(dollar amounts in thousands, except per share data, unless otherwise indicated) CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS We have included or incorporated by reference in this Form 10-Q, and from time to time our management may make, "forward-looking statements". These forward-looking statements are not historical facts, but instead relate to future events or the future performance or financial condition ofTCG BDC, Inc. (together with its consolidated subsidiaries, "we," "us," "our," "TCG BDC" or the "Company"). These statements are based on current expectations, estimates and projections about us, our current or prospective portfolio investments, our industry, our beliefs, and our assumptions. The forward-looking statements contained in this Form 10-Q involve a number of risks and uncertainties, including statements concerning: •our, or our portfolio companies', future business, operations, operating results or prospects, including our and their ability to achieve our respective objectives as a result of the current COVID-19 pandemic; •the return or impact of current and future investments; •the general economy and its impact on the industries in which we invest and the impact of the COVID-19 pandemic thereon; •the impact of any protracted decline in the liquidity of credit markets on our business and the impact of the COVID-19 pandemic thereon; •the impact of fluctuations in interest rates on our business, including from changes in or the discontinuation of LIBOR, on our business; •the valuation of investments in portfolio companies, particularly those having no liquid trading market, and the impact of the COVID-19 pandemic thereon; •the impact of changes in laws, policies or regulations (including the interpretation thereof) affecting our operations or the operations of our portfolio companies; •the valuation of our investments in portfolio companies, particularly those having no liquid trading market, and the impact of the COVID-19 pandemic thereon; •our ability to recover unrealized losses; •market conditions and our ability to access alternative debt markets and additional debt and equity capital, and the impact of the COVID-19 pandemic thereon; •our contractual arrangements and relationships with third parties; •uncertainty surrounding the financial stability ofthe United States ,Europe andChina ; •the social, geopolitical, financial, trade and legal implications of the exit of theUnited Kingdom from theEuropean Union , or Brexit; •competition with other entities and our affiliates for investment opportunities; •the speculative and illiquid nature of our investments; •the use of borrowed money to finance a portion of our investments; •our expected financings and investments; •the adequacy of our cash resources and working capital; •the timing, form and amount of any dividend distributions; •the timing of cash flows, if any, from the operations of our portfolio companies and the impact of the COVID-19 pandemic thereon; •the ability to consummate acquisitions; •the ability of our investment adviser to locate suitable investments for us and to monitor and administer our investments; •currency fluctuations could adversely affect the results of our investments in foreign companies, particularly to the extent that we receive payments denominated in foreign currency rather thanU.S. dollars; •the ability ofThe Carlyle Group Employee Co., L.L.C. to attract and retain highly talented professionals that can provide services to our investment adviser and administrator; 77 -------------------------------------------------------------------------------- •our ability to maintain our status as a business development company; and •our intent to satisfy the requirements of a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. We use words such as "anticipates," "believes," "expects," "intends," "will," "should," "may," "plans," "continue," "believes," "seeks," "estimates," "would," "could," "targets," "projects," "outlook," "potential," "predicts" and variations of these words and similar expressions to identify forward-looking statements, although not all forward-looking statements include these words. Our actual results and condition could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth in "Risk Factors" in Part II, Item 1A of our annual report on Form 10-K for the year endedDecember 31, 2020 (our "2020 Form 10-K"). We have based the forward-looking statements included in this Form 10-Q on information available to us on the date of this Form 10-Q, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with theSecurities and Exchange Commission (the "SEC"), including our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
OVERVIEW
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Part I, Item 1 of this Form 10-Q "Financial Statements." This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to those described in "Risk Factors" in Part I, Item 1A of our 2020 Form 10-K. Our actual results could differ materially from those anticipated by such forward-looking statements due to factors discussed under "Risk Factors" in our 2020 Form 10-K and "Cautionary Statements Regarding Forward-Looking Statements" appearing elsewhere in this Form 10-Q. We are aMaryland corporation formed onFebruary 8, 2012 , and structured as an externally managed, non-diversified closed-end investment company. We have elected to be regulated as a BDC under the Investment Company Act. We have elected to be treated, and intend to continue to comply with the requirements to qualify annually, as a RIC under Subchapter M of the Code. Our investment objective is to generate current income and capital appreciation primarily through debt investments inU.S. middle market companies. Our core investment strategy focuses on lending toU.S. middle market companies, which we define as companies with approximately$25 million to$100 million of EBITDA, which we believe is a useful proxy for cash flow. We complement this core strategy with additive, diversifying assets including, but not limited to, specialty lending investments. We seek to achieve our investment objective primarily through direct origination of Middle Market Senior Loans, with the balance of our assets invested in higher yielding investments (which may include unsecured debt, mezzanine debt and investments in equities). We generally make Middle Market Senior Loans to privateU.S. middle market companies that are, in many cases, controlled by private equity firms. Depending on market conditions, we expect that between 70% and 80% of the value of our assets will be invested in Middle Market Senior Loans. We expect that the composition of our portfolio will change over time given our Investment Adviser's view on, among other things, the economic and credit environment (including with respect to interest rates) in which we are operating. OnJune 19, 2017 , we closed our IPO, issuing 9,454,200 shares of our common stock (including shares issued pursuant to the exercise of the underwriters' over-allotment option onJuly 5, 2017 ) at a public offering price of$18.50 per share. Net of underwriting costs, we received cash proceeds of$169,488 . Shares of common stock ofTCG BDC began trading on the Nasdaq Global Select Market under the symbol "CGBD" onJune 14, 2017 . OnJune 9, 2017 , we acquiredNF Investment Corp. ("NFIC"), a BDC managed by our Investment Advisor (the "NFIC Acquisition"). As a result, we issued 434,233 shares of common stock to the NFIC stockholders and approximately$145,602 in cash, and acquired approximately$153,648 in net assets. We are externally managed by our Investment Adviser, an investment adviser registered under the Advisers Act. Our Administrator provides the administrative services necessary for us to operate. Both our Investment Adviser and our Administrator are wholly owned subsidiaries ofCarlyle Investment Management L.L.C. , a subsidiary of Carlyle. Our Investment Adviser's five-person investment committee is responsible for reviewing and approving our investment opportunities. The members of the investment committee have experience investing through different credit cycles. Our Investment Adviser's investment committee comprises five of the most senior credit professional within the Carlyle Global 78 -------------------------------------------------------------------------------- Credit segment, with backgrounds and expertise across asset classes and over 26 years of average industry experience and 10 years of average tenure. In addition, our Investment Adviser and its investment team are supported by a team of finance, operations and administrative professionals currently employed byCarlyle Employee Co. , a wholly owned subsidiary of Carlyle. In conducting our investment activities, we believe that we benefit from the significant scale, relationships and resources of Carlyle, including our Investment Adviser and its affiliates. We have operated our business as a BDC since we began our investment activities inMay 2013 . KEY COMPONENTS OF OUR RESULTS OF OPERATIONS Investments Our level of investment activity can and does vary substantially from period to period depending on many factors, including the amount of debt available to middle market companies, the general economic environment and the competitive environment for the type of investments we make. Revenue We generate revenue primarily in the form of interest income on debt investments we hold. In addition, we generate income from dividends on direct equity investments, capital gains on the sales of loans and debt and equity securities and various loan origination and other fees. Our debt investments generally have a stated term of five to eight years and generally bear interest at a floating rate usually determined on the basis of a benchmark such as LIBOR. Interest on these debt investments is generally paid quarterly. In some instances, we receive payments on our debt investments based on scheduled amortization of the outstanding balances. In addition, we receive repayments of some of our debt investments prior to their scheduled maturity date. The frequency or volume of these repayments fluctuates significantly from period to period. Our portfolio activity also reflects the proceeds of sales of securities. We may also generate revenue in the form of commitment, origination, amendment, structuring or due diligence fees, fees for providing managerial assistance and consulting fees. Expenses Our primary operating expenses include the payment of: (i) investment advisory fees, including base management fees and incentive fees, to our Investment Adviser pursuant to the Investment Advisory Agreement between us and our Investment Adviser; (ii) costs and other expenses and our allocable portion of overhead incurred by our Administrator in performing its administrative obligations under the Administration Agreement between us and our Administrator; and (iii) other operating expenses as detailed below: •administration fees payable under our Administration Agreement and Sub-Administration Agreements, including related expenses; •the costs of any offerings of our common stock and other securities, if any; •calculating individual asset values and our net asset value (including the cost and expenses of any independent valuation firms); •expenses, including travel expenses, incurred by our Investment Adviser, or members of our Investment Adviser team managing our investments, or payable to third parties, performing due diligence on prospective portfolio companies and, if necessary, expenses of enforcing our rights; •certain costs and expenses relating to distributions paid on our shares; •debt service and other costs of borrowings or other financing arrangements; •the allocated costs incurred by our Investment Adviser in providing managerial assistance to those portfolio companies that request it; •amounts payable to third parties relating to, or associated with, making or holding investments; •the costs associated with subscriptions to data service, research-related subscriptions and expenses and quotation equipment and services used in making or holding investments; •transfer agent and custodial fees; •costs of hedging; 79 -------------------------------------------------------------------------------- •commissions and other compensation payable to brokers or dealers; •federal and state registration fees; •anyU.S. federal, state and local taxes, including any excise taxes; •independent director fees and expenses; •costs of preparing financial statements and maintaining books and records, costs of preparing tax returns, costs of Sarbanes-Oxley Act compliance and attestation and costs of filing reports or other documents with theSEC (or other regulatory bodies), and other reporting and compliance costs, including registration and listing fees, and the compensation of professionals responsible for the preparation or review of the foregoing; •the costs of any reports, proxy statements or other notices to our stockholders (including printing and mailing costs), the costs of any stockholders' meetings and the compensation of investor relations personnel responsible for the preparation of the foregoing and related matters; •the costs of specialty and custom software for monitoring risk, compliance and overall portfolio, including any development costs incurred prior to the filing of our election to be regulated as a BDC; •our fidelity bond; •directors and officers/errors and omissions liability insurance, and any other insurance premiums; •indemnification payments; •direct fees and expenses associated with independent audits, agency, consulting and legal costs; and •all other expenses incurred by us or our Administrator in connection with administering our business, including our allocable share of certain officers and their staff compensation. We expect our general and administrative expenses to be relatively stable or to decline as a percentage of total assets during periods of asset growth and to increase during periods of asset declines. PORTFOLIO AND INVESTMENT ACTIVITY Below is a summary of certain characteristics of our investment portfolio as ofJune 30, 2021 andDecember 31, 2020 . As of June 30, 2021 December 31, 2020 Fair value of investments$ 1,872,311 $
1,825,749
Count of investments 161
160
Count of portfolio companies / investment funds 118
117
Count of industries 27
27
Percentage of total investment fair value:
First lien debt 66.5 % 67.0 % Second lien debt 16.7 % 15.6 % Total secured debt 83.2 % 82.6 % Investment Funds 13.9 % 15.5 % Equity investments 2.9 % 1.9 % Percentage of debt investment fair value: Floating rate (1) 99.1 % 99.1 % Fixed interest rate 0.9 % 0.9 %
(1) Primarily subject to interest rate floors.
80 -------------------------------------------------------------------------------- Our investment activity for the three month periods endedJune 30, 2021 and 2020 is presented below (information presented herein is at amortized cost unless otherwise indicated):
For the three month periods ended
June 30, 2021 June 30, 2020
Investments:
Total investments, beginning of period$ 1,924,992 $ 2,247,327 New investments purchased 212,977 61,595 Net accretion of discount on investments 2,003 1,473 Net realized gain (loss) on investments 1,945 (47,784) Investments sold or repaid (205,589) (214,262) Total Investments, end of period$ 1,936,328 $ 2,048,349
Principal amount of investments funded:
First Lien Debt$ 183,647 $ 62,194 Second Lien Debt 12,378 368 Equity Investments 19,401 518 Investment Funds - - Total$ 215,426 $ 63,080
Principal amount of investments sold or repaid:
First Lien Debt$ (172,259) $ (261,200) Second Lien Debt (5,865) (3,000) Equity Investments (1,500) - Investment Funds (23,000) - Total$ (202,624) $ (264,200) Number of new funded investments 10 5 Average amount of new funded investments $ 12,819$ 8,656
Percentage of new funded debt investments at floating interest rates
100 % 100 %
Percentage of new funded debt investments at fixed interest rates
- % - % As ofJune 30, 2021 andDecember 31, 2020 , investments consisted of the following: June 30, 2021 December 31, 2020 Amortized Amortized Cost Fair Value Cost Fair Value First Lien Debt$ 1,301,004 $ 1,246,018 $ 1,298,154 $ 1,224,063 Second Lien Debt 314,632 313,130 297,962 284,523 Equity Investments 49,596 53,379 32,754 33,877 Investment Funds 271,096 259,784 294,096 283,286 Total$ 1,936,328 $ 1,872,311 $ 1,922,966 $ 1,825,749 The weighted average yields (1) for our first and second lien debt, based on the amortized cost and fair value as ofJune 30, 2021 andDecember 31, 2020 , were as follows: June 30, 2021 December 31, 2020 Amortized Amortized Cost Fair Value Cost Fair Value First Lien Debt 7.41 % 7.73 % 7.21 % 7.65 % Second Lien Debt 9.07 % 9.11 % 9.15 % 9.59 % First and Second Lien Debt Total 7.73 % 8.01 % 7.57 % 8.01 % (1)Weighted average yields include the effect of accretion of discounts and amortization of premiums and are based on interest rates as ofJune 30, 2021 andDecember 31, 2020 . Weighted average yield on debt and income producing securities at fair value is computed as (a) the annual stated interest rate or yield earned plus the net annual amortization of original issue discount "OID") and market discount 81 -------------------------------------------------------------------------------- earned on accruing debt included in such securities, divided by (b) total first lien and second lien debt at fair value included in such securities. Weighted average yield on debt and income producing securities at amortized cost is computed as (a) the annual stated interest rate or yield earned plus the net annual amortization of OID and market discount earned on accruing debt included in such securities, divided by (b) total first lien and second lien debt at amortized cost included in such securities. Actual yields earned over the life of each investment could differ materially from the yields presented above. Total weighted average yields (which includes the effect of accretion of discount and amortization of premiums) of our first and second lien debt investments as measured on an amortized cost basis increased from 7.57% to 7.73% fromDecember 31, 2020 toJune 30, 2021 . The following table summarizes the fair value of our performing and non-accrual/non-performing investments as ofJune 30, 2021 andDecember 31, 2020 : June 30, 2021 December 31, 2020 Fair Value Percentage Fair Value Percentage Performing$ 1,810,620 96.7 %$ 1,767,613 96.8 % Non-accrual (1) 61,691 3.3 58,136 3.2 Total$ 1,872,311 100.0 %$ 1,825,749 100.0 % (1)For information regarding our non-accrual policy, see Note 2 to the consolidated financial statements included in Part I, Item 1 of this Form 10-Q. See the Consolidated Schedules of Investments as ofJune 30, 2021 andDecember 31, 2020 in our consolidated financial statements in Part I, Item 1 of this Form 10-Q for more information on these investments, including a list of companies and type and amount of investments. As part of the monitoring process, our Investment Adviser has developed risk policies pursuant to which it regularly assesses the risk profile of each of our debt investments and rates each of them based on categories, which we refer to as "Internal Risk Ratings". Pursuant to these risk policies, an Internal Risk Rating of 1 - 5, which are defined below, is assigned to each debt investment in our portfolio. Key drivers of internal risk ratings include financial metrics, financial covenants, liquidity and enterprise value coverage. Internal Risk Ratings Definitions Rating Definition 1 Borrower is operating above expectations, and the trends
and risk factors are
generally favorable. 2 Borrower is operating generally as expected or at an
acceptable level of
performance. The level of risk to our initial cost bases
is similar to the risk
to our initial cost basis at the time of origination. This
is the initial risk
rating assigned to all new borrowers. 3 Borrower is operating below expectations and level of risk
to our cost basis has
increased since the time of origination. The borrower may
be out of compliance
with debt covenants. Payments are generally current
although there may be higher
risk of payment default. 4 Borrower is operating materially below expectations and
the loan's risk has
increased materially since origination. In addition to the
borrower being
generally out of compliance with debt covenants, loan
payments may be past due,
but generally not by more than 120 days. It is anticipated
that we may not
recoup our initial cost basis and may realize a loss of
our initial cost basis
upon exit. 5 Borrower is operating substantially below expectations and
the loan's risk has
increased substantially since origination. Most or all of
the debt covenants are
out of compliance and payments are substantially
delinquent. It is anticipated
that we will not recoup our initial cost basis and may
realize a substantial
loss of our initial cost basis upon exit. Our Investment Adviser monitors and, when appropriate, changes the investment ratings assigned to each debt investment in our portfolio. Our Investment Adviser reviews our investment ratings in connection with our quarterly valuation process. The below table summarizes the Internal Risk Ratings as ofJune 30, 2021 andDecember 31, 2020 . 82 -------------------------------------------------------------------------------- June 30, 2021 December 31, 2020 Fair Value % of Fair Value Fair Value % of Fair Value (dollar amounts in millions) Internal Risk Rating 1 $ 6.0 0.4 %$ 19.1 1.3 % Internal Risk Rating 2 1,157.7 74.2 1,047.5 69.4 Internal Risk Rating 3 333.7 21.4 361.1 23.9 Internal Risk Rating 4 26.5 1.7 48.2 3.2 Internal Risk Rating 5 35.2 2.3 32.8 2.2 Total$ 1,559.1 100.0 %$ 1,508.6 100.0 % As ofJune 30, 2021 andDecember 31, 2020 , the weighted average Internal Risk Rating of our debt investment portfolio was 2.3 and 2.4, respectively. As ofJune 30, 2021 , five of our debt investments, with an aggregate fair value of$61.7 million were assigned an Internal Risk Rating of 4-5. As ofDecember 31, 2020 , six of our debt investments, with an aggregate fair value of$80.9 million were assigned an Internal Risk Rating of 4-5. As ofJune 30, 2021 andDecember 31, 2020 , five and five of our debt investments were on non-accrual status, respectively. Our debt investments non-accrual status had a fair value of$61.7 million and$58.1 million , respectively, which represented approximately 3.3% and 3.2%, respectively, of our total investments at fair value as ofJune 30, 2021 andDecember 31, 2020 . The remaining first and second lien debt investments were performing and current on their interest payments as ofJune 30, 2021 andDecember 31, 2020 .
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