Private Credit Demand And First Lien Lending Will Support Long Term Earnings Stability

Catalysts

About BlackRock TCP Capital

BlackRock TCP Capital is a business development company that provides primarily first lien, senior secured floating rate loans to diversified core middle market borrowers.

What are the underlying business or industry changes driving this perspective?

• Integration into BlackRock's Private Financing Solutions platform is expanding deal flow and screening volume, which may support higher quality originations and sustained gross investment income.
• A strategic shift toward smaller, more granular first lien positions is reducing single name risk and nonaccrual volatility, which can stabilize net asset value and help protect net margins.
• Rising borrower demand for private credit solutions to refinance existing debt and extend maturities is positioning the company to capture attractive spreads, supporting recurring interest income and earnings.
• Focus on lending to businesses with recurring revenue, healthy margins and strong free cash flow, such as KBRA and Syndigo, is intended to enhance portfolio resilience through cycles and support stable or improving net investment income.
• Proactive balance sheet management, including fee waivers, diversified low cost funding and planned refinancing of 2026 notes, is aimed at lowering the total cost of capital over time and supporting net margins and earnings per share.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming BlackRock TCP Capital's revenue will decrease by 11.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from -4.2% today to 70.8% in 3 years time.
• Analysts expect earnings to reach $107.8 million (and earnings per share of $1.15) by about December 2028, up from $-9.2 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 7.2x on those 2028 earnings, up from -54.2x today. This future PE is lower than the current PE for the US Capital Markets industry at 25.5x.
• Analysts expect the number of shares outstanding to decline by 0.28% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.5%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Multiple recent restructurings that subsequently failed, including Renovo being written down to zero and two other restructured loans returning to nonaccrual, suggest that credit remediation outcomes are uncertain and could resurface in future periods. This may pressure net asset value and drive higher credit related losses that weigh on earnings.
• The portfolio still carries a meaningful level of nonaccruals, with 9 companies on nonaccrual at 3.5% of fair value and 7.0% at cost. If macro conditions soften or idiosyncratic issues increase, elevated problem loans could reduce recurring interest income and compress net margins.
• Market commentary indicates that deal flow is still dominated by refinancings and add ons rather than new growth financings, and the volume of high quality opportunities remains limited. If this persists or spreads tighten further, reinvestment at lower yields could reduce gross investment income and put downward pressure on adjusted net investment income per share.
• Secular shifts such as AI driven disruption and greater sensitivity to cyclical and geopolitical risks, which management is already flagging in underwriting, could unexpectedly impair borrowers in software and other sectors. This could lead to higher default rates and write downs that negatively impact revenue, net margins and long term earnings power.
• Net realized losses of approximately 97.0 million in the quarter, largely tied to restructurings like Razor and other dispositions, highlight that past credit decisions can crystallize into large losses. If similar events recur while incentive fees and fee waivers normalize, the combination of realized losses and higher operating costs could depress future earnings and constrain dividend coverage.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $6.5 for BlackRock TCP Capital based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $7.0, and the most bearish reporting a price target of just $5.5.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $152.2 million, earnings will come to $107.8 million, and it would be trading on a PE ratio of 7.2x, assuming you use a discount rate of 12.5%.
  
• Given the current share price of $5.87, the analyst price target of $6.5 is 9.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.