Prepared remarks
Hello, everyone. Thank you for joining us, and welcome to the BlackRock TCP Capital Corp Q2 2026 earnings call. After today's prepared remarks, we will host a question-and-answer session. If you would like to ask a question, please press *1 to raise your hand. To withdraw your question, press *1 again. I will now hand the conference over to Alex Doll, a member of the BlackRock TCP Capital Corp investor relations team. Alex, please go ahead.
Thank you, operator. Before we begin, I will note that this conference call may contain forward-looking statements based on management's estimates and assumptions at the time such statements are made, which are not guarantees of future performance. Forward-looking statements involve risks and uncertainties and actual results could differ materially from those projected. For more information, please refer to the risk factors discussed in our Form 10-Q and the Form 8-Ks filed with the SEC today, along with the associated press release. Any forward-looking statements made on this call are as of today and are subject to change without notice. Additionally, certain information discussed and presented may have been derived from third-party sources and has not been independently verified. Accordingly, we make no representation or warranty with respect to such information. Before we begin, I would also like to note that today's discussion includes references to certain non-GAAP financial measures, including adjusted net investment income.
As detailed in our earnings press release, adjusted net investment income excludes the amortization of the purchase accounting discount resulting from our merger with BCIC and is calculated in accordance with GAAP. A full reconciliation of adjusted net investment income to GAAP net investment income, as well as other non-GAAP financial metrics, is included in the earnings press release and Form 10-Q. Earlier today, we issued a press release announcing our results for the second quarter ended 06/30/2026, as well as the portfolio sale transaction we just completed. We posted a supplemental presentation with information on both to our website at www.tcpcapital.com. To view the slide presentation, which we will refer to on today's call, please click the Investor Relations link and select Events and Presentations. These documents should be reviewed in conjunction with the company's Form 10-Q filed with the SEC earlier today.
Now I will turn the call over to our Chairman and CEO, and Co-CIO, Philip Tseng. Thank you, Alex, and thank you to our investors and analysts for joining us. Today, I will start with an overview of the portfolio sale transaction we announced this morning, followed by the highlights of our second quarter 2026 performance. Then Jason Mehring, our President, will cover portfolio and investment activity and Erik L. Cuellar, our CFO, will walk through our financial results and our balance sheet. I will provide closing remarks before we open the call for questions. We are also joined by Dan Worrell, our Co-CIO, who will be available for questions. Let me begin with the transaction. This is a milestone for TCPC that meaningfully accelerates the work already underway to strengthen our financial position and reshape our investment portfolio. This transaction materially lowers leverage, reduces investment position sizes, and significantly enhances our investment capacity, while realizing a substantial premium to the value implied by TCPC's current share price.
Looking forward, it provides substantially greater financial, investment, and operational flexibility, creating a stronger foundation for delivering long-term shareholder value. We will step through the transaction at a high level. Additional detail can be found in the subsequent events disclosure section of the Form 10-Q. TCPC transferred approximately $523 million of investments across 78 portfolio companies into a continuation vehicle sponsored by Pantheon. The assets sold comprised approximately 48% of the fair market value of our pre-transaction debt portfolio and have broadly similar sector leanings and credit characteristics. The assets include all collateral underlying the recently issued BlackRock DLF 2026-C CLO, plus additional contributed investments. TCPC retained a direct interest in substantially all of the portfolio companies, transferring on average approximately two-thirds of each investment position to the vehicle.
In addition, the company retained a 5% equity interest in the continuation vehicle and TCPC's investment adviser will also act as the investment adviser for the vehicle without compensation. The continuation vehicle assumed all of the CLO liabilities. The transaction was priced at 95% of the 12/31/2025 gross fair market value of the assets sold, subject to customary adjustments including unfunded commitments, portfolio repayments, investment income generated prior to closing, and other items as more fully outlined in Appendix A of the 8-Ks we filed this morning. The transaction is expected to result in a NAV decline of approximately 10.4% or $0.68 per share based on June 30 NAV. Our board of directors obtained a third-party fairness opinion from Lincoln International in connection with the transaction. The strategic impact of the transaction is substantial. The approximately $152 million of proceeds were used primarily to reduce debt and, together with deconsolidation of the CLO and post-quarter-end repayments, TCPC has reduced net leverage to approximately 0.4x on a pro forma basis and unfunded commitments to below $40 million, significantly improving TCPC's financial flexibility and creating substantial new investment capacity.
To help evaluate the best way to use that flexibility to create further long-term shareholder value, the board has engaged Keefe, Bruyette & Woods to assist with a strategic review. This review will consider a range of options including, but not limited to, reinvesting in the portfolio, returning capital to shareholders, pursuing strategic combinations or other corporate transactions, or some combination of these options. I want to thank everyone involved in the transaction. It was a complex process, and the hard work required reflects the firm's commitment to TCPC and its shareholders. With that, let me turn to our second quarter results. Apart from the transaction, we continued to make progress against our strategic priorities during the second quarter, including reducing non-accruals, strengthening the balance sheet, and advancing our portfolio repositioning efforts. While quarterly NAV performance reflected issuer-specific developments at a small number of portfolio companies, broader portfolio performance was generally in line with our expectations.
We experienced strong repayment volumes. NAV in the quarter declined approximately 2.1% to $6.58 per share, primarily reflecting developments at Pluralsight, PVHC, and Zillion, as well as realized losses on our exits of AutoAlert and BCom. Non-accruals declined to 1.6% of the portfolio at fair value and 7.4% at cost, from 2.8% and 7.6%, respectively, at the end of the first quarter. The improvement was driven in large part by positive developments at Thrasio, which repaid $22 million. We removed our remaining $3.7 million position at Thrasio from non-accrual status as we expect this position will be paid down in full given the current health of the business. As you may recall, we restructured our investment in Thrasio in early 2024 and we are pleased with this outcome, which we believe reflects the benefits of active portfolio management and patience. Repayment activity was strong in the second quarter, totaling $112 million in payoffs and paydowns and resulting in net repayments of $86.6 million which advanced our portfolio repositioning efforts.
In addition to Thrasio, we received repayments of $14.9 million from StarRez, $13.1 million from AutoAlert, and an additional $48.7 million across five other companies. This repayment activity also strengthened the balance sheet, with net leverage declining to 1.38x at quarter end from 1.48x at the end of the first quarter. Following the portfolio sale transaction and post-quarter-end repayments completed to date, net leverage is expected to decline to approximately 0.4x on a pro forma basis and to less than 0.3x after additional portfolio company paydowns from transactions that have been announced. Turning to capital allocation: on 07/30/2026, our Board declared a third-quarter dividend of $0.17 per share, payable on September 30 to shareholders of record as of September 16. We also repurchased 156 thousand shares of TCPC stock during the second quarter at a weighted-average price of $3.78 per share. Now I will turn the call over to Jason to discuss the portfolio and investment activity in more detail.
Thanks, Philip, and welcome, everyone. With the portfolio sale transaction now complete, I will review our second-quarter portfolio metrics and then highlight how the transaction and post-quarter-end repayments have positioned the portfolio going forward. At quarter end, the portfolio had a fair market value of $1,290 million invested across 134 portfolio companies in 35 industry sectors with an average position size of $9.6 million. 91.5% of the portfolio was invested in senior secured loans, all of which were floating rate, with the balance of the portfolio in equity. Substantially all new investments during the quarter were in first-lien loans, bringing total first-lien exposure to 89.8% on a fair value basis. Our largest investment based on fair value represented 8.9% of the portfolio and the five largest investments accounted for 27.6%. As of June 30, software represented 29.7% of the portfolio at fair value across 45 portfolio companies with approximately 97% invested in debt and 3% in equity.
This software exposure decreased modestly from 30.5% across 47 companies in Q1, primarily reflecting the successful exits of Persado and StarRez during the period. The current software portfolio was originated at a loan-to-value of approximately 26%, providing a considerable equity cushion. As we have discussed previously, we do not view software and potential AI risk as monolithic, because certain segments are fundamentally more resilient than others. For some time, our underwriting has focused on systems of record with proprietary data assets and solutions that are deeply embedded in customer workflows or serve regulated end markets, which we believe are generally more insulated from AI-related disruption. In line with our focus on enhancing portfolio quality, disciplined deployment, and strengthening our balance sheet, we intentionally kept investment activity limited and highly selective in the second quarter.
A majority of the $25 million of capital deployed during the quarter was directed towards previously committed investments and we added one new borrower. Capitalizing on incumbency remains a priority for us. We continue to find compelling investment opportunities among our existing portfolio companies where we have longstanding relationships and industry experience. As Phil mentioned, we saw meaningful payoffs and paydowns this quarter totaling $112 million and resulting in net repayments of $86.6 million. Subsequent to quarter end, we also received $97.4 million in additional repayments, including $55.2 million from Motive Technologies, formerly known as KeepTruckin', and $39 million from Pico Quantitative Trading. In addition, Domo announced that it had entered into a definitive agreement to sell substantially all of its operating businesses to Progress Software. We expect this will result in full repayment of our $69 million debt investment when the transaction closes in the fourth quarter.
This is a significant positive development in our software book and another example of our ability to create value through active engagement with our portfolio companies. Together, these developments address more than $150 million of exposure across three larger portfolio positions and represent meaningful progress towards reducing concentration and advancing our broader portfolio repositioning efforts. We also see increasing repayment volumes as a sign of general borrower health. At the end of the second quarter, the weighted-average effective yield on our portfolio was 10.5%. New investments had a weighted-average yield of 9.4%, while those we exited had a weighted-average yield of 10.9%. Current yields reflect lower base rates and spread compression, consistent with the past several quarters. The portfolio sale transaction and post-quarter-end repayments have significantly reduced our leverage and unfunded commitments, and increased our new investment capacity, meaningfully accelerating our ability to reposition the portfolio.
On a pro forma basis, the portfolio has a fair market value of $671 million invested across 132 portfolio companies with an average position size of approximately $5.1 million. If we include the additional investment capacity available at a modest 1x debt-to-equity ratio and assume no new software investments with that capacity, software would represent approximately 23% of the pro forma portfolio. That level would be further reduced to approximately 17% if you factor in the expected repayment of Domo. Following recent repayments and the portfolio sale transaction, we have approximately $395 million of liquidity, providing significant flexibility and investment capacity as the board evaluates how best to create long-term shareholder value. We continue to benefit from the capabilities of the PFS platform, which provides access to a broad opportunity set while allowing us to remain highly selective and focused on granular high-quality first-lien investments. Now I will turn the call over to Erik to discuss our financial results, capital, and liquidity position.
Thank you, Jason. I will begin with a review of our financial results for the second quarter of 2026. Total investment income was $40.0 million, or $0.48 per share. This included recurring cash interest income of $0.35 per share, nonrecurring income of $0.04 per share, recurring discount and fee amortization of $0.02 per share, PIK income of $0.04 per share, and dividend income of $0.03 per share. PIK income represented 7.6% of total investment income, down from 8.5% in Q1. Operating expenses for the second quarter were $21.9 million, or $0.26 per share, including $15.0 million, or $0.18 per share, of interest and other debt expenses. Net investment income was $18.1 million, or $0.22 per share, and adjusted net investment income was $17.5 million, or $0.21 per share. As of 06/30/2026, our cumulative total return did not exceed the total return hurdle, and therefore no incentive compensation was accrued for the quarter.
Net realized losses for the quarter were $14.8 million, or $0.18 per share, driven primarily by a $10.0 million loss on the exit of our investment in AutoAlert. Net unrealized gains were $1.3 million, or $0.01 per share, driven primarily by $11.3 million in reversals of previous unrealized losses related to AutoAlert and Thrasio. These gains were partially offset by markdowns in Pluralsight, PVHC, and Finjan, which together accounted for approximately $9.5 million of unrealized losses. Quarterly distributions to shareholders totaled $0.17 per share during the period. After net investment income, realized and unrealized gains and losses, and distributions, NAV declined by $0.14 per share to $6.58 at June 30. The corresponding decrease in net assets for the quarter was $13.1 million. Now I will discuss our balance sheet and liquidity, which benefited from both repayment and liability optimization activity during the quarter, with improvements further accelerated by the portfolio sale transaction we completed today.
During the quarter, we completed two important liability management initiatives. In May, we issued $406 million of CLO debt and used the proceeds to fully repay our TCPC Funding II and merger-sub facilities, allowing us to term out a significant portion of our secured debt. Additionally, given the level of paydowns and realizations, including those related to the portfolio transaction, and the absence of new development activity in our SBIC subsidiary, we elected to repay the remaining $107 million outstanding on our SBIC debt and subsequently surrender our license. We concluded there was limited benefit to maintaining the structure given the SBIC's cash position and fully drawn facility. Together, these two actions support our broader balance sheet objectives by extending liability maturities, increasing financing flexibility, and reducing complexity within our capital structure. As Jason mentioned, we also received $86.6 million in net repayments in the second quarter.
As a result, total liquidity at the end of the second quarter was $534 million, including $376 million in available borrowing capacity under our revolvers and $158 million in cash. The combined weighted-average interest rate on debt outstanding was 6.03% as of 06/30/2026. Net leverage was reduced to 1.38x at quarter end, resulting in a total debt-to-equity ratio of 1.66x. With the combination of post-quarter-end repayment activity and this portfolio sale transaction, we estimate that our pro forma net leverage ratio further improved to approximately 0.4x, and would be less than 0.3x if adjusted for the future close of the recently announced Domo transaction that Jason mentioned. Unfunded loan commitments represented 7.0% of our $1,290 million investment portfolio, or $90 million, including $53 million in revolver commitments as of 06/30/2026. Pro forma for repayments and the portfolio sale transaction, unfunded loan commitments have been reduced to approximately $36 million.
Overall, TCPC has a simpler balance sheet, greater liquidity, and substantially greater financial flexibility today than it did at the outset of the second quarter. Now I will turn the call back to Philip for closing remarks.
Thanks, Erik. Over the past year, we have made strong progress strengthening our financial position and reshaping our investment portfolio. This transaction pulls forward the realization of those efforts. The outcome is significantly lower leverage, reduced investment position sizes, and enhanced investment capacity. We believe these outcomes provide substantially greater financial, investment, and operational flexibility, creating a stronger foundation from which to evaluate and pursue strategic alternatives that can deliver greater long-term value to shareholders. We look forward to working with Keefe, Bruyette & Woods and sharing more details as that process progresses as appropriate. With that, I would like to thank our investors and analysts for their continued support of TCPC. Operator, we are now ready to open the call for questions.
Questions and answers
We will now begin the question-and-answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press *1 to raise your hand. To withdraw your question, press *1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Robert James Dodd with Raymond James. Robert, your line is now open. Please go ahead.
Hi, guys, and congrats on a landmark transaction. To your point, Philip, it does raise the question of what is next. Can you address that? This is for the strategic review, so two components to the question. First, how long do you think the strategic review will take? I know that is hard to say. Second, while the review is ongoing, what are your likely strategies? For example, if the review considers whether to reinvest or buy back stock, are you likely to do either of those things while the review is ongoing, or is it semi-paused until the review is complete and you have a strategic mandate to pursue something?
Robert, thanks for the question. There is no specific timetable on the strategic review. Obviously, we are now in a much stronger position and there are various alternatives that we otherwise were not in a position to pursue. This transaction has given us and accelerated our ability to evaluate a variety of alternatives, which includes the investment flexibility and capacity that we discussed on the call, and also enables us to go deeper into other initiatives we have been undertaking at the company. We have made good progress, but this certainly accelerates it. In terms of timing, we will see. Keefe, Bruyette & Woods will do their work together with management and the board and come back with a variety of alternatives that we can evaluate, and it may be a combination of alternatives to drive longer-term shareholder value. In terms of how we will be investing in the interim, we will continue to be prudent with our capital. The strategic review will be a lens through which we consider capital allocation decisions. So we will proceed with that lens as we move through this period.
Got it. Thank you. Moving on, and again, congrats on the transaction. On Thrasio, you expect to be fully paid down, and the $69 million you mentioned should get repaid in the fourth quarter. There has been a lot of repayment activity. How much more can be done on the portfolio side this year? Longer term, how many more things could potentially be accelerated—even beyond the transaction—in terms of reducing concentration and addressing some of the chunkier investments in the portfolio?
Let's take a step back about why we embarked on this transaction because that speaks to what we can do in terms of continuing to drive shareholder value through repayments and portfolio positioning. In recent quarters our leverage level—around 1.3 to 1.4x and sometimes north of 1.4x—has inhibited our ability to reposition the portfolio. That has prevented us from making meaningfully sized new investments, which limited our ability to diversify the portfolio and to put on new investments to generate a healthier income profile. It also constrained our ability to buy back shares in a more meaningful way, aside from programmatic repurchases. We could have reduced leverage organically, and we have made progress doing that: healthy repayments, non-accruals coming down, position sizes coming down. But that takes time and was not certain. What we achieved with this sale is that we have accelerated that path: pro forma leverage around 0.4x, 0.3x with the expected additional paydown, and north of $300 million of new investment capacity. That newfound flexibility allows us to invest in new deals, accelerate diversification, and evaluate shareholder-friendly initiatives like buybacks. We will continue on the organic path in the interim, but this transaction materially accelerates our ability to act. I appreciate the question.
Your next question comes from the line of Paul Conrad Johnson with Keefe, Bruyette & Woods Capital Markets. Paul? Your line is now open. Please go ahead.
Yeah. Good afternoon and thanks for taking my questions. First, I wanted to confirm the impact from the transaction: the asset sale NAV impact of 10.4%. Does that also include transaction-related expenses for completing the sale?
Hi, Paul. It is Erik. The 10.4% does include the transaction-related expenses. The easiest way to think about the approximate 10.4% hit to NAV is by starting with the 5% portfolio discount that we stated and then recognizing other customary adjustments that are done in these types of transactions, which bring you to roughly a 10% effective discount, and then transaction expenses bring it to about 10.4% of NAV impact.
Okay, got it. That is clear. And then on the strategic alternatives, obviously there's a broad range of possibilities. Should we view this as a resolution to the ongoing challenges from prior years? Does BlackRock have any specific intention, or is this more of a rebuild of the franchise? Thanks.
Hey, Paul. We do not have any comment on what will come out of the strategic evaluation process and we are not going into it with a specific agenda other than generating long-term shareholder value. BlackRock is committed to the success of this for shareholders, as evidenced by this complex transaction and the effort behind it. We have no preconceived notion of the outcome; rather, we hired a third-party adviser to assist the board and management in evaluating alternatives and identifying what will create the most value for shareholders.
We have reached the end of the Q&A session. I will now turn the call back to Philip for closing remarks.
Thanks, operator. Thank you all for joining our call today. I would also like to thank our team for their continued effort and hard work on behalf of TCPC. As always, please reach out with any questions. Thank you very much.
This concludes today's call. Thank you for attending. You may now disconnect.