Investcorp Credit Management BDC, Inc 10-Q, filed Feb 10, 2020
Investcorp Credit Management BDC, Inc. (ICMB)
About this 10-Q
Investcorp Credit Management BDC, Inc filed this 10-Q on February 10, 2020, covering the quarter ended December 31, 2019.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2019
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
COMMISSION FILE NUMBER: 814-01054
INVESTCORP CREDIT MANAGEMENT BDC, INC.
(Exact Name of Registrant as Specified in Its Charter)
| Maryland | 46-2883380 | |
| (State or other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
280 Park Avenue
39th Floor
New York, NY 10017
(Address of Principal Executive Offices) (Zip Code)
(212) 257-5199
(Registrant’s Telephone Number, Including Area Code)
65 East 55th Street
15th Floor
New York, NY 10022
(Former name or address, if changed, since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☐ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer |
☐ |
Accelerated filer |
☒ | |||
| Non-accelerated filer |
☐ |
Smaller reporting company |
☐ | |||
| Emerging growth company |
☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class |
Trading Symbol(s) | Name of each exchange on which registered | ||
| Common Stock, par value $0.001 per share |
ICMB | The NASDAQ Global Select Market | ||
| 6.125% Notes due 2023 |
CMFNL | The NASDAQ Global Select Market |
The number of shares of the issuer’s Common Stock, $0.001 par value, outstanding as of February 7, 2020 was 13,756,748.
| Page | ||||||
| PART I. FINANCIAL INFORMATION |
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| Item 1. | Financial Statements |
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| 1 | ||||||
| 2 | ||||||
| 3 | ||||||
| 4 | ||||||
| Consolidated Schedule of Investments as of December 31, 2019 (unaudited) |
5 | |||||
| 8 | ||||||
| 11 | ||||||
Investcorp Credit Management BDC, Inc. and Subsidiaries
Consolidated Statements of Assets and Liabilities
| December 31, 2019 (Unaudited) |
June 30, 2019 | |||||||
| Assets |
||||||||
| Non-controlled, non-affiliated investments, at fair value (amortized cost of $325,352,114 and $321,504,359, respectively) |
$ | 304,953,607 | $ | 306,390,993 | ||||
| Cash |
17,192,788 | 19,706,281 | ||||||
| Cash, restricted |
8,933,193 | 6,589,901 | ||||||
| Receivable for investments sold |
5,417,165 | 820,332 | ||||||
| Interest receivable |
2,181,747 | 3,090,639 | ||||||
| Payment-in-kind interest receivable |
388,150 | — | ||||||
| Deferred offering costs |
121,922 | 121,922 | ||||||
| Prepaid expenses and other assets |
77,699 | 227,924 | ||||||
|
|
|
|
|
|
| |||
| Total Assets |
$ | 339,266,271 | $ | 336,947,992 | ||||
|
|
|
|
|
|
| |||
| Liabilities |
||||||||
| Notes payable: |
||||||||
| Term loan |
$ | 122,000,000 | $ | 122,000,000 | ||||
| Revolving credit facility |
— | 11,026,670 | ||||||
| 2023 Notes payable |
51,375,000 | 34,500,000 | ||||||
| Deferred debt issuance costs |
(1,997,818 | ) | (2,000,262 | ) | ||||
|
|
|
|
|
|
| |||
| Notes payable, net |
171,377,182 | 165,526,408 | ||||||
| Payable for investments purchased |
20,130,000 | 22,276,343 | ||||||
| Dividend payable |
3,437,133 | 3,404,923 | ||||||
| Deferred financing costs payable |
1,037,000 | 1,037,000 | ||||||
| Income-based incentive fees payable |
1,061,231 | 545,991 | ||||||
| Base management fees payable |
1,312,131 | — | ||||||
| Accrued provision for taxes |
— | 13,778 | ||||||
| Interest payable |
1,133,736 | 724,222 | ||||||
| Directors’ fees payable |
14,832 | 95,240 | ||||||
| Accrued expenses and other liabilities |
205,710 | 240,197 | ||||||
|
|
|
|
|
|
| |||
| Total Liabilities |
199,708,937 | 193,864,102 | ||||||
| Commitments and Contingencies (Note 6) |
||||||||
| Net Assets |
||||||||
| Common stock, par value $0.001 per share (100,000,000 shares authorized, 13,748,532 and 13,619,690 shares issued and outstanding, respectively) |
13,749 | 13,620 | ||||||
| Additional paid-in capital |
199,700,863 | 198,398,831 | ||||||
| Distributable earnings (losses) |
(60,157,278 | ) | (55,328,561 | ) | ||||
|
|
|
|
|
|
| |||
| Total Net Assets |
139,557,334 | 143,083,890 | ||||||
|
|
|
|
|
|
| |||
| Total Liabilities and Net Assets |
$ | 339,266,271 | $ | 336,947,992 | ||||
|
|
|
|
|
|
| |||
| Net Asset Value Per Share |
$ | 10.15 | $ | 10.51 | ||||
See notes to unaudited consolidated financial statements.
1
Investcorp Credit Management BDC, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
| For the three months ended December 31, |
For the six months ended December 31, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Investment Income: |
||||||||||||||||
| Interest income |
$ | 7,741,904 | $ | 8,481,251 | $ | 15,312,166 | $ | 16,136,091 | ||||||||
| Payment in-kind interest income |
1,454,214 | 540,308 | 2,361,991 | 953,928 | ||||||||||||
| Dividend income |
— | — | — | 31,275 | ||||||||||||
| Other fee income |
235,331 | 277,365 | 315,726 | 432,520 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
| Total investment income |
9,431,449 | 9,298,924 | 17,989,883 | 17,553,814 | ||||||||||||
| Expenses: |
||||||||||||||||
| Interest expense |
2,533,278 | 2,156,537 | 4,885,023 | 4,421,394 | ||||||||||||
| Base management fees |
1,369,983 | 1,405,297 | 2,725,061 | 2,757,152 | ||||||||||||
| Income-based incentive fees |
851,842 | 753,721 | 851,842 | 874,042 | ||||||||||||
| Provision for tax expense |
10,018 | 12,946 | 10,018 | 12,946 | ||||||||||||
| Professional fees |
390,107 | 233,528 | 699,960 | 466,328 | ||||||||||||
| Allocation of administrative costs from advisor |
330,000 | 341,633 | 682,000 | 679,696 | ||||||||||||
| Amortization of deferred debt issuance costs |
195,377 | 195,377 | 390,754 | 390,754 | ||||||||||||
| Insurance expense |
83,761 | 84,440 | 167,523 | 168,880 | ||||||||||||
| Directors’ fees |
22,500 | 101,250 | 105,000 | 202,500 | ||||||||||||
| Custodian and administrator fees |
77,597 | 7,500 | 207,469 | 15,000 | ||||||||||||
| Offering expense |
85,604 | 51,750 | 137,354 | 103,500 | ||||||||||||
| Other expenses |
120,590 | 236,033 | 276,860 | 355,214 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
| Total expenses |
6,070,657 | 5,580,012 | 11,138,864 | 10,447,406 | ||||||||||||
| Waiver of base management fees |
(57,852 | ) | — | (102,035 | ) | — | ||||||||||
| Waiver of income-based incentive fees |
(336,619 | ) | — | (336,619 | ) | (22,000 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
| Net expenses |
5,676,186 | 5,580,012 | 10,700,210 | 10,425,406 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
| Net investment income |
3,755,263 | 3,718,912 | 7,289,673 | 7,128,408 | ||||||||||||
| Net realized and unrealized gain/(loss) on investments: |
||||||||||||||||
| Net realized gain (loss) from investments |
25,285 | 75,000 | 56,358 | (183,192 | ) | |||||||||||
| Net change in unrealized appreciation (depreciation) in value of investments |
(813,105 | ) | (13,176,208 | ) | (5,285,140 | ) | (14,899,471 | ) | ||||||||
|
|
|
|
|
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|
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|
|
|
|
| |||||
| Total realized and unrealized gain (loss) on investments |
(787,820 | ) | (13,101,208 | ) | (5,228,782 | ) | (15,082,663 | ) | ||||||||
|
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|
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|
|
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|
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| |||||
| Net increase (decrease) in net assets resulting from operations |
$ | 2,967,443 | $ | (9,382,296 | ) | $ | 2,060,891 | $ | (7,954,255 | ) | ||||||
|
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| |||||
| Basic and diluted: |
||||||||||||||||
| Net investment income per share |
$ | 0.27 | $ | 0.27 | $ | 0.53 | $ | 0.52 | ||||||||
| Earnings per share |
$ | 0.22 | $ | (0.69 | ) | $ | 0.15 | $ | (0.58 | ) | ||||||
| Weighted average shares of common stock outstanding |
13,668,027 | 13,638,869 | 13,646,653 | 13,644,483 | ||||||||||||
| Distributions paid per common share |
$ | 0.25 | $ | 0.25 | $ | 0.50 | $ | 0.50 | ||||||||
See notes to unaudited consolidated financial statements.
2
Investcorp Credit Management BDC, Inc. and Subsidiaries
Consolidated Statements of Changes in Net Assets (Unaudited)
| For the three months ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Net assets at beginning of period |
$ | 138,811,806 | $ | 169,442,399 | ||||
| Increase (decrease) in net assets resulting from operations: |
||||||||
| Net investment income |
3,755,263 | 3,718,912 | ||||||
| Net realized gain/(loss) on investments |
25,285 | 75,000 | ||||||
| Net change in unrealized appreciation (depreciation) on investments |
(813,105) | (13,176,208 | ) | |||||
|
|
|
|
|
|
| |||
| Net increase (decrease) in net assets resulting from operations |
2,967,443 | (9,382,296 | ) | |||||
| Stockholder distributions: |
||||||||
| Distributions from net investment income |
(3,437,133) | (3,410,712 | ) | |||||
|
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| |||
| Net decrease in net assets resulting from stockholder distributions |
(3,437,133) | (3,410,712 | ) | |||||
| Capital transactions: |
||||||||
| Issuance of common shares (113,500 and 0, respectively) |
1,156,565 | — | ||||||
| Reinvestments of stockholder distributions |
58,653 | 44,295 | ||||||
| Repurchase of common stock |
— | (257,378 | ) | |||||
|
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| |||
| Net increase (decrease) in net assets resulting from capital transactions |
1,215,218 | (213,083 | ) | |||||
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| |||
| Net increase (decrease) in net assets |
745,528 | (13,006,091 | ) | |||||
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|
| |||
| Net assets at end of period |
$ | 139,557,334 | $ | 156,436,308 | ||||
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|
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|
| |||
| For the six months ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Net assets at beginning of period |
$ | 143,083,890 | $ | 171,522,666 | ||||
| Increase (decrease) in net assets resulting from operations: |
||||||||
| Net investment income |
7,289,673 | 7,128,408 | ||||||
| Net realized gain/(loss) on investments |
56,358 | (183,192 | ) | |||||
| Net change in unrealized appreciation (depreciation) on investments |
(5,285,140) | (14,899,471 | ) | |||||
|
|
|
|
|
|
| |||
| Net increase (decrease) in net assets resulting from operations |
2,060,891 | (7,954,255 | ) | |||||
| Stockholder distributions: |
||||||||
| Distributions from net investment income |
(6,843,516) | (6,823,243 | ) | |||||
|
|
|
|
|
|
| |||
| Net decrease in net assets resulting from stockholder distributions |
(6,843,516) | (6,823,243 | ) | |||||
| Capital transactions: |
||||||||
| Issuance of common shares (113,500 and 0, respectively) |
1,156,565 | — | ||||||
| Reinvestments of stockholder distributions |
99,504 | 49,713 | ||||||
| Repurchase of common stock |
— | (358,573 | ) | |||||
|
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| |||
| Net increase (decrease) in net assets resulting from capital transactions |
1,256,069 | (308,860 | ) | |||||
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|
| |||
| Net increase (decrease) in net assets |
(3,526,556) | (15,086,358 | ) | |||||
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| Net assets at end of period |
$ | 139,557,334 | $ | 156,436,308 | ||||
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| |||
See notes to unaudited consolidated financial statements.
3
Investcorp Credit Management BDC, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
| For the six months ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Cash Flows from Operating Activities |
||||||||
| Net increase (decrease) in net assets resulting from operations |
$ | 2,060,891 | $ | (7,954,255 | ) | |||
| Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities: |
||||||||
| Origination and purchase of investments |
(60,014,116 | ) | (104,067,555 | ) | ||||
| Payment in-kind interest |
(1,973,841 | ) | (953,928 | ) | ||||
| Sales and repayments of investments |
59,421,100 | 101,767,898 | ||||||
| Net realized (gain) loss on investments |
(56,358 | ) | 183,192 | |||||
| Net change in unrealized (appreciation) depreciation on investments |
5,285,140 | 14,899,471 | ||||||
| Amortization of discount/premium on investments |
(1,224,538 | ) | (1,572,367 | ) | ||||
| Amortization of deferred debt issuance costs |
390,754 | 390,754 | ||||||
| Net (increase) decrease in operating assets: |
||||||||
| Interest receivable |
908,892 | 729,287 | ||||||
| Payment-in-kind interest receivable |
(388,150 | ) | — | |||||
| Receivable for investments sold |
(4,596,833 | ) | 7,354,729 | |||||
| Other receivables |
— | (2,270,075 | ) | |||||
| Prepaid expenses and other assets |
150,225 | 196,185 | ||||||
| Net increase (decrease) in operating liabilities: |
||||||||
| Payable for investments purchased |
(2,146,343 | ) | (9,584,450 | ) | ||||
| Interest payable |
409,514 | 542,413 | ||||||
| Accrued provision for income taxes |
(13,778 | ) | (2,579,337 | ) | ||||
| Directors fees payable |
(80,408 | ) | (5,848 | ) | ||||
| Accrued expenses and other liabilities |
(34,488 | ) | (153,292 | ) | ||||
| Base management fees payable |
1,312,131 | 85,444 | ||||||
| Income-based incentive fees payable |
515,222 | (728,165 | ) | |||||
|
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| |||
| Net cash provided by (used in) operating activities |
(74,984 | ) | (3,719,899 | ) | ||||
| Cash Flows from Financing Activities: |
||||||||
| Payment for deferred financing costs |
(388,310 | ) | (1,965,667 | ) | ||||
| Issuance of common shares |
1,156,565 | — | ||||||
| Distributions to stockholders |
(6,711,802 | ) | (6,780,665 | ) | ||||
| Repurchase of common stock |
— | (358,573 | ) | |||||
| Proceeds from 2023 Notes |
16,875,000 | 34,500,000 | ||||||
| Proceeds from borrowing on revolving credit facility |
8,020,881 | 19,105,470 | ||||||
| Repayments of borrowing on revolving credit facility |
(19,047,551 | ) | (36,928,470 | ) | ||||
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| |||
| Net cash provided by (used in) financing activities |
(95,217 | ) | 7,572,095 | |||||
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| |||
| Net change in cash |
(170,201 | ) | 3,852,196 | |||||
| Cash: |
||||||||
| Cash and restricted cash at beginning of period |
26,296,182 | 8,326,714 | ||||||
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| Cash and restricted cash at end of period |
$ | 26,125,981 | $ | 12,178,910 | ||||
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| |||
| Supplemental and non-cash financing cash flow information: |
||||||||
| Cash paid for interest |
$ | 4,475,510 | $ | 3,878,981 | ||||
| Cash paid for taxes |
$ | 23,797 | $ | 2,592,283 | ||||
| Issuance of shares pursuant to Dividend Reinvestment Plan |
$ | 99,504 | $ | 49,713 | ||||
| Non-cash purchase of investments |
$ | — | $ | — | ||||
| Non-cash sale of investments |
$ | — | $ | — | ||||
See notes to unaudited consolidated financial statements.
4
Investcorp Credit Management BDC, Inc. and Subsidiaries
Consolidated Schedule of Investments
(Unaudited)
December 31, 2019
| Investments(1)(2) |
Industry |
Interest Rate |
Initial Acquisition Date |
Maturity Date |
Principal Amount/ Shares(3) |
Amortized Cost |
Fair Value | % of Net Assets |
||||||||||||||||||||
| Non-Controlled/
|
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| Senior Secured First Lien Debt Investments |
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| 1888 Industrial Services, |
Energy Equipment & Services | 3M L + 5.00% PIK (1.00% Floor) | 9/30/2016 | 9/30/2021 | $ | 5,219,854 | $ | 5,219,854 | $ | 5,219,854 | 3.75% | |||||||||||||||||
| 1888 Industrial Services, |
Energy Equipment & Services | 3M L + 8.00% PIK (1.00% Floor) |
9/30/2016 | 9/30/2021 | 13,310,240 | 7,536,133 | 7,986,144 | 5.74% | ||||||||||||||||||||
| 1888 Industrial Services, |
Energy Equipment & Services | 3M L + 5.00% PIK (1.00% Floor) |
6/25/2019 | 9/30/2021 | 656,407 | 656,407 | 656,407 | 0.48% | ||||||||||||||||||||
| 1888 Industrial Services, |
Energy Equipment & Services | 3M L + 5.00% PIK (1.00% Floor) |
9/19/2019 | 9/30/2021 | 101,153 | 101,153 | 101,153 | 0.07% | ||||||||||||||||||||
| 1888 Industrial Services, |
Energy Equipment & Services | 3M L + 5.00% PIK (1.00% Floor) |
10/18/2019 | 9/19/2020 | 453,883 | 453,883 | 453,883 | 0.33% | ||||||||||||||||||||
| 1888 Industrial Services, |
Energy Equipment & Services | 3M L + 5.00% PIK (1.00% Floor) |
10/11/2016 | 9/30/2021 | 2,456,978 | 1,862,919 | 1,862,919 | 1.34% | ||||||||||||||||||||
| 4L Technologies Inc |
Technology Hardware, Storage & Peripheral | 3M L + 4.50% (1.00% Floor) | 8/21/2018 | 5/8/2020 | 7,154,260 | 7,132,122 | 3,434,045 | 2.47% | ||||||||||||||||||||
| ACProducts, Inc |
Household Durables | 3M L + 5.50% (1.00% Floor) |
2/26/2019 | 2/14/2024 | 9,812,500 | 9,388,357 | 9,812,500 | 7.05% | ||||||||||||||||||||
| Altern Marketing, LLC Revolver(5) |
Internet & Direct Marketing Retail | 3M L + 6.00% (1.00% Floor) |
10/7/2019 | 10/7/2024 | 2,631,579 | 1,289,474 | 1,289,474 | 0.93% | ||||||||||||||||||||
| Altern Marketing, LLC |
Internet & Direct Marketing Retail | 3M L + 6.00% (1.00% Floor) |
10/7/2019 | 10/7/2024 | 7,368,421 | 7,296,387 | 7,294,737 | 5.24% | ||||||||||||||||||||
| Barri Financial Group, LLC |
Consumer Finance | 3M L + 7.75% (1.300% Floor) |
10/21/2019 | 10/22/2024 | 10,000,000 | 9,758,992 | 9,775,000 | 7.02% | ||||||||||||||||||||
| Bioplan USA, Inc |
Containers & Packaging | 3M L + 4.75% (1.00% Floor) |
8/9/2018 | 9/23/2021 | 13,552,685 | 13,132,333 | 12,603,997 | 9.05% | ||||||||||||||||||||
| CareerBuilder, LLC |
Professional Services | 3M L + 6.75% (1.00% Floor) |
7/27/2017 | 7/31/2023 | 13,079,231 | 12,869,971 | 13,079,231 | 9.39% | ||||||||||||||||||||
| CB URS Holdings |
Road &Rail | 3M L + 5.75% (1.00% Floor) |
7/31/2019 | 9/1/2024 | 4,920,843 | 4,868,544 | 4,773,218 | 3.43% | ||||||||||||||||||||
| Cook & Boardman Group, |
Distributors | 3M L + 5.75% (1.00% Floor) | 10/12/2018 | 10/17/2025 | 9,900,000 | 9,813,308 | 9,801,000 | 7.04% | ||||||||||||||||||||
| Deluxe Toronto Ltd.(8) |
Media | 3M L + 5.50% (1.00% Floor) | 6/29/2018 | 12/7/2020 | 4,930,599 | 4,909,025 | 4,930,599 | 3.54% | ||||||||||||||||||||
| Empire Office Inc |
Commercial Services & Supplies | 3M L + 7.00% (1.00% Floor) | 3/28/2019 | 4/12/2024 | 14,437,500 | 14,182,274 | 14,293,125 | 10.27% | ||||||||||||||||||||
| Exela Intermedia LLC |
IT Services | 3M L + 6.50% (1.00% Floor) |
6/5/2018 | 7/12/2023 | 5,741,790 | 5,782,411 | 3,445,074 | 2.48% | ||||||||||||||||||||
| Exela Intermedia LLC |
IT Services | Fixed 10.00% | 5/22/2019 | 7/15/2023 | 1,000,000 | 914,799 | 600,000 | 0.43% | ||||||||||||||||||||
| FR Flow Control CB LLC – Term B(8) |
Trading Companies & Distributors | 3M L + 6.00% (1.00% Floor) |
5/10/2019 | 5/10/2026 | 5,373,000 | 5,271,116 | 5,265,540 | 3.78% | ||||||||||||||||||||
| FR Flow Control CB LLC – Term C(8) |
Trading Companies & Distributors | 3M L + 6.00% (1.00% Floor) |
5/10/2019 | 5/10/2026 | 2,100,000 | 2,060,176 | 2,058,000 | 1.48% | ||||||||||||||||||||
| Fusion Connect, Inc.(12)(#) |
Internet Software & Services | 3M L + 7.50% (1.00% Floor) |
7/21/2018 | 5/4/2023 | 11,874,210 | 11,409,123 | 7,480,752 | 5.37% | ||||||||||||||||||||
| Fusion Connect, Inc. –
Exit |
Internet Software & Services | 3M L + 9.50% (2.00% Floor) |
12/11/2019 | 12/31/2024 | 6,000,000 | 5,880,000 | 5,880,000 | 4.22% | ||||||||||||||||||||
| Fusion Connect, Inc. –Superpriority Secured Debtor-In-Possession |
Internet Software & Services | 3M L + 10.00% (1.00% Floor) |
6/13/2019 | 1/14/2020 | 1,630,443 | 1,611,680 | 1,630,442 | 1.17% | ||||||||||||||||||||
| GEE Group, Inc.(7) |
Professional Services | 2M L + 18.00% (1.00% Floor) |
3/26/2018 | 3/31/2021 | 11,052,302 | 11,052,302 | 11,052,302 | 7.94% | ||||||||||||||||||||
| Horus Infrastructure IA LLC(6) |
Energy Equipment & Services | 1M L+3.50% (1.00% Floor) |
11/8/2019 | 10/25/2022 | 5,000,000 | 4,500,000 | 4,500,000 | 3.23% | ||||||||||||||||||||
| Hyperion Materials & Technologies, Inc. (6) |
Construction & Engineering | 3M L + 5.50% (1.00% Floor) |
8/16/2019 | 8/23/2026 | 5,000,000 | 4,901,872 | 4,950,000 | 3.56% | ||||||||||||||||||||
| Infrastructure & Energy Alternatives, Inc. |
Construction & Engineering | 3M L + 8.25% | 11/14/2018 | 9/25/2024 | 7,611,979 | 7,385,584 | 7,611,979 | 5.47% | ||||||||||||||||||||
| KIK Custom Products Inc. |
Chemicals | 3M L + 4.00% (1.00% Floor) |
3/11/2019 | 5/15/2023 | 5,000,000 | 4,760,634 | 4,875,000 | 3.50% | ||||||||||||||||||||
See notes to unaudited consolidated financial statements.
5
Investcorp Credit Management BDC, Inc. and Subsidiaries
Consolidated Schedule of Investments – (continued)
(Unaudited)
December 31, 2019
| Investments(1)(2) |
Industry | Interest Rate | Initial Acquisition Date |
Maturity Date |
Principal Amount/ Shares(3) |
Amortized Cost |
Fair Value | % of Net Assets |
||||||||||||||||||||||||
| Senior Secured First Lien Debt Investments, continued |
||||||||||||||||||||||||||||||||
| Liberty Oilfield Services
|
|
Energy Equipment & Services |
|
|
1M L + 7.625% (1.00% Floor) |
|
9/19/2017 | 9/19/2022 | $ | 6,283,750 | $ | 6,210,608 | $ | 6,283,750 | 4.52% | |||||||||||||||||
| Limbach Holdings, Inc(5) |
|
Construction & Engineering |
|
|
1M L + 11.00% (2.00% Floor) |
|
4/11/2019 | 4/12/2023 | 9,461,538 | 9,385,974 | 9,366,923 | 6.73% | ||||||||||||||||||||
| Montreign Operating Company, LLC |
|
Hotels, Restaurants & Leisure |
|
|
1M L + 8.25% (1.00% Floor) |
|
12/16/2016 | 1/24/2023 | 12,998,831 | 13,070,384 | 12,088,913 | 8.68% | ||||||||||||||||||||
| Northstar Group Services Inc |
|
Construction & Engineering |
|
|
3M L + 5.00% (1.00% Floor) |
|
9/5/2019 | 9/8/2025 | 4,987,500 | 4,939,539 | 4,937,625 | 3.55% | ||||||||||||||||||||
| One Sky Flight LLC(6) |
Airlines | |
1M L+7.50% (1.00% Floor) |
|
12/19/2019 | 12/19/2024 | 10,000,000 | 9,750,000 | 9,750,000 | 7.00% | ||||||||||||||||||||||
| Potpourri Group, Inc. |
Retail | |
3M L + 8.25% (1.00% Floor) |
|
6/27/2019 | 7/3/2024 | 12,343,750 | 12,207,001 | 12,195,625 | 8.76% | ||||||||||||||||||||||
| Premiere Global Services, Inc. |
|
Diversified Telecommunication Services |
|
|
3M L + 6.50% (1.00% Floor) |
|
5/6/2016 | 9/6/2023 | 10,132,160 | 9,663,128 | 7,396,477 | 5.31% | ||||||||||||||||||||
| ProFrac Services LLC |
|
Energy Equipment & Services |
|
|
3M L + 5.75% (1.25% Floor) |
|
9/7/2018 | 9/7/2023 | 8,401,375 | 8,346,063 | 8,317,361 | 5.97% | ||||||||||||||||||||
| Qualtek USA LLC |
|
Construction & Engineering |
|
|
3M L + 5.75% (1.00% Floor) |
|
7/15/2018 | 7/18/2025 | 9,687,500 | 9,539,588 | 9,542,187 | 6.85% | ||||||||||||||||||||
| RPX Corporation |
|
Professional Services |
|
3M L + 6.00% | 6/8/2018 | 6/19/2024 | 3,683,948 | 3,654,252 | 3,683,948 | 2.65% | ||||||||||||||||||||||
| Specialty Building Products Holdings LLC |
|
Construction Materials |
|
3M L + 5.75% | 9/25/2018 | 9/25/2025 | 3,962,538 | 3,913,332 | 3,932,819 | 2.82% | ||||||||||||||||||||||
| Techniplas LLC |
Auto Components | Fixed 10.00% | 11/13/2018 | 5/1/2020 | 9,500,000 | 9,342,887 | 8,835,000 | 6.35% | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
| Total Senior Secured First Lien Debt |
288,812,747 | 276,023,589 | 263,047,003 | 188.93% | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
| Senior Secured Second Lien Debt Investments |
||||||||||||||||||||||||||||||||
| AP NMT Acquisition BV(8)(9) |
Media | |
3M L + 9.00% (1.00% Floor) |
|
8/12/2014 | 8/13/2022 | 15,000,000 | 14,523,334 | 15,000,000 | 10.77% | ||||||||||||||||||||||
| Premiere Global Services, Inc. |
|
Diversified Telecommunication Services |
|
|
3M L + 9.50% (1.00% Floor) |
|
11/30/2016 | 6/6/2022 | 15,348,198 | 15,087,251 | 8,594,991 | 6.17% | ||||||||||||||||||||
| TouchTunes Interactive Networks, Inc. |
Media | |
1M L + 8.25% (1.00% Floor) |
|
5/4/2017 | 5/27/2022 | 10,451,613 | 10,442,382 | 10,451,613 | 7.51% | ||||||||||||||||||||||
| ZeroChaos Parent, LLC |
|
Professional Services |
|
|
2M L + 8.25% (1.00% Floor) |
|
11/21/2017 | 10/31/2023 | 8,000,000 | 7,901,549 | 7,860,000 | 5.65% | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
| Total Senior Secured Second Lien Debt Investments |
48,799,811 | 47,954,516 | 41,906,604 | 30.10% | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
See notes to unaudited consolidated financial statements.
6
Investcorp Credit Management BDC, Inc. and Subsidiaries
Consolidated Schedule of Investments – (continued)
(Unaudited)
December 31, 2019
| Investments(1)(2) |
Industry | Interest Rate | Initial Acquisition Date |
Maturity Date |
Principal Amount/ Shares(3) |
Amortized Cost |
Fair Value | % of Net Assets |
||||||||||||||||||||||||
| Equity, Warrants and Other Investments |
||||||||||||||||||||||||||||||||
| 1888 Industrial Services, LLC
(Equity |
|
Energy Equipment & Services |
|
11,880 | $ | — | $ | — | 0.00% | |||||||||||||||||||||||
| Limbach Holdings, Inc. (Warrants)(10) |
|
Construction Materials |
4/12/2024 | 1 | — | — | 0.00% | |||||||||||||||||||||||||
| PR Wireless, Inc., $0.01 strike (Warrants)(10) |
|
Wireless Telecommunication Services |
|
6/27/2027 | 201 | 1,374,009 | — | 0.00% | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
| Total Equity, Warrants and Other Investments |
12,082 | 1,374,009 | — | 0.00% | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
| Total Non-Controlled/ |
$ | 337,624,641 | $ | 325,352,114 | $ | 304,953,607 | 219,03% | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
| Liabilities in excess other assets |
(165,724,661 | ) | (119.03% | ) | ||||||||||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||||||||||
| Net Assets |
$ | 139,228,946 | 100.00% | |||||||||||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||||||||||
| (1) | The Company’s investments are generally acquired in private transactions exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”) and, therefore, are generally subject to limitations on resale, and may be deemed to be “restricted securities’’ under the Securities Act of 1933. |
| (2) | All investments are non-controlled and non-affiliated issuers unless otherwise noted. All investments are valued in good faith by the board of directors. |
| (3) | Principal amount includes capitalized PIK interest unless otherwise noted. |
| (4) | Effective October 1, 2017, AAR Intermediate Holdings, LLC changed its name to 1888 Industrial Services, LLC. |
| (5) | Refer to Note 6 for more detail on the unfunded commitments. |
| (6) | Security, or a portion thereof, unsettled as of December 31, 2019. |
| (7) | First Lien Unitranche Last Out Investment, which accounts for 3.62% of our investment portfolio at fair value. |
| (8) | The investment is not a qualifying asset under Section 55(a) of the Investment Company Act of 1940. The Company may not acquire any non-qualifying asset unless, at the time of acquisition, qualifying assets represent at least 70% of the Company’s total assets. Non-qualifying assets represent 10.2% of total assets. |
| (9) | A portfolio company domiciled in the Netherlands. The jurisdiction of the security issuer may be a different country than the domicile of the portfolio company. |
| (10) | Securities are non-income producing. |
| (11) | As defined in the 1940 Act, the Company is deemed to be an “Affiliated Person” of this portfolio company because it owns 5% or more of the portfolio company’s outstanding voting securities. |
| (12) | Security in default. |
| # | Classified as non-accrual asset. |
1M L — 1 month LIBOR (1.76% as of December 31, 2019)
2M L — 2 month LIBOR (1.83% as of December 31, 2019)
3M L — 3 month LIBOR (1.91% as of December 31, 2019)
PIK — Payment-In-Kind
See notes to unaudited consolidated financial statements.
7
Investcorp Credit Management BDC, Inc. and Subsidiaries
Consolidated Schedule of Investments
June 30, 2019
| Investments(1)(2) |
Industry | Interest Rate | Initial Acquisition Date |
Maturity Date |
Principal Amount/ Shares(3) |
Amortized Cost |
Fair Value | % of Net Assets |
||||||||||||||||||||||||
|
Non-Controlled/Non-Affiliates |
||||||||||||||||||||||||||||||||
| Senior Secured First Lien Debt Investments |
||||||||||||||||||||||||||||||||
| 1888 Industrial Services, LLC – Term A(4)(12) |
|
Energy Equipment & Services |
|
3M L + 5.00% (1.00% Floor) |
|
9/30/2016 | 9/30/2021 | $ | 4,950,495 | $ | 4,950,495 | $ | 4,950,495 | 3.46% | ||||||||||||||||||
| 1888 Industrial Services, LLC – Term B(3)(4)(12) |
|
Energy Equipment & Services |
|
3M L + 8.00% PIK (1.00% Floor) |
|
9/30/2016 | 9/30/2021 | 12,304,681 | 6,530,574 | 8,613,277 | 6.02% | |||||||||||||||||||||
| 1888 Industrial Services, LLC – Term C(3)(4)(12) |
|
Energy Equipment & Services |
|
3M L + 5.00% (1.00% Floor) |
|
6/25/2019 | 9/30/2021 | 632,594 | 632,594 | 632,594 | 0.45% | |||||||||||||||||||||
| 1888 Industrial Services, LLC – Revolver(4)(5)(12) |
|
Energy Equipment & Services |
|
3M L + 5.00% (1.00% Floor) |
|
10/11/2016 | 9/30/2021 | 1,881,188 | 1,881,188 | 1,881,188 | 1.31% | |||||||||||||||||||||
| 4L Technologies Inc(6) |
|
Technology Hardware, Storage & Peripheral |
|
3M L + 4.50% (1.00% Floor) |
|
8/21/2018 | 5/8/2020 | 10,194,409 | 10,103,240 | 7,339,974 | 5.13% | |||||||||||||||||||||
| ACProducts, Inc |
Household Durables | |
3M L + 5.50% (1.00% Floor) |
|
2/26/2019 | 2/14/2024 | 9,937,500 | 9,465,902 | 9,440,625 | 6.60% | ||||||||||||||||||||||
| Bioplan USA, Inc |
|
Containers & Packaging |
|
3M L + 4.75% (1.00% Floor) |
|
8/9/2018 | 9/23/2021 | 13,623,828 | 13,089,944 | 12,942,636 | 9.04% | |||||||||||||||||||||
| CareerBuilder, LLC |
Professional Services | |
3M L + 6.75% (1.00% Floor) |
|
7/27/2017 | 7/31/2023 | 13,079,231 | 12,845,118 | 13,079,231 | 9.14% | ||||||||||||||||||||||
| Carlton Group |
Business Services | |
3M L + 7.00% (1.00% Floor) |
|
3/27/2019 | 9/30/2022 | 5,425,670 | 5,425,670 | 5,425,670 | 3.79% | ||||||||||||||||||||||
| Cook & Boardman Group, LLC |
Distributors | |
3M L + 5.75% (1.00% Floor) |
|
10/12/2018 | 10/17/2025 | 9,950,000 | 9,857,462 | 9,850,500 | 6.89% | ||||||||||||||||||||||
| Deluxe Toronto Ltd.(8) |
Media | |
3M L + 5.50% (1.00% Floor) |
|
6/29/2018 | 12/7/2020 | 4,949,749 | 4,916,962 | 4,949,749 | 3.46% | ||||||||||||||||||||||
| Empire Office Inc |
|
Commercial Services & Supplies |
|
3M L + 7.00% (1.00% Floor) |
|
3/28/2019 | 4/12/2024 | 14,812,500 | 14,526,409 | 14,516,250 | 10.14% | |||||||||||||||||||||
| Exela Intermedia LLC |
IT Services | |
3M L + 6.50% (1.00% Floor) |
|
6/5/2018 | 7/12/2023 | 5,856,626 | 5,902,727 | 4,978,132 | 3.48% | ||||||||||||||||||||||
| Exela Intermedia LLC |
IT Services | Fixed 10.00% | 5/22/2019 | 7/15/2023 | 1,000,000 | 905,579 | 820,000 | 0.57% | ||||||||||||||||||||||||
| FPC Holdings, Inc. |
Distributors | |
3M L + 4.50% (1.00% Floor) |
|
1/28/2019 | 4/2/2026 | 4,987,500 | 4,891,828 | 4,912,688 | 3.43% | ||||||||||||||||||||||
| FR Flow Control CB LLC – Term B(6) |
|
Trading Companies & Distributors |
|
3M L + 6.00% (1.00% Floor) |
|
5/10/2019 | 5/10/2026 | 5,400,000 | 5,292,000 | 5,292,000 | 3.70% | |||||||||||||||||||||
| FR Flow Control CB LLC – Term C(6) |
|
Trading Companies & Distributors |
|
3M L + 6.00% (1.00% Floor) |
|
5/10/2019 | 5/10/2026 | 2,100,000 | 2,058,000 | 2,058,000 | 1.44% | |||||||||||||||||||||
| Fusion Connect, Inc.(13)(#) |
|
Internet Software & Services |
|
3M L + 7.50% (1.00% Floor) |
|
7/21/2018 | 5/4/2023 | 11,874,210 | 11,371,040 | 8,074,463 | 5.64% | |||||||||||||||||||||
| Fusion Connect, Inc. – Super Senior Secured(6) |
|
Internet Software & Services |
|
3M L + 10.00% (1.00% Floor) |
|
5/16/2019 | 6/3/2019 | 401,503 | 393,473 | 393,473 | 0.27% | |||||||||||||||||||||
| Fusion Connect, Inc. – Superpriority Secured Debtor-In-Possession(6) |
|
Internet Software & Services |
|
3M L + 10.00% (1.00% Floor) |
|
6/13/2019 | 10/7/2019 | 401,503 | 400,440 | 383,435 | 0.27% | |||||||||||||||||||||
| GEE Group, Inc.(6)(7) |
Professional Services | |
2M L + 18.00% (1.00% Floor) |
|
3/26/2018 | 3/31/2021 | 11,319,236 | 11,319,236 | 11,319,236 | 7.91% | ||||||||||||||||||||||
| Infrastructure & Energy Alternatives, Inc.(#) |
|
Construction & Engineering |
3M L + 8.25% | 11/14/2018 | 9/25/2024 | 11,875,000 | 11,491,066 | 11,221,875 | 7.84% | |||||||||||||||||||||||
| Immucor, Inc. |
|
Health Care Equipment & Supplies |
|
3M L + 5.00% (1.00% Floor) |
|
6/27/2017 | 6/15/2021 | 7,350,000 | 7,310,573 | 7,350,000 | 5.14% | |||||||||||||||||||||
| KIK Custom Products Inc. |
Chemicals | |
3M L + 4.00% (1.00% Floor) |
|
3/11/2019 | 5/15/2023 | 5,000,000 | 4,730,171 | 4,750,000 | 3.32% | ||||||||||||||||||||||
| Liberty Oilfield Services LLC(8) |
|
Energy Equipment & Services |
|
1M L + 7.625% (1.00% Floor) |
|
9/19/2017 | 9/19/2022 | 6,358,750 | 6,272,383 | 6,358,750 | 4.44% | |||||||||||||||||||||
See notes to unaudited consolidated financial statements.
8
Investcorp Credit Management BDC, Inc. and Subsidiaries
Consolidated Schedule of Investments – (continued)
June 30, 2019
| Investments(1)(2) |
Industry | Interest Rate | Initial Acquisition Date |
Maturity Date |
Principal Amount/ Shares(3) |
Amortized Cost |
Fair Value | % of Net Assets |
||||||||||||||||||||||||
| Senior Secured First Lien Debt Investments, continued |
||||||||||||||||||||||||||||||||
| Limbach Holdings, Inc.(#) |
|
Construction & Engineering |
|
1M L + 8.00% (1.00% Floor) |
|
4/11/2019 | 4/12/2023 | $ | 9,230,769 | $ | 9,143,579 | $ | 9,138,462 | 6.39% | ||||||||||||||||||
| Montreign Operating Company, LLC |
|
Hotels, Restaurants & Leisure |
|
1M L + 8.25% (1.00% Floor) |
|
12/16/2016 | 1/24/2023 | 13,064,995 | 13,140,133 | 11,105,246 | 7.76% | |||||||||||||||||||||
| Potpourri Group, Inc.(6) |
Retail | |
3M L + 8.25% (1.00% Floor) |
|
6/27/2019 | 7/3/2024 | 12,500,000 | 12,350,000 | 12,350,000 | 8.63% | ||||||||||||||||||||||
| PR Wireless LLC(5) |
|
Wireless Telecommunication Services |
|
3M L + 5.25% (1.00% Floor) |
|
11/15/2017 | 6/29/2020 | 2,293,932 | 2,293,932 | 2,293,932 | 1.60% | |||||||||||||||||||||
| Premiere Global Services, Inc.(8) |
|
Diversified Telecommunication Services |
|
3M L + 6.50% (1.00% Floor) |
|
5/6/2016 | 9/6/2023 | 10,141,266 | 9,604,558 | 7,403,124 | 5.17% | |||||||||||||||||||||
| ProFrac Services LLC |
|
Energy Equipment & Services |
|
3M L + 5.75% (1.00% Floor) |
|
9/7/2018 | 9/7/2023 | 8,929,431 | 8,859,820 | 8,840,137 | 6.18% | |||||||||||||||||||||
| Qualtek USA LLC |
|
Construction & Engineering |
|
3M L + 5.75% (1.00% Floor) |
|
7/15/2018 | 7/18/2025 | 9,812,500 | 9,652,203 | 9,665,312 | 6.75% | |||||||||||||||||||||
| RPX Corporation |
Professional Services | 3M L + 6.00% | 6/8/2018 | 6/19/2024 | 9,250,000 | 9,167,538 | 9,157,500 | 6.40% | ||||||||||||||||||||||||
| Sears Holding Company |
Retail | |
3M L + 7.25% (1.00% Floor) |
|
2/11/2019 | 2/12/2024 | 2,000,000 | 1,981,026 | 2,000,000 | 1.40% | ||||||||||||||||||||||
| Specialty Building Products Holdings LLC |
|
Construction Materials |
3M L + 5.75% | 9/25/2018 | 9/25/2025 | 6,982,500 | 6,888,014 | 6,912,675 | 4.84% | |||||||||||||||||||||||
| Techniplas LLC |
Auto Components | Fixed 10.00% | 11/13/2018 | 5/1/2020 | 9,500,000 | 9,185,104 | 8,835,000 | 6.17% | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
| Total Senior Secured First Lien Debt Investments |
269,371,566 | 258,829,981 | 249,235,629 | 174.17% | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
| Senior Secured Second Lien Debt Investments |
||||||||||||||||||||||||||||||||
| AP NMT Acquisition BV(8)(9) |
Media | |
3M L + 9.00% (1.00% Floor) |
|
8/12/2014 | 8/13/2022 | 15,000,000 | 14,455,174 | 14,943,750 | 10.44% | ||||||||||||||||||||||
| Carlton Group |
Business Services | |
3M L + 11.50% (1.00% Floor) |
|
3/27/2019 | 9/29/2023 | 2,000,000 | 2,000,000 | 2,000,000 | 1.40% | ||||||||||||||||||||||
| Lionbridge Technologies, Inc.(3) |
|
Commercial Services & Supplies |
|
1M L + 9.75% (1.00% Floor) |
|
2/6/2017 | 2/28/2025 | 12,000,000 | 11,812,039 | 12,000,000 | 8.39% | |||||||||||||||||||||
| Premiere Global Services, Inc. |
|
Diversified Telecommunication Services |
|
3M L + 9.50% (1.00% Floor) |
|
11/30/2016 | 6/6/2022 | 15,000,000 | 14,701,257 | 9,900,000 | 6.92% | |||||||||||||||||||||
| TouchTunes Interactive Networks, Inc. |
Media | |
1M L + 8.25% (1.00% Floor) |
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5/4/2017 | 5/27/2022 | 10,451,613 | 10,440,999 | 10,451,613 | 7.30% | ||||||||||||||||||||||
| ZeroChaos Parent, LLC |
Professional Services | |
2M L + 8.25% (1.00% Floor) |
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11/21/2017 | 10/31/2023 | 8,000,000 | 7,890,900 | 7,860,000 | 5.49% | ||||||||||||||||||||||
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| Total Senior Secured Second Lien Debt Investments |
62,451,613 | 61,300,369 | 57,155,363 | 39.94% | ||||||||||||||||||||||||||||
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See notes to unaudited consolidated financial statements.
9
Investcorp Credit Management BDC, Inc. and Subsidiaries
Consolidated Schedule of Investments – (continued)
June 30, 2019
| Investments(1)(2) |
Industry | Interest Rate | Initial Acquisition Date |
Maturity Date |
Principal Amount/ Shares(3) |
Amortized Cost |
Fair Value | % of Net Assets |
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| Equity, Warrants and Other Investments |
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| 1888 Industrial Services, LLC (Equity Interest)(4)(10) |
|
Energy Equipment & Services |
11,880 | $ | — | $ | 1 | 0.00% | ||||||||||||||||||||||||
| Limbach Holdings, Inc.(Warrants) |
|
Construction Materials |
4/12/2024 | 1 | — | — | 0.00% | |||||||||||||||||||||||||
| PR Wireless, Inc., $0.01 strike (Warrants)(10) |
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Wireless Telecommunication Services |
6/27/2027 | 201 | 1,374,009 | — | 0.00% | |||||||||||||||||||||||||
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| Total Equity, Warrants and Other Investments |
12,082 | 1,374,009 | 1 | 0.00% | ||||||||||||||||||||||||||||
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| Total Non-Controlled/Non-Affiliates |
$ | 331,835,261 | $ | 321,504,359 | $ | 306,390,993 | 214.11% | |||||||||||||||||||||||||
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| Liabilities in excess other assets |
(163,293,325 | ) | (114.11% | ) | ||||||||||||||||||||||||||||
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| Net Assets |
$ | 143,097,668 | 100.00% | |||||||||||||||||||||||||||||
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| (1) | The Company’s investments are generally acquired in private transactions exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”) and, therefore, are generally subject to limitations on resale, and may be deemed to be “restricted securities’’ under the Securities Act of 1933. |
| (2) | All investments are non-controlled and non-affiliated issuers. All investments are valued in good faith by the board of directors. |
| (3) | Principal amount includes capitalized PIK interest unless otherwise noted. |
| (4) | Effective October 1, 2017, AAR Intermediate Holdings, LLC changed its name to 1888 Industrial Services, LLC. |
| (5) | Refer to Note 6 for more detail on the unfunded commitments. |
| (6) | Security, or a portion thereof, unsettled as of June 30, 2019. |
| (7) | First Lien Unitranche Last Out Investment, which accounts for 3.69% of our investment portfolio at fair value. |
| (8) | The investment is not a qualifying asset under Section 55(a) of the Investment Company Act of 1940. The Company may not acquire any non-qualifying asset unless, at the time of acquisition, qualifying assets represent at least 70% of the Company’s total assets. Non-qualifying assets represent 9.85% of total assets. |
| (9) | A portfolio company domiciled in the Netherlands. The jurisdiction of the security issuer may be a different country than the domicile of the portfolio company. |
| (10) | Securities are non-income producing. |
| (12) | As defined in the 1940 Act, the Company is deemed to be an “Affiliated Person” of this portfolio company because it owns 5% or more of the portfolio company’s outstanding voting securities. |
| (13) | As of 4/1/2019, this investment has been in default. |
| # | Classified as non-accrual asset. |
1M L — 1 month LIBOR (2.40% as of June 30, 2019)
2M L — 2 month LIBOR (2.33% as of June 30, 2019)
3M L — 3 month LIBOR (2.32% as of June 30, 2019)
PIK — Payment-In-Kind
See notes to unaudited consolidated financial statements.
10
Investcorp Credit Management BDC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2019
Note 1. Organization
Investcorp Credit Management BDC, Inc. (“ICMB” or the “Company”) (formerly known as CM Finance Inc until August 30, 2019), a Maryland corporation formed in May 2013, is a closed-end, externally managed, non-diversified management investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”), and has elected to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code (the “Code”) for U.S. federal income tax purposes. The Company is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 946 Financial Services – Investment Companies.
On February 11, 2014, the Company completed its initial public offering (the “Offering”), selling 7,666,666 shares of its common stock, par value $0.001, including the underwriters’ over-allotment, at a price of $15.00 per share with net proceeds of approximately $111.5 million.
CM Finance LLC, a Maryland limited liability company, commenced operations in March 2012. Immediately prior to the Offering, CM Finance LLC was merged with and into the Company (the “Merger”). In connection with the Merger, the Company issued 6,000,000 shares of common stock and $39.8 million in debt to the pre-existing CM Finance LLC investors, consisting of funds managed by Cyrus Capital Partners, L.P. (the “Original Investors” or the “Cyrus Funds”). The Company had no assets or operations prior to completion of the Merger and, as a result, the books and records of CM Finance LLC became the books and records of the Company, as the surviving entity. Immediately after the Merger, the Company issued 2,181,818 shares of its common stock to Stifel Venture Corp. (“Stifel”) in exchange for $32.7 million in cash. The Company used all of the proceeds of the sale of shares to Stifel to repurchase 2,181,818 shares of common stock from the Original Investors. Immediately after the completion of the Offering, the Company had 13,666,666 shares outstanding. The Company used a portion of the net proceeds of the Offering to repay 100% of the debt issued to the Original Investors in connection with the Merger.
On August 30, 2019, Investcorp Credit Management US LLC (“Investcorp”), a subsidiary of Investcorp Bank B.S.C., acquired the interests in the Adviser currently held by the Cyrus Funds and Stifel and paid off certain debt owed by the Adviser, resulting in Investcorp having a majority ownership interest in the Adviser (the “Investcorp Transaction”).
In connection with the Investcorp Transaction, on June 26, 2019, the Company entered into a definitive stock purchase and transaction agreement with Investcorp BDC Holdings Limited (“Investcorp BDC”), an affiliate of Investcorp (the “Stock Purchase Agreement”), pursuant to which, following the closing of the Investcorp Transaction on August 30, 2019 (the “Closing”) and prior to the second anniversary of the date of the Closing (the “Closing Date”), Investcorp BDC would purchase (i) 680,985 newly issued shares of the Company’s common stock, par value $0.001 per share, which represents 5% of the Company’s common stock outstanding as of June 26, 2019, at the most recently determined net asset value per share of the Company’s common stock at the time of such purchase, as adjusted as necessary to comply with Section 23 of the 1940 Act, and (ii) 680,985 shares of the Company’s common stock in open-market or secondary transactions.
11
In connection with the Investcorp Transaction, on June 26, 2019, the Company’s board of directors, including all of the directors who are not “interested persons” of the Company, as defined in Section 2(a)(19) of the 1940 Act (each, an “Independent Director”), unanimously approved a new investment advisory agreement (the “Advisory Agreement”), which was subsequently approved by the Company’s stockholders at a special meeting of stockholders held on August 28, 2019. On August 30, 2019, in connection with the Closing, the Company entered into the Advisory Agreement and a new administration agreement (the “Administration Agreement”) with the Adviser as its investment adviser and administrator, respectively. The Advisory Agreement and the Administration Agreement are substantially similar to the Company’s prior investment advisory agreement, dated February 5, 2014, between the Company and the Adviser (the “Prior Advisory Agreement”) and the Company’s prior administration agreement (the “Prior Administration Agreement”), respectively. In addition, on August 30, 2019, the Company changed its name to Investcorp Credit Management BDC, Inc.
The Company’s primary investment objective is to maximize total return to stockholders in the form of current income and capital appreciation by investing directly in debt and related equity of privately held middle-market companies to help these companies fund acquisitions, growth or refinancing. The Company invests primarily in middle-market companies in the form of unitranche loans, standalone first and second lien and mezzanine loans. The Company may also invest in unsecured debt, bonds and in the equity of portfolio companies through warrants and other instruments.
As a BDC, the Company is required to comply with certain regulatory requirements. For instance, as a BDC, the Company must not acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of total assets are qualifying assets. Qualifying assets include investments in “eligible portfolio companies.” Under the relevant Securities and Exchange Commission (“SEC”) rules, the term “eligible portfolio company” includes all private operating companies, operating companies whose securities are not listed on a national securities exchange, and certain public operating companies that have listed their securities on a national securities exchange and have a market capitalization of less than $250 million, in each case organized and with their principal of business in the United States.
From time-to-time, the Company may form taxable subsidiaries that are taxed as corporations for U.S. federal income tax purposes (the “Taxable Subsidiaries”). At December 31, 2019, the Company had no Taxable Subsidiaries. At June 30, 2019, the Company had one Taxable Subsidiary: Zinc Borrower Blocker, LLC. The Taxable Subsidiaries, if any, allow the Company to hold equity securities of portfolio companies organized as pass-through entities while continuing to satisfy the requirements applicable to a RIC under the Code.
Note 2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Company.
a. Basis of Presentation
The accompanying consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) and all values are stated in U.S. dollars, unless noted otherwise. The financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the periods included herein as required by U.S. GAAP. These adjustments are normal and recurring in nature.
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the fair value of investments and other amounts reported in the consolidated financial statements and accompanying notes. Management believes that the estimates utilized in preparing the Company’s consolidated financial statements are reasonable and prudent. Actual results could differ materially from these estimates. All material inter-company balances and transactions have been eliminated.
12
As permitted under Regulation S-X and ASC Topic 946, the Company will generally not consolidate its investment in a portfolio company other than an investment company subsidiary or a controlled operating company whose business consists of providing services to the Company. Accordingly, the Company consolidated the results of the Company’s wholly-owned subsidiaries, CM Finance SPV Ltd. (“SPV”) and CM Finance SPV LLC (“LLC”), which are special purpose vehicles used to finance certain investments, and Zinc Borrower Blocker, LLC in its consolidated financial statements. All intercompany balances and transactions have been eliminated.
b. Revenue Recognition, Security Transactions, and Realized/Unrealized Gains or Losses
Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis. Origination, closing, commitment, and amendment fees, purchase and original issue discounts associated with loans to portfolio companies are accreted into interest income over the respective terms of the applicable loans. Accretion of discounts or premiums is calculated by the effective interest or straight-line method, as applicable, as of the purchase date and adjusted only for material amendments or prepayments. Upon the prepayment of a loan or debt security, any prepayment penalties are included in other fee income and unamortized fees and discounts are recorded as interest income and are non-recurring in nature.
Loans are placed on non-accrual status when principal or interest payments are past due 90 days or more or when there is reasonable doubt that principal or interest will be collected. Accrued interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment about ultimate collectability of principal. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in management’s judgment, are likely to remain current.
Dividend income is recorded on the ex-dividend date.
Origination, closing, commitment, and amendment fees, purchase and original issue discounts associated with loans to portfolio companies are accreted into interest income over the respective terms of the applicable loans. Accretion of discounts or premiums is calculated by the effective interest or straight-line method, as applicable, as of the purchase date and adjusted only for material amendments or prepayments. Upon the prepayment of a loan or debt security, any prepayment penalties are included in other fee income and unamortized fees and discounts are recorded as interest income and are non-recurring in nature. During the three and six months ended December 31, 2019, $236,998 and $399,474, respectively, of prepayment penalties and unamortized discounts upon prepayment were recorded as interest income. During the three and six months ended December 31, 2018, $877,376 and $1,015,923, respectively, of prepayment penalties and unamortized discounts upon prepayment were recorded as interest income.
Investment transactions are accounted for on a trade-date basis. Realized gains or losses on investments are determined by calculating the difference between the net proceeds from the disposition and the amortized cost basis of the investments, without regard to unrealized gains or losses previously recognized. Realized gains or losses on the sale of investments are calculated using the specific identification method. The Company reports changes in fair value of investments as a component of the net change in unrealized appreciation (depreciation) on investments in the Unaudited Consolidated Statements of Operations.
Management reviews all loans that become 90 days or more past due on principal or interest or when there is reasonable doubt that principal or interest will be collected for possible placement on non-accrual status. Accrued interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment regarding collectability. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in management’s judgment, are likely to remain current, although management may make exceptions to this general rule if the loan has sufficient collateral value and is in the process of collection. As of December 31, 2019, one loan was on non-accrual status.
13
The Company may hold debt investments in its portfolio that contain a payment-in-kind (“PIK”) interest provision. PIK interest, which represents contractually deferred interest added to the investment balance that is generally due at maturity, is recorded on an accrual basis to the extent that such amounts are expected to be collected. PIK interest is not accrued if the Company does not expect the issuer to be able to pay all principal and interest when due. The Company earned PIK interest of $1,454,214 and $2,361,991 during the three and six months ended December 31, 2019, respectively. The Company earned PIK interest of $540,308 and $953,928 during the three and six months ended December 31, 2018, respectively.
The Company may hold equity investments in its portfolio that contain a PIK dividend provision. PIK dividends, which represent contractual dividend payments added to the investment balance, is recorded on an accrual basis to the extent that such amounts are expected to be collected. The Company earned no PIK dividends during the three and six months ended December 31, 2019. The Company earned no PIK dividends during the three and six months ended December 31, 2018.
c. Paid In Capital
The Company records the proceeds from the sale of its common stock to common stock and additional paid-in capital, net of commissions and marketing support fees.
d. Net Increase in Net Assets Resulting from Operations per Share
The net increase in net assets resulting from operations per share is calculated based upon the weighted average number of shares of common stock outstanding during the reporting period.
e. Distributions
Dividends and distributions to common stockholders are recorded on the ex-dividend date. The amount to be paid out as a dividend or distribution is determined by the Company’s board of directors each quarter and is generally based upon the earnings estimated by management. Net realized capital gains, if any, are generally distributed annually, although the Company may decide to retain such capital gains for investment.
The Company has adopted a dividend reinvestment plan that provides for reinvestment of any distributions the Company declares in cash on behalf of the Company’s stockholders, unless a stockholders elects to receive cash. As a result, if the Company’s board of directors authorizes, and the Company declares, a cash distribution, then the Company’s stockholders who have not “opted out” of the Company’s dividend reinvestment plan will have their cash distributions automatically reinvested in additional shares of the Company’s common stock, rather than receiving the cash distribution.
f. Cash and Restricted Cash
Cash and restricted cash consist of bank demand deposits. The Company deposits its cash in financial institutions and, at times, such balance may be in excess of the Federal Deposit Insurance Corporation insurance limits. All of the Company’s cash deposits are held at large established high credit quality financial institutions and management believes that the risk of loss associated with any uninsured balances is remote. The Company has restrictions on the uses of the cash held by SPV and LLC based on the terms of the Notes Payable. For more information on the Notes Payable, see Note 5.
g. Deferred Offering Costs
Deferred offering costs consist of fees and expenses incurred in connection with the offer and sale of the Company’s common stock and bonds, including legal, accounting, printing fees, and other related expenses, as well as costs incurred in connection with the filing of a shelf registration statement. These costs are capitalized when incurred and recognized as a reduction of offering proceeds when the offering is completed.
14
h. Investment Transactions and Expenses
Purchases of loans, including revolving credit agreements, are recorded on a fully committed basis until the funded and unfunded portions are known or estimable, which in many cases may not be until settlement.
Expenses are accrued as incurred.
Deferred debt issuance costs, incurred in connection with the Company’s Notes Payable, are amortized using the straight line method over the life of the notes.
Offering costs were charged to paid-in capital upon the sale of shares in the Offering.
i. Investment Valuation
The Company applies fair value accounting to all of its financial instruments in accordance with the 1940 Act and ASC Topic 820 – Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a framework used to measure fair value and requires disclosures for fair value measurements. In accordance with ASC 820, the Company has categorized its investments and financial instruments carried at fair value, based on the priority of the valuation technique, into a three-level fair value hierarchy as discussed in Note 4. Fair value is a market-based measure considered from the perspective of the market participant who holds the financial instrument rather than an entity specific measure. Therefore, when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that management believes market participants would use in pricing the financial instrument at the measurement date.
Fair value is defined as the price that would be received upon a sale of an asset in an orderly transaction between market participants at the measurement date. Market participants are buyers and sellers in the principal (or most advantageous) market for the asset that (a) are independent of us, (b) are knowledgeable, having a reasonable understanding about the asset based on all available information (including information that might be obtained through due diligence efforts that are usual and customary), (c) are able to transact for the asset, and (d) are willing to transact for the asset or liability (that is, they are motivated but not forced or otherwise compelled to do so).
Securities that are traded on securities exchanges (including such securities traded in the after hour’s market) are valued on the basis of the closing price on the valuation date (if such prices are available). Securities that are traded on more than one securities exchange are valued at the closing price on the primary securities exchange on which such securities are traded on the valuation date (or if reported on the consolidated tape, then their last sales price on the consolidated tape). Listed options for which the last sales price falls between the last “bid” and “ask” prices for such options are valued at their last sales price on the date of the valuation on the primary securities exchange on which such options are traded. Options for which the last sales price on the valuation date does not fall between the last “bid” and “ask” prices are valued at the average of the last “bid” and “ask” prices for such options on that date. To the extent these securities are actively traded, and valuation adjustments are not applied, they are categorized in Level 1 of the fair value hierarchy. The Company held no Level 1 investments as of December 31, 2019 and June 30, 2019.
Investments that are not traded on securities exchanges but are traded on the over-the-counter (“OTC”) markets (such as term loans, notes and warrants) are valued using various techniques, which may consider recently executed transactions in securities of the issuer or comparable issuers, market price quotations (when observable) and fundamental data relating to the issuer. These investments are categorized in Level 2 of the fair value hierarchy, or in instances when lower relative weight is placed on transaction prices, quotations, or similar observable inputs, they are categorized in Level 3.
15
Investments for which market quotations are not readily available or may be considered unreliable are fair valued, in good faith, using a method determined to be appropriate in the given circumstances. The valuation methods used include the Cost Approach, the Market Approach and the Income Approach. Inputs used in these approaches may include, but are not limited to, interest rate yield curves, credit spreads, recovery rates, comparable company transactions, trading multiples, and volatilities. The valuation method of the Company may change as changes in the underlying company dictates, such as moving from the Cost Approach to Market Approach when underlying conditions change at the company. Because of the inherent uncertainty of valuation in these circumstances, the fair values for the aforementioned investments may differ significantly from values that would have been used had a ready and liquid market for such investments existed or from the amounts that might ultimately be realized, and such differences could be material.
The Company’s valuation policies and procedures are developed by the Adviser, which is also responsible for ensuring that the valuation policies and procedures are consistently applied across all investments of the Company, and approved by the Company’s board of directors. The valuations are continuously monitored and the valuation process for Level 3 investments is completed on a quarterly basis and is designed to subject the valuation of Level 3 investments to an appropriate level of consistency, oversight and review. The valuation process begins with each portfolio company or investment being initially valued by the investment professionals of the Adviser responsible for the portfolio investment. These investment professionals prepare the preliminary valuations based on their evaluation of financial and operating data, company specific developments, market valuations of comparable securities from the same company or that of comparable companies as well as any other relevant factors including recent purchases and sales that may have occurred preceding month-end.
Valuation models are typically calibrated upon initial funding, and are re-calibrated as necessary upon subsequent material events (including, but not limited to additional financing activity, changes in comparable companies, and recent trades). The preliminary valuation conclusions are then documented and discussed with senior management of the Adviser. On a periodic basis and at least once annually, independent valuation firm(s) engaged by the Company conduct independent appraisals and review the Adviser’s preliminary valuations and make their own independent assessment. The Valuation Committee of the Company’s board of directors then reviews the preliminary valuations of the Adviser and that of the independent valuation firms. The Valuation Committee discusses the valuations and makes a recommendation to the Company’s board of directors regarding the fair value of each investment in good faith based on the input of the Adviser and the independent valuation firm(s). Upon recommendation by the Valuation Committee and a review of the valuation materials of the Adviser and the third party independent valuation firm(s), the board of directors of the Company determines, in good faith, the fair value of each investment.
For more information on the classification of the Company’s investments by major categories, see Note 4.
The fair value of the Company’s assets and liabilities that qualify as financial instruments under U.S. GAAP approximates the carrying amounts presented in the Unaudited Consolidated Statements of Assets and Liabilities.
j. Income Taxes
The Company has elected to be treated and qualifies, for U.S. federal income tax purposes, as a RIC under Subchapter M of the Code. To qualify, and maintain qualification, as a RIC, the Company must, among other things, meet certain source of income and asset diversification requirements and distribute to stockholders, for each taxable year, at least 90% of the Company’s “investment company taxable income,” which is generally the Company’s net ordinary income plus the excess, if any, of realized net short-term capital gains over realized net long-term capital losses. If the Company continues to qualify as a RIC and continues to satisfy the annual distribution requirement, the Company will not have to pay corporate level U.S. federal income taxes on any income that the Company distributes to its stockholders. The Company intends to make distributions in an amount sufficient to maintain RIC status each year and to avoid any federal income taxes on income.
16
The Company will also be subject to nondeductible U.S. federal excise taxes if the Company does not distribute to its stockholders at least 98% of net ordinary income, 98.2% of capital gains, if any, and any recognized and undistributed income from prior years for which it paid no U.S. federal income taxes. Additionally, certain of the Company’s consolidated subsidiaries are subject to U.S. federal and state income taxes. The Company recorded a provision for taxes of $10,018 for the three and six months ended December 31, 2019 for U.S. federal and state income taxes related to the Taxable Subsidiaries. The Company did not record a provision for taxes for the three and six months ended December 31, 2018 for U.S. federal and state income taxes related to the Taxable Subsidiaries.
Book and tax basis differences that are permanent differences are reclassified among the Company’s capital accounts, as appropriate at year-end. Additionally, the tax character of distributions is determined in accordance with the Code, which differs from U.S. GAAP. During the three and six months ended December 31, 2019, the Company recorded distributions of $3.4 million and $6.8 million, respectively. During the three and six months ended December 31, 2018, the Company recorded distributions of $3.4 million and $6.8 million, respectively. The tax character of a portion of these distributions may be return of capital.
U.S. GAAP requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet a more-likely-than-not threshold would be recorded as a tax expense in the current year. The Company’s policy is to recognize accrued interest and penalties associated with uncertain tax positions as part of the tax provision.
The Company has analyzed such tax positions and has concluded that no unrecognized tax benefits should be recorded for uncertain tax positions for any tax year since inception. Each of the tax years since inception remains subject to examination by taxing authorities. This conclusion may be subject to review and adjustment at a later date based on factors, including but not limited to, ongoing analysis and changes to laws, regulations, and interpretations thereof.
Permanent differences between investment company taxable income and net investment income for financial reporting purposes are reclassified among capital accounts in the financial statements to reflect their tax character. Differences in classification may also result from the treatment of short-term gains as ordinary income for U.S. federal income tax purposes. During the year ended June 30, 2019, the Company reclassified for book purposes amounts arising from permanent book/tax differences related to the different tax treatment of paydown gains and losses, Taxable Subsidiary partnership investments, nondeductible taxes paid and income/(loss) from wholly owned subsidiaries as follows:
| As of June 30, 2019 | |||||
| Additional paid-in capital |
$ (46,092 | ) | |||
| Distributable earnings |
46,092 | ||||
The tax character of all distributions paid by the Company during the year ended June 30, 2019 was ordinary income.
17
At June 30, 2019, the components of distributable earnings on a tax basis detailed below differ from the amounts reflected in the Company’s Consolidated Statement of Assets and Liabilities by temporary and other book/tax differences, primarily relating to the tax treatment of dividends payable and non-deductible incentive fee income unvested, as follows:
| As of June 30, 2019 |
||||
| Undistributed net investment income |
$ | 6,961,406 | ||
| Accumulated capital gains (losses) and other |
(21,939,217) | |||
| Capital loss carryover |
(21,270,472) | |||
| Unrealized appreciation (depreciation) |
(15,113,364) | |||
| Distributions payable |
(3,404,923) | |||
|
|
|
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| Components of tax distributable earnings at year end |
$ | (54,766,570) | ||
|
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|
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For U.S. federal income tax purposes, net realized capital losses may be carried over to offset future capital gains, if any. These capital losses can be carried forward for an indefinite period, and will retain their character as either short-term or long-term capital losses. As of June 30, 2019, the Company had a net short-term capital loss carryforward of $1,177,259 and a net long-term capital loss carryforward of $20,093,213 available to be carried forward for an indefinite period.
A RIC may elect to defer any capital losses incurred after October 31, 2018 (“post-October”) to the beginning of the following fiscal year. As of June 30, 2019, the Company had a post-October short-term capital loss deferral of $220,936 and a post-October long-term capital loss deferral of $21,718,281. These losses are deemed to arise on July 1, 2019.
k. Capital Gains Incentive Fee
The Advisory Agreement went into effect on August 30, 2019 (the “Commencement Date”). As with the Prior Advisory Agreement, under the Advisory Agreement, the Company has agreed to pay the Adviser a fee for investment advisory and management services consisting of two components — a base management fee (the “Base Management Fee”) and an incentive fee (the “Incentive Fee”). The Incentive Fee, which provides the Adviser with a share of the income that it generates for the Company, has two components, ordinary income (the “Income-Based Fee”) and capital gains (the “Capital Gains Fee”).
Under U.S. GAAP, the Company calculates the Capital Gains Fee payable to the Adviser as if the Company had realized all investments at their fair values as of the reporting date. Accordingly, the Company accrues a provisional Capital Gains Fee taking into account any unrealized gains or losses. As the provisional Capital Gains Fee is subject to the performance of investments until there is a realization event, the amount of provisional Capital Gains Fee accrued at a reporting date may vary from the incentive fee that is ultimately realized and the differences could be material.
Under the Advisory Agreement, the Capital Gains Fee is determined and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement, as of the termination date), commencing with the fiscal year ending June 30, 2021, and will equal to 20.0% of the Company’s cumulative aggregate realized capital gains from the Commencement Date through the end of that fiscal year, computed net of the Company’s aggregate cumulative realized capital losses and the Company’s aggregate cumulative unrealized capital depreciation through the end of such year, less the aggregate amount of any previously paid Capital Gains Fees. If such amount is negative, then no Capital Gains Fee will be payable for such year. Additionally, if the Advisory Agreement is terminated as of a date that is not a fiscal year end, the termination date will be treated as though it were a fiscal year end for purposes of calculating and paying the Capital Gains Fee. Therefore, under the Advisory Agreement, the Capital Gains Fee will not be charged until the fiscal year ending June 30, 2021.
18
As of December 31, 2019 and June 30, 2019, there was no capital gains incentive fee payable to the Adviser under the Advisory Agreement or the Prior Advisory Agreement.
l. Share Repurchase Program
On May 2, 2018, the Company’s board of directors authorized a discretionary repurchase program of up to $5.0 million shares of the Company’s common stock, until the earlier of (i) May 1, 2019 or (ii) the repurchase of $5.0 million in aggregate amount of the common stock unless extended by the Company’s board of directors. On May 1, 2019, the Company’s board of directors extended the share repurchase program until the earlier of (i) May 1, 2020 or (ii) the repurchase of $5.0 million in aggregate amount of the common stock. Under the discretionary repurchase program, the Company may, but is not obligated to, repurchase the outstanding common stock from time to time in the open market provided that the Company complies with the prohibitions under its insider trading policies and procedures and the applicable provisions of the 1940 Act, and the Securities Exchange Act of 1934, as amended.
In addition, any repurchases will be conducted in accordance with the 1940 Act. The timing and number of shares to be repurchased will depend on a number of factors, including market conditions and alternative investment opportunities and no assurances can be given that any common stock, or any particular amount, will be purchased. The Company will retire immediately all shares of common stock that are purchased in connection with the share repurchase program. During the three and six months ended December 31, 2019, the Company did not repurchase shares of its common stock in the open market. During the three and six months ended December 31, 2018, the Company repurchased 30,999 and 42,214 shares of its common stock in the open market for $257,336 and $358,573, respectively (including commissions). Refer to Note 11 for additional information concerning share repurchases.
Note 3. Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that are adopted by the Company as of the specified effective date. The Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial statements upon adoption.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). ASU 2018-13 will modify the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. ASU 2018-13 is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period, with early adoption permitted. The Company is currently evaluating the impact ASU 2018-13 will have on the Company’s consolidated financial statements and disclosures.
Certain items in the December 31, 2018 consolidated financial statements have been reclassified to conform to the December 31, 2019 presentation with no effect on net income.
Note 4. Investments
The Company’s investments, at any time, may include securities and other financial instruments, including, without limitation, corporate and government bonds, convertible securities, collateralized loan obligations, term loans, trade claims, equity securities, privately negotiated securities, direct placements, working interests, warrants and investment derivatives (such as credit default swaps, recovery swaps, total return swaps, options, forward contracts, and futures) (all of the foregoing collectively referred to in these financial statements as “investments”).
19
a. Certain Risk Factors
In the ordinary course of business, the Company manages a variety of risks including market risk, liquidity risk and credit risk. The Company identifies, measures and monitors risk through various control mechanisms, including trading limits and diversifying exposures and activities across a variety of instruments, markets and counterparties.
Market risk is the risk of potential adverse changes to the value of financial instruments because of changes in market conditions, including as a result of changes in the credit quality of a particular issuer, credit spreads, interest rates, and other movements and volatility in security prices or commodities. In particular, the Company may invest in issuers that are experiencing or have experienced financial or business difficulties (including difficulties resulting from the initiation or prospect of significant litigation or bankruptcy proceedings), which involves significant risks. The Company manages its exposure to market risk through the use of risk management strategies and various analytical monitoring techniques.
The Company’s assets may, at any time, include securities and other financial instruments or obligations that are illiquid or thinly traded, making purchase or sale of such securities and financial instruments at desired prices or in desired quantities difficult. Furthermore, the sale of any such investments may be possible only at substantial discounts, and it may be extremely difficult to value any such investments accurately.
Credit risk is the potential loss the Company may incur from a failure of an issuer to make payments according to the terms of a contract. The Company is subject to credit risk because of its strategy of investing in the debt of leveraged companies. The Company’s exposure to credit risk on its investments is limited to the fair value of the investments.
b. Investments
Investment purchases, sales and principal payments/paydowns are summarized below for the three and six months ended December 31, 2019 and December 31, 2018, respectively. These purchase and sale amounts exclude derivative instruments.
| Three months ended December 31, | Six months ended December 31, |
|||||||||||||||
| 2019 | 2018 |
2019 |
2018 | |||||||||||||
| Investment purchases, at cost (including PIK interest) |
$ | 40,797,499 | $ | 50,655,913 | $ | 61,987,957 | $ | 105,021,483 | ||||||||
| Investment sales and repayments |
37,921,314 | 86,223,802 | 59,421,100 | 101,767,898 | ||||||||||||
The composition of the Company’s investments as of December 31, 2019, as a percentage of the total portfolio, at amortized cost and fair value, are as follows:
| Investment at Amortized Cost |
Percentage | Investments at Fair Value |
Percentage | |||||||||||||
| Senior Secured First Lien Debt Investments |
$ | 264,971,286 | 81.44% | $ | 251,994,701 | 82.64% | ||||||||||
| Unitranche First Lien Debt Investment |
11,052,302 | 3.40 | 11,052,302 | 3.62 | ||||||||||||
| Senior Secured Second Lien Debt Investment |
47,954,517 | 14.74 | 41,906,604 | 13.74 | ||||||||||||
| Equity, Warrants and Other Investments |
1,374,009 | 0.42 | 0 | 0.00 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 352,352,114 | 100.00% | $ | 304,953,607 | 100.00% | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
20
The composition of the Company’s investments as of June 30, 2019, as a percentage of the total portfolio, at amortized cost and fair value, are as follows:
| Investment at Amortized Cost |
Percentage | Investments at Fair Value |
Percentage | |||||||||||||
| Senior Secured First Lien Debt Investments |
$ | 247,510,745 | 76.98% | $ | 237,916,393 | 77.66% | ||||||||||
| Unitranche First Lien Debt Investment |
11,319,236 | 3.52 | 11,319,236 | 3.69 | ||||||||||||
| Senior Secured Second Lien Debt Investments |
61,300,369 | 19.07 | 57,155,363 | 18.65 | ||||||||||||
| Equity, Warrants and Other Investments |
1,374,009 | 0.43 | 1 | 0.00 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 321,504,359 | 100.00% | $ | 306,390,993 | 100.00% | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The Company uses Global Industry Classification Standard (“GICS”) codes to identify the industry groupings in its portfolio. The following table shows the portfolio composition by industry grouping at fair value at December 31, 2019:
| Industry Classification |
Investments at Fair Value |
Percentage of Total Portfolio |
||||||
| Professional Services |
$ | 35,675,481 | 11.70% | |||||
| Energy Equipment & Services |
35,381,470 | 11.60% | ||||||
| Construction & Engineering |
31,458,715 | 10.32% | ||||||
| Media |
30,382,212 | 9.96% | ||||||
| Diversified Telecommunication Services |
15,991,468 | 5.24% | ||||||
| Internet Software & Services |
14,991,195 | 4.92% | ||||||
| Commercial Services & Supplies |
14,293,125 | 4.69% | ||||||
| Containers & Packaging |
12,603,997 | 4.13% | ||||||
| Retail |
12,195,625 | 4.00% | ||||||
| Hotels, Restaurants & Leisure |
12,088,913 | 3.96% | ||||||
| Household Durables |
9,812,500 | 3.22% | ||||||
| Distributors |
9,801,000 | 3.21% | ||||||
| Consumer Finance |
9,775,000 | 3.21% | ||||||
| Airlines |
9,750,000 | 3.20% | ||||||
| Construction Materials |
8,882,819 | 2.91% | ||||||
| Auto Components |
8,835,000 | 2.90% | ||||||
| Internet & Direct Marketing Retail |
8,584,210 | 2.80% | ||||||
| Trading Companies & Distributors |
7,323,540 | 2.40% | ||||||
| Chemicals |
4,875,000 | 1.60% | ||||||
| Road & Rail |
4,773,218 | 1.57% | ||||||
| IT Services |
4,045,074 | 1.33% | ||||||
| Technology Hardware, Storage & Peripherals |
3,434,045 | 1.13% | ||||||
|
|
|
|
|
|||||
| Total |
$ | 304,953,607 | 100.00% | |||||
|
|
|
|
|
|||||
21
The following table shows the portfolio composition by industry grouping at fair value at June 30, 2019:
| Industry Classification |
Investments at Fair Value |
Percentage of Total Portfolio |
||||||
| Professional Services |
$ | 41,415,967 | 13.52% | |||||
| Energy Equipment & Services |
31,276,442 | 10.21% | ||||||
| Media |
30,345,112 | 9.91% | ||||||
| Construction & Engineering |
30,025,649 | 9.80% | ||||||
| Commercial Services & Supplies |
26,516,250 | 8.65% | ||||||
| Diversified Telecommunication Services |
17,303,124 | 5.65% | ||||||
| Distributors |
14,763,188 | 4.82% | ||||||
| Retail |
14,350,000 | 4.68% | ||||||
| Containers & Packaging |
12,942,636 | 4.22% | ||||||
| Hotels, Restaurants & Leisure |
11,105,246 | 3.62% | ||||||
| Household Durables |
9,440,625 | 3.08% | ||||||
| Internet Software & Services |
8,851,371 | 2.89% | ||||||
| Auto Components |
8,835,000 | 2.88% | ||||||
| Business Services |
7,425,670 | 2.42% | ||||||
| Trading Companies & Distributors |
7,350,000 | 2.40% | ||||||
| Health Care Equipment & Supplies |
7,350,000 | 2.40% | ||||||
| Technology Hardware, Storage & Peripherals |
7,339,974 | 2.40% | ||||||
| Construction Materials |
6,912,675 | 2.26% | ||||||
| IT Services |
5,798,132 | 1.89% | ||||||
| Chemicals |
4,750,000 | 1.55% | ||||||
| Wireless Telecommunication Services |
2,293,932 | 0.75% | ||||||
|
|
|
|
|
|||||
| Total |
$ | 306,390,993 | 100.00% | |||||
|
|
|
|
|
|||||
The following table shows the portfolio composition by geographic grouping at fair value at December 31, 2019:
| Fair Value | Percentage of Total Portfolio |
|||||||
| U.S. Northeast |
$ | 103,009,354 | 38.78% | |||||
| U.S. Midwest |
58,717,223 | 19.25% | ||||||
| U.S. Southwest |
32,404,861 | 10.63% | ||||||
| U.S. Southeast |
30,976,589 | 10.16% | ||||||
| U.S. West |
28,548,518 | 9.36% | ||||||
| International |
27,254,139 | 8.94% | ||||||
| U.S. Mid-Atlantic |
24,042,923 | 7.88% | ||||||
|
|
|
|
|
|||||
| Total |
$ | 304,953,607 | 100.00% | |||||
|
|
|
|
|
|||||
The following table shows the portfolio composition by geographic grouping at fair value at June 30, 2019:
| Fair Value | Percentage of Total Portfolio |
|||||||
| U.S. Northeast |
$ | 112,966,230 | 36.87% | |||||
| U.S. Midwest |
48,834,830 | 15.94% | ||||||
| U.S. Southeast |
45,178,967 | 14.74% | ||||||
| International |
27,243,499 | 8.89% | ||||||
| U.S. West |
25,235,056 | 8.24% | ||||||
| U.S. Mid-Atlantic |
23,738,962 | 7.75% | ||||||
| U.S. Southwest |
23,193,449 | 7.57% | ||||||
|
|
|
|
|
|||||
| Total |
$ | 306,390,993 | 100.00% | |||||
|
|
|
|
|
|||||
22
The Company’s primary investment objective is to maximize total return to stockholders in the form of current income and capital appreciation by investing directly in debt and related equity of privately held middle-market companies to help these companies fund acquisitions, growth or refinancing. During the six months ended December 31, 2019, the Company made investments in seven new portfolio companies of approximately $52.3 million to which it was not previously contractually committed to provide financial support. During the six months ended December 31, 2019, the Company made investments of $7.9 million in two existing portfolio companies to which it was previously committed to provide financial support through the terms of the revolvers and delayed draw term loans. The details of the Company’s investments have been disclosed on the Unaudited Consolidated Schedule of Investments.
c. Derivatives
Derivative contracts include total return swaps and embedded derivatives in Notes Payable. The Company may enter into derivative contracts as part of its investment strategies.
The Company and UBS entered into a total return swap (“TRS”) transactions whereby the Company will receive the total return of the Term Notes and the Revolving Notes (as defined in Note 5) purchased by UBS and pay the Financing Rate and the Revolver Financing Rate (both as defined in Note 5). Therefore, amounts required for the future satisfaction of the swaps may be greater or less than the amount recorded. Realized and change in unrealized gains and losses on total return swaps, if any, are included in the net realized gain or loss on derivative, and net change in unrealized appreciation (depreciation) on derivative in the Consolidated Statements of Operations. On December 5, 2016, the TRS on the Revolving Notes expired in accordance with its terms.
In connection with the TRS transactions, the Company entered into an International Swap and Derivatives Association Agreement (“ISDA Agreement”) with UBS. The ISDA Agreement includes provisions for general obligations, representations, collateral and events of default or termination. Under an ISDA Agreement, the Company typically may offset with the counterparty certain derivative payable and/or receivable with collateral held and/or posted and create one single net payment (close-out netting) in the event of default or termination.
The Company’s ISDA Agreement may contain provisions for early termination of over-the-counter derivative transactions in the event the net assets of the Company decline below specific levels (“net asset contingent features”). If these levels are triggered, the Company’s counterparty has the right to terminate such transaction and require the Company to pay or receive a settlement amount in connection with the terminated transaction.
The Company has determined that the Term Notes payable from SPV to UBS related to the Term Financing (discussed further in Note 5) contains an embedded derivative. SPV is obligated to pay UBS the net appreciation (depreciation) of the SPV Assets, as defined below, as well as pay any income generated by the SPV Assets until maturity. Therefore, amounts required for the future satisfaction of the note may be greater or less than the amount recorded. Realized and change in unrealized gains and losses on the embedded derivative is included in the net realized gain or loss on derivatives, and net change in unrealized appreciation (depreciation) on derivative in the Unaudited Consolidated Statements of Operations.
At December 31, 2019 and June 30, 2019, the Company held no derivative contracts.
23
The following table reflects the amount of gains (losses) on derivatives included in the Unaudited Consolidated Statements of Operations for the three and six months ended December 31, 2019 and December 31, 2018, respectively. None of the derivatives were designated as hedging instruments under U.S. GAAP.
| For the three months ended December 31, | For the six months ended December 31, | |||||||||||||||
| 2019 | 2018 |
2019 |
2018 | |||||||||||||
| Total Return Swaps |
$ | — | $ | (972,380 | ) | $ | — | $ | (324,298 | ) | ||||||
| Embedded Derivatives - Notes Payable |
— | 972,380 | — | 324,298 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | — | $ | — | $ | — | $ | — | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
d. Fair Value Measurements
ASC 820 defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a framework for measuring fair value and a valuation hierarchy that prioritizes the inputs used in the valuation of an asset or liability based upon their transparency. The valuation hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Classification within the hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s assets and liabilities measured at fair value have been classified in the following three categories:
Level 1 – valuation is based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 – valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, such as (a) quoted prices for similar assets or liabilities in active markets; (b) quoted prices for identical or similar assets or liabilities in markets that are not active, that is, markets in which there are few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly; (c) inputs other than quoted prices that are observable for the asset or liability; or (d) inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 – valuation is based on unobservable inputs for the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. However, the fair value measurement objective remains the same, that is, an exit price from the perspective of a market participant that holds the asset or owes the liability. Therefore, unobservable inputs reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. Unobservable inputs are developed based on the best information available under the circumstances, which might include the Company’s own data. The Company’s own data used to develop unobservable inputs is adjusted if information is reasonably available without undue cost and effort that indicates that market participants would use different assumptions.
The availability of observable inputs can vary from security to security and is affected by a wide variety of factors, including, for example, the type of security, whether the security is new and not yet established in the marketplace, the liquidity of the market and other characteristics particular to the security. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.
24
Estimates of fair value for cash and restricted cash are measured using observable, quoted market prices, or Level 1 inputs. All other fair value significant estimates are measured using unobservable inputs, or Level 3 inputs.
The following table summarizes the classifications within the fair value hierarchy of the Company’s assets and liabilities measured at fair value as of December 31, 2019:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets |
||||||||||||||||
| Investments |
||||||||||||||||
| Senior Secured First Lien Debt Investments |
$ | — | $ | — | $ | 263,047,003 | $ | 263,047,003 | ||||||||
| Senior Secured Second Lien Debt Investments |
— | — | 41,906,604 | 41,906,604 | ||||||||||||
| Equity, Warrants and Other Investments |
— | — | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Investments |
— | — | $ | 304,953,607 | $ | 304,953,607 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The following table summarizes the classifications within the fair value hierarchy of the Company’s assets and liabilities measured at fair value as of June 30, 2019:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets |
||||||||||||||||
| Investments |
||||||||||||||||
| Senior Secured First Lien Debt Investments |
$ | — | $ | — | $ | 249,235,629 | $ | 249,235,629 | ||||||||
| Senior Secured Second Lien Debt Investments |
— | — | 57,155,363 | 57,155,363 | ||||||||||||
| Equity, Warrants and Other Investments |
— | — | 1 | 1 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Investments |
— | — | $ | 306,390,993 | $ | 306,390,993 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the six months ended December 31, 2019:
| Senior Secured First Lien Debt Investments |
Senior Secured Second Lien Debt Investments |
Unsecured Debt Investment |
Equity, Warrants and Other Investments |
Total Investments |
||||||||||||||||
| Balance as of June 30, 2019 |
$ | 249,235,629 | $ | 57,155,363 | $ | — | $ | 1 | $ | 306,390,993 | ||||||||||
| Purchases (including PIK interest) |
61,639,759 | 348,198 | — | — | 61,987,957 | |||||||||||||||
| Sales |
(45,421,100 | ) | (14,000,000 | ) | — | — | (59,421,100 | ) | ||||||||||||
| Amortization |
918,588 | 305,950 | — | — | 1,224,538 | |||||||||||||||
| Net realized gains (losses) |
56,359 | — | — | — | 56,358 | |||||||||||||||
| Transfers in |
— | — | — | — | — | |||||||||||||||
| Transfers out |
— | — | — | — | — | |||||||||||||||
| Net change in unrealized (depreciation) appreciation |
(3,382,232 | ) | (1,902,907 | ) | — | (1) | (5,285,140 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Balance as of December 31, 2019 |
$ | 263,047,003 | $ | 41,906,604 | $ | — | $ | — | $ | 304,953,607 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Change in unrealized gains (losses) relating to assets still held as of December 31, 2019 |
$ | (3,302,971 | ) | $ | (1,714,946 | ) | $ | — | $ | (1) | $ | (5,017,918 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
25
The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the six months ended December 31, 2018:
| Senior Secured First Lien Debt Investments |
Senior Secured Second Lien Debt Investments |
Unsecured Debt Investments |
Equity, Warrants and Other Investments |
Total Investments |
||||||||||||||||
| Balance as of June 30, 2018 |
$ | 165,136,316 | $ | 127,200,954 | $ | 731,742 | $ | 523,001 | $ | 293,592,013 | ||||||||||
| Purchases (including PIK |
97,164,542 | 7,084,821 | — | — | 104,249,363 | |||||||||||||||
| Sales |
(68,419,564 | ) | (33,348,333 | ) | — | — | (101,767,897 | ) | ||||||||||||
| Amortization |
685,295 | 887,071 | — | — | 1,572,366 | |||||||||||||||
| Net realized gains (losses) |
93,750 | (276,942 | ) | — | — | (183,192 | ) | |||||||||||||
| Transfers in |
— | — | — | — | — | |||||||||||||||
| Transfers out |
— | — | — | — | — | |||||||||||||||
| Net change in unrealized (depreciation) appreciation |
(2,580,542 | ) | (11,635,000 | ) | (731,742 | ) | 318,055 | (14,629,229 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Balance as of December 31, |
$ | 192,079,797 | $ | 89,912,571 | $ | — | $ | 841,056 | $ | 282,833,424 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Change in unrealized gains (losses) relating to assets and liabilities still held as of December 31, 2018 |
$ | (2,286,087 | ) | $ | (11,970,853 | ) | $ | (731,742 | ) | $ | 47,813 | $ | (14,940,869 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total Return Swaps |
Embedded Derivatives - Notes Payable |
Total Derivatives |
||||||||||
| Balance as of June 30, 2018 |
$ | (229,918) | $ | 229,918 | $ | — | ||||||
| Net change in unrealized (depreciation) appreciation |
324,298 | (324,298 | ) | — | ||||||||
|
|
|
|
|
|
|
|||||||
| Balance as of December 31, 2018 |
$ | 94,380 | $ | (94,380 | ) | $ | — | |||||
|
|
|
|
|
|
|
|||||||
| Change in unrealized gains (losses) relating to assets and liabilities still held as of December 31, 2018 |
$ | 5,924,881 | $ | (5,924,881 | ) | $ | — | |||||
|
|
|
|
|
|
|
|||||||
Transfers into Level 3 during or at the end of the reporting period are reported under Level 1 or Level 2 as of the beginning of the period. Transfers out of Level 3 during or at the end of the reporting period are reported under Level 3 as of the beginning of the period. Changes in unrealized gains (losses) relating to Level 3 instruments are included in net change in unrealized (depreciation) appreciation on investments and derivatives on the Unaudited Consolidated Statements of Operations.
During the three and six months ended December 31, 2019 and December 31, 2018, the Company did not transfer any investments among levels 1, 2 and 3.
26
The following tables present the ranges of significant unobservable inputs used to value the Company’s Level 3 investments as of December 31, 2019 and June 30, 2019. These ranges represent the significant unobservable inputs that were used in the valuation of each type of investment. These inputs are not representative of the inputs that could have been used in the valuation of any one investment. For example, the highest market yield presented in the table for senior secured notes is appropriate for valuing a specific investment but may not be appropriate for valuing any other investment. Accordingly, the ranges of inputs presented below do not represent uncertainty in, or possible ranges of, fair value measurements of the Company’s Level 3 investments.
| Fair Value as of December 31, 2019 |
Valuation Methodology |
Unobservable Input(s) |
Weighted Average |
Range | ||||||||
| Senior Secured First Lien Debt Investments |
$ | 90,218,407 | Yield Analysis | Market Yields | 15.8% | 4.8% - 30.1% | ||||||
| Unitranche First Lien Debt Investments |
11,052,302 | Discounted Cash Flow | Discount Rate | 23.7% | 19.9% - 27.6% | |||||||
| Senior Secured First Lien Debt Investments |
102,086,975 | Discounted Cash Flow | Discount Rate | 8.4% | 5.0% - 19.9% | |||||||
| Senior Secured First Lien Debt Investments |
21,200,108 | Broker Quoted | Market Comparable | 75.9% | 51.0% - 100.5% | |||||||
| Senior Secured First Lien Debt Investments |
38,489,210 | Recent Purchase | Recent Purchase | N/A | N/A | |||||||
| Senior Secured Second Lien Debt Investments |
23,594,991 | Yield Analysis | Market Yield | 18% | 9.6% - 30.6% | |||||||
| Senior Secure Second Lien Debt Investments |
18,311,613 | Discounted Cash Flow | Discount Rate | 13.2% | 9.2% - 25.1% | |||||||
| Equity, Warrants, and Other Investments |
- | EV Multiple | EBITDA Multiple | 0.0x | 0.0x - 0.0x | |||||||
| Fair Value as of June 30, 2019 |
Valuation Methodology |
Unobservable Input(s) |
Weighted Average |
Range | ||||||||
| Senior Secured First Lien Debt Investments |
$ | 58,178,487 | Yield Analysis | Market Yields | 12.1% | 5.5% - 24.9% | ||||||
| Unitranche First Lien Debt Investments |
11,319,236 | Discounted Cash Flow | Discount Rate | 21.8% | 20.6% - 23.1% | |||||||
| Senior Secured First Lien Debt Investments |
127,490,234 | Discounted Cash Flow | Discount Rate | 10.1% | 5.1% - 26.3% | |||||||
| Senior Secured First Lien Debt Investments |
21,179,709 | Broker Quoted | Market Comparable | 79.6% | 65.0% - 101.3% | |||||||
| Senior Secured First Lien Debt Investments |
31,067,964 | Recent Purchase | Recent Purchase | N/A | N/A | |||||||
| Senior Secured Second Lien Debt Investments |
2,000,000 | Yield Analysis | Market Yield | 16.7% | 16.2% - 17.2% | |||||||
| Senior Secure Second Lien Debt Investments |
55,155,363 | Discounted Cash Flow | Discount Rate | 15.1% | 9.6% - 31.1% | |||||||
| Equity, Warrants, and Other Investments |
1 | EV Multiple | EBITDA Multiple | 0.0x | 0.0x - 0.0x | |||||||
Fair value measurements categorized within Level 3 are sensitive to changes in the assumptions or methodology used to determine fair value and such changes could result in a significant increase or decrease in the fair value. Significant increases in illiquidity discounts, PIK discounts and market yields would result in significantly lower fair value measurements.
27
Note 5. Notes Payable
On May 23, 2013, as amended on June 6, 2013, December 4, 2013, September 26, 2014, July 20, 2015, August 14, 2015, February 28, 2017 and November 20, 2017 and June 21, 2019, the Company, through SPV, entered into a $122.0 million financing transaction (the “Term Financing”) due December 5, 2021 with UBS. The Term Financing is collateralized by the portion of the Company’s assets held by SPV (the “SPV Assets”) and pledged as collateral as noted in the Consolidated Schedule of Investments. Prior to June 21, 2019, borrowings under the Term Financing bore interest (i) at a rate per annum equal to one-month London Interbank Offered Rate (“LIBOR”) plus 2.75% through December 4, 2018, and (ii) at a rate per annum equal to one-month LIBOR plus 2.55% from December 5, 2018 through December 5, 2020 (the “Term Financing Rate”). The Company also incurred an annual fee of approximately 1% of the outstanding borrowings under the Term Financing.
On June 21, 2019, the Company amended the Term Financing to increase the Term Financing by $20.0 million from $102.0 million to $122.0 million. On March 30, 2020, with the consent of UBS, the Company can opt (the “Option”) to increase the Term Financing by up to $53.0 million, expanding the Term Financing to $175.0 million. Borrowings under the Term Financing, as amended, bear interest (a) with respect to the $102.0 million (i) at a rate per annum equal to one-month LIBOR plus 2.55% through December 4, 2019, and (ii) at a rate per annum equal to one-month LIBOR plus 3.55% from December 5, 2019 through December 4, 2020, and (iii) at a rate per annum equal to one-month LIBOR plus 3.15% (if the Option was not exercised) or 2.90% if the Option was exercised from December 5, 2020 through December 5, 2021 and (b) with respect to the additional $20.0 million increase in the Term Financing, (i) at a rate per annum equal to one-month LIBOR plus 3.15% through April 14, 2020, which is the date before the Option Exercise Date, and (ii) at a rate per annum equal to one-month LIBOR plus 2.90% from the Option Exercise Date through December 5, 2021.
As of December 31, 2019 and June 30, 2019, there were $122.0 million and $122.0 million borrowings outstanding under the Term Financing, respectively.
On November 20, 2017, the Company entered into a $50 million revolving financing facility (the “2017 UBS Revolving Financing”) with UBS. On June 21, 2019, the Company amended the 2017 UBS Revolving Financing to reduce the size of the facility to $30.0 million. Borrowings under the 2017 UBS Revolving Financing generally bear interest at a rate per annum equal to one-month LIBOR plus 3.55% (the “Revolver Financing Rate”). The Company pays a fee on any undrawn amounts of 2.50% per annum; provided that if 50% or less of the 2017 UBS Revolving Financing is drawn, the fee will be 2.75% per annum. Any amounts borrowed under the 2017 UBS Revolving Financing will mature, and all accrued and unpaid interest will be due and payable, on December 7, 2020. As of December 31, 2019 and June 30, 2019, there were $0 million and $11.0 million in borrowings outstanding under the 2017 UBS Revolving Financing, respectively.
As of December 31, 2017, SPV issued and sold an additional $50.0 million notes (the “2017 Revolving Notes”) secured by the SPV Assets to UBS. Cash is only exchanged when the 2017 Revolving Notes are drawn. Under the terms of the Indenture under which the 2017 Revolving Notes were issued (the “2017 Revolver Indenture”), the holders of the 2017 Revolving Notes are entitled to (i) periodic interest payments equal to their pro rata portion of the interest collected on the SPV Assets and (ii) their pro-rata portion of the net appreciation (depreciation) on the SPV Assets at maturity (the “Total Return of the 2017 Revolving Notes”).
The fair value of the Company’s Notes Payable is estimated based on the rate at which similar facilities would be priced. At December 31, 2019 and June 30, 2019, the fair value of the Notes Payable was estimated at $122.0 million and $133.0 million, respectively, which the Company concluded was a Level 3 fair value.
On July 2, 2018, the Company closed the public offering of $30 million in aggregate principal amount of 6.125% notes due 2023 (the “Existing Notes”). On July 12, 2018, the underwriters exercised their over-allotment option to purchase an additional $4.5 million in aggregate principal amount of the Existing Notes. The total net proceeds to the Company from the Existing Notes, including the exercise of the underwriters’ over-allotment option, after deducting underwriting discounts and commissions of approximately $1.0 million and estimated offering expenses of approximately $230,000, were approximately $33.2 million.
28
On October 18, 2019, the Company closed the public offering of $15 million in aggregate principal amount of additional 6.125% notes due 2023 (the “Notes,” and together with the Existing Notes, the “2023 Notes”). The Notes constitute a further issuance of, rank equally in right of payment with, and form a single series with the $34.5 million in Existing Notes that the Company initially issued on July 2, 2018 and July 12, 2018. On November 7, 2019, the underwriters exercised their option to purchase an additional $1.875 million in aggregate principal of the Notes. The total net proceeds received by the Company from the sale of the Notes, including the exercise of the underwriters’ option, was approximately $16.4 million, based on the purchase price paid by the underwriters of 96.875% of the aggregate principal amount of the Notes, after deducting estimated offering expenses of approximately $255,000 payable by the Company.
The 2023 Notes will mature on July 1, 2023 and bear interest at a rate of 6.125%. The 2023 Notes are direct unsecured obligations and rank pari passu, which means equal in right of payment, with all outstanding and future unsecured indebtedness issued by the Company. Because the 2023 Notes are not secured by any of the Company’s assets, they are effectively subordinated to all of the Company’s existing and future secured unsubordinated indebtedness (or any indebtedness that is initially unsecured as to which the Company subsequently grants a security interest), to the extent of the value of the assets securing such indebtedness. The 2023 Notes are structurally subordinated to all existing and future indebtedness and other obligations of any of the Company’s subsidiaries and financing vehicles, including, without limitation, borrowings under the Term Financing and the 2017 UBS Revolving Financing. The 2023 Notes are obligations exclusively of the Company and not of any of the Company’s subsidiaries. None of the Company’s subsidiaries is a guarantor of the 2023 Notes and the 2023 Notes will not be required to be guaranteed by any subsidiary the Company may acquire or create in the future.
The 2023 Notes may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after July 1, 2020. Interest on the 2023 Notes is payable quarterly on January 1, April 1, July 1 and October 1 of each year. The 2023 Notes are listed on the NASDAQ Global Select Market (“NASDAQ”) under the trading symbol “CMFNL.” The Company may from time to time repurchase Notes in accordance with the 1940 Act and the rules promulgated thereunder.
As of December 31, 2019 and June 30, 2019, the outstanding principal balance of the 2023 Notes was approximately $51.4 million and $34.5 million, respectively, and had an estimated fair value of $51.1 million and $34.7 million, respectively, based on the closing price as of December 31, 2019 and June 30, 2019, respectively, as traded on NASDAQ.
Cash, restricted (as shown on the Unaudited Consolidated Statements of Assets and Liabilities) is held by the trustee of the Term Financing, and the 2017 UBS Revolving Financing, and is restricted to purchases of investments by SPV and LLC that must meet certain eligibility criteria identified by the Indenture. As of December 31, 2019, SPV and LLC had aggregate assets of $194.51 million, which included $193.5 million of the Company’s portfolio investments at fair value, no accrued interest receivable and $0.9 million in cash held by the trustees of the Term Financing and the 2017 UBS Revolving Financing (together, the “UBS Financing Facility”, or the “Financing Facilities”). As of June 30, 2019, SPV and LLC had aggregate assets of $234.5 million, which included $232.8 million of the Company’s portfolio investments at fair value, $0.7 million of accrued interest receivable and $1.0 million in cash held by the trustee of the Term Financing. For the three and six months ended December 31, 2019, the weighted average outstanding debt balance and the weighted average stated interest rate under the Financing Facilities was $139.1 million and 4.56%, respectively and $138.5 million and 4.75%, respectively. For the three and six months ended December 31, 2018, the weighted average outstanding debt balance and the weighted average stated interest rate under the Financing Facilities was $112.9 million and 5.07%, respectively and $108.8 million and 5.12%, respectively.
29
Note 6. Indemnification, Guarantees, Commitments and Contingencies
In the normal course of business, the Company enters into contracts that provide a variety of representations and warranties and general indemnifications. Such contracts include those with certain service providers, brokers and trading counterparties. Any exposure to the Company under these arrangements is unknown as it would involve future claims that may be made against the Company; however, based on the Company’s experience, the risk of loss is remote and no such claims are expected to occur. As such, the Company has not accrued any liability in connection with such indemnifications.
The Company’s Board of Directors declared the following quarterly distributions:
| Declared |
Ex-Date |
Record Date |
Pay Date |
Amount | Fiscal Quarter | |||||
| August 28, 2019 | September 25, 2019 | September 26, 2019 | October 16, 2019 | $0.2500 | 1st 2020 | |||||
| November 6, 2019 | December 12, 2019 | December 13, 2019 | January 2, 2020 | $0.2500 | 2nd 2020 |
Loans purchased by the Company may include revolving credit agreements or other financing commitments obligating the Company to advance additional amounts on demand. The Company generally sets aside sufficient liquid assets to cover its unfunded commitments, if any.
The following table details the unfunded commitments as of December 31, 2019:
| Investments |
Unfunded Commitment |
Fair Value |
Annual Non-use Fee |
Expiration Date |
||||||||||||
| 1888 Industrial Services, LLC – Revolver |
$ | 594,060 | $ | — | 0.5% | 9/30/21 | ||||||||||
| 1888 Industrial Services, LLC – Term E |
120,844 | — | — | 9/30/21 | ||||||||||||
| Limbach Holdings Inc |
5,538,462 | — | 2.0% | 4/12/23 | ||||||||||||
| Altern Marketing, LLC |
1,315,789 | — | 0.5% | 10/7/24 | ||||||||||||
|
|
|
|
|
|||||||||||||
| Total Unfunded Commitments |
$ | 7,569,155 | — | |||||||||||||
|
|
|
|
|
|||||||||||||
The following table details the unfunded commitments as of June 30, 2019:
| Investments |
Unfunded Commitment |
Fair Value |
Annual Non-use Fee |
Expiration Date |
||||||||||||
| 1888 Industrial Services, LLC |
$ | 494,050 | $ | — | 0.5% | 9/30/21 | ||||||||||
| Fusion Connect Inc. |
391,465 | — | — | 10/3/19 | ||||||||||||
| Limbach Holdings Inc. |
5,769,230 | — | 2.0% | 4/12/23 | ||||||||||||
|
|
|
|
|
|||||||||||||
| Total Unfunded Commitments |
$ | 6,655,745 | — | |||||||||||||
|
|
|
|
|
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Note 7. Agreements and Related Party Transactions
Advisory Agreement
Effective August 30, 2019, or the Commencement Date, the Company became party to the Advisory Agreement with the Adviser. See below for a description of the prior agreement. Under the Advisory Agreement, the Base Management Fee is calculated at an annual rate of 1.75% of the Company’s gross assets, including assets purchased with borrowed funds or other forms of leverage and excluding cash and cash equivalents (such amount, “Gross Assets”). The Base Management Fee is payable quarterly in arrears and the Base Management Fees for any partial month or quarter will be appropriately pro-rated.
30
For the three and six months ended December 31, 2019, $1,369,983 and $2,725,061, respectively, in Base Management Fees were earned by the Adviser, of which $57,852 and $102,035, respectively, was waived. As of December 31, 2019, $1,312,131 of such fees were payable. For the three and six months ended December 31, 2018, $1,405,297 and $2,757,152, respectively, in Base Management Fees were earned by the Adviser under the Prior Advisory Agreement, of which $1,405,297 was payable at December 31, 2018.
Under the Advisory Agreement, for the period from the Commencement Date through the end of the first and second fiscal quarters after the Commencement Date, the Base Management Fee is calculated based on the value of the Company’s Gross Assets as of the end of such quarter. Subsequently, the Base Management Fee will be calculated based on the average value of the Company’s Gross Assets at the end of the two most recently completed fiscal quarters. Base Management Fees for any partial month or quarter will be appropriately pro-rated.
Under the Advisory Agreement, the Income-Based Fee is calculated and payable quarterly in arrears based on the Company’s Pre-Incentive Fee Net Investment Income (as defined below) for the immediately preceding fiscal quarter, subject to a total return requirement (the “Total Return Requirement”) and deferral of non-cash amounts, and is 20.0% of the amount, if any, by which the Company’s Pre-Incentive Fee Net Investment Income, expressed as a rate of return on the value of our net assets attributable to its common stock, for the immediately preceding fiscal quarter, exceeds a 2.0% (which is 8.0% annualized) hurdle rate and a “catch-up” provision measured as of the end of each fiscal quarter. Under this provision, in any fiscal quarter, the Adviser receives no Incentive Fee until the Company’s Pre-Incentive Fee Net Investment Income equals the hurdle rate of 2.0%, but then receives, as a “catch-up,” 100% of the Company’s Pre-Incentive Fee Net Investment Income with respect to that portion of such Pre-Incentive Fee Net Investment Income, if any, that exceeds the hurdle rate but is less than 2.5% (which is 10.0% annualized). The effect of the “catch-up” provision is that, subject to the Total Return Requirement and deferral provisions discussed below, if Pre-Incentive Fee Net Investment Income exceeds 2.5% in any fiscal quarter, the Adviser receives 20.0% of our Pre-Incentive Fee Net Investment Income as if a hurdle rate did not apply.
“Pre-Incentive Fee Net Investment Income” means interest income, dividend income and any other income (including any other fees, such as commitment, origination, structuring, diligence, managerial assistance and consulting fees or other fees that we receive from portfolio companies) accrued during the fiscal quarter, minus the Company’s operating expenses for the quarter (including the Base Management Fee, expenses payable under the Administration Agreement and any interest expense and any distributions paid on any issued and outstanding preferred stock, but excluding the Incentive Fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount (“OID”), debt instruments with payment-in-kind (“PIK”) interest and zero coupon securities), accrued income that we have not yet received in cash.
Pre-Incentive Fee Net Investment Income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation.
No Income-Based Fee is payable under the Advisory Agreement except to the extent 20.0% of the cumulative net increase in net assets resulting from operations over the fiscal quarter for which fees are being calculated and the Lookback Period exceeds the cumulative Incentive Fees accrued and/or paid for the Lookback Period.
For the foregoing purpose, the “cumulative net increase in net assets resulting from operations” is the amount, if positive, of the sum of Pre-Incentive Fee Net Investment Income, realized gains and losses and unrealized appreciation and depreciation of the Company for the then current fiscal quarter and the Lookback Period. The “Lookback Period” means (1) through June 30, 2022, the period that on the last day of the fiscal quarter in which the Commencement Date occurs and ends on the last day of the fiscal quarter immediately preceding the fiscal quarter for which the Income-Based Fee is being calculated, and (2) after June 30, 2022, the eleven fiscal quarters immediately preceding the fiscal quarter for which the Income-Based Fee is being calculated.
31
For the three and six months ended December 31, 2019, the Company incurred 851,842 of incentive fees related to pre-incentive fee net investment income, of which $336,619 was waived. As of December 31, 2019, $757,030 of Income-Based Fees incurred by the Company were generated from deferred interest (i.e. PIK and certain discount accretion) and are not payable until such amounts are received in cash. For the three and six months ended December 31, 2018, the Company incurred $753,721 and $874,042 of Income-Based Fees, of which $22,000 was waived. As of December 31, 2018, $1,566,513 of such Income-Based Fees were payable to the Adviser under the Prior Advisory Agreement, and $693,771 of Income-Based Fees incurred by the Company were generated from deferred interest (i.e., PIK and certain discount accretion) and are not payable until such amounts are received in cash.
Under the Advisory Agreement, the Capital Gains Fee is determined and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement, as of the termination date), commencing with the fiscal year ending June 30, 2021, and will equal to 20.0% of our cumulative aggregate realized capital gains from the Commencement Date through the end of that fiscal year, computed net of the Company’s aggregate cumulative realized capital losses and our aggregate cumulative unrealized capital depreciation through the end of such year, less the aggregate amount of any previously paid Capital Gains Fees. If such amount is negative, then no Capital Gains Fee will be payable for such year. Additionally, if the Advisory Agreement is terminated as of a date that is not a fiscal year end, the termination date will be treated as though it were a fiscal year end for purposes of calculating and paying the Capital Gains Fee. For the avoidance of doubt, realized capital gains, realized capital losses, unrealized capital appreciation and unrealized capital depreciation with respect to the Company’s portfolio as of the end of the fiscal year ended June 30, 2020 will be excluded from the calculations of the Capital Gains Fee.
Under U.S. generally accepted accounting principles, the Company calculates the Capital Gains Fee as if it had realized all assets at their fair values as of the reporting date. Accordingly, the Company accrues a provisional Capital Gains Fee taking into account any unrealized gains or losses. As the provisional Capital Gains Fee is subject to the performance of investments until there is a realization event, the amount of the provisional Capital Gains Fee accrued at a reporting date may vary from the Capital Gains Fee that is ultimately realized and the differences could be material.
As of December 31, 2019, there was no Capital Gains Fee accrued, earned or payable to the Adviser under the Advisory Agreement. As of June 30, 2019, there was no Capital Gains Fee accrued, earned or payable to the Adviser under the Prior Advisory Agreement.
The Advisory Agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations under the Advisory Agreement, the Adviser and its officers, managers, partners, agents, employees, controlling persons and members, and any other person or entity affiliated with it, are entitled to indemnification from the Company for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of the Adviser’s services under the Advisory Agreement or otherwise as the Adviser.
Prior Advisory Agreement
The following is a description of the Prior Advisory Agreement, which was terminated on August 30, 2019. Pursuant to the Prior Advisory Agreement, the Company agreed to pay to the Adviser a Base Management Fee of 1.75% of gross assets, as adjusted, including assets purchased with borrowed funds or other forms of leverage and excluding cash and cash equivalents and “fair value of derivatives associated with our financing”, and the Incentive Fee consisting of two parts.
32
Under the Prior Advisory Agreement, the first part of the Incentive Fee, or the Income-Based Fee, which was calculated and payable quarterly in arrears, equaled 20.0% of the “pre-incentive fee net investment income” (as defined in the Prior Advisory Agreement) for the immediately preceding quarter, subject to a hurdle rate of 2.0% per quarter (8.0% annualized), and was subject to a “catch-up” feature. The Incentive Fee was subject to a total return requirement, which provided that no Incentive Fee in respect of the Company’s pre-incentive fee net investment income would be payable except to the extent 20.0% of the cumulative net increase in net assets resulting from operations over the then current and 11 preceding quarters exceeded the cumulative incentive fees accrued and/or paid for the 11 preceding quarters. The net pre-incentive fee investment income used to calculate the Income-Based Fee was also included in the amount of the Company’s gross assets used to calculate the 1.75% Base Management Fee.
Under the Prior Advisory Agreement, the second part of the incentive fee, or the Capital Gains Fee, was calculated and payable in arrears as of the end of each calendar year and equaled 20.0% of the aggregate cumulative realized capital gains from inception through the end of each calendar year, computed net of aggregate cumulative realized capital losses and aggregate cumulative unrealized capital depreciation through the end of such year, less the aggregate amount of any previously paid capital gain incentive fees.
With respect to the incentive fee expense accrual relating to the Capital Gains Fee, U.S. GAAP requires that the Capital Gains Fee accrual consider the cumulative aggregate unrealized appreciation in the calculation, as a Capital Gains Fee would be payable if such unrealized appreciation were realized, even though such unrealized appreciation is not permitted to be considered in calculating the fee actually payable under the Prior Advisory Agreement.
The Prior Advisory Agreement provided that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations under the Prior Advisory Agreement, the Adviser and its officers, managers, partners, agents, employees, controlling persons and members, and any other person or entity affiliated with it, were entitled to indemnification from the Company for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of the Adviser’s services under the Prior Advisory Agreement or otherwise as the Adviser.
Messrs. Mauer and Jansen, together, hold an approximate 24% interest in the Adviser. Investcorp holds an approximate 76% ownership interest in the Adviser. Pursuant to the Advisory Agreement, the Company has agreed to pay to the Adviser a base management fee and an incentive fee. Mr. Mauer, an interested member of the Board, has a direct or indirect pecuniary interest in the Adviser. The incentive fee will be computed and paid on income that we may not have yet received in cash at the time of payment. This fee structure may create an incentive for the Adviser to invest in certain types of speculative securities. Additionally, the Company will rely on investment professionals from the Adviser to assist the Board with the valuation of the Company’s portfolio investments. The Adviser’s management fee and incentive fee is based on the value of our investments and, therefore, there may be a conflict of interest when personnel of the Adviser are involved in the valuation process for the Company’s portfolio investments.
33
Administration Agreement
Pursuant to the Administration Agreement, the Adviser furnishes the Company with office facilities and equipment and provides it with the clerical, bookkeeping, recordkeeping and other administrative services necessary to conduct day-to-day operations. Under the Administration Agreement, the Adviser performs, or oversees the performance of the Company’s required administrative services, which includes, among other things, being responsible for the financial records which it is required to maintain and preparing reports to its stockholders and reports filed with the SEC. In addition, the Adviser assists the Company in determining and publishing its net asset value, oversees the preparation and filing of its tax returns and the printing and dissemination of reports and other materials to its stockholders, and generally oversees the payment of its expenses and the performance of administrative and professional services rendered to it by others. Under the Administration Agreement, the Adviser also provides managerial assistance on the Company’s behalf to those portfolio companies that have accepted its offer to provide such assistance. In addition, the Adviser may satisfy certain of its obligations to the Company under the Administration Agreement through the services agreement with Investcorp International Inc., an affiliate of Investcorp, including supplying the Company with accounting and back-office professionals upon the request of the Adviser. The Company incurred costs of $330,000 and $682,000 under the Administration Agreement for the three and six months ended December 31, 2019, respectively. The Company incurred costs of $341,633 and $679,696 under the Prior Administration Agreement for the three and six months ended December 31, 2018, respectively.
As of December 31, 2019 and June 30, 2019, the Company recorded no accrued expenses or other liabilities for reimbursement of expenses owed to the Adviser under the Administration Agreement and the Prior Administration Agreement, respectively.
Stock Purchase Agreement
The Company is party to the Stock Purchase Agreement with Investcorp BDC, pursuant to which, following the Closing and prior to the second anniversary of the Closing Date, Investcorp BDC will purchase (i) 680,985 newly issued shares of the Company’s common stock, par value $0.001 per share at the most recently determined net asset value per share of the Company’s common stock at the time of such purchase, as adjusted as necessary to comply with Section 23 of the 1940 Act, and (ii) 680,985 shares of the Company’s common stock in open-market or secondary transactions.
As of December 31, 2019, Investcorp BDC had purchased 113,500 newly issued shares of the Company’s common stock pursuant to the requirement under the Stock Purchase Agreement. See “Part II. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds” for more information.
As of December 31, 2019, Investcorp BDC had purchased 90,459 shares of the Company’s common stock in open-market transactions pursuant to its obligation under the Stock Purchase Agreement.
Co-investment Exemptive Relief
On March 19, 2019, the SEC issued an order granting the Company’s application for exemptive relief to co-invest, subject to the satisfaction of certain conditions, in certain private placement transactions with other funds managed by the Adviser or its affiliates and any future funds that are advised by the Adviser or its affiliated investment advisers. Under the terms of the exemptive order, in order for the Company to participate in a co-investment transaction a “required majority” (as defined in Section 57(o) of the 1940 Act) of the Company’s independent directors must conclude that (i) the terms of the proposed transaction, including the consideration to be paid, are reasonable and fair to the Company and its stockholders and do not involve overreaching in respect of the Company or its stockholders on the part of any person concerned, and (ii) the proposed transaction is consistent with the interests of the Company’s stockholders and is consistent with the Company’s investment objectives and strategies.
34
License Agreement
The Company has entered into a license agreement with the Adviser under which the Adviser has agreed to grant us a non-exclusive, royalty-free license to use the name “Investcorp.” Under this agreement, we have a right to use the “Investcorp” name for so long as the Adviser or one of its affiliates remains our investment adviser. Other than with respect to this limited license, the Company has no legal right to the “Investcorp” name. This license agreement will remain in effect for so long as the Advisory Agreement with the Adviser is in effect and Investcorp is the majority owner of the Adviser.
Note 8. Directors’ Fees
Each of the Company’s independent directors receives (i) an annual fee of $75,000, and (ii) $2,500 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending in person or telephonically each regular board of directors meeting and each special telephonic meeting. The Company’s independent directors also receive $1,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with each committee meeting attended in person and each telephonic committee meeting. The chairman of the audit committee receives an annual fee of $7,500. The chairperson of the valuation committee, the nominating and corporate governance committee and the compensation committee receives an annual fee of $2,500, $2,500 and $2,500, respectively. The Company has obtained directors’ and officers’ liability insurance on behalf of the Company’s directors and officers. Independent directors have the option of having their directors’ fees paid in shares of the Company’s common stock issued at a price per share equal to the greater of net asset value or the market price at the time of payment. For the three and six months ended December 31, 2019, the Company recorded directors’ fees of $22,500 and $105,000, of which $14,832 were payable at December 31, 2019. For the three and six months ended December 31, 2018, the Company recorded directors’ fees of $101,250 and $202,500, of which $93,448 were payable at December 31, 2018.
Note 9. Net Change in Net Assets Resulting from Operations Per Share
Basic earnings per share is computed by dividing earnings available to common stockholders by the weighted average number of shares outstanding during the period. Other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis.
The following table sets forth the computation of the weighted average basic and diluted net increase in net assets per share from operations:
| Three months ended December 31, | Six months ended December 31, | |||||||
| 2019 | 2018 | 2019 | 2018 | |||||
| Net increase (decrease) in net assets resulting from operations |
$2,967,443 | $(9,382,296) | $2,060,891 | $(7,954,255) | ||||
| Weighted average shares of common stock outstanding |
13,668,027 | 13,638,869 | 13,646,653 | 13,644,483 | ||||
| Basic/diluted net increase (decrease) in net assets from operations per share |
$ 0.22 | $ (0.69) | $ 0.15 | $ (0.58) | ||||
On December 4, 2019, the Company issued 113,500 shares of common stock, par value $0.001 per share (the “Common Stock”), to Investcorp BDC at a price of $10.19 per share for an aggregate offering price of $1,156,565.
The sale of the Common Stock was made pursuant to the Stock Purchase Agreement. The issuance of the Common Stock is exempt from the registration requirements of the Securities Act, pursuant to Section 4(a)(2) thereof and Regulation D thereunder. Investcorp BDC is an “accredited investor” as that term is defined in Rule 501(a) of Regulation D under the Securities Act.
35
Note 10. Distributions
The following table reflects the cash dividend distributions per share that the Company declared and/or paid to its stockholders since the Offering in February 2014. Stockholders of record as of each respective record date were entitled to receive the distribution:
| Declaration Date |
Record Date | Payment Date | Amount Per Share | |||||
| March 14, 2014 |
March 24, 2014 | March 31, 2014 | $ | 0.1812 | ||||
| May 14, 2014 |
June 16, 2014 | July 1, 2014 | $ | 0.3375 | ||||
| September 4, 2014 |
September 18, 2014 | October 1, 2014 | $ | 0.3375 | ||||
| November 6, 2014 |
December 18, 2014 | January 5, 2015 | $ | 0.3375 | ||||
| January 28, 2015 |
March 18, 2015 | April 2, 2015 | $ | 0.3469 | ||||
| May 6, 2015 |
June 8, 2015 | July 5, 2015 | $ | 0.3469 | ||||
| June 10, 2015* |
September 1, 2015 | September 15, 2015 | $ | 0.4300 | ||||
| June 10, 2015 |
September 18, 2015 | October 2, 2015 | $ | 0.3469 | ||||
| November 3, 2015 |
December 18, 2015 | January 5, 2016 | $ | 0.3469 | ||||
| February 2, 2016 |
March 18, 2016 | April 7, 2016 | $ | 0.3516 | ||||
| April 28, 2016 |
June 17, 2016 | July 7, 2016 | $ | 0.3516 | ||||
| August 25, 2016 |
September 16, 2016 | October 6, 2016 | $ | 0.3516 | ||||
| November 3, 2016 |
December 16, 2016 | January 5, 2017 | $ | 0.3516 | ||||
| November 3, 2016 |
March 17, 2017 | April 6, 2017 | $ | 0.2500 | ||||
| May 2, 2017 |
June 16, 2017 | July 6, 2017 | $ | 0.2500 | ||||
| August 24, 2017 |
September 8, 2017 | October 5, 2017 | $ | 0.2500 | ||||
| November 7, 2017 |
December 15, 2017 | January 4, 2018 | $ | 0.2500 | ||||
| February 6, 2018 |
March 16, 2018 | April 5, 2018 | $ | 0.2500 | ||||
| May 2, 2018 |
June 15, 2018 | July 5, 2018 | $ | 0.2500 | ||||
| August 23, 2018 |
September 18, 2018 | October 5, 2018 | $ | 0.2500 | ||||
| November 6, 2018 |
December 14, 2018 | January 3, 2019 | $ | 0.2500 | ||||
| February 5, 2019 |
March 15, 2019 | April 4, 2019 | $ | 0.2500 | ||||
| May 1, 2019 |
June 14, 2019 | July 5, 2019 | $ | 0.2500 | ||||
| August 28, 2019 |
September 26, 2019 | October 16, 2019 | $ | 0.2500 | ||||
| November 6, 2019 |
December 13, 2019 | January 2, 2020 | $ | 0.2500 | ||||
| * | Special distribution |
The following table reflects, for U.S. federal income tax purposes, the sources of the cash distributions that the Company has paid on its common stock during the six months ended December 31, 2019 and December 31, 2018:
| Six months ended December 31, | ||||||||||||||||
| 2019 | 2018 | |||||||||||||||
| Distribution Amount | Percentage | Distribution Amount | Percentage | |||||||||||||
| Ordinary income and short-term capital gains |
$ | 6,843,516 | 100% | $ | 6,823,243 | 100% | ||||||||||
| Long-term capital gains |
— | — | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 6,843,516 | 100% | $ | 6,823,243 | 100% | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
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Note 11. Share Repurchase Program
As described in Note 2, the Company has a share repurchase program under which the Company may repurchase up to $5.0 million shares of its common stock until the earlier of (i) May 1, 2019 or (ii) the repurchase of $5.0 million in aggregate amount of its common stock unless extended by the Company’s board of directors. On May 1, 2019, the Company’s board of directors extended the share repurchase program until the earlier of (i) May 1, 2020 or (ii) the repurchase of $5.0 million in aggregate amount of the common stock. During the three and six months ended December 31, 2019, the Company did not repurchase shares of its common stock on the open market. During the three and six months ended December 31, 2018, the Company repurchased 30,999 and 42,214 shares of its common stock on the open market for $257,336 and $358,573 (including commissions). The following table summarizes the Company’s share repurchases under the share repurchase program for the three and six months ended December 31, 2019 and December 31, 2018.
| Three months ended December 31, |
Six months ended December 31, |
|||||||||||||||
| 2019 |
2018 |
2019 | 2018 | |||||||||||||
| Number of shares repurchased |
— | 30,999 | — | 42,214 | ||||||||||||
| Cost of shares repurchased, including commissions |
$ | — | $ | 257,336 | $ | — | $ | 358,573 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Weighted average price per share |
$ | — | $ | 8.25 | $ | — | $ | 8.44 | ||||||||
| Net asset value per share at period end |
— | $ | 11.49 | — | $ | 11.49 | ||||||||||
| Weighted average discount to period end net asset value |
— | 28.19 | % | — | 26.52 | % | ||||||||||
Note 12. Share Transactions
The following table summarizes the total shares for the six months ended December 31, 2019 and December 31, 2018.
| Six months ended December 31, | ||||||||||||||||
| 2019 | 2018 | |||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||
| Balance at beginning of period |
13,619,690 | $ | 199,947,288 | 13,649,504 | $ | 200,203,363 | ||||||||||
| Issuance of common shares |
113,500 | 1,156,565 | — | — | ||||||||||||
| Reinvestments of stockholder distributions |
15,342 | 99,504 | 5,826 | 49,713 | ||||||||||||
| Retirement of repurchased shares |
— | — | (42,214 | ) | (358,573 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Balance at end of period |
13,748,532 | $ | 201,203,357 | 13,613,116 | $ | 199,894,539 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
37
Note 13. Financial Highlights
The following represents the per share data and the ratios to average net assets for Investcorp Credit Management BDC, Inc.:
| For the six months ended December 31, |
||||||||
| 2019 | 2018 | |||||||
| Per Share Data:(1) |
||||||||
| Net asset value, beginning of period |
$ | 10.51 | $ | 12.57 | ||||
| Net investment income |
0.52 | 0.52 | ||||||
| Net realized and unrealized gains (losses) |
(0.38) | (1.11) | ||||||
|
|
|
|
|
|||||
| Net increase (decrease) in net assets resulting from operations |
0.14 | (0.59) | ||||||
| Capital transactions(2) |
||||||||
| Share repurchases |
— | 0.01 | ||||||
| Dividends from net investment income |
(0.50) | (0.50) | ||||||
| Distributions from net realized gains |
— | — | ||||||
|
|
|
|
|
|||||
| Net decrease in net assets resulting from capital transactions |
(0.50) | (0.49) | ||||||
| Offering costs |
— | — | ||||||
| Net asset value, end of period |
$ | 10.15 | $ | 11.49 | ||||
|
|
|
|
|
|||||
| Market value per share, end of period |
$ | 6.70 | $ | 8.60 | ||||
| Total return based on market value(3)(4) |
(4.81)% | (24.58)% | ||||||
| Shares outstanding at end of period |
13,748,532 | 13,613,116 | ||||||
| Ratio/Supplemental Data: |
||||||||
| Net assets, at end of period |
$ | 139,557,334 | $ | 156,436,308 | ||||
| Ratio of total expenses to average net assets(5) |
15.92% | 12.72% | ||||||
| Ratio of net expenses to average net assets(5) |
15.29% | 12.69% | ||||||
| Ratio of interest expense and fees and amortization of deferred debt issuance costs to average net assets |
7.54% | 5.86% | ||||||
| Ratio of net investment income before fee waiver to average net assets |
9.94% | 8.65% | ||||||
| Ratio of net investment income after fee waiver to average net assets |
10.42% | 8.68% | ||||||
| Total Notes Payable |
$ | 173,375,000 | $ | 136,500,000 | ||||
| Asset Coverage Ratio(6) |
1.80 | 2.15 | ||||||
| Portfolio Turnover Rate(4) |
19% | 32% | ||||||
| * | Net asset value at beginning of period reflects the deduction of the sales load of $0.25 per share paid by the stockholder from the $15.00 offering price. |
| (1) | The per share data was derived by using the shares outstanding during the period. |
| (2) | The per share data for dividends and distributions declared reflects the actual amount of the dividends and distributions declared per share during the period. |
| (3) | Total returns are historical and are calculated by determining the percentage change in the market value with all dividends distributions, if any, reinvested. Dividends and distributions are assumed to be reinvested at prices obtained under the company’s dividend reinvestment plan. Total investment return does not reflect sales load. |
| (4) | Not annualized. |
| (5) | Annualized. |
| (6) | Asset coverage ratio is equal to (i) the sum of (A) net assets at the end of the period and (B) debt outstanding at the end of the period, divided by (ii) total debt outstanding at the end of the period. |
38
Total return is calculated based on a time-weighted rate of return methodology for the members, and is not annualized. Total return is reflected after all investment-related and operating expenses. An individual member’s return may vary from these returns based on the timing of capital transactions. The ratios to average members’ capital are calculated based on the monthly average members’ capital during the period.
The ratios to average members’ capital are calculated based on the monthly average members’ capital during the period. Credit facility related expenses include interest expense and amortization of deferred debt issuance costs.
Note 14. Other Fee Income
The other fee income consists of structuring fee income, amendment fee income and royalty income. The following tables summarize the Company’s other fee income for the three and six months ended December 31, 2019 and December 31, 2018:
| For the three months ended December 31, | For the six months ended December 31, | |||||||||||||||
| 2019 | 2018 |
2019 |
2018 | |||||||||||||
| Loan Amendment/Consent Fee |
$ | 235,331 | $ | 277,365 | $ | 315,726 | $ | 432,520 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Other Fee Income |
$ | 235,331 | $ | 277,365 | $ | 315,726 | $ | 432,520 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Note 15. Tax Information
As of December 31, 2019, the Company’s aggregate investment unrealized appreciation and depreciation based on cost for U.S. federal income tax purposes were as follows:
| Tax cost |
$ | 325,352,114 | ||
|
|
|
|||
| Gross unrealized appreciation |
2,250,318 | |||
| Gross unrealized depreciation |
(22,648,826) | |||
|
|
|
|||
| Net unrealized investment depreciation |
$ | (20,398,508) | ||
|
|
|
As of June 30, 2019, the Company’s aggregate investment unrealized appreciation and depreciation based on cost for U.S. federal income tax purposes were as follows:
| Tax cost |
$ | 321,504,360 | ||
|
|
|
|||
| Gross unrealized appreciation |
3,259,980 | |||
| Gross unrealized depreciation |
(18,373,346) | |||
|
|
|
|||
| Net unrealized investment depreciation |
$ | (15,113,366) | ||
|
|
|
Note 16. Subsequent Events
The Company has evaluated the need for disclosures and/or adjustments resulting from subsequent events through the date the consolidated financial statements were issued.
Subsequent to the three months ended December 31, 2019 through February 7, 2020, the Company invested $16.2 million in two new portfolio companies and one existing portfolio company and received no payment or sales proceeds.
On February 4, 2020, our board of directors declared a distribution for the quarter ended March 31, 2020 of $0.25 per share payable on April 2, 2020 to stockholders of record as of March 13, 2020.
39
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements, which relate to future events or our future performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties, including statements as to:
| • | our future operating results; |
| • | our business prospects and the prospects of our portfolio companies; |
| • | the effect of investments that we expect to make; |
| • | our contractual arrangements and relationships with Investcorp Credit Management US LLC (“Investcorp”) and its affiliates |
| • | our contractual arrangements and relationships with lenders and other third parties; |
| • | actual and potential conflicts of interest with CM Investment Partners LLC (the “Adviser”); |
| • | the dependence of our future success on the general economy, interest rates and the effects of each on the industries in which we invest; |
| • | the ability of our portfolio companies to achieve their objectives or service their debt obligations to us; |
| • | the use of borrowed money to finance a portion of our investments; |
| • | the adequacy of our financing sources and working capital; |
| • | the timing of cash flows, if any, from the operations of our portfolio companies; |
| • | the ability of the Adviser to locate suitable investments for us and to monitor and administer our investments; |
| • | the ability of the Adviser to attract and retain highly talented professionals; |
| • | our ability to qualify and maintain our qualification as a regulated investment company (“RIC”) and as a business development company (“BDC”); |
| • | our ability to obtain exemptive relief from the Securities and Exchange Commission (“SEC”); and |
| • | the effect of changes to tax legislation and our tax position and other legislative and regulatory changes. |
Such forward-looking statements may include statements preceded by, followed by or that otherwise include the words “may,” “might,” “will,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “estimate,” “anticipate,” “predict,” “potential,” “plan” or similar words.
We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this report on Form 10-Q. Actual results could differ materially from those anticipated in our forward-looking statements, and future results could differ materially from historical performance. We undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law or SEC rule or regulation. You are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
40
Overview
Investcorp Credit Management BDC, Inc. (“CMFN,” the “Company”, “us”, “we” or “our”), a Maryland corporation formed in May 2013, is a closed-end, externally managed, non-diversified management investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, for U.S. federal income tax purposes, we have elected to be treated and intend to continue to qualify as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code (the “Code”). On August 30, 2019, we changed our name from CM Finance Inc to Investcorp Credit Management BDC, Inc.
Our primary investment objective is to maximize total return to stockholders in the form of current income and capital appreciation by investing directly in debt and related equity of privately held middle market companies to help these companies fund acquisitions, growth or refinancing. We invest primarily in middle-market companies in the form of unitranche loans, standalone first and second lien and mezzanine loans. We may also invest in unsecured debt, bonds and in the equity of portfolio companies through warrants and other instruments.
On February 5, 2014, we priced our initial public offering, selling 7,666,666 shares of our common stock, par value $0.001, including the underwriters’ over-allotment, at a price of $15.00 per share with net proceeds of approximately $111.5 million.
CM Finance LLC, a Maryland limited liability company, commenced operations in March 2012. Immediately prior to our initial public offering, the merger was consummated, whereby CM Finance LLC merged with and into us (the “Merger”). In connection with the Merger, we issued 6,000,000 shares of common stock and $39.8 million in debt to the pre-existing CM Finance LLC investors, consisting of certain funds (the “Cyrus Funds”) managed by Cyrus Capital. CM Finance Inc had no assets or operations prior to completion of the Merger and, as a result, the books and records of CM Finance LLC became our books and records, as the surviving entity. Immediately after the Merger, we issued 2,181,818 shares of our common stock to Stifel Venture Corp. (“Stifel”) in exchange for $32.7 million in cash. We used all of the proceeds of the sale of shares to Stifel, to repurchase 2,181,818 shares of common stock from the Cyrus Funds. Immediately after the completion of the initial public offering, we had 13,666,666 shares outstanding. We also used a portion of the net proceeds of the initial public offering to repay 100% of the debt issued to the Cyrus Funds in connection with the Merger.
On August 30, 2019, Investcorp Credit Management (“Investcorp”) acquired an approximate 76% ownership interest in the Adviser through the acquisition of the interests held by Stifel and certain funds managed the Cyrus Funds and through a direct purchase of equity from the Adviser (the “Investcorp Transaction”). Investcorp is a leading global credit investment platform with assets under management of $12.8 billion as of December 31, 2019. Investcorp manages funds which invest primarily in senior secured corporate debt issued by mid and large-cap corporations in Western Europe and the United States.
In connection with the Investcorp Transaction, on June 26, 2019, our board of directors, including all of the directors who are not “interested persons” of the Company, as defined in Section 2(a)(19) of the 1940 Act (each, an “Independent Director”), unanimously approved a new investment advisory agreement (the “Advisory Agreement”) and recommended that the Advisory Agreement be submitted to our stockholders for approval, which our stockholders approved at the Special Meeting of Stockholders held on August 28, 2019.
In addition, on June 26, 2019, we entered into a definitive stock purchase and transaction agreement with Investcorp BDC Holdings Limited (“Investcorp BDC”), an affiliate of Investcorp (the “Stock Purchase Agreement”), pursuant to which, following the initial closing under the Stock Purchase Agreement on August 30, 2019 (the “Closing”) and prior to the second anniversary of the date of the Closing (the “Closing Date”), Investcorp BDC will purchase (i) 680,985 newly issued shares of our common stock, par value $0.001 per share at the most recently determined net asset value per share of our common stock at the time of such purchase, as adjusted as necessary to comply with Section 23 of the 1940 Act, and (ii) 680,985 shares of our common stock in open-market or secondary transactions.
41
As of December 31, 2019, Investcorp BDC had purchased 113,500 newly issued shares of our common stock pursuant to the requirement under the Stock Purchase Agreement. See “Part II. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds” for more information.
As of December 31, 2019, Investcorp BDC had purchased 90,459 shares of our common stock in open-market transactions pursuant to its obligation under the Stock Purchase Agreement.
At the Closing, we entered into the Advisory Agreement with the Adviser, pursuant to which we have agreed to pay the Adviser a fee for investment advisory and management services consisting of two components — a base management fee (the “Base Management Fee”) and an incentive fee (the “Incentive Fee”). The Base Management Fee is equal to 1.75% of our gross assets, payable in arrears on a quarterly basis. The Incentive Fee, which provides the Adviser with a share of the income that it generates for the Company, has two components, ordinary income (the “Income-Based Fee”) and capital gains (the “Capital Gains Fee”). The Income-Based Fee is equal to 20.0% of pre-incentive fee net investment income, subject to an annualized hurdle rate of 8.0% with a “catch up” fee for returns between the 8.0% hurdle and 10.0%. The Capital Gains Fee is determined and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement, as of the termination date), commencing with the fiscal year ending June 30, 2021, and will equal to 20.0% of the Company’s cumulative aggregate realized capital gains from the Commencement Date through the end of that fiscal year, computed net of the Company’s aggregate cumulative realized capital losses and the Company’s aggregate cumulative unrealized capital depreciation through the end of such year, less the aggregate amount of any previously paid Capital Gains Fees. The Advisory Agreement has substantially the same terms as the prior investment advisory agreement, dated February 5, 2014, between us and the Adviser (the “Prior Advisory Agreement”).
At the Closing, we entered into a new administration agreement with the Adviser (the “Administration Agreement”). Under the Administration Agreement, the Adviser provides us with our chief financial officer, accounting and back-office professionals, equipment and clerical, bookkeeping, recordkeeping and other administrative services. The terms of the Administration Agreement, including the reimbursement of expenses by the Company to the Adviser, are identical to those contained in the Company’s prior administration agreement with the Adviser (the “Prior Administration Agreement”).
From time to time, we may form taxable subsidiaries (the “Taxable Subsidiaries”) that are taxed as corporations for federal income tax purposes. At December 31, 2019, we had no Taxable Subsidiaries. At June 30, 2019, we had one Taxable Subsidiary: Zinc Borrower Blocker, LLC. The Taxable Subsidiaries, if any, allow the Company to hold equity securities of portfolio companies organized as pass-through entities while continuing to satisfy the requirements applicable to a RIC under the Code.
We are generally permitted, under specified conditions, to issue multiple classes of indebtedness and one class of stock senior to our common stock if our asset coverage, as defined in the 1940 Act, is at least equal to 200% immediately after each such issuance. Recent legislation has modified the 1940 Act by allowing a BDC to increase the maximum amount of leverage it may incur from an asset coverage ratio of 200% to an asset coverage ratio of 150%, if certain requirements were met. On May 2, 2018, our board of directors, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) of the board, approved the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act, as amended by the Small Business Credit Availability Act. As a result, our asset coverage requirements for senior securities changed from 200% to 150%, effective as of May 2, 2019.
42
On March 19, 2019, the SEC issued an order granting our application for exemptive relief to co-invest, subject to the satisfaction of certain conditions, in certain private placement transactions with other funds managed by the Adviser or its affiliates and any future funds that are advised by the Adviser or its affiliated investment advisers. Under the terms of the exemptive order, in order for us to participate in a co-investment transaction a “required majority” (as defined in Section 57(o) of the 1940 Act) of our independent directors must conclude that (i) the terms of the proposed transaction, including the consideration to be paid, are reasonable and fair to us and our shareholders and do not involve overreaching in respect of us or our shareholders on the part of any person concerned, and (ii) the proposed transaction is consistent with the interests of our shareholders and is consistent with our investment objectives and strategies.
Critical accounting policies
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ. Management considers the following critical accounting policies important to understanding the financial statements. In addition to the discussion below, our critical accounting policies are further described in the notes to our consolidated financial statements.
Valuation of portfolio investments
We value our portfolio investments at fair value based upon the principles and methods of valuation set forth in policies adopted by our board of directors. Fair value is defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. Market participants are buyers and sellers in the principal (or most advantageous) market for the asset that (a) are independent of us, (b) are knowledgeable, having a reasonable understanding about the asset based on all available information (including information that might be obtained through due diligence efforts that are usual and customary), (c) are able to transact for the asset, and (d) are willing to transact for the asset or liability (that is, they are motivated but not forced or otherwise compelled to do so).
Investments for which market quotations are readily available are valued at such market quotations unless the quotations are deemed not to represent fair value. We generally obtain market quotations from recognized exchanges, market quotation systems, independent pricing services or one or more broker dealers or market makers.
Debt and equity securities for which market quotations are not readily available or for which market quotations are deemed not to represent fair value are valued at fair value as determined in good faith by our board of directors. Because a readily available market value for many of the investments in our portfolio is often not available, we value many of our portfolio investments at fair value as determined in good faith by our board of directors using a consistently applied valuation process in accordance with a documented valuation policy that has been reviewed and approved by our board of directors. Due to the inherent uncertainty and subjectivity of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may differ significantly from the values that would have been used had a readily available market value existed for such investments and may differ materially from the values that we may ultimately realize. In addition, changes in the market environment and other events may have differing impacts on the market quotations used to value some of our investments than on the fair values of our investments for which market quotations are not readily available. Market quotations may also be deemed not to represent fair value in certain circumstances where we believe that facts and circumstances applicable to an issuer, a seller or purchaser, or the market for a particular security causes current market quotations not to reflect the fair value of the security. Examples of these events could include cases where a security trades infrequently, causing a quoted purchase or sale price to become stale, where there is a “forced” sale by a distressed seller, where market quotations vary substantially among market makers, or where there is a wide bid-ask spread or significant increase in the bid ask spread.
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Those investments for which market quotations are not readily available or for which market quotations are deemed not to represent fair value are valued utilizing a market approach, an income approach, or both approaches, as appropriate. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that we may take into account in determining the fair value of our investments include, as relevant and among other factors: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, merger and acquisition comparables, our principal market (as the reporting entity) and enterprise values.
With respect to investments for which market quotations are not readily available, our board of directors undertakes a multi-step valuation process each quarter, as described below:
| • | our quarterly valuation process begins with each portfolio company or investment being initially valued by the members of the Adviser’s investment team responsible for the portfolio investment; |
| • | preliminary valuation conclusions are then documented and discussed by our senior management and the Adviser; |
| • | on a periodic basis, at least once annually, the valuation for each portfolio investment is reviewed by an independent valuation firm engaged by our board of directors; |
| • | the valuation committee of our board of directors then reviews these preliminary valuations and makes a recommendation to our board of directors regarding the fair value of each investment; and |
| • | the board of directors then reviews and discusses these preliminary valuations and determines the fair value of each investment in our portfolio in good faith, based on the input of the Adviser, the independent valuation firm and the valuation committee. |
When valuing all of our investments, we strive to maximize the use of observable inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of us. Unobservable inputs are inputs that reflect our assumptions about the assumptions market participants would use in pricing an asset or liability developed based on the best information available under the circumstances.
Our investments are categorized based on the types of inputs used in their valuation. The level in the U.S. GAAP valuation hierarchy in which an investment falls is based on the lowest level input that is significant to the valuation of the investment in its entirety. Investments are classified by U.S. GAAP into the three broad levels as follows:
| Level 1 – | valuation is based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. |
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| Level 2 – | valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, such as (a) quoted prices for similar assets or liabilities in active markets; (b) quoted prices for identical or similar assets or liabilities in markets that are not active, that is, markets in which there are few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly; (c) inputs other than quoted prices that are observable for the asset or liability; or (d) inputs that are derived principally from or corroborated by observable market data by correlation or other means. |
| Level 3 – | valuation is based on unobservable inputs for the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. However, the fair value measurement objective remains the same, that is, an exit price from the perspective of a market participant that holds the asset or owes the liability. Therefore, unobservable inputs reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. Unobservable inputs are developed based on the best information available under the circumstances, which might include the Company’s own data. The Company’s own data used to develop unobservable inputs is adjusted if information is reasonably available without undue cost and effort that indicates that market participants would use different assumptions. |
As of December 31, 2019, all of our investments were classified as Level 3 investments determined based on valuations by our board of directors. As of June 30, 2019, all of our investments were classified as Level 3 investments determined based on valuations by our board of directors.
Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our financial statements express the uncertainty with respect to the possible effect of such valuations, and any change in such valuations, on the consolidated financial statements.
Revenue recognition
Our revenue recognition policies are as follows:
Net realized gains (losses) on investments: Gains or losses on the sale of investments are calculated using the specific identification method.
Interest Income: Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis. Origination, closing, commitment, and amendment fees, purchase and original issue discounts associated with loans to portfolio companies are accreted into interest income over the respective terms of the applicable loans. Accretion of discounts or premiums is calculated by the effective interest or straight-line method, as applicable, as of the purchase date and adjusted only for material amendments or prepayments. Upon the prepayment of a loan or debt security, any prepayment penalties and unamortized fees and discounts are recorded as interest income and are non-recurring in nature.
Structuring fees and similar fees are recognized as income as earned, usually when received. Structuring fees, excess deal deposits, net profits interests and overriding royalty interests are included in other fee income.
We may hold debt investments in its portfolio that contain a payment-in-kind (“PIK”) interest provision. The PIK interest, which represents contractually deferred interest added to the investment balance that is generally due at maturity, is recorded on the accrual basis to the extent such amounts are expected to be collected.
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Non-accrual: Loans are placed on non-accrual status when principal or interest payments are past due 90 days or more or when there is reasonable doubt that principal or interest will be collected. Accrued interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment about ultimate collectability of principal. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in management’s judgment, are likely to remain current. PIK interest is not accrued if we do not expect the issuer to be able to pay all principal and interest when due. As of December 31, 2019, we had one investment on non-accrual status, Fusion Connect Inc., which represented approximately 2.5% of our portfolio at fair value. As of June 30, 2019, we had one investment on non-accrual status, Fusion Connect Inc., which represented approximately 3.0% of our portfolio at fair value.
Financing Facility
We have, through CM Finance SPV Ltd. (“CM SPV”), our wholly owned subsidiary, entered into a $122.0 million term secured financing facility (the “Term Financing”), due December 5, 2021 with UBS AG, London Branch (together with its affiliates “UBS”). The Term Financing is collateralized by a portion of the debt investments in our portfolio. Prior to amending the Term Financing on June 21, 2019, borrowings under the Term Financing bear interest (i) at a rate per annum equal to one-month LIBOR plus 2.75% through December 4, 2018, and (ii) at a rate per annum equal to one-month LIBOR plus 2.55% from December 5, 2018 through December 5, 2020 (the “Term Financing Rate”). We also incurred an annual fee of approximately 1% of the outstanding borrowings under the Term Financing. On June 21, 2019, we amended the Term Financing and increase the Term Financing by $20.0 million from $102.0 million to $122.0 million. On March 30, 2020, with the consent of UBS, we can opt (the “Option’) to increase our Term Financing by up to $53.0 million, expanding the Term Financing to $175.0 million.
Borrowings under the Term Financing, as amended, bear interest (a) with respect to the $102.0 million (i) at a rate per annum equal to one-month LIBOR plus 2.55% through December 4, 2019, and (ii) at a rate per annum equal to one-month LIBOR plus 3.55% from December 5, 2019 through December 4, 2020, and (iii) at a rate per annum equal to one-month LIBOR plus 3.15% (if the Option was not exercised) or 2.90% if the Option was exercised from December 5, 2020 through December 5, 2021, and (b) with respect to the additional $20.0 million increase in the Term Financing, (i) at a rate per annum equal to one-month LIBOR plus 3.15% through April 14, 2020, which is the date before the Option Exercise Date, and (ii) at a rate per annum equal to one-month LIBOR plus 2.90% from the Option Exercise Date through December 5, 2021.
As of both December 31, 2019 and June 30, 2019, there were $122.0 million borrowings outstanding under the Term Financing.
On November 20, 2017, we entered into a $50 million revolving financing facility (the “2017 UBS Revolving Financing”) with UBS. On June 21, 2019, we amended the 2017 UBS Revolving Financing to reduce the size of the 2017 UBS Revolving Financing to $30.0 million and extend the maturity date (as amended, the “Revolving Financing”). Borrowings under the Revolving Financing will generally bear interest at a rate per annum equal to one-month LIBOR plus 3.15%. The Company will pay a fee on any undrawn amounts of 2.25% per annum; provided that if 50% or less of the Revolving Financing is drawn, the fee will be 2.50% per annum. Any amounts borrowed under the Revolving Financing will mature, and all accrued and unpaid interest will be due and payable, on December 7, 2020. As of December 31, 2019, there were no borrowings outstanding under the Revolving Facility. As of June 30, 2019, there were $11.0 million borrowings outstanding under the Revolving Financing. We refer to the Term Financing and the Revolving Financing together as the “Financing Facilities.”
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Notes due 2023
On July 2, 2018, we closed the public offering of $30 million in aggregate principal amount of 6.125% notes due 2023 (the “Existing Notes”). On July 12, 2018, the underwriters exercised their over-allotment option to purchase an additional $4.5 million in aggregate principal amount of the Existing Notes. The total net proceeds to us from the Existing Notes, including the exercise of the underwriters’ over-allotment option, after deducting underwriting discounts and commissions of approximately $1.0 million and estimated offering expenses of approximately $230,000, were approximately $33.2 million.
On October 18, 2019, we closed the public offering of $15 million in aggregate principal amount of additional 6.125% notes due 2023 (the “Notes,” and together with the Existing Notes, the “2023 Notes”). The Notes constitute a further issuance of, rank equally in right of payment with, and form a single series with the $34.5 million in Existing Notes that we initially issued on July 2, 2018 and July 12, 2018. On November 7, 2019, the underwriters exercised their option to purchase an additional $1.875 million in aggregate principal of the Notes. The total net proceeds received by us from the sale of the Notes, including the exercise of the underwriters’ over-allotment option, was approximately $16.4 million, based on the purchase price paid by the underwriters of 96.875% of the aggregate principal amount of the Notes, after deducting estimated offering expenses of approximately $255,000 payable by us.
The 2023 Notes will mature on July 1, 2023 and bear interest at a rate of 6.125%. The 2023 Notes are direct unsecured obligations and rank pari passu, which means equal in right of payment, with all outstanding and future unsecured indebtedness issued by us. Because the 2023 Notes are not secured by any of our assets, they are effectively subordinated to all of our existing and future secured unsubordinated indebtedness (or any indebtedness that is initially unsecured as to which we subsequently grant a security interest), to the extent of the value of the assets securing such indebtedness. The 2023 Notes are structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries and financing vehicles, including, without limitation, borrowings under the Term Financing and the Revolving Financing. The 2023 Notes are obligations exclusively of Investcorp Credit Management BDC, Inc. and not of any of its subsidiaries. None of our subsidiaries is a guarantor of the 2023 Notes and the 2023 Notes will not be required to be guaranteed by any subsidiary we may acquire or create in the future.
The 2023 Notes may be redeemed in whole or in part at any time or from time to time at our option on or after July 1, 2020. Interest on the Notes is payable quarterly on January 1, April 1, July 1 and October 1 of each year. The 2023 Notes are listed on the NASDAQ Global Select Market under the trading symbol “CMFNL.” We may from time to time repurchase Notes in accordance with the 1940 Act and the rules promulgated thereunder. As of December 31, 2019 and June 30, 2019, the outstanding principal balance of the 2023 Notes was approximately $51.4 million and 34.5 million, respectively, and had an estimated fair value of $51.1 million and $34.7 million, respectively, based on the closing price as of December 31, 2019 and June 30, 2019, respectively, as traded on NASDAQ.
The indenture under which the Notes are issued (the “Indenture”) contains certain covenants, including covenants (i) requiring our compliance with the asset coverage requirements set forth in Section 18(a)(1)(A) as modified by Section 61(a) of the 1940 Act, whether or not we continue to be subject to such provisions of the 1940 Act; (ii) requiring our compliance, under certain circumstances, with the requirements set forth in Section 18(a)(1)(B) as modified by Section 61(a) of the 1940 Act, whether or not we continue to be subject to such provisions of the 1940 Act, prohibiting the declaration of any cash dividend or distribution upon any class of our capital stock (except to the extent necessary for us to maintain its treatment as a RIC under Subchapter M of the Code), or purchasing any such capital stock, if our asset coverage, as defined in the 1940 Act, is below 150% at the time of the declaration of the dividend or distribution or the purchase and after deducting the amount of such dividend, distribution, or purchase; and (iii) requiring us to provide financial information to the holders of the Notes and the Trustee if we cease to be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These covenants are subject to limitations and exceptions that are described in the Indenture.
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Investments
Our level of investment activity can and does vary substantially from period to period depending on many factors, including the amount we have available to invest as well as the amount of debt and equity capital available to middle-market companies, the level of merger and acquisition activity, the general economic environment and the competitive environment for the types of investments we make.
As a BDC, we are required to comply with certain regulatory requirements. For instance, as a BDC, we may not acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). Qualifying assets include investments in “eligible portfolio companies.” Under the relevant SEC rules, the term “eligible portfolio company” includes all private companies, companies whose securities are not listed on a national securities exchange, and certain public companies that have listed their securities on a national securities exchange and have a market capitalization of less than $250 million. In each case, the company must be organized in the United States. As of December 31, 2019 and June 30, 2019, approximately 10.20% and 9.78% of our total assets were non-qualifying assets, respectively.
To qualify as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements. As a RIC, we generally will not have to pay corporate-level taxes on any income we distribute to our stockholders.
Revenues
We generate revenues primarily in the form of interest on the debt we hold. We also generate revenue from royalty income, dividends on our equity interests and capital gains on the sale of warrants and other debt or equity interests that we acquire. Our investments in fixed income instruments generally have an expected maturity of three to five years, although we have no lower or upper constraint on maturity. Interest on our debt investments is generally payable quarterly or semi-annually. Payments of principal of our debt investments may be amortized over the stated term of the investment, deferred for several years or due entirely at maturity. In some cases, our debt investments and preferred stock investments may defer payments of cash interest or dividends or PIK interest. Any outstanding principal amount of our debt investments and any accrued but unpaid interest will generally become due at the maturity date. In addition, we may generate revenue in the form of prepayment fees, commitment, origination, structuring or due diligence fees, fees for providing significant managerial assistance, consulting fees and other investment related income.
Expenses
Our primary operating expenses include the payment of the Base Management Fee and, depending on our operating results, the Income-Based Fee and/or Capital Gains Fee, expenses reimbursable by us under the Advisory Agreement, administration fees, and our allocable portion of overhead expenses under the Administration Agreement. The Base Management Fee and incentive compensation remunerates the Adviser for work in identifying, evaluating, negotiating, closing and monitoring our investments. We bear all other out-of-pocket costs and expenses of our operations and transactions, including, without limitation, those relating to:
| • | our organization and our offering; |
| • | valuing our assets and calculating our net asset value per share (including the cost and expenses of any independent valuation firm(s)); |
| • | fees and expenses payable to third parties, including agents, consultants or other advisors, in monitoring financial and legal affairs for us and in monitoring our investments and performing due diligence on our prospective portfolio companies or otherwise relating to, or associated with, evaluating and making investments; |
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| • | valuing our assets and calculating our net asset value per share (including the cost and expenses of any independent valuation firm(s)); |
| • | interest payable on debt, if any, incurred to finance our investments and expenses related to unsuccessful portfolio acquisition efforts; |
| • | offerings of our common stock and other securities; |
| • | administration fees and expenses, if any, payable under the Administration Agreement (including our allocable portion of the Adviser’s overhead in performing its obligations under the Administration Agreement, including rent, equipment and the allocable portion of the cost of our chief compliance officer, chief financial officer and his staffs’ compensation and compensation-related expenses); |
| • | transfer agent and custody fees and expenses; |
| • | federal and state registration fees; |
| • | costs of registration and listing our shares on any securities exchange; |
| • | federal, state and local taxes; |
| • | independent directors’ fees and expenses; |
| • | costs of preparing and filing reports or other documents required by the SEC or other regulators; |
| • | costs of any reports, proxy statements or other notices to stockholders including printing costs; |
| • | costs associated with individual or group stockholders; |
| • | costs and fees associated with any fidelity bond, directors and officers/errors and omissions liability insurance, and any other insurance premiums; |
| • | direct costs and expenses of administration and operation, including printing, mailing, long distance telephone, copying, secretarial and other staff, independent auditors and outside legal costs; and |
| • | all other non-investment advisory expenses incurred by us or the Adviser in connection with administering our business. |
Portfolio and investment activity
Portfolio composition
We invest primarily in middle-market companies in the form of unitranche loans and standalone first and second lien loans. We may also invest in unsecured debt, bonds and in the equity of portfolio companies through warrants and other instruments.
At December 31, 2019, our investment portfolio of $305 million (at fair value) consisted of debt and equity investments in 35 portfolio companies, of which 82.6% were first lien investments, 13.8% were second lien investments, 3.6% were unitranche first lien debt investments, and none were in equities, warrants, or other positions. At December 31, 2019, our average and largest portfolio company investment at fair value was $8.7 and $16.3 million, respectively.
At June 30, 2019, our investment portfolio of $306.4 million (at fair value) consisted of investments in 33 portfolio companies, of which 77.6% were first lien investments, 18.7% were second lien investments, 3.7% were unitranche first lien debt investments, and none were in equity and warrants, or other positions. At June 30, 2019, our average and largest portfolio company investment at fair value was $9.3 million and $17.3 million, respectively.
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As of December 31, 2019 and June 30, 2019, respectively, our weighted average total yield of debt and income producing securities at amortized cost (which includes interest income and amortization of fees and discounts) was 10.41% and 10.50%. As of December 31, 2019 and June 30, 2019, respectively, our weighted average total yield on investments at amortized cost (which includes interest income and amortization of fees and discounts) was 10.37% and 10.25%.
We use Global Industry Classification Standard (“GICS”) codes to identify the industry groupings. At December 31, 2019 and June 30, 2019, respectively, the industry composition of our portfolio in accordance with the GICS codes at fair value was as follows:
| Percentage of Total Portfolio at December 31, 2019 |
Percentage of Total Portfolio at June 30, 2019 |
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| Professional Services |
11.70% | 13.52% | ||||||
| Energy Equipment & Services |
11.60 | 10.21 | ||||||
| Construction & Engineering |
10.32 | 9.80 | ||||||
| Media |
9.96 | 9.91 | ||||||
| Diversified Telecommunication Services |
5.24 | 5.65 | ||||||
| Internet Software & Services |
4.92 | 2.89 | ||||||
| Commercial Services & Supplies |
4.69 | 8.65 | ||||||
| Containers & Packaging |
4.13 | 4.22 | ||||||
| Retail |
4.00 | 4.68 | ||||||
| Hotels, Restaurants & Leisure |
3.96 | 3.62 | ||||||
| Household Durables |
3.22 | 3.08 | ||||||
| Distributors |
3.21 | 4.82 | ||||||
| Consumer Finance |
3.21 | — | ||||||
| Airlines |
3.20 | — | ||||||
| Construction Materials |
2.91 | 2.26 | ||||||
| Auto Components |
2.90 | 2.88 | ||||||
| Internet & Direct Marketing Retail |
2.80 | — | ||||||
| Trading Companies & Distributors |
2.40 | 2.40 | ||||||
| Chemicals |
1.60 | 1.55 | ||||||
| Road & Rail |
1.57 | — | ||||||
| IT Services |
1.33 | 1.89 | ||||||
| Technology Hardware, Storage and Peripherals |
1.13 | 2.40 | ||||||
| Business Services |
— | 2.42 | ||||||
| Health Care Equipment & Supplies |
— | 2.40 | ||||||
| Wireless Telecommunication Services |
— | 0.75 | ||||||
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| 100.00% | 100.00% | |||||||
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During the three months ended December 31, 2019, we added seven new investments totaling approximately $39.7 million. Six of these investments were in new portfolio companies. Of the new investments, 100.0% consisted of first lien investments.
At December 31, 2019, 96.9% of our debt investments bore interest based on floating rates based on indices such as LIBOR (in certain cases, subject to interest rate floors), and 3.1% bore interest at fixed rates. At June 30, 2019, 95.8% of our debt investments bore interest based on floating rates based on indices such as LIBOR (in certain cases, subject to interest rate floors), and 4.2% bore interest at fixed rates.
Our investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require us to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of December 31, 2019, we had four investments with aggregate unfunded commitments of $7.6 million, and as of June 30, 2019, we had three investments with aggregate unfunded commitments of $6.7 million.
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Asset Quality
In addition to various risk management and monitoring tools, we use the Adviser’s investment rating system to characterize and monitor the credit profile and expected level of returns on each investment in our portfolio. This investment rating system uses a five-level numeric rating scale. The following is a description of the conditions associated with each investment rating:
| Investment Rating 1 |
Investments that are performing above expectations, and whose risks remain favorable compared to the expected risk at the time of the original investment. | |
| Investment Rating 2 |
Investments that are performing within expectations and whose risks remain neutral compared to the expected risk at the time of the original investment. All new loans will initially be rated 2. | |
| Investment Rating 3 |
Investments that are performing below expectations and that require closer monitoring, but where no loss of return or principal is expected. Portfolio companies with a rating of 3 may be out of compliance with their financial covenants. | |
| Investment Rating 4 |
Investments that are performing substantially below expectations and whose risks have increased substantially since the original investment. These investments are often in workout. Investments with a rating of 4 will be those for which some loss of return but no loss of principal is expected. | |
| Investment Rating 5 |
Investments that are performing substantially below expectations and whose risks have increased substantially since the original investment. These investments are almost always in workout. Investments with a rating of 5 will be those for which some loss of return and principal is expected. | |
If the Adviser determines that an investment is underperforming, or circumstances suggest that the risk associated with a particular investment has significantly increased, the Adviser will increase its monitoring intensity and prepare regular updates for the investment committee, summarizing current operating results and material impending events and suggesting recommended actions. While the investment rating system identifies the relative risk for each investment, the rating alone does not dictate the scope and/or frequency of any monitoring that will be performed. The frequency of the Adviser’s monitoring of an investment will be determined by a number of factors, including, but not limited to, the trends in the financial performance of the portfolio company, the investment structure and the type of collateral securing the investment.
The following table shows the investment rankings of the investments in our portfolio:
| As of December 31, 2019 | As of June 30, 2019 | |||||||||||||||||||||||
| Fair Value | % of Portfolio |
Number of Investments(1) |
Fair Value | % of Portfolio |
Number of Investments |
|||||||||||||||||||
| 1 |
$ | 9,967,698 | 3.2% | 2 | $ | 6,358,750 | 2.1% | 1 | ||||||||||||||||
| 2 |
220,364,632 | 72.3 | 34 | 223,645,544 | 73.0 | 32 | ||||||||||||||||||
| 3 |
55,111,487 | 18.1 | 8 | 67,535,327 | 22.0 | 8 | ||||||||||||||||||
| 4 |
8,594,991 | 2.8 | 1 | 8,851,371 | 2.9 | 3 | ||||||||||||||||||
| 5 |
10,914,799 | 3.6 | 3 | 1 | — | 1 | ||||||||||||||||||
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| Total |
$ | 304,953,607 | 100.00% | 48 | $ | 306,390,993 | 100.00% | 45 | ||||||||||||||||
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Results of Operations
Comparison of the three months ended December 31, 2019 and December 31, 2018
Investment income
Investment income, attributable primarily to interest and fees on our debt investments, for the three months ended December 31, 2019 increased to $9.4 million from $9.3 million for the three months ended December 31, 2018, primarily related to an increase in payments in kind income.
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Expenses
Total expenses for the three months ended December 31, 2019 increased to $6.1 million, compared to $5.6 million for the three months ended December 31, 2018, primarily due to an increase in interest expenses related to interest payments on the 2023 Notes, and an increase in professional fees.
Net investment income
Net investment income increased to $3.8 million for the three months ended December 31, 2019 from $3.7 million for the three months ended December 31, 2018, primarily due to an decrease in expenses compared to the prior period offset by an increase in investment income during the same period.
Net realized gain or loss
There was a small realized gain on investments for the three months ended December 31, 2019 related to the sale of Hyperion Materials & Technologies, Inc. Net realized losses on investments totaled $0.1 million for the three months ended December 31, 2018, primarily due to a sale of International Wireless Group, Inc.
Net change in unrealized (depreciation) appreciation on investments
We recorded a net change in unrealized depreciation of $0.8 million for the three months ended December 31, 2019, primarily due to the decrease in value of 4L Technologies Inc, Bioplan USA, Inc., and Exela Intermedia LLC which was offset by an increase in the value of Deluxe Toronto Ltd., Empire Office, Inc., Infrastructure & Energy Alternatives, Inc., and KIK Custom Products Inc.
During the three months ended December 31, 2018, we recorded a net change in unrealized depreciation of $13.2 million, primarily due to the decrease in valuations of certain investments offset by accretion on certain investments.
Comparison of the six months ended December 31, 2019 and December 31, 2018
Investment income
Investment income, attributable primarily to interest and fees on our debt investments, for the six months ended December 31, 2019 increased to $18.0 million from $17.6 million for the six months ended December 31, 2018, primarily due to an increase in payments in kind income offset by a decrease in interest income.
Expenses
Total expenses for the six months ended December 31, 2019 increased to $11.1 million, compared to $10.4 million for the six months ended December 31, 2018, primarily due to an increase in interest expenses related to interest payments on the 2023 Notes.
Net investment income
Net investment income increased to $7.3 million for the six months ended December 31, 2019 from $7.1 million for the six months ended December 31, 2018, primarily due to an decrease in expenses compared to the prior period offset by an increase in investment income during the same period.
Net realized gain or loss
Net realized gains on investments totaled $0.1 million for the six months ended December 31, 2019, primarily due to the sale of Hyperion Materials & Technologies, Inc. Net realized losses on investments totaled $0.2 million for the six months ended December 31, 2018, primarily due to a sale of International Wireless Group, Inc.
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Net change in unrealized (depreciation) appreciation on investments
We recorded a net change in unrealized depreciation of $5.3 million for the six months ended December 31, 2019, primarily due to the decrease in value of 4L Technologies Inc, Bioplan USA, Inc., and Exela Intermedia LLC which was offset by an increase in the value of Deluxe Toronto Ltd., Empire Office, Inc., Infrastructure & Energy Alternatives, Inc., and KIK Custom Products Inc.
During the six months ended December 31, 2018, we recorded a net change in unrealized depreciation of $14.9 million, primarily due to the decrease in valuations of certain investments offset by accretion on certain investments.
Liquidity and capital resources
Cash flows
For the six months ended December 31, 2019, our unrestricted cash balance decreased by $2.5 million. During that period, cash decreased by $0.1 million from operating activities, primarily due to payments for the purchase of investments in portfolio companies of $60.0 million, offset by sales of investments of $59.4 million in portfolio companies and a decrease in payables for investments purchased of $2.1 million. During the same period, cash from financing activities decreased by $0.1 million, consisting primarily of proceeds of $24.9 million from the 2023 Notes and the Revolving Financing offset by and payments of $19.0 million from borrowings under the Revolving Financing and distributions of $5.6 million to our stockholders.
Capital resources
As of December 31, 2019, we had $17.2 million of cash as well as $8.9 million in restricted cash and $30.0 million of capacity under the Revolving Financing. We intend to generate additional cash primarily from future offerings of securities, future borrowings under the Revolving Financing as well as cash flows from operations, including income earned from investments in our portfolio companies and, to a lesser extent, from the temporary investment of cash in U.S. government securities and other high-quality debt investments that mature in one year or less. Our primary liquidity needs include interest and principal repayments on our Financing Facilities, interest payments on the 2023 Notes, our unfunded loan commitments (if any), investments in portfolio companies, dividend distributions to our stockholders and operating expenses.
As discussed below in further detail, we have elected to be treated as a RIC under the Code. To maintain our RIC status, we generally must distribute substantially all of our net taxable income to stockholders in the form of dividends. Our net taxable income does not necessarily equal our net income as calculated in accordance with U.S. GAAP.
Regulated Investment Company Status and Distributions
We have elected to be treated as a RIC under Subchapter M of the Code. If we continue to qualify as a RIC, we will not be taxed on our investment company taxable income or realized net capital gains, to the extent that such taxable income or gains are distributed, or deemed to be distributed, to stockholders on a timely basis.
Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation until realized. Dividends declared and paid by us in a year may differ from taxable income for that year as such dividends may include the distribution of current year taxable income or the distribution of prior year taxable income carried forward into and distributed in the current year. Distributions also may include returns of capital.
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To continue to qualify for RIC tax treatment, we must, among other things, distribute to our stockholders, with respect to each taxable year, at least 90% of our investment company net taxable income (i.e., our net ordinary income and our realized net short-term capital gains in excess of realized net long-term capital losses, if any). We will also be subject to a federal excise tax, based on distributive requirements of our taxable income on a calendar year basis.
We intend to distribute to our stockholders between 90% and 100% of our annual taxable income (which includes our taxable interest and fee income). However, the covenants contained in the Financing Facility may prohibit us from making distributions to our stockholders, and, as a result, could hinder our ability to satisfy the distribution requirement. In addition, we may retain for investment some or all of our net taxable capital gains (i.e., realized net long-term capital gains in excess of realized net short-term capital losses) and treat such amounts as deemed distributions to our stockholders. If we do this, our stockholders will be treated as if they received actual distributions of the capital gains we retained and then reinvested the net after-tax proceeds in our common stock. Our stockholders also may be eligible to claim tax credits (or, in certain circumstances, tax refunds) equal to their allocable share of the tax we paid on the capital gains deemed distributed to them. To the extent our taxable earnings for a fiscal taxable year fall below the total amount of our dividends for that fiscal year, a portion of those dividend distributions may be deemed a return of capital to our stockholders.
We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage test for borrowings applicable to us as a BDC under the 1940 Act and due to provisions in Financing Facilities. We cannot assure stockholders that they will receive any distributions or distributions at a particular level.
In accordance with certain applicable Treasury regulations and private letter rulings issued by the Internal Revenue Service, a RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder elects to receive his or her entire distribution in either cash or stock of the RIC, subject to a limitation that the aggregate amount of cash to be distributed to all stockholders must be at least 20% of the aggregate declared distribution. If too many stockholders elect to receive cash, each stockholder electing to receive cash must receive a pro rata amount of cash (with the balance of the distribution paid in stock). In no event will any stockholder, electing to receive cash, receive less than 20% of his or her entire distribution in cash. If these and certain other requirements are met, for U.S. federal income tax purposes, the amount of the dividend paid in stock will be equal to the amount of cash that could have been received instead of stock. We have no current intention of paying dividends in shares of our stock in accordance with these Treasury regulations or private letter rulings.
Advisory Agreement
Effective August 30, 2019 (the “Commencement Date”), we entered into the Advisory Agreement with the Adviser. Under the Advisory Agreement, the Base Management Fee is calculated at an annual rate of 1.75% of our gross assets, including assets purchased with borrowed funds or other forms of leverage and excluding cash and cash equivalents (such amount, “Gross Assets”). The Base Management Fee is payable quarterly in arrears and the Base Management Fees for any partial month or quarter will be appropriately pro-rated.
Under the Advisory Agreement, for the period from the Commencement Date through the end of the first and second fiscal quarters after the Commencement Date, the Base Management Fee is calculated based on the value of our Gross Assets as of the end of such quarter. Subsequently, the Base Management Fee will be calculated based on the average value of the Company’s Gross Assets at the end of the two most recently completed fiscal quarters. Base Management Fees for any partial month or quarter will be appropriately pro-rated.
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For the three and six months ended December 31, 2019, the Advisory Agreement $1,369,983 and $2,725,061, respectively, in Base Management Fees were earned by the Adviser, of which $57,852 and $102,035 was waived and $1,312,131 was payable at December 31, 2019. For the three and six months ended December 31, 2018, $1,405,297 and $2,757,152, respectively, in Base Management Fees were earned by the Adviser, of which $1,405,297 was payable at December 31, 2018.
Under the Advisory Agreement, the Income-Based Fee is calculated and payable quarterly in arrears based on our Pre-Incentive Fee Net Investment Income (as defined below) for the immediately preceding fiscal quarter, subject to a total return requirement (the “Total Return Requirement”) and deferral of non-cash amounts, and is 20.0% of the amount, if any, by which our Pre-Incentive Fee Net Investment Income, expressed as a rate of return on the value of our net assets attributable to its common stock, for the immediately preceding fiscal quarter, exceeds a 2.0% (which is 8.0% annualized) hurdle rate and a “catch-up” provision measured as of the end of each fiscal quarter. Under this provision, in any fiscal quarter, the Adviser receives no Incentive Fee until our Pre-Incentive Fee Net Investment Income equals the hurdle rate of 2.0%, but then receives, as a “catch-up,” 100% of our Pre-Incentive Fee Net Investment Income with respect to that portion of such Pre-Incentive Fee Net Investment Income, if any, that exceeds the hurdle rate but is less than 2.5% (which is 10.0% annualized). The effect of the “catch-up” provision is that, subject to the Total Return Requirement and deferral provisions discussed below, if Pre-Incentive Fee Net Investment Income exceeds 2.5% in any fiscal quarter, the Adviser receives 20.0% of our Pre-Incentive Fee Net Investment Income as if a hurdle rate did not apply.
“Pre-Incentive Fee Net Investment Income” means interest income, dividend income and any other income (including any other fees, such as commitment, origination, structuring, diligence, managerial assistance and consulting fees or other fees that we receive from portfolio companies) accrued during the fiscal quarter, minus our operating expenses for the quarter (including the Base Management Fee, expenses payable under the Administration Agreement and any interest expense and any distributions paid on any issued and outstanding preferred stock, but excluding the Incentive Fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount (“OID”), debt instruments with payment-in-kind (“PIK”) interest and zero coupon securities), accrued income that we have not yet received in cash.
Pre-Incentive Fee Net Investment Income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation.
No Income-Based Fee is payable under the Advisory Agreement except to the extent 20.0% of the cumulative net increase in net assets resulting from operations over the fiscal quarter for which fees are being calculated and the Lookback Period exceeds the cumulative Incentive Fees accrued and/or paid for the Lookback Period. For the foregoing purpose, the “cumulative net increase in net assets resulting from operations” is the amount, if positive, of the sum of Pre-Incentive Fee Net Investment Income, realized gains and losses and unrealized appreciation and depreciation of the Company for the then current fiscal quarter and the Lookback Period. The “Lookback Period” means (1) through June 30, 2022, the period that on the last day of the fiscal quarter in which the Commencement Date occurs and ends on the last day of the fiscal quarter immediately preceding the fiscal quarter for which the Income-Based Fee is being calculated, and (2) after June 30, 2022, the eleven fiscal quarters immediately preceding the fiscal quarter for which the Income-Based Fee is being calculated.
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For the three and six months ended December 31, 2019, we incurred $851,842 and $851,842, respectively, of Income-Based Fees, of which $336,619 and $336,619 was waived. As of December 31, 2019, $1,061,213 of such Income-Based Fees are currently payable to the Adviser and $757,030 of Income-Based Fees incurred by us were generated from deferred interest (i.e. PIK and certain discount accretion) and are not payable until such amounts are received in cash. For the three and six months ended December 31, 2018, we incurred $753,721 and $874,042, respectively, of Income-Based Fees, of which $0 and $22,000 was waived. As of December 31, 2018, $1,566,513 of such Income-Based Fees were payable to the Adviser under the Prior Advisory Agreement and $693,771 of Income-Based Fees incurred by us were generated from deferred interest (i.e., PIK and certain discount accretion) under the Prior Advisory Agreement and are not payable until such amounts are received in cash.
Under the Advisory Agreement, the Capital Gains Fee is determined and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement, as of the termination date), commencing with the fiscal year ending June 30, 2021, and will equal to 20.0% of our cumulative aggregate realized capital gains from the Commencement Date through the end of that fiscal year, computed net of our aggregate cumulative realized capital losses and our aggregate cumulative unrealized capital depreciation through the end of such year, less the aggregate amount of any previously paid Capital Gains Fees. If such amount is negative, then no Capital Gains Fee will be payable for such year. Additionally, if the Advisory Agreement is terminated as of a date that is not a fiscal year end, the termination date will be treated as though it were a fiscal year end for purposes of calculating and paying the Capital Gains Fee. For the avoidance of doubt, realized capital gains, realized capital losses, unrealized capital appreciation and unrealized capital depreciation with respect to our portfolio as of the end of the fiscal year ended June 30, 2020 will be excluded from the calculations of the Capital Gains Fee.
Under U.S. generally accepted accounting principles, we calculate the Capital Gains Fee as if we had realized all assets at their fair values as of the reporting date. Accordingly, we accrue a provisional Capital Gains Fee taking into account any unrealized gains or losses. As the provisional Capital Gains Fee is subject to the performance of investments until there is a realization event, the amount of the provisional Capital Gains Fee accrued at a reporting date may vary from the Capital Gains Fee that is ultimately realized and the differences could be material.
As of December 31, 2019, there was no Capital Gains Fee accrued, earned or payable to the Adviser under the Advisory Agreement. As of December 31, 2018, there was no Capital Gains Fee accrued, earned or payable to the Adviser under the Prior Advisory Agreement.
The Advisory Agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations under the Advisory Agreement, the Adviser and its officers, managers, partners, agents, employees, controlling persons and members, and any other person or entity affiliated with it, are entitled to indemnification from us for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of the Adviser’s services under the Advisory Agreement or otherwise as the Adviser.
Prior Advisory Agreement
The following is a description of the Prior Advisory Agreement, which was terminated on August 30, 2019. Pursuant to the Prior Advisory Agreement, we agreed to pay to the Adviser a Base Management Fee of 1.75% of gross assets, as adjusted, including assets purchased with borrowed funds or other forms of leverage and excluding cash and cash equivalents and “fair value of derivatives associated with our financing”, and the Incentive Fee consisting of two parts.
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Under the Prior Advisory Agreement, the first part of the Incentive Fee, or the Income-Based Fee, which was calculated and payable quarterly in arrears, equaled 20.0% of the “pre-incentive fee net investment income” (as defined in the Prior Advisory Agreement) for the immediately preceding quarter, subject to a hurdle rate of 2.0% per quarter (8.0% annualized), and was subject to a “catch-up” feature. The Incentive Fee was subject to a total return requirement, which provided that no Incentive Fee in respect of our pre-incentive fee net investment income would be payable except to the extent 20.0% of the cumulative net increase in net assets resulting from operations over the then current and 11 preceding quarters exceeded the cumulative incentive fees accrued and/or paid for the 11 preceding quarters. The net pre-incentive fee investment income used to calculate the Income-Based Fee was also included in the amount of our gross assets used to calculate the 1.75% Base Management Fee.
Under the Prior Advisory Agreement, the second part of the incentive fee, or the Capital Gains Fee, was calculated and payable in arrears as of the end of each calendar year and equaled 20.0% of the aggregate cumulative realized capital gains from inception through the end of each calendar year, computed net of aggregate cumulative realized capital losses and aggregate cumulative unrealized capital depreciation through the end of such year, less the aggregate amount of any previously paid capital gain incentive fees.
With respect to the incentive fee expense accrual relating to the Capital Gains Fee, U.S. GAAP requires that the Capital Gains Fee accrual consider the cumulative aggregate unrealized appreciation in the calculation, as a Capital Gains Fee would be payable if such unrealized appreciation were realized, even though such unrealized appreciation is not permitted to be considered in calculating the fee actually payable under the Prior Advisory Agreement.
The Prior Advisory Agreement provided that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations under the Prior Advisory Agreement, the Adviser and its officers, managers, partners, agents, employees, controlling persons and members, and any other person or entity affiliated with it, were entitled to indemnification from us for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of the Adviser’s services under the Prior Advisory Agreement or otherwise as the Adviser.
Off-Balance Sheet Arrangements
We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. As of December 31, 2019, our off-balance sheet arrangements consisted of $7.6 million in unfunded commitments to three of our portfolio companies. As of June 30, 2019, our off-balance arrangements consisted of $2.8 million in unfunded commitments to three of our portfolio companies.
Recent Developments
We have evaluated the need for disclosures and/or adjustments resulting from subsequent events through the date the consolidated financial statements were issued.
Subsequent to the three months ended December 31, 2019 through February 10, 2020, we invested $16.2 million in two new portfolio companies and one existing portfolio company and received no payment or sales proceeds.
On February 4, 2020, our board of directors declared a distribution for the quarter ended March 31, 2020 of $0.25 per share payable on April 2, 2020 to stockholders of record as of March 13, 2020.
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Item 3. Quantitative and Qualitative Disclosure about Market Risk
We are subject to financial market risks, including changes in interest rates. At December 31, 2019, 96.9% of our debt investments bore interest based on floating rates, such as LIBOR, the Euro Interbank Offered Rate, the Federal Funds Rate or the Prime Rate. The interest rates on such investments generally reset by reference to the current market index after one to three months. Floating rate investments subject to a floor generally reset by reference to the current market index after one to three months only if the index exceeds the floor.
Generally, we believe higher yielding assets such as those in our investment portfolio do not necessarily follow a linear interest rate relationship and are less sensitive in price to interest rate changes than many other debt investments. Our investments in fixed rate assets are generally exposed to changes in value due to interest rate fluctuations, and our floating rate assets are generally exposed to cash flow variability from fluctuation in rates. Consequently, our net interest income (interest income less interest expense) is exposed to risks related to interest rate fluctuations. Based on our current portfolio with certain interest rate floors and our financing at December 31, 2019, a 1.00% increase in interest rates would increase our net interest income by approximately 24.2% and a 2.00% increase in interest rates would increase our net interest income by approximately 34.7%. Variable-rate instruments subject to a floor generally reset periodically to the applicable floor and, in the case of investments in our portfolio, quarterly to a floor based on LIBOR, only if the floor exceeds the index. Under these loans, we do not benefit from increases in interest rates until such rates exceed the floor and thereafter benefit from market rates above any such floor.
Although management believes that this analysis is indicative of our existing sensitivity to interest rate changes, it does not adjust for changes in the credit markets, the size, credit quality or composition of the assets in our portfolio and other business developments, including borrowing, that could affect the net increase in net assets resulting from operations or net income. It also does not adjust for the effect of the time lag between a change in the relevant interest rate index and the rate adjustment under the applicable loan. Accordingly, we can offer no assurances that actual results would not differ materially from the statement above.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
As of December 31, 2019, we, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective in timely alerting management, including the Chief Executive Officer and Chief Financial Officer, of material information about us required to be included in periodic SEC filings.
(b) Changes in Internal Control Over Financial Reporting
Management did not identify any change in the Company’s internal control over financial reporting that occurred during the quarter ended December 31, 2019 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings
We are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us. From time to time, we may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations.
Item 1A. Risk Factors
An investment in our securities involves a high degree of risk. Except as set forth below, there have been no material changes to the risk factors previously reported under Part I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended June 30, 2019, which was filed with the SEC on September 13, 2019 and Part II, Item 1A. “Risk Factors” of our Quarterly Report on Form 10-Q for quarter ended September 30, 2019, which was filed with the SEC on November 12, 2019. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may materially affect our business, financial condition and/or operating results.
The interest rates of our term loans to our portfolio companies that extend beyond 2021 might be subject to change based on recent regulatory changes.
LIBOR, the London Interbank Offered Rate, is the basic rate of interest used in lending between banks on the London interbank market and is widely used as a reference for setting the interest rate on loans globally. We typically use LIBOR as a reference rate in term loans we extend to portfolio companies such that the interest due to us pursuant to a term loan extended to a partner company is calculated using LIBOR. The terms of our debt investments generally include minimum interest rate floors which are calculated based on LIBOR.
On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. It is unclear if at that time whether LIBOR will cease to exist or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with a new index calculated by short term repurchase agreements, backed by Treasury securities called the Secured Overnight Financing Rate (“SOFR”). The first publication of SOFR was released in April 2018. Whether or not SOFR attains market traction as a LIBOR replacement remains a question and the future of LIBOR at this time is uncertain. If LIBOR ceases to exist, we may need to renegotiate the credit agreements extending beyond 2021 with our portfolio companies that utilize LIBOR as a factor in determining the interest rate to replace LIBOR with the new standard that is established in its place, which may have an adverse effect on our ability to receive attractive returns. In addition, if LIBOR ceases to exist we may need to renegotiate any LIBOR based credit facilities to replace LIBOR with the new standard that is established in its place.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On December 4, 2019, we issued 113,500 shares of common stock, par value $0.001 per share (the “Common Stock”), to Investcorp BDC at a price of $10.19 per share for an aggregate offering price of $1,156,565.
The sale of the Common Stock was made pursuant to the Stock Purchase Agreement. The issuance of the Common Stock is exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section 4(a)(2) thereof and Regulation D thereunder. Investcorp BDC is an “accredited investor” as that term is defined in Rule 501(a) of Regulation D under the Securities Act.
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Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the SEC:
| * | Filed herewith |
| (1) | Incorporated by reference to Registrant’s Registration Statement on Form N-2 (File No. 333-192370), filed on November 15, 2013. |
| (2) | Incorporated by reference to Registrant’s Current Report on Form 8-K (File No. 814-01054), filed on September 3, 2019. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: February 10, 2020
| INVESTCORP CREDIT MANAGEMENT BDC, INC. | ||
| By: | /s/ Michael C. Mauer | |
| Michael C. Mauer | ||
| Chief Executive Officer | ||
| By: | /s/ Rocco DelGuercio | |
| Rocco DelGuercio | ||
| Chief Financial Officer | ||
1
Exhibit 31.1
I, Michael C. Mauer, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Investcorp Credit Management BDC, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: February 10, 2020
| /s/ Michael C. Mauer | ||
| Michael C. Mauer | ||
| Chief Executive Officer | ||
1
Exhibit 31.2
I, Rocco DelGuercio, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Investcorp Credit Management BDC, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: February 10, 2020
| /s/ Rocco DelGuercio | ||
| Rocco DelGuercio | ||
| Chief Financial Officer | ||
1
Exhibit 32.1
Certification of Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
In connection with this Quarterly Report on Form 10-Q (the “Report”) of Investcorp Credit Management BDC, Inc. (the “Registrant”), as filed with the Securities and Exchange Commission on the date hereof, I, Michael C. Mauer, the Chief Executive Officer of the Registrant, hereby certify, to the best of my knowledge, that:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. |
| /s/ Michael C. Mauer | ||
| Name: Michael C. Mauer | ||
| Date: February 10, 2020 | ||
1
Exhibit 32.2
Certification of Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
In connection with this Quarterly Report on Form 10-Q (the “Report”) of Investcorp Credit Management BDC, Inc. (the “Registrant”), as filed with the Securities and Exchange Commission on the date hereof, I, Rocco DelGuercio, the Chief Financial Officer of the Registrant, hereby certify, to the best of my knowledge, that:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. |
| /s/ Rocco DelGuercio | ||
| Name: Rocco DelGuercio | ||
| Date: February 10, 2020 | ||
1