We’ve just heard from BlackRock TCP Capital (TCPC) about its IIIQ 2020 performance. That included the latest valuation of the $24mn at cost lent to regional air carrier Mesa Air Group Inc (dba Mesa Airlines). Management – as has often been the case this year – specifically discussed the company on its conference call, expressing confidence all is well despite the impact of the pandemic on flying in metal tubes in the sky. As has been the case since the crisis began, TCPC has valued all debt outstanding at close to par and pointed to its aircraft collateral as one reason for its confidence. Here’s the latest commentary made by TCPC on November 2, 2020:
“In the case of Mesa, they are a regional operator, they connect jet service to American and United feeding into their hubs. They’ve obviously been impacted that dramatically. They have gotten federal money under the CARES Act that loans continue to perform fully on amortization and interest, of course we all know that the sector has been impacted.We do think our approach to underwriting focusing typically on somewhat older equipment, These are all backed by assets and engines has proved highly effective since we started in this business, financing planes and playing parts since 2003, but clearly there is some disruption there”
The BDC Credit Reporter most of the time will defer to a BDC’s valuation judgement as they have much more information available and are often supported by an independent firm. However, there are times when our credit antennae are up and we differ. This is one of those times. We don’t pretend to have special insights but believe that the market conditions – the worst we’ve ever seen – warrant more caution.
As a result, we have unilaterally decided to downgrade Mesa from CCR 2 to CCR 3 until conditions are clearer. There’s over $1.8mn of annual investment income in play, all of which is still being paid in cash.
As recently as yesterday the company announced borrowing an additional $200mn of secured debt under the CARES Act. Those funds may have repaid the TCPC obligations and may explain the high valuation as of September but no mention was made of that publicly revealed development on the BDC’s conference call. We apologize for being alarmist if TCPC has just been – or shortly will be – repaid. If not, though, this latest borrowing expedition only increases our concern about the company’s financial condition. We will circle back once new information becomes available.