BlackRock Capital Investment Corp - Quarter Report: 2008 September (Form 10-Q)

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended September 30, 2008

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from to

Commission file number 001-33559

BlackRock Kelso Capital Corporation

(Exact Name of Registrant as Specified in Its Charter)


Delaware		20-2725151
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)


40 East 52nd Street, New York, New York		10022
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s Telephone Number, Including Area Code 212-810-5800

Former Name, Former Address and Former Fiscal Year, 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 þ No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨ Accelerated filer þ Non-Accelerated filer ¨

Smaller reporting company ¨ (Do not check if a smaller reporting company)

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ¨ No þ

The number of shares of the Registrant’s common stock, $.001 par value per share, outstanding at November 6, 2008 was 55,423,416.

BLACKROCK KELSO CAPITAL CORPORATION

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2008

Table of Contents


	INDEX	PAGE NO.
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Statements of Assets and Liabilities	4

	Statements of Operations	5

	Statements of Changes in Net Assets	6

	Statements of Cash Flows	7

	Schedules of Investments	8

	Notes to Financial Statements	22

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	41

Item 4.	Controls and Procedures	41

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	41

Item 1A.	Risk Factors	42

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42

Item 3.	Defaults Upon Senior Securities	43

Item 4.	Submission of Matters to a Vote of Security Holders	43

Item 5.	Other Information	43

Item 6.	Exhibits	43

SIGNATURES		44

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

In addition to factors previously identified elsewhere in the reports BlackRock Kelso Capital Corporation has filed with the Securities and Exchange Commission (the “SEC”), the following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance:

•

our future operating results;

•

our business prospects and the prospects of our portfolio companies;

•

the impact of investments that we expect to make;

•

our contractual arrangements and relationships with third parties;

•

the dependence of our future success on the general economy and its impact on the industries in which we invest;

•

the ability of our portfolio companies to achieve their objectives;

•

our expected financings and investments;

•

the adequacy of our cash resources and working capital;

•

the timing of cash flows, if any, from the operations of our portfolio companies;

•

the ability of BlackRock Kelso Capital Advisors LLC, our investment advisor (the “Advisor”), to locate suitable investments for us and to monitor and administer our investments;

•

the ability of the Advisor to attract and retain highly talented professionals;

•

fluctuations in foreign currency exchange rates; and

•

the impact of changes to tax legislation and, generally, our tax position.

This report, and other statements that we may make, may contain forward-looking statements with respect to future financial or business performance, strategies or expectations. Forward-looking statements are typically identified by words or phrases such as “trend,” “opportunity,” “pipeline,” “believe,” “comfortable,” “expect,” “anticipate,” “current,” “intention,” “estimate,” “position,” “assume,” “potential,” “outlook,” “continue,” “remain,” “maintain,” “sustain,” “seek,” “achieve” and similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “may” or similar expressions.

Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Forward-looking statements speak only as of the date they are made, and we assume no duty to and do not undertake to update forward-looking statements. Actual results could differ materially from those anticipated in forward-looking statements and future results could differ materially from historical performance.

PART 1. FINANCIAL INFORMATION

In this Quarterly Report, “Company”, “we”, “us” and “our” refer to BlackRock Kelso Capital Corporation unless the context states otherwise.

Item 1.

Financial Statements

BlackRock Kelso Capital Corporation

Statements of Assets and Liabilities (Unaudited)


	September 30, 2008			December 31, 2007
Assets:
Investments at fair value:
Non-controlled, non-affiliated investments (amortized cost of $1,122,335,709 and $1,049,585,229)	$	996,248,332		$	1,018,013,709
Non-controlled, affiliated investments (amortized cost of $64,337,949 and $66,907,657)		54,876,927			65,412,682
Controlled investments (amortized cost of $42,467,130 and $38,881,854)		—			14,834,395

Total investments at fair value (amortized cost of $1,229,140,788 and $1,155,374,470)		1,051,125,259			1,098,260,786
Cash and cash equivalents		61,330,283			5,077,695
Foreign currency at fair value (cost of $742,667 and $10,291)		733,078			10,864
Net unrealized appreciation on forward foreign currency contracts		3,309,690			—
Interest receivable		19,125,247			14,260,266
Dividends receivable		3,425,201			1,796,615
Prepaid expenses and other assets		3,064,093			2,414,954

Total Assets	$	1,142,112,851		$	1,121,821,180

Liabilities:
Payable for investments purchased	$	1,060,000		$	—
Net unrealized depreciation on forward foreign currency contracts		—			451,944
Credit facility payable		491,000,000			381,300,000
Interest payable on credit facility		1,226,004			1,508,277
Dividend distributions payable		—			3,310,606
Base management fees payable		5,841,124			5,606,213
Accrued administrative services		262,741			361,118
Other accrued expenses and payables		1,554,092			1,091,153

Total Liabilities		500,943,961			393,629,311

Net Assets:
Common stock, par value $.001 per share, 100,000,000 common shares authorized, 55,670,594 and 52,825,109 issued and 55,650,246 and 52,825,109 outstanding		55,650			52,825
Paid-in capital in excess of par		818,871,595			790,378,102
Distributions in excess of net investment income		(2,463,476	)		(5,411,353	)
Accumulated net realized gain (loss)		(554,093	)		729,635
Net unrealized depreciation		(174,740,786	)		(57,557,340	)

Total Net Assets		641,168,890			728,191,869

Total Liabilities and Net Assets	$	1,142,112,851		$	1,121,821,180

Net Asset Value Per Share	$	11.52		$	13.78

The accompanying notes are an integral part of these financial statements.

BlackRock Kelso Capital Corporation

Statements of Operations (Unaudited)


	Three months ended September 30, 2008			Three months ended September 30, 2007			Nine months ended September 30, 2008			Nine months ended September 30, 2007
Investment Income:
From non-controlled, non-affiliated investments:
Interest	$	35,516,763		$	30,901,350		$	101,133,085		$	85,410,789
Dividends		472,562			369,249			1,257,265			585,317
Other income		16,142			16,500			18,438			34,995
From non-controlled, affiliated investments:
Interest		1,170,717			1,141,468			3,525,042			1,983,094
Dividends		257,618			568,083			994,668			653,925
Other income		—			—			—			300,000
From controlled investments:
Interest		11,910			951,449			1,085,667			2,801,006
Dividends		—			215,787			—			654,555

Total investment income		37,445,712			34,163,886			108,014,165			92,423,681

Expenses:
Base management fees		5,841,124			5,319,049			16,991,573			13,546,675
Incentive management fees		—			(112,226	)		—			9,412,097
Administrative services		261,744			325,608			867,177			804,084
Professional fees		622,532			260,960			1,461,003			803,746
Director fees		82,450			121,688			275,185			251,860
Investment advisor expenses		283,301			218,221			822,150			608,488
Insurance		119,781			112,146			396,217			201,921
Interest and credit facility fees		4,311,893			5,321,907			13,818,524			14,471,228
Amortization of debt issuance costs		149,068			62,819			482,493			207,788
Other		191,941			178,092			840,365			444,533

Expenses before management fee waiver		11,863,834			11,808,264			35,954,687			40,752,420
Base management fee waiver		—			—			—			(2,056,907	)

Net expenses		11,863,834			11,808,264			35,954,687			38,695,513

Net Investment Income		25,581,878			22,355,622			72,059,478			53,728,168

Realized and Unrealized Gain (Loss):
Net realized gain (loss):
Non-controlled, non-affiliated investments		187,711			860,090			314,350			1,529,132
Non-controlled, affiliated investments		—			—			112,783			—
Foreign currency		(158,501	)		(531,262	)		(1,710,861	)		(923,992	)

Net realized gain (loss)		29,210			328,828			(1,283,728	)		605,140

Net change in unrealized appreciation or depreciation on:
Non-controlled, non-affiliated investments		(36,330,023	)		(17,055,475	)		(94,515,860	)		(14,338,411	)
Non-controlled, affiliated investments		(1,700,589	)		3,898,046			(7,966,047	)		3,885,522
Controlled investments		(9,392,438	)		(5,653,788	)		(18,419,671	)		(10,792,963	)
Foreign currency translation		3,018,444			(1,407,763	)		3,718,130			(970,173	)

Net change in unrealized appreciation or depreciation		(44,404,606	)		(20,218,980	)		(117,183,448	)		(22,216,025	)

Net realized and unrealized gain (loss)		(44,375,396	)		(19,890,152	)		(118,467,176	)		(21,610,885	)

Net Increase (Decrease) in Net Assets Resulting from Operations	$	(18,793,518	)	$	2,465,470		$	(46,407,698	)	$	32,117,283

Net Investment Income Per Share	$	0.47		$	0.44		$	1.34		$	1.23

Earnings (Loss) Per Share	$	(0.34	)	$	0.05		$	(0.87	)	$	0.74

Basic and Diluted Weighted-Average Shares Outstanding		54,632,752			51,190,376			53,588,041			43,600,033

The accompanying notes are an integral part of these financial statements.

BlackRock Kelso Capital Corporation

Statements of Changes in Net Assets (Unaudited)


	Nine months ended September 30, 2008			Nine months ended September 30, 2007
Net Increase (Decrease) in Net Assets Resulting from Operations:
Net investment income	$	72,059,478		$	53,728,168
Net change in unrealized appreciation or depreciation		(117,183,448	)		(22,216,025	)
Net realized gain (loss)		(1,283,728	)		605,140

Net increase (decrease) in net assets resulting from operations		(46,407,698	)		32,117,283

Dividend Distributions to Stockholders from:
Net investment income		(69,111,601	)		(54,660,300	)

Capital Share Transactions:
Proceeds from shares sold		—			164,143,683
Less offering costs		—			(9,884,838	)
Reinvestment of dividends		28,689,398			60,637,978
Purchase of treasury stock		(193,078	)		—

Net increase in net assets resulting from capital share transactions		28,496,320			214,896,823

Total Increase (Decrease) in Net Assets		(87,022,979	)		192,353,806
Net assets at beginning of period		728,191,869			561,799,922

Net assets at end of period	$	641,168,890		$	754,153,728

Capital Share Activity:
Shares issued from subscriptions		—			10,273,904
Shares issued from reinvestment of dividends		2,845,485			4,077,016
Purchase of treasury stock		(20,348	)		—

Total increase in shares		2,825,137			14,350,920

Distributions in Excess:
Distributions in excess of net investment income, end of period	$	(2,463,476	)	$	(4,324,681	)

The accompanying notes are an integral part of these financial statements.

BlackRock Kelso Capital Corporation

Statements of Cash Flows (Unaudited)


	Nine months ended September 30, 2008			Nine months ended September 30, 2007*
Operating Activities:
Net increase (decrease) in net assets resulting from operations	$	(46,407,698	)	$	32,117,283
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash used in operating activities:
Purchases of long-term investments		(183,326,767	)		(635,102,461	)
Purchases of foreign currency—net		(2,277,249	)		(302,953	)
Proceeds from sales/repayments of long-term investments		112,069,141			273,915,761
Net change in unrealized depreciation on investments		120,901,578			21,245,852
Net change in unrealized appreciation on foreign currency translation		(3,718,130	)		970,173
Net realized gain on investments		(427,133	)		(1,529,132	)
Net realized loss on foreign currency		1,710,861			923,992
Amortization of premium/discount—net		(2,280,622	)		(992,434	)
Amortization of debt issuance costs		482,493			207,788
Increase in interest receivable		(4,864,981	)		(13,794,097	)
Increase in dividends receivable		(1,628,586	)		(1,838,686	)
Increase in prepaid expenses and other assets		(1,151,632	)		(305,849	)
Increase (decrease) in payable for investments purchased		1,060,000			(7,672,698	)
Increase in offering costs payable		—			65,288
Increase in base management fees payable		234,911			3,161,968
Decrease in incentive management fees payable		—			(4,443,298	)
Decrease in accrued administrative services payable		(98,377	)		(773	)
Increase (decrease) in interest payable on credit facility		(282,273	)		4,553,549
Increase in other accrued expenses and payables		462,939			123,234

Net cash used in operating activities		(9,541,525	)		(328,697,493	)

Financing Activities:
Net proceeds from issuance of common stock		—			154,258,845
Dividend distributions paid		(72,422,207	)		(70,463,810	)
Dividend distributions reinvested		28,689,398			60,637,978
Borrowings under credit facility		202,700,000			1,247,203,995
Repayments under credit facility		(93,000,000	)		(1,064,803,995	)
Decrease (increase) in deferred debt issuance costs		20,000			(81,948	)
Purchase of treasury stock		(193,078	)		—

Net cash provided by financing activities		65,794,113			326,751,065

Net increase (decrease) in cash and cash equivalents		56,252,588			(1,946,428	)
Cash and cash equivalents, beginning of period		5,077,695			3,036,413

Cash and cash equivalents, end of period	$	61,330,283		$	1,089,985

Supplemental disclosure of cash flow information:
Interest paid during period	$	13,893,802		$	9,748,088
Franchise and income taxes paid during period	$	93,449		$	60,600

*	Certain amounts have been reclassified to conform to the current period’s presentation.

The accompanying notes are an integral part of these financial statements.

BlackRock Kelso Capital Corporation

Schedules of Investments (Unaudited)

September 30, 2008


Portfolio Company	Industry	Principal Amount or Number of Shares/Units			Cost(a)		Fair Value
Senior Secured Notes—8.0%
AGY Holding Corp., Second Lien, 11.00%, 11/15/14	Glass Yarns/ Fibers	$	23,500,000		$	23,066,882	$	20,915,000
TriMark Acquisition Corp., Second Lien, 11.50% (9.50% cash, 2.00% PIK), 11/30/13.	Food Service Equipment		30,578,200			30,578,200		30,578,200	(b)

Total Senior Secured Notes						53,645,082		51,493,200

Unsecured Debt—26.5%
AMC Entertainment Holdings, Inc., 7.82% PIK (LIBOR + 5.00%), 6/13/12	Entertainment		13,497,866			13,276,027		9,448,506
ASM Intermediate Holdings Corp. II, 12.00% PIK, 12/27/13	Marketing Services		49,403,243			49,403,243		43,227,838
BE Foods Investments, Inc., 7.32% (LIBOR + 4.50% cash or 5.25% PIK), 7/11/12	Food		24,950,709			24,282,055		22,954,652
Big Dumpster Acquisition, Inc., 13.50% PIK, 7/5/15	Waste Management Equipment		36,238,443			36,238,443		23,927,100	(b)
Lucite International Luxembourg Finance S.àr.l., 13.96% PIK (EURIBOR + 9.00%), 7/14/14(c)	Chemicals		12,155,635	(d)		15,500,809		11,952,108
Marquette Transportation Company Holdings, LLC, 14.75% PIK, 3/21/14	Transportation		45,423,354			45,423,354		45,423,354	(b)
Marsico Parent Holdco, LLC et al., 12.50% PIK, 7/15/16, acquired 11/28/07(e)	Financial Services		9,671,191			9,671,191		7,446,817
Marsico Parent Superholdco, LLC et al., 14.50% PIK, 1/15/18, acquired 11/28/07(e)	Financial Services		6,520,517			6,190,905		5,216,414

Total Unsecured Debt						199,986,027		169,596,789

Subordinated Debt—24.1%
A & A Manufacturing Co., Inc., 14.00% (12.00% cash, 2.00% PIK), 4/2/14	Protective Enclosures		19,060,930			19,060,930		19,060,930	(b)
Advanstar, Inc.,10.76% PIK (LIBOR + 7.00%), 11/30/15	Printing/ Publishing		6,972,272			6,972,272		5,191,946	(b)
Al Solutions, Inc., 16.00% PIK, 12/29/13(f)(g)	Metals		13,680,233			13,541,871		236,100	(b)
Conney Safety Products, LLC, 16.00%, 10/1/14	Safety Products		30,000,000			30,000,000		30,000,000	(b)
DynaVox Systems LLC, 15.00%, 6/23/15	Augmentative Communication Products		25,000,000			25,000,000		25,000,000	(b)
Mattress Giant Corporation, 16.25% PIK, 8/1/12(g)	Bedding —Retail		15,185,673			15,098,343		8,495,300	(b)
MediMedia USA, Inc., 11.38%, 11/15/14, acquired multiple dates(e)	Information Services		8,000,000			8,068,894		7,840,000
The Pay-O-Matic Corp., 14.00% (12.00% cash, 2.00% PIK), 1/15/15	Financial Services		15,214,343			15,214,343		15,214,343	(b)
PGA Holdings, Inc., 12.50%, 3/12/16	Healthcare Services		5,000,000			4,907,444		4,904,000	(b)
Sentry Security Systems, LLC, 15.00% (12.00% cash, 3.00% PIK), 8/7/12	Security Services		10,510,798			10,510,798		10,510,798	(b)

The accompanying notes are an integral part of these financial statements.

BlackRock Kelso Capital Corporation

Schedules of Investments (Unaudited)—(Continued)

September 30, 2008


Portfolio Company	Industry	Principal Amount or Number of Shares/Units			Cost(a)		Fair Value
Tri-anim Health Services, Inc. et al., 14.00% (12.00% cash, 2.00% PIK), 6/4/15	Healthcare Products	$	15,021,667		$	15,021,667	$	15,021,667	(b)
U.S. Security Holdings, Inc., 13.00% (11.00% cash, 2.00% PIK), 5/8/14, acquired 5/10/06(e)	Security Services		7,000,000			7,000,000		6,580,000
Wastequip, Inc., 12.00% (10.00% cash, 2.00% PIK), 2/5/15	Waste Management Equipment		7,715,353			7,715,353		6,301,700	(b)

Total Subordinated Debt						178,111,915		154,356,784

Senior Secured Loans—100.2%(h)
Advanstar Communications Inc., Second Lien, 8.76% (LIBOR + 5.00%), 11/30/14	Printing/ Publishing		14,000,000			14,000,000		10,425,187	(b)
Alpha Media Group Inc., Second Lien, 11.26% (LIBOR + 7.50%), 2/11/15	Publishing		20,000,000			19,316,973		16,000,000
American Residential Services L.L.C., Second Lien, 12.00% (10.00% cash, 2.00% PIK), 4/17/15	HVAC/ Plumbing Services		40,200,000			40,200,000		40,200,000	(b)
American Safety Razor Company, LLC, Second Lien, 9.96% (LIBOR + 6.25%), 1/30/14	Consumer Products		10,000,000			10,000,000		8,900,000
American SportWorks LLC, Second Lien, 18.00% (15.00% cash, 3.00% PIK), 6/27/14(i)	Utility Vehicles		13,506,033			13,506,033		13,506,033	(b)
AmQuip Crane Rental LLC, Second Lien, 9.48% (LIBOR + 5.75%), 6/29/14	Construction Equipment		22,000,000			22,000,000		20,020,000
Applied Tech Products Corp. et al., Tranche A, First Lien, 9.50% (Base Rate + 4.50%), 10/24/10	Plastic Packaging		1,230,907			1,226,959		895,200	(b)
Applied Tech Products Corp. et al., Tranche B, Second Lien, 13.50% (Base Rate + 8.50%), 4/24/11(g)	Plastic Packaging		2,308,004			2,298,613		565,000	(b)
Applied Tech Products Corp. et al., Tranche C, Third Lien, 17.00% PIK (Base Rate + 12.00%), 10/24/11(g)	Plastic Packaging		916,240			864,271		—	(b)
Arclin US Holdings Inc., Second Lien, 9.31% (LIBOR + 6.50%), 7/10/15	Chemicals		14,500,000			14,500,000		13,121,700	(b)
Bankruptcy Management Solutions, Inc., Second Lien, 9.95% (LIBOR + 6.25%), 7/31/13	Financial Services		24,500,000			24,500,000		20,676,500	(b)
The Bargain! Shop Holdings Inc., Term Loan A, First Lien, 13.50%, 6/29/12(c)	Discount Stores		14,076,230	(j)		13,595,104		13,239,494	(b)
The Bargain! Shop Holdings Inc., Term Loan B, First Lien, 13.50%, 7/1/12(c)	Discount Stores		19,348,770	(j)		18,078,941		18,198,617	(b)
Berlin Packaging L.L.C., Second Lien, 9.31% (LIBOR + 6.50%), 8/17/15	Rigid Packaging		24,000,000			23,380,000		20,520,000
Champion Energy Corporation et al., First Lien, 14.50%, 5/22/11	Heating and Oil Services		34,000,000			34,000,000		34,000,000	(b)
Custom Direct, Inc. et al., Second Lien, 9.76% (LIBOR + 6.00%), 12/31/14	Printing		10,000,000			10,000,000		4,850,000

The accompanying notes are an integral part of these financial statements.

BlackRock Kelso Capital Corporation

Schedules of Investments (Unaudited)—(Continued)

September 30, 2008


Portfolio Company	Industry	Principal Amount or Number of Shares/Units		Cost(a)		Fair Value
Deluxe Entertainment Services Group Inc., Second Lien, 9.76% (LIBOR + 6.00%), 11/11/13	Entertainment	$	12,000,000	$	12,000,000	$	8,100,000
Electrical Components International, Inc., Second Lien, 12.73% (LIBOR + 9.25%), 5/1/14	Electronics		22,000,000		21,060,000		11,660,000
Event Rentals, Inc., Acquisition Loan, First Lien, 6.98% (LIBOR + 4.00%), 12/19/13	Party Rentals		15,000,000		15,000,000		14,925,000
Facet Technologies, LLC, Second Lien, 16.00% (LIBOR + 2.00% cash, 10.00% PIK), 1/26/12	Medical Devices		27,843,525		27,843,525		27,843,525	(b)
Fairway Group Holdings Corp. et al., Term B Loan, First Lien, 8.75% (Base Rate + 3.75%), 1/18/13	Retail Grocery		1,485,000		1,482,340		1,485,000	(b)
Fairway Group Holdings Corp. et al., Term C Loan, Second Lien, 13.00% (12.00% cash, 1.00% PIK), 1/18/14	Retail Grocery		11,690,599		11,647,086		11,690,599	(b)
Fitness Together Franchise Corporation, First Lien, 8.95% (LIBOR + 6.25%), 7/14/12	Personal Fitness		12,950,000		12,908,296		12,908,296	(b)
Heartland Automotive Services II Inc. et al., Term Loan A, First Lien, 7.75% (LIBOR + 3.75%), 2/27/12	Automobile Repair		3,678,231		3,676,066		3,126,496	(b)
Heartland Automotive Services II Inc. et al., Acquisition Loan, First Lien, 8.00% (LIBOR + 4.00%), 2/27/12	Automobile Repair		1,799,837		1,799,837		1,529,861
HIT Entertainment, Inc., Second Lien, 8.30% (LIBOR + 5.50%), 2/26/13	Entertainment		1,000,000		1,000,000		775,000
InterMedia Outdoor, Inc., Second Lien, 10.51% (LIBOR + 6.75%), 1/31/14	Printing/ Publishing		10,000,000		10,000,000		8,050,000
Isola USA Corp., First Lien, 10.51% (LIBOR + 6.75%), 12/18/12	Electronics		9,230,263		9,132,565		8,537,993
Isola USA Corp., Second Lien, 13.80% (LIBOR + 11.00%), 12/18/13	Electronics		25,000,000		25,000,000		21,750,000
Kaz, Inc. et al., M&E Loan, First Lien, 7.19% (LIBOR + 4.50%), 12/8/08	Consumer Products		3,000,000		3,000,000		3,000,000	(b)
Kaz, Inc. et al., First Lien, 16.00% (12.00% cash, 4.00% PIK), 12/8/11	Consumer Products		35,721,617		35,382,826		35,382,826	(b)
LJVH Holdings Inc., Second Lien, 9.26% (LIBOR + 5.50%), 1/19/15(c)	Specialty Coffee		25,000,000		25,000,000		21,875,000
MCCI Group Holdings, LLC, Second Lien, 10.06% (LIBOR + 7.25%), 6/21/13	Healthcare Services		29,000,000		28,947,350		29,000,000	(b)
NAMIC/VA, Inc., Second Lien, 12.25%, 8/14/15	Healthcare Services		15,000,000		14,759,023		14,475,000
New Enterprise Stone & Lime Co., Inc., Second Lien, 12.50%, 7/11/14	Mining/ Construction		35,000,000		34,684,281		33,250,000
Oriental Trading Company, Inc., Second Lien, 9.71% (LIBOR + 6.00%), 1/31/14	Party Supplies and Novelties		3,000,000		3,000,000		1,612,500

The accompanying notes are an integral part of these financial statements.

BlackRock Kelso Capital Corporation

Schedules of Investments (Unaudited)—(Continued)

September 30, 2008


Portfolio Company	Industry	Principal Amount or Number of Shares/Units		Cost(a)		Fair Value
Penton Media, Inc. et al., Second Lien, 7.80% (LIBOR + 5.00%), 2/1/14(i)	Information Services	$	26,000,000	$	25,582,374	$	18,525,000
Physiotherapy Associates, Inc. et al., Second Lien, 13.00% (LIBOR + 9.75%), 12/31/13	Rehabilitation Centers		17,000,000		17,000,000		12,325,000
PQ Corporation, Second Lien, 9.30% (LIBOR + 6.50%), 7/30/15	Specialty Chemicals		10,000,000		8,739,440		8,375,000
Precision Parts International Services Corp. et al., First Lien, 8.51% (LIBOR + 5.50%), 9/30/11	Automotive Parts		2,867,973		2,867,973		2,337,398
Premier Yachts, Inc. et al., Term A, First Lien, 7.45% (LIBOR + 3.75%), 8/22/12	Entertainment Cruises		7,367,589		7,343,708		7,349,170
Premier Yachts, Inc. et al., Term B, First Lien, 10.75% (LIBOR + 7.00%), 8/22/13	Entertainment Cruises		1,921,233		1,915,121		1,916,430
Sunrise Medical LTC LLC et al., Second Lien, 10.27% (LIBOR + 6.50%), 12/28/13	Healthcare Equipment		14,400,000		14,400,000		13,331,700	(b)
Total Safety U.S. Inc., Second Lien, 9.54% (LIBOR + 6.50%), 12/8/13	Industrial Safety Equipment		9,000,000		9,000,000		8,505,000
United Subcontractors, Inc., Second Lien, 12.42% (LIBOR + 7.25% cash, 2.00% PIK), 6/27/13	Building and Construction		10,058,929		10,058,929		4,878,580
Water Pik, Inc., Second Lien, 8.25% (LIBOR + 5.50%), 6/15/14	Consumer Products		30,000,000		30,000,000		28,500,000	(b)
WBS Group LLC et al., Second Lien, 9.06% (LIBOR + 6.25%), 6/7/13	Software		20,000,000		20,000,000		16,600,000	(b)
Wembley, Inc., Second Lien, 7.06% (LIBOR + 4.25%), 8/23/12(g)	Gaming		1,000,000		1,000,000		200,000
Westward Dough Operating Company, LLC, Term Loan A, First Lien, 7.81% (LIBOR + 4.00%), 3/30/11	Restaurants		6,850,000		6,850,000		6,084,000	(b)
Westward Dough Operating Company, LLC, Term Loan B, First Lien, 10.81% (LIBOR + 7.00%), 3/30/11(g)	Restaurants		8,334,656		8,334,656		7,302,900	(b)

Total Senior Secured Loans					721,882,290		642,325,005

Preferred Stock—0.9%
Facet Holdings Corp., Class A, 12.00% PIK(g)	Medical Devices		900		900,000		—	(b)
Fitness Together Holdings, Inc., Series A, 8.00% PIK	Personal Fitness		187,500		187,500		187,500	(b)
M & M Tradition Holdings Corp., Series A Convertible, 16.00% PIK(i)	Sheet Metal Fabrication		5,376		5,376,000		5,537,280	(b)
Tygem Holdings, Inc., 8.00% PIK(f)(g)	Metals		10,789,367		10,826,867		—	(b)
Tygem Holdings, Inc., Series B Convertible(f)(k)	Metals		54,574,501		14,725,535		—	(b)

Total Preferred Stock					32,015,902		5,724,780

The accompanying notes are an integral part of these financial statements.

BlackRock Kelso Capital Corporation

Schedules of Investments (Unaudited)—(Continued)

September 30, 2008


Portfolio Company	Industry	Principal Amount or Number of Shares/Units	Cost(a)		Fair Value
Common Stock—1.7%(k)
BKC ASW Blocker, Inc.(i)(l)	Utility Vehicles	1,000	$	250,000	$	78,274	(b)
BKC DVSH Blocker, Inc.(m)	Augmentative Communication Products	100		1,000,000		1,100,000	(b)
BKC MTCH Blocker, Inc.(n)	Transportation	1,000		5,000,000		3,800,000	(b)
Facet Holdings Corp.	Medical Devices	10,000		100,000		—	(b)
Fitness Together Holdings, Inc.	Personal Fitness	62,500		62,500		61,200	(b)
M & M Tradition Holdings Corp.(i)	Sheet Metal Fabrication	500,000		5,000,000		5,550,000	(b)
MGHC Holding Corporation	Bedding—Retail	205,000		2,050,000		—	(b)
Tygem Holdings, Inc.(f)	Metals	3,596,456		3,608,956		—	(b)

Total Common Stock				17,071,456		10,589,474

Limited Partnership/Limited Liability Company Interests—3.4%
ARS Investment Holdings, LLC(k)	HVAC/Plumbing Services	66,902		—		520,000	(b)
Big Dumpster Coinvestment, LLC(k)	Waste Management Equipment	—		5,333,333		—	(b)
Marsico Parent Superholdco, LLC, 16.75% PIK, acquired 11/28/07(e)	Financial Services	1,750		1,650,005		1,496,250
PG Holdco, LLC, 15.00% PIK	Healthcare Services	333		333,333		333,333	(b)
PG Holdco, LLC, Class A(k)	Healthcare Services	16,667		166,667		166,667	(b)
Prism Business Media Holdings LLC(i)(k)	Information Services	68		14,943,200		12,000,000	(b)
Sentry Common Investors, LLC(k)	Security Services	147,271		147,271		—	(b)
Sentry Security Systems Holdings, LLC 8.00% PIK	Security Services	602,729		602,729		474,977	(b)
WBS Group Holdings, LLC, Class B, 16.00% PIK	Software	8,000		8,000,000		6,922,018	(b)

Total Limited Partnership/Limited Liability Company Interests				31,176,538		21,913,245

Equity Warrants/Options—0.2%(k)
ATEP Holdings, Inc., expire 10/24/15	Plastic Packaging	470		—		—	(b)
ATH Holdings, Inc., expire 10/24/15	Plastic Packaging	470		—		—	(b)
ATPP Holdings, Inc., expire 10/24/15	Plastic Packaging	470		90,112		—	(b)
ATPR Holdings, Inc., expire 10/24/15	Plastic Packaging	470		—		—	(b)
Fitness Together Holdings, Inc., expire 7/14/16	Personal Fitness	105,263		56,000		54,900	(b)
Kaz, Inc., expire 12/8/16	Consumer Products	49		512,000		204,584	(b)
Kaz, Inc., expire 12/8/16	Consumer Products	16		64,000		28,631	(b)
Kaz, Inc., expire 12/8/16	Consumer Products	16		24,000		13,275	(b)
Kaz, Inc., expire 12/8/16	Consumer Products	16		9,000		6,661	(b)
Marsico Superholdco SPV, LLC, expire 12/14/19, acquired 11/28/07(e)	Financial Services	455		444,452		765,917

Total Equity Warrants/Options				1,199,564		1,073,968

The accompanying notes are an integral part of these financial statements.

BlackRock Kelso Capital Corporation

Schedules of Investments (Unaudited)—(Continued)

September 30, 2008


Portfolio Company	Industry	Principal Amount or Number of Shares/Units	Cost(a)			Fair Value
TOTAL INVESTMENTS INCLUDING UNEARNED INCOME			$	1,235,088,774		$	1,057,073,245
UNEARNED INCOME—(0.9)%				(5,947,986	)		(5,947,986	)

TOTAL INVESTMENTS—163.9%			$	1,229,140,788			1,051,125,259

OTHER ASSETS & LIABILITIES (NET)—(63.9)%							(409,956,369	)

NET ASSETS—100.0%						$	641,168,890

(a)	Represents amortized cost for fixed income securities and unearned income, and cost for preferred and common stock, limited partnership/limited liability company interests and equity warrants/options.

(b)	Fair value of this investment determined by or under the direction of the Company’s Board of Directors (see Note 2). The aggregate fair value of these investments (net of unearned income) is $632,039,825 or 98.6% of net assets at September 30, 2008.

(c)	Non-U.S. company or principal place of business outside the U.S.

(d)	Principal amount is denominated in Euros.

(e)

These securities are exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions that are exempt from registration, normally to qualified institutional buyers. In the aggregate, these securities represent 4.6% of net assets at September 30, 2008.

(f)	“Controlled” investments under the Investment Company Act of 1940, whereby the Company owns more than 25% of the portfolio company’s outstanding voting securities, are as follows:


Controlled Investments	Fair Value at December 31, 2007			Gross Additions (Cost)*		Net Unrealized Gain (Loss)			Fair Value at September 30, 2008			Interest Income**
Al Solutions, Inc. Subordinated Debt	$	12,648,145		$	893,726	$	(13,305,771	)	$	236,100		$	1,085,667
Tygem Holdings, Inc.:
Preferred Stock		—			—		—			—			—
Preferred Stock Series B Convertible		2,613,900			2,500,000		(5,113,900	)		—			—
Common Stock		—			—		—			—			—
Less: Unearned Income		(427,650	)		191,550		—			(236,100	)		—

Totals	$	14,834,395		$	3,585,276	$	(18,419,671	)	$	—		$	1,085,667

Gross additions include increases in the cost basis of investments resulting from new portfolio investments, payment-in-kind interest or dividends, the amortization of unearned income, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company into this category from a different category.

**	For the nine months ended September 30, 2008. There were no realized gains (losses) or dividend income from these securities during the period.

The aggregate fair value of controlled investments (net of unearned income) at September 30, 2008 was zero.

(g)	Non-accrual status (in default) at September 30, 2008 and therefore non-income producing.

(h)

Approximately 67% of the senior secured loans to the Company’s portfolio companies bear interest at a floating rate that may be determined by reference to the London Interbank Offered Rate (LIBOR), Euro Interbank Offered Rate (EURIBOR), or other base rate (commonly the Federal Funds Rate or the Prime Rate), at the borrower’s option. In addition, approximately 9% of such senior secured loans have floors between 3.25% and

The accompanying notes are an integral part of these financial statements.

4.00% on the LIBOR base rate. The borrower under a senior secured loan generally has the option to select from interest reset periods of one, two, three or six months and may alter that selection at the end of any reset period. The stated interest rate represents the weighted average interest rate as of September 30, 2008 of all contracts within the specified loan facility.

(i)	“Non-controlled, affiliated” investments under the Investment Company Act of 1940, whereby the Company owns 5% or more (but not more than 25%) of the portfolio company’s outstanding voting securities, are as follows:


Non-controlled, Affiliated Investments	Fair Value at December 31, 2007			Gross Additions (Cost)*		Gross Reductions (Cost)**			Net Unrealized Gain (Loss)			Fair Value at September 30, 2008			Net Realized Gain (Loss)***		Interest Income***		Dividend Income***
American SportWorks LLC:
Senior Secured Loan	$	13,202,280		$	303,753	$	—		$	—		$	13,506,033		$	—	$	1,864,473	$	—
Common Stock		406,689			—		—			(328,415	)		78,274			—		—		—
M&M Tradition Holdings Corp.:
Preferred Stock		9,415,180			—		(3,832,000	)		(45,900	)		5,537,280			112,783		—		994,668
Common Stock		5,000,000			—		—			550,000			5,550,000			—		—		—
Penton Media, Inc.
Senior Secured Loan		21,250,000			916,732		—			(3,641,732	)		18,525,000			—		1,660,569		—
Prism Business Media Holdings LLC
Limited Liability Co. Interest		16,500,000			—		—			(4,500,000	)		12,000,000			—		—		—
Less: Unearned Income		(361,467	)		41,807		—			—			(319,660	)		—		—		—

Totals	$	65,412,682		$	1,262,292	$	(3,832,000	)	$	(7,966,047	)	$	54,876,927		$	112,783	$	3,525,042	$	994,668

Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company out of this category into a different category.

***	For the nine months ended September 30, 2008.

The aggregate fair value of non-controlled, affiliated investments (net of unearned income) at September 30, 2008 represents 8.6% of net assets.

(j)	Principal amount is denominated in Canadian dollars.

(k)	Non-income producing equity securities at September 30, 2008.

(l)	The Company is the sole stockholder of BKC ASW Blocker, Inc., which is the beneficiary of 5% or more (but not more than 25%) of the voting securities of American SportWorks LLC.

(m)	The Company is the sole stockholder of BKC DVSH Blocker, Inc., which is the beneficiary of less than 5% of the voting securities of DynaVox Systems LLC.

(n)	The Company is the sole stockholder of BKC MTCH Blocker, Inc., which is the beneficiary of less than 5% of the voting securities of Marquette Transportation Company Holdings, LLC.

PIK	Payment-in-kind.

The accompanying notes are an integral part of these financial statements.

BlackRock Kelso Capital Corporation

Schedules of Investments

December 31, 2007


Portfolio Company	Industry(a)	Principal Amount or Number of Shares/Units			Cost(b)		Fair Value
Senior Secured Notes—6.2%
AGY Holding Corp., Second Lien, 11.00%, 11/15/14, acquired 10/20/06(c)	Glass Yarns/ Fibers	$	15,000,000		$	15,000,000	$	14,550,000
TriMark Acquisition Corp., Second Lien, 11.50% (9.50% cash, 2.00% PIK), 11/30/13	Food Service Equipment		30,277,111			30,277,111		30,277,111	(d)

Total Senior Secured Notes						45,277,111		44,827,111

Unsecured Debt—24.8%
AMC Entertainment Holdings, Inc., 9.99% PIK (LIBOR + 5.00%), 6/13/12	Entertainment		12,661,936			12,395,105		11,981,357
ASM Intermediate Holdings Corp. II, 12.00% PIK, 12/27/13	Marketing Services		45,152,493			45,152,493		42,669,106
BE Foods Investments, Inc., 10.50% PIK (LIBOR + 5.25%), 7/11/12	Food		25,486,292			24,683,196		23,702,251
Big Dumpster Acquisition, Inc., 13.50% PIK, 7/5/15	Waste Management Equipment		32,756,167			32,756,167		32,756,167	(d)
Lucite International Luxembourg Finance S.àr.l., 13.64% PIK (EURIBOR + 9.00%), 7/14/14(e)	Chemicals		10,978,044	(f)		13,666,704		14,987,131
Marquette Transportation Company Holdings, LLC, 14.75% PIK, 3/21/14	Transportation		39,500,000			39,500,000		39,500,000	(d)
Marsico Parent Holdco, LLC et al., 12.50% PIK, 7/15/16, acquired 11/28/07(c)	Financial Services		9,000,000			9,000,000		9,045,000
Marsico Parent Superholdco, LLC et al., 14.50% PIK, 1/15/18, acquired 11/28/07(c)	Financial Services		6,000,000			5,658,622		5,685,687

Total Unsecured Debt						182,812,287		180,326,699

Subordinated Debt—14.9%
A & A Manufacturing Co., Inc., 14.00% (12.00% cash, 2.00% PIK), 4/2/14	Protective Enclosures		18,777,852			18,777,852		18,777,852	(d)
Advanstar, Inc., 11.84% PIK (LIBOR + 7.00%), 11/30/15	Printing/ Publishing		6,441,546			6,441,546		6,441,546
Al Solutions, Inc., 16.00% PIK, 12/29/13(g)	Metals		12,648,145			12,648,145		12,648,145	(d)
Conney Safety Products, LLC, 16.00%, 10/01/14	Safety Products		25,000,000			25,000,000		25,000,000	(d)
Mattress Giant Corporation, 13.25% (11.00% cash, 2.25% PIK), 8/1/12	Bedding —Retail		13,944,709			13,840,288		13,247,474
MediMedia USA, Inc., 11.38%, 11/15/14, acquired multiple dates(c)	Information Services		8,000,000			8,074,656		8,220,000
Sentry Security Systems, LLC, 15.00% (12.00% cash, 3.00% PIK), 8/7/12	Security Services		10,274,409			10,274,409		10,274,409	(d)

The accompanying notes are an integral part of these financial statements.

BlackRock Kelso Capital Corporation

Schedules of Investments—(Continued)

December 31, 2007


Portfolio Company	Industry(a)	Principal Amount or Number of Shares/Units			Cost(b)		Fair Value
U.S. Security Holdings, Inc., 13.00% (11.00% cash, 2.00% PIK), 5/8/14, acquired 5/10/06(c)	Security Services	$	7,000,000		$	7,000,000	$	6,650,000
Wastequip, Inc., 12.00% (10.00% cash, 2.00% PIK), 2/5/15	Waste Management Equipment		7,561,250			7,561,250		7,561,250	(d)

Total Subordinated Debt						109,618,146		108,820,676

Senior Secured Loans—97.9%(h)
Advanstar Communications Inc., Second Lien, 9.84% (LIBOR + 5.00%), 11/30/14	Printing/ Publishing		14,000,000			14,000,000		12,880,000
Alpha Media Group Inc., Second Lien, 12.33% (LIBOR + 7.50%), 2/11/15	Publishing		20,000,000			19,236,444		18,400,000
American Residential Services L.L.C., Second Lien, 12.00% (10.00% cash, 2.00% PIK), 4/17/15	HVAC/Plumbing Services		40,000,000			40,000,000		40,000,000	(d)
American Safety Razor Company, LLC, Second Lien, 11.69% (LIBOR + 6.25%), 1/30/14	Consumer Products		10,000,000			10,000,000		9,950,000
American SportWorks LLC, Second Lien, 18.00% (15.00% cash, 3.00% PIK), 6/27/14(i)	Utility Vehicles		13,202,280			13,202,280		13,202,280	(d)
AmQuip Crane Rental LLC, Second Lien, 10.63% (LIBOR + 5.75%), 6/29/14	Construction Equipment		22,000,000			22,000,000		21,340,000
Applied Tech Products Corp. et al., Tranche A, First Lien, 11.75% PIK (Base Rate + 4.50%), 10/24/10	Plastic Packaging		4,847,723			4,829,127		4,847,723	(d)
Applied Tech Products Corp. et al., Tranche B, Second Lien, 15.75% PIK (Base Rate + 8.50%), 4/24/11	Plastic Packaging		2,308,004			2,295,861		1,568,358	(d)
Applied Tech Products Corp. et al., Tranche C, Third Lien, 19.25% PIK (Base Rate + 12.00%), 10/24/11(j)	Plastic Packaging		916,240			851,534		—	(d)
Arclin US Holdings Inc., Second Lien, 11.40% (LIBOR + 6.50%), 7/10/15	Chemicals		14,500,000			14,500,000		14,500,000	(d)
Bankruptcy Management Solutions, Inc., Second Lien, 11.10% (LIBOR + 6.25%), 7/31/13	Financial Services		24,687,500			24,687,500		20,367,188
The Bargain! Shop Holdings Inc., Term Loan B, First Lien, 11.81% (CBA + 7.00%), 7/1/12(e)	Discount Stores		19,739,508	(k)		18,414,992		19,800,510	(d)
Berlin Packaging L.L.C., Second Lien, 11.85% (LIBOR + 6.50%), 8/17/15	Rigid Packaging		24,000,000			23,312,346		23,040,000
Cannondale Bicycle Corporation, Second Lien, 10.85% (LIBOR + 6.00%), 6/5/10	Bicycles/Apparel		10,000,000			10,000,000		10,000,000	(d)
Champion Energy Corporation et al., First Lien, 12.50%, 5/22/11	Heating and Oil Services		34,000,000			34,000,000		34,000,000	(d)

The accompanying notes are an integral part of these financial statements.

BlackRock Kelso Capital Corporation

Schedules of Investments—(Continued)

December 31, 2007


Portfolio Company	Industry(a)	Principal Amount or Number of Shares/Units		Cost(b)		Fair Value
Custom Direct, Inc. et al., Second Lien, 10.84% (LIBOR + 6.00%), 12/31/14	Printing	$	10,000,000	$	10,000,000	$	8,500,000
Deluxe Entertainment Services Group Inc., Second Lien, 10.83% (LIBOR + 6.00%), 11/11/13	Entertainment		12,000,000		12,000,000		10,800,000
DynaVox Systems LLC, Term Loan B, First Lien, 8.38% (LIBOR + 3.50%), 6/30/11	Augmentative Communication Products		3,351,322		3,333,809		3,351,322	(d)
DynaVox Systems LLC, Term Loan C, First Lien, 9.88% (LIBOR + 5.00%), 12/13/11	Augmentative Communication Products		1,750,000		1,740,579		1,750,000	(d)
Eight O’Clock Coffee Company et al., Second Lien, 11.38% (LIBOR + 6.50%), 7/31/13	Coffee Distributor		14,000,000		14,000,000		13,440,000
Electrical Components International, Inc., Second Lien, 11.37% (LIBOR + 6.50%), 5/1/14	Electronics		20,000,000		20,000,000		16,000,000
Event Rentals, Inc., Acquisition Loan, First Lien, 9.05% (LIBOR + 4.00%), 12/19/13	Party Rentals		15,000,000		15,000,000		14,925,000
Facet Technologies, LLC, Second Lien, 11.88% (LIBOR + 7.00%), 1/26/12	Medical Devices		27,000,000		27,000,000		27,000,000	(d)
Fairway Group Holdings Corp. et al., Term B Loan, First Lien, 9.96% (LIBOR + 5.00%), 1/18/13	Retail Grocery		1,485,000		1,481,877		1,485,000	(d)
Fairway Group Holdings Corp. et al., Term C Loan, Second Lien, 13.00% (12.00% cash, 1.00% PIK), 1/18/14	Retail Grocery		11,601,670		11,551,996		11,601,670	(d)
Fitness Together Franchise Corporation, First Lien, 11.40% (LIBOR + 6.25%), 7/14/12	Personal Fitness		13,150,000		13,099,256		13,099,256	(d)
Heartland Automotive Services II Inc. et al., Term Loan A, First Lien, 12.00% (Base Rate + 4.75%), 2/27/12(j)	Automobile Repair		3,558,311		3,555,669		3,415,978
Heartland Automotive Services II Inc. et al., Acquisition Loan, First Lien, 12.25%, (Base Rate + 5.00%), 2/27/12(j)	Automobile Repair		1,740,000		1,740,000		1,722,600
HIT Entertainment, Inc., Second Lien, 10.38% (LIBOR + 5.50%), 2/26/13	Entertainment		1,000,000		1,000,000		950,000
InterMedia Outdoor, Inc., Second Lien, 11.58% (LIBOR + 6.75%), 1/31/14	Printing/ Publishing		10,000,000		10,000,000		9,600,000
Isola USA Corp., First Lien, 9.58% (LIBOR + 4.75%), 12/18/12	Electronics		9,900,000		9,776,400		9,306,000
Isola USA Corp., Second Lien, 12.83% (LIBOR + 7.75%), 12/18/13	Electronics		25,000,000		25,000,000		23,500,000
Kaz, Inc. et al., M&E Loan, First Lien, 9.69% (LIBOR + 4.50%), 12/8/08	Consumer Products		3,000,000		3,000,000		3,000,000	(d)
Kaz, Inc. et al., First Lien, 16.00% (12.00% cash, 4.00% PIK), 12/8/11	Consumer Products		41,753,560		41,274,295		41,274,295	(d)

The accompanying notes are an integral part of these financial statements.

BlackRock Kelso Capital Corporation

Schedules of Investments—(Continued)

December 31, 2007


Portfolio Company	Industry(a)	Principal Amount or Number of Shares/Units		Cost(b)		Fair Value
LJVH Holdings Inc., Second Lien, 10.33% (LIBOR + 5.50%), 1/19/15(e)	Specialty Coffee	$	25,000,000	$	25,000,000	$	23,000,000
MCCI Group Holdings, LLC, Second Lien, 12.71% (LIBOR + 7.25%), 6/21/13	Healthcare Services		29,000,000		28,938,983		29,000,000	(d)
Oriental Trading Company, Inc., Second Lien, 10.85% (LIBOR + 6.00%), 1/31/14	Party Supplies and Novelties		3,000,000		3,000,000		2,790,000
Penton Media, Inc. et al., Second Lien, 9.98% (LIBOR + 5.00%), 2/1/14(i)	Information Services		25,000,000		24,665,642		21,250,000
Physiotherapy Associates, Inc. et al., Second Lien, 11.41% (LIBOR + 6.50%), 12/31/13	Rehabilitation Centers		17,000,000		17,000,000		15,810,000
Precision Parts International Services Corp. et al., First Lien, 10.08% (LIBOR + 4.75% cash, 0.75% PIK), 9/30/11	Automotive Parts		4,853,442		4,853,442		4,368,097
Premier Yachts, Inc. et al., Term A, First Lien, 8.69% (LIBOR + 3.75%), 8/22/12	Entertainment Cruises		7,877,183		7,847,172		7,837,797
Premier Yachts, Inc. et al., Term B, First Lien, 11.94% (LIBOR + 7.00%), 8/22/13	Entertainment Cruises		1,921,233		1,914,184		1,911,626
Stolle Machinery Company, LLC, Second Lien, 11.38% (LIBOR + 6.50%), 9/29/13	Canning Machinery		8,500,000		8,500,000		8,245,000
Sunrise Medical LTC LLC et al., Second Lien, 11.35% (LIBOR + 6.50%), 12/28/13	Healthcare Equipment		14,400,000		14,400,000		14,040,000
Total Safety U.S. Inc., Second Lien, 11.33% (LIBOR + 6.50%), 12/8/13	Industrial Safety Equipment		9,000,000		9,000,000		8,730,000
United Subcontractors, Inc., Second Lien, 12.21% (LIBOR + 7.25%), 6/27/13	Building and Construction		10,000,000		10,000,000		7,850,000
Water Pik, Inc., Second Lien, 10.49% (LIBOR + 5.50%), 6/15/14	Consumer Products		30,000,000		30,000,000		29,400,000	(d)
WBS Group LLC et al., Second Lien, 11.35% (LIBOR + 6.25%), 6/7/13	Software		20,000,000		20,000,000		20,000,000	(d)
Wembley, Inc., Second Lien, 9.72% (LIBOR + 4.25%), 8/23/12	Gaming		1,000,000		1,000,000		910,000
Westward Dough Operating Company, LLC, Term Loan A, First Lien, 8.83% (LIBOR + 4.00%), 3/30/11	Restaurants		6,850,000		6,850,000		6,850,000	(d)
Westward Dough Operating Company, LLC, Term Loan B, First Lien, 11.83% (LIBOR + 7.00%), 3/30/11	Restaurants		8,334,656		8,334,656		8,334,656	(d)
York Tape & Label, Inc. et al., Second Lien, 12.25% (LIBOR + 7.25%), 9/30/13	Printing		45,197,368		44,767,550		44,293,421

Total Senior Secured Loans					741,955,594		713,237,777

Preferred Stock—1.7%
Facet Holdings Corp., Class A, 12.00% PIK	Medical Devices		900		900,000		318,420	(d)
Fitness Together Holdings, Inc., Series A, 8.00% PIK	Personal Fitness		187,500		187,500		187,500	(d)

The accompanying notes are an integral part of these financial statements.

BlackRock Kelso Capital Corporation

Schedules of Investments—(Continued)

December 31, 2007


Portfolio Company	Industry(a)	Principal Amount or Number of Shares/Units	Cost(b)		Fair Value
M & M Tradition Holdings Corp., Series A Convertible, 16.00% PIK(i)	Sheet Metal Fabrication	9,208	$	9,208,000	$	9,415,180	(d)
Tygem Holdings, Inc., 8.00% PIK(g)(j)	Metals	10,789,367		10,826,867		—	(d)
Tygem Holdings, Inc., Series B Convertible(g)(l)	Metals	45,567,701		12,225,535		2,613,900	(d)

Total Preferred Stock				33,347,902		12,535,000

Common Stock—1.7%(l)
BKC ASW Blocker, Inc.(i)(m)	Utility Vehicles	1,000		250,000		406,689	(d)
BKC MTCH Blocker, Inc.(n)	Transportation	1,000		5,000,000		5,100,000	(d)
Facet Holdings Corp.	Medical Devices	10,000		100,000		—	(d)
Fitness Together Holdings, Inc.	Personal Fitness	62,500		62,500		77,400	(d)
M & M Tradition Holdings Corp.(i)	Sheet Metal Fabrication	500,000		5,000,000		5,000,000	(d)
MGHC Holding Corporation	Bedding—Retail	205,000		2,050,000		1,700,000	(d)
Tygem Holdings, Inc.(g)	Metals	3,596,456		3,608,956		—	(d)

Total Common Stock				16,071,456		12,284,089

Limited Partnership/Limited Liability Company Interests— 4.2%
ARS Investment Holdings, LLC(l)	HVAC/Plumbing Services	66,902		—		575,000	(d)
Big Dumpster Coinvestment, LLC(l)	Waste Management Equipment	—		5,333,333		3,200,000	(d)
Marsico Parent Superholdco, LLC, 16.75% PIK, acquired 11/28/07(c)	Financial Services	1,750		1,650,005		1,657,860
Prism Business Media Holdings LLC(i)(l)	Information Services	68		14,943,201		16,500,000	(d)
Sentry Common Investors, LLC(l)	Security Services	147,271		147,271		147,300	(d)
Sentry Security Systems Holdings, LLC, 8.00% PIK	Security Services	602,729		602,729		602,729	(d)
WBS Group Holdings, LLC, Class B, 16.00% PIK	Software	8,000		8,000,000		8,000,000	(d)

Total Limited Partnership/Limited Liability Company Interests				30,676,539		30,682,889

Equity Warrants/Options—0.2%(l)
ATEP Holdings, Inc., expire 10/24/15	Plastic Packaging	470		—		—	(d)
ATH Holdings, Inc., expire 10/24/15	Plastic Packaging	470		—		—	(d)
ATPP Holdings, Inc., expire 10/24/15	Plastic Packaging	470		90,112		—	(d)
ATPR Holdings, Inc., expire 10/24/15	Plastic Packaging	470		—		—	(d)
Fitness Together Holdings, Inc., expire 7/14/16	Personal Fitness	105,263		56,000		55,400	(d)
Kaz, Inc., expire 12/8/16	Consumer Products	49		512,000		477,065	(d)
Kaz, Inc., expire 12/8/16	Consumer Products	16		64,000		81,554	(d)

The accompanying notes are an integral part of these financial statements.

BlackRock Kelso Capital Corporation

Schedules of Investments—(Continued)

December 31, 2007


Portfolio Company	Industry(a)	Principal Amount or Number of Shares/Units	Cost(b)			Fair Value
Kaz, Inc., expire 12/8/16	Consumer Products	16	$	24,000		$	44,333	(d)
Kaz, Inc., expire 12/8/16	Consumer Products	16		9,000			25,378	(d)
Marsico Superholdco SPV, LLC, expire 12/14/19, acquired 11/28/07(c)	Financial Services	455		444,450			446,672

Total Equity Warrants/Options				1,199,562			1,130,402

TOTAL INVESTMENTS INCLUDING UNEARNED INCOME				1,160,958,597			1,103,844,643
UNEARNED INCOME—(0.8)%				(5,583,857	)		(5,583,857	)

TOTAL INVESTMENTS—150.8%			$	1,155,374,740			1,098,260,786

OTHER ASSETS & LIABILITIES (NET)—(50.8)%							(370,068,917	)

NET ASSETS—100.0%						$	728,191,869

(a)	Unaudited.

(b)	Represents amortized cost for fixed income securities and unearned income, and cost for preferred and common stock, limited partnership/limited liability company interests and equity warrants/options.

(c)

(d)	Fair value of this investment determined by or under the direction of the Company’s Board of Directors (see Note 2). The aggregate fair value of these investments (net of unearned income) is $559,803,995, or 76.9% of net assets at December 31, 2007.

(e)	Non-U.S. company or principal place of business outside the U.S.

(f)	Principal amount is denominated in Euros.

(g)	“Controlled” investments under the Investment Company Act of 1940, whereby the Company owns more than 25% of the portfolio company’s outstanding voting securities, are as follows:


Controlled Investments	Fair Value at December 31, 2006			Gross Additions (Cost)*		Gross Reductions (Cost)**			Net Unrealized Gain (Loss)			Fair Value at December 31, 2007			Interest Income***
Al Solutions, Inc. Subordinated Debt	$	22,000,000		$	3,296,290	$	(12,648,145	)	$	—		$	12,648,145		$	3,808,869
Tygem Holdings, Inc.: Preferred Stock		10,826,867			—		—			(10,826,867	)		—			—
Preferred Stock Series B		—			12,225,535		—			(9,611,635	)		2,613,900			—
Convertible
Common Stock		3,608,956			—		—			(3,608,956	)		—			—
Less: Unearned Income		(998,763	)		571,113		—			—			(427,650	)		—

Totals	$	35,437,060		$	16,092,938	$	(12,648,145	)	$	(24,047,458	)	$	14,834,395		$	3,808,869

The accompanying notes are an integral part of these financial statements.

***	For the year ended December 31, 2007. There were no realized gains (losses) or dividend income from these securities during the year.

The aggregate fair value of controlled investments (net of unearned income) at December 31, 2007 represents 2.0% of net assets.

(h)

Approximately 80% of the senior secured loans to the Company’s portfolio companies bear interest at a floating rate that may be determined by reference to the London Interbank Offered Rate (LIBOR), Euro Interbank Offered Rate (EURIBOR), Canadian Bankers’ Acceptance Rate (CBA), or other base rate (commonly the Federal Funds Rate or the Prime Rate), at the borrower’s option. Additionally, the borrower under a senior secured loan generally has the option to select from interest reset periods of one, two, three or six months and may alter that selection at the end of any reset period. The stated interest rate represents the weighted average interest rate as of December 31, 2007 of all contracts within the specified loan facility.

(i)	“Non-controlled, affiliated” investments under the Investment Company Act of 1940, whereby the Company owns 5% or more (but not more than 25%) of the portfolio company’s outstanding voting securities, are as follows:


Non-controlled, Affiliated Investments	Fair Value at December 31, 2006		Gross Additions (Cost)*			Net Unrealized Gain (Loss)			Fair Value at December 31, 2007			Interest/ Other Income**		Dividend Income**
American SportWorks LLC:
Senior Secured Loan	$	—	$	13,202,280		$	—		$	13,202,280		$	1,248,969	$	—
Common Stock		—		250,000			156,689			406,689			—		—
M&M Tradition Holdings Corp.:
Preferred Stock		—		9,208,000			207,180			9,415,180			300,000		1,191,434
Common Stock		—		5,000,000			—			5,000,000			—		—
Penton Media, Inc.
Senior Secured Loan		—		24,665,642			(3,415,642	)		21,250,000			2,010,213		—
Prism Business Media Holdings LLC
Limited Liability Co. Interest		—		14,943,201			1,556,799			16,500,000			—		—
Less: Unearned Income		—		(361,467	)		—			(361,467	)		—		—

Totals	$	—	$	66,907,656		$	(1,494,794	)	$	65,412,682		$	3,559,182	$	1,191,434

**	For the year ended December 31, 2007. There were no realized gains (losses) from these securities during the year.

The aggregate fair value of non-controlled, affiliated investments (net of unearned income) at December 31, 2007 represents 9.0% of net assets.

(j)	Non-accrual status (in default) at December 31, 2007 and therefore non-income producing.

(k)	Principal amount is denominated in Canadian dollars.

(l)	Non-income producing equity securities at December 31, 2007.

(m)	The Company is the sole stockholder of BKC ASW Blocker, Inc., which is the beneficiary of 5% or more (but not more than 25%) of the voting securities of American SportWorks LLC.

(n)	The Company is the sole stockholder of BKC MTCH Blocker, Inc., which is the beneficiary of less than 5% of the voting securities of Marquette Transportation Company Holdings, LLC.

PIK	Payment-in-kind.

The accompanying notes are an integral part of these financial statements.

BlackRock Kelso Capital Corporation

Notes to Financial Statements (Unaudited)

1. Organization

BlackRock Kelso Capital Corporation (the “Company”) was organized as a Delaware corporation on April 13, 2005 and was initially funded on July 25, 2005. The Company has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”). In addition, for tax purposes the Company has qualified and has elected to be treated as a regulated investment company, or RIC, under the Internal Revenue Code of 1986 (the “Code”). The Company’s investment objective is to generate both current income and capital appreciation through debt and equity investments. The Company invests primarily in middle-market companies in the form of senior and junior secured and unsecured debt securities and loans, each of which may include an equity component, and by making direct preferred, common and other equity investments in such companies.

On July 25, 2005, the Company completed a private placement of 35,366,589 shares of its common stock at a price of $15.00 per share, receiving net proceeds of $529,333,799. On July 2, 2007, the Company completed an initial public offering through which it sold an additional 10,000,000 shares of its common stock at a price of $16.00 per share and listed its shares on The NASDAQ Global Select Market (collectively, the “Public Market Event”). Net proceeds from the Public Market Event of $150,110,500 reflected the payment of an underwriting discount of $8,400,000 and legal fees and other offering costs of $1,489,500.

The accompanying financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, all adjustments, consisting solely of normal recurring accruals, considered necessary for the fair presentation of financial statements for the interim periods, have been included. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year.

Certain financial information that is normally included in annual financial statements, including certain financial statement footnotes, prepared in accordance with GAAP, is not required for interim reporting purposes and has been condensed or omitted herein. These financial statements should be read in conjunction with the Company’s financial statements and notes related thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, which was filed with the Securities and Exchange Commission (“SEC”) on March 17, 2008.

2. Significant accounting policies

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reported period. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ and such differences could be material.

The significant accounting policies consistently followed by the Company are:

(a)

Investments for which market quotations are readily available are valued at such market quotations unless they are deemed not to represent fair value. The Company generally obtains market quotations from an independent pricing service or one or more broker-dealers or market makers. However, debt investments with remaining maturities within 60 days are valued at cost plus accreted discount, or minus amortized premium, which approximates fair value. 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 or under the direction of the Company’s Board of Directors. Because the Company expects that there will not be a readily available market value for many of the investments in its portfolio, the Company expects to value many of its portfolio investments at fair value as determined in good faith by or under the direction of the Board of Directors using a consistently applied valuation process in accordance with a documented valuation policy that has been reviewed and approved by the Board of Directors. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s 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 the Company 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 the Company’s investments than on the fair values of the Company’s investments for which market quotations are not readily available. Market quotations may be deemed not to represent fair value in certain circumstances where BlackRock Kelso Capital Advisors LLC, the Company’s investment advisor (the “Advisor”), believes that facts and circumstances

applicable to an issuer, a seller or purchaser or the market for a particular security cause current market quotations to not reflect the fair value of the security. Examples of these events could include cases in which material events are announced after the close of the market on which a security is primarily traded, when a security trades infrequently causing a quoted purchase or sale price to become stale or in the event of a “forced” sale by a distressed seller.

With respect to the Company’s investments for which market quotations are not readily available or for which market quotations are deemed not to represent fair value, the Board of Directors undertakes a multi-step valuation process each quarter, as described below:

(i)	The quarterly valuation process begins with each portfolio company or investment being initially evaluated and rated by the investment professionals of the Advisor responsible for the portfolio investment;

(ii)

The investment professionals provide recent portfolio company financial statements and other reporting materials to independent valuation firms engaged by the Board of Directors, such firms conduct independent appraisals each quarter and their preliminary valuation conclusions are documented and discussed with senior management of the Advisor;

(iii)

The audit committee of the Board of Directors reviews the preliminary valuations of the independent valuation firms; and

(iv)	The Board of Directors discusses valuations and determines the fair value of each investment in the portfolio in good faith based on the input of the Advisor, the respective independent valuation firms and the audit committee.

With respect to the initial valuations of unquoted investments by the investment professionals of the Advisor, upon acquisition each unquoted investment generally is valued at cost until the end of the second calendar quarter following its acquisition date. As of that date, an independent valuation firm conducts the initial independent appraisal of the investment.

The types of factors that the Company may take into account in fair value pricing its investments include, as relevant, the enterprise value of the portfolio company, the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business, comparison to publicly traded securities, changes in the interest rate environment and the credit markets generally that may affect the price at which similar investments may be sold and other relevant factors. Determination of fair values involves subjective judgments and estimates. Accordingly, these notes to the financial statements express the uncertainty with respect to the possible effect of such valuations, and any change in such valuations, on the financial statements.

(b)	Security transactions are accounted for on the trade date unless there are substantial conditions to the purchase.

(c)	Gains or losses on the sale of investments are calculated using the specific identification method.

(d)

Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis. Discounts and premiums on securities purchased are accreted/amortized over the life of the respective security using the effective yield method. For loans and securities with contractual payment-in-kind (“PIK”) income, which represents contractual interest or dividends accrued and added to the principal balance and which generally becomes due at maturity, PIK income is not accrued if the portfolio company valuation indicates that the PIK income is not collectible. Origination, structuring, closing, commitment and other upfront fees and discounts and premiums on investments purchased are accreted/amortized over the life of the respective investment. Unamortized origination, structuring, closing, commitment and other upfront fees are recorded as unearned income. Upon the prepayment of a loan or debt security, any prepayment penalties and unamortized loan origination, structuring, closing, commitment and other upfront fees are recorded as interest income. Expenses are recorded on an accrual basis.

(e)

The Company has qualified and elected and intends to continue to qualify for the tax treatment applicable to regulated investment companies under Subchapter M of the Code, and, among other things, has made and intends to continue to make the requisite distributions to its stockholders which will relieve the Company from federal income and excise taxes. Therefore, no provision has been recorded for federal income or excise taxes. The Company, at its discretion, may carry forward taxable income in excess of calendar year distributions and pay a 4% excise tax on this income. The Company will accrue excise tax on estimated excess taxable income as required.

In order to qualify for favorable tax treatment as a RIC, the Company is required to distribute annually to its stockholders at least 90% of investment company taxable income, as defined by the Code. To avoid federal excise taxes, the Company must distribute annually at least 98% of its income (both ordinary income and net capital gains).

(f)

Dividends and distributions to common stockholders are recorded on the record date. The amount to be paid out as a dividend is determined by the Board of Directors. Net realized capital gains, if any, generally are distributed at least annually, although the Company may decide to retain such capital gains for investment.

(g)

Loans are placed on non-accrual status, as a general matter, when principal or interest payments are past due 30 days or more or when there is reasonable doubt that principal or interest will be collected. Accrued interest generally is 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. 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. At September 30, 2008, 3.6% of total debt investments at amortized cost (or 1.6% at fair value) were on non-accrual status.

(h)	Recently Issued Accounting Pronouncements:

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. SFAS 157 requires companies to disclose the fair value of their financial instruments according to a fair value hierarchy (i.e., levels 1, 2, and 3, as defined). Additionally, companies are required to provide enhanced disclosure regarding instruments in the level 3 category (which have inputs to the valuation techniques that are unobservable and require significant management judgment), including a reconciliation of the beginning and ending balances separately for each major category of assets and liabilities. The Company adopted SFAS 157 on January 1, 2008. The adoption of SFAS 157 did not have a material impact on the Company’s financial statements.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”), which is effective for fiscal years beginning after November 15, 2008. SFAS 161 is intended to improve financial reporting for derivative instruments by requiring enhanced disclosure that enables investors to understand how and why an entity uses derivatives, how derivatives are accounted for, and how derivative instruments affect an entity’s results of operations and financial position. The Company is currently evaluating the impact of adopting SFAS 161 on its financial statements. At this time, the impact on the Company’s financial statements has not been determined.

In October 2008, the FASB issued FASB Staff Position No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active (“FSP 157-3”). FSP 157-3 provides an illustrative example of how to determine the fair value of a financial asset in an inactive market. FSP 157-3 does not change the fair value measurement principles set forth in SFAS 157. Since adopting SFAS 157 in January 2008, the Company’s practices for determining the fair value of its investment portfolio have been, and continue to be, consistent with the guidance provided in the example in FSP 157-3. Therefore, FSP 157-3 did not affect the Company’s practices for determining the fair value of its investment portfolio and did not have a material impact on the Company’s financial statements.

3. Agreements and related party transactions

The Company has entered into an Investment Management Agreement (the “Management Agreement”) with the Advisor, under which the Advisor, subject to the overall supervision of the Company’s Board of Directors, manages the day-to-day operations of, and provides investment advisory services to, the Company. For providing these services, the Advisor receives a base management fee (the “Management Fee”) from the Company quarterly in arrears at an annual rate of 2.0% of the Company’s total assets, including any assets acquired with the proceeds of leverage.

Prior to the completion of the Public Market Event, the Advisor agreed to waive its rights to receive a portion of the Management Fee the Advisor would otherwise be entitled to receive from the Company. All such fee waivers terminated upon completion of the Public Market Event.

For the three and nine months ended September 30, 2008, the Advisor earned $5,841,124 and $16,991,573, respectively, in base management fees from the Company. For the three and nine months ended September 30, 2007, the Advisor earned $5,319,049 and $11,489,768, respectively, in such fees, net of the waiver provision.

The Management Agreement provides that the Advisor or its affiliates may be entitled to an incentive management fee (the “Incentive Fee”) under certain circumstances. The determination of the Incentive Fee, as described in more detail below, will result in the Advisor or its affiliates receiving no Incentive Fee payments if returns to Company stockholders, as described in more detail below, do not meet an 8.0% annualized rate of return and will result in the Advisor or its affiliates receiving less than the full amount of the Incentive Fee percentage until returns to stockholders exceed an approximate 13.3% annualized rate of return. Annualized rate of return in this context is computed by reference to the Company’s net asset value and does not take into account changes in the market price of the Company’s common stock.

The Advisor will be entitled to receive the Incentive Fee if the Company’s performance exceeds a “hurdle rate” during different measurement periods: the pre-offering period; the transition period; trailing four quarters’ periods (which will apply only to the portion of the Incentive Fee based on income) and annual periods (which will apply only to the portion of the Incentive Fee based on capital gains).

•

The “pre-offering period” began on July 25, 2006 and ended on June 30, 2007.

•

The “transition period” began on July 1, 2007 and ended on June 30, 2008.

•

The initial “trailing four quarters’ periods” ended on September 30, 2008. In other words, the income portion of the Incentive Fee payable for the quarterly period ended on September 30, 2008 was determined by reference to the four quarter period ended on September 30, 2008.

•

The term “annual period” means the period beginning on July 1 of each calendar year beginning in 2007 and ending on June 30 of the next calendar year.

The hurdle rate for each quarterly portion of a measurement period is 2.0% times the net asset value of the Company’s common stock at the beginning of the respective measurement period calculated after giving effect to any distributions that occurred during the measurement period times the number of calendar quarters in the measurement period. A portion of the Incentive Fee is based on the Company’s income and a portion is based on capital gains. Each portion of the Incentive Fee is described below.

Quarterly Incentive Fee Based on Income. For each of the first three measurement periods referred to above (the pre-offering period, the transition period and each trailing four quarters’ period), the Company paid or will pay the Advisor an Incentive Fee based on the amount by which (A) aggregate distributions and amounts distributable out of taxable net income (excluding any capital gain and loss) during the period less the amount, if any, by which net unrealized capital depreciation exceeds net realized capital gains during the period exceeds (B) the hurdle rate for the period. The amount of the excess described in this paragraph for each period is referred to as the excess income amount.

The portion of the Incentive Fee based on income for each period equals 50% of the period’s excess income amount, until the cumulative Incentive Fee payments for the period equal 20% of the period’s excess income amount distributed or distributable to stockholders. Thereafter, the portion of the Incentive Fee based on income for the period equals an amount such that the cumulative Incentive Fee payments to the Advisor during the period based on income equals 20% of the period’s excess income amount.

Periodic Incentive Fee Based on Capital Gains. The portion of the Incentive Fee based on capital gains is calculated separately for each of two periods: the pre-offering period (on a quarterly basis) and after the pre-offering period (on an annual basis). For each period, the Company paid or will pay the Advisor an Incentive Fee based on the amount by which (A) net realized capital gains, if any, to the extent they exceed unrealized capital depreciation, if any, occurring during the period exceeds (B) the amount, if any, by which the period’s hurdle rate exceeds the amount of income used in the determination of the Incentive Fee based on income for the period. The amount of the excess described in this paragraph is referred to as the excess gain amount.

The portion of the Incentive Fee based on capital gains for each period equals 50% of the period’s excess gain amount, until such payments equal 20% of the period’s excess gain amount distributed or distributable to stockholders. Thereafter, the portion of the Incentive Fee based on capital gains for the period equals an amount such that the portion of the Incentive Fee payments to the Advisor based on capital gains for the period equals 20% of the period’s excess gain amount. The result of this formula is that, if the portion of the Incentive Fee based on income for the period exceeds the period’s hurdle, then the portion of the Incentive Fee based on capital gains is capped at 20% of the excess gain amount.

In calculating whether the portion of the Incentive Fee based on capital gains is payable with respect to any period, the Company accounts for its assets on a security-by-security basis. In addition, the Company uses the

“period-to-period” method pursuant to which the portion of the Incentive Fee based on capital gains for any period is based on realized capital gains for the period reduced by realized capital losses and unrealized capital depreciation for the period. Based on current interpretations of Section 205(b)(3) of the Investment Advisers Act of 1940 by the SEC and its staff, the calculation of unrealized depreciation for each portfolio security over a period is based on the fair value of the security at the end of the period compared to the fair value at the beginning of the period. Incentive Fees earned in any of the periods described above are not subject to modification or repayment based upon performance in a subsequent period.

For the three and nine months ended September 30, 2008, the Advisor earned no Incentive Fees from the Company as the hurdle rate was not achieved. Although the Company did not incur any Incentive Fees during the nine months ended September 30, 2008, it may incur such fees in the future relating to investment performance since December 31, 2007 measured on a trailing four quarters’ basis. For the three and nine months ended September 30, 2007, the Advisor earned $(112,226) and $9,412,097, respectively, in Incentive Fees, with the negative amount representing a reversal of incentive management fees accrued in prior quarters.

The Management Agreement provides that the Company will reimburse the Advisor for costs and expenses incurred by the Advisor for office space rental, office equipment and utilities allocable to the performance by the Advisor of its duties under the Management Agreement, as well as any costs and expenses incurred by the Advisor relating to any non-investment advisory, administrative or operating services provided by the Advisor to the Company. For the three and nine months ended September 30, 2008 the Company incurred $283,301 and $822,150, respectively, for costs and expenses reimbursable to the Advisor under the Management Agreement. For the three and nine months ended September 30, 2007, the Company incurred $218,221 and $608,488, respectively, in such costs and expenses.

From time to time, the Advisor may pay amounts owed by the Company to third party providers of goods or services. The Company will subsequently reimburse the Advisor for such amounts paid on its behalf. Reimbursements to the Advisor for the three and nine months ended September 30, 2008 were $354,192 and $1,161,023, respectively. Reimbursements to the Advisor for the three and nine months ended September 30, 2007 were $342,057 and $1,059,382, respectively.

No person who is an officer, director or employee of the Advisor and who serves as a director of the Company receives any compensation from the Company for such services. Directors who are not affiliated with the Advisor receive compensation for their services and reimbursement of expenses incurred to attend meetings.

The Company also has entered into an administration agreement with BlackRock Financial Management, Inc. (the “Administrator”) under which the Administrator provides administrative services to the Company. For providing these services, facilities and personnel, the Company reimburses the Administrator for the Company’s allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations under the administration agreement, including rent and the Company’s allocable portion of the cost of certain of the Company’s officers and their respective staffs. The PNC Financial Services Group, Inc. (“PNC”) is a significant stockholder of the ultimate parent of the Administrator. For the three and nine months ended September 30, 2008 the Company incurred $212,977 and $725,538, respectively, for administrative services expenses payable to the Administrator under the administration agreement. For the three and nine months ended September 30, 2007, the Company incurred $281,154 and $669,835, respectively, for such expenses.

PNC Global Investment Servicing Inc. (“PGIS”), a subsidiary of PNC, provides administrative and accounting services to the Company pursuant to a Sub-Administration and Accounting Services Agreement. PFPC Trust Company, another subsidiary of PNC, provides custodian services to the Company pursuant to a Custodian Services Agreement. Also, PGIS provides transfer agency and compliance support services to the Company pursuant to a Transfer Agency Agreement and a Compliance Support Services Agreement, respectively. For the services provided to the Company by PGIS and its affiliates, PGIS is entitled to an annual fee of 0.02% of the Company’s average net assets plus reimbursement of reasonable expenses, and a base fee, payable monthly. PFPC Trust Company may charge the Company additional fees for cash overdraft balances or for sweeping excess cash balances.

For the three and nine months ended September 30, 2008 the Company incurred $55,232 and $177,566 respectively, for administrative, accounting, custodian and transfer agency services fees payable to PGIS and its affiliates under the related agreements. For the three and nine months ended September 30, 2007, the Company incurred $54,175 and $181,207, respectively, for such fees.

In November 2007, the Company’s Board of Directors authorized the purchase by the Advisor from time to time in the open market of an indeterminate number of shares of the Company’s common stock, in the Advisor’s discretion, subject to compliance with the Company’s and the Advisor’s applicable policies and requirements of law. Pursuant to that authorization, during the nine months ended September 30, 2008, the Advisor purchased 103,735 shares of the Company’s common stock in the open market for $1,228,448, excluding brokerage commissions.

In 2006, the Company’s Board of Directors authorized the issuance and sale from time to time of up to $2,500,000 in aggregate net asset value of shares of the Company’s common stock to certain existing and future officers and employees of the Advisor at a price equal to the greater of $15.00 per share or the Company’s most recently determined net asset value per share at the time of sale. Pursuant to this authorization, during the nine months ended September 30, 2007, the Company issued and sold to certain officers and employees of the Advisor in private placements a total of 89,604 shares of common stock for aggregate proceeds of approximately $1,354,000.

In 2006, the Company’s Board of Directors authorized the issuance and sale from time to time of an indeterminate number of shares of the Company’s common stock to the Advisor at a price per share equal to the Company’s most recently determined net asset value per share at the time of sale, such shares to be used by the Advisor for employee compensation and other purposes. Pursuant to this authorization, during the nine months ended September 30, 2007, the Company issued and sold to the Advisor in private placements 184,300 shares of common stock for aggregate proceeds of approximately $2,791,000.

At September 30, 2008 and December 31, 2007, the Advisor owned directly approximately 388,000 and 276,000 shares, respectively, of the Company’s common stock, representing 0.7% and 0.5% of the total shares outstanding. The Advisor’s allocable portion of shares of the Company’s common stock owned indirectly by an entity in which the Advisor holds a non-voting investment interest was approximately 1,114,000 and 854,000 shares at September 30, 2008 and December 31, 2007, respectively. The Advisor disclaims ownership of the shares held by such entity. Inclusive of its allocable portion of the shares held by such entity, the Advisor would be deemed to own approximately 2.7% and 2.1% of the Company’s total shares outstanding at September 30, 2008 and December 31, 2007, respectively. At September 30, 2008 and December 31, 2007, other entities affiliated with the Administrator and PGIS beneficially owned indirectly approximately 3,195,000 and 2,843,000 shares, respectively, of the Company’s common stock, representing approximately 5.7% and 5.4% of the total shares outstanding. At September 30, 2008 and December 31, 2007, an entity affiliated with the Administrator and PGIS owned 36.5% of the members’ interests of the Advisor.

In 2006, BlackRock, Inc. (“BlackRock”) and Merrill Lynch & Co., Inc. (“Merrill Lynch”) completed a merger of Merrill Lynch’s investment management business, Merrill Lynch Investment Managers, and BlackRock to create a new independent asset management company that operates under the BlackRock name. Pursuant to the underwriting agreement with respect to the Public Market Event, Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S”), a subsidiary of Merrill Lynch, served as an underwriter and a senior book-running manager, committing to purchase 2,000,000 shares of the Company’s common stock at a price of $16.00 per share. The terms and conditions applicable to MLPF&S under the underwriting agreement were identical to those of other entities serving in similar capacities. In accordance with such terms, MLPF&S received approximately $1,800,000 of the underwriting fee paid by the Company on July 2, 2007.

4. Earnings (loss) per share

The following information sets forth the computation of basic and diluted net increase (decrease) in net assets per share (earnings (loss) per share) resulting from operations for the three and nine months ended September 30, 2008 and 2007.


	Three months ended September 30, 2008			Three months ended September 30, 2007		Nine months ended September 30, 2008			Nine months ended September 30, 2007
Numerator for basic and diluted net increase (decrease) in net assets per share	$	(18,793,518	)	$	2,465,470	$	(46,407,698	)	$	32,117,283
Denominator for basic and diluted weighted average shares		54,632,752			51,190,376		53,588,041			43,600,033
Basic/diluted net increase (decrease) in net assets per share resulting from operations	$	(0.34	)	$	0.05	$	(0.87	)	$	0.74

Diluted net increase (decrease) in net assets per share resulting from operations equals basic net increase (decrease) in net assets per share resulting from operations for the period because there were no common stock equivalents outstanding during the above periods.

5. Investments

Purchases of long-term investments for the three months ended September 30, 2008 and 2007 totaled $8,725,720 and $124,012,575, respectively, and for the nine months ended September 30, 2008 and 2007 totaled $183,326,767 and $635,102,461, respectively. Sales/repayments of long-term investments for the three months ended September 30, 2008 and 2007 totaled $60,585,583 and $90,834,630, respectively, and for the nine months ended September 30, 2008 and 2007 totaled $112,069,141 and $273,915,761, respectively.

At September 30, 2008, investments consisted of the following:


	Cost			Fair Value
Senior secured notes	$	53,645,082		$	51,493,200
Unsecured debt		199,986,027			169,596,789
Subordinated debt		178,111,915			154,356,784
Senior secured loans:
First lien		176,594,392			172,218,681
Second/other priority lien		545,287,898			470,106,324

Total senior secured loans		721,882,290			642,325,005

Preferred stock		32,015,902			5,724,780
Common stock		17,071,456			10,589,474
Limited partnership/limited liability company interests		31,176,538			21,913,245
Equity warrants/options		1,199,564			1,073,968

Total investments including unearned income		1,235,088,774			1,057,073,245
Unearned income		(5,947,986	)		(5,947,986	)

Total investments	$	1,229,140,788		$	1,051,125,259

At December 31, 2007, investments consisted of the following:


	Cost			Fair Value
Senior secured notes	$	45,277,111		$	44,827,111
Unsecured debt		182,812,287			180,326,699
Subordinated debt		109,618,146			108,820,676
Senior secured loans:
First lien		181,045,458			181,279,860
Second/other priority lien		560,910,136			531,957,917

Total senior secured loans		741,955,594			713,237,777

Preferred stock		33,347,902			12,535,000
Common stock		16,071,456			12,284,089
Limited partnership/limited liability company interests		30,676,539			30,682,889
Equity warrants/options		1,199,562			1,130,402

Total investments including unearned income		1,160,958,597			1,103,844,643
Unearned income		(5,583,857	)		(5,583,857	)

Total investments	$	1,155,374,740		$	1,098,260,786

The industry composition of the portfolio at fair value at September 30, 2008 and December 31, 2007 was as follows:


Industry	September 30, 2008		December 31, 2007
Other Services	11.3	%	10.9	%
Consumer Products	10.0		10.4
Business Services	8.8		8.7
Healthcare	7.8		6.1
Printing, Publishing and Media	7.1		12.5
Electronics	6.4		4.9


Industry	September 30, 2008		December 31, 2007
Manufacturing	5.9		8.1
Beverage, Food and Tobacco	5.5		6.8
Retail	5.5		4.8
Chemicals	5.1		4.0
Financial Services	4.8		3.4
Transportation	4.7		4.0
Distribution	4.3		2.3
Entertainment and Leisure	3.9		5.2
Utilities	3.2		3.1
Metals	3.2		1.4
Containers and Packaging	2.1		2.7
Building and Real Estate	0.4		0.7

Total	100.0	%	100.0	%

In the ordinary course of its business, the Company manages a variety of risks relating to its investments, including market risk and credit risk. Market risk is the risk of potential adverse changes to the values of investments because of changes in market conditions such as interest rate movements and volatility in investment prices. Credit risk is the risk of default or non-performance by portfolio companies equivalent to the investment’s carrying amount. The Company is also exposed to credit risk related to maintaining all of its cash and cash equivalents at a major financial institution.

The Company has investments in lower rated and comparable quality unrated senior and junior secured, unsecured and subordinated debt securities and loans, which are subject to a greater degree of credit risk than more highly rated investments. The risk of loss due to default by the issuer is significantly greater for holders of such securities and loans, particularly in cases where the investment is unsecured or subordinated to other creditors of the issuer.

6. Foreign Currency Transactions

The Company may enter into forward foreign currency contracts from time to time to facilitate settlement of purchases and sales of investments denominated in foreign currencies or to help mitigate the impact that an adverse change in foreign exchange rates would have on the value of the Company’s investments denominated in foreign currencies. A forward foreign currency contract is a commitment to purchase or sell a foreign currency at a future date (usually the security transaction settlement date) at a negotiated forward rate. Risks may arise as a result of the potential inability of the counterparties to meet the terms of their contracts. Details of open forward foreign currency contracts at September 30, 2008 and at December 31, 2007, respectively, were as follows:


Foreign Currency	Settlement Date	Amount and Transaction	US$ Value at Settlement Date		US$ Value at September 30, 2008		Unrealized Appreciation
Euro	October 23, 2008	11,400,000 Sold	$	17,841,684	$	16,062,672	$	1,779,012
Canadian dollar	October 23, 2008	31,188,000 Sold		30,986,587		29,455,909		1,530,678

Total			$	48,828,271	$	45,518,581	$	3,309,690


Foreign Currency	Settlement Date	Amount and Transaction	US$ Value at Settlement Date		US$ Value at December 31, 2007		Unrealized Appreciation/ (Depreciation)
Euro	January 23, 2008	11,000,000 Sold	$	15,485,448	$	16,058,413	$	(572,965	)
Canadian dollar	January 23, 2008	19,750,000 Sold		20,045,552		19,924,531		121,021

Total			$	35,531,000	$	35,982,944	$	(451,944	)

7. Credit agreement and borrowings

In accordance with the 1940 Act, with certain limited exceptions, the Company is only permitted to borrow such that its asset coverage, as defined in the 1940 Act, is at least 200% after such borrowing. On December 28, 2007, the Company amended and restated its Senior Secured, Multi-Currency Credit Agreement (the “Credit Agreement”). Under the amended Credit Agreement, the lenders agreed to extend credit to the Company in an aggregate principal amount not to exceed $600 million outstanding, at any one time, consisting of $455 million in revolving loan commitments and $145 million in term loan commitments. Total revolving loan commitments reverted to $400 million on April 14, 2008. The Credit Agreement has a stated maturity date of December 6, 2010 and is secured by

substantially all of the assets in the Company’s portfolio, including cash and cash equivalents. The term loans under the facility mature on the termination date of the Credit Agreement, have been fully drawn and, once repaid, may not be reborrowed. Subject to certain exceptions, the interest rate payable under the facility is LIBOR plus 87.5 basis points with respect to revolving loans and LIBOR plus 150 basis points with respect to term loans. The Credit Agreement also includes an “accordion” feature that allows the Company to increase the size of the credit facility under certain circumstances to a maximum of $1 billion with respect to the revolving loans and $395 million with respect to the term loans. The Credit Agreement is used to supplement the Company’s equity capital to make additional portfolio investments and for other general corporate purposes.

At September 30, 2008, the Company had $491,000,000 drawn on the credit facility, consisting of $346,000,000 under the revolving loan commitments and $145,000,000 under the term loan commitments. At December 31, 2007, the Company had $381,300,000 drawn on the credit facility, consisting of $236,300,000 under the revolving loan commitments and $145,000,000 under the term loan commitments. The weighted average annual interest cost for the three and nine months ended September 30, 2008 was 3.64% and 4.13%, respectively, exclusive of 0.175% in commitment fees on undrawn amounts and of other prepaid expenses related to establishing the credit facility.

The average debt outstanding on the credit facility during the three and nine months ended September 30, 2008 was $465,637,403 and $440,610,128, respectively. The maximum amount borrowed during the three and nine months ended September 30, 2008 was $491,000,000 and during the three and nine months ended September 30, 2007 was $430,803,995. The remaining amount available under the facility was $54,000,000 at September 30, 2008.

At September 30, 2008, the Company was in compliance with all financial and operational covenants required by the Credit Agreement.

8. Capital Stock

As a closed-end investment company regulated as a BDC under the 1940 Act, the Company is prohibited from selling shares of its common stock at a price below the current net asset value of the stock, or NAV, unless the Company’s stockholders approve such a sale and its Board of Directors makes certain determinations. On April 24, 2008, the Company’s stockholders approved a proposal authorizing the Company to issue shares of its common stock for a twelve-month period, with the approval of its Board of Directors, at a price below the then-current NAV. The approval expires on the earlier of April 23, 2009 or on the date of the Company’s 2009 Annual Meeting of Stockholders. The Company’s Board of Directors has adopted a policy to limit the Company’s ability to sell common stock at a price below NAV to circumstances in which the price per share of the common stock is equal to 95% or greater of its NAV in effect on the date any such sale is priced. Any sale of the Company’s common stock at a price below NAV would have a dilutive effect on NAV.

On August 7, 2008, the Company’s Board of Directors approved a share repurchase plan under which the Company may repurchase up to 2.5 percent (or 1,365,613 shares as of such date) of its outstanding shares of common stock from time to time in open market or privately negotiated transactions. The repurchase plan does not obligate the Company to acquire any specific number of shares and may be discontinued at any time. The Company intends to fund any repurchases with available cash. The repurchase plan is expected to be in effect through the earlier of September 30, 2009 or until the approved number of shares has been repurchased. During the three months ended September 30, 2008, the Company purchased a total of 20,348 shares of its common stock on the open market for $192,264 at an average price of $9.45 per share, excluding brokerage commissions. The Company currently holds the shares it repurchased in treasury.

9. Commitments and contingencies

At December 31, 2007, the Company had a commitment outstanding to make an equity investment of up to $2,500,000 in an existing portfolio company, which commitment was funded in January 2008. The Company had no such commitments outstanding at September 30, 2008.

In the normal course of business, the Company enters into contractual agreements that provide general indemnifications against losses, costs, claims and liabilities arising from the performance of individual obligations under such agreements. The Company has had no prior claims or payments pursuant to such agreements. The Company’s individual maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. However, based on management’s experience, the Company expects the risk of loss to be remote.

From time to time, the Company may be a party to certain legal proceedings incidental to the normal course of its business, including the enforcement of the Company’s rights under contracts with its portfolio companies. While the Company cannot predict the outcome of these legal proceedings with certainty, it does not expect that these proceedings will have a material effect on its financial statements.

10. Fair value of financial instruments

The carrying values of the Company’s financial instruments approximate fair value. The carrying values of receivables, other assets, accounts payable and accrued expenses approximate fair value due to their short maturities. The carrying value of the Company’s credit facility payable approximates fair value because it bears interest at a variable rate, based on current market.

For cash and cash equivalents, foreign currency, investments and forward foreign currency transactions, effective January 1, 2008, the Company adopted SFAS 157. SFAS 157 defines fair value as the price that the Company would receive upon selling an investment or pay to transfer a liability in an orderly transaction to a market participant in the principal or most advantageous market for the investment. SFAS 157 emphasizes that valuation techniques maximize the use of observable market inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability, 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 the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances.

SFAS 157 establishes a hierarchy that classifies these inputs into the three broad levels listed below:

Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

Level 2 – Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The inputs into the determination of fair value may require significant management judgment or estimation. Even if observable market data is available, such information may be the result of consensus pricing information or broker quotes which include a disclaimer that the broker would not be held to such a price in an actual transaction. The non-binding nature of consensus pricing and/or quotes accompanied by disclaimer would result in classification as Level 3 information, assuming no additional corroborating evidence.

In addition to using the above inputs in investment valuations, the Company continues to employ the valuation policy approved by its Board of Directors that is consistent with SFAS 157 (see Note 2). Consistent with this valuation policy, the Company evaluates the source of inputs, including any markets in which its investments are trading, in determining fair value.

The following table summarizes the fair values of the Company’s cash and cash equivalents, foreign currency, investments and forward foreign currency transactions based on the inputs used as of September 30, 2008 in determining such fair values:


Valuation Inputs	Cash and Cash Equivalents		Foreign Currency		Investments		Forward Foreign Currency Contracts
Level 1 - Price quotations	$	61,330,283	$	733,078	$	—	$	—
Level 2 - Significant other observable inputs		—		—		—		3,309,690
Level 3 - Significant unobservable inputs		—		—		1,051,125,259		—

Total Fair Value	$	61,330,283	$	733,078	$	1,051,125,259	$	3,309,690

The following are reconciliations for the three and nine months ended September 30, 2008, respectively, of investments for which significant unobservable inputs (Level 3) were used in determining fair value:


	Investments
Fair value at June 30, 2008	$	652,615,215
Amortization of premium/discount - net		1,007,403
Net realized gain		187,711
Net change in unrealized appreciation or depreciation		(48,059,397	)
Net purchases, sales or redemptions		(51,219,550	)
Net transfers in or out of Level 3		496,593,877

Fair value at September 30, 2008	$	1,051,125,259


Fair value at December 31, 2007	$	559,803,995
Amortization of premium/discount - net		2,264,059
Net realized gain		427,133
Net change in unrealized appreciation or depreciation		(122,123,689	)
Net purchases, sales or redemptions		72,296,970
Net transfers in or out of Level 3		538,456,791

Fair value at September 30, 2008	$	1,051,125,259

All realized and unrealized gains and losses are included in earnings (changes in net assets) and are reported as separate line items within the Company’s statements of operations. Transfers in or out of Level 3 represents the value of any investment where a change in the pricing level occurred from the beginning to the end of the period.

For the three and nine months ended September 30, 2008, the net change in unrealized appreciation or depreciation on investments for which significant unobservable inputs (Level 3) were used in determining fair value that are still held by the Company as of September 30, 2008 was $(47,423,049) and $(120,901,578), respectively. At September 30, 2008 and December 31, 2007, net unrealized depreciation on the investments that use Level 3 inputs was $(178,015,529) and $(25,307,726), respectively.

Investments designated as Level 3 may include, among other things, assets valued using quotes or indications furnished by brokers which are based on models or estimates and may not be executable prices. In light of current market conditions, the Company classified all long-term investments as Level 3 at September 30, 2008, as the broker quotes it utilized represent indications and not prices at which investment transactions may be executed. As a result, for the three and nine months ended September 30, 2008, $496,593,877 and $538,456,791, respectively, of the Company’s portfolio investments were transferred from Level 2 to Level 3.

Due to recent market conditions, the dispersion between the bid and ask quotes on the Company’s investments has widened significantly by historical standards. The Company attributes this to various factors, such as forced sales by distressed sellers and brokers’ reluctance to commit capital at quoted prices in rapidly changing markets. Accordingly, the Company generally values its quoted investments at the mean of the bid and ask quotes rather than the bid quote, as management considers the mean to be more representative of an exit price.

At September 30, 2008 and December 31, 2007, the aggregate fair value of the investments that use Level 3 inputs represented 163.9% and 76.9% of net assets and 100.0% and 51.0% of total investments, respectively. At September 30, 2008 and December 31, 2007, the aggregate fair value of the investments for which broker quotes were used in determining fair value was $419,085,434 and $538,456,791, respectively, representing 65.4% and 73.9% of net assets and 39.9% and 49.0% of total investments on such dates.

11. Financial highlights

The following per share data and ratios have been derived from information provided in the financial statements. The following is a schedule of financial highlights for a common share outstanding during the nine months ended September 30, 2008 and 2007.


	Nine months ended September 30, 2008			Nine months ended September 30, 2007
Per Share Data:
Net asset value, beginning of period	$	13.78		$	14.93

Net investment income		1.34			1.23
Net realized and unrealized gain (loss)		(2.21	)		(0.49	)

Total from investment operations		(0.87	)		0.74
Dividend distributions to stockholders from net investment income		(1.29	)		(1.26	)
Effect of anti-dilution (dilution)		(0.10	)		0.29
Offering costs		—			(0.19	)

Net decrease in net assets		(2.26	)		(0.42	)

Net asset value, end of period	$	11.52		$	14.51

Market price, end of period	$	11.53		$	14.50

Total return based on market value(1)(2)		(14.71	)%		—	(3)
Total return based on net asset value(1)(2)		(5.53	)%		5.70	%
Ratios / Supplemental Data:
Ratio of operating expenses to average net assets(4)(5)		4.24	%		4.88	%
Ratio of credit facility related expenses to average net assets(4)		2.80	%		2.98	%

Ratio of total expenses to average net assets(4)(5)		7.04	%		7.86	%
Ratio of net investment income to average net assets(4)		14.12	%		10.91	%
Net assets, end of period	$	641,168,890		$	754,153,728
Average debt outstanding	$	440,610,128		$	292,041,834
Weighted average shares outstanding		53,588,041			43,600,033
Average debt per share(6)	$	8.22		$	6.70
Portfolio turnover(2)		10	%		28	%

(1)

Total return was calculated based on the change in market value per share or net asset value per common share during the period, as indicated. Total return calculations take into account dividends and distributions, if any, reinvested in accordance with the Company’s dividend reinvestment plan and do not reflect brokerage commissions.

(2)	Not annualized.

(3)	The Company’s common stock commenced trading on The NASDAQ Global Select Market on June 27, 2007. There was no established public trading market for the stock prior to that date.

(4)	Annualized.

(5)	For the nine months ended September 30, 2008 and 2007, the ratio of operating expenses before management fee waiver to average net assets is 4.24% and 5.30%, respectively, and the ratio of total expenses before management fee waiver to average net assets is 7.04% and 8.28%, respectively.

(6)	Average debt per share is calculated as average debt outstanding divided by the weighted average shares outstanding during the period.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The information contained in this section should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report.

Overview

We were incorporated in Delaware on April 13, 2005 and were initially funded on July 25, 2005 via a private placement of our common stock. Our investment objective is to provide a combination of current income and capital appreciation. We intend to invest primarily in debt and equity securities of private and certain public U.S. middle-market companies.

We are externally managed and have elected to be regulated as a BDC under the 1940 Act. As a BDC, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in “qualifying assets,” including securities of private or thinly traded public U.S. companies, cash, cash equivalents, U.S. Government securities and high-quality debt investments that mature in one year or less.

On July 2, 2007, we completed an initial public offering through which we sold an additional 10,000,000 shares of our common stock at a price of $16.00 per share and listed our shares on The NASDAQ Global Select Market (collectively, the “Public Market Event”).

Investments

Our level of investment activity can and does vary substantially from period to period depending on many factors, including 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 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 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 and companies whose securities are not listed on a national securities exchange. These rules also permit us to include as qualifying assets certain follow-on investments in companies that were eligible portfolio companies at the time of initial investment but that no longer meet the definition.

The SEC recently adopted a rule under the 1940 Act to further expand the definition of eligible portfolio company to include certain public companies that have listed their securities on a national securities exchange and have a market capitalization of less than $250 million. The new rule became effective on July 21, 2008. We will continue to monitor closely any developments with respect to the definition of an eligible portfolio company and intend to adjust our investment focus as needed to comply with and/or take advantage of the new rule, as well as any other regulatory, legislative, administrative or judicial actions in this area.

Revenues

We generate revenues primarily in the form of interest on the debt we hold, dividends on our equity interests and capital gains on the sale of warrants and other debt or equity interests that we acquire in portfolio companies. Our investments in fixed income instruments generally have an expected maturity of three to ten years, although we have no lower or upper constraint on maturity, and our debt investments bear interest at a fixed or floating rate. 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 instruments and preferred stock investments may defer payments of cash interest or dividends or pay interest or dividends in-kind. Any outstanding principal amount of our debt securities 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 and consulting fees.

Expenses

Our primary operating expenses include the payment of a base management fee and, depending on our operating results, an incentive management fee, expenses reimbursable under the management agreement, administration fees and the allocable portion of overhead under the administration agreement. The base management fee and incentive management fee compensate the Advisor for work in identifying, evaluating, negotiating, closing and monitoring our investments. Our management agreement with the Advisor provides that we will reimburse the Advisor for costs and expenses incurred by the Advisor for office space rental, office equipment and utilities allocable to the performance by the Advisor of its duties under the management agreement, as well as any costs and expenses incurred by the Advisor relating to any non-investment advisory, administrative or operating services provided by the Advisor to us. We bear all other costs and expenses of our operations and transactions.

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 GAAP. The preparation of these 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. Our critical accounting policies are further described in the notes to the financial statements and in Note 2 to the financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

Recently issued accounting pronouncements

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”), which is effective for fiscal years beginning after November 15, 2008. SFAS 161 is intended to improve financial reporting for derivative instruments by requiring enhanced disclosure that enables investors to understand how and why an entity uses derivatives, how derivatives are accounted for, and how derivative instruments affect an entity’s results of operations and financial position. The Company is currently evaluating the impact of adopting SFAS 161 on its financial statements. At this time, the impact on the Company’s financial statements has not been determined.

Within the context of these critical accounting policies, we are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported.

Portfolio and investment activity

During the three months ended September 30, 2008, we invested approximately $8.7 million across existing portfolio companies. The investments consisted primarily of senior loans secured by first liens ($0.4 million, or 4% of the total) or second liens ($1.9 million, or 22%) and unsecured or subordinated debt securities ($6.4 million, or 74%). Additionally, we received proceeds from sales/repayments of principal of approximately $60.6 million during the three months ended September 30, 2008.

At September 30, 2008, our portfolio of $1.05 billion (at fair value) consisted of 62 portfolio companies and was invested 57% in senior secured loans, 29% in unsecured or subordinated debt securities, 5% in senior secured notes, 3% in equity investments and 6% in cash, cash equivalents and foreign currency. Our average portfolio company investment by value was approximately $17.0 million. Our largest portfolio company investment by value was approximately $49.2 million and our five largest portfolio company investments by value comprised approximately 18% of our portfolio at September 30, 2008. At December 31, 2007, our portfolio of $1.10 billion (at fair value) consisted of 60 portfolio companies and was invested 64% in senior secured loans, 26% in unsecured or subordinated debt securities, 5% in equity investments, 4% in senior secured notes and approximately 1% in cash, cash equivalents and foreign currency. Our average portfolio company investment by value was approximately $18.3 million at December 31, 2007. Our largest portfolio company investment by value was approximately $44.9 million and our five largest portfolio company investments by value comprised approximately 20% of our portfolio at December 31, 2007.

Our weighted average yield (to cost) of the debt and income producing equity securities in our portfolio was 11.9% at September 30, 2008 and 12.2% at December 31, 2007. The weighted average yields (to cost) on our senior secured loans and other debt securities were 11.6% and 12.2%, respectively, at September 30, 2008, versus 11.9% and 13.3%, respectively, at December 31, 2007. Yields are computed using interest rates and dividend yields as of the balance sheet date and include amortization of loan origination and commitment fees, original issue discount and market premium or discount, weighted by the amortized cost of the respective investment. Yields exclude common equity investments, preferred equity investments with no stated dividend rate, short-term investments, cash, cash equivalents and foreign currency.

At September 30, 2008, 47% of our debt investments bore interest based on floating rates, such as LIBOR, EURIBOR, the Federal Funds Rate or the Prime Rate, and 53% bore interest at fixed rates. At December 31, 2007, 60% of our debt investments bore interest based on floating rates and 40% bore interest at fixed rates.

The Advisor employs a grading system for our entire portfolio. The Advisor grades all loans on a scale of 1 to 4. This system is intended to reflect the performance of the borrower’s business, the collateral coverage of the loans and other factors considered relevant. Generally, the Advisor assigns only one loan grade to each portfolio company for all loan investments in that portfolio company; however, the Advisor will assign multiple ratings when appropriate for different investments in one portfolio company. The following is a description of the conditions associated with each investment rating:

Grade 1: Investments in portfolio companies whose performance is substantially within the Advisor’s expectations and whose risk factors are neutral to favorable to those at the time of the original investment.

Grade 2: Investments in portfolio companies whose performance is below the Advisor’s expectations and that require closer monitoring; however, no loss of investment return (interest and/or dividends) or principal is expected.

Grade 3: Investments in portfolio companies whose performance is below the Advisor’s expectations and for which risk has increased materially since origination. Some loss of investment return is expected, but no loss of principal is expected. Companies graded 3 will generally be out of compliance with debt covenants and will be unlikely to make debt repayments on their original schedule.

Grade 4: Investments in portfolio companies whose performance is materially below the Advisor’s expectations where business trends have deteriorated and risk factors have increased substantially since the original investment. Investments graded 4 are those for which some loss of principal is expected.

The Advisor monitors and, when appropriate, changes the investment ratings assigned to each investment in our portfolio. In connection with our valuation process, the Advisor and our Board of Directors review these investment ratings on a quarterly basis. Our average investment rating was 1.37 at September 30, 2008. The following is a distribution of the investment ratings of our portfolio companies as of September 30, 2008, June 30, 2008 and December 31, 2007:


	September 30, 2008			June 30, 2008			December 31, 2007
Grade 1	$	725,224,583		$	856,260,053		$	910,545,131
Grade 2		285,899,953			252,403,408			154,212,434
Grade 3		30,650,954			21,953,278			17,888,578
Grade 4		15,297,755			25,175,821			21,198,500

Total investments including unearned income		1,057,073,245			1,155,792,560			1,103,844,643
Unearned income		(5,947,986	)		(6,583,468	)		(5,583,857	)

Total investments	$	1,051,125,259		$	1,149,209,092		$	1,098,260,786

Results of operations

Operating results for the three months ended September 30, 2008 as compared to September 30, 2007

Investment income

Investment income totaled $37,445,712 and $34,163,886, respectively, for the three months ended September 30, 2008 and 2007, of which $22,696,445 and $22,862,066 were attributable to interest and fees on senior secured loans, $13,946,741 and $10,007,186 to interest earned on other debt securities, $730,180 and $1,153,119 to dividends from preferred equity securities, $56,204 and $125,015 to interest earned on short-term investments and cash equivalents, and $16,142 and $16,500 to other income, respectively. The increase in investment income compared to the prior period reflects the growth of our portfolio as a result of the deployment of debt capital under our Credit Facility and equity capital from our initial public offering in July 2007. Total investments (at cost) and borrowings were $1,229,140,788 and $491,000,000 at September 30, 2008, compared to $1,115,108,274 and $346,400,000 at September 30, 2007, respectively. Many of our floating rate debt investments bear interest based on LIBOR. Investment income increased despite lower prevailing levels of LIBOR compared to the prior period, as fixed rate instruments as a percentage of our debt investments increased to 53% at September 30, 2008 from 37% at September 30, 2007.

Expenses

Net expenses for the three months ended September 30, 2008 and 2007 were $11,863,834 and $11,808,264, respectively, which consisted of $5,841,124 and $5,319,049 in base management fees, zero and $(112,226) in incentive management fees, $261,744 and $325,608 in administrative services expenses, $622,532 and $260,960 in professional fees, $82,450 and $121,688 in director fees, $283,301 and $218,221 in Advisor expenses, $119,781 and $112,146 in insurance expenses, $4,311,893 and $5,321,907 in interest expense and fees related to the Credit Facility, $149,068 and $62,819 in amortization of debt issuance costs, and $191,941 and $178,092 in other expenses, respectively. No incentive management fees were incurred during the most recent period due primarily to the increase in unrealized depreciation on investments. In comparison to the prior period, interest expense and fees related to the Credit Facility declined due to lower prevailing levels of LIBOR. The increase in base management fees reflects the growth of the beginning of period portfolio value on which the fees are based. Professional fees increased as a result of an increase in tax, legal and accounting fees.

Net investment income

Net investment income was $25,581,878 and $22,355,622, respectively, for the three months ended September 30, 2008 and 2007. The increase was primarily due to portfolio growth and the benefits of leverage from increased borrowings under our Credit Facility.

Net realized gain or loss

Net realized gain of $29,210 for the three months ended September 30, 2008 was the result of $187,711 in net gains realized from the disposition of investments and $(158,501) in net losses realized on foreign currency transactions during the period. For the three months ended September 30, 2007, the net realized gain was $328,828.

Net unrealized appreciation or depreciation

For the three months ended September 30, 2008 and 2007, the change in net unrealized appreciation or depreciation was an increase in net unrealized depreciation of $(44,404,606) and $(20,218,980), respectively. For the three months ended September 30, 2008, the increase in net unrealized depreciation was comprised of an increase in net unrealized depreciation on investments of $(47,423,050) and an increase in net unrealized appreciation on foreign currency translation of $3,018,444. For the three months ended September 30, 2007, the increase in net unrealized depreciation was comprised of an increase in net unrealized depreciation on investments of $(18,811,217) and an increase in net unrealized depreciation on foreign currency translation of $(1,407,763). The increase in net unrealized depreciation for the three months ended September 30, 2008 was primarily a result of a reduction in multiples used to estimate the fair value of our investments and the underperformance of some portfolio companies, particularly Tygem Holdings, Inc., Mattress Giant Corp. and Wastequip, Inc. Other portfolio investments experienced significant unrealized depreciation as a result of distressed sales by third parties in illiquid markets, which can have a disproportionate effect on the fair value of an illiquid portfolio investment. Another contributing factor to the increase in unrealized depreciation was market-wide increases in interest yields. Market-wide movements are not necessarily indicative of any fundamental change in the condition or prospects of our portfolio companies.

Net increase or decrease in net assets resulting from operations

The net increase or decrease in net assets resulting from operations for the three months ended September 30, 2008 and 2007 was $(18,793,518) and $2,465,470, respectively. As compared to the prior period, the decrease primarily reflects the increase in net unrealized depreciation on investments.

Operating results for the nine months ended September 30, 2008 as compared to September 30, 2007

Investment income

Investment income totaled $108,014,165 and $92,423,681, respectively, for the nine months ended September 30, 2008 and 2007, of which $66,658,468 and $65,076,753 were attributable to interest and fees on senior secured loans, $39,012,023 and $24,808,755 to interest earned on other debt securities, $2,251,933 and $1,893,797 to dividends from preferred equity securities, $73,303 and $309,381 to interest earned on short-term investments and cash equivalents, and $18,438 and $334,995 to other income, respectively. The increase in investment income compared to the prior period reflects the growth of our portfolio as a result of the deployment of debt capital under our Credit Facility and equity capital from our initial public offering in July 2007. Total investments (at cost) and borrowings were to $1,229,140,788 and $491,000,000 at September 30, 2008, compared to $1,115,108,274 and $346,400,000 at September 30, 2007, respectively.

Expenses

Net expenses for the nine months ended September 30, 2008 and 2007 were $35,954,687 and $38,695,513, respectively, which consisted of $16,991,573 and $11,489,768 in base management fees (net of base management fee waivers of zero and $2,056,907, respectively), zero and $9,412,097 in incentive management fees, $867,177 and $804,084 in administrative services expenses, $1,461,003 and $803,746 in professional fees, $275,185 and $251,860 in director fees, $822,150 and $608,488 in Advisor expenses, $396,217 and $201,921 in insurance expenses, $13,818,524 and $14,471,228 in interest expense and fees related to the Credit Facility, $482,493 and $207,788 in amortization of debt issuance costs, and $840,365 and $444,533 in other expenses, respectively. In comparison to the prior period, incentive management fees decreased primarily due to the increase in unrealized depreciation on investments. The increase in other expenses reflects the growth of our portfolio and higher professional fees associated with being a publicly-traded company following the Public Market Event.

Net investment income

Net investment income was $72,059,478 and $53,728,168, respectively, for the nine months ended September 30, 2008 and 2007 (which amounts would have been $72,059,478 and $51,671,261, respectively, without base management fee waivers). The increase was primarily due to portfolio growth and the benefits of leverage from increased borrowings under our Credit Facility.

Net realized gain or loss

Net realized loss of $(1,283,728) for the nine months ended September 30, 2008 was the result of $427,133 in net gains realized from the disposition of investments and $(1,710,861) in net losses realized on foreign currency transactions during the period. For the nine months ended September 30, 2007, the net realized gain was $605,140.

Net unrealized appreciation or depreciation

For the nine months ended September 30, 2008 and 2007, the change in net unrealized appreciation or depreciation was an increase in net unrealized depreciation of $(117,183,448) and $(22,216,025), respectively. For the nine months ended September 30, 2008, the increase in net unrealized depreciation was comprised of an increase in net unrealized depreciation on investments of $(120,901,578) and an increase in net unrealized appreciation on foreign currency translation of $3,718,130. For the nine months ended September 30, 2007, the increase in net unrealized depreciation was comprised of an increase in net unrealized depreciation on investments of $(21,245,852) and an increase in net unrealized depreciation on foreign currency translation of $(970,173). The increase in net unrealized depreciation for the nine months ended September 30, 2008 was primarily a result of a reduction in multiples used to estimate the fair value of our investments and the underperformance of some portfolio companies, particularly Tygem Holdings, Inc., Mattress Giant Corp. and Wastequip, Inc. Other portfolio investments experienced significant unrealized depreciation as a result of distressed sales by third parties in illiquid markets, which can have a disproportionate effect on the fair value of an illiquid portfolio investment. Another contributing factor to the increase in unrealized depreciation was market-wide increases in interest yields. Market-wide movements are not necessarily indicative of any fundamental change in the condition or prospects of our portfolio companies.

Net increase or decrease in net assets resulting from operations

The net increase or decrease in net assets resulting from operations for the nine months ended September 30, 2008 and 2007 was $(46,407,698) and $32,117,283, respectively. As compared to the prior period, the decrease primarily reflects the increase in net unrealized depreciation on investments.

Financial condition, liquidity and capital resources

During the nine months ended September 30, 2008, we generated operating cash flows primarily from interest earned and fees received on senior secured loans and other debt securities, and from sales of selected portfolio company investments or repayments of principal, as well as from dividends earned on preferred equity investments.

Our primary uses of funds from operations during the nine months ended September 30, 2008 consisted of investments in portfolio companies (net of sales and repayments) of $71,257,626, base management fees of $16,991,573 and interest and fees incurred on Credit Facility borrowings of $13,818,524.

Our operating activities resulted in a net use of cash of $9,541,525 for the nine months ended September 30, 2008.

On December 28, 2007, we amended and restated our senior secured, multi-currency Credit Facility to provide us with $600,000,000 in total availability, consisting of $455,000,000 in revolving loan commitments and $145,000,000 in term loan commitments. Total revolving loan commitments reverted to $400,000,000 on April 14, 2008. Subject to certain conditions, we have the ability in the future to seek additional commitments from new and existing lenders up to an aggregate amount not to exceed $1,000,000,000 with respect to revolving loans and $395,000,000 with respect to term loans. The interest rate applicable to borrowings under the Credit Facility is LIBOR plus 87.5 basis points with respect to revolving loans and LIBOR plus 150 basis points with respect to term loans. The term loans mature on December 6, 2010, the termination date of the Credit Facility, and term loans, once repaid, may not be reborrowed. The Credit Facility will continue to be used to supplement our equity capital to make additional portfolio investments and for general corporate purposes. At September 30, 2008, we had $491,000,000 drawn and outstanding under the Credit Facility, with $54,000,000 available to us.

Our financing activities resulted in a net inflow of cash of $65,794,113 for the nine months ended September 30, 2008, primarily from net borrowings under our Credit Facility.

At September 30, 2008, we had $61,330,283 in cash and cash equivalents. In addition, we had $733,078 in foreign currency at that date.

On October 24, 2008, our Form N-2 shelf registration statement was declared effective by the SEC, which will permit us to offer from time to time up to $1 billion of our common stock, preferred stock, debt securities, warrants representing rights to purchase shares of our common stock, preferred stock or debt securities and subscription rights.

Certain institutional shareholders beneficially own, in the aggregate, approximately 76.4% of the outstanding shares of our common stock at September 30, 2008. On December 26, 2008, upon the expiration of a lock-up agreement entered into in connection with our initial public offering, all of the outstanding shares of our common stock owned by such institutions will become available for sale, subject to compliance with applicable securities laws. Sales of substantial amounts of our common stock, or the availability of common stock for sale, could adversely affect the prevailing market price of our common stock. If this occurs and continues it could impair our ability to raise additional capital through the sale of common stock should we desire to do so.

As a closed-end investment company regulated as a BDC under the 1940 Act, we are prohibited from selling shares of our common stock at a price below the current net asset value of the stock, or NAV, unless our stockholders approve such a sale and our Board of Directors makes certain determinations. On April 24, 2008, our stockholders approved a proposal authorizing us to issue shares of our common stock for a twelve-month period, with the approval of our Board of Directors, at a price below the then-current NAV. The approval expires on the earlier of April 23, 2009 or on the date of our 2009 Annual Meeting of Stockholders. Our Board of Directors has adopted a policy to limit our ability to sell common stock at a price below NAV to circumstances in which the price per share of the common stock is equal to 95% or greater of its NAV in effect on the date any such sale is priced. Any sale of our common stock at a price below NAV would have a dilutive effect on our NAV.

Contractual Obligations

A summary of our significant contractual payment obligations for the repayment of outstanding borrowings under our Credit Facility at September 30, 2008 is as follows:


	Payments Due By Period (dollars in millions)
	Total		Less than 1 year		1-3 years		3-5 years		After 5 years
Credit Facility Payable(1)	$	491	$	—	$	491	$	—	$	—

(1)	At September 30, 2008, $54 million remained unused under our Credit Facility.

Off-Balance sheet financing

At December 31, 2007, our only off-balance sheet contractual obligation or arrangement consisted of a commitment to make an equity investment of up to $2.5 million in an existing portfolio company, which commitment was funded in January 2008. We had no off-balance sheet contractual obligations or arrangements at September 30, 2008.

Dividends

We intend to distribute quarterly dividends to our stockholders. Our quarterly dividends are determined by our Board of Directors. Dividends declared by the Company since July 25, 2005 (inception of operations) have been as follows:


Dividend Amount Per Share Outstanding	Record Date	Pay Date
$0.20	December 31, 2005	January 31, 2006
$0.20	March 15, 2006	March 31, 2006
$0.23	June 15, 2006	June 30, 2006
$0.30	September 15, 2006	September 29, 2006
$0.42	December 31, 2006	January 31, 2007
$0.42	March 15, 2007	March 30, 2007
$0.42	May 15, 2007	May 31, 2007
$0.42	September 14, 2007	September 28, 2007
$0.43	December 14, 2007	December 31, 2007
$0.43	March 17, 2008	March 31, 2008
$0.43	June 16, 2008	June 30, 2008
$0.43	September 15, 2008	September 30, 2008
$0.43	December 15, 2008	December 31, 2008

Tax characteristics of all dividends are reported to stockholders on Form 1099 after the end of the calendar year.

We maintain an “opt out” dividend reinvestment plan for our common stockholders. As a result, except as discussed below, if we declare a dividend, stockholders’ cash dividends will be automatically reinvested in additional shares of our common stock, unless they specifically “opt out” of the dividend reinvestment plan so as to receive cash dividends. We recently adopted a new dividend reinvestment plan that would result in the payment of all dividends in cash on any dividend payment date on which the reinvestment purchase price does not equal or exceed our net asset value. Dividends reinvested pursuant to our previous dividend reinvestment plan totaled $28,689,398 for the nine months ended September 30, 2008, versus $60,637,978 for the nine months ended September 30, 2007. Pursuant to our previous dividend reinvestment plan, the dividend reinvestment price for the dividend paid to stockholders on September 30, 2008 was 95% of the closing market price of our common stock on that date, or $10.9535 per common share, which was less than our net asset value. Reinvestment at this price resulted in dilution of our net asset value of approximately $0.01 per share at September 30, 2008.

With respect to the dividends paid to stockholders, income we receive from origination, structuring, closing, commitment and other upfront fees associated with investments in portfolio companies is treated as taxable income and accordingly, distributed to stockholders. For the three and nine months ended September 30, 2008, these fees totaled zero and $2,571,938, respectively. For the three and nine months ended September 30, 2007, such fees totaled $1,520,000 and $5,313,262, respectively. We anticipate earning additional upfront fees in the future and such fees may cause our taxable income to exceed our GAAP income, although the differences are expected to be temporary in nature.

Recent developments

On August 7, 2008, our Board of Directors approved a share repurchase plan under which we may repurchase up to 2.5% of our outstanding shares of common stock from time to time in open market or privately negotiated transactions. During the three months ended September 30, 2008, we purchased a total of 20,348 shares of our common stock on the open market for $192,264, excluding brokerage commissions. During the month of October 2008, we purchased a total of 224,890 additional shares for $1,953,105, excluding brokerage commissions. We are currently holding the shares we repurchased in treasury.

Notice is hereby given in accordance with Section 23(c) of the 1940 Act that from time to time the Company may purchase shares of its common stock in the open market at prevailing market prices.

On November 5, 2008, our Board of Directors declared a dividend of $0.43 per share, payable on December 31, 2008 to stockholders of record at the close of business on December 15, 2008.

On November 5, 2008, we adopted, and our Board of Directors approved, an amended and restated dividend reinvestment plan. Under the new plan, dividends are permitted to be reinvested only if the reinvestment purchase price equals or exceeds our net asset value on the date of payment, as permitted under SEC guidelines. If the reinvestment purchase price is below our net asset value, no reinvestment will occur under the plan and all dividends will be paid to shareholders in cash. The reinvestment purchase price under the new plan is the greater of our net asset value or 95% of the closing market price of our common stock on the date of payment. In order to opt out of dividend reinvestment under the new plan, participants must provide notice to the plan agent no later than the record date for the dividend involved. Our amended and restated dividend reinvestment plan is effective immediately. Any dividends reinvested under our previous dividend reinvestment plan are not affected.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

We are subject to financial market risks, including changes in interest rates. At September 30, 2008, 47% of our debt investments bore interest based on floating rates, such as LIBOR, EURIBOR, the Federal Funds Rate or the Prime Rate. All of the borrowings under our Credit Facility bear interest based on floating rates. The interest rates on our investments and borrowings generally reset by reference to the current market index after one to six months.

To illustrate the potential impact of changes in interest rates, we have performed the following analysis based on our September 30, 2008 balance sheet and assuming no changes in our investment structure. Net asset value is analyzed using the assumptions that interest rates, as defined by the LIBOR and U.S. Treasury yield curves, increase or decrease and that the yield curves of the rate shocks will be parallel to each other. Under this analysis, an instantaneous 100 basis point increase in LIBOR and U.S. Treasury yields would cause a decrease of approximately $13,500,000, or $0.24 per share, in the value of our net assets at September 30, 2008 and a corresponding 100 basis point decrease in LIBOR and U.S. Treasury yields would cause an increase of approximately $13,200,000, or $0.24 per share, in the value of our net assets on that date. These projected changes in the value of our net assets primarily reflect the inverse relationship between the value of our fixed rate investments and interest rates. The effect of interest rate changes on the value of our floating rate investments and borrowings would be expected, to a certain extent, to offset each other.

While hedging activities may help to insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to our portfolio of investments. During the three and nine months ended September 30, 2008 and 2007, we did not engage in any interest rate hedging activity.

Item 4.

Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15 under the Securities Exchange Act of 1934). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our current disclosure controls and procedures are effective in timely alerting them to material information relating to us that is required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934.

There have been no changes in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

From time to time, we and the Advisor may be a party to certain legal proceedings incidental to the normal course of our business, including the enforcement of our rights under contracts with our portfolio companies. While we cannot predict the outcome of these legal proceedings with certainty, we do not expect that these proceedings will have a material effect on our financial statements.

Item 1A.

Risk Factors

Our business is subject to certain risks and events that, if they occur, could adversely affect our financial condition and results of operations and the trading price of our common stock. For a discussion of these risks, please refer to Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2007. In addition, please consider the following:

Current market conditions have materially and adversely impacted debt and equity capital markets in the United States.

The debt and equity capital markets in the United States have been negatively impacted by significant writeoffs in the financial services sector relating to subprime mortgages and the re-pricing of credit risk in the broadly syndicated market, among other things. These events, along with the deterioration of the housing market and the failure of major financial institutions, have led to worsening general economic conditions, which have materially and adversely impacted the broader financial and credit markets and have reduced the availability of debt and equity capital for the market as a whole and financial firms in particular. The debt capital that will be available, if at all, may be at a higher cost, and on terms and conditions that may be less favorable, which could negatively affect our financial performance and results. In addition, the prolonged continuation or further deterioration of current market conditions could adversely impact our business.

We are currently in a period of capital markets disruption and instability.

We believe that in 2007 and throughout 2008, the U.S. capital markets entered into a period of disruption as evidenced by increasing spreads between the yields realized on riskier debt securities and those realized on risk-free securities and a lack of liquidity in parts of the debt capital markets. We believe the United States and other countries are also in a period of slowing economic growth or perhaps a recession and these conditions may continue for a prolonged period of time or worsen in the future. A prolonged period of market illiquidity may cause us to reduce the volume of loans we originate and/or fund, which could have an adverse effect on our business, financial condition, and results of operations. This period may increase the probability that these risks could negatively impact us.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Sales of unregistered securities

We did not sell any securities during the period covered by this report that were not registered under the Securities Act of 1933.

Issuer purchases of equity securities

The following table provides information regarding our open-market purchases of our common stock for each month in the three month period ended September 30, 2008.


Period	Average Price Paid per Share		Total Number of Shares Purchased	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
July 2008		—	—	—	—
August 2008		—	—	—	—
September 2008	$	9.45	20,348	20,348	1,345,265

Total	$	9.45	20,348	20,348	1,345,265

On August 7, 2008, our Board of Directors approved a share repurchase plan under which we may repurchase up to 2.5% of our then outstanding shares of common stock (representing a maximum of 1,365,613 shares as of such date) from time to time in open market or privately negotiated transactions. The repurchase plan does not obligate us to acquire any specific number of shares and may be discontinued at any time. We intend to fund any repurchases with available cash. The repurchase plan is expected to be in effect through the earlier of September 30, 2009 or until the approved number of shares has been repurchased.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Submission of Matters to a Vote of Security Holders

None.

Item 5.

Other Information

None.

Item 6.

Exhibits.

(a)

Exhibits.


31.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	BLACKROCK KELSO CAPITAL CORPORATION

Date: November 10, 2008	By:	/s/ James R. Maher
		James R. Maher
		Chief Executive Officer

Date: November 10, 2008	By:	/s/ Frank D. Gordon
		Frank D. Gordon
		Chief Financial Officer