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TCP Capital Corporation - Initiation Note

TCP Capital Corp.

BUY (TCPC, $12.36)

Strong Origination Platform, Good Asset Quality, and Potential for Portoflio Growth - Initiating With A BUY Rating And $17 Price Target.

January 20, 2016

Christopher R. Testa

212.417.7447

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Investment Conclusion. We are initiating coverage TCP Capital Corporation (TCPC) with a BUY rating and $17 price target. TCPC is an externally managed BDC primarily focused on senior secured debt. The company has sound asset quality, with non-accruals finishing 3Q15 at 0.2% of the portfolio at fair value. Non-accruals have averaged 0.3% since the beginning of 2013. TCPC has had a very stable NAV/share over the past several years and has not issued equity below NAV. The company has declared numerous special dividends as well while managing to keep NII payout ratios at or under 100% for the last three calendar years. Prudent capital management, accretive offerings, steadily increasing distributions, and sound asset quality have boosted economic returns for TCPC shareholders. TCPC finished 3Q15 with regulatory D/E (debt to equity excluding SBA debentures) at 0.73x, near the high end of the company’s preferred leverage range. We expect TCPC will finish 2015 and 2016 with regulatory D/E of 0.72x and 0.65x, respectively. We anticipate the portfolio will have robust growth through the remainder of 2015 and into 2016, with the stock likely to trade at or above NAV in 2016 permitting accretive equity issuance of $150 million. NIM (net investment margin) fell from 10.77% in 2013 to 10.01% in 2014 although we expect NIM will finish 2015 at 10.22% and 2016 at 10.28%. We expect that the regular dividend will be increased in 1Q16 to $0.38/share from $0.36/share as the regular run rate of NII/share should rise with higher debt investment balances and modestly higher effective yields. Our $17 price target implies an estimated 2016 P/NII (Price/NII) of 10.2x, dividend yield of 8.5%, and P/NAV (Price/NAV) of 1.09x compared to the BDC sector averages of 7.0x, 13.4%, and 0.73x, respectively.

TCPC

Source: S&P Capital IQ, National Securities Corporation Estimates


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