity will be sufficient to refinance $268.5 million of 2024 debt maturities while the firm maintains an appropriate cushion to cover unfunded commitments.

Unsecured debt accounted for 51.1% of TCPC's total debt at March 31, 2024, which was down from 58.2% at YE23. This was partially due to the closing of the merger with BlackRock Capital Investment Corporation in March 2024, but remained within Fitch's 'bbb' category benchmark range of 35%-100%. Fitch estimates unsecured debt would increase to 56.8% of total debt, pro forma for the $325 million issuance and the repayment of $250 million of unsecured notes maturing in August 2024, as well as secured borrowings.

Fitch believes TCPC's improved liquidity following the notes issuance will allow for the maintenance of a sufficient liquidity cushion for both unfunded commitments and operating expenses after the repayment of the notes due August 2024, as well as $18.5 million of Small Business Administration (SBA) debentures maturing in September 2024.

As of March 31, 2024, TCPC had $120.6 million of cash, $276 million of borrowing capacity on its secured credit facilities and $10 million of capacity under a Small Business Investment Company (SBIC) facility relative to $90.9 million of unfunded commitments. Fitch expects TCPC to continue opportunistically accessing the unsecured debt market to maintain an adequate liquidity cushion and unsecured debt above 35% of total debt.

The affirmation of TCPC's ratings continues to reflect the affiliation with BlackRock Inc. The ratings also reflect the firm's experienced management team, stable earnings performance, and senior secured investment focus. Rating constraints include TCPC's above-average leverage, including borrowings guaranteed by the SBA, above-average realized losses compared to rated peers historically, and recent higher non-accrual levels.

Rating constraints for business development companies (BDCs) include the market impact on leverage, given the need to fair-value the portfolio each quarter, dependence on access to the capital markets to fund portfolio growth and limited ability to retain capital due to dividend distribution requirements. Additionally, Fitch believes BDCs will experience weaker asset quality metrics in 2024, given the challenging economic backdrop, elevated interest rates and an increasingly competitive underwriting environment as private credit lenders grow and banks re-enter the space.

At March 31, 2024, leverage (par debt-to-equity) was 1.37x, a slight decline from 1.44x at YE23, but up from 1.27x at YE22. Regulatory leverage, excluding SBA debentures, was 1.21x, consistent with 1.22x at YE23. Regulatory leverage implied an asset coverage cushion of 17.8%, below the rated peer average but within Fitch's 'bbb' category benchmark range of 11%-33%.

Leverage has risen steadily over the last four years, partially a result of cumulative net realized and unrealized portfolio losses, and is at the higher end of the peer group. In 1Q24, TCPC began disclosing a 0.9x-1.20x regulatory leverage target. Fitch would view a reduction in leverage favorably. The notes issuance is not expected to have a material impact on leverage as proceeds will be used to repay outstanding borrowings.

Net realized losses were elevated in 2023, amounting to 2% of the average portfolio at value. TCPC generated a modest net realized loss (0.01%) in 1Q24. As of March 31, 2024, non-accrual investments were 4% of the debt portfolio at cost and 1.9% at fair value, which were down from 4.1% and 2.2%, respectively at YE23, but remain elevated compared to peers.

Fitch believes asset quality metrics may deteriorate further in 2024, given existing non-accrual investments, continued elevated interest rates and a challenging macroeconomic environment. A meaningful increase in non-accrual levels and/or the recognition of material realized losses could result in negative rating action.

The Stable Rating Outlook reflects Fitch's expectation that TCPC will continue to focus on senior debt investments. Additionally, the Outlook reflects Fitch's expectation that TCPC will maintain unsecured debt to total debt above 35%, maintain leverage near or below current levels, and maintain ample liquidity and solid dividend coverage. While modest incremental credit losses are anticipated, given the recent up-tick in non-accrual levels, the Stable Outlook does not reflect expectations for meaningful realized losses or a significant uptick in non-accruals from 1Q24 levels.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

Further deterioration in non-accrual levels, meaningful realized credit losses, a sustained decline in the unsecured funding mix below 35% of total debt, failure to maintain a sufficient liquidity cushion for unfunded commitments and operating needs, a sustained increase in gross leverage or an inability to maintain the asset coverage cushion above 11%, weaker cash-based net investment income (NII) coverage of the dividend and/or an elevation in the portfolio risk profile, including a material decline in first lien loans as a percentage of the portfolio, without a commensurate decline in leverage could yield negative rating action.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Positive rating momentum is limited over the near-term given the recent deterioration in credit metrics. However, over time, positive rating momentum could be driven by strong and differentiated credit performance and a sustained increase in the asset coverage cushion over 33%, maintenance of consistent core earnings performance, demonstrated economic access to unsecured funding that results in the maintenance of unsecured debt to total debt of at least 40%, and ample liquidity and solid cash-based NII coverage of the dividend.

DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS

The 'BBB-(EXP)' rating assigned to the new unsecured notes is equalized with the rating of the existing unsecured notes as the notes will rank equally in the capital structure. The alignment of the secured and unsecured debt ratings with the Long-Term IDR reflects Fitch's expectations for solid collateral coverage for all classes of debt since TCPC is subject to a 150% asset coverage requirement and has a meaningful unsecured funding component.

DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES

Upon settlement of the unsecured notes issuance, Fitch would convert the expected rating on the new unsecured notes to a final rating of 'BBB-'.Thereafter, the secured and unsecured debt ratings are primarily linked to the Long-Term IDR and are expected to move in tandem. However, a material reduction in unsecured debt as a proportion of total debt could result in the unsecured debt rating being notched down from the IDR.

ADJUSTMENTS

The Standalone Credit Profile (SCP) has been assigned in line with the implied SCP.

The Capitalization & Leverage score has been assigned below the implied score due to the following adjustment reason(s): Historical and future metrics (negative).

The Funding, Liquidity & Coverage score has been assigned below the implied score due to the following adjustment reason(s): Funding flexibility (negative).

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visitwww.fitchratings.com/topics/esg/products#esg-relevance-scores.

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