Fitch Ratings has assigned an expected rating of 'BBB-(EXP)' to BlackRock TCP Capital Corp.'s (TCPC) proposed issuance of $300 million senior unsecured notes and placed the rating on Rating Watch Negative (RWN).

Key Rating Drivers

The RWN reflects TCPC's relatively weak liquidity profile and elevated near-term refinancing risk, prior to completion of the proposed issuance, given the firm's upcoming unsecured note maturity in August 2024 and Small Business Administration (SBA) debentures maturity in September 2024.

If TCPC prices an issuance of at least $300 million in unsecured notes, Fitch expects to remove the RWN and affirm the existing ratings at 'BBB-' with a Stable Outlook given the expected improvement in liquidity as proceeds from the issuance would be sufficient for TCPC to refinance $268.5 million of 2024 debt maturities while maintaining an appropriate cushion to cover unfunded commitments. A $300 million issuance would also result in unsecured debt being sustained over 35% of TCPC's total debt outstanding. Fitch does not expect the issuance to have a material impact on leverage as the proceeds will be used to repay outstanding borrowings.

Unsecured debt accounted for 51.1% of TCPC's total debt at March 31, 2024, which was down from 58.2% at YE23, 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 that unsecured debt would increase to 54.9% of total debt, pro forma for the $300 million issuance and the repayment of $250 million of unsecured notes maturing in August 2024 and secured borrowings.

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.

TCPC's ratings reflect its affiliation with BlackRock Inc., 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 higher non-accrual levels more recently.

Rating constraints for business development companies (BDCs) more broadly 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 a limited ability to retain capital due to dividend distribution requirements. 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.

RATING SENSITIVITIES

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

An inability to successfully execute on an issuance of at least $300 million of unsecured notes would result in a downgrade of the ratings by one notch to 'BB+'.

Beyond that, negative rating momentum could be driven by 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.

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

Fitch expects to remove the RWN and affirm TCPC's ratings at 'BBB-' with a Stable Outlook if TCPC is able to price at least $300 million in unsecured notes to address the near-term maturities and maintain a sufficient liquidity cushion for unfunded commitments and operating needs.

Positive rating action is unlikely in 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 an unsecured notes issuance of at least $300 million, 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.

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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